Welcome to the Advanced Energy Industries Second Quarter 20 21 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, 20 20. I would now like to hand the conference over to your speaker today, Edwin Mach, Vice President of Strategic Marketing and Investor Relations. Please go ahead, sir.
20. Thank you, operator. Good morning, everyone. Welcome to Advanced Energy's Q2 2021 earnings conference 12. With me today are Steve Kelly, our President and CEO and Paul Oldham, our Executive Vice President and CFO.
If you have not seen our earnings press release, you can find it on our website at ir.advancedenergy.com. There, you'll also find the Q2 slide presentation. 2. Before I begin, I'd like to mention that AE will be participating at several investor conferences in the coming months. 2.
Let me remind you that today's call contains forward looking statements. They are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of new performance. Information
concerning these risks can
be found in our SEC filings. All forward looking statements are based on management's estimates as of today, August 4, 2021, and the company assumes no obligation to update them. Medium and long term targets presented today should not be interpreted as guidance. On today's call, our financial results will be presented Integration and transition costs, unrealized foreign exchange gains or losses and restructuring items. 2.
With that, let me pass the call to our President and CEO, Steve Cowley.
Thank you, Edwin. Good morning, everyone, and thanks for joining the call today. 2nd quarter revenue and earnings per share met the midpoint of our guidance. Demand remains very strong 2 and we recorded significant new design wins in all of our target markets. As forecasted, Our second quarter revenue was limited by shortages of integrated circuits and other key components.
Additionally, Late in the quarter, output from our Malaysia factory was constrained due to COVID restrictions. Component shortages will continue to limit our revenue into the Q3, but we expect a healthy recovery beginning in Q4 as supply improves. Near term, our number one priority is resolving the supply constraints. COVID restrictions also remain a concern, but the vaccination of our employees in Malaysia this quarter should mitigate much of that risk moving forward. As we deal with these supply issues, it's important to note that our order book is very strong, which sets us up very well for revenue growth 22 as constraints ease and we are able to bring supply more in line with demand.
2. During the quarter, customer demand across all of our markets continued to grow. 2. In the semiconductor market, the demand for our plasma power products twenty one. As the industry continues to invest heavily in new capacity.
After setting a record for sales into this market in the first half of twenty twenty one, 2. We expect second half sales to be even stronger. And as supply constraints ease, we saw increased demand across a wide variety of applications as macro conditions improved. In medical, 2. We benefited from an uptick in elective care procedures.
In the industrial market, we saw strength in flat panel displays, industrial automation, Data center computing demand also grew in the 2nd quarter and revenues from both hyperscale and enterprise customers were up sequentially. In addition, we shipped initial production units to a 4th hyperscale customer. Demand in the telecom market is improving largely due to increasing 5 gs infrastructure investment in the U. S. Although second half revenues in both data center and telecom will continue to be paced by supply, 20.
We are winning new high value added designs in both markets. Now let me turn to our strategy and growth initiatives. 2. Our ultimate objective is to drive sustainable increases in shareholder value through profitable revenue growth. We intend to achieve this growth by developing highly engineered proprietary power delivery systems.
This approach Leverages our core competencies, our technologies and our manufacturing base. Technology leadership, customer intimacy 20 and operational excellence will be the key enablers of our success. To accelerate our growth, We are putting particular focus on the semiconductor, industrial and medical markets. Customers in these markets build expensive complex machines 2. We are expanding our product development capabilities in these target markets and focusing our sales and applications teams on leading customers in these markets.
2. In our other markets such as telecom, networking and data center computing, the team will continue to develop highly differentiated solutions, By focusing on differentiated solutions and long lifecycle applications, we are building a business which should grow steadily And deliver good profitability. And we have a strong starting position with proprietary products accounting for nearly 3 quarters of our current revenue. In semiconductor, we are seeing great traction with our new flagship products. Both the EVOS plasma power system and the MaxStream RPS solution are being evaluated by all 2, an industry leader in RF instrumentation and calibration systems.
The GaAMS technology enables our plasma power customers to precisely quantify delivered RF power. This data is critical to the development of repeatable Thin film manufacturing processes. BKAM also provides a platform to expand Advanced Energy Service Business. In the medical market, we won multiple designs in the Q2 in imaging, therapeutic and life science applications. Winning in medical takes time, but the lawn product life cycles in this market ensure a steady stream of recurring revenue.
