Advanced Energy Industries (NASDAQ:AEIS) Q1 2026 Earnings Call

0:00 Greetings, and welcome to the Advanced Energy First Quarter twenty twenty six Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Edwin Ma, Senior Vice President of Strategic Marketing and Investor Relations. Please go ahead. Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy's first quarter twenty twenty six earnings conference call. With me today are Steve Kelly, our President and CEO and Paul Oldham, our Executive Vice President and CFO. You can find today's press release and presentation on our website at ir.advancedenergy.com.

0:49 Before we begin, let me remind you that today's call contains forward looking statements that 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, 05/04/2026, and the company assumes no obligation to update them. Any targets beyond the current quarter 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 found in today's press release. With that, let me pass the call to our President and CEO, Steve Kelly.

1:38 Thanks, Edwin. Good afternoon, everyone, and thanks for joining the call. First quarter revenue came in above the midpoint of guidance, driven by record data center revenue. Total revenue increased 26% year on year and gross margin exceeded 40%. In the second quarter, we expect to deliver record revenue, largely due to strength in semiconductor. Looking into the second half of twenty twenty six, we see increased demand in all of our markets. We are particularly well positioned to benefit from AI related capacity investments in data centers and wafer fabs. We are also seeing steady improvement in the industrial medical market, as evidenced by a 14% sequential increase in bookings and a growing backlog.

2:36 We delivered over 40% gross margin in the first quarter, the culmination of a multiyear effort to improve our manufacturing efficiency and product differentiation. Our investments in leadership technology and world class manufacturing are paying off. Looking forward, we believe that we can further increase gross margin as high value products ramped to volume and manufacturing efficiency continues to improve. Given our progress over the last few years, we are confident that we can achieve the longer term goal of greater than 43% gross margin. Given the strong demand environment, we are executing our capacity expansion plans in Malaysia, The Philippines and Mexico.

3:32 Moving forward, we will focus on building out capacity at our new 500,000 square foot facility in Thailand. Qualification builds for semiconductor and data center products are kicking off this quarter with initial production slated for late twenty twenty six or early twenty twenty seven. Exiting the year, we expect to have over $2,500,000,000 in revenue generating capacity. The addition of Thailand will bring total capacity to over $3,500,000,000 once it is fully built out. Now let me provide some color on each of our markets.

4:18 Semiconductor revenue increased quarter over quarter and was flattish year on year. In the first quarter, customer forecast strengthened considerably, which we believe will drive record performance in 2026 and continued growth in 2027. We are delighted by the widespread customer acceptance of our EVOS, Everest and NAVEX plasma power technologies. These technologies enable significant improvements in throughput and yield at the leading edge and are expected to drive market share gains into the next decade. In addition, we are seeing wider adoption of these technologies across multiple generations of processes and device types.

5:13 We are also benefiting from an uptick in demand for our system power products, largely due to recent wins in test and wafer fab equipment applications. In data center computing, we delivered record revenue in the first quarter. Overall demand in the data center market remains very strong. Based on customer forecasts, we expect second half revenue to be stronger than first half. We continue to make solid progress developing next generation technology, including 800 volt solutions. We are working closely with multiple customers who view AE as a technology leader in this space. The attributes which have fueled our success in the data center market, power density, efficiency, reliability and development speed will be equally critical to our success in next generation platforms.

6:14 In the first quarter, leveraging our technology expertise and product portfolio, we secured multiple new wins with second wave data center customers. Factory qualifications should be completed this year ahead of production ramps in 2027. Industrial medical revenue was up year on year, but down sequentially. Although demand is improving, factory priorities in the first quarter limited our output. We expect to increase our factory output in the short term, which should enable I and M revenue to track bookings moving forward. In medical, we secured multiple wins in therapeutic, diagnostic and life science applications.

7:04 In industrial, we won key designs in test and measurement, factory automation, and battery backup applications. We secured many of these wins by adding custom features to best in class technology platforms, enabling us to meet customers' unique requirements. We have won a number of opportunities with new customers, many of whom discovered AE products on our website. Some of these wins have been quite large, reinforcing our view that the new website is acting as a force multiplier in the I and M space. Telecom and networking revenue grew to its highest level since 2023, driven by the production ramp of several AI related wins in the networking space.

