Good day, ladies and gentlemen. Welcome to the Advanced Energy Industries Q1 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today's conference call, Ms. Rhonda Bennetto, Investor Relations. You may begin, ma'am.

Thank you, operator. Good morning, everybody. Welcome to Advanced Energy's first quarter 2018 earnings conference call. With me on today's call are Yuval Wasserman, President and CEO; Tom McGimpsey, Executive Vice President, Interim CFO and General Counsel. By now, you should have received a copy of the earnings release that was issued yesterday afternoon. For a copy of this release, please visit our website at advancedenergy.com. Before we begin, let me remind you that today's call contains forward-looking statements including Advanced Energy's current view of its industry, performance, products, applications and business outlook. These statements 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 and uncertainties is contained in Advanced Energy's most recent Form 10-K, Form 10-Q and 8-K filings with the SEC. All forward-looking statements are based on management's estimates, projections and assumptions as of April 30, 2018, and Advanced Energy assumed no obligation to update them. Guidance will not be updated after today's call until our next scheduled quarterly financial release. Aspirational goals and targets discussed on this conference call or in the presentation materials should not interpreted in any respect as guidance. Today's call also includes non-GAAP adjusted financial measures. Reconciliations to GAAP measures are contained in yesterday's earnings press release and in our reconciliation slides, which are available on the Investor Relations page of our website at advancedenergy.com. We will be referring to earnings slides posted on the Investor Relations section of our website. And finally Advanced Energy will be presenting at the J.P. Morgan Global Conference in Boston on May 15, as well as the Cowen TMT conference in New York on May 30, and finally, at the Stifel Cross Sector Conference on June 12. We look forward to seeing many of you few at these events. And with that, I'd like to turn the call over to Yuval Wasserman. Yuval?

Thank you, Rhonda. Good morning, everyone. And thank you for joining us for our first quarter earnings conference call. The momentum of 2017 carried well into the first quarter, giving us a very solid start to the year. Continued demand for AE's high performance power solutions in advanced semiconductor applications, again, grew to record levels. Our expanding Industrial business also surged ahead in the first quarter, resulting in total revenue growth of 31% and non-GAAP EPS growth of 29% year-over-year. These results demonstrate the solid execution of our growth strategy, and our investment and focus on meeting market technology needs through innovation. In addition to our strong financial performance, we accomplished several key initiatives in the quarter. We completed the acquisition of Trek, adding complementary high voltage and electrostatic technology products to our specialty power products portfolio. This is the second acquisition we have completed during the last nine months, in addition to Excelsys, which we closed in July last year. As part of our general and organic strategy, the Trek position is in line with our roll-up plan in the high voltage technology space, joining high-tech power and UltraVolt acquisitions and increasing our SAM in applications such as life science, ion implantation, metrology and analytical equipment. Following a rigorous and disciplined approach, we are pleased with the six acquisitions we made during the last few years, as all of them have exhibited significant growth and profitability. In addition, and in line with our capital deployment strategy which is ongoing, year to date, we have deployed nearly $28.5 million in share repurchases. Lastly, and most importantly, we deepened our senior leadership team, by hiring Paul Oldham as our new CFO. Paul will play an instrumental role in accelerating AE's growth strategy. And we were excited to have him join us…

Thank you, Yuval. The first quarter was a strong start to 2018 for Advanced Energy. We executed on our strategy to growth both organically and inorganically, and reached record highs on the top and bottom line. Total revenue increased 9% sequentially and 31% year-over-year to $195.6 million. Non-GAAP EPS rose to $1.34 from $1.31 last quarter and $1.04 in the prior year. Turning to sales by market. Semiconductor revenue again reached a new record of $136 million, up 10.1% from the last quarter and 30% from last year. We continue to see strong demand for our precision power products from ongoing industry momentum and the close correlation of our sales with OEM shipments. Industrial revenue grew to $35.2 million, up 15% from the fourth quarter and 45.6% from last year. We have increased our industrial revenue both organically and inorganically into new verticals with our highly engineered products. We increased the adoption rate of our advanced technologies and continued to expand our geographic footprint. Service revenue for the quarter came in at $24.4 million, a decrease of 2.5% from a record fourth quarter, but up 18.9% from last year. The sequential decline was due to the timing of installation and delivering mix of service projects received during the quarter. Gross margin for the first quarter was 53%, this compares to 54% in the prior quarter and 52.8% a year-ago. As a reminder, in the prior quarter, we were benefited by lower warranty costs, which were unique to the period. GAAP operating expenses for the first quarter increased in support our strategy to grow and diversify. In addition to the acquisition of Trek, we also invested globally to expand and upgrade our facilities to meet future demand as we continue to penetrate new verticals. Additionally, we decided to expand our performance-based…

[Operator Instructions] Our first question comes from Tom Diffely with D.A. Davidson.

