Good day, ladies and gentlemen, and welcome to the Advanced Energy Industries Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today’s conference is being recorded.

I’d now like to introduce your host for today’s conference, Mr. Edwin Mok, Vice President of Strategic Marketing and Investor Relations. Sir, please go ahead..

Thank you, operator. Good morning, everyone. Welcome to Advanced Energy’s third quarter 2018 earnings conference call. With me on today’s call are Yuval Wasserman, our President and CEO; Paul Oldham, our Executive Vice President and CFO; and Brian Smith, our Director of Investor Relations.

Before we begin, I would like to mention that AE will be participating at the Wells Fargo Tax Summit and the New York City CEO Summit, both in December and the Needham Growth Conference in January. As all these events occur, we’ll make additional announcements.

And now let me remind you that today’s conference call contains forward-looking statements including the company’s current view of its industry, performance, products, applications and business outlook.

These statements are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks and uncertainties is contained in our filings with the SEC.

All forward-looking statements are based on management’s estimates, projections and assumptions as of today October 30, 2018, and the company assumes no obligation to update them. Aspirational goals and targets discussed on this conference call or in the presentation material should not be interpreted in any respect as guidance.

Today’s call also includes non-GAAP adjusted financial measures, which exclude the effects of discontinued operations, stock compensation expenses, amortization of intangibles, restructuring charges, acquisition-related costs and other one-time items.

Reconciliation between GAAP and non-GAAP measures are contained in yesterday’s earnings release, which is available on our Investor Relations page of our website. We’ll be referring to earnings slides posted on the investor section of our website as well. With that, let me pass the call to Advanced Energy’s President and CEO, Yuval Wasserman.

Yuval?.

Thank you, Edwin. Good morning, everyone, and thank you for joining us for our third quarter earnings conference call. Our third quarter results reflected the dynamic demand environment in a semiconductor market.

Both our industrial and service revenues again achieved records high, partially offsetting lower semi revenues and resulting in a total revenue decline of 2% year-over-year.

In addition, we advanced our diversification growth strategy by completing the acquisition of LumaSense Technologies, expanding our footprint in several industrial technology markets.

Despite the near-term challenges in the quarter, we delivered solid financial results, exceeding the midpoint of our revenue and EPS targets with adjusted operating margins of 26%. In semiconductors, the impact of delays in memory expansion by large chip makers drove our semi revenues to decline sequentially and year-over-year.

Further, we expect our semi revenues to decline again in the current quarter as equipment OEMs reduced their finished goods inventories.

Despite the near-term weakness, we continue to believe this pause represent a normal and modest digestion period within the semiconductor industry, with equipment investment impacted largely by yield, technology transition and IC device ASPs.

The long-term growth drivers for our semi business, including both the broad underlying demand for semiconductors and the continued increase in the dependence on power supply technology, resulting in growing power content in Etch to position in other production processes remain intact.

The pace of innovation in semiconductor manufacturing continues at high velocity. Our customers come to AE for solutions to the toughest technical challenges in scaling both leading edge, logic and memory devices.

This not only spurs growth of the overall power market, but also creates opportunities to gain market share, as we look to displace competitors with our differentiated technology.

As the supplier of critical technologies and plasma-based Etch and deposition processes, we see increased adoption of our highest-performance power supplies in matching networks. This quarter, we won multiple new designs, including one major win for an application in advanced memory, where we displaced the incumbent supplier in new technology.

Our commitment to innovation and focus engineering investment allows us to enable our customers, as they develop the next-generation of semiconductor manufacturing technology and process. In our industrial markets, we had another strong quarter. Revenues were once again at a record high in Q3, growing 35% year-over-year.

Excluding the contribution of acquisitions, industrial grew 15% year-over-year. This demand came from multiple markets and across our product portfolio. In thin films, we had a significant shipment to a solar PV manufacturer we secured in the second quarter, which more than offset the weakness in a general PV production equipment market.

We also saw flat panel display investment in China for both OLED and large-screen capacities, while demand for hard industrial coating for both consumer and automotive applications moderated in the quarter. More importantly, we won multiple designs during the quarter with new applications in glass, hard coatings and display.

Specialty power saw strength in power control and thermal management for thin film batteries, PV solar, glass and steel production. Last week at the Glasstec Trade Fair, we published a paper with our partner, Siemens, on our joint efforts on advanced process control for TFT glass production, validating our success in this area.

We also had multiple design wins in the medical equipment market, including one, powering instruments for geno mapping and the second one for electroporation therapy.

Overall, we expect our industrial business in the fourth quarter to grow year-over-year, but decline sequentially following a record third quarter with incremental revenues for LumaSense, partially offsetting the typical fourth quarter’s seasonal decline in our core industrial markets.