8:01 Now I'd like to provide an update to our 2026 view. Based on strengthening demand and new product momentum, We are now expecting year on year revenue growth in the low to mid-twenty percent range. This outlook represents the second consecutive year of greater than 20% growth for Advanced Energy. In semiconductor, we expect demand to start accelerating in the second quarter, supporting a stronger outlook for 2026. With some of our new products moving into high volume production later this year, we believe that we are well positioned to drive further growth in 2027 and beyond.

8:47 In data center, based on strong customer adoption of our high power AI solutions, we are raising our full year revenue growth expectation to the mid-thirty percent range. In the industrial medical market, we expect sequential revenue growth over the next few quarters, supported by improved market conditions and the production ramps of several key design wins. Now for some closing thoughts. First, demand across all of our markets is strong, and we are raising our growth target for the year. While supply and cost challenges have begun to surface, we are well prepared to navigate a dynamic environment. Second, we continue to see strong pull for our new products across all target markets.

9:40 Our design win pipeline is growing and is expected to drive higher revenue and profits in the coming years. Third, we're proud to have achieved 40% gross margin in the first quarter, but we are not done. We have line of sight to 43% based on the success of our new products and efficiency gains. Finally, we have a solid pipeline of potential acquisitions and we'll continue to actively pursue opportunities which make strategic and financial sense. Paul will now provide more detailed financial information. Thank you, Steve, and good afternoon, everyone. Overall, we executed well in the first quarter.

10:27 Revenue of $511,000,000 increased 26% year over year and was ahead of our guidance, driven by strong data center computing revenue. Importantly, we achieved our initial milestone of gross margins of over 40% despite ongoing tariff expenses and less favorable market mix than we originally modeled. It is the highest level since the Artisan acquisition in 2019, highlighting the structural improvements we've made in operational efficiency and our product portfolio. With solid operating leverage, we delivered record operating income of $98,000,000 As a result, first quarter earnings per share were $2.09 exceeding our guidance and up 70% year over year.

11:14 Now let's review our first quarter financial results in more detail. First quarter semiconductor revenue of $219,000,000 grew 4% sequentially, finishing just below our mid cycle peak last year. Looking forward, our outlook is increasing based on stronger customer demand. Data center computing revenue was another record at $194,000,000 up 9% sequentially and 102% year over year. While demand remains high, we continue to experience frequent customer changes in demand mix due to various downstream constraints. While we expect this demand volatility to limit revenue in Q2, we anticipate the ramp of several programs to support a stronger second half.

12:00 Industrial medical market revenue was $72,000,000 down 8% from last quarter, but up 12% from last year. We prioritized factory production to meet demand in other markets, impacting revenue for the quarter. On the other hand, demand is strengthening as bookings grew 14% sequentially, reaching the highest level since 2023. Distributor sell through increased again and inventory levels further normalized. Telecom and networking revenue increased 17% sequentially and 16% year over year to $25,000,000 ahead of expectations due to strength in AI related networking programs. First quarter gross margin was 40.1%, up 40 basis points from last quarter and two twenty basis points from last year.

12:51 Gross margin was above our previous guidance, driven by better product mix and lower other cost of sales. Looking ahead, we expect to further expand gross margins on ramp up of higher margin new products, improved manufacturing efficiency and higher volume. Operating expenses of $107,000,000 were down slightly from last quarter and at the low end of our target range. OpEx increased 9% year over year, well below half of our revenue growth rate of 26%. As a result, first quarter operating income reached $98,000,000 and operating margin was 19.1%, up five sixty basis points from last year. Depreciation was $10,500,000 and our adjusted EBITDA was $108,000,000 up 66% year over year and also a record.

13:45 Other income was roughly breakeven versus $1,000,000 in Q4, mainly due to higher realized FX losses. For Q1, our non GAAP tax rate was 14.5%, below our target mainly due to timing of discrete tax items. First quarter earnings were $2.09 per share compared to $1.94 in the previous quarter and $1.23 a year ago. Turning now to the balance sheet. Total cash and cash equivalents at the end of the first quarter was $700,000,000 with net cash of $131,000,000 During the quarter, we increased inventory by $48,000,000 mostly in critical piece parts to support growth and improve supply resiliency.

