I guess we can get started. Hi, I'm Shane Brett, US Semiconductor Equipment Analyst. Joining me today from Advanced Energy are Steve Kelley, President and CEO, and Paul Oldham, EVP and CFO. Before I start my questions, I'm going to hand it over to Paul for a quick Reg FD disclosure, and for Steve, if you want to give kind of an elevator pitch of what Advanced Energy does after that. Thanks.
Yeah, thanks a lot, Shane. Thanks for joining us today. Just a reminder that any comments we make today may be subject to certain risk factors. You can find a better discussion of those in our SEC filings. Also, a reminder that we are not providing any update to guidance today. Our earnings release was on November 4, so please refer to that as our latest guidance.
Okay, maybe a quick overview of Advanced Energy. We're headquartered in Denver, Colorado. We're about a 45-year-old company. We got our start providing power solutions for etched chamber makers, so for Applied Materials, Lam , and others in that business. So about half our business today is in Semiconductor Equipment. We provide these critical subsystems. The other half is what we call System Power.
So most of that business is for AI Data Center, but we're also a significant player in Industrial and Medical products. And in all the markets we play in the high end, over 70% of our revenue comes from sole-source products. So we're on a journey to get that above 80%. And our goal over the next years is articulated in our investor day last November, is to double the size of the company to $3 billion in revenue and about $15 in earnings per share.
Great. As a semiconductor equipment analyst, I've always thought of you guys as a semiconductor equipment company, but I think you're probably a data center company now, or I just want to kind of talk about that data center business as you're on track to double it this year. Just what's driven this growth? Can you give us kind of a bit of color on what's the drivers and what's kind of the visibility in 2026 on data center?
Yeah, so when we bought Artesyn back in 2019, they were in the data center business, but they were supplying commodity solutions. So we faced a decision roughly three to four years ago about whether to exit the business because of the low margins or to reorient the business. So we chose to stay in the business and focus our Engineering Team on higher-end solutions, so trying to tackle the most difficult problems. And so that strategy has worked out well for us.
Today, the margins we generate in the data center business are just below corporate average, which is a huge increase over what we used to be able to generate. We're engaged with a select group of hyperscaler customers. We're going to grow over 100% this year relative to revenue in 2024. And we forecasted to grow 25%-30% in 2026.
And this is solely with our first wave customers, this select group of hyperscalers that we've engaged with. We're also starting discussions with second wave customers, which don't require the same level of engineering intensity. We could modify basically standard solutions to meet their needs. So there's some upside looking forward. We think most of that upside occurs in 2027.
I'd say 100% growth is probably a little bit better than going well, but yes, it is going well.
We're pleased.
Yeah. So I guess there's just so many data center projects going on right now, and I think just within Morgan Stanley Research, it seems to consistently be raising numbers. But where are you guys in terms of meeting this data center demand, and how big of a challenge has it been to sort of expand capacity to meet this demand?
Yeah, so there's basically two areas where we need to invest. One is in development, and the second's in production capacity. So development's largely a function of our engineering team. It's also a function of our investment because these higher power products require more expensive labs and development equipment. So we've invested a lot. We've invested much more than we normally do in a year.
Actually, in the last couple of years, we've over-invested in CapEx. And most of that's gone for data center capacity and development products. So we have kept up with demand. We have expanded capacity in the Philippines and Mexico. And we have a third factory we'll likely ramp next year for data center in Thailand.
But in terms of this new capacity, though, the payback period isn't a matter of years. It's almost a month.
Yeah. So typically, our payback on this new investment is nine months or shorter. So it's quick payback. And the equipment is fungible, which means we could use it for other products such as Semiconductor, Industrial, and Medical.
Got it. I just want to kind of follow up on that 25%-30% growth you've kind of talked about for 2026. Granted, you are a sole-source business. I think the hyperscalers would probably give you a certain amount of visibility. How much does your visibility from these customers extend? And maybe how early are you kind of brought into new projects with these hyperscalers?
Yeah, so our visibility, I would say, is roughly nine months. We get a forecast and sometimes a PO for nine months. So the visibility is good. We need to be involved with our customers on these designs very early because what we're seeing now is a yearly cadence of new products, and a lot of it's tied into the introduction of new GPUs. And so for every new GPU, you typically need a new power solution because each GPU typically uses more power.
