Advanced Energy Industries, Inc. Q2 FY2025 earnings call

• Second quarter revenue exceeded the high end of guidance, driven by strong data center power solutions demand and growth in industrial and medical. - Business diversification strategy across 3 target markets is driving profitability and cash flow. - Semiconductor had mid-single-digit growth expected this year, with eVoS, eVerest and NavX platforms seeing strong customer interest. - Data center high-efficiency products ideal for AI applications, with wins in next-generation programs. - Industrial and Medical secured record design wins, with new website and distributor partnerships yielding results. - Took actions to mitigate tariff impact, including qualifying products in Mexicali facility under USMCA.

Second quarter total revenue was $442 million. Semiconductor revenue was $210 million, up 11% year-over-year but down 6% sequentially. Data center computing revenue was $142 million, up 47% quarter-over-quarter and 94% year-over-year. Industrial and Medical revenue was $69 million, up 7% sequentially but 13% below last year. Telecom and Networking revenue was $22 million, flat quarter-over-quarter.

• Expect 2025 overall revenue growth of approximately 17%. - Data center now expected to grow revenue over 80% in 2025. - Semiconductor revenue projected to grow mid-single digits in 2025, with next-generation plasma power products revenue expected to double. - Industrial and Medical expected to have modest sequential growth in second half. - Q3 revenue expected to be similar to Q2, with Q4 growing sequentially. - Gross margins expected to be between 39% and 40% exiting 2025, including tariff impact.

• Tariff environment is very dynamic, posing margin headwinds. - Market cycle risk due to dependence on multiple growth markets.

Q: Congrats on the great results. You kind of mentioned about sustainability of the data center demand. And if I flatline your $142 million in Q2 for the rest of the year, obviously, you're going to grow over 80%. I'm just kind of curious how sustainable is this run rate? Because historically, data center used to be very lumpy. So I understand AI has changed things. Is this more a structural change? Is there any market share gain? How to think about the sustainability of data center revenues going forward?

A: Yes. Thanks for the question, Krish. Yes, looking forward, we think these revenues are sustainable into 2026. And the reason is the hyperscalers are continuing to invest at a very high rate. So we've seen what they spent this year and what they intend to spend next year. And that's supported by the forecast that we're receiving from our customers. Particularly at AE, you see a high frequency of change in this market because each of the GPUs that comes out typically on a yearly basis usually requires more power. And so that means each power solution is probably a little bit more expensive. And you have to work very closely with the customer, which is what we're doing. And so our win rate is quite high. We're also seeing some ancillary opportunities appear that complement what we're doing with our large hyperscale customers. So we think some of those opportunities may kick in, in 2026. And I think probably one of the more important aspects of this business is the willingness to invest not just in development, but also in factory capacity. So we continue to spend to expand our capacity to serve the market.

Q: Steve, could you talk about content per server or content per rack for an AI data center versus a traditional DC? And are you modeling the business based on where you see that hyperscaler CapEx going? Or how do you put together a forecast with demand like this?

A: Yes, Steve, the content of an AI data center for us is much higher because the power consumption is much higher. So typically, you're looking at 5 to 10x the power consumption of a non-AI data center. So that's all good news for us. Now the way we model our future revenue is based on customer forecast. And so we have a select group of customers that we work closely with, and they give us forecasts, which are updated every quarter, if not more frequently, quite frankly. So we take that as our base level, and then we add in a few other opportunities where we can reuse our technology blocks, which we developed for our large hyperscale customers. And that's how we come up with the forecast.

Q: On the semiconductor business, I think you talked about mid-single-digit growth now for 2025. And last quarter, you're talking about 10%. So wondering if you could help us understand like what's changed there or expand upon what's changed there? And then relative to, I think, one of your customers talking about second half or first half being flattish, it looks like you're going to be down 6%, 7%.

A: Yes. Yes. I think we were a little bit optimistic coming out of Q1. We've just come off a very strong quarter. What we've seen is I think the tariff is starting to influence some of the ordering behavior from our customers as they eat into their own inventory and they move things around, right, to optimize versus the tariff regimes. The second is, based on what we've heard from our customers and also reading other earnings call transcripts, China seems to be slowing down. And I think trailing edge logic in general across China as well as non-China geographies is slowing. And finally, there's been a little bit of concern on the DRAM side. The growth seems to have slowed a bit. But looking at our revenue levels that we're generating in 2025 for semiconductor, we're actually quite pleased with the revenue level. And if you take out 2022, which was the COVID recovery year, these are the highest levels we've ever had in semiconductor. So we're operating about $200 million a quarter, which is quite healthy for us.

Q: As a follow-up, on the tariff front, I think you quantified over 100 basis points of gross margin headwind this quarter. I guess what's the expectation? And I can understand -- I appreciate that the tariffs are moving around quite frequently. But what's the expectation embedded within the guidance for that impact this quarter? And what's the right, I guess, revenue level to think about being at 40% now?

A: Yes. Thanks for the question, Joe. So we're projecting the tariffs level will stay at this level or a little higher as we look into Q3 and probably through Q4. That means that we have some mitigation actions that were kicking in over the course of Q2 that largely offset the increased rates that we've seen announced in last week. As we look forward, we think there's further opportunity to mitigate that going forward as we work with our customers on optimizing supply channels and chains and those types of things. In terms of Yes, I think I'll start with -- we're close to that $450 million mark as it is today. And certainly, at that level, if you excluded tariffs, we're very comfortable that we'd be over 40%. So it's probably trending up another $20 million or so on top of that, that offsets that roughly 100 basis points of tariff impact.

Q: Would it be accurate to believe that what you've shipped to date in data center is more in support of "legacy" H200, H100 computing racks where looking forward, GB 200, GB 300, there's obviously a multiplier effect in terms of power per rack. So even off of a very strong 2025 revenue in data center, when did that give you a lot of confidence just in terms of directional growth, maybe even magnitude next year?