14:31 As a result, inventory days increased ten days to 135 with turns of about 2.7 times. Correspondingly, DPO increased from sixty eight days in Q4 to 80 in Q1. DSO increased six days to sixty six days in Q1 on higher revenue. As a result of the increased trade networking capital to support growth and the seasonal factors such as timing of incentive and tax payments, cash flow from continuing operations was an outflow of $6,000,000 During the first quarter, we spent $37,000,000 in CapEx as we continue to invest in capacity and capability across our factory network. We paid $3,800,000 in dividends and we repurchased $300,000 of common stock at an average price of $209.36 per share.

15:28 Turning now to our guidance. We are forecasting our second quarter revenue to be approximately $540,000,000 plus or minus $20,000,000 We expect the majority of the sequential growth to come from the semiconductor and industrial and medical markets, while data center will moderate sequentially based on timing of customer deliveries. We expect Q2 gross margin to improve 20 to 50 basis points sequentially, driven by higher volumes and more favorable mix. We expect Q2 operating expenses to increase to 112,000,000 to $114,000,000 due primarily to investments in new products and annual merit increases. We expect other income to be approximately $1,000,000 and the tax rate to remain within the 16% to 17% range.

16:19 As a result, we expect Q2 non GAAP earnings per share to be $2.18 plus or minus $0.25 on 40,600,000 shares outstanding. For the full year 2026, we are raising our revenue growth target from the high teens to the low to mid-20s. The increased growth outlook contemplates solid customer demand, as well as some tightening in supply and increasing input costs. In semiconductor, we expect revenue to accelerate in the second half with 2H revenues likely up over 30% from the prior year. In data center, despite a moderating Q2, we expect sequential growth in the second half and are raising our full year revenue growth outlook from over 30% to the mid-30s.

17:07 In Industrial and Medical, we expect revenue growth throughout the year on higher demand and increased factory output. With continued improvement in gross margin and operating leverage in our model, we expect earnings to grow meaningfully faster than revenue for the year. Finally, we expect our 2026 CapEx will be in the $170,000,000 to $180,000,000 range, up slightly from our previous outlook based on initial investments in the Thailand factory to support earlier customer qualifications. Despite higher capital spending, we are targeting 2026 free cash flow to be at or above 25 levels. Before opening it up for questions, I want to highlight a few points. Demand is strengthening across our markets. Our diversification strategy is paying dividends as we are benefiting from accelerating growth in semiconductor, increasing investments in data center and AI infrastructure, and a recovering industrial and medical market.

18:05 In addition to positive market trends, we expect our design win pipeline to contribute incremental revenue in 2026 and to support more meaningful growth in 2027 and beyond. We are excited to have achieved gross margin of over 40% this quarter and expect to further improve our margins for the full year. Longer term, with higher value new products, ongoing improvements in factory efficiency and higher volumes, we remain confident in our ability to achieve our long term goal of over 43%. Finally, our balance sheet remains strong, enabling us to invest in capability and capacity to capture growth ahead while providing ample liquidity to pursue strategic acquisitions that create shareholder value. With that, we'll now take your questions.

18:52 Operator? Thank you. We'll now be conducting a question and answer session. Our first question is from Steve Barger with KeyBanc Capital Markets. Hey. Good afternoon. This is Jacob Moore on for Steve, actually. Thank you for taking our questions. First, I was hoping you could provide us some more detail on the uptake of the new semiconductor products.

19:42 I mean, for leading edge, of course, but also for the opportunity at nodes larger than two nanometers that I think you were alluding to. How has qualification and uptake progressed since your last update? How do you expect it to progress through the rest of the year? And what milestones are you watching out for to determine different levels of success in that rollout? Yeah. Hi, Jacob. This is Steve. Yeah. We're we're seeing quite a bit of uptake, on our leading edge technologies, namely Everest, EVOS, and NavX. And so, what these technologies provide to fab operators are improved yield and improved throughput at the leading edge. So right now, that's where the battles are being fought at the leading edge, and we're winning every battle that we're engaged in. So we're in a very good spot.

20:34 And so once these customers see the improvements we can bring at the leading edge, they want to see those same improvements at some of the other nodes they operate at. And we've also seen migration from one device type to other device types. So we think this is a good thing for the company ultimately because it will allow us to basically ramp our new product revenue faster than we originally expected. We expect to see most of the new product revenue become meaningful you know, starting late this year, but really into '27 and '28 as some of these node transitions occur. I appreciate that. That's helpful. And then second question from us, I actually wanted to focus on industrial and medical, which looks like it could represent either another leg of growth or help extend the growth profile beyond the next call at twelve to eighteen months.