And so today, we have secured the design wins necessary to support our forecast for 2026. So what we're actually working on with customers today are designs for 2027 and 2028. And so that's really the cadence is we're looking at not M+1, but M+2 and beyond with our customers.
Got it, got it. And I guess a little bit more of a longer-term question, which may be interpreted as a short-term question, but how would you think about the longer-term growth prospects of this business? And is there sort of any way you've thought about your attach rate, sort of revenue opportunity per gigawatt or dollar of hyperscaler CapEx that you've sort of thought about?
Yeah, it's difficult to identify an attach rate or some growth with the industry because if you think about it, our whole strategy is to be a specialty player. It's to focus where there's unique opportunities for customization, where we can bring great technology to market. I think what we could say, though, is that as this data center market evolves and continues to require more power and more capability, that our content at each of those levels should continue to increase.
Got it. And would there be a bit of a content story with these kind of second wave of customers that you've identified?
Yes, absolutely. If you take a look at what we've done, is we've developed the core technology building blocks, if you will, to serve our primary hyperscale customers. Now we're seeing the second wave of customers come in, the so-called NeoCloud, CSPs, or even enterprise customers who are looking now for more rack-level solutions.
We can repurpose those technology blocks to their needs with just a little bit of customization. And so we get good leverage, we think, on the engineering investment that we've made. We don't have to create whole new solutions. And we can bring very good products to market that are proven, reliable, and leading edge to this next wave of customers.
Got it, got it. Now I'm going to move over to Semi, which I'm probably a little bit more comfortable with. So you've had a nice year in Semi. Q4 guidance implies about low- teens growth for the full year. Can you talk about what's driven that? And your customers have talked about a really big, well, not a really big, but a good second half 2026 ramp. Just what are you doing in terms of preparing for what the customers have kind of talked about publicly?
Yeah, I think the real story in semiconductor is our success with the new products because that's laying the groundwork for sustained share gain moving forward. So in 2023, we introduced two new platforms called Everest and Evos together with an accompanying product called NavX. And we've had great success on the conductor etch side of the business. So you're going to start seeing that in the form of significant revenue next year. We're also having success in the dielectric etch part of the business. And that's a new area for us, actually.
And so we anticipate significant revenue starting 2027 in that area. So we're expanding our TAM, and we're going to grow market share over the next five years based on the success of our new products. I think short term, all of our customers are saying similar things about second half strengthening next year and 2027 being a really good year, and I think that's based on a number of factors, including when new fabs are coming online.
Got it. Yeah, so as we kind of think about we're headed hopefully towards a pretty good 2026 and 2027 for WFE, you guys have laid out a goal where I think it was 20% or 1.2 or 1.3x above WFE. How much of that can we kind of attribute to these new products? And how much of that do you think we should think about in terms of just etch and dep intensity increasing within WFE?
Yeah, it's a little bit of both. I think our customers have been vocal about the fact that etch and dep intensity is going up, and that's the nature of these new processes. Just a lot more steps, a lot more etch and deposition going on, so that's good. It's good for our customers. It's good for us. In addition, we think we get a bump from our success with the new products, so you're going to see eVerest and eVoS in many of these new processes that are ramping over the next two or three years, and that's both in logic and memory applications.
Got it. And I guess between logic and memory, how would you sort of characterize your exposure? How would you characterize sort of your excitement levels for the two end markets into 2026?
I think at the leading edge, it's pretty exciting across the board. I think certainly for leading edge logic, the AI demand is driving these new process developments, is driving volume. Obviously, the leader there is TSMC, and they're doing quite well.
On the memory side, very exciting as well with high bandwidth memory, DRAM, and NAND. Also, I think all three of those markets will be strong next year, probably into 2027. I think we've turned the corner on leading edge in semiconductor. We're pretty excited about our ability to grow share in all these segments.
Now I want to go back to eVerest and eVoS. But as sort of your main customers come over to you, how demanding are these customers in terms of asking you for R&D, getting you to sort of kind of enable the next wave of leading edge semiconductors?