Acquisition has been an important part of our revenue growth strategy. During the quarter, we took a significant step forward by closing the acquisition of LumaSense Technologies, our largest transaction so far.

LumaSense greatly expands our offering around critical, measurement and sensing technologies, including barometry, temperature control and process material metrology solutions and broadens our exposure to power intensive industrial applications.

We are actively integrating our four acquisitions we completed over the last five quarters and we have already started to make progress in driving integrated product offering. Combined, these businesses generated over $90 million of annualized revenue in Q3 on a pro forma basis.

With additional revenue and cost synergies coming, we continue to anticipate solid returns for these acquisitions. We remain committed to our stringent M&A process and are confident we will add more in organic revenues in the future. Our service business hit another record quarter, increasing 17% year-over-year.

In addition to an expanding installed base, we are strategically growing this business with programs in product refurbishment, retrofits, upgrades and regional expansion. Looking forward, we expect service to continue to grow at greater than 10% CAGR, as we gain share from third-party providers and expand our engineered service solutions.

In summary, we expect capacity digestion in semiconductor to create headwinds for our semi business in the current quarter. Industrial sales in the fourth quarter should be down sequentially, while our service revenue should reach yet another record high.

Despite a pause in the semiconductor market, we continue to expect overall revenue growth in both 2018 and 2019 for Advanced Energy.

While we are taking some steps in a new-term to manage our cost structure and accelerate integration of acquisitions, we will continue to invest in developing our core technologies, products and channels to expand our leadership. In our core RF and DC power business, our market share remains more than double that of the next biggest competitor.

With a solid pipeline of our position in power innovations and our deep applications knowledge, we will stay at the forefront of leading edge technology advances. Leveraging our financial model and cash position, we have an active acquisition funnel targeting to take our business to the next level.

Our drive to achieve our stated aspirational targets remains in full force. I’d like to thank our customers, shareholders, partners and our valued employees for your support. I look forward to seeing many of you in the upcoming quarter. With that, let me turn the call over to Paul..

Thank you, Yuval, and good morning, everyone. In the third quarter, we continue to execute on our strategy to grow and diversify the company, while feeling the impact of the near-term pause and capital spending by semiconductor manufacturers. Total revenue was $173 million, down 12% from last quarter’s record levels, but just 2% from a year ago.

Both industrial and service revenues achieved record levels again in Q3, partially offsetting the decline in the semi market. In spite of the overall decline in Q3, year-to-date revenues are up 15%, with 6% growth in semi and 46% growth in our industrial products.

The LumaSense acquisition, which closed at the beginning of September added $5.6 million. Looking at sales by market, semiconductor revenue in the quarter was $96.4 million, down 24% from last quarter and 17% year-over-year.

The impact was broad-based and not from a single customer or product area and was the result of the capital spending delays we have already discussed. This delayed investment will also affect our Q4 semi revenues and it may extend into early 2019, as our customers reduced their finished goods inventories.

Industrial revenue saw significant growth and reached a record $48.5 million, up 16% from the second quarter and 35% from last year. Even excluding the impact of LumaSense, it still would have been a record quarter with strength from our large win in PV solar, as well as glass and thermal applications.

Looking forward, we expect industrial revenues in Q4 to be seasonally lower, in line with historical trends and up year-over-year. Longer-term, we continue to expect our industrial products to grow in the mid-teens range. Service revenue for the quarter was also a record at $28.2 million, up 5% from the second quarter and 17% from last year.

As industrial and service continue to grow and make up a larger portion of total revenues, they will both boost our overall growth rate and help to offset fluctuations in our semiconductor market. Gross margin for the third quarter was 49.4%.

On a non-GAAP basis, gross margin was 50%, compared to 51.8% last quarter, largely due to lower revenues and unfavorable product mix. We also saw higher warranty due to timing and repairs and expedite costs early in the quarter. Looking forward, in the fourth quarter, we expect adjusted gross margins to be in the same range on lower revenues.

GAAP operating expenses in Q3 were $45.7 million, increased by about $450,000 over Q2, primarily as a result of the addition of LumaSense. Non-GAAP operating expenses from continuing operations were $42.2 million, or 24.4% of revenue. This compares to $41.9 million, or 21.3% in the prior quarter.

Excluding the addition of LumaSense, operating expenses decreased $2 million, or about 5%, primarily the result of lower headcount and temporary actions were taken to control costs. GAAP operating expenses also included approximately $400,000 of restructuring expense.

Looking forward, we expect to incur $3 million to $6 million of additional restructuring expense in the fourth quarter. A result of actions we are putting in place to optimize our manufacturing footprint improve efficiencies and realize synergies related to our acquisitions.

In addition, during the fourth quarter, we will be taking a number of temporary actions to reduce costs, including our reducing discretionary spending and taking additional time off, particularly in manufacturing consistent with our lower volumes.

We believe these actions will allