Annie Leschin - Head, Investor Relations Yuval Wasserman - President and Chief Executive Officer Tom Liguori - Executive Vice President and Chief Financial Officer.

Edwin Mok - Needham Krish Sankar - Bank of America Weston Twigg - KeyBanc Capital Markets Amanda Scarnati - Citi Pavel Molchanov - Raymond James Patrick Ho - Stifel Nicolaus Mehdi Hosseini - SIG Tom Diffely - DA Davidson.

Good day, ladies and gentlemen and welcome to the Advanced Energy Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Ms.

Annie Leschin, Head of Investor Relations. Ma’am, you may begin..

Thank you, operator and good morning everyone. Welcome to Advanced Energy’s third 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 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, plans, objectives, estimates, anticipate, intent, target, goals or the like should be viewed as forward-looking and uncertain.

Such risks and uncertainties 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 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 with guidance. And just remember, in today’s call we will also be referring to GAAP and non-GAAP results.

Non-GAAP measures exclude the impact of 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 costs. 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. And with that, I would like to turn the call over to Yuval Wasserman.

Yuval?.

Good morning, everyone and thank you for joining us for our third quarter earnings conference call.

Our seventh consecutive quarter of strong performance is a direct result of our ability to consistently deliver the highest quality mission-critical precision power solutions to our customers during this exciting and demanding period across all our product lines.

It takes an incredibly talented global team and a world class operation working in concert to capitalize on this extraordinary time in our business. Our singular focus on creating the most advanced power conversion technology to address our customer’s next generation products and technologies remains our number one priority.

Our commitment to constant innovation and tight customer engagement has allowed us to grow our leading position in the industry and once again post strong results for the third quarter.

With an upward trend lasting nearly 2 years, the semiconductor business sustained its record level this quarter, while our industrial business search led by thin films, which had their highest quarter in 5 years. Total revenue climbed to nearly $177 million, while non-GAAP earnings per share reached $1.19.

Having generated $34 million in cash, we ended the quarter with $370 million, having completed a $25 million share repurchase and the acquisition of Excelsys. Our appetite for inorganic additions to our product and technology portfolio remains robust with an active pipeline of potential acquisitions.

In semiconductors, our advanced plasma processing products again enable our business to continue at near record pace. Growth of 44% year-over-year highlighted the accelerated demand for 3D NAND amidst the ongoing technology upgrades occurring throughout the industry.

Demand for solid state drives and higher mobile content per handset drove the recovery in DRAM, while the ramp of 1x nanometer foundry logic also contributed.

As the era of big data and architectural intelligence take hold, fab capacity expansions are driving the wafer fab equipment market to new highs and requiring more complex tools to address these advanced technologies.

The semiconductor industry is facing exponential increases in data generation, greater complexity across virtually all end markets in higher capital intensity.

For example, as we learn from our OEM and end user customer, 64-layer 3D NAND is 60% more capital-intensive than planar, while 14 to 16-nanometer DRAM is 40% more intensive than 25 nanometers and 7 nanometers logic is 100% more intensive than 28 nanometers, new materials and device structures on enabling these technologies.

As device architectures become more complex with smaller geometries, more advanced processes such as selective atomic layer deposition and atomic layer edge are necessary to accurately build device features.

AE’s position as an enabler is becoming even more critical to OEM customer roadmaps as semiconductor manufacturers struggled to achieve acceptable yields of these higher complexity devices.

In the fourth quarter, we look for semiconductor revenues to increase over the third quarter, with memory under supply and fab utilization rates running high capacity expansion in 3D NAND and DRAM is continuing.

Coupled with recent CapEx increases the wafer fab equipment industry is pointing towards an uptick in the fourth quarter and strength heading into 2018. Our industrial business has the strongest quarter in 5 years climbing 36% over last year.

In thin film applications, capacity expansion and demanding processes for consumer products coating drove the need for high-performance process power requirements. We saw increased advanced power technologies option in China for these functional and decorative coatings ahead of the holiday season.

