team. We have Steve Kelley, President and Chief Executive Officer, Paul Oldham, Executive Vice President and Chief Financial Officer. In the audience, we also have Edwin Mok, Senior Vice President of Strategic Marketing and Investor Relations. Before we begin, Paul has some couple comments to make.
Just a reminder that our comments today are subject to a number of disparate risk factors, and we encourage you to have a look at those in our filings.
Awesome. Crazy week so far. I'm sure there's a lot going on at Advanced Energy as well. Steve, could you start us off maybe by giving us an overview of what you've been seeing the first quarter and then in your second quarter outlook?
Yeah. The first quarter was a good quarter for us. We came in above our midpoint guidance in both revenue and profitability. We also crossed the gross margin threshold of 40%. We've been trying to get above 40% for the 5 years I've been CEO, so it was nice to finally make that move, and we think we can maintain the move above 40%, keep it there, for the remainder of this year, and our ultimate goal is to get to 43%, but 40% was a big milestone. We also announced that we saw a large increase in orders from our semiconductor customers in the first quarter. We have a strong backlog now for the remainder of this year into 2027. From what we hear, that semiconductor strength should last into 2028. That was a good quarter for semiconductor orders.
In Data Center, we were able to start sampling our 800-volt solutions. Today, we actually announced some more specifics on those solutions. We've been sampling a number of customers over the past three months and getting really good feedback on our modular solutions, which feature very high power density, best-in-class power density, and very high efficiency. In Industrial & Medical, we talked about the health of that market. It had been in correction mode for the better part of two years. We see Industrial & Medical normalizing now. Backlog is strengthening. We expect our revenue to increase every quarter this year. Bottom line, all three markets are looking very strong in 2026 and into 2027.
Got it. We'll certainly get into each of those segments for sure, but when we look at the high level and look at the full year, you've certainly also raised the guide for this year. Maybe walk us through which segments you're seeing the most strengths in, and then maybe perhaps some weaknesses in others?
Yeah. We don't see any weakness. What we've said is, in Semiconductor, it's very strong, and we're expecting greater than 20% growth this quarter, year-on-year. The second half is going to be more than 30% better than second half of 2025. In fact, the demand is so good in semi that we're going to open our Thailand factory a quarter early, so we'll be able to start producing semiconductor products in Thailand in Q4 of this year. In Data Center, demand is very strong. What we've seen is that there's been some movement in the forecast, and it really is tied to the availability of memory modules and logic silicon, basically. As we enter each quarter, there's a lot of uncertainty about the exact mix, but we know the overall demand is excellent.
What we see there is a very strong second half. Again, the other factor behind our Thailand factory opening is Data Center. In addition to the semiconductor products we're going to produce in Thailand, we're also producing Data Center products. That's important because Data Center is high volume, low mix, and it's a great way to start a factory, right? Because you absorb some of those initial fixed costs that you have in any new factory startup. Demand in Semis, Data Center, very strong. In I&M, it's also looking good. We're seeing a lot of our design wins transition into production, and we're seeing the health of our distributor channel, is much better than it was a year ago. We've seen our inventories and distribution go down six straight quarters in a row, and it's pretty close to equilibrium levels.
We're pretty optimistic about our I&M business moving forward.
Mm-hmm. Appreciate it. Going into semiconductors, as you say, we can probably talk about both demand and supply. Starting with the demand side, I think it's been pretty clear that a lot of the semicap vendors have been raising their guide this year and next year. Clearly, a lot of demand signals here and there. I think consensus at this point is the WFE market rises maybe 30% this year, another 20%-25% next year.
First of all, is this similar to what you're seeing? Secondly, clearly you have a more exposed side to depo and etch.
Yes.
How should we think about AE's growth in relation to the WFE market?
Yeah. I think we're going to have the best year we've ever had this year, and we're seeing very strong growth. As I mentioned before, second half is going to be at least 30% better than last year, the second half. There's upside to that. Again, that's why we're opening our new production line in Thailand. I think for us, the more important question is: Are we positioned to gain market share over time? We are. We had introduced our new products, eVerest, eVoS, the NavX, back in mid 2023. We've been working closely with our customers over the past three years, getting these products designed into leading-edge processes. Not just logic, but also memory processes. We've been successful, and so we're starting to see some of that revenue appear in our revenue line.
