Good day, ladies and gentlemen. And welcome to the Advanced Energy Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the floor over to Annie Leschin, Investor Relations. Please go ahead..

Thank you, operator, and good morning, everyone. Welcome to Advanced Energy’s second quarter 2017 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 www.advancedenergy.com. Before we begin, I would like to mention that AE will be participating in a Keybanc Global Technology Leadership Forum on August 7 in Vail, Colorado. The DA Davidson Technology Form on August 15 in New York.

And Institutional Investor Conference on September 19 in Minneapolis. And other events occurred we will make additional announcement.

And now I’d like to remind everyone that except for historical financial information contained herein, 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, plan, objective, 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 on 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 make no obligation to update the information that we have provided during this call today, including our guidance provided in yesterday’s press release.

Guidance will not be updated after today’s call until our next scheduled quarterly financial release. Operational goals and targets discussed on this conference call or in the presentation material should not be interpreted in any respect wit guidance. 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 cash, non-cash related charges such as stock-based compensation and the amortization of intangible assets as well as non-recurring items such as acquisition related cost. A reconciliation of our 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 the Investor Relations section of our website as well. 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 second quarter earnings conference call. Our results this quarter exceeded expectations on both the top and bottom line.

Semiconductors led the way as AE outperformed the broader wafer fab equipment industry, industrial growth continued in all sectors and service surpassed historical levels. In total, revenues grew 40% year-over-year to $166 million and non-GAAP earnings per share climbed 67% to $1.22, driven by strong non-GAAP operating margins.

We generated nearly $64 million in cash during the quarter and once again demonstrated the success of our model to deliver during very high growth period across our business. More recently, we made a small acquisition that strengthen our Specialty Power portfolio and expands our TAM in key markets.

The nearly 50% year-over-year increase in our semiconductor business experienced in the second quarter exceeded initial expectations, leading to another record performance.

Semiconductor revenues reached $117 million in a quarter, driven by the acceleration and expansion of 3DNAND capacity, the ramp in 1xnanometer logic to high volume and the recovery in DRAM spending. Additionally, this quarter we saw accelerated pull-ins from selected customers of both existing and legacy products.

We also began high volume manufacturing and shipping of our Navigator-II FastCapsolid-state match product, reflecting our expertise in RF power and early collaboration with customers to address their needs and challenges for advanced etch applications.

Business from all our OEMs grew substantially in a quarter as the wafer fab equipment market remains robust worldwide. For example, we had record quarter in Korea where sales to local OEMs increased over 00% from last year's second quarter.

The value we creating for our customers as a critical component supplier can be seen in the success of semiconductor design wins and share gains. This quarter we won the majority of the designs we pursued primarily in advanced memory, logic and PEALD applications. We saw strength across multiple geographies including North America, Japan & Korea.

In China, we also secured designs with indigenous Wafer Feb Equipment companies. By engaging locally with the global customers very early in the design process, our technology plays a critical role in enabling them to perform very sophisticated and complex processes.

These wins are the direct result of our continuing innovation and commitment to maintaining our industry leading position in precision power solutions for critical applications. AE semi business continues to outperforming the Wafer Fab Equipment industry with double-digit CAGRs the last few years.

The primary reason for this is a compounding effect of the complexity of plasma process technology with a sophistication of power supplies demanding different levels of performance such as RF supplies that require advanced measurement, power conversion and power control.

This is a resulted in growing capital intensity as the number of deposition and etch process steps increase. And more power supply for chamber is needed. Doubling our SAM as the industry moves from planar to 3D.

We remain confident that 3DNAND will be the biggest driver for the semi cap markets in AE over the next few years with demand still well ahead of current capacity. We expect this to be aided by the ongoing ramp of Foundry and Logic to be on 7nanometer capacity. Additional DRAM spending and potential demands from China as well.

