Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2019 Advance Energy Industries' Earnings Conference Call. [Operator Instructions]I would now like to hand the conference over to your speaker today, Edwin Mok, Vice President, Strategic Marketing and Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Welcome to Advanced Energy's third quarter 2019 earnings conference call.With me today are Yuval Wasserman, our President and CEO; Paul Oldham, our Executive Vice President and CFO; and Brian Smith, our Director of Investor Relations. If you have not seen our earnings press release, you can find it on our website at ir.advanced-energy.com. There, you will also find a slide presentation to follow along our discussion today.Let me remind you that today's call contains forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees for future performance. Information concerning these risks and uncertainties is in our filings with the SEC. All forward-looking statements are based on management's estimates, projections and assumptions as of today, November 12, 2019, and the Company assumes no obligation to update them. Long-term targets and aspirational goals presented today should not be interpreted in any respect as guidance. Today's call also includes Advanced Energy's non-GAAP financial measures. An explanation of these measures as well as reconciliations between GAAP and non-GAAP measures are contained in our press release and our presentation.Before I pass the call to Yuval, I'd like to go over two housekeeping items. First, AE will be hosting our Analyst Day on Monday, December 16 in New York City. We welcome all of you to join us at this event where you will learn more about our market opportunities, our strategies to outgrow our markets intercessory earnings growth and additional details on Artesyn.Additionally, with the acquisition of Artesyn Embedded Power, we have reclassified our revenue breakdown into four market verticals, which better reflects the broadened exposure of our business. Our comments today will reflect this change. Detail on these market verticals can be found in today's third quarter 2019 10-Q filing. In today's earnings press release, you can also find the reconciliations of our historical data between the old and the new market verticals.With that, let me pass the call to our President and CEO, Yuval Wasserman. Yuval?

Thank you, Edwin. Good morning everyone and thank you for joining us on this call.Advanced Energy delivered strong financial results in the third quarter with organic revenue and earning exceeding the high end of our guidance ranges. Despite the challenging macroeconomic environment, we saw improved market conditions for semiconductor equipment, the successful ramp of several new designs we previously secured, introduction of new innovative technologies and strong operational execution by our team.Lastly, we closed the acquisition of Artesyn Embedded Power ahead of schedule, which contributed additional revenue and earnings and accelerated our growth as a premier provider of power electronic solutions.Let me start with Artesyn. The acquisition closed on September 10 and contributed $41 million in revenue and $0.07 per share in non-GAAP earnings accretion to Q3 results. We are pleased to welcome the Artesyn employees into the AE family. We've begun executing on integration plans, starting on day one and it is progressing well.We are building an integrated functional organization to enable efficiencies and increased focus on the application spaces we serve. The advantages of our combined company, both on the top and bottom lines are significant. We are extremely excited about the opportunities for the combined company to create a platform for accelerated growth in both revenues and earnings as we execute our integration strategy.Turning now to our markets and performance in the third quarter. In semiconductor equipment, investments in both foundry/logic and equipment spending out of China, increased in Q3. Demand for our products strengthened over the course of the quarter and coupled with new designs contributing incremental revenues, our semi-product sales surpassed our original outlook.As expected, semi service revenues was down modestly from Q2 due to low fab utilization in some regions, partially offset by good execution by our service team to grow higher value programs.As…

Thank you, Yuval, and good morning everyone.Before I begin, let me remind you of what Edwin stated at the outset. Starting from this quarter, we have reclassified our revenue breakdown into four market verticals. As part of this change, we have included service revenues within their respective markets, consistent with the majority of our peers and customers.In addition, we have updated Artesyn's pro forma 2018 revenue based on these market classifications. You will find supplementary tables of historical and third quarter data in the earnings slide deck.Also as Yuval mentioned, going forward we expect to run the Company in an integrated functional structure in order to drive efficiencies and synergies, but we will provide organic and inorganic results for comparative purposes in the interim period.Turning now to the results for the quarter. Total revenue for the quarter was $175.1 million, up 30% from last quarter and up 1% from a year ago. On an organic basis, revenue of $134.2 million was above the high end of our guidance range. The addition of Artesyn added $40.9 million in the 20 days we owned the business.Looking at sales by market. Semiconductor equipment revenue was $96.4 million, up 7% from last quarter and down 20% year-over-year. Semi product sales grew 9% sequentially in the third quarter and we're ahead of our target, driven by strengthening foundry/logic investments and incremental contributions from our prior design wins.Looking into Q4, we expect our total semi revenue to grow in the low to mid-teens sequentially, supported by strong foundry logic, early signs of NAND spending, OEM inventories bottoming, and incremental revenues from our design wins.Revenues from industrial and medical markets were $55.2 million, an increase of 23% from the second quarter and up 4% from last year. On an organic basis, revenues came in at $38.7 million,…

[Operator Instructions] Our first question comes from Tom Diffely with D.A. Davidson. Your line is now open.

It's nice to be on the other side of the cycle now it sounds like. Quick question on the comments you made about the OEMs ending of your inventory ramp down, how big an impact was the inventory at the OEMs during the quarter versus your expectations?

Yes, Tom, I think it's a little hard to articulate because it's kind of a blend, right? I mean it's not a cliff, but as we - in general as we tried to observe what's happening with our customers' inventory, it seems like we're seeing a pretty tight connection between what we're seeing in the market trends and in our results. And so, when we look through by customer, our sense is the drawdowns largely completed.

And it wasn't done at the same time, Tom. I mean, different customers had different timing of the drawdown.

That's right.

And then Paul, a question on the guidance you just gave, initially you had $0.07 impact from the acquisition in the quarter. I think we are expecting something in the lines of $0.07 to $0.10 a quarter for the next few quarters. Is that where we are as far as the impact from the Artesyn acquisition or are there some near-term items that make the earnings contribution different than that?

Well, as it relates to the results, as I mentioned on the prepared remarks, be careful about extrapolating the results. You've got a few weeks of revenues which are typically at the end of the quarter disproportionate to the expenses. So it's very, very good results in that regard. You have a little bit of better mix and you have some purchase accounting things that flow through there.So for the short period, those are very good earnings, but if you look at our guidance and you look at total what we basically believe is that Artesyn's going to start right about where we thought when we announced the acquisition, where they would sort of run in the mid-single digits of operating income and gross margins in the low to mid-20s. So, I'd say it's right on track to what we expected if you looked at a full quarter.And there's going to be a little noise at the beginning as you can imagine. So, it could be plus or minus that, but I think you can kind of get a sense for the contribution if you use, in general, the basic guidance we said when we did the acquisition, no change from that - from what we've seen.

And Tom, the starting point that we announced when we talked about this acquisition is basically in line with the presentation, we gave everybody about this business. You can look at that as the starting point of our integration process.

That's right.

And then, Yuval from a bigger picture point of view, a lot of companies are starting to see the beginnings of a NAND recovery. Is there any way, I guess, not quantify, but determine whether or not this is the beginning of something larger or if it's just a slug of business in the interim, or how do you view the pickup in NAND business that we're seeing?

The way we look at that, Tom, is investment cycle. We don't have visibility beyond this quarter or maybe in the next one. The other thing that we know from the industry, a lot of this investment is added capacity to existing lines or existing fabs. These are not greenfield fabs investment that we saw in the - 2019 and 2017. And for that reason, we look at that as investment cycle. And yes, it started with foundry logic and now we see the investment cycle setting in the memory, in NAND.

Finally, Paul, when you look at the Artesyn business, is there any particular seasonality that you see there?

Typically, the fourth quarter is a stronger quarter and balanced in the other quarters. Otherwise, it's a broader business and it can be, there are big projects for sure. So it can bounce around a little bit quarter-to-quarter based on the major projects that are happening, but in general, the fourth quarter is a little bit stronger quarter.

Our next question comes from Krish Sankar with Cowen & Company. Your line is now open.