Yeah, I think semiconductor customers are among the most demanding. They're very focused on developing solutions that meet the needs of their customers, the fab operators. And so it's an intense process. I said we launched the platforms back in 2023. It typically takes two, maybe two and a half years to customize the product. And it's a three-party development. It's us, it's our customers, and it's their customers. And so we basically tune our sub systems to their chambers and then work with them to tune it further to the end customer processes.
Got it. And just last a little bit more shorter-term question. How would you characterize sort of the inventory situation at your customers or just given the customer concentration for Semis? Is that not something we probably need to think about too much?
Yeah, I think the inventory situation is healthy. I wouldn't say there's too little or too much. It's about where it should be. So we deal with our major semiconductor customers on a JIT basis. And so we basically fill the bins to wherever they need them filled to. And that's going to vary depending on their view of the market. But we're keeping up with demand. And we have upside capacity at our factory in Malaysia. And ultimately, we're going to qualify the semi products in both Malaysia and Thailand. We'll have two factories.
You're speaking with these customers every week, so you're on top of it.
Yes.
Got it. So I want to move over to industrial and medical. And I guess, to be a little bit critical, data center has absolutely exploded. Industrial Medical has been a little bit lackluster. But could you talk about what you're seeing in that, what you're seeing in that end market, what you're seeing in that business segment, and how you're kind of thinking about the 2026 setup for here?
Yeah, I think Industrial Medical has been in a correction mode for almost two years. And so I think the industrial medical customers, many of them suffered with the COVID supply chain shortages. And it's taken them a while to work through their inventories. I think today, most customers have worked through the inventory. The rest of them should be finished in the next three to six months. So we're seeing incrementally improving business in 2025.
We hit bottom in Q1 of 2025. And each quarter since, we've been a little bit higher in that business, a little higher revenue. We see some good trends in distribution where the inventories have declined seven quarters in a row. And we're at equilibrium now in distribution. So we think in Industrial Medical, 2026 will be a growth year. It's not going to be a V-shaped recovery. We think it's going to be gradual. But we have a very solid design win pipeline. And we think we could start showing outsized revenue growth in 2026 and 2027.
I guess to ask a deeper question. So I feel like in semiconductors, when we're in an upcycle, we call it secular. When we're in a downcycle, we call semiconductors cyclical. But just how does this industrial and medical portfolio play a part within the Advanced Energy portfolio, just given how cyclical in hindsight semiconductors and data center may be?
Yeah, I think Industrial Medical plays an important part, so the way we think about the business, we have three pillars. We have Semiconductor, we have Data Center, we have Industrial Medical. And at any one point in time, at least one of those markets will be up, and so we can sustain our R&D spending, our capacity investments because under any condition, we're generating good cash flow as a company, so we think it strengthens us as a company, enables us to create some space between us and our competitors.
That's the overall view. Industrial Medical is the weakest of the three pillars, so part of that's market-based. Part of it's our starting position, so moving forward, our primary focus for M&A will be adding more to our I&M portfolio. In addition, we've been investing for the last three years in strengthening our channel and strengthening our direct sales force calling on Industrial Medical accounts. So we think the organic efforts together with some inorganic efforts will boost us to a number one position in Industrial Medical.
Got it. I want to move over to some financial questions, and then I'll open it up to the audience, but so you're on track to about, I think, low to mid $6 of EPS this year in line with your sort of $1.75 billion revenue model. Assuming we get a good year in semi and data center, it doesn't feel like we're too far away from you guys' $2.5 billion target you laid out for 2030, but it feels like it's not too far away. Just not asking you to update your guidance, but just relative to when you kind of put out this 2030 model, how different has the operating environment been for you guys?
Yeah, I think the biggest change that we've talked about is really the explosion of the data center market. And that's really come on scene as you've seen all of AI explode combined with our change of strategy Steve mentioned earlier about targeting specific areas which we've been able to win. So that market is running well ahead of what we thought.
