Advanced Energy Industries Inc 2026 Q2 Earnings Call

Please go ahead. Thank you, operator.

Good afternoon, everyone. Welcome to Advanced Energy's second quarter 2026 earnings conference call. With me today are Steve Kelley, our President and CEO, and Paul Oldham, our Executive Vice President and CFO. You can find today's earnings press release and presentation on our website at ir.advancedenergy.com. Before we begin, 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 future 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 3rd, 2026, and the company assumes no obligation to update them. Any targets beyond current year presented today should not be interpreted as guidance. On today's call, our financial results are presented on a non-GAAP financial basis, unless otherwise specified.

Detailed reconciliation between our GAAP and non-GAAP results can be released. With that, let me pass the call to our President and CEO, Steve Kelley.

Thanks, Edwin. Good afternoon, everyone, and thanks for joining the call. In the second quarter, we delivered record results with revenue and earnings above the high end of our guidance. Demand strengthened in all of our target markets, and solid factory execution allowed us to capture upside within the quarter. Looking forward, we expect record revenue in both Q3 and Q4. Our investments in capacity and piece part inventory are allowing us to keep pace with increasing customer demand. We continue to make progress improving gross margin. In addition to manufacturing efficiency improvements, we are benefiting from a richer product mix. The success of our new products, which deliver more value to the customer, is the key reason our mix is improving. In addition, we have taken pricing actions in our mature product lines, primarily to offset the impact of increased input costs.

We are increasing output at our factories in Malaysia. We are working closely with some of our largest data center and semiconductor customers to qualify our new Thailand factory, where we now expect first production revenue in the fourth quarter. When Thailand is fully built out, we expect to have roughly $5 billion of revenue-generating capacity across our factory network. On the new product front, we continue to increase our investment in R&D, which is critical to maintaining our technology leadership and competitive edge. Our modular approach is driving technology reuse across the company, reducing development cycle time, and speeding time to market. Now let me provide some color on each of our markets. In semiconductor, we delivered record revenue in the second quarter. The semiconductor equipment market is growing to record levels, driven by strong demand for leading-edge memory and logic, as well as increasing etch and dep intensity.

We are executing well to meet this increased demand, delivering sequential revenue growth of over 27% in the second quarter. In plasma power, we continue to work closely with customers to tailor the performance of our eVerest and eVoS platforms to the requirements of next-generation processes. Customers have validated meaningful yield and throughput performance at the leading edge, and we believe that adoption of these platforms will drive market share gains for AE in the coming years. In system power, we secured design wins and test, ALD, and thermal sensing applications in the second quarter. Across both plasma and system power, we have several programs beginning to ramp to production. With additional design wins in the pipeline, we expect new product revenue to accelerate our revenue growth in 2027 and beyond.

In data center computing, we see robust demand in the second half and now expect full-year revenue growth of at least 50%. Our improved outlook is due to increased demand from hyperscalers. We continue to pursue multiple opportunities with second-wave data center customers, defined as customers outside of the top hyperscalers. We expect that these second-wave customers will accelerate our revenue growth in 2027 and beyond. We have developed multiple products to address the power requirements of 800-volt data centers. Our low-profile modular solutions feature industry-leading power density, efficiency, and reliability. By leveraging common modules, we are able to quickly develop customized products as this technology evolves. We have received positive feedback from a number of customers who have evaluated early production units of our 800-volt products.

Based on customer roadmaps, we expect these products to go into high volume production in 2028. In industrial and medical, revenue increased sequentially and year-on-year. Key design wins are beginning to ramp to volume, and we see much healthier demand in the overall I&M market. In the distribution channel, which accounts for roughly half of our I&M revenue, resales, orders, and inventory all improved this quarter. On the execution front, we are working down our overdue I&M backlog and expect to catch up to demand in the second half. In medical, we secured multiple wins in therapeutic, imaging, and life science applications. Our momentum in electrosurgery is particularly strong, fueled by our highly differentiated pulse power technology. In industrial, we won key slots in test and measurement, factory automation, and robotics applications. We also recorded multiple wins in aerospace and defense with recognized versions of our leading-edge commercial products.

We continue to leverage our digital marketing and channel strategies to broaden our I&M customer base. In the first half of 2026, design wins, which started as website inquiries, increased 40% year-on-year. In Telecom and Networking, several customers are evaluating our rack power solutions for AI-related applications. We classify these as second-wave data center opportunities, where we could redeploy existing technology blocks into new applications. I'd like to update our view on 2026. Demand continues to strengthen, and we are executing to capture near-term revenue upside. As a result, we have increased our 2026 growth outlook to the low to mid 30% range. In semiconductor, we expect second half revenue to grow nearly 50% year-on-year. With our new products just beginning to ramp into production and additional wins in the pipeline, we believe that AE is well-positioned to outgrow our market and gain share in the coming years.

In data center, we are on track to increase revenue more than 50% in 2026 after more than doubling in 2025. We continue to win new programs at our hyperscale customers and are engaged with multiple second-wave customers, setting us up for a strong 2027. In Industrial and Medical, we expect revenue to grow sequentially over the next few quarters. Market conditions have improved, and a number of new product wins are ramping to volume. For some closing thoughts. We are well-positioned to deliver strong revenue growth into 2027 and beyond. Our design win pipeline is impressive, and our new products continue to hit the mark. We are making the necessary investments in capacity and inventory to allow us to keep pace with strong customer demand across all of our markets.

We are fortunate to be a leading player in two large and fast-growing markets, AI data center and semiconductor. We continue to improve gross margin and have line of sight to over 43%. We continue to actively pursue potential acquisitions that make strategic and financial sense. Paul will now provide more detailed financial information.

Thank you, Steve, good afternoon, everyone. We delivered record financial results in the second quarter. Revenue of $574 million increased 30% year-over-year, EPS of $2.74 was up 83%, both exceeding the high end of our guidance. Gross margin improved 380 basis points year-on-year to 41.9%, we delivered record operating income. Operating margin was well over 20%, a level that we've not achieved in many years. Operating cash flow increased meaningfully to $86 million. Let's review our second quarter financial results in more detail. Total revenue of $574 million was up 12% sequentially and 30% year-over-year. Solid execution allowed us to capture upside to our guidance. Semiconductor revenue was a record $278 million, up 27% quarter-over-quarter and 33% year-over-year. We believe that we are shipping in line with underlying demand.

Data Center Computing revenue was down 1% sequentially as expected but increased 35% over last year to $192 million. Demand progressively improved in the quarter as customers resolved downstream constraints, setting up a higher second half. In Industrial and Medical market revenue was $80 million, up 11% from last quarter and 17% from last year, as we increased output to meet customer demand. Telecom and Networking revenue decreased 4% sequentially but grew 12% year-over-year to $24 million. Gross margin in the second quarter was 41.9%. During the quarter, we received the large majority of our expected IEEPA tariff refunds. Excluding the benefit of these refunds, gross margin was above our guidance range at 40.7%, driven by higher volume and favorable mix of new products. Relative to Q2 earnings, the refunds benefited EPS by $0.04.