The significant recovery in glass coating this year helped bolster new capacity buys for coaters this quarter adding to the large number of technology upgrades of existing lines across all regions. In flat panel display, mobile OLED share gains in Korea contributed to the strong results with volume shipments of new advanced pulse DC technology.

This quarter, Specialty Power Products reached record level with strength from high voltage power solutions for mass spectrometry and scanning electron microscopes and power control modules for glass, solar cells and lithium ion battery applications, coupled with full quarter contribution from our Excelsys acquisition were driving expansion across a strong and diverse customer base and outperforming our markets.

We also added 3 new Rockwell channel partners enhancing the distribution of our industrial product portfolio. Our long-term goal is to grow the industrial business in GDP plus 2 to 3 points. Year-to-date, we are substantially exceeding that with growth of 32% for the first 9 months.

Given the collection of adjacent markets and application that comprises this business the timing of capital investment can cause fluctuations in any given quarter.

After the significant buildup we experienced in advanced coating capacity for consumer devices, we anticipate a decline in revenues for the fourth quarter as factories transitioned to volume production and prepare for the holiday season.

With the market share gains we are making with new products and applications, we expect to continue to see year-over-year growth in the fourth quarter. At AE, investing in innovation remains a core compliance of our strategy.

Integral to increasing our role as an industry leader, the investment we make each and every quarter are deepening our relationship with our customers and ensuring that we are designed into the roadmaps across end markets.

This quarter, we increased our investment in demonstrations and evaluation units that we supply to both existing and new customers. In China, for example, we are exceeding the market with our latest Ascend portfolio for consumer products coating to put AE technology into our customers’ hands early in the development process.

As a result, customers are realizing the benefits in real world applications and we are gaining a better understanding of the requirements for pilot production in anticipation for market trends. We see this as an important part of our philosophy to invest for the future by bringing innovative new products to market and expanding our SAM.

In semiconductors, AE is enabling the applications that are driving the migration to more advanced memory and logic such as plasma processes. Our continuing design wins are helping to ensure our growth as the industry, migrate to 10-nanometer technology and below. Our customers span geographies from North America to China, Korea and Japan.

This quarter, we won all of the design we pursued in advanced memory and logic application. Some of the most notable include the PEALD design for memory devices with an RF power solution and as designed for next-generation platform for advanced memory and sub 10-nanometer logic as well as the high-voltage application.

These design wins should transition into mass production roughly 1 to 2 years from acceptance to reach high-volume manufacturing and secure our growth well into the future. Overall, we are gaining traction in a variety of industrial applications, markets and geographies.

In thin film industrial, we are gaining share in China with new and existing product penetration, including last quarter wins this quarter. Advanced power technology products led to share gains in mobile OLED, solar PV and consumer products coating as process demands continue to grow.

In Specialty Power Products this quarter, we secured thermal and PCM design in petrochemical, PV solar wafer coating and furnace for thin-film lithium ion battery materials.

We continue to win designs and grow in high-voltage applications, including mass spectrometry, scanning electron microscopes and x-ray mainly due to our superior performance providing low ripple, stable power for high-sensitivity metrology applications.

Recent additions to our portfolio of low-voltage, high density configurable solutions have expanded our SAM leading to design wins in the medical, life science and analytical equipment applications as well. Our service business continues to excel having grown 28% year-over-year in the third quarter to yet another high.

Increasing effectiveness in deploying a strategy and serving our customers throughout the lifecycle of our products is proving invaluable in his exceptional semiconductor environment, with utilization rates running high and end customer pushing to improved yields on increasingly complex processes, OEM service volumes are growing significantly benefiting AE as well.

Our close relationship with OEM customers and highly engineered service products are driving a sizable portion of our growth through market share gains. Recent expansion in China and Japan, have positioned us closer to Asian customers allowing us to serve them more quickly and cost effectively.