With the growing complexity of FinFET in the challenging architecture of 3DNAND with an increased number of layers, we expect deposition and etch to continue outpace other wafer fab equipment segments. These trends favor enabling technology as AE's precision power solutions.

Looking at the third quarter, we anticipate semiconductor revenues will be slightly below our record run-rate as a result of the pull-ins we saw in the second quarter and customer shipments and installation timetables.

We expect second half of 2017 semi revenue to be equal or higher to the first half in longer term anticipate continued high level of growth in semi. On the heels of a significant rebound seen in the beginning of the year, growth continued in the second quarter across our industrial business, as revenue grew 19% over last year.

All over our targeted thin films industrial markets increased this quarter led by the capacity ramp of advanced industrial coating for consumer electronics. Capacity expansion is also underway in the glass coating market which drove demand for new coaters as well as retrofits and upgrades of existing line.

Additionally, flat panel display was fueled by the mobile OLED ramp. In Specialty Power, we saw a recovery in broader Industrial markets in EMEA which contributed to strong PCM sales in manufacturing applications, especially glass float lines.

As activity in glass increased across regions, we expand our product covering in North America by delivering our 1st integrated power system for a glass formation project. We also saw a number of high voltage opportunities in emerging mass spectrometry, life sciences and analytical applications.

This quarter design wins in our industrial business centered primarily on the glass market.

In a Thin Films Industrial, wins included glass coaters in U.S., China and Japan where our technology is being increasingly adopted as well as a successful evaluation of power solution for co-sputtering to enable the formation of engineered material with improved film qualities.

Other thin film wins include PVD applications for OLED with a new, mid-power level platform that is gaining traction. In Specialty Power, our third thermal/PCM business had a strong quarter driven by build-out of glass formation capacity.

While these capital investments cycle tend to be lumpy, we are seeing a sufficient number of projects to absorb current capacity leading to another wave of investment for glass float and coating.

Additionally, we also secured a variety of high voltage designs in life science for technical applications that should increase our SAM and generate revenue going forward as the enabling technology start to take hold. These include mass spectrometry, genomic cell separation and capillary electrophoresis.

Looking ahead, we expect to see a strong third quarter for the Industrial business. With strength throughout our markets. Thin film should accelerate due primarily to the demand for advanced industrial coating and new glass coaters, while our recent acquisition of Excelsys adds tour specialty power business.

Excelsys is a small, well-known DC power supply company with a strong established presence in certain markets including medical, laser drivers and other industrial applications.

Their power supply fills in AE portfolio with low power, high density, configurable solutions for critical applications and now entirely incremental and compatible for Advanced Energy. Recently, Excelsys launched a new product line without cooling fans.

This is a significant advancement resulting in better reliability, pure failures and virtually no particles generation which is advantageous in clean room environment such as in medical or semiconductor applications.

Another important feature is the ability to configure these products in field which is clear competitive advantage accelerating time to market of new designs. We see this as strategic acquisition that expands our scope and brings domain expertise with applications in channel resources.

With AE scale, global presence and supply chain management, we believe that we can take this growing business to the next level. This acquisition is part of our ongoing strategy to grow and diversify our Industrial business. We remained focus on increasing our TAM in precision power solutions critical applications in highly regulated markets.

These include new and adjacent market such as medical and analytical equipment, aerospace and defense. The advantage of this market is that similar to semiconductors once designed into a product, the company becomes a preferred supplier for the long term.

With the pipeline of actionable targets if we look to progress this year, we see this most recent acquisition as the first step towards our goal of adding $150 million to $200 million in Industrial revenue over the next few years. Service revenue grew to record level in a second quarter, increasing 10% sequentially.

Growth accelerated this quarter and we responded to surges in demand and continue to execute on a proven strategy to give service in an aftermarket business rather than just a support function.

Incremental revenue from highly engineered aftermarket products including upgrades of retrofit is enabling capital re-use and extending the life of older equipment. With our optimize approach, we are deepening our relationship with customer and lowering their total cost of ownership.