In the industrial market, we have multiple design wins in the Q2, including 2 new custom power solutions for industrial test systems. 2. In addition, we recently launched a new family of programmable DC power supplies optimized for test and measurement applications. 2. In the data center computing market, we secured multiple design wins by meeting the stringent power efficiency and density requirements of high performance computing and AI customers.
In the telecom networking market, 2nd quarter. Our focus on high performance infrastructure opportunities has already yielded several key design wins. 1 of those wins is on a 5 gs base station expected to be deployed by multiple carriers in the U. S. We secured a second win in the 5 gs space with a customized DC to DC converter We hired a new global sales leader, John Donahue.
John is a seasoned professional with extensive experience selling technology based products around the world. You will strengthen our customer relationships and help to drive share gains in our target markets. In closing, our markets are healthy with very strong demand for Advanced Energy's differentiated solutions. Although the operating environment continues to be challenging, our order book is at an all time high. As the component shortages abate, We expect to catch up to market demand, setting us up for a strong 2022.
We continue to be on the lookout 2. We've made 3 tuck in acquisitions, which have enhanced our technology portfolio and market position. Finally, as we execute our growth strategy, we believe that the company is well positioned to meet or exceed our medium and long term financial targets. Paul will now review our financial results and provide detailed guidance.
Thank you, Steve, and good morning, everyone. In the Q2, we delivered revenue slightly above the midpoint of our guidance despite a challenging operating environment. Total revenue of $361,000,000 was up 6% year over year and 3% sequentially. We also generated record revenues in our plasma power 22nd in our service business. Customer demand remained very healthy again during the quarter, resulting in an order book which twenty two.
On the other hand, new COVID related restrictions in Malaysia resulted in our factory idling for several days and further limited our capacity output for semiconductor products in June. 2nd quarter. In addition, shortages of critical parts continue to be a challenge across all our markets, limiting revenue upside. Cost pressures associated with the supply chain were worse than expected, resulting in Q2 gross margins below our target. Favorable discrete items in our tax rate largely offset these shortfalls this quarter resulting in earnings of $1.25 per share.
20. We expect the operating environment to remain challenging, particularly in the near term. Supply chain and pandemic related restrictions continue to be very dynamic with a few key suppliers and ongoing COVID risk in Malaysia being the most significant issues. 2. While we have made some improvements, recent decommits and extended lead times are expected to have a meaningful impact on our Q3 outlook eighteen.
With respect to Malaysia, we are actively working to get our employees vaccinated and plan to leave additional production capacity in Shenzhen through the end of the year to mitigate the impact and enable a quick recovery. 20. More broadly, we are working closely with both our suppliers and customers to optimize deliveries, while maintaining capacity across our factory network to be able to respond quickly as supply improves. While these challenges will have a significant impact on our results in the near term, nineteen. We remain confident in our ability to meet our medium and long term strategic goals as the operating environment normalizes.
2019. Now let me discuss our Q2 results. Overall, demand continued to strengthen across our markets, 2, which contributed to the greater than $125,000,000 increase in our order book. Revenues were impacted to a varying degree by market 2nd quarter. Semiconductor sales were $177,000,000 up 21% from last year nineteen and just off the record set in Q1.
Demand further strengthened throughout the quarter and our team overcame some of the COVID related restrictions in Malaysia, Revenue from our industrial medical markets grew 6% sequentially and 17% from a year ago to $83,000,000 22. Our order book in I and M is particularly strong, giving us visibility to support revenue growth well into 2022. Data center computing revenue was $69,000,000 up 17% sequentially with growth coming from both enterprise and hyperscale applications. Telecom and networking revenue was $32,000,000 in the quarter, which was lower than expected due solely to material 20. Non GAAP gross margin for the quarter was 38%.
The sequential decline was 20, primarily due to less favorable mix and higher than expected logistics and supply chain costs. We also saw lower factory productivity eighteen. Exacerbated by the Malaysia restrictions. While we expect gross margins to come under additional pressure in the second half, We continue to be confident in our ability to meet our long term gross margin goal of over 40% as the supply chain environment and related constraints improve. Non GAAP operating expenses were $82,600,000 up about $3,000,000 from last quarter and slightly above our expectations.