We'll see more of that in 2027, and it's going to grow in 2028, 2029. We feel very good about our ability to grow market share in semiconductor. In addition to that, referring to WFE, I think it's well known that at these advanced nodes, there are many more etch and deposition steps. The etch and deposition intensity goes up. That benefits our customers, and it benefits us.
These new products, you've been mentioning them for quite some time, obviously. Is there any way to think about maybe units and content? How are they different from the prior products? Do they give you any advantages in certain areas?
Yeah, that's a good question. These new products are replacing, I would say, pretty mature products introduced more than 10 years ago. The value that we're providing, it's much greater than was provided by the old products, which means it's a higher price. It's also a higher margin. That's an accelerator for us. As these leading-edge processes ramp to volume in memory and in logic, we get the benefit of share gain, higher prices, and etch and dep intensity.
Could you also maybe talk about the design wins that you might have had, and how long do these wins typically last for? Is it a two to three-year timeline or a three to four-year timeline?
Yeah. I think on the design wins, it's a multi-year effort. The way it works is we introduce our platform, the customer evaluates the platform, and their laboratories comes back to us with requests for changes. We create a derivative product, and they work on it some more. We go back and forth, and then our customer brings their customer into the mix. That's where we're at with most of these products now, where our products are being tested in end customer wafer fabs, essentially. This is a multi-year effort, but the good news is it's a sole source design win. There's no competition once we win the slot, and it lasts for years. Particularly for some of these nodes that will last for five or 10 years, they'll keep buying products from us. After that, they'll continue to service products with us.
These are good revenue annuities for us, these design wins in semiconductor.
Is there any way to quantify the ramp? You said it starts in 2027, and then it runs through 2029+. Clearly, you're seeing semi strength beginning probably next quarter and then into second half. I'm sure all of this is incremental to what you're seeing today.
Yes.
Maybe help us quantify this benefit over the medium to long term.
What we said was in 2025, we had new product revenue in semiconductor between $10 million and $20 million, and that we would at least double that this year. We haven't quantified beyond that, but these ramps tend to ramp pretty steeply, so once the process is qualified, you see a pretty big increase in orders. We're expecting a significant ramp in 2027 and in 2028 for both conductor etch in 2027 and dielectric in 2028.
Got it. Are these, in any ways, cannibalistic to your old products? I think you said these are very mature tenure-type products that you're replacing. Is it, you think, pretty much all majority incremental or any others?
I think it's all incremental. The good part here is that we're providing something that's very difficult for our competition to compete with. This is increasing our market share at the leading edge. What we're seeing is once we've won that leading edge node, in some cases, the customers are trying to basically back convert. They'll go a little bit nearer in time to see if they could use our technology for more mature processes. There's also, I guess I characterize it as an upgrade opportunity in some cases that we haven't quantified yet, but it could be substantial.
Got it. One more on the semis market. Increasingly, obviously, the industry is very supply constrained today. We're seeing increasingly more fab upgrades, say, rather than greenfield sites. How does that have an impact, if it has any, on Advanced Energy's tools and services?
Yeah. I think we've heard a lot of talk about upgrades is in the NAND fab business. Really, it doesn't impact us very much because our penetration in NAND fabs is less than what we have in DRAM and Advanced Logic. I think where we'll be able to gain share in NAND is in the greenfield fabs, where I think the end customer has an opportunity to upgrade to systems that use our latest solutions.
Got it. Speaking of your customers, I guess, is there any lag between when your customers start to ship orders and then when you maybe recognize revenue? Is it usually before your customers? How does that typically work?
Yeah. It's generally before our customers, because we have a subsystem that they plug into the larger system. The way we operate with our largest customers is in a just-in-time inventory mode. They'll have bins where they keep a certain inventory of our products, and we'll ship to the bin level essentially. That prevents them from running out of product.