Looking ahead, we anticipate growth in the mid to high single digit as we gain market share from 3rd party repair shops and continue to expand our engineered service solutions. In line with our successful strategy to remain intimately close to our served market and our customers, we have invested and opened three new locations in Asia.

Our new aftermarket business centers in Shenzhen, in China and Japan are improving our proximity to customers in Asia to provide a highest quality and most responsive services. In Singapore, we are also establishing an important new center of excellence for plasma processing close to our key customers operations into the Asian markets in general.

This center will include R&D, service and support, customer operations and logistics. In total, this was an exceptional quarter as AE fired on all cylinders demonstrating the strength of our organization and a flexibility of our model to deliver during a period of unprecedented growth.

This while also successfully executing on an acquisition that added to our specialty power portfolio, expand our TAM and is already contributing to our top and bottom line.

With our strong balance sheet and solid pipeline of acquisitions target worldwide, we look to achieve our goal of adding $150 million to $200 million in industrial revenue over the next three years.

Looking ahead to the third quarter, we expect a growth and diversification of our industrial business to more than offset the temporary pause in semiconductor as we maintain our recent overall record revenue run rate. 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 to turn the call over to Tom.

Tom?.

Thank you, Yuval. From a financial perspective we had an exceptional quarter. We continue to excel on a top line while maintaining our cost structure and margins. Both of which drove significant profitability. Total revenue was $165.9 million, up 11.1% sequentially and 39.7% from a year ago.

Non-GAAP operating margin was 31.8% compared to 31.9% in the first quarter and 27.8% last year. We generated $64 million in cash from continuing operations. Our semiconductor and service businesses set new records in the second quarter. And our industrial business continued its sequential acceleration.

Semiconductor sales increased 11.8% quarter-over-quarter to $117 million as our customers' need for increased power content grew. Service revenue rose 10% sequentially reaching $22.6 million as we accommodated a wave of demand. Our industrial business climbed 8.6% to $26.3 million. As all segments of the market performed well.

Recently, we added to our industrial business with a strategic acquisition of Excelsys. We acquired Excelsys in an all cash transaction for €15.5 million or approximately US $18 million at current exchange rate. Excelsys' 2016 audited revenues were €10.2 million or approximately US $12 million at current exchange rate.

Beginning in the third quarter, Excelsys will add to our top line and be accretive to our bottom line. Non-GAAP operating margin of 31.8% was similar to last quarter and 400 basis point improvement compared to 27.8% last year.

We continue to benefit from business process and system improvements that allow us to leverage our infrastructure as we scale our business. This quarter these initiatives resulted in a more efficient order cycle process, which also benefited our working capital and reduced our day sales outstanding.

The tax rate for the second quarter was 3.8% as there was significant number of options exercised by employees which resulted in a sizeable tax benefit. For 2017, we anticipate a tax rate of approximately 9%. Longer term, we continue to expect a tax rate in the mid-teens reflecting our anticipated mix of business by geography.

Non-GAAP EPS for the quarter was $1.22 compared to $1.01 in the first quarter. Turning to the balance sheet. We generated $64 million of cash from continuing operations and ended the quarter with $380.8 million in cash and marketable securities. This included $17.7 million in restricted cash related to the acquisition of Excelsys.

Cash flow benefited from both increased profitability, as well as lower working capital investment, specifically receivables as we worked with customers to streamline order and payment process. As a result, DSO declined by 13 days.

With a significant portion of our cash held overseas, we entered into $100 million line of credit to fund domestic operations and acquisitions. Our goal is to ensure we have the flexibility to quickly and seamlessly transact M&A initiative whether domestic or international.

In conclusion, our second quarter results demonstrated that we are making significant progress through our longer term, strategic and financial goals.