The sequential change was due to planned increases in annual labor costs, the addition of TGAM and higher customer and program spending. 2. Operating margins for the quarter were 15.1%. Other expense was $1,900,000 eighteen including $1,100,000 of interest expense and $480,000 of FX losses. We continue to expect other expense to be in the 1.5 $2,000,000 range going forward.
Our non
GAAP tax expense was $4,700,000 or 8.9 percent, primarily on favorable discrete items, which will not repeat next quarter. 2. Looking forward, we continue to expect the GAAP and non GAAP tax rate to remain in the 15% range. 20. Earnings for the quarter were $1.25 per share, up from $1.18 a year ago, but down from last quarter.
Turning now to the balance sheet. We ended the 2nd quarter with total cash of $510,000,000 and a net cash of $196,000,000 20, up slightly from Q1. Operating cash flow was $34,000,000 or just under 10% of revenue. 2. During the quarter, we invested $15,000,000 in the acquisition of TGAM and paid $5,400,000 in CapEx, $4,400,000 towards our debt and $3,900,000 in dividend payments.
In addition, During the quarter, we repurchased $6,500,000 worth of stock at $90.34 a share. From a working capital perspective, our days of net working capital were about flat at 96 days. However, Inventory increased by $49,000,000 as we continue to acquire raw materials to support higher demand levels. Churns were 3.3 times. 2.
Although it may take a few quarters, we expect turns to rebound as critical part shortages abate and we are able to fully ship demand. Accounts payable rose to $207,000,000 with associated DPO of 82 days, largely offsetting the increased level of inventory in the short term. Receivables rose slightly to $243,000,000 and DSO was unchanged to 61 days. Finally, Today, we announced that our Board of Directors increased our stock repurchase authorization to $200,000,000 in support of our long term opportunistic share repurchase strategy. Now let me turn to guidance.
Overall demand continues to be strong 22 and our order book supports growth well into 2022. However, a more challenging supply chain environment, particularly around a few integrated circuit 2019. And uncertainties related to COVID restrictions are expected to have a larger impact to our revenue levels in the near term. 20. As a result, we expect Q3 revenues to be approximately $340,000,000 plus or minus 15,000,000 2.
However, based on current parts projections, we expect revenues to rebound and grow modestly year over year in the 4th quarter 2nd half revenues approximately flat to first half levels. We expect Q3 gross margin to be around 35% to 36% on lower volumes and higher supply chain costs with the full impact of material and logistics costs being realized in the 4th quarter as we continue to invest in critical programs. As a result, we expect Q3 non GAAP earnings per share to be $0.80 $0.20 Looking forward, we are encouraged about the increasing customer demand for our proprietary power solutions, 2nd quarter. We are taking multiple actions to mitigate the impact of 20. Supply chain and operating challenges, while staying focused on delivering new products and next generation technologies to our customers.
22. As the current operating environment improves, we believe that strong demand coupled with actions we are taking will enable us to deliver solid revenue and earnings growth in 20 22. With that, let's take your questions. Operator?
Please standby while we compile the Q and A roster. Your first question comes from the line of Chris Sankar of Cowen and Company.
Yes. Hi. Thanks for taking my question. I had a couple of them. First one, just to clarify, I think, Paul, you mentioned Q4 should be up on a year over year basis.
So that basically implies Q4 revenue should be well north of $371,000,000 A, is that right? And if so, what kind of gross margin should we think about for Q4 Given you're still in this constrained environment and then I had a follow-up.
Yes, it's a good question, Krish. On balance, we would expect gross margins to improve from Q3 levels based on the higher volumes, but we'll also see the full impact of the material and cost Increases that we're seeing in the near term as those roll through. So I would say the gross margins would be up modestly from Q3 sequentially with further improvement as we move into the New Year.
2. Got it, got it. Very helpful. And then a question for Steve. It seems like you guys are having a little bit of a double run rate both on the revenue side And the cost side given all the constraints, you said that in Q4 at least the revenue side should improved given some of those constraints easing.
When do you expect the cost constraints to ease? And more importantly, because of this Constrained environment, are you losing any market share to your company? Thank you.
Sure. 2. Yes. So let me just address those two questions. You're asking about cost constraints and when those ease and then market share.
So we talk about cost 2 issues, we're talking about 2 things. 1 is that we're seeing increases in cost for actual parts. Some of that is just price increases, some is expedite these we're paying to get the products quickly. The other area of increase is shipping costs. So we've seen a tremendous amount of pressure on shipping costs from Asia to other parts of the world.
So we are taking action. We took action back in the Q1 to pass on at least some of these costs to our customers and we'll take further actions Particularly on the shipping cost front to make sure that we're sharing the burden with our customers on that. Now from a market share standpoint, The short answer is no, I don't think we're losing market share. Actually, I think we're gaining market share in semi. When I think about market share, I think about it over the course of years, not quarters.
And as I look at our semiconductor market share 20. In 2020, we grew at twice the rate of WFE and that was partly due to our customers ordering products From us, somewhat ahead of the demand wave. Now this year, largely due to parts shortages, We're going to underperform relative to WFE. And our customers are coping with our underperformance by Consuming more from the hub inventory. So that hub is really designed as a shock absorber and so far it's been working pretty well for our customers and for us.
Next year we expect to resume our growth at more than 1.2x WFE semiconductor in particular is there's a significant time lag between design in and production and also our products are proprietary.
2. So you need to
look at market share gains and losses over the course of years and not quarters. So for us the key to growing share is bringing out the new innovative products like EVOS and MaxStream and bringing those products to market in a timely fashion. So if we deliver those products
2. Your next question comes from the line of Scott Graham of Rosenblatt Securities.
2. Hey, good morning and thanks for taking some questions here. So, Steve, I mean, the Plain and simple first question I have is when I kind of take the 3rd quarter guidance and roll it through the old model, it just It's hard getting to $0.80 a share. It just seems like maybe you have maybe some fudge factors in there. I don't know.
But 2. Are you just putting in sort of a buffer in there, sort of just in case?
Yes. Scott, maybe let me take that question. I think the biggest impact relative to where we've been, I'll say most of last year is the change in gross margin. And when we look forward, there's really 3 factors that are impacting that, that are, I'll say, different than they were 3 or 4 quarters 2 ago, number 1. And 2, that we think are more transitory.
The first is clearly there's higher Near term supply chain costs both in materials and logistics. And as Steve described, some of those are very transitory like expedite fees, we think logistics costs will normalize over time, but also some part piece price increases. That's the biggest 2,000 factor between where we ran in gross margin to where we see things. And that result, we started to see that in the second quarter. It'll be more pronounced in the Q3 and we'll see the full impact as it rolls through our inventory in the Q4.
That's why we think that's going to progressively get a little worse before it gets better. 20. The second thing is we just have lower factory utilization because our factory is waiting for parts. We've consciously decided to maintain capacity And capability because as we get parts in, we want to be able to turn them around quickly and we do believe the supply chain environment will improve and that will give us a chance 2 to over perform. And the third thing is, we've consciously delayed the closure of our Shenzhen to Malaysia factory in order to preserve some flexibility.
So a year ago, we essentially had one highly efficient factory Outputting our semiconductor products. Today, we've nearly fully ramped semi, but we haven't ramped down Shenzhen to preserve this little bit extra capacity. That's inefficient. That will also resolve itself over the next couple of quarters. So look, I'd like to say we have some nineteen-twenty nineteen guidance, we're certainly looking to drive that.
But those are the factors that are impacting gross margin. And again, think of them as things that are going to impact us for a couple of quarters, But there's a clear path for those to improve as we move into next year move in and through 2022.
Maybe just a further comment, Scott. And sometimes that cost us a little bit more, but I think it pays off in the long run for Advanced Energy.
Just off of the guidance, just to circle on my question here. I don't want to beat a dead horse, but it just so you're essentially saying, Paul, that it's possible that the gross margin can be lower than the guidance that you've laid out and you just want to handicap against
20? We think this is our best view of gross margin given that dynamics in the market and our factories right now. I wouldn't say it's conservative or that we have A lot of downside, we tried to call it the best we can and be realistic about it. And look, we'll try to beat it, but that's our best view.