I had a couple of them. First one, Yuval, on the NAND recovery that you're seeing, kind of curious, do you - from your vantage point, are most of the power supplies being purchased by your customers, is it for 96 layer 128 layer at this point?

I can't comment on that Krish.

Got you, but...

I think it's a combination, buy I cannot give you a specific delineation how much is it.

No worries. From your vantage point, can you know the difference between is this an inventory replenishment or is this a more cyclical recovery by? Do you have any insight into that, especially on the NAND side?

No, we don't.

No worries. And then a question for Paul. Paul, thanks for the color on the Q4 guidance. You said, well over half of the revenues is going to come from Artesyn in Q4. Is it fair to assume if we take that as the baseline, the December quarter Aretsym revenue? Will the out quarter revenues in 2020 be determined basically by data center and telecom or should we think this run rate of revenue is a good assumption to use for 2020?

Well, I think - first, I'm not sure if I heard you correctly, but we said in our prepared remarks that Artesyn was a little more than 50% of the total and I also mentioned that the fourth quarter tends to be a little stronger quarter than the others. So I wouldn't quite take the fourth quarter and just multiply it by four. It will bounce around a little bit by quarter, but within that, the trends that we talked about on the call, I think are the important ones and that is that we could see a little strengthening in data center over the course of the year based on the market and some wins that we've had that telecom and networking will be a little weaker because of the tariffs in the external markets that we're seeing.And the industrial and medical is kind of a steady grower, although there is some project timing that would be in there. And I think if you look at our other markets then, the important thing is when we look at semi going into next quarter, we continue to see a solid growth there in the low to mid-teens overall.

And then a final question, either for Yuval or Paul on the reclassification. The semi equipment revenues was $96.4 million in September, and basically in this part, I'm just kind of curious, if you look at calendar '20 for you guys on that segment, how is it compared to calendar - calendar '19 compared to calendar '18? How much down is it on a year-over-year basis on the new reclassification?

Yes. If you look at the quarter, you can see that we're down about 20% year-on-year for the fourth quarter and then we provided some breakout, Krish, in our presentation that actually gives you by quarter the numbers going back through 2018. So you can take a look at that. It's all right there.

Our next question comes from Amanda Scarnati with Citi. Your line is now open.

Can you just go back to talk a little bit about the run rates in data center and telecom? Yuval, you mentioned that 4Q datacenter should surpass last year's run rate whereas 4Q telecom should be below the historical run rate, before potentially recovering. Can you just talk about what those run rates look like in the fourth quarter? I know you said it's sort of seasonally strong but any way you can sort of help us understand and quantify that for our models.

I'm not sure I can quantify, but I can give you a little background. On the data centers hyperscale what we saw - there was a wave of investment in 2018 and since then, we were through a period of digestion. And this is right now coming to an end and we see a recovery in data center hyperscale with new wages in investment and that is accelerated by some really important design wins we had in hyperscale, right? And that basically will influence the results of Q4 this year. I'm not sure if we broke it down in terms of the historical run rate, but we may have in the - do you have that, Paul?

Yes. If you look, Amanda, in the - again the supplemental information on Page 8, we did break down for the full year the split between the different markets. I think you can use that as kind of a stake in the ground.

Yes.

If you look at that, there is a pie chart last year, about 40% of the business on the new classification business. Our basis was data center, about 33% was telecom and networking and industrial and medical is about 25%.

Yes.

And then there is a semi like nominal a couple of percent, that's for Artesyn.

For Artesyn 2018.

That's right. But if you use that and combine it with the color, you get a rough size of what's happening in the markets.

But the important thing Amanda is data center hyperscale is recovering, went through digesting after the investment in 2018 and in conjunction with some really important design wins in hyperscale we had, we see a very strong recovery in Q4.

And then on the 5G side, can you just talk about your growth opportunity in 5G relative to what Artesyn had in 4G and what the expectations are for that revenue growing. I think you said you’re sort of 5G at this point?

