Good day, ladies and gentlemen, and welcome to the Advanced Energy Q3 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Annie Leschin, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us today for our third quarter 2015 earnings conference call. With me on today's call are Yuval Wasserman, President and CEO; and Tom Liguori, Executive Vice President and CFO. By now, you should have received a copy of the earnings release that was issued yesterday evening. For a copy of this release, please visit our website at advanced-energy.com, or call us directly at (970) 407-4670. Let me just mention that we will be presenting at the UBS Global Technology Conference on November 18, in San Francisco, and at the CEO Midtown CAP Summit in New York on December 10. As other events occur, we will make additional announcements. Now I'd like to remind everyone that, except for the historical financial information contained herein, the matters discussed on this call contain certain forward-looking statements, subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Statements that include the terms believe, expect, plans, objectives, estimate, anticipate, intend, target, goals or the like should be viewed as forward-looking and uncertain. Such risks and uncertainties include, but are not limited to, the volatility and cyclicality of the markets we serve; the timing of orders received from our customers; and unanticipated changes in our estimates, reserves or allowances; as well as other factors listed in our press release. These and other risks are described in Forms 10-Q, 10-K and other forms filed with the SEC. In addition, we assume no obligation to update the information that we have provided you during this call, including our guidance provided today and in our press release. Guidance will not be updated after today's call until our next scheduled quarterly financial release. And just as a reminder, in today's call, we will refer to both GAAP and non-GAAP results. Non-GAAP measures exclude the impact of stock-based compensation, the amortization of intangibles, restructuring charges and other nonrecurring items. A reconciliation of non-GAAP income from operations and per share earnings is provided in the press release table. We'll be referring to the earnings slides posted on our website as well this morning. And with that, I'd like to turn the call over to Yuval Wasserman. Yuval?

Thank you, Annie. Good morning, everyone, and thank you for joining us for our third quarter conference call. The third quarter of 2015 was a solid one for AE. Total results met our expectations on a top line, and we outperformed on the bottom line. Driven by new record volume of our semiconductor business, core Precision Power revenues, excluding inverters, increased 3% from last quarter. Service revenues reached new highs yet again this quarter, while industrial revenues stayed at similar level to last quarter. As expected, revenues from our inverter business continue to ramp down as we remain on track to complete the majority of the wind-down process by year-end. In total, third quarter revenue was $131 million. Non-GAAP profitability exceeded our expectations at $0.51 per share, driven mainly by healthy revenues and operating margins for our core Precision Power business, excluding inverters. We ended the quarter with a solid cash position of nearly $200 million. Over the last 3 years, we had expanded our addressable precision power markets with the addition of other leading power products and technologies. This quarter was no exception. We again continue to target and win important designs across multiple application areas. In semiconductors, we are benefiting from increasing our Power Solution presence in content for both current and next-generation technologies as the industry relies on an increasing number of deposition and etch process steps to support multi-patterning, advanced device architectures and new electronic materials. The projected growth in the number of process steps is compounded by the increase in power content in each process chamber, driven mainly by demanding process requirements for complex architectures, in new chemistries, requiring the use of multiple, RF frequencies and power combinations during the process. This quarter, we've made further headway in advanced memory. We won etch and surface…

Thank you, Yuval. Looking at the third quarter financial highlights on Slide 14. Total revenues were in line with our expectations for the quarter of $130.8 million. Non-GAAP earnings per share of $0.51 came in above expectations. As our business, excluding inverters, generated non-GAAP operating margin of 30%. Inverter wind-down is proceeding well on schedule and budget. We continue to generate healthy cash flows. Cash and marketable securities increased by $15.8 million to $199 million. And as Yuval mentioned, we announced a capital deployment strategy in the third quarter that centers on increasing shareholder value by investing in long-term opportunities to drive earnings and share repurchases to meaningfully reduce our share count. Turning to Slide 15, which illustrates sales by market. Excluding inverters, revenues increased 18% year-over-year to $107.9 million. Semiconductor sales drove the overall increase, increasing 26% year-over-year and 4% sequentially. Industrial sales were $21.4 million, a 4% increase year-over-year, and up slightly from the second quarter. Service revenues of $13.6 million increased 17 -- 7% year over year and 3% sequentially due to share gains and volume increases. Inverter revenues decreased 56% year-over-year and 29% sequentially to $22.9 million as we continue to wind down the business. Turning to Slide 16 and the non-GAAP information. As noted earlier, revenues excluding inverters increased 18% year-over-year to $107.9 million, with operating income of $32.4 million or 30% of revenues. In the inverter business, we continue to sell off existing inventory from wind-down operations. On Slide 17, our wind-down team performed well in adherence with the strict schedule, costs and cash flow budget. We are, in fact, to cease all production activities in Q4. Our last customer shipment is scheduled for December. In Q1 2016, we plan to collect the remaining receivables as well as exit our facilities. The cash outflow…