Fair enough. Okay. Could you tell us when it comes to the 3rd quarter kind of how you see each of the segments performing and just best you can and then also how that impacts mix on the gross margin
The Q3. Yes. I'll make a few comments there. First, circling back to our prepared comments, we see strong demand across all the markets. So for us demand is not the issue.
It's just truly supply at this point. And that's the case for the next 3 quarters at least. And so we think we're doing very well in the design win front and on the demand front, It's off the charts in almost all of our markets right now.
Okay. If I could just squeeze in one more question, if you don't mind, particularly for you, Steve, 10. Since you're now steering the company. I know you indicated that semiconductor, industrial and medical are sort of your Main drivers, but Artisan brought a wealth of really nice markets as well. And as you noted, 67% of your sales are proprietary.
So am I reading too much into the sort of the main drivers versus the secondary drivers being telecom, Data center and networking there.
Well, no, I think what I'm saying is we're accelerating 2,000 to focus on proprietary opportunities. So Artisan brought in some very interesting business particularly industrial and medical, Also in telecom, also in data center and some other areas. And so we're basically pushing more of our development resource on to proprietary opportunities because we like those opportunities because they're sticky, they're typically long lifecycle And we partner with the customers to come up with unique solutions. And that's really in our wheelhouse at Advanced Energy.
2. Your next question comes from the line of Mehdi Hosseini, SIG.
A couple of follow ups from my end. It seems to me Most of them, the revenue shortfall, at least to my expectation, came from the semiconductor segment and this is a sector that you have had the most experience And your OEM customers have the longest lead time. How should I reconcile that with Shortages that you're experiencing. And I'm just curious how you're managing Required inventory of components for semi versus other sectors. Then I have a follow-up.
2?
Okay. I'll start and then Paul will complete our answer on that one maybe. First, we're seeing shortages across all of our 2 target markets including semiconductor. But we are working very closely with our biggest customers in semiconductor to make sure 2, that we satisfy their immediate needs. So obviously it's a daily struggle, but I think I could say in Q2 we did a reasonably good job Not being the gate to their production.
And that's our objective in Q3 as well. And so we work closely with the customer To make sure we're using the components we have in the right products that the customer needs. So that's our number one priority.
2. Yes. If I could just add on to that, I think Mehdi, tactically in the short term to answer your question, you're right, semi was a little lower than our expectations. That was primarily the result of the late movement control orders in Malaysia in June, which we just ran out of Both in Malaysia and actions we're able to take now that we're able to get vaccines into our people there. And we would expect in the second half, we would see semi grow in total.
Now the timing exactly between quarters will depend on parts and timing a little bit, But we'd expect to grow off the record first half levels in semi in the second half.
Okay, got it. Thank you. And regarding telecom and data center, are you finally beginning to see A stronger recovery, like I look at your data center, it seems to me that The rate of decline on a year over year is coming down, which is very encouraging. But the telecom, You had like a 20 some percent decline on
a year over year basis. And I'm trying to better understand How do
you see the recovery trending for each one of these subsectors?
Yes, it's a good question. I would say demand in both those markets is strengthening like we said in our earlier comments. The gating factors is materials. And so certainly we're seeing the revenue levels uptick in our data center and computing nineteen. Markets, we talked about initial shipments to a 4th hyperscaler.
But in the end, as we look over the balance of the year, How much that grows will be a function of how quickly we can get parts. I'll say similarly in telecom, we expected that as we said last quarter To kind of bounce around the current levels as we begin to see more investment in 5 gs over time. Well, we're beginning to see that investment and we commented on declined sequentially. And remember in telecom and networking is where we had the most pronounced impact of our
20. Great. Thank you. And then one last item for me is, If I were to look at a year from now and assuming that end market demand for different sectors remain strong, Should I assume that the margin profile for all the different sectors are similar?
Yes, I think the margin profiles across the various markets aren't going to be similar because there's different dynamics. But I would say you would expect to see margins improving across all of our markets. Part of that will just be recovery in volumes. Part of that is our portfolio optimization programs that we have in place. And part of it will be optimizing our factory and supply chain as we're able 2 get into a more normalized environment.
Got it. Thank you.