And in fact, we'll probably achieve our 2030 target that we set a year ago in data center either this year or early next year. So we're well on track. They're a little bit ahead. And as we said, as we look forward, we think that's sustainable at these levels or higher, at least over the next year or so, with reason to believe with the second wave of customers that we can sustain that, even grow that beyond that point.
Semiconductors, this 2025 is a good year for us. We'll grow, and it'll be our second best semiconductor year ever. Having said that, if you go back a year ago, the WFE projections for growth sound a lot like they sound now. I think the difference is now I think there's a lot more end market data points to corroborate the 2026 second half. We'll see growth. So I think we're generally on track there if you looked at a post 2026 or early 2027 level. Industrial Medical, as you pointed out, frankly, was a little softer.
Our trough level in Q1 of this year was lower than we expected, but we're slowly building out of it. So we feel confident in the model that we are on track from a revenue perspective to achieve the $3 billion, and we could achieve it early. I think it's very possible depending on how the markets go. I'll also just add that we feel like we're well on track from a gross margin perspective.
I want to touch on that margin portion because I guess the next step for you guys would be the $2.25 billion level, which is 30% growth from here. But when I think about that, your gross profit margin should be 42%, operating profit margin 20%. But I feel like you've also been spending a lot more on CapEx just given where in demand is. Can you kind of talk about how that sort of increased CapEx or sort of a changing end market mix per se may sort of impact that financial model that you are envisioning?
Yeah, it's a really good question. When we look at gross margins, we have improved them almost 400 basis points over the last five quarters and to 280 basis points just last quarter alone year over year. So we think we're on track. We've delivered about half the gross margin improvement to get to the 43% that we talked about earlier. From a CapEx perspective and the additional headwind that goes with that, I'm not too worried about that because that CapEx was contemplated in our model.
Bringing on Thailand was always contemplated. It was contemplated at certain revenue levels. We're achieving those revenue levels earlier. So I think that works well within the model. Frankly, what wasn't contemplated was the tariff environment, which has been about 100 basis points of headwind for us, and what wasn't contemplated was the high level of mix of data center at this point.
Now, semi will recover, and I think that mix will normalize a little bit over the next couple of years. Having said that, we believe we can still achieve the 43%. There's other levers we can pull operationally to help offset the tariff impact if those don't get mitigated, hopefully on their own. And we see opportunities, frankly, to continue to improve overall margins and absorb the data center mix. Frankly, we think it's pretty positive that we've absorbed a roughly doubling of our data center business. And we're still on track to get close to 40% exiting this year or early next year.
Got it. So when I think about the three drivers of gross margin improvement, which is manufacturing and cost improvements, just product mix, and then volume leverage, would you say that kind of the contribution from them has been a little bit more skewed towards the volume leverage over the last year or so?
Well, I think the first thing is we've executed on our factory consolidation plan. So we talked about 200-250 basis points of improvement on that. We've largely achieved that, not completely, but largely. And like I said, I think we can actually do more there. So over time, we'll get a little bit more. We've been right on track with volume, so certainly volume's up. That's fit right with our model of how we would expect that to occur.
The third leg of margin improvement that we haven't realized as much yet is the portfolio mix. And portfolio mix has mostly to do with, as our new products take hold in the market and become a bigger portion of our revenue, those come with higher margins. And we think there's 200-300 basis points of improvement that relate to that.
Now, that won't happen immediately because products have to get in the market. They have to ramp to scale. But we feel very good about that aspect. That will occur over time. So on balance, we feel good about the strategy and the execution that we've had and think we'll still be able to get to the 43% ultimately and overcome some of the headwinds we have.
Got it. And just one more question for me, and then I'll pass it over to the audience. But just I&M and sort of how M&A sort of kind of plays into the growth strategy there?
Yeah. So if you look at I&M, Industrial Medical, it's a highly fragmented market. So we think there's an opportunity to do a partial roll-up. We play in the high end of the I&M market. Let's say the top third of the market is where we play. So we're looking for similar companies that are out there who provide these industrial medical products, which are sticky.
Once they're designed in, they stay designed in for a very long time. They tend to be long lifecycle, 10, 15, 20 years. And they tend to be very profitable. So that's our kind of business. And it's hard to displace existing competitors. So you have to go out and do some M&A to really increase market share over the short to medium term.
