Good day ladies and gentlemen, and welcome to the Advanced Energy Industries First Quarter 2016 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 be given at that time. As a reminder, this conference is being recorded.

I would now like to hand the conference over to Annie Leschin of Investor Relations. Please go ahead..

Thank you, operator, and good morning everyone. Welcome to Advanced Energy's first quarter 2016 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 afternoon.

For a copy of this release, please visit our website at advancedenergy.com. Before we begin, I would like to mention that AE will be presenting at the J.P. Morgan Global Technology Media and Telecom Conference on May 24 in Boston, Massachusetts, and the DA Davidson 8th Annual Technology Forum on June 1st in New York.

As other events occur, we will make additional announcements.

Now, I’d like to remind everyone that except for historical financial information contained herein, the matters discussed on this call contains 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, intent, 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 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 both to GAAP and non-GAAP results.

Non-GAAP measures exclude the impact of stock-based compensation, amortization, restructuring, acquisition related cost and other significant non-recurring items. A reconciliation of non-GAAP income from operations and per share earnings is provided in the press release table.

We will be referring to earnings slides posted on our website as well as this morning in the Investor Relations section of the website. And with that, I’d like to turn the call over to Yuval Wasserman.

Yuval?.

thin film industrial power and specialty industrial power. Let me begin with thin film industrial power, which includes hard coatings, PV solar cells, low-E and architectural glass coatings, flat panel display and optical coating. First, we won a new position on an advanced audit expansion program.

Next in our hard coatings business, we had some sizable wins for our Solvix products outside of the EMEA region, which has been an ongoing strategic priority for us.

You know specialty industrial power applications, which include high voltage modules and systems, power control modules and thermal and instrumentation solutions, we won a majority of the project based programs that we target at this quarter.

In our PCM business, we are starting to see some recovery in regions outside of Europe such as China and North America. In high voltage, we achieve a number of design wins further enabling our expansion and diversification including a design for scanning electro microscope applications in Japan.

We also won a design in pyrometry for the solar cell manufacturing market. With a newer design, industrial pyrometer, we’re expanding our SAM beyond our leading position in semiconductors to include temperate measurement applications for industrial markets.

Each quarter, we highlight a variety of design wins to demonstrate our progress in penetrating existing and new market opportunities, both large and small.

Where many of the day, semiconductor design wins can take 18 to 24 months or longer to translate into high volume revenue, industrial design wins are more project driven and can convert to volume sales in as little as a few months.

The recently released VLSI research report serves as a testimony to our success in wining designs that are leading to increase market share and revenue growth. Now, let me turn to our quarterly results as we execute on our growth strategy focused on our core semiconductor thin film industrial power and specialty industrial power markets.

As expected, we begin 2016 with a double-digit recovery of nearly 39% in our semiconductor revenues coming off of the many troughs seen in the fourth quarter. Strong 3D NAND investments as well as some logic and foundry buying resumed during the quarter leading to increased order activity.

Once again, we demonstrated a disproportionate strength in advanced plasma processing enabling products, allowing us to outperform the sector and approach the record run rates seen last year.

The biggest contributor to recovery in semiconductors are the technology upgrades happening virtually across the board in DRAM and 3D NAND as well as fab capacity RAMs and the beginning of the RAM of 10-nanometers logic. These technologies are expanding the market for etch into position and remain a primary investment driver for 2016.

We expect to benefit the most from these areas even our position in applications enabling advanced patterning 3D devices and 3D packaging for 3D NAND and logic devices.

In addition, the sizable investment the Chinese government is making into its local semiconductor market mainly to significant growth in China throughout the semiconductor ecosystem from IC design to fabs to manufacturing equipment and materials.

With a growing number of collaborations alliances between large global semiconductor companies and Chinese companies, in many cases sponsored by local and central government incentives. Our increasing presence in China is a clear advantage that could contribute to our growth.

We expect these trends to continue to drive demand in the second quarter with a ramp of newer 3D NAND, the focus of the first half; and logic and foundry, the focus of the second half. In total, revenue from our industrial markets declined 22% from the fourth quarter in keeping with general lack growth seen in the global industrial markets.

In spite of this temporary slump, we continue to develop products, increase our design wins and invest in channel development and regional expansion while driving operating efficiencies as we move the manufacturing of our acquired products to low cost regions.

In the thin film industrial power business, hard coatings saw a good traction in EMEA during the quarter while overall investment in Asia and North America paused after some of the large purchases made at year-end.

Similarly, large area coating applications saw a decline with glass in particular slowing due to low investment in construction and infrastructure building in China.

In solar cell production, while still relatively small, we are seeing higher demand for crystal and silicon based cell driven by the Chinese government’s new policy that is driving increased investment in 2016.

In our specialty industrial power business, we’re beginning to generate traction in PCM to North America and APAC through our industrial automation channel partners. Our entry into the industrial pyrometry market led to strong shipments during the quarter and our high voltage product strategy for e-beam applications is also making in roads.

Looking at the second quarter, we anticipate an increase in our industrial applications, driven primarily by glass coating upgrades and the trend in China for solar PV crystal and silicon applications. We are seeing some recovery in regions that declined last year leading to a more favorable view of industrial markets.

Our primary goal is to grow our SAM significantly by expanding geographically, entering new markets and winning designs in new applications organically and through acquisitions. Once again, our service business grew this quarter, up 9% from the fourth quarter, what is normally one of the two seasonally slower times of the year.

This growth was due to continued share gain from third-party competitors in the precision power market as customers recognized a significant role that quality plays in the total partnership.

In addition, we are seeing growing demand from our precision power customers for high value service offering across our portfolio; particularly in our trailing etch 200-millimeter legacy products. We are also seeing increases in inverter service revenue from our out-of-warranty installed base.

We expect further positive growth in the second quarter as we differentiate our service value proposition. Finally, our capital deployment strategy aiming that returning value to shareholders is proceeding well. Recently, we completed a $50 million accelerated share repurchase as part of our three years $150 million share repurchase program.

Next, as part of our allocation of 70% of our free cash flow towards organic and inorganic investment, we have built a solid M&A pipeline. We have begun to narrow that field of potential opportunities that we believe could accelerate our future growth opportunities while maintaining our financial criteria.

In summary, we begin 2016 singularly focus on our strategy to grow faster than a core precision power markets that we serve, semiconductors, thin film industrial power and specialty industrial power.

Looking at the second quarter, we expect semiconductors to remain at near record levels while industrial is rebound from the first quarter lows and our service business continues its upward trend.

Longer term, we plan to invest in developing products and channels to maintain our industry leading position by staying at a forefront of leading edge technology advances, expand our SAM by entering new markets, applications and geographies being nimble and agile enough to respond to the cyclical nature of our markets and leverage our financial model and put our cash to work by executing on our share repurchase plan and simultaneously targeting organic and inorganic investment that we believe will take our business to the next level, achieving our aspirational goals and return value to our shareholders.

I’d like to thank our customers, partners, shareholders and our valued employees for their support. Thank you for joining us and we look forward to seeing many of you in the upcoming quarter. I’d like now to turn the call over to Tom.

Tom?.

Thank you, Yuval. With a strong rebound in semiconductor sales this quarter, we saw significant improvement in profitability as we achieved revenues of $103 million, improved non-GAAP operating margins to 25.3% and increased non-GAAP EPS to $0.56. Sales by market are shown on Slide 16.

Semiconductor sales were $69.7 million, an increase of 39% quarter-over-quarter as we saw a substantial recovery from the industry-wide pause in the fourth quarter.

Industrial sales were lower at $16.5 million due to the general lack of growth across the global industrial markets, service revenues of $16.8 million or an increase over both last quarter and prior year, primarily due to share gains of semiconductors. Overall, we realized a strong start to 2016. Turning to Slide 17.

With the recovery of revenues, profitability grew significantly. First quarter non-GAAP operating margin increased to 25.3% from 20.7% in the fourth quarter. Non-GAAP EPS improved meaningfully to $0.56 in the first quarter from $0.32 in the fourth quarter.

While operating margins and profitability bounced back from the fourth quarter, they were lower than last year’s first quarter, which were driven by record semiconductor sales. During the first quarter, total operating expenses increased over the fourth quarter and year-over-year.

This was due in part to our ongoing investment in R&D, reflecting our commitment to keep pace with our customers next-gen technologies and our commitment to global sales expansion. Higher stock compensation expense and audit cost, which typically incur in the first quarter, contributed to the increase in SG&A.

On Slide 18, our first quarter tax rate was 15.7%, a decrease from 20.8% in the fourth quarter. The fourth quarter included a tax valuation allowance that increased the tax rate. We anticipate a normalized annual tax rate of approximately 15% for 2016 assuming existing regulations.

Turning to the balance sheet on Slide 19, we ended the quarter with $184 million in cash and marketable securities, an increase of $13.5 million compared to December 31, 2015. Our network and capital increased by $8.5 million during the quarter, due to higher receivables and inventory to support our growing revenues.

Our second quarter guidance is on Slide 20. We expect to see continuing growth in semiconductor revenue driven by the current capital spending outlook for the industry. We anticipate improvements across most of our industrial end markets and ongoing momentum in our service business. Finally, few comments on capital deployment.

We remain focused on our capital deployment strategy to achieve our aspirational goals and accelerate shareholder returns. We intend to deploy 70% of our cash flows to organic and inorganic growth opportunities and 30% to shareholder distributions.

As part of this plan, we completed a $50 million accelerated share repurchase program retiring 1.7 million shares since November or 4.3% of our total shares outstanding. Keep in mind this is just one-third of the total $150 million share repurchase program currently in place.

As Yuval noted, we are aggressively looking at acquisition opportunities that are complimentary to our target markets and provide long-term value to shareholders. We have a healthy pipeline of actionable opportunities. In summary, coming are for sharp cyclical downturn in the fourth quarter, we saw a substantial recovery in the first quarter.

We generated significant profits and cash during the quarter.

We continue to focus on winning new designs, investing in R&D, expanding globally, and deploying capital as we march towards our three year aspirational goals of $600 million to $700 million in revenues, $3 to $3.50 of non-GAAP earnings per share, and $250 million to $300 in cash generation. This concludes our prepared remarks for today.

Operator, I’d like to open the call for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Edwin Mok from Needham & Company..

Great. Thanks for taking my question and congrats for really great quarter. First question I have is you mentioned that you expect your semi cap business continue to grow in the second quarter.

And just kind of wondering if you have anyhow visibility in terms of how sustainable that is or as [indiscernible] investment happened, do you think that drive further growth in that, so any color on that?.

Hi, Ed. Yes, we expect at future we will be higher in Q1, not the same rate of growth we saw in Q1 compared to Q4. As we look at the rest of the year, we haven’t changed our opinion that we expressed at beginning of the year. We believe 2016 will be higher for us than 2015.

A lot depends on the timing of some of the large investments that will happen in some of the fabs, but overall we’re optimistic for the rest of the year..

Okay, great. Okay, that’s a good color. On the first quarter and also in the second quarter, I think on your prepared remarks, you mentioned quite a few different areas where you’re seeing good growth in DRAM, 3D NAND and also some foundry logic.

Is that where you can kind of quantifyit or rankleswhich part of that how the end market is striving thegreatest growthbecause the39% that you guysstill - probablybetter than mostyou have seen on peers, I am just trying to kind of get a sense..

Yes, let me give you most of what we saw in Q1 was driven by 3D NAND and memory in general. We saw some small investment in logic. So in terms of that we know if you look at 80/20 Rule, most of the growth came from the 3D NAND.

We assume based on market information and what we studied talking to the analysts, end-users, and our customers that the second half of the year will be driven by logic and foundry and the transition to 10-nanometers technology.

So if you want to look at how much of the growth in Q1 was driven by memory, I would say the majority, lion’s share of the growth came from memory..

Great, that’s very helpful. Moving on to industrial business, I’m just kind of wondering what happened there I think you guys are saying particularly end market growth is slow although your design win actually looks like pretty strong, you have good momentum there.

I am just curious what happened there? Is there one or two particular end-markets that was extremely weak that kind of pull down the whole business because if I go back and look at that and let me call this is just almost like lowest level we’ve seen over the last two years or so range..

Right..

Just I want to get a sense there..

Yes. So, obviously, the industrial markets for us – the industrial business is very fragmented and diversified. We’re serving multiple markets and applications and they obviously do not behave and they’re not synchronizing right. Some of them are very lumpy.

The glass business is lumpy, flat panel display business is lumpy due to the cycles of capital investment. What we saw in Q1, the decline is a result of – Q4 was a strong quarter. And as the industry digests with some of the acquisitions in Q4, we saw a decline in Q1.

What we see right now in general is a decline in glass coating business driven by the reduction in the investment in glass coating factories to a really small level driven by the China infrastructure decline and the reduction in real estate investment in China.

We expect to see this trend recovers by the adoption of our new technology for upgrades of existing lines around the world. So, again, we serve multiple markets and they can be lumpy and that’s exactly what have it in Q1, mainly glass and infrastructure..

Great, that’s all I have. Thank you..

Thank you..

Thank you. And our next question comes from line of Joe Maxa from Dougherty & Company..

Thank you and congratulations on nice quarter..

Thank you..

Follow up on the industrial weakness.

Do you have an estimate when you might get back to these prior levels, I mean, is it going to take the balance of the year, are you going to be soft or you look at it maybe in the next year, what’s your best sense today?.

As we indicated in our prepared remarks, we expect to see a recovery in Q2. We are constructive towards the rest of the year. As we said earlier, it’s a collection of niche markets, many applications, many geographies and they tend to behave asynchronously. We continue to grow our presence in world regions.

We do not have any presence before, for example China, North America. And we leveraged a really good relationship that we have developed with our channel partners both in Europe and North America. And we see some incremental growth from these new regions that we believe will support continuous growth going forward..

Okay.

And back on the semi side with the ramp of 3D NAND in first half of the year and looking towards logic and foundry in the second half, I am just curious about timing of some of those shipments in the back half and if there is potential to see a pause as one kind of cleans up the ramp and one gets started or – if that’s the way to look at it or do you think you’ll see back half very similar to the first half..

Well, the way we look at the market right now in semi, obviously strongly driven by the behavior of the end-users. When we look at that the investment at TSMC is investing over the year. Obviously, they did not spend the capital budget they plan for the year.

So, therefore, there’s some assumptions that the second half maybe stronger for them for foundry investment. Intel reaffirmed their CapEx spending, which is again up year-over-year, again more second half loaded as they ramp to 10-nanometers logic capacity and NAND memory in India, Delhi and China fab.

So at the end of the day, a lot depends on the timing of this specific investment. We don’t have very good visibility – the visibility quarter-by-quarter. We’re still constructive towards 2016 in the second half. And with our nimbleness and agility, we believe that we can respond very quickly and effectively to increase in demand..

Great, thank you very much..

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

Thanks for taking the question guys. First just kind of a modeling question, in Q1 there was a pretty meaningful uptick sequentially in R&D and SG&A spend.

Is that something that will kind of be sustained as the year progresses or was that just a one-time blip?.

Good question. Going forward through the quarters, you should see total OpEx spending about the same level with R&D continuing to increase because we want to spend more in R&D and invest in technology and there will be a corresponding decrease in the G&A side..

Okay, understood. And then about the M&A opportunities, I have asked you this guy last time as well, the fact that it’s now I think 18 months and counting since the last acquisition.

Does that continue to be a function of valuation that are being maybe not supportive bid-ask spread is problematic or what’s the – I guess what’s the challenge there, given how long it’s been since the last acquisition?.

So, two comments, Pavel. The first one 2015, we spent a significant amount of effort to make sure that the winding down of the inverter business was – with a best outcome that the assets disposition will be done in a way that will be the most beneficial for our shareholders. And that was the main focus of 2015.

We’re now entertaining a very interesting pipeline of target acquisitions. We are extremely disciplined. We have every rigorous process. We have target models and the target profile of an acquisition that we would like to add to the portfolio. And what you see right now is a careful review and analysis of actionable targets.

We are aggressively pursuing this strategy. We are optimistic that we will be successful adding incremental revenue and profit that a company through acquisitions, but we’re very disciplined about it..

Understood, I appreciate it guys..

Thank you. And our next question comes from the line of Mehdi Hosseini from SIG..

Hi, guys. This is Bill Grinstead in for Mehdi. Thanks for the questions. Here I just wanted to follow up on M&A there. You guys in the past have discussed what kind of valuation metrics or what kind of valuation ranges you expect to pay for some of these industrial type acquisitions.

And I was wondering if you guys would be willing to speak to that whether you’re willing to pay that kind of within the same range or pay more or less or what you’re seeing in the market, any kind of guidance there would be helpful?.

Sure, let us give you the general criteria. First of all, it used to be close to our precision power business, needs to expand our products and/or geographies. There is a focus on industrial, needs to create value have synergies, as Yuval said is very disciplined. Financially, we’re not tied to a multiple.

We’re tied to – in the long-term it needs to have a return greater than our weighted average cost of capital. And in the near-term, we wanted to be comparable or better than a share repurchase. And those are the criteria that we’ve been following and we continue to follow..

Okay.

And then have you guys discussed what’s your weighted average cost of capital is?.

Yes, it’s a little under 10%..

Okay, all right. And then I guess just kind of following up on the growth from first quarter driven primarily by 3D NAND.

I guess looking into the second quarter from a high level, what do you expect the growth specifically within semiconductor to be driven by 3D NAND or are you going to see some logic come in to offset any kind of tapering off of 3D NAND?.

Well, we expect to see continuation of growth driven by 3D NAND. Obviously, there’s some small content of logic and foundry, mainly driven by technology. But as we mentioned before, if we look at as a whole year, we see the first half driven by memory and the second half driven by logic and foundry..

Okay, all right. Thank you guys..

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to management for any additional comments..

Well, thank you everyone for joining us this morning. We’re very excited about the performance of the business. Q1 was a strong quarter. We expect Q2 to be as strong or better. And we expect the rest of 2016 to be very important and strategic for the future of the company.

As we continue to build on the momentum to meet our three years strategic goal of revenue between $600 million and $700 million, EPS of $3 to $3.50 per share, and generating cash between $250 million and $300 million. I’m looking forward to see you all the noon next quarter. Thank you very much..

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day..