Your next question comes from the line of Amanda Scarnati of Citi.
Good morning. The first question I have is on the TDM acquisition. Can you just Remind us of what the impact is there in semis and what is adding to the portfolio outside of your traditional power businesses?
Yes, Amanda, I'd be happy to comment. Just to remind you, so TCAM is the industry leader in RF calibration instrumentation. And what we saw was their technology is very complementary to AEs because we're the leader in RF power generation and impedance matching networks. So when you combine TGM and AE together, we think that enables an AE qualified WACC ecosystem, which is traceable to international standards. So we think it enhances the overall RF business and our value proposition, particularly with the semiconductor customers.
20. Yes. I'll just comment on the impact. We said when we acquired TGaM that there was annualized revenues of greater than 10,000,000 That's in support of a range of customers, but I would say more than 50% would be semiconductor in that market.
2. Great. And then just kind of switching over back to your confidence levels on the Q4 recovery, We're sitting here last quarter, you're talking about growth in the second half around 5% to 10%, half over half, and now we're talking about sort of approximately flattish. What gives that sense of confidence in that recovery happening in Q4? I know you've been commenting that demand is still strong at the supply side, 20, but what changes over the next 2.5, 3 months?
Yes, I
mean, I think there's been 2 constraints to growth. 1 is parts and one is Malaysia. So in Malaysia, practically all of our employees will be vaccinated by the end of this quarter. So I think we're taking the Malaysia COVID restrictions out of the equation, at least as it pertains to our factory. So that's a big plus.
So we can go full speed ahead in Malaysia and that again that's for semiconductor customers primarily. The other part And I could tell you that we've solved most of our issues. There's only a few suppliers now that are gating us 2. And we're having daily conversations with those suppliers. And what I see right now as far as their commitments gives me a lot of Hope that things will start to get better in September and we're going to steam into Q4 with a better product supply.
That said, we've been surprised. We were surprised in Q2 because we thought our Q3 was going to set up a lot better. But I think I sense that things are going to get better over the next couple of months and it's going to help us a lot in Q4.
One more question just to kind of follow-up here and clarify. You mentioned that the Shenzhen is here in part Malaysia. Can you just talk about how that's offsetting each other and sort of what's going into and how much Shenzhen is actually replacing from Malaysia?
2? Yes. So the reason we're keeping Shenzhen open is to allow to expand the aperture a bit on some of our high volume RF generators and matches. And this way could supplement what we're doing in Malaysia. It also allows us to have burst capacity Because sometimes these scarce components come in, in a lumpy fashion.
And so we can Basically expand the amount of product we can build in a given amount of time if we have 2 locations as opposed to 1.
20. Thank you.
Your next question comes from the line of Tom Diffely of D. A. Davidson.
Yes, good morning. Thank you for the questions. So first, 2. Paul, you talked a lot about mitigation actions. I was just curious, does that just street ball around looking for new suppliers and expediting parts?
Or 2. Is there more to it than that?
I'd say, as Steve mentioned, this is our number one management 20. Priority is resolving these and we've made a lot of progress. As Steve said, if you look across the broad set of parts, a lot of those are resolved, But we have a few key suppliers where we've not been able to close the gaps like we'd like. So it is looking at all options. Sometimes those are similar, but alternative parts.
Sometimes those are parts we can get from other places in the channel. Sometimes it's working with those suppliers to find ways to expedite or run hot lots, so we can get a few parts faster. In some cases, we may in the longer run actually redesign some parts to give ourselves more flexibility. So it's a full court press of actions throughout the management chain to help resolve 2, these last few key component shortages. And there is no silver bullet here.
It is just down to hard work and Day to day effort to improve the situation.
Okay. On the front, have your customers and customers' customers That involved and helped you kind of put pressure on some of these suppliers as well?
Yes, I'll make a few comments here. We're certainly involving our customers where it makes sense in exerting pressure on our suppliers and certainly they've made a difference on more than one occasion. So we're involving everybody that can help us extract more parts from our suppliers or from the channel.
2. Great. That's good to hear. Thanks, Steve. And then on the Malaysia front, it sounds like you've had pretty good success getting access to gas beams.