21:32 So I guess first, can you just speak to the split that you're seeing between market growth and share gains? And then maybe you could, touch on the status of potential m and a rehash what you're targeting and how that landscape has changed since you first began the hunt to expand there. Sure. Yeah. So I think the good news regarding industrial medical is, the market has recovered. So we just went through a, you know, painful two year inventory correction period after the COVID supply chain issues. So based on what we see today as far as our increased bookings, increased backlog, we think we're in very good shape from a market standpoint. And we're seeing both the industrial and the medical markets pick up. And within those markets, test and measurement, aerospace and defense, factory automation, robotics, and anything related to AI are leading the way.

22:29 We think that the market share gain that we expect, over the next year and a half is coming from new products. We have a number of significant design wins in our target segments. They're going to help us, you know, pull ahead of the competition essentially. So I think we're in very good shape in I and M. As far as M and A goes, you know, I've said many times that our primary focus, is to increase our breadth in industrial medical. And so we think this is a pretty fragmented market where we can, in addition to our organic efforts, grow inorganically. So this will be an objective for us.

23:14 And we think some of the valuation mismatch we've had in past years, those mismatches are starting to close, and that will allow us to make an acquisition sometime in the not too distant future. Our next question is from Mehdi Hosseini with SIG. Hello, Mehdi. Is your line on mute? Yes, it was on mute. You. Thanks for taking my question. Steve, just a clarification. You talked about two capacity expansion and talked about incremental revenue.

24:04 Can you just tell me what your revenue would be once you're done with these capacity expansion projects? Yes. So, you know, in my prepared remarks, I referred to the investments we're currently making in The Philippines, Malaysia and Mexico, and that we expect to be at a run rate or a capacity revenue run rate of over $2,500,000,000 So this is our potential essentially after the investments in the current factory network are done. The second remark I made was on Thailand. So we are going to bring up Thailand earlier than we expected based on the strength we're seeing in data center and semiconductor.

24:50 And so we think once Thailand is built out, that adds more than $1,000,000,000 of revenue generating capacity. So in total, I think we'll be in a position to ship in excess of $3,500,000,000 with our current factory network plus Thailand. Got you. And these capacity expansion projects, when would it materialize? Would that be in the next one or two quarters? Or would you need more time for the expansion? Yes. So for the current factory network, it's the expansion effort is underway, and we'll have that in place in the second half of this year. So that's right around the corner. For Thailand, we'll start the investments late this year. So we're pulling in some of the spending we had expected to make in 'twenty seven into second half of 'twenty six so that we can start up production lines for data center as well as production lines for semiconductor.

25:50 And we're going to start that effort with large customers and with the higher volume products. And the 43% margin target, is that inclusive of these capacity expansion projects? It is. Yes. We comprehend the Thailand expansion in that number. And really, that number is going be driven by increasing new product mix. So as as we introduce new products, they typically carry better margins than the older products. And, you know, secondly, we think we get better from a manufacturing efficiency standpoint. Sure. May I squeeze one more follow-up? That actually is as a follow-up to these capacity expansion projects.

26:37 And just strategically, why not focus on executing on these expansion projects, executing on expanding TAM, especially on the data center, why dilute your effort by, by having M and A on the side or in parallel? Yeah. I I I think it's it's, you know, it's possible to do both. I think we spent the last, three years basically streamlining our manufacturing capacity. And you remember we broke ground on Thailand in 2023, so this has been in the works for a while. I think at the same time, it's very difficult to reach our growth targets in I and M without acquisition.

27:25 So this is why we think in I and M in particular, it makes sense to push forward organically and inorganically. Our next question is from Krish Sankar with TD Hi. Thanks for taking my question. Steve, my first question is on the data centers. I understand there's like quarterly volatility in data center revenue. But if we take your first quarter and analyze it, it's almost like low 30% growth, you're guiding to mid-thirty percent plus. I'm just wondering, is the data center growth this year inhibited due to the fact that components are constrained? Or is there something else going on in terms of the build outs or market share or something else?