Got it. On to Data Center. Clearly one of the fastest-growing segments for you. I think you've had eight record quarters of straight growth. This second quarter, I think you said the growth may be moderating a little bit. Could you explain what that could mean and what you're seeing for the rest of the year as well?
I think the second quarter forecast, is really a short-term phenomena. It's not an indicator that demand is going down for us. It's just an indication that some of our customers were having difficulty securing some products. There are downstream supply chain issues that our customers were dealing with. I said on the call that I thought that our customers would be able to solve most of these issues over time, and we are seeing that. I also said there's upside bias to our numbers and Data Center. I think we guided to a relatively conservative number, a number we knew we could hit, but we're certainly aiming for much better.
I see. I've been comparing your semi market to the WFE market. I think a lot of investors probably compare your Data Center market to the cloud CapEx.
Yes.
I know it's not exactly one-to-one, but what's the relationship there, and perhaps what could help you upside or downside the headline cloud CapEx number?
I would say the relationship is loose at best. If you take a look at our growth last year was 107%, I think 2025 versus 2024. This year, our forecast shows that we're going to grow at least 35%. It's difficult to correlate with CapEx spend. What we think, based on what we see in front of us, is that we're gaining share with our customers, our margins are getting better, and we're filling our factories with these products. It's another reason we're opening Thailand in Q4 is because we've run out of capacity for Data Center in our existing factory network. The business is very healthy.
I see. Are there any other metrics that investors should be aware of? I think some people are trying to track the gigawatts that are installed. Is it the power architecture type, or what are some helpful metrics that we should be looking at then?
It's a tough one. Because our strategy in Data Center has always been to focus on the hard power problems, solve those problems, and get paid for solving them. We're not trying to address every opportunity out there. We're very selective. I think you're going to see years where we have outsized growth, other years where we have more modest growth, but it's kind of independent of the large metrics.
Got it. For 2026 specifically, you've said you have probably more upside than the 35% that you mentioned. Would the gating factor be more supply or demand? Because the demand seems to be almost out of control.
Yeah.
Any thoughts around that?
Yeah, I think the gating factor is definitely supply. It's downstream supply chain constraints, if our customers are successful in addressing those constraints, yeah, the demand is quite impressive.
Got it. On your specific customers, I know you can't talk specific names, but you do have exposure at all four hyperscalers. Are there any differences in what you ship to each of these customers? What's your general relationship there and your exposure?
Yeah. It's interesting because every customer wants something different. That's our kind of market. Our business is bringing best-in-class technology to our customers and then customizing that technology to their needs. That's a characteristic of the hyperscale business, is everybody wants something a little bit different. We're able to accommodate that for a limited number of hyperscalers. As we look forward, we have a second wave of customers coming, basically non-hyperscale customers who want similar products. They're not as engineering intensive, so we take existing technology blocks that we've already developed for other purposes, put them together, add a few bells and whistles, and we've got a product for the second wave customers. It doesn't drain resources from our main focus, which remains the hyperscale.
Got it. When you say second wave, are these mostly neoclouds or enterprises? Help us understand that nomenclature, and I think you've also said that these are more for 2027 and beyond. Is that still the right outlook to have?
Yeah. We use the second wave nomenclature to refer to anybody who's not a hyperscale customer, so it includes neoclouds, it includes enterprise customers. We have none of that revenue in our forecast for 2026, so we believe it begins in earnest next year. There's a possibility we could start to ship to those customers in the last quarter of 2026. It's not in our forecast yet.
Got it. Your hyperscalers, you've been mentioning they're sole-sourced. Is it also similar for these second-wave customers?
It's a mix, like it is with hyperscale. Mostly sole source, but also some were one of two sources.
Got it. Does that have any impact to your margins or pricing, do you think?
No. We think the business for the second wave of customers should come in with very similar margins to what we get for the hyperscale products.
Understood. I do want to dig into the competitive landscape. People obviously talk a lot about the competition. Delta is also doing pretty well. Could you talk about what makes you differentiated? Do you think you can gain further market share at existing customers on top of these new customers?
Yeah. I think our position in the market is we're the technology leader, and I think we have one peer competitor, it's Delta. Our objective is to leverage our technology advantages. Together with that, we combine speed of development, as well as our ability to ramp to volume quickly. That combination has been a winning combination for us. It's our willingness to invest a lot of money in our factories, our willingness to invest a lot of money in our engineering team, and our focus on highest power density, highest efficiency, and highest reliability. That's a winner in the data center market.
Is there any way to think about the relative market share today?
We don't measure market share in Data Center. We're focused on a high-quality business that has a good return on investment and good gross margins, and less concerned about market share.
Understood. You've said the gating factor is probably going to be supplies. You've mentioned the Thailand factory. When you add all of those together, I think at some point you've said you can satisfy about $3.5 billion of sales. Well, here we are. The WFE market is exceptionally strong. Data center is exceptionally strong. Industrial is likely recovering. Is it going to be enough, and do you have any plans further out than the Thailand fab?
Yeah. I think those figures I discussed in the last call, the $3.9 billion in total, those are kind of our nameplate capacity. We have the ability to stretch that capacity to probably $4.5 billion -$5 billion if need be. I don't think capacity's going to be an issue for the company anytime soon. The other thing to keep in mind is we'll likely do at least one acquisition, which will come with factories. Yeah, I think we're okay on capacity.
Got it. More on the 800-volt, clearly a big tailwind for the industry. What's AE exactly doing in this architecture? How are you guys differentiated? Any implications to pricing, margin, share, any of that would be helpful.
For us, it's the next logical step. I think we've gone from 12 volts to 48 volts, and now we're going to 800 volts. The nice part about this is it leverages the same things we've done before. This focus on high power density, high efficiency is the same thing we're bringing to 800 volts. We announced some new products this morning in our press release, basically, we're claiming best-in-class power density and efficiency. These aren't future products, these are today's products. We've been actually working with customers for months now, with these modules, and we're getting some very good feedback. You'll note that it's a modular approach, that allows the customer to customize to their needs. We can build the modules, we can put the modules on a board for the customer.
We could construct heat sinks, the whole thing. It leaves the ultimate solution in the hands of the customer, and they could work with us to arrange the parts.
Should we assume you're designed into each specific customer's racks rather than maybe, say, NVIDIA or some specific accelerators?
Yeah. We're focused just on the rack. This would be taking 800 volts in and then down converting it to whatever voltage the customer needs.
Got it. When we think about the 800-volt architecture, are these usually greenfield data centers? Obviously the hyperscalers, do they need to invest in completely new sites to support these, or are there also upgrades type revenue as well?
To the best of my knowledge, it's mostly greenfield. There might be some upgrade plans out there too, that I'm not aware of, but that's the reason why we don't really see meaningful revenue in 800-volt until the second half next year. Really 2028, I think we'll see.
Got it. Any implications on content and margins from the 800-volt?
Yeah. We've taken a look at that, we think our content goes up with the 800-volt transition. We also think our margins get better. It's a different type of product, right? It's modules and boards and not boxes. It's easier to manufacture, and I think we can drive better margins in that business. We're looking forward to becoming a major supplier to 800-volt Data Center solutions. I think we're in a good position from a technology standpoint, and we certainly know how to build these types of modules.
Got it. A little bit on the Industrial & Medical market as well. A lot of the, at least in the semiconductor market, we've been seeing some recovery, particularly in the industrial side. Help us understand what you're seeing in the market, and what kind of outlook you have for the foreseeable future.
Yeah. Maybe going back a couple of years, I think the Industrial & Medical market was the last market to catch up after the COVID supply chain shortages. That catch-up occurred in 2023, in large part. After that, basically Industrial & Medical distributors and customers had too much inventory. They were out of phase, the inventory and the demand. It took about two years to work through their inventory problems as a market. Now we're in a situation where inventories are where they need to be, and the customers are ramping new designs. A lot of the customers are focusing on trying to consume the inventory and selling older products. Now they're focused on the future. They're ramping up new products. That's causing a lot of our design wins to ramp to production.