20. I'm wondering how that was worked and is there going to be an issue or an opportunity to change that to get the vaccine as well?
2? Yes, we work with the government in Malaysia and they had a special program to vaccinate key employees in Penang and other parts of Malaysia. So we signed up early and that's why our employees are getting vaccinated in Q3. So I think the nineteen. In Shenzhen, I also believe our vaccination rate is pretty high.
So that has not been a concern for
us. 2. Okay, great. And finally, Paul, you mentioned decommit. Is that when you're a supplier, you've made that Contracts supplies?
Yes, that's essentially when we have committed deliveries from a supplier. And then as you approach that date, the supplier moves the date out of when they expected to ship the parts. And look, that could be for a number of reasons. 20. When the supply chain is this tight, if you have any hiccup, it ripples through the system, right.
And so I think that's where we mentioned it's a dynamic environment. You have commitments around when you expect to get parts And we've seen a few of those move around, and even recently. I think that's maybe the biggest change from our view If you go back a quarter is some parts that we thought we had in hand have moved out. Look, This is a function of lead times. I think if you look across the particularly the integrated circuit, Broad range of parts, you've seen lead times extend over the last quarter or so.
And 2. That ripples through the industry a little bit as people adjust to those changes.
Okay. Thanks for the
color. 2.
Your next question comes from the line of Paretosh Misra of Berenberg.
Thanks, good morning. So when I compare your 3 year goal of sales of $1,650,000,000 with the Q3 3 guidance. It's about $300,000,000 delta. So I was hoping if you could provide some thoughts on which end markets might provide A bigger improvement to get to your long term target. It's going to come from a little bit of all of 2.
The markets, Paretosh, but certainly semi has been strong and can be stronger. We've been limited in our ability to deliver The full demand in that market and we think that market is going to continue to strengthen through 2022 and That's I think there's conventional there's a lot of information in the market that suggests that even the supply challenge you're seeing in the near term Essentially, could have the effect of extending the upside run. So certainly, we'd expect further growth from semi. Industrial and Medical is a focus area for us. We'd expect that one to actually grow faster than the other markets as we are able to Expand our product portfolio of configurable products, move into some targeted areas where we're making investments and expand our channel.
Data center computing has been in a digestion period that it's coming out of. So we would expect more growth there Even as we focus our efforts on kind of the more differentiated or proprietary parts of that market. Telecom and networking, we've said all along, we don't expect to grow a lot. So it'll probably be the slowest grower of the 3. 5 gs demand as that actually starts to get traction and rollout will help there.
But on balance, the capital equipment market, the infrastructure market Is now as fast to grow as the other areas. So hopefully that gives a little bit of color. Yes. No, this is great. Very useful.
And would you say same ease
of the end market or segment that's most affected by these supply chain issues?
No, I would say that all markets are affected by it. So we're working hard to close the gaps in all areas. But Obviously, semiconductors is a high priority for us, given the importance of our customers in that segment.
2. Got it. And the last one for me. If you could give some more context on your order book. Did it improve in all three segments or at least the 3 major segments?
And is it set an all time high for all three of them? Or any more color you Yes, if you just look at the absolute growth in the order book in our earlier comments, clearly There is a lot more demand that we could ship if we had parts. And that's across all areas. Semi, you hear it in the comments of our customers. Clearly, we don't take orders necessarily there.
We ship into JIT VINs. But as Steve said, we've that's Kind of been the buffer in the meantime. And so getting those back to more comfortable level in the higher growth there will certainly help, but we think we have Good and continuing growth to come in, Sami. Our strongest order book is actually in Industrial and Medical. If you look at the orders that have come in relative to our ability to deliver parts, we think that's really encouraging because that's a market again that we are Applying additional resources and effort to because we think it's very attractive.
But we also have we had good demand well over But a little stronger certainly our best order book is in I and M and we have a lot of confidence in the order growth in semi number
12. Your next question comes from the line of Pavel S. Moshanov of Raymond James.
Yes. Thanks for taking the question. Back to Malaysia, are you operating under a legally mandatory curtailment restriction in terms of operating hours or factory utilization? Or is it purely a matter of kind of precautionary actions that you're taking at the plant?