28:15 Yeah. I think that's a great question. And and as we look forward into 2026, the forecast the unconstrained forecasts are quite strong, but our customers are dealing with downstream constraints. And so that's that's really tempering expectations for 2026. However, you know, I think, we think that some of these constraints will be addressed, and so that would allow us to increase our forecast. So I'd say in data center, there's definitely a bias to the upside in our 2026 forecast. But again, some of these constraints need to be knocked down, and then we'll be able to take advantage of better short term SAM. I think you may have noticed that our inventory is going up, and much of that increase is us preparing to take advantage of these upsides that appear as our customers knock down these short term constraints. So we are ready to respond if these constraints are addressed.

29:17 And actually, there is some of that in the first quarter. We were able to outperform in data center in the first quarter largely because some of the constraints were addressed by our customers. Got you. Thanks for that, Steve. And then a similar question on the semiconductor side. When I look at your full year revenue guide, let's say mid-twenty percent revenue growth, data center mid-thirty percent, it looks like semi is probably undergrowing what your depth and edge customers are talking about for WFE in the high-twenty percent. So I'm just curious, like, what's going on the semiconductor side? Are you just being conservative, or do you think that semi growth could be actually high 20s for you too? Yeah. I think if you look over time, we had a good year last year. It was our second largest revenue year in our history. And so we came into 2026 pretty hot.

30:06 And as you look forward in 2026, actually, if you compare the second half of twenty six to the second half of twenty five, our revenue in semiconductor will be up more than 30%. And so we're going to be going very hot into 2027. And so we're, you know, we are very happy with our backlog in semiconductor, and that's one of the reasons we're going be opening Thailand, faster than we expected. And lastly, that makes sense. Thank you. Our next question is from Jim Ricchiuti with Needham and Company. Hi, thanks. Just wanted to go back to the data center computing growth that the moderation you're anticipating in Q2.

30:56 Was there any pull in activity into Q1? And as you talk about growth accelerating again, is that something we should see as early as Q3? Or do your the constraints of your customers that they're facing, does that mean the growth pickup is more in Q4? Yes, Jim. I wouldn't characterize the Q1 outperformance as a pull in. I think it was us taking advantage of an opportunity that was created when our customers were able to address their supply constraints downstream. And so I think that's an indicator of what's going happen in future quarters in 2026. Very difficult to predict, but we know that demand mix is quite dynamic.

31:49 We're trying to stay in a position where we can respond quickly to changes in demand from our customers. So I think that, again, there's upside potential in data center this year, and we're positioning to take advantage of that. When you talk about the factory priorities limiting the INM output in Q1, I was wondering if you could size that. And so maybe elaborate, were these resources shifted to other verticals? Can you talk about that? Yes. So we build the INM product in the same factories as we build the data center product. And so we had a surge in demand from data center in Q1, particularly in the last month of the quarter.

32:42 And so our factories pivoted to data center, and unfortunately, we underperformed in industrial medical. So I'm giving my personal attention to make sure we catch up to that demand over the next 0.5. So I think we'll solve this problem. The good news is we know what to build. Our backlog is robust now, so we're not taking a guess. We know exactly what the customers need, and we're going to build it. Okay. And you expect to catch up in Q2 there? Yes, it'd be Q2 and into Q3, and I think we'll be caught up. And maybe one final question just for me is, are there semi device types in particular that you're gaining traction with the new products?

33:31 So you're talking about semiconductor, processes and so forth, Jim? Yeah. Yeah. I think we've basically focused on the leading edge processes both in memory and in logic. And so we've been working with our customers very closely, for the past three years. And, also our customers' customers are also involved in the equation. So a lot of iteration going on. And what it's leading to is the realization that these technologies provide, real benefits at the leading edge. And so that's why we're excited about the potential to grow share based on these new technologies, and we can grow share in both memory and in logic.

34:19 Yeah. You willing to share any kind of revenue expectation for this year from the new products collectively? We haven't really guided to that, Jim. We said we made our goals last year. We expected to increase that significantly this year. But based on the timing of when these nodes start to ramp, we said there'd be more significant growth in 2027. Thank you. Our next question is from Scott Graham with Seaport Research Partners. Hey, good afternoon. Thanks for taking my question. I have a couple follow ups on data centers, and maybe I'll just ask you all at the same time.