[Operator Instructions] And our first question comes from Edwin Mok of Needham.

First, just housekeeping. On your non-GAAP EPS guidance for the 4th quarter, what tax rate are you using to calculate that?

15%, Edwin.

15%, okay, great, just to clarify that. And then, on the semi-cap side, so based on your commentary, it seems to imply [indiscernible] to your competitor, are down quite a bit this quarter sequentially. Yuval, any way you can kind of think about how much do you think that is customer digesting inventories [indiscernible] map build up, because you just had a record quarter versus your actual shipment and your customer actually down that much. Just kind of give us a sense of the industry and visibility or color you can provide at least for the first half of '16.

I think, Edwin, I think Q4 decline is, for us, practically is not new news as was reported to the rest of the year in the market by our customers and our peer group companies. I think it's a combination. If you see our Q3, we saw an increase in our semi business, and it was increased from Q2. And it was driven mainly by a product mix and the customer mix, which means, IC product, that saw some investment, and also an increase in our remote plasma source product line. So that's why we saw this 4% increase quarter-over-quarter, obviously, coming from an increase of 4% in Q3 to a decline in Q4, which is, we believe, is an air pocket. That's why you saw the revenue drop. As far as we can see into next year, based on what we hear from analysts, forecasters, end-user or customers and some of our customers, we expect to see a recovery within the first half towards the end of the first half in our business as some of the wafer fab equipment companies start buying components for their anticipated recovery. I think the important thing to note here from our perspective, we continue to operate our business at 20% operating income during the lower end of the trough, right, which is a very powerful model, which allows us, at the bottom of the trough, to continue to invest in R&D to develop technologies and products for the market as the market recovers. I hope that helps.

That's actually a helpful color. On the industrial side, I think your commentary suggest you expect to see some growth this quarter with a new partner ramping. Is that -- industrial, we always find [indiscernible] to launch [ph] on your business quite a few different products that you guys are selling to this market, right? Any way you can kind of think about that partners opportunity because you expect this is going to be a ramp-up this quarter. And also, that is quite -- if you put in picture, any kind of general trend we should think about for the quarter given that there are holidays this quarter, is there anything that we should expect to benefit from those holidays as well as the New Year, any color there?

Yes, sure. So if you look at the industrial market for us, very diversified, very broad spaces of applications. As we continue to grow our products, either of the organic products or the products we acquired in 2014, we take them to the new markets. So the growth is going to be driven -- let me start with that. The industrial world is more influenced by macroeconomic forces than the other side of our business. So as a result of that, it can be lumpy. And a lot of the influence on the glass market and such is driven by emerging markets and how they invest in infrastructures. But at the same time, we expect to see gradual growth in our industrial world driven by, number one, geographical expansion, as we take products to markets that they were not present before. For example, our hard-coating product line is now they're catching really good momentum in North America for hard-coating applications, as I mentioned in the prepared remarks, in machine tools, hard-coating in aerospace and et cetera. And also, we saw some really nice progress in Korea, driven by automotive applications in coating for some appliances. So that's basically geographical expansion. We also see additional growth that will come from practically gaining share as we continue to win new applications with recently acquired product lines, for example, high-voltage power supplies and the power control modules that grow in various industries, even in semiconductors.