Yes. So in Malaysia, we're definitely operating under constraints, but the constraints are much less than they were back in June. So we think the current operating model of 80% capacity is definitely something we could work with and maintain our production output.
And that 80% is in That's mandated.
Yes, that's a regulated
and highly
A monitored or enforced limitation, but that's not our choice.
Understood. In the context of the supply shortages that have been amply discussed in the last half hour, Presumably, some smaller players in the space are feeling even more pain than you are. And I'm curious if From an kind of opportunistic M and A standpoint, if this creates some interesting potential for you that perhaps did not exist 6 months ago.
I think your thesis is correct that some of the smaller players are feeling even worse pain than we are. And we have seen opportunities open up at customers because of that. But we have not seen any M and A Opportunities of pure quote, yes, because of that reason.
Always tomorrow. Thank you, guys.
2. Thanks, Pavel.
Your next question comes from the line of Quinn Bolton of Needham and Company.
Hey, guys. Maybe I missed
a bit, but maybe just starting off in the Q3 guidance, looks like you're about 10% below where the street consensus was. And so Wondering if you might be able to sort of ballpark, give us a sense how much of that are the movement restrictions in Malaysia limiting output from that factory in the quarter? How much of it is supply constraints where you can't get components? Is it split fifty-fifty? Is one a bigger factor?
Just looking for any Thoughts you might have on the impact of the relative contributors?
Yes. Quinn, for the Q3, it's predominantly Materials availability and parts. We do think the COVID restrictions impacted us in Malaysia in June. We talked about that being sort of the late quarter additional restrictions there. But we expect that to get much Better over the course of the Q3 as we get our workforce vaccinated and hopefully things just continue to improve.
So So it's predominantly supply chain related that's impacting our lower revenues in Q3.
Got it. Second question,
just wanted to follow-up on the confidence in the Q4. I mean, obviously, you guys Had a more bullish outlook for the second half 90 days ago and you've experienced some decommits from suppliers. So what makes you think that doesn't happen again? I mean, you read the press, you talk to other companies in the supply chain, things are still pretty bad. Hopefully, they start to trend upward on the margin, but for you guys to be kind of talking up 10%, maybe 10% plus quarter on quarter is a pretty hefty sequential guide for the Q4?
Yeah. As Paul mentioned earlier, we've closed most of our gaps with our suppliers And we're down to the last few. And so, we're giving those last few suppliers a lot of focus and a lot of pressure. And from what I could see, most of those commitments from the problem suppliers are getting better in the last 4 months of this year. So I actually see upside in Q3, but I'm not ready
to commit to it because of some of the
issues we faced recently. But certainly Q4, I'm relatively confident that we can meet that number and hopefully exceed it.
Great, Stephen. And maybe last question. You guys have said you're sole sourced on a good percentage of the 20 percentage of the solutions you deliver to your customers, you're likely sole source and almost everything semi cap equipment related. I guess I'm just Struggling with your ability not to pass along some of these supply chain costs, I mean things like expedite fees, obviously, I think are something that your customers would understand given the supply constraints in the environment. I Realize you're trying to protect customer relationships, but on the other hand, you're not running a charity either.
So where are you in those negotiations in terms of trying to pass along some of the twenty. Supply chain costs, I know you're probably not ready to raise pricing across the board, but it feels like there should be a median here that you can pass along some of these increased costs that you're facing.
I think it's a good point and I think we have a continuing dialogue with our customers on how we could share the burden of these increased costs, Both the parts cost and the shipping cost. So I think moving forward, I think you'll see hopefully more sharing with our customers Because it's a difficult environment and we can't bear the cost alone.
Yes, I think Quinn part of that too is just timing. I mean, I think in the last quarter, we've seen things become more difficult on that front and we did take actions early in the year, We've learned more and so part of that's just timing.
Got it. A lag effect. Understood.
Okay. Thank you. Yes.
20. This concludes our Q and A session. I will now turn the call back over to Steve Kelly.
Hey, thanks for joining us today. We're excited about the opportunities in front of us and are executing on our growth strategy. While we are constrained by supply in the near term, we believe that strong demand for our products coupled with a record order book positions us well to deliver solid revenue and earnings growth in 2022 and beyond. We look forward to talking to many of you in the coming weeks. Thank you.
20.