Our ability to manage rapid top line growth while continuing to invest in R&D to expand our technology leadership has resulted in first half 2017 profitability level that are on track to surpass our aspirational EPS goal. We continue to work on business opportunities and initiatives to further grow and optimize our business over the longer term.

This concludes our prepared remarks for today. Operator, I'd like to open the call for questions..

[Operator Instructions] Our first question comes from the line of Edwin Mok with Needham & Co..

Good morning, guys. Congrats for great quarter. So first question I have on the kind of pull-ins that you mentioned from selected customer. And you said you point out that's part of reason why you expect September quarter to be down right.

So demand pretty strong right now and that pull-ins suggest strong demand and you expect second half to be flat or even up a little bit from the first half of the year. What feasibility you have for that beyond this quarter and even beyond that to give you confidence say that second half is going to be flat from the first half..

Sure. Thanks for the question, Edwin. The pull-ins that we saw in a quarter are a combination of things.

Number one, our customers are planning and adjusting their material shipments for key components to match the delivery cycles and plans that basically indicated the need for more components that we anticipated, obviously since we have a just in time type of relationship with our key customers. They pull a product when they needed.

The other component of the pull-in had to do with as we mentioned with some of our legacy products. As we continue to evolve and migrate our customers to next generation products, we retire older generation products. And in some cases customers choose to stock inventory of older generation products for future use of older technology.

That happens as well in second quarter so the combination of two drivers cost Q2 to be much higher than we anticipated. Looking at the second half, we expect the second half to be as good as or better than the second half.

And the key drivers are simply because of the number one, underlying demand for the plasma processing equipment that we serve is still there. And it's not going down.

As we discussed in previous conversations, we may see periods when quarters are not all quarters on a straight line and some digestion period driven by installation timetables and deliveries.

But overall if you look at the end user's investment plan as some of them have not been fulfilled yet for this year, we assume there will be investment in the second half in both logic and memory.

And right now based on information that we see coming from our customers end users, we expect to see fairly strong Q4 and in general equal or stronger second half. And that by the way -- that same semi, Edwin, that semi right obviously we are talking about semi..

Yes, obviously, yes, I understand that, yes, so that's very helpful color regarding semi. If we move down to industrial and seems like you are very successful in the glass area and able to left ratio -- high relationship to cross-sell more power control modules and product into across area.

Can I ask you -- that said what's right in growth in the glass area right now? Is it a lot of it driven by the flat panel display market investing or is that other driver of the glass market that will drive this growth?.

That's a great question Edwin because it will allow me to explain the difference between glass and flat panel displays. When we talk about the glass business, the industrial glass business, there are two industrial spaces that we serve that are linked to each other but are very different in the scope.

The first one is glass float which is the manufacturing of glass from sand right. It's a very energy consuming process where a lot of power is being consumed to melt the key ingredients and then create the native glass. This specific application is served by our power control module product line.

Obviously, most of the glass that is used for architectural applications is coated with low E films that ensure that these high rise building that are glass coat created do not turn into greenhouses and these films are coated using very large PVD machines. And for this application space we sell our AC and DC high power supplies.

Now this is an interesting field because there is an investment in the process technology that is applied for architectural and low E glass to ensure that the right color and the right UV filtering are taking care of successfully.

Now what's happening right now, right now every big city I am driving through all I see is cranes? And obviously close to us you drive through Denver you see the sky is basically filled with cranes. There are a lot of constructions and most of the high rise buildings are glass buildings.

So there is a huge increase in consumption globally for glass and glass coating and that's basically what we see is driving the demand for additional glass formation line and glass coating line.

In many cases, companies choose to put these factories side by side to make sure that they don't have to shuttle glass pieces between a forming factory and coating factory..

Okay, great, that's helpful. Tom, I have a question around margins. If you look at last two quarters you guys at little bit high end of the margin range right.

Is there a reason to believe that you cannot deliver in a high end in the September quarter?.