In addition to a market recovery, we're also seeing our design wins kick in, and that helps us outgrow the market, and it also helps our margins, because the new products are better margins than the old products.
Just one actually quick question, going back to Data Center. How should we think about your visibility? What gives you confidence, maybe, say, each specific quarter and maybe the next couple of quarters? Is it your customers really just giving you that visibility?
Yeah, our customers are giving us good visibility. I would say most customers at least 12 months right now. They're giving us a lot of positive signals for 2027 and 2028. The primary discussion point I have today with customers is our ability to ramp to their needs. I think they've been satisfied with the answers. We have the factories that we can use to build their products. Also, I think we've got a good supply chain strategy, where we're staying ahead of the demand. We're putting in place more inventory, quite frankly. This is allowing us to be more flexible as the demand in Data Center shifts based on what our customers can procure in the way of memory and logic chips. We've been able to keep up with their demand, and that's a big plus.
Got it. I do want to leave some time for Paul as well. Gross margin's clearly a very big achievement and milestone, as you said. What inning are we in at this point? You've come a long way. Your goal is 43%. Help us with any color.
Yeah, it's a good question. First, thanks for the comment, because I think it is a big accomplishment what we've done to date. We think we're still in the middle innings here. As you mentioned, we crested 40% in Q1. We expect Q2 to be up again 20 basis points to 50 basis points. We said in our call that we expect to exit the year around 41%. Our goal is 43% plus. We think we're well on our way to that. The biggest contributor to that will be as our new products start to layer in, they come with substantially better margins. That will add 200 basis points to 300 basis points to the margin profile as those products become more substantial. The good news there is we're already seeing that start to have an effect. Even in Q1, we started to see that benefit.
We'll get the benefit of additional volumes. There's still some opportunities to wring out some improvements in manufacturing. We're pretty excited about the margin opportunity for the company looking forward.
Got it. As Data Center continues to ramp, this segment historically has been slightly dilutive. How should we think about it going forward?
Yeah, I think a couple of things. One, we've made a lot of progress to bring gross margins up. As Steve commented, new products here can also help with the margin as the content and the complexity increases. In addition, as the volumes in these increase, we get some pretty significant manufacturing efficiency on those, which maybe doesn't contribute to the product margin, but does contribute to the overall company margins. We think across our markets, we can continue to improve margins here and continue to make progress in Data Center as well.
Besides gross margin, how should we think about your OpEx trajectory? A lot of investments do need to be made. When we think about the EPS leverage, what would be the biggest contributor?
Looking at OpEx, we actually held up OpEx flat or a little bit down in Q1. I think that was timing with year-end. We do expect to see OpEx continue to grow throughout the year to get to about $460 million for the full year. The thing to remember there is our goal for OpEx is to grow about half the rate of the revenue growth. Based on our guidance, we'd be about on that track. Last year, that was much less than half, and I think as revenue accelerates, we can repeat that performance again. Bottom line is we don't have to make major incremental investments. We're going to continue to double down on R&D, because that's important. It's the lifeblood of the company. We can continue to be more efficient and leverage fixed costs in our infrastructure and SG&A.
Overall, that should allow us to continue to hit our leverage targets. Overall, for the company, we should be able to drop 35%-45% of every incremental revenue dollar towards the operating income line.
Understood. Perhaps the last one is, when we think about cash returns, you've mentioned acquisitions. You've recently also had a convertible note offering. What would be the priorities in cash spending, and then perhaps any of return projections as well?
Sure. First, you're right, we did just raise additional money. That was primarily to recapitalize or refinance our existing convertible notes. We got much better terms on this one, so we've lowered our cost to capital in that regard. From a cash perspective, we're clearly investing heavily internally in our Data Center and Semiconductor markets, both in terms of engineering as well as in CapEx to grow the factory's capability and capacity. With respect to external spending, we would allocate that towards smart M&A, largely in the Industrial & Medical market.
Sounds good. Well, thank you so much, Steve and Paul.
Perfect.
Thank you very much.