35:07 So you your sales in the first quarter were above your thinking and it looks like that's going to sort of, you know, you know, kind of go a little bit the other way in the second quarter. And I understand it's a customer thing, but I guess my question is why wouldn't customers I mean, data center demand is so dynamic right now as you guys know, and it seems like these same customers face some challenges, yet we're able to kind of, for lack of better term, fix them in the first quarter. Why won't that happen in the second quarter? Yes. It's possible that happens. But I think we do tend to guide conservatively.

36:02 We see what's in front of us. We take the forecast into account. And we typically will not include the upside in our forecast. But again, we're trying to stay as flexible as we can so we can respond quickly to our customers' change in forecast. So I think if there is an upside, could take advantage of it. And I also know that your guidance for the quarter and the year in data centers was not including new customers. So I'm wondering if you have a slack period in 2Q, does that enable some revenues harvested from new customers to backfill? I don't think so. So the position we're in right now with the second wave customers is that we've completed a number of qualifications in the first quarter, and we're working on additional ones this quarter.

36:57 And those second wave customers are now qualifying our factories to produce those products. That's typically a six to nine month process. So right now, we expect the second wave customers to begin contributing meaningfully on the revenue line in 2027, but there is some potential to pull some of that revenue into the fourth quarter of 'twenty six. Understood. And then I guess my last question is on the gross margin. So I think we your conference call last quarter, you talked about, hey, we think we're going to hit a 40% gross margin this year, implying one of the quarters. And now it looks like you're going to not only hit it in the first quarter, but now you can hit it again in the second quarter off of your guidance. And I'm just wondering, is now a 41% gross margin, a point higher doable for one of the next one of the two quarters in the second half?

37:58 Yeah, this is Paul. Yeah, I think you're right about that. Clearly, we were a little bit ahead in Q1. We think we can build on that going forward because we are seeing traction on some of our new product mix. We're making progress in some of the factory optimization and other things. And in general, as we have higher volumes, we should get some benefits. So when we look forward, we see that that we should be able to improve gross margins modestly each quarter, which could definitely mean that we could get to 41% by the end of the year. Thank you. Our next question is from Elizabeth Sun with Citi. Hi, good afternoon. Thanks for taking my question.

38:46 I guess my first question is on the 800 volt transition. Steve, you mentioned in your prepared remarks you are working with multiple customers working on some solutions. So I was just wondering if you if you could double click into what kind of solutions you are working on and what kind of customers you are working with and the up the timing of the ramp in 800 volt, I think your competitor is talking about second half ramping actually. And also, what will be the puts and takes for AE's demand when the transition happens? Yeah. Yeah. Thanks, Elizabeth. So right now, we're sampling our solutions to key customers, and we have, you know, a number of different options.

39:33 So we we we have developed some some 800 volt to 50 volt modules that provide 4,000 watt power, 6,000 watt output power, and 8,000 watt output power. So we have different options for our customers. What differentiates us is, very high efficiency, around 98% efficiency, high power density and high reliability. So so these are are very important, to customers, And we've been told that we're leading from a technology standpoint. So we've got a number of customers that are very interested in technology. We're sampling it. We expect the initial production revenue, most of that will start next year. I think you'll see some some small amount of revenue this year, but really, it starts in earnest in '27 and becomes more meaningful in '28.

40:28 We think it's also good news, for us because we think it increases our dollar content, per rack. And and generally speaking, these types of of changes in technology are good for AE because we have a lot of the the knowledge already in house. So we're we're, I think, very well positioned as some of these data centers transition to 800 volts. Got it. And the follow-up on the second wave of customers in data center. First question is just a clarification. If the demand pulls in into later half of this year, would that be incremental to the 35 ish percentage data center growth?

41:13 And also, like, how how should we think of the size of the ramp or, like, size of the volume potential? And also, if if it pulls in, do you have enough capacity to support the ramp if that pulls in early? Yeah, Elizabeth, this is Paul. Yeah, so we don't have any forecast for our second wave customers in our guidance for 2026. So any of that that we're able to pull in would be upside to the 35% growth. And I think getting started on winning some of the designs and getting started on the actual manufacturing line qualification on that I think is pretty exciting for us because we're seeing in general that pull in. We haven't quantified what that is. These aren't going to be customers that are the same size as our kind of primary customers, but they could be meaningful and there's several of them. So on balance we see this as a pretty significant driver or supporter to growth in 2027 from a data center as we essentially expand our penetration across a broader set of customers.