Together, these trends are resulting in acceleration in our service revenue across the globe. Looking at the fourth quarter, we expect to see moderate sequential growth. In summary, we are on an accelerated trajectory to meet our aspirational goals.

Our vision to capitalize on emerging demand drivers and balanced investment for sustainable and profitable growth remain intact. Multiyear reflections are driving the industry to serve and reinforcing our perspective that our markets are becoming stronger.

By engaging with the customers early in the development process and providing the most innovative products, we are staying at the forefront of these evolutions.

For the fourth quarter, we anticipate the growth of our semiconductor business will largely offset the fluctuation in the investment business as we maintain overall revenue run-rates close to the third quarter.

Long-term, as we look to maintain our trajectory of sustainable growth and outpace the markets we serve, we are committed to continuing to expand our portfolio, redistributed our capital and achieve our aspirational goals. I would 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 would like to turn the call right now to Tom.

Tom?.

Thank you, Yuval. In the third quarter, we successfully executed on our growth strategy, exceeded our top line expectations and deliver strong bottom line results. Total revenue came in at $176.6 million, up 6.5% sequentially and up 39.5% from a year ago. Non-GAAP operating margin was 31.9% compared to 31.8% in the second quarter and 29% last year.

We also completed the acquisition of Excelsys and repurchased $25 million of stock. Our semiconductor business remains strong and our industrial and service businesses set new records this quarter.

Semiconductor sales of $116.5 million remained at near record levels as the capital equipment industry met the demand for more complex tools required for next-generation technology. This quarter, industrial revenue reached $35.9 million, up 36.6% from last quarter driven by industrial coating capacity expansions and the acquisition of Excelsys.

Service revenue for the quarter was $24.2 million, an increase of 7.2% sequentially as OEM service volume increased due to higher fab utilization rates. Non-GAAP operating margin of 31.9% was similar to last quarter and a 290 basis point improvement over last year’s 29.0%.

Year-to-date as sales have grown 41%, operating expenses have decreased significantly as a percent of total revenues, reflecting the leverage in our model driving more to the bottom line. This quarter, we had a one-time tax benefit of $40 million related to the solar inverter business.

Excluding this, our tax rate would have been 15.9% for the quarter. For 2017, we anticipate an annual tax rate of approximately 12% to 14% excluding this one-time benefit. Longer term, we expect the tax rate to be in the mid-teens reflecting the geographic mix of our global operations.

Due to the one-time tax benefit, GAAP EPS for the quarter was $2.09. Excluding this, GAAP EPS would have been $1.09 compared to $1.14 in the second quarter. In the second quarter, we benefited from an exceptionally low tax rate resulting from a significant number of stock options exercised by employees.

Similarly, non-GAAP EPS for the quarter was $1.19 at the high-end of our expectations compared to $1.22 in the second quarter. Turning to the balance sheet, we generated $33.7 million of cash from continuing operations during the quarter.

We ended the quarter with $369.6 million in cash and marketable securities, after using $25 million to buyback stock as part of our ongoing share repurchase authorization and $17.4 million for the purchase of Excelsys. We continue to keep our focus on driving operational efficiency.

Over the last 2 years, we have made sizable improvements in our working capital management. While there will be some fluctuations quarter-to-quarter, our net working capital days decreased by 5 days year-over-year to 72 days in the third quarter.

Overall, with another solid financial performance this quarter, we are making significant progress toward our longer term strategic and financial goals. Our ongoing investments in innovation and key acquisitions are expanding our addressable market and leveraging our cost model, all this while consistently returning value to our shareholders.

With that, let me turn it over to the operator for questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Edwin Mok with Needham. Your line is now open..

Hi, great. Congrats for a great quarter. Thanks for taking my question. So, first, I have on the semi side, you highlight a couple of good rate for new wins that you guys talked about.

And also you had good exposure to the end market, I was curious, is that what you guys think about how those win rates translate to revenue? I know that you mentioned a few years out, just trying to implement the design, but maybe a good way to think about it is maybe cost, is that what you think about what win rates you guys have won before that and how that translate your revenue now and any metric or color you can provide around that?.