I see, great. That's helpful. Last question I have on the margin front. Yuval, you mentioned, obviously, you were going into a downtrend so margin could see a little more pressure here. If I went back 2014, which is kind of, if I do the math, is structured on a similar level on your semi-cap side of the business. Before you did an acquisition, your operating margin is actually a little higher, right, maybe comp [ph] blend [ph] in the average for that period is kind of in the mid-20s, right? Is it because just on cost option of this additional new industrial or can you help me out with kind of bridging those 2 maths [ph]?

Yes. I'll ask Tom to respond to that.

Edwin, I think what you're seeing is -- what you looked at in the past didn't have the shared corporate cost. So actually, on an apples-to-apples basis, about a year ago, we were between 19% and 21% on similar volumes, so actually slightly better.

The response to that Edwin is the shared cost -- corporate costs.

Shared corporate cost with the inverter business, you mean?

Right. So now when you look at our financials and when we say AE without inverters, which I think is what you're referring to, Edwin, that includes all the shared corporate costs, which we're on track to reduce.

And our next question comes from Krish Sankar of Bank of America Merrill Lynch.

I had 2 of them. First one, Yuval, you kind of mentioned that expected recovery towards the back half or towards the end of second half, I'm kind of curious, if you look at your guidance for Q4, your down sequentially 13%-or-so. Have you seen a dip this sharp in the past? If so or if not, what is different this time around?

I think as I mentioned before, I think it's a timing issue. Obviously, it's no different from other companies in our segment in Q4. As you know, it's a very consolidated industry. We have just a few fab companies buying equipment from just a few suppliers that buy power supplies or components from a small number of key suppliers. So you would expect to see some lumpiness that is driven by timing and by the product and customer mix. In general, directionally, I think we're performing like the rest of the market. As I said, as I mentioned before, our Q3 was exceptionally higher than others. And in Q4, I think we're doing just like others. We expect to see the market see an initial, I mean, recovery in the first half. And in the specific application space related to some of the advanced technology of plasma processes, what we hear from forecasters and some of our customers that the future growth expected in this specific application is going to be double-digit CAGR. So we're very bullish about the future, and we're very excited about the product and technology that we have in the pipeline. And we need to go through Q4, perform as well as we do in terms of operating margins and be ready for the ramp in the first half.

Got it. Got it. And then a quick question. Can you guys quantify [Audio Gap] [indiscernible]

We really do not break our industrial revenue components. We have a very broad mix of products and applications. What I can tell you, that our high-voltage product line is one of the focus areas for us of growth. It's an area that we expand in multiple industries, and we will continue to grow in this area both organically and inorganically.

Got it. And just to clarify with Tom. You said that buyback has not yet started, right?

Correct. So we plan to initiate the first phase of that authorization in Q4. The reason we didn't start, when we announced it, we were in a quiet period, and we thought it was best to wait till after the earnings call to get into Q4.

Your next question comes Mehdi Hosseini of SIG.

Going back to the -- looking into second half of '16 when the inverter business is completely off your book and some of the duplicate costs are going away, how should we think about pro forma operating margin?

Sure, that's a great question, Mehdi. So long term, our operating margin is the low to mid-20% range, okay? And that's how you should view it. So even in Q4, we're slightly -- we're at the low end, yes.

Got you. So you're effectively -- by as we exit this year, you're at the low end of that targeted margin. And as semi rebounds by mid next year, you should be able to see the margin expansion, correct?

Correct, correct. But we should see the margin expansion -- go ahead, sorry.

What was the cash outflow in Q3?

For inverters, I assume that's what you mean?

Yes, yes.

It was $11.7 million. And for Q4, roughly the same because what we said was the total for the second half associated wind-down would be at the low end of our $20 million to $30 million range. So everything with that cash flow is on plan and on schedule.

Sure. And one question, last question. Just going back to your post semi. And I don't want to beat on a dead horse, but if I just go with the midpoint of your guide range, your semi business would decline by 30% sequentially and 27% year-over-year and would reach a low $50 million revenue run rate, which you haven't really seen since early 2014. So this doesn't seem to be an air pocket. How should -- and I know the question has come up, but I wanted to go back, is this really lack of visibility that your customers are seeing? Or is the mix here more back-end loaded and, in that context, your customer shipment is going to decline and not you're to make any adjustment to their inventory, which is adversely impacting you?