Yes, that's a great question and if you look at what's happening right now, we are at the beginning of the investment in 5G infrastructure and this is basically the base stations investment. There is still investment in 4G and slow emerging investment in 5G. It's very different from the hype we see around the handheld devices. There is a lot of investment right now related to smartphones at our 5G capable, that drives demand in the semiconductor chip industry. The investment in the infrastructure of 5G is different.We are just at the beginning. It's a slow ramp and because of some of the trade wars in macro-economical pressures or headwinds, we saw some pushouts in this area as well and that's why we made a comment that 5G is not going to recover as strong as people believe initially as a whole 5G industry. So we need to look differently at handheld devices able 5G versus the infrastructure.

And then the last question I have is on TSMC. Obviously TSMC increased their CapEx budget quite substantially and that seems to be reflected in your results, in your guidance on the semiconductor side of the business, how much of that do you think is more of a pull forward in terms of what their expectations are in technology nodes or is this sort of a new normal do you think?

I think it's a combination of both. And if you look at TSMC, they got a 2020 CapEx flat, right? So, we'll look at that. It's basically a combination of both.

Our next question comes from Pavel Molchanov with Raymond James. Your line is now open.

First, just a quick one on the balance sheet. You have almost precisely matched your debt balance versus your cash balance and obviously that is pretty cheap these days, but I imagine there are still some cost to carry on that. So, I'm curious why not use some of the cash to repay half - two-thirds of the acquisition loan?

That's a good question, Pavel. I think we've stated from a capital allocation perspective that as we go forward, our first priority would be for debt reduction. The pace of that, we'll manage as we go forward and recall that is pretty low cost of debt at LIBOR plus 75 basis points.So that's what we'll focus on. We'd like to get a couple of quarters under our belt here and be prudent, but directionally you're right. We'll be bringing the debt levels down. We'd like to see the gross debt sort of more in the 1.5 times EBITDA, which we're a little higher than that now. So, we will work towards that as we run the business for a few quarters and get through some of the integration and other activities that we're working on.

In thinking about the macro headwinds, it seems like everybody in the industrials landscape is talking about that. So, US/China is pretty clear, but I know you guys also have a historically sizable footprint in Europe. And so, I thought I would ask if the - kind of the Brexit and the uncertainty over the EU maybe the elections that are et cetera. Is that also one of the issues you guys are dealing with?

I don't think so, Pavel. I think some of the headwind we see on our side has to do with the automotive industry, for example, that right now I see some headwinds in general industrial applications, some of them related to just manufacturing investment. And if you look at the global manufacturing equipment and infrastructure investments, it's in decline and that's not only Europe. We see that across the board.

[Operator Instructions] Our next question comes from Mehdi Hosseini with SIG. Your line is now open.

Just had a one short follow-up for the team. I'm just trying to better understand how you're going to manage inventory for a new set of customers like data centers and how you're going to be able to forecast. I find the semicap end market quite different than some of the new markets that has - that have - that is not part of your business. I want to understand the working capital management and how you're able to provide guide given lack of experience when it comes to lack of data centers?

So let me talk about the go-to-market strategy or what you perceive is lack of experience. We acquired Artesyn that came with a very strong and a capable management team, people that have been in the industry for more than 20 years. Each of the executive, more than 20 years, 25 years. People that have been in the industry for this long time, engaged with customers, engaged with partners, engaged with distribution channel. There is serious depth of knowledge and experience in the company relative to the data center hyper scale. Regarding the inventory, I am not sure what the question was, but I'll ask maybe Paul to answer.

Yes. So it's a good question, Mehdi, and one of the things that we're doing as you would see is that we are breaking out the revenues by market because you're right. The market trends are different, depending on the various markets that we sell our power supplies into. And in conjunction with that, we'll give color directionally and we'll obviously give results within those markets so that you can see that, but within each of those markets, we have products and we have the manufacturing strategies to sell those products and we'll manage it just like our other - all the other products that we have.There is a process for that that looks at customer demand, that assesses what the impact of new products will be and projects what we'll build and what inventory therefore that we'll need. It will be very common process and common practices across that.One thing I will note is that, Artesyn does tend to run a higher backlog in those products - in those markets than we typically do in semi where it's more of an adjusted time or a pull basis. So, that does give a little more visibility in those markets.

The higher backlog is very helpful. Just wanted to go back to Yuvals' comment. The entire data center end market is fairly new. And I think over the past five years, six years, it has become more impactful on the supply and demand for components and other products. They are increasingly pushing down inventory to their suppliers, making them to hold inventory for them as they adopt a consumption model.Just to - perhaps a better question for you is, are you also - given the depth of the experience within Artesyn, are you seeing this kind of trend were data center customers wanting to hold more inventory as they change their business model to one that is more consumption driven?

No, we don't see that. Look, again, Artesyn has been active in this business for many years, have deep intimate relationship with customers, with distributed engineering center is very close to where the customers operate. And the reason we got all the recent very important design wins with the hyperscale customers has to do with the following, very high efficiency rate of conversion.As you know, Mehdi, higher efficiency means lower thermal and lower cost of cooling water or cooling processes in the data centers. Form factor with high-power density that allows them to fit right in the size of the customers rack, right? And extremely responsive and capable engineering team that is able to turn on a dime and work with the customers on next-generation devices.The footprint of the company right now with factories in multiple places around Asia, allows the company to choose where to manufacturer the capacity as required by the customers. And that gives - that flexibility gives some of the customers a comfort level that they can choose which country to buy the product from. So, this agility, flexibility, continuity of business, and very competitive products when it comes to power density, power conversion, and the responsiveness are the main reason we continue to win those important design wins.

Our next question comes from Quinn Bolton with Needham & Company. Your line is now open.

This is Charles Shi on behalf of Quinn. So first off, congratulations on the strong results. I have a two-part question on your new product lines, including RPS, I mean, maybe a little bit on RF match. Forgive me if this question has been answered in the past. So first at the long-term, how should I think about the SAM expansion brought by you guys entering RPS and RF match. And if I remember correctly, the TAM of RF and DC generator is up about $1 billion per year as based on our 2018 numbers. Then I have a second part of how it's played.

So, just a comment, we are not entering into the RF match business. We have been in the RF match business for decades, and we are the market leader in RF matching. The important comment about RF matching is that it has become more and more critical technology and enabling technology, especially as you go into more complex action to position applications, AE's match technology is extremely sophisticated and very advanced to the point that we enable a lot of the customers to perform the processes that they need to perform for these advanced application. That's the reason we saw a surge in our revenue above the market growth driven by significant increase in our RF match business last quarter and going forward.On the RPS side, you're right. The RPS is a business that Advanced Energy did not serve for years due to IP limitations and contractual limitations we had with competitors. However, the market right now is hungry for enabling capable quality supplier for remote plasma source products. We believe that we have not only the product performance and the capability, but also the quality and reliability and the service capabilities to support the customers globally.We have seen tremendous increase in the number of units that go into new customer programs and tools for remote plasma source applications from Advanced Energy. So our remote plasma source product is very capable, very competitive, and coming from a very low market share, we view that opportunity as a growth opportunity for Advanced Energy. We will expand more on that strategy during the Analyst Day.

So maybe a follow-up is really relatively shorter term in terms of RPS. How should I think about the revenue ramp? I understand from design win to really meaningful revenue contribution may take a little bit long time and how should I think about that? And specifically on Q4 do you see meaningful contribution from your RPS new products?

We see growth in Q4 coming from our RPS product. We're not at this stage right now that we're willing to disclose it, but we expect to see growth coming from RPS.

I am not showing any further questions at this time. I would now like to turn the call back over to Yuval Wasserman for any further remarks.

Thanks for joining us today. We appreciate your time here with us. This is exciting time at Advanced Energy as we embark on a new company with tremendous opportunity for growth both in revenue and earnings. We're excited about the integration process. We have started a process. It's going well and we look forward to see many of you at our Analyst Day in New York. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.