Edwin, this is a great question.

What’s I think new right now in the semi industry is that the pace of changing from one technology, I wouldn’t even call it note, but one technology toolset to the next one is accelerated and what we see as end use customers moving from one memory generation to the next, there is a new set of tools that are being developed, especially in the 3D NAND when you have really accelerated growth in the complexity of the devices and aspect ratios.

The increase in aspect ratio requires a different power distribution for accuracy in order to be able to effectively go all the way down to the depth of the tranches of the contact. That requires either new set of power supplies or derivative of existing power supplies.

And the interesting thing about this generation of the era we are living right now is that the pace of adopting these new tools is much faster, which required from us a very strong engagement with our customers from an early stage to ensure that they have their tools ready when the fabs are ready to start the production for the next node or next memory device.

So, yes, there is an acceleration and we believe that in semi the transition of these design wins into mass production is faster than what we saw in the past. When we talked in the script, we talked about 1 to 2 years adoption to mass production. That was mainly the industrial section..

I see okay, great. That’s interesting – helpful color. And then since you mentioned slow, I have a question around that. You mentioned that thin film was a big driver this quarter and you expect a pullback in the coming quarter.

Sometimes thin film market can become lumpy risk that any risk that, that we could have this low level of thin film spending for few quarters and until sometime maybe a three, four quarters out before we have to now jump or how do you kind of think about that?.

So, specifically, this – in Q3, also Q2 this year, we enjoyed a significant growth in our thin film, especially hard coating and optical coating business driven by consumer electronic products. And obviously, these products usually are geared towards mass production before the holiday season.

So, our revenue in Q2 and Q3 was especially geared for building the capacity into factories that make those devices.

Q4 obviously there will be less investment in equipment for these factories as they moved to mass production, we expect to see resumption of the investment in capacity next year as these factories are geared for next-generation devices and we have enough indication to believe that we will continue to grow in the area of hard coating, optical coating and decorative coating for consumer products.

The other thing that is very interesting we are becoming the standard. As we start being an enabler for highly engineered advanced materials for consumer products coating, many companies, end use customers are adopting our technology, because we have been proven to deliver on this unique set of new materials that are going to market.

So, we see propagation both with technology and knows migration and the new investment in capacity, but also expanding our footprint and serving more customers as they are adopting our technology..

Okay, great. That’s helpful. Last question I have just on kind of capital allocation and I guess our M&A, you guys have talked about working through an M&A pipeline and so far on one deal, smaller deal.

Just curious you have got any update on that pipeline that you expect to anticipate any kind of transaction to happen, let’s say, the next 12 months and I noticed that you bought back $25 million this quarter seems like you are generating quick level cash, why not buyback more stocks?.

So, we do have a very active pipeline of target acquisitions as you know and we talked about it very openly, we are very structured and very disciplined about how we do this. We have hurdles that we want to make sure that all the opportunities have to meet and we expect to see additional acquisitions happening in the next few quarters.

Our shares that we purchased is not in lieu of acquisitions, it’s something that we have putt a plan more than 1.5 years ago and we continue to pursue that in a way that allows us to manage our share count, but also to time these buybacks effectively. So, these are not competing efforts, but rather complementary efforts.

Regarding the acquisitions, we do have in the pipeline both small and large acquisitions, we are expecting to continue to pursue those.

The way we look at our acquisitions is very strategically they have to be a good fit in terms of the application space, in terms of the product and technologies they bring and in terms of the operational makeup of these companies.

Tom, do you want to add anything to that?.

No. Thank you, Yuval..

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

Thank you. And our next question comes from the line of Krish Sankar with Bank of America. Your line is now open..

Yes, hi. Thanks for taking my question. I had a few of them.