No. We are doing very well on our operating margins and we think with higher volume this leverage left in our model. So sure our pricing environment is the same, our cost structure is very similar and things are in the right direction on margin..

Okay. That's helpful. And I guess last question I have just going back to industrial Excelsys acquisition.

How much your guidance comes from Excelsys? And is that all going to be report in industrial or something that goes into semi cap too?.

It's mostly industrial. Last year they had -- well we had with Excelsys now US $12 million revenue. It's growing so in that range, Edwin and it's accretive..

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

Thank you, good morning. Hi, just wondering on the service gross margin took -- dipped a little bit in the quarter. Maybe give us some puts and takes on that line and where you see that going..

Yes. There is one product line that has lowered this margin, it's a very product that we done very well with sales. And there is schedule maintenance and because of the location of their customer base, it's slightly lower gross margin.

So the service team on that Joe has developed a new service plan and we expect the service margin to get back into the high 40%, possibly not Q3 but by the end of Q4..

All right. That's helpful by the end of the year. And then you talked a little bit about seen some success, initial success in China.

I am just wondering if you can elaborate on that and what your expectations are?.

Okay.

Obviously, are you talking about success with indigenous company?.

Right, correct. More in overall.

Yes right, so we are lucky to be a local company in China. We have more than 700 employees in China in general. We are a local player. We have an engineering capability locally service and support and we were engaged with a lot of the startup companies that were created in China especially in a wafer fab equipment industry.

And being local and close to them, we continue to work with the local companies on design win and as we mentioned in the prepared remarks, we are making great process in securing some applications both for deposition and etch in China.

Getting ready for the growth we anticipate to say in China semi industry, we continue to expand our local footprint and for that reason we have opened recently our customer support center in Shenzhen basically in the technology center there, very close to our customers and their customers.

We expect to see China as an important hub for us both for semi and industrial applications and we continue to expand and invest in China both in sales, marketing, support, engineering, R&D and manufacturing..

Okay. Thank you. And one last one would be on your just want to touch based on your aspiration goals of greater than $4; you are well above that now.

What's your take on and perhaps updating those goals?.

Sure. We are in the middle of our strategic plan, Joe. And we'll be updating those at the end of the year and beginning of next. Now, as we said at our Analyst Day, that $4 aspirational goal is four quarters in a row. And we want to see it in our year end report. So we feel really good that we are on very solid footing on track to hit that.

I think if you look at historically right, two years ago so we were at $2, last year we were little bit over $3. Now we are at $4 and obviously internal our activity is focused on what's next. What's the next step function there? So, yes, things are going very well with earnings..

Thank you. And our next question comes from the line of Krish Sankar with Bank of America/ Merrill Lynch..

Yes, thanks for taking my question. I had a couple of them.

Hi, can you guys hear me?.

We can hear you better now..

Thanks. Thanks Yuval, thanks Tom. I had a question when you look into like Q3 and beyond or let just say Q3.

If your semiconductor sales are going to moderate and industrial growth, could you gross margin grow in September versus June?.

I am sorry. Say that one more time, please..

The mix change between semi and industrial.

Will that impact our gross margins?.

Well, industrial in general has higher gross margins..

Yes. Our industrial margins are higher than semi. So in case the mix changes we have more industrial, we expect to see more uplift in margins..

Now, and the operating expenses as more customers is more OpEx so they are pretty neutral equal on the operating margin line right..

Right, got it. That's really helpful.

And then how much was AMAT and Lam as a percentage of sale?.

We filed the Q2 today, it's in there. I don't have it off hand. [Multiple Speaker].

Got you, got you, no worry. I think I got it. all right and then the last question you guys mentioned about like the goal is to add $150 million to $200 million in industrial revenues over the next three years.

Where is the industrial -- out of the industrial revenue how much of the high voltage going to be in that?.

High voltage is not the only area of focus when it comes to our inorganic growth. Obviously, we continue to focus on power conversion and precision power applications or critical application in highly regulated industries. So high voltage is one component of that.

High voltage has been an interesting market for us because it's very fragmented and most of the companies serving the high voltage market today are small and privately owned. It has been an area of interest for us and we'll continue to pursue that market.

But in addition to that there are other power applications that we find very interesting and the industries we mentioned earlier. And that could be DC to DC power supplies, AC to DC, RF et cetera..

Got it, got it. And then last question.

I mean if I look at the midpoint of the guidance for September, it's roughly flat sequentially and you said semi's might be down a little bit so is it fair to assume that the acquisition is probably contributing a couple of million dollars to the Q, handful of million dollars offsetting semi decline?.

Yes, the industrial is growing and the addition of Excelsys --.

It's not only the acquisition of Excelsys, a combination of the acquisition plus growth in industrial..

Thank you. And our next question comes from the line of Amanda Scarnati with Citi..

Hi. Good morning. I just had the question on the services side of business. Maybe a little clarification, Yuval. What is the lifecycle of the typical power component, Yuval? I think you mentioned earlier in the call that you tend to retire some older products and it seems some sort of build up in the customers and holding those.

If you retire those products, is there any concerns going forward and replacing them if the component lasts longer than expected..

No concern but let me give you a little bit of background. The life time of our products it's really interesting. Some of our products models have been in the market between 15 to 20 years. And they are successful, they are matured and they are been used in various applications.

Obviously with copy exactly atmosphere in semi, we see some older design, the older node technologies continue to use legacy products.

What we do however combination of -- licenses and the offering of new advanced solutions to allow our customers to extend the lifecycle of their capital equipment or to repurpose the capital equipment to advance nodes, we replace these old models with new models. Obviously, they have more capability.

They have higher ASP and they do have higher margins. So part of that product lifecycle management is to continue to chop the long tail of the legacy products and give birth to new product that is more powerful, more capable.

Now, when these products are in the field, obviously the installed base is enormous because people continue to use capital investment they have, deployed years ago which allow us the service opportunity to the following things. Number one, repair and maintenance.

Number two, upgrade and retrofits of older products to more capabilities and more sophistication either by hardware or software or both. And also replacement of older products in the field with new products.

What we do right now in a service organization is focusing on generating more service products and service offerings beyond just repairing old equipment. And these new initiatives provide lot of the incremental growth that you had seen recently, as well as share gain and increase in demand..

All right. And then in terms of gross margin, this quarter revenue increased quite substantially the last two quarters and margins have remained flat.

Is that a function of growing semiconductor business and lower margins there or is there anything else happening there? Are you giving away pricing and supply material becoming a little bit larger of a customer or is it really just a function of similar pricing but semiconductor is growing?.

Amanda, that's a good question. And you are right. We get cost savings from higher volume and in general we participate, we share those or provide them to our customers. We think that's a good thing to be doing.

When you look at our operating margins, just about all of that increase in the margin over the last year or two is leveraging the operating expenses. So gross margin is rather amazing. I think there is eight quarters in a row that 52% hasn't changed but that's why, as we get cost savings we pass them on..

And cost savings, Amanda, we get is by continuously working on our operation, driving efficiencies, reducing labor content, relying on a more sophisticated supply chain which allows us to share some of these savings with the customers as Tom said..

So fair in choice..

There was a question earlier and the two largest customers, they are at 57% in the quarter end and year-to-date..

Both of them.

Combined. I am sorry, Amanda, go ahead..

Sorry.

Is it fair then to assume that gross margin will stay roughly around the 52% range but we'll continue to see improvement in operating margin excluding any sort of acquisition and that bring operating margin down?.

Yes. I mean and the operating margins will vary with volume. So it will go higher with higher volume..

Thank you. And our next question comes from the line of Patrick Ho with Stifel Nicolaus. Please go ahead..