Yeah, good morning. I want to dig in a little on the design wins. You talked about on the NAND and the DRAM side, and really just curious, if at this point the growth you've seen in that space is coming from unit growth or the content increasing - increases for the power supplies on the systems?

I think it's a combination of all of the above, Tom. Our design wins normally will go to high-volume manufacturing within 18 to 24 months from now. So lot of the design win activities is for next generation devices. As we talk about the adoption of technology by the market, after we qualify our product and our customers they go and qualify their products with the end-use customers. So there is a process of adoption and the valuation. So, some of these design wins will be in high-volume manufacturing in the future. But again, it's driven by next generation technology, next generation devices both in memory and logic.

So when you look at the changing contents of increasing capital intensity of power supplies and matching units on these systems over time, have we - do you feel like you've saturated the market or is there still plenty of content growth to go with the next generation etch tool versus the last generation etch tool?

I think there is more room to grow in content, both in terms of the number of power supplies for chamber, but also the complexity of the power supplies and the adjacent accessories like RF matching networks. These power supplies and matching networks become more complex in terms of their capability to drive high speed controls and adaptive control as the complexity of device drives very, very complex process schemes and these processes require a different level of performance on the power distribution network.

Okay. So in a market where the number of etch systems perhaps stays stable over time you think you could still grow in that space.

We believe so.

Okay. And then just a quick follow-up on service, the service business, is this normal seasonality of is it more of a project based dip that you saw in the quarter?

We don't believe in seasonality, because we know specifically what drove the dynamic in the quarter. We have won a few upgrade and retrofit business deals. We have booked those deals, but the customers requested the implementation of those upgrades and retrofits in Q2. So what happened is the revenue that we basically booked in Q1 will be delivered in Q2 and we're not concerned about that. We have strong backlog. And we expect our service business to continue to grow as we expand our offerings. We gained share in our repair centers around the world and displace orphan competitors' products in the field.

Okay. Thanks for your time.

Our next question comes from Edwin Mok with Needham & Company.

Great. Thanks for taking my questions. So first just a housekeeping, how much did Trek to this quarter into your guidance and is all those sales go into Industrial or part of it is semi?

Hi, Edwin. It's Tom McGimpsey. I think you can look at Trek adding greater than $20 million on an annual run rate. So in Q1 we did have about $4 million that was added in revenue. And we did actually beat - we were above guidance without Trek. As you recall, our midpoint was 188 and we actually finished out at 191 plus without Trek. So, hopefully that's helpful.

Okay. Great, thanks. Thanks for clarifying that. And then, let's focus on the semi. I think you've always said the second quarter you expect demand to be relatively stable. And I think, Tom, you said that your business generally track customers' shipment now. Based on that, how do you got to think about second half of the year? It sounds like some of the constraint in the second half might - we might have, [let us call, softer] [ph] shipment at your customer OEM side.

So, Edwin, this is a great question. So as we look at our, the market right now from our vantage point, it's kind of been flex and it's kind of dynamic. We have recent news about some delays in the Intel high volume manufacturing, TSMC timing of investment, and Samsung is still quite about what their plans are. We right now from our vantage point assume that the second half will be flattish to the first half. That's our current assumption. But I think the most important thing and we believe that the underlying demand for the market is continuing to be strong. We believe that the growth in the market will continue within - into 2019. And that's our work in assumption. As we said in the past, we may see quarter by quarter bumps or flatness before resurgence of growth. But the underlying demand is still there, driven by the adoption of edge computing, AI, IoT and we see that demand continuing into the future. So if the market takes a breather for adoption and installation of capacity, that's fine. We're in a very strong position. We continued to grow both organically and inorganically. Some of the acquired entities we have added to our portfolio participate also in semi. For example, a portion of the Trek business serves the high voltage semi market with new applications we never had before. So we're encouraged about the future.

Okay. Great, that's a great color there. Moving on to Industrial, looks like you guys are continuing growing quite well there. I remember last year part of the growth came from this consumer electronic win that you guys - wins that you guys have talked about, right? And I think historically we also talk about that being a little more lumpy, right? Are we seeing more broadening now and that gives you the confidence now that you can raise your target to kind of grow in the mid-teens rather than GDP plus?

So, Edwin, were you asking about consumer electronic products? I'm sorry. I didn't hear the whole question.

Yeah, sorry, sorry, I guess, two-part question. First is consumer electronic kind of win that you guys have in consumer electronic holdings, right? Is that still going to be kind of lumpy, strong versus Q1 and maybe kind of pull back? And then the second thing regarding, just started broadening of the product offering, how concentrated your sales now in the - I guess, in this group versus it was last year and the year before that?