Yuval, if I look at your semi revenue compared with your closest peer, MKSI, for the last 5 years, you guys are actually outgrown, I mean kudos to both of you for having outgrown the WFE, but on a relative basis, your semi revenues have been – the growth has been better than MKSI for the last 5 years, but this year, it looks like it’s relatively slowing compared to MKSI.

So, I am kind of curious is there something going on in terms of market share or is it just a timing issue?.

I don’t think it’s timing and I don’t think it’s market share issue, I think that when we look at these two companies and MKS is a good company, but when you compare the two companies, it’s not apples-to-apples, right. The product portfolio of MKS is very different from ours. And if I rely on third-party analysis, we continue to lead in market share.

Our market share I think is maybe 2.5x that of MKS. We are a pure-play power company. And if you look at our revenue growth compared to previous quarter, we did better than MKS and compared to last year we did better than MKS. So, we continue to outperform, we continue to grow.

I think the one thing that may skew the picture optically is that I think the product portfolio has dramatically changed after the acquisition of Newport. So, I think that, it’s difficult to compare apples-to-apples, because the company is at totally different portfolios..

Krish, I would add, I think if you look at our guidance going forward, we are forecasting up versus some of our peers flat to down..

Got it. Alright.

And then a couple of other questions, did you guys say what gross margin in the industrial and services business was in Q3?.

Yes, but you can see, it is actually it was very healthy it was a little over 49%. It’s in our income statement in the press release..

Okay, got it. Alright.

And then one other question is, if OLED as a percentage of total revenue still under 5% at this point?.

OLED continues to be small although we continue to gain share for the applications we serve it’s a small sliver of the total pie of revenue for each..

Got it. And then the last question I had is if I look at your customers, like AMAT and all these guys on the display side or OLED side, they have really long lead times almost close to a year and they have a pretty good visibility into 2018.

How does their long lead time translate into your shipment schedule?.

Their lead time doesn’t really affect our – as you know we have just in time arrangement with our key customers. We don’t have long lead time products for them. They pooled our product when they need them..

Got it. Alright. Thank you very much. It’s very helpful. Thank you..

Thank you..

Thank you. And our next question comes from the line of Weston Twigg with KeyBanc Capital Markets. Your line is now open..

Hi, thanks for taking my question. First, just wanted to follow-up on the tax situation, I think the rate for 2017 increased this quarter from the guidance last quarter, I think the guidance was around 9% and now its 12% to 14% for the year.

Just wondering if you could help us understand what’s moving around in the tax line a little bit better?.

Sure, West. Yes, our tax rate went up. We had a change in the geographic mix, but more importantly, we made some changes internally. We have some intercompany sale of assets from one entity and other, things that we thought really better positioned us for the next 3 years and is part of strategic plan.

And associated with that in the quarter, there was some additional tax on those transactions. So, I think the way I would look at tax is the way we look at it long-term is use the tax rate, we model the tax rate in the mid-teens and that continues to be a good number hopefully it’s conservative number..

Okay, that’s helpful.

But just also wondering if you could help us understand maybe some of the semiconductor demand trends and your expected industrial growth rate for 2018, so just looking out into next year what you are seeing?.

Let me respond to that qualitatively. We expect the semiconductor business to continue to grow. We expect the first half of next year to be higher than the second half of this year. We expect the next quarter – I mean, we expect Q4 to be stronger than Q3 and Q1 is stronger than Q4.

Beyond that, we are not – we don’t have enough visibility to quantify that. When it comes to the industrial part of the business, we originally aimed at growing at GDP plus 2 to 3 points. We are demonstrating much stronger than that. Obviously, we enjoyed from this very large investment in coating for consumer electronic products.

What we expect to see going forward will be a continuing growth in the industrial, we believe that we will continue to grow faster than the markets we serve..

Okay. So industrial growth maybe ahead of that GDP plus 2 to 3%....

That’s correct..

Still next year, okay. And then finally, if you have any thoughts on operating margin trends into 2018 that would be helpful.

I know that it’s been bouncing around, but it’s been running quite high, it could be impacted by M&A, but if any color into 2018 would be helpful?.

Sure. Really, no change in our model. We expect gross margins to be flattish. The way we view the gross margin line is that we give our customers price concessions and our job is to get supply chain savings to offset those and that’s why those will be flat though we continue to get some leverage in the operating expenses.

So, when you look at the total model with operating margin, yes, there continues to be volume leverage potential and I think you saw this in the current quarter, our gross margin, because the mix was down about I think 30 basis points, but our operating margin more than made up for it and was actually up 10 points..

Very helpful. Thank you..

Thank you..

Thank you. And our next question comes from line Amanda Scarnati with Citi. Your line is now open..

Good morning. Just kind of continuing on the industrial acquisition pipeline, when you look at kind of growing that business you mentioned 2 to 3 points above GDP, I mean, assuming that means excluding any acquisitions that you do.

Are you still on track to hit that $150 million in acquisitions target by the end of 2018 or is that starting to look like it’s a little pushed out or less competent in hitting that target at this point?.

Amanda, we are confident that we can achieve that within the next – with the 3 years window we declared. We do have active pipeline of acquisitions. The growth rate we talked about at GDP plus 2 to 3 points was obviously an organic number is reacquire in the industrial domain we expect to accelerate the growth..

Are you seeing any sort of increased competition in your acquisition pipeline or is it kind of the same over the last year or two?.

Not really. What we see in general, in general – in general, we see higher valuations that we saw 2 or 3 years ago. Obviously, the environment is more robust and the multiples are more frothy. So, we are very careful in the way we look at our acquisitions.

The last five acquisitions we have made during the last 3 or 4 years all of them are very successful, accretive, contributing to profit and to cash flow and growing.

So, that’s what we would like to do is to continue to adhere to our very rigorous method of scouting, scoping and acquiring integrating businesses, because at the end of the day it’s all about growth. We want to buy businesses and grow them..

And then just on the Excelsys acquisition, how much revenue did they contribute this quarter.

And did you see any sort of impact on margins in your industrial business because of that acquisition?.

Sure. Little over $3 million of revenue and that’s pretty much the run-rate accretive to earnings..

Okay, great. Thank you so much..

Thanks Amanda..

Thank you. And our next question comes from the line of Pavel Molchanov with Raymond James. Your line is now open..

Thanks for taking the question.

First one about industrials in the context of your aspirational targets, I remember at the start of this year, you are talking about kind of in the medium-term getting industrials to a third of total top line, but this past quarter which was an standout quarter for industrials, it was 20%, so barely half of what you guys were targeting.

So, are you – is it still realistic for you to get to 30% plus industrial waiting or are you perhaps kind of rethinking that percentage?.

We still adhere to that aspirational goals and we believe that we are very realistic. This is not a short-term goal, Pavel and it’s a long-term goal..

Okay. And then on taxes, so I am assuming you are giving your guidance in the context of the status quo if we were to get tax reform along the lines of what the speculation is 20% U.S.

corporate rate, what would that mid-teens company blended rate, how that change for you guys specifically?.

It would have a smaller impact. There would be a benefit too, Pavel, but it’s not going to be drastic. We already have a very good tax structure. I would add that this benefit we took, the way to think of that is that it’s similar to an NOL.

So, we are going to pay less cash taxes, then report it going forward and that’s going to help increase our cash flows. So, we have put a lot of time and effort on this tax structure. We believe it’s very solid compliance wise, which is really important to that.

And when we look at tax reform things like repatriation, that’s great, things like lower cash, that’s great, but we have to wait and see what the proposal is correct..

Understood. Yes, very clear. Thanks, guys..

Thank you..

Thank you. And our next question comes from the line of Patrick Ho with Stifel Nicolaus. Your line is now open..

Thank you very much.

Yuval, first in terms of your services business, you have seen your customers also kind of involved in that business area themselves, were they trying to add more value for their customers and you talked a little bit about that on the call today? Given the gross margin improvement we have seen, can you give a little bit or an example of some of the changes on your services and what you are trying to provide more value-added for your customers?.