So Mehdi, obviously, we have clear visibility regarding what will happen in Q4, which is practically we're in the middle of. And we rely on the best information we get from our customers and sometimes listening to their customers trying to predict what will happen in 2016. And what we hear is that there is an anticipation for a recovery toward the second half of next year of wafer fab equipment shipments or deliveries. Well, since we are a supplier to the companies that build and deliver equipment, we anticipate that we will see some of the recovery a little bit earlier than our customers. That's the extent of the visibility we have. On some of the critical applications of which we are a key supplier, we expect to see an accelerated growth as the investment will not be driven by capacity, but some of the investments may be driven by transition of some of the advanced applications to mass production. But our crystal ball is as good as the information we hear from our customers, their customers and some forecasters.

Mehdi, just let me clarify the revenue, I just want to make sure we're on the same thinking. So Q4 without inverters, the midpoint of the guidance is $85 million, so it's down 21%.

21%, not 30%.

Right. I was more focusing on semiconductor, which would be, to get to $85 million, you would need to do below 50. Now just...

Okay, right. [indiscernible] and it's offset.

Sure. And just to summarize the trend in semi, if this year, you saw a front-loaded year, your first half was much stronger second half. Next year, is it may be more of a back-end loaded in just how your customers are ramping? Is that a fair way of summarizing everything?

This is the information that we hear from various sources within the industry. And this is the extent of visibility that we have, Mehdi.

And our next question comes from Jairam Nathan of Sidoti.

In your slides you kind of indicated wins on the Advanced Packaging, 3D packaging side. Can you kind of talk about your exposure in general to that trend and the potential there?

I'm sorry, were you asking about our exposure to 3D?

Packaging, yes.

Packaging, okay. Obviously, a very important process in 3D packaging is deep via etched into silicon, okay? And this is a unique process. It's a plasma etch process where deep holes are being drilled in the silicon substrate to allow for stacking of devices, one on top of the other. Obviously, as a unique etch process, it requires power supplies, RF power supplies and matching networks and adjacent accessories to be used in this specific unique process and we are supplier of choice for some of the critical applications related to 3D packaging.

Okay. So would you be involved only with when it's 3D and not interposer? Or would you be involved even if it's an interposer because it looks like there are 2 different ways you can do it?

Well, we were involved in all the processes where plasma chemistry is being used for either etch or deposition. So we're not -- there's not a single process that we serve. We serve a broad base of plasma processes, and that could be etch, deposition, surface treatment; in some non-packaging areas, some applications related to surface modification, atomic layer deposition, et cetera. We are critical supplier of these applications. We are the #1 power supplier for the industry. And as a result of that, we're very spread across applications and end markets within the semi market.

Okay. And then my next question was regarding operating expenses. The non-GAAP OpEx for this quarter was around $28 million. How should we think about OpEx on a sustainable basis in '16 especially after you talked about that $4 million to $5 million in further cost reductions?

That's a good question. So by mid-2016, basically it'll be down $4 million to $5 million on an annual basis or slightly over a $1 million a quarter.

Okay, okay. And -- but I'm guessing the $28 million includes some OpEx on the inverter side as well, right? So that should go away as well?

Yes, okay. Okay. Thank you for clarifying that. So right now, we're reporting operating margin. Once we go into a discontinued mode, you'll see the full breakout of the R&D and SG&A, et cetera. But for modeling right now, the current run rate less -- slightly over $1 million a quarter is a good way to think about it.

Okay. And my last question, pro forma, and you're probably not spending too much CapEx in inverter, but how should we think about CapEx and D&A?

Yes. We look at CapEx in basically less than $5 million a year going forward, without inverters.

And our next question comes from Pavel Molchanov of Raymond James.

So I guess it's now been almost a year since your last acquisition, about as long a period without M&A as I think any of us can remember. Can you talk about the pipeline and whether -- is this just a kind of a temporary blip or are you not seeing a lot of attractive opportunities out there?