With that, I'd like to open it up to the audience. If there's any questions? If not, I'll have plenty of questions about semiconductors, but. Great. Actually, I want to ask about data center there. So just this 25%-30% growth for next year, how would you sort of characterize the risk to the upside just given 100% was probably maybe a little bit higher than what you guys are envisioning this year? Just how would you characterize that risk to the upside?
So, risk to the upside? Does that mean is there an upside?
Yes.
Okay. Okay. I think there are opportunities. We charted out 2026 based on the design wins we have with our tier one customers. We have not included tier two customer opportunities in 2026. We have those penciled in for 2027 revenue. But is there potential to pull it into 2026? Yes. But we're not at that point where we could confirm it's going to happen. So I think the bias is probably towards the upside in 2026 for data center.
But I guess would that be an Advanced Energy capacity issue or Advanced Energy just being a little bit more selective on, okay, these are the projects that we'd want to go after and kind of prioritize?
Yes, definitely not a capacity issue. We've invested a lot, so we have sufficient capacity in the Philippines and in Mexicali today. We can also ramp up Thailand next year, and so that factory is completed, and for about six months from a go signal, we could start to produce product in that factory, so we've got substantial upside, I think, in the second half of next year if we need it.
Got it.
What's the risk of double ordering?
So just to repeat, the risk of double ordering in data center?
Yeah.
In data center.
Yeah. The risk of double ordering seems to be minimal. In fact, as a company, we really haven't experienced double ordering, I think, over the last five years. Most of our products are sole source. And so customers order them when they need the products. And so whether it's Data Center, Semiconductor, Industrial M edical, we haven't seen double ordering. So it's not a risk for us that I'm aware of.
What's the lifetime of your products, especially in data center?
Yeah. So the question is, what's the lifetime of our products, particularly in data center? The lifetime is quite long. We build highly reliable products. So I would say typically they're going to last for seven to 10 years. So it depends on the price of the product. Ultimately, the customer can choose to replace our product with a new box.
But in the semiconductor market, the pricing is so high that we have a pretty thriving service business where periodically we bring the boxes back into our shop and calibrate them, repair them, upgrade them. And that's a very good business for the company. But that's primarily semiconductor.
How large part of the semi business is the service part?
Service overall is about 10% of total revenues. And so within semiconductor, you could think of it in the mid-to-high teens as a percentage of revenue. So it's healthy. And it's been growing.
And a lot less volatile.
Much more stable. Yeah, absolutely.
I guess, going back to that sort of data center product lifetime question, but I would say your kind of customers are constantly asking for new products and innovation though.
Yeah. So basically, it's a continuous process. We're innovating every year. So the customers are trying to keep pace with the introduction of new GPUs and equivalents. And so they bring us in early in the design process so that our power solution is ready. And it's an integral part of their rack design.
The hyperscalers are demanding customers.
Yes. So we have a lot of demanding customers. Semiconductor and hyperscalers top the list.
Got it. Just have 30 seconds left, but if there are no questions, then we can wrap that up for today. Sorry.
I mean. I can see the next two years data center could be strong, but I mean, no one expects the amount of CapEx to be the same in five years' time, right?
Yes.
So I guess where's the big change that's coming to kind of make up for that maybe drop at some point? Or I mean, how's that going to?
Yeah, that goes back to our.
Which one do you think's got the biggest recovery sort of cycle there?
Yeah, that goes back to our business strategy. So we realize that semiconductor and data center are cyclical businesses. So at any given point in time, we think though industrial medical, semiconductor, or data center will be up. And so all these businesses go through ups and downs. But because we're diversified and we play in the high end in multiple markets, we think it makes it much easier for us to thrive during the cyclical downturns of these various markets.
We've kind of proven that out over the last few years because 2023 was a down year in Semiconductor. We continued to increase our R&D spending and capacity spending. 2024, we had some issues in some markets. And so every year we've had the ability to continue to increase R&D spending and increase capacity spending despite downturns in certain of our markets.
Great. That brings us to time. Thank you, Steve. Thank you, Paul.
Thanks a lot.
Thank you, Shane. Thanks, everybody.