Okay. Thanks, Patrick. The first value add we bring to our customers is shortening the distance from us to them by placing new repair facilities in some strategic areas.

Two examples, Jian in China, we have a new repair lab in the technical technology free trade zone that allows us to significantly increase our responsiveness, reduce turnaround time and reduce the cost of logistics and freight and duties. That’s tangible value for our customers.

We have a similar investment active lab that we opened in Tachikawa in Japan that is doing the same thing. So, this is more of the repair aspect or part of the service business.

In addition, we continue to offer our customers, which we call the non-break fee solutions is to highly engineered upgrades, retrofits, solutions and products that extend the lifetime of our legacy products that increased the capability and the performance of products that are already installed and filled and the result of that reduced the total cost of ownership for our customers and their customers.

So, it’s all basically value-driven. And for that reason, we see an increase in market share as we get more and more repair and business revenue coming back to us in a way from the third-party repair shops..

Great. That’s helpful. And maybe as a follow-up the strength in the semi business that I also believe will into the early part of 2018. You gave quite a bit of visibility that typically a lot of times component suppliers don’t usually get.

Is that changing with you and your customers are they giving you more lead times that you have seen in the past and I guess most importantly from your end, how do you react as they extend some of the lead times for you?.

It is different, Patrick. And I cannot give you details, but in general, I can give you we received formal notices from almost all of our customers asking us to be ready for the ramp. And it is not a big surprise we are expecting to see a continuing ramp at least through the first half of next year.

And we have very effective, very agile and nimble operation. We do not see any challenge to address the need both in terms of volume, mix, and delivery time..

Great. Thank you very much..

Thank you. And our next question comes from the line of Mehdi Hosseini with SIG. Your line is now open..

Thank you. Yuval, just back to your prior comments, you said your OEM customers are asking to be ready for the ramp. Your Q3 semiconductor revenue was up by more than 40% on a year-over-year basis.

So, can you help us understand what do you mean by the ramp?.

Ramp means quarter – increase quarter-over-quarter..

Okay.

So, is that more than just single-digit growth that you have guided?.

I can’t give you specific numbers, Mehdi. All I can tell you that we had indication coming from the market that we should be ready to increase our delivery and capacity of probably basically the number of units we shipped every quarter increase going forward..

Okay. You have a pretty good insight into the 3D NAND technology that has enabled you to outgrow revenue by significant factor compared to the overall WFE spend. In that context, how do you see the evolution of 3D NAND, especially with the stacking of the stacks.

Is that going to change the power supply content for you or is that neutral, the stacking of the stacks?.

It’s a good question, Mehdi.

The answer is yes, what we are seeing as the industry goes into more layers in the 3D NAND, as I mentioned earlier in first question, the aspect ratios are becoming very challenging and they require in many cases higher power, better control and a very sophisticated way to pause the RF power to be able to process these very challenging architectures.

In addition, we see additional applications driven by new materials and new process technologies. All-in-all what we see is increase in the power density delivered into the chambers and with that more complex power supplies, which will drive potentially higher ASPs..

But does that change with the number of stack, is there a maximum number of layers above and beyond which…?.

It changes with the increase in number of layers, but obviously, Mehdi, it’s a really strong function of the architecture of the chamber itself. And if we look at the top 3 or 4, actually the companies they do not have the same architecture and the same design.

So, it depends on the actual process chamber architecture, you will see a change in the power content deliverer as the devices become more challenging..

Okay.

One more question here just clarification, would you see a scenario in the next 1 or 2 years that will – customers will actually – the end customer would actually stack more than 2 stacks?.

I don’t know, Mehdi. I don’t have enough knowledge of that..

Okay.

And then looking at the overall trend, it seems like based on what your OEM customers have elaborated or discuss WFE could grow the growth rate of like 5% through the turn of the decade and given what he has done over the past few years, would it be fair to say that you can grow your semiconductor revenue at 3x that growth rate looking forward?.