Thanks for the question, Pavel. Obviously, we were very busy during the last 3 or 4 quarters doing 2 things. Number one, integrating 3 acquisitions we acquired in 2014, as we consolidate 2 high-voltage acquisitions into 1 product line, migrating our manufacturing to low-cost regions, integrating our G&A and driving significant synergies from these acquisitions. The other area of focus and emphasis was to manage carefully through the wind-down of the inverter business. So we were very busy integrating acquisitions and divesting the inverter product line. Obviously, we continue to very aggressively looking at a lot of opportunities. We have a very rigorous method of screening and looking at potential acquisitions. We do entertain the pipeline. And our intention, as we described during the capital allocation strategy disclosure, is to continue to focus on inorganic growth, and we're definitely entertaining some targets right now.

Okay. And then on what you guys talked about in September, which is the allocation, $70 million sort of M&A, 30% buyback. If we just look at round numbers, that implies about $30 million of buyback annually. But your authorization is for $150 million over 2.5 years, but still a lot more than $30 million annually. So that 70-30, what's the timetable for that -- for those percentages to actually apply? It's clearly not in the short run, right?

Yes. That's a really good question. So when we look at the authorization, we were also looking at the cash we had available today. And as far as the capital deployment plan, we're saying, okay, going forward then 30% of cash flows a year or 2 as share repurchase, that's the difference. I understand your question.

So this is a 30-month plan, Pavel. And over the next 3 months, since the announcement, the plan is to spend $150 million in stock -- on stock repurchase. And as Tom mentioned earlier, we are going to start implementing a strategy and a plan in Q4, this quarter, right. Obviously, it is going to be dependent on various drivers that will be decision points for how much and when. Also, we are going to focus on acquisitions as well. And as you heard today, we ended up the quarter with $199 million cash, and we continue to generate cash as we go forward. So we feel very comfortable that we have a solid plan and a solid strategy.

[Operator Instructions] And our next question comes James Covello of Goldman Sachs.

This is Chelsea Jurman, on behalf of Jim. If WFE is flat next year, can you talk about what your expectations might be for the semi business, and what you're expecting in terms of share gain?

Well, the only way I can answer the question is that we continue to win significant applications in the semiconductor market driven by our advanced technology, mainly in RF power and remote plasma source technology. We are the #1 leader in the market by far. And as such, it allows us to continue to invest in R&D and to continue to pursue additional applications. We expect to see growth coming from recent wins we had all the way from last year through this year in new applications that go into 3D devices, 3D packaging, in FinFET technology that will require not only additional -- and I'm sorry, in multi-patterning, that will require not only additional process steps, but also much higher power content in every process chamber. So there's a compounding effect here that, in addition to the growing number of process steps, there is more content of power in each chamber. And that may explain the anticipation to see the 3D process technology drivers to grow much faster than the general WFE market. I hope I can -- I answered the question. I cannot give you percentages or our anticipated share gain. All I can tell you is that we're doing great, our technology is leading and we look forward to growth in 2016 and beyond.

That's helpful. And then as a follow-up, you've given the target of $2 to $3 in earnings before. Is that still the right target to be thinking about? Or can you give us any sort of update on this goal or what would need to happen to hit that target.

Yes, this continue to be our aspirational goal, and I can repeat that. We talked about operating between $2 to $3 per share and accumulating throughout -- accumulatively since the last Analyst Day between $250 million to $320 million of cash, which basically will help us to pursue some of the strategy that was described by Tom earlier. So we reiterate our aspirational goals.

And I'm showing no further questions at this time. I'd like to turn the conference back over to Yuval Wasserman for closing remarks.

Thank you, everyone, for joining us today. Obviously, we had a very strong Q3, with almost record revenue for semi and service. As the rest of the industry anticipates, we expect to see a temporary decline in Q4, which we manage carefully, and we expect to continue to deliver profitability at the level we have demonstrated before, with operating incomes above 20% of revenue, which allows us to continue to invest and continue to compete effectively. I'm looking forward to see all of you or some of you in the next events that we talked about. And again, thank you very much for participating today in the call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.