42:26 Got it. Thanks, Paul. Thanks, Steve. Our next question is from Quinn Fredrickson with Baird. Yeah, thank you for the question. Just as we think about the data center outlook that you've outlined for 2Q in the back half, how should we think about supply constraints playing out from here? Are you anticipating those sequentially ease at all or stay the same in order to hit the guide that you've discussed? Yes, Quinn, the supply constraints I've discussed so far have been downstream supply constraints. So they're really constraints our customers are dealing with. That's been the limiting factor, I think, in our forecast. So far, I think we're doing a pretty good job of managing our supply chain.

43:15 That's not to say we won't run into issues, but so far, nothing has really stopped us from shipping product. So yes, I'm hopeful that our customers can knock down some of the supply chain issues later this year, and we can increase our forecast. That's helpful. And then second, just on the new products. Curious if there's been any move forward in the timing of your dielectric etch wins converting to revenue at all. And I know one of your larger customers is recently discussing a pull forward of NAND conversion spending. Is there a potential that could move up the timing of new equipment orders and your wins in dielectric etch at all? Yes.

44:01 So on dielectric etch, we haven't been too specific about wins, but, I'm very confident that we'll be able to communicate wins, later this year. You know, I I think that, what we're doing probably has little connection to the NAND upgrade, exercise, lot has to do with next generation nodes in DRAM and logic. Great. Thank you. Our next question is from David Dooley with Steelhead Securities. Thank you very much for taking my questions. I guess the first off, as far as the improvement in gross margins in the March quarter, that was done with the semi revenue being down.

44:50 So I'm kind of curious if you could just elaborate on why the gross margin was better in Q1 given the semi mix was down. And I guess a second question I have is regarding your new growth rate for semi in the second half. It was accelerating, I think, by 30%. Do you think that's more driven by your products actually starting to ramp up? Or is it more driven by just two nanometer spending is broadening out definitely beyond TSMC as we've seen in the news lately with both Samsung and Intel kind of joining the party? Yes, good questions. Is Dave. I'll take the first one. Yes, margins were up in Q1. And I think the thing that we saw that was pretty encouraging was that at the product level, the mix was better. We're seeing a little better traction on our new products kind of across the portfolio which carry better margins. And so even though as a proportion data center was higher and semi was a little bit lower, at the product level we saw improvement. I think that's encouraging because as you know we're counting on that being a driver of gross margins as we move towards our 43%.

46:06 And frankly, we think that can carry on through the year and we should get some benefit given what we see accelerated growth in semiconductor right now. We also saw a little better what I'll call other cost of sales, just a variety of things were a little bit better, including some cost of quality, made a little bit of progress on some of our ramp costs and efficiency. And we had a very modest pickup from tariffs. So on balance, we had a few things kind of go the right way and that offset kind of more broadly our factory ramp costs and slightly higher material premium. So on balance, we feel good about the progress we're seeing. We think that can carry forward, which is why we've essentially mulled up slightly our gross margin outlook for the year.

46:55 Maybe I'll make a few comments on the revenue increase. I think as you look at our forecast for second half and the growth that we're forecasting is primarily due to growth in our flagship product revenue. When I say flagship, I mean the older products that have been designed in for a while. We're also being helped by wins in the system power space with semiconductor testers as well as with wafer fab equipment. The new products become, significant, started in Q4 this year, but they they become a bigger factor in 2027. So maybe you could comment a little bit on what your customers are saying about growth in 2027 and if the two nanometer kind of ramp is spilling over into 2027, I would think that your semi business would perhaps grow faster in 'twenty seven than it grows in 'twenty six.

47:54 Yes. Our customers in semiconductor are very enthusiastic about 2027. I think one of the key factors is at the leading edge, there's a lot of new clean room space coming online in 'twenty seven, and so they'll have a place to put all this new equipment. So again, if you combine that with new product revenue becoming more significant in 'twenty seven due to the node transitions, I think it's going to be a very good year for Advanced Energy in the semiconductor space. Final thing for me, and you mentioned it twice in your prepared remarks and the Q and A here is the systems business for, I think you said, semiconductor testers and other wafer fab equipment. Can you just kind of help me understand how that's different than you know, the the boxes you provide for, you know, your big OEM customers at this point?