A: Yes. So Brian, I don't have specifics as far as where all of our power supplies are going to what GPUs are tied to. But what I can say is that we have won a number of new designs this year that will ramp to volume next year. And we're actually working now on designs that will ramp to volume in '27. So I think we're keeping up. It's basically a very rapid design cycle now where we have to work closely with the customer so that they can hit their design windows based on these new GPUs. So it's a very dynamic environment, but we're winning at a very high rate.

Q: Is there any way to characterize the margin profile of the new design wins in data center relative to some of the legacy data center products you've sold into this market?

A: Yes. I think the best way to think about that, Jim, if you go back 2 or 3 years ago, we talked about this market being highly dilutive. And if you go back a year or 2 before that, you could see the numbers from what we acquired Artesyn at, which had margins overall in the low 20s, and it had -- that included I&M, which was above our corporate model. So it's been historically quite dilutive. As we've talked about over time, we've been able to rationalize the portfolio and our new products are much closer to the corporate average. So on balance, we're not at the corporate average at this point, but the dilutive impact is much less. In fact, we've said that as the mix shifts around, we kind of expect that to live within a band of plus or minus 50 basis points. And of course, this quarter, our percentage of data center revenue was up, I think, 8 points or something, quite a lot. And we were able basically to stay on our margin targets. So we absorbed, if you will, kind of the dilutive effect within our model really without any problems. And so I think that demonstrates that we're approaching the corporate average there.

Q: You talked about these ancillary opportunities looking out to 2026. Is there any way of sizing that? I mean these -- I would think these have been enterprise customers you've been selling to, but this is now being driven by the AI demand. Is that a fair way to characterize it?

A: Yes, that's a good way to characterize it, Jim. There's enterprise customers and some other new customers that have appeared. And generally, we'll entertain those opportunities where we could do so without stretching our engineers too far. So we try to reuse as much as possible and execute. We're also installing a lot of new capacity in our factories in the Philippines and Mexico to support these opportunities, not just for our biggest customers, but also some of the smaller ones.

Q: Has there been -- or is there any impact from the recent design wins in I&M on the growth that you're expecting in the second half? Or is that -- what you're seeing, is that mainly the market recovery and these design wins are more of a '26 story?

A: I think it's a bit of both. Obviously, the market has gone through an extended correction period, and we're starting to see stocking orders. We're starting to see orders from customers we haven't seen orders from in quite some time. So that's more due to the market. But in addition, we're seeing some of these wins that we've recorded over the past, say, 2 years, start to contribute to our revenue growth in the second half of this year. I think you'll see that accelerate next year because we have quite a backlog of design wins. And the dynamic is that most customers, they're working through their inventory, and they're waiting for that inventory to clear before they ramp their new products. So we think '26 is going to be a good year for Industrial and Medical, and we think we're going to gain share next year and into '27.

Q: I'm just wondering if you can give us some feeling if you're seeing any pull-ins from data center customers or any double ordering or if inventory levels, if they're overstocking inventory in anticipation of demand?

A: Yes, Mark, we don't see that, quite frankly. In data center, we're certainly being expedited, but that's because the demand continues to increase. In Industrial and Medical, what we see right now is that most customers are still recovering from the supply chain shock associated with the COVID supply chain issues. And so there's a reluctance to put in place inventory as insurance. I also think there's a lot of uncertainty about the tariffs themselves. And so I think people are taking a wait-and-see attitude, and they're trying to match their orders to real demand.

Q: We're starting to see after some time of depressed pricing, NAND pricing is starting to improve. Any feeling about in terms of NAND improvements next year, if that would be an opportunity for you?

A: For us, we're less exposed to NAND than to the other parts of semiconductor. So where we're most excited is for leading edge logic as well as DRAM because that's where our products are being evaluated, and that's where they're going to go into production next year. I think we're also participating in NAND, but there's really less activity there as far as capacity additions. There's some upgrade activity going on, but that's not a big area for us at this point in time.

Q: Congratulations on a good quarter. I was hoping that you would, at this point, be able to with your eVoS, eVerest and NavX, maybe be able to quantify a little bit what that's meaning to semi. Was that maybe half of the growth year-over-year in that segment? Is that something you can tell us?

A: Yes, it's a good question, Scott. It's difficult for us to quantify that for a number of reasons competitively. What we said is we expect that number to double from last year, what we call revenue from those 3 products. And Steve just commented that it's in the double-digit millions of revenue this year. So we always expected it to be a slow start because of the way these products ramp and that it would contribute a little bit to growth in the second half. I think separately, we said think in the 1% range of 1% to 2%. But we expect that to pick up next year as these products move out of this early production phase and into more of a ramp phase. So we're encouraged by the progress we're seeing. In that regard, I think it's following that normal process. And the good news, we continue to have a lot of irons in the fire on a number of applications and a number of customers who are still working through that qualification process.

Q: Industrial and Medical, I was hoping that certainly with 50% of sales through distributors, I assume that they're showing you POS data, and I was hoping you'd be able to share that with us.

A: Yes. What we've shared is that for 5 quarters now, our sales into the channel have been less than the sales out of the resale data, right? So that's led to a decrease in inventory and I think an increased willingness from distribution to stock products, particularly new products. So I think that the trend is favorable. It's just -- it's obviously taken some time for the distributors to work down their inventories and also for the end customers to work through their inventories. But what we see now is that some end customers have worked through them, others have not. And so that's why we think the recovery in I&M is going to be gradual. The other issue there in I&M is the tariff impact. And so a lot of the industrial medical customers tend to be small or medium-sized, and they're not in a great position to mitigate some of the tariffs.