Sure, very, very good question. So, Edwin, in general, our industrial business comprising of multiple slivers that are niche market, that all of them are lumpy. The good news is that when you combine all of them together we continue to see growth. Now, more specifically about the consumer electronic products, coating applications, we're very excited about that. Granted it is a lumpy like any other capital investment required for adding capacity to the market, this business is driven not only by capacity, but also next generation highly engineered materials that are being used for various consumer electronic products. So we see investment in capital equipment, driven by capacity, but also driven by new materials that are implemented to these devices. More so, we're excited about the fact that we are expanding our presence to new customers we haven't served before in that specific application space. So the growth is capacity, new engineered materials and broadening our footprint, both geographically, but with new customers that serve different consumer electronic products. I hope that helps.

Okay, great. One last question, Tom, you mentioned that there are some increase in costs, OpEx in your model. That's the result - I think your 2Q guidance at least in the midpoint of the range is down over 100 basis points from what you guided last quarter. And that you also mentioned that there are some costs that you expect improved as you integrate some of these acquisitions. How are you talking about the long-term margin model? Is this 31% to 33% now the new range or how do we think about that?

Yes, it is, Edwin. And we do continue to expect 52% to 54% range for gross margins. And as you've outlined for non - basically operating margins, non-GAAP 31% to 33%, we've invested in the business, we've invested in R&D, we've invested in our employees through certainly our performance-based plan. And so, I think we're pretty excited about it. And so, you can see us as a percent of revenue or non-GAAP operating expenses being around the low-teens around 20% - low-20s, around 21%, very consistent with our business model.

Okay, great. That's all I have. Thank you.

Thank you.

Our next question comes from Pavel Molchanov with Raymond James.

Thanks for taking my question. In the slides, you, I think for the second quarter in a row identified solar cell capacity build out as one of the industrial drivers and given that we're now about four months into this Section 201 tariff and more announcements about fab newbuild in the U.S. announced by a number of OEMs. I'm curious to kind of to what extend that is, you are seeing that as a source of order uplift?

Hi, Pavel. We are very excited about our presence in the manufacturing of solar cells. We have enjoyed significant growth and revenue coming from capacity adds and new technology adds in China. We see additional opportunity coming from the rest of the world based on the changes in the regulations as you basically alluded to. And we continue to see the PV solar manufacturing market, as the market will allow us to continue to have sustainable business and potential growth, very, very constructive on PV solar.

Okay. And as return of capital, I think it was maybe two years ago or three years ago you outlined kind of 30% buyback, 70% M&A allocation for using your free cash flow. And given the time that's passed, I'm curious, is that still in your eyes kind of the right split, because it's certainly seems like buyback has been more noticeable in your capital allocation of late. So is it still 30%, 70% that you're sticking with?

Pavel, in general, yes. Obviously, we continued every quarter we evaluate our strategy, and we said historically that long-term we see it 70/30 percent split. However, we're being very cognizant of the changes in the market. We can apply opportunistic decision when we need to, and we do have a very active pipeline of acquisition. So all of the above influences what we are doing. But just a reminder, Pavel, since the inception of our plan, we have spent $108.5 million in shares repurchased. Year-to-date, we spent $28.5 million in shares repurchase including to two acquisitions rather small ones, but two acquisitions during the last nine months. And we expect to see more acquisitions happened this year. So obviously, we have the guideline that helps us make our strategic decision. But we have to be cognizant of the dynamic in the market, and we make decisions as the market and dynamic changes.

It's helpful. I appreciate it, guys.

Our next question comes from Amanda Scarnati with Citi.

Hi, good morning. Just a quick question on your content in DRAM versus NAND. Some of your customers have been talking about there's been a shift from NAND to DRAM in shipment towards the end of the quarter. And how does that impact your growth going forward if DRAM is significantly stronger?

Thanks for the question, Amanda. Obviously, there is a difference in content of the actual wafer-fab equipment between logic and memory between 3D NAND and DRAM. And our customers presence in those applications or devices is different, and our presence within our customers equipment is different. So it is complex puzzle of looking at all the drivers in the content. However, the one thing that is interesting for us is the migration to DRAM increases the FEP content of the wafer-fab equipment, the front-end processing equipment. For example, you will see a higher content driven by ion implantation, you see higher content in RTP, in some cases higher content in metrology. Luckily, these are markets that we have really strong presence through our high voltage power supplies. We are a critical supplier for both ion implantation and metrology and inspection tools. But also, DRAM drives growth in a process called RTP, Rapid Thermal Processing, where we have a really extremely high market share when it comes to temperature measurement and control. So the migration to DRAM, in addition to our historical content in deposition, etch, et cetera, has an increasing strength and growth in our high voltage business, and our Sekidenko pyrometry business.

Right. And then, can you just remind us what your market share is in conductor versus dielectric etch? And if you're starting to see any more competition on the conductor etch side and its fragment that you mentioned for 18 to 24 months out?

We don't disclose our market share by application. And when it comes to market share, well, the one thing we all need to remember that with the complex environment we play in, we have different shares, and different content, and different end-use customer - I mean, OEM customer. And they have different content and different presence in their end-use customers. At the bottom-line, we're not concerned about small short-term changes based on revenue distribution. The bottom line is Advanced Energy is undisputed leader in power supplies and power conversion solutions for the semiconductor industry, by far leading with - leading technology, leading product, leading presence and that explains why we have leading financial performance. We are an enabler and continue to be so across multiple applications, world regions and customers. So we - the change in mix driven by device change or customer change or end-user change may be looked as a change in share. We are excited about our position. We are excited about being the leader. And based on what coming down to pipeline in terms of next generation technology, we are excited about the opportunity to even increase our share.

Great. Thank you.

Our next question comes from Patrick Ho with Stifel.

Hi, this is Brian Chin on for Patrick. Thanks for letting us ask a few questions. I guess, my first question is, just looking at your revenue guidance for the second quarter, typically, you're given $10 million range in the past. This time, it's $15 million, maybe not anything to read into there. But just curious if there's anything behind the wire than typical guidance range. Is it a reflection of perhaps timing of shipments into other the semi or industrial markets?

It's a reflection of benchmarking. We constantly look at the guidance provided by our peer group players, and we have noticed that peer group players offer plus/minus 7%, and we adopted that as a best practice.

Got it. Okay. And there is the EPS range still it's kind of a tight $0.10…

Yeah, we remain. Yeah, yeah.

Okay. Fair enough. Also looking at your filing that you just put out in conjunction with the results, your top customer was up pretty significantly Q-on-Q, a couple of multiples above your growth rate in semis. Just curious if you'd attribute that outgrowth to being driven perhaps by share gains in semi process power, perhaps penetration of some of your high voltage products that you referenced? Or if it's more just indicative of perhaps the customers baseline shipment strength?

Okay. It's a great question. So the growth we've seen with our biggest customer and since this is public information, we're not afraid of sharing that. We have grown 28% year-over-year and 18% quarter-by-quarter. Now it's a combination of multiple things: number one, product mix; number two, increase in high voltage content and also the addition of Trek. Trek has brought us an incremental revenue that goes into semi, about 60% of Trek revenue is coming from semi applications. So all the above organic growth, inorganic growth, product mix and obviously we have a higher content with our largest customer simply because of the fact that they have very broad base of equipment content different than others.

Okay. Thanks, Yuval. Very helpful. I guess, one last question. Just going back to some of the discussion on the industrial segment, clearly a lot of strength there, again, you built backlog overall in the business in Q1. Just kind of curious, I did know it's a bit of a - maybe a revenue bias or shift towards Europe in particular. Maybe you can flesh that out a little bit and just kind of dissect a little bit what's going on there. And then also whether - I think you mentioned late last year little bit of digestion in some of the glass coating lines, the added capacity in China, just whether your - that digestion is– you've moved past that in that market too.

So in general, if you look at the thin film industrial business, it is a lumpy business. And we see a lot of changes, and ebbs and flows between various regions in the market. If you look at the general dynamic of this market, periodically we saw investment in greenfield glass coating lines that served us with basically installation of new factories. In some other periods, we saw upgrades and retrofits driving more of the business. Also, it's very regional and there are players both in Asia and in Europe, but it comes to the glass coating, and for that matter, even flat panel display business. And we see periodical shift between Europe and Asia, when it comes to the adoption of this capital equipment pieces in the world. So you should expect to see lumpiness when it comes to what we call the large area to position market. And it could be either glass coating or the flat panel display large TV-type implementation or investments. The things that we're encouraged about is that the adoption of the handheld devices OLED flat panel displays is exciting for us, because it's continuing regardless of the dynamic of the flat panel TVs for example. So we see continuing investment in this area, driven by volume and adoption of OLED to handheld devices and that added to some of our growth recently. In general, as we said earlier, it will be lumpy and it will be both seasonal and regional. The good news is we are a strong player in these markets, especially in the deposition side and continue to serve the market, both in Europe and in Asia, including Korea, China.

Okay. Thanks so much.

[Operator Instructions] And I'm not showing any further questions at this time. I would like to turn the call back over to the management for closing remarks.

Thanks, everybody, for joining us. We had a strong quarter. We have a fantastic performance against our aspirational goal, where we feel very comfortable and confident with our program and progress. As I mentioned earlier, since inception we have deployed $108.5 million in share repurchase, returning value to our shareholders. And we continue to increase the cadence of acquisitions and looking forward to seeing many of you during the next quarter. Thank you so much.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.