48:50 Yeah. Yeah. So let me just explain that. We divide it broadly into two categories. Plasma power, is basically RF or pulse DC power we provide, that's injected into plasma chamber, and that's been our traditional business. Now when we talk about system power, we're talking about the power that the machine uses to operate. So this is you know, think of it as between, the wall and the machine. That's system power. And so that could also be relatively sophisticated because these machines are very complex, And we've made a, you know, push into this area over the last few years, and they're starting to pay off for us. I'll make a TAM, do you think this is?

49:36 Excuse me. Dave, what we have said is that in aggregate, our solar plasma power is over a billion dollars market opportunity for us. That's what we disclosed in 2025 analyst event, and that's what we have said. Okay. Thank you. Our next question is from Brian Chin with Stifel. Hi there. Good afternoon. Two maybe two questions from us. First, on the data center, definitely hear that the quarterly revenue progression in DC is more owed to timing and variability. But just thinking on a full year on your perspective, increasing power content per rack wasn't a major tailwind last year. It it should still be a tailwind, but would you say it might be less pronounced this year relative to last year?

50:37 I don't think so because we continue to develop solutions for increased power. It's just a continuous exercise for us. And so I would say this is one of our advantages because the basic challenge is to continue to increase the power density. At the same time, don't sacrifice reliability or efficiency. So basically, you have the same amount of space, but you have to produce a lot more power. And to do that reliably and efficiently is a challenge from a design standpoint. And so that's one reason we've been able to be successful with our hyperscale customers, and we've been successful now with the second wave customers because we we have that that combination of technical features, as well as good speed of development.

51:28 And then finally, we've got the factory net network to to produce these these boxes in high volume. Okay. Thanks, Steve. And then second question on semi cap and answer this however you're comfortable addressing it. But in terms of that second half guide that you're providing, do you think you're shipping in sync with customers or perhaps a little ahead given that multiyear visibility and outlook? And then kind of second part of that is from a supply chain perspective, given the duration of visibility, certainly well into next year, has that given you a lot of confidence to go out and maybe be really proactive sourcing some of those components, maybe call it chips, other materials that can be issues as you get through like a multi quarter growth period?

52:23 Okay, Brian. So so on the, you know, customer demand being in sync with their requirements or, you know, are they putting in inventory essentially? Our view is that we're more or less in sync. I think what we've seen is across the customer set that we've received increased orders, and that's because of leading edge primarily. So we know the end market demand is there. I think the constraint right now in semiconductor is really clean room space. And so if some of these clean rooms come on faster than expected, then that will increase demand. And if they come on slower than expected, then we may create a little bit of inventory, but I don't think it'll be much.

53:12 Now as far as supply chain goes, you know, it's a it's a hot topic, right, especially after COVID when we had to deal with so many issues. So so we have been leaning in to inventory so that we are able to have some reserve in case things get tighter, lead times go out. So I think we spend quite a bit of time on the supply chain topic. One of the things we did during the COVID supply chain shortages was to develop, more second sources, which we've done, so that gives us more flexibility. And where we couldn't develop a second source, then we put in extra inventory. So I think we're going into this with our eyes wide open, and I'm pretty aggressive on the inventory front.

54:11 Our next question is from Jim Ricchiuti with Needham and Company. Paul, you may have given this. I apologize if you did, but any color on OpEx as we look out over the balance of the year beyond Q2? Anything we should be thinking about? Yes, Jim, obviously OpEx was down a little bit in the first quarter. So we've done a good job controlling spending there. But in the second quarter, we do have our annual salary or merit increases. So we've guided second quarter of 5,000,000 to $7,000,000 We continue to expect that that run rate will increase a little bit every quarter, kind of what we said before as we invest in these new programs primarily in engineering, as well as some variable costs with higher volumes. So we would expect operating expenses to be in this four sixty million dollars range for the year and kind of graduating up kind of sequentially to basically at that level.

55:15 Got it. Okay. Thanks a lot. Thank you. This concludes our question and answer session and our conference for today. We thank you again for your participation. You may disconnect your lines at this time.