I don’t know. In general, we have demonstrated our ability to grow faster than the market we serve. Our aspirational goal is to continue to do that. The last time we presented publicly we talked about our CAGR for last 4, 5 years of 17%. So, double-digit growth rate in this environment is not out of the question..

Is there any technological change that could make your growth rate more or less so that we could think about growth rates that will be above or beyond the historical trend rates?.

Well, we continue to invest significantly in innovation and in new technologies for next-generation power distribution for plasma processes. Some of these new technologies are being evaluated right now.

We believe if the adoption rate will be fast and we will continue to remain the enabler for the industry, we may see acceleration of growth, but it depends on the success of these technologies and the adoption..

Okay, thank you..

Thank you..

Thank you. And our next question comes from the line of Tom Diffely with DA Davidson. Your line is now open..

Yes, good morning.

I wanted to dig a little deeper into the capital intensity comments you made earlier in the prepared remarks, you talked about I think it was 100% increase in capital intensity from 20 down to 7, was that just a broad industry number or was that for your tools?.

Broad industry number..

Okay.

And I would assume with etch growing as a percentage and then the complexity of etch and your power supply is on there that you have a faster higher capital intensity growth rate?.

It’s an assumption.

Again, our product intensity – the power content is not only a function of the migration to the next node like say from 28 to 10 nanometers, but also as the increase in the stacking of the films and memory and the adoption of new materials, for example, we see the acceleration of adoption of new technologies like atomic layer deposition or atomic layer etch, these are new technologies that will be incremental in terms of the growth, I mean, 5, 10 years ago we didn’t use it on the clear deposition extensively.

So, we will see the adoption of new materials and new process technologies as another accelerator that will increase the capital intensity..

Okay.

And then moving over to the services side of the business, it sounds like we have put a lot of effort into the gaining some share from the third-party players and services, curious on the 28% year-over-year growth, how much of that do you think is you are recapturing some share versus just the growth of the marketplace for services?.

We do not delineate that. I think its combination of the few thrusts in our strategy. The market share again away from third-party shops by providing value add repair for our customers and the incremental growth coming from new service product that we develop in our service engineering department..

Okay.

And then maybe just finally here on the thin film growth, I was just trying to understand a little better, how that’s been driven, is it technology changes and what the customer is doing, is it just need for more capacity or is it you mentioned share gains there as well?.

It’s really both. You will find out that a lot of products that you and I use almost every day that historically used to be coated using liquid films or chemical coating are moving into vacuum coating, which is PVD mainly. And as the technology moves forward, new devices adopt new materials and new techniques for coating.

And the main purpose for that is to provide the color, the surface feel and look of the film of the product, films that are anti-smear, anti-scratch films etcetera. So, these are new engineered materials. So, it’s not only capacity, it’s also new materials and new methods for depositing these materials and thus drive a lot of growth right now..

Okay, thank you..

Thank you..

Thank you. [Operator Instructions] And we do have a follow-up question from the line of Krish Sankar with Bank of America. Your line is now open..

Yes, hi, thanks for letting my follow-up. Two quick ones.

Yuval, how much was AMAT and LAM as a percentage of total sales in Q3?.

Krish, it should be in the Q that was filed at probably 52%, 53%..

Got it.

And then, it looks like you have about $75 million buyback left, is that true and if so what is – is it it open-ended or is it a timeframe for it?.

The specific authorization, Krish, expires in March ‘18. That said, we are in discussions with the board to either extension and replace that. So going forward, for capital deployment, you should expect both acquisitions and share repurchases..

Got it. Thank you very much..

Thank you..

Thank you. And I am showing no further questions. I would like to return the call to management for any closing remarks..

Thank you everyone for joining us today. As you can see we are excited about the current and the future. We are very constructive both in all the markets we serve and we are very excited about the future. We hope to see you many of you soon. Take care..

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