Hi, thank you very much. And good morning and congrats on a nice quarter. Yuval, first in terms of the supply chain management, obviously you guys have been doing really good job this year particularly with the high demand. And you talked about pulls.

Can you give a little bit of color on some of the -- I guess the levers and the dynamics that are helping you not become a road walk or hurdle for your OEM customers that are also very constrained at this time..

Sure, Patrick. Our operational model is that we believe is unique. Over the years we have deployed a following key strategic pieces. Number one, we focused on final assembly and test.

We believe that at a business that is as high mix low volume as ours, the key to provide agility, nimbleness and flexibility is to be non-vertical which means limit our operation and assembly to just final assembly and test.

That obviously require a strong supply chain and we drive the demand flow technology and we work with our suppliers to adopt the same philosophy of demand flow technology that we have, which basically allows us to have really good control over our trade working capital as we do not sit on large inventories or raw material.

In addition to that, as we continue to drive labor cost down and labor content down, we move from dedicated production lines to mix line configuration which means that our production lines can operate and manufacture randomly any product that they see coming through the flow. And which means that we do not have waste of time on setup.

So it's a very high efficiency, very fast and very nimble operation. Obviously, that combined with a just in time philosophy with our customers allows us to deliver our products when they needed. And luckily we've been doing a great job with that as was reflected in getting awards for the last two years based on our strength and operations.

We are not de-linked -- we are not the weakest link in our customers' shipment..

Great. That's helpful. And maybe as a follow up question. You talked about some of the high voltage opportunities ahead for you guys and particularly how fragment that market place is.

Given that you have a very strong position on the semiconductor equipment side of things, what are some of the other market places where you see additional opportunity to increase your share or increase your presence in those markets? What are some of them?.

Well, thanks for the question, Patrick. So obviously we are a critical supplier of high voltage power supplies for the semiconductor industry as well. And it goes through ion implantation, electron beam based metrology and inspection and electrostatic chucks for wafer holding in backend chambers.

Obviously, the immediate adjacent markets, the most intuitive adjacent market for us are E beam based other markets like scanning electron microscopes that going to analytical equipment and industrial SAMs and medical SAM.

And beyond that new areas that are very well suited to our unique core competencies in high voltage and these are mass spectrometry, E beam applications as well as some defense and homeland security type applications.

The uniqueness of our power supplies and high voltage is that they are high density power which means the footprint and the size of a power supply is small. We have very, very stable power, very low ripple and very accurate power.

All of the above allows us to lead in technology when it comes to measurement accuracy, the clarity of the image and scanning electro microscope et cetera..

And our next question comes from a line of Weston Twigg with Keybanc..

Hi, thanks for taking my question. First, just wondering if you could comment on the DRAM recovery that you mentioned. And maybe also comment on how that drag to second half strength..

Yes, obviously we see that investment in DRAM is well. Obviously, it's also influence our Korean revenue because DRAM usually drive more Korean OEM content as well as US OEM content. We saw this investment continues. We also saw some repurposing of some other memory capacity back to DRAM in Korea.

And we believe that that will continue as we stated earlier the underlying demand is there and will continue to grow. What was the other part of the question? I am sorry, Wes..

I was just wondering if the DRAM recovery helped your second half outlook in terms of second half revenue being higher than first half or those still primarily treating end..

We believe that both will drive the second half as well..

Okay. Also just I was wondering a moment ago you mentioned that operating margin should go higher with higher volume but you had a good increase in revenue in the June quarter but relatively flat operating margin.

Could you just comment on the moving parts there and should we expect that trend moving forward?.

Sure. We had -- so pricing environment pretty much the same, cost structure pretty much the same. We did have the lower gross margin in the service which was the function of the schedule maintenance and one fairly high volume part. Excelsys 60 basis points or so. So that would be main reason, without it we would have been over 32%..

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

Thanks for taking my question, guys.

On cash balance, so it's obviously at an all time high even with the $17 million you paid for Excelsys but can you talk about the breakdown between US versus overseas cash particularly given the line of credit that you decided that you need?.

Yes, that's a really good question, Pavel. So about two thirds of our cash is overseas. And generally two third plus of our cash flow tend to go overseas.

So with a line of credit, we want to really shore up the liquidity for domestic because as you said or you know, we have a very pretty active M&A target list and it has a fair share of international and domestic.

And what the line of credit does it really gives us -- you can use a term truck dry powder, liquidity et cetera to be able to move fast on acquisitions. Plus it's just a good time in the credit market and we got fairly low cost five years LIBOR plus 125 just seem like a good thing to be doing at this time..

Understood. And supposing that there were to be repatriation tax deal in Congress later this year or it could bring some money back in a preferential rate.

Is that something that you would be inclined in doing?.

Well, we have to see what the proposal is. The thing is changing I would say overall, hey, if that happens it's very good for us and a lot of different companies. And would depend on those specifics..

Thank you. Our next question comes from the line of Tom Diffely with DA Davidson..

Yes. Good morning. I guess first follow up on the industrial glass commentary earlier. It sounds like there is lot of new capacity being put in place.

Are there any technology changes that also benefit you?.

In the glass market?.

In the industrial glass market, yes..

Yes.

What we see is the market is starting to adopt more sophisticated deposition technologies and mainly these are PVD machines sputtering machines and a market is adopting to areas of technologies that will potentially result with the ability to deposit more advanced engineered films that also provide the quality, the adhesiveness and the reproducibility and deposition rate that is needed.

One technology is bipolar power and we see an adoption of our bipolar power supply with some of these applications and the other area is co-sputtering where power supply is basically served more than one target per chamber.

And the ability to drive two foreign materials at the same time allows the user to mix the atoms if you may and create a desired film. So these are two areas that we see a need for advanced power supplies for advanced applications..

Okay, great. And then move over to the semi side. I think earlier you talked about how you served available market was about 2x in 3DNAND or is it planar, I am curious to what happens when the 3DNAND moves from GEN1 to GEN2 to GEN3.

Is there someway to kind of correlate the opportunity for as the number of layers increases?.

So let me clear that - let me make clear, I want to make sure that the message is understood. As the industry migrate from the planar to 3D, our SAM for this specific set of applications, more specifically deposition and etch has practically doubled for these applications right.

Now as the industry goes from 64 to 128 or more layers of 3D devices, obviously what we'll see is two things happen. There will be need for many more steps with deposition and etch.

But also because of the aspect ratio of these very, very deep trenches and deep holes and very high structures that are created on the surface ¸there is a need for more advanced power generation and distribution because of the need to go and etch and provide these processes in very high aspect ratio topography.

So it's a number of films, the number of steps, the number of tools but also the type of power supplies and power distribution to address or highly steep topology..

Okay. So it sounds like your multiplayer effect is continuing here..

We believe so. As we see a compounding effect of not only quantity but also the quality and the type of performance that is required..

Okay, great.

And then finally when you look at the Korean market, I think you said 100% growth year-over-year, is that representative of the market growth itself or is more of a share gain story for you?.

It's both..

Okay. Which -- what was the biggest driver or just a year-over-year..

I think within -- some of the share gain we talk about is winning design wins, some of the design wins materialize to mass production. 18 months to two years later after the design win. So I can give you two data points.

Number one, VLSI Research from April this year indicated that Advanced Energy won I think they win two points, 2.5 points of market share in our served market. So we continue to gain share. At the same time, we continue to win design wins.

In Korea, what we saw is a doubling of revenue driven by both capacity but also realization of design wins that converted to high volume..

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

Thanks everyone for joining us today. We had a great quarter. Obviously, it has been a great period for us in the semi industry. We continue to benefit from our enabling technology. We look forward to continuous success as we believe that the underlying demand still there. And we continue to be enabler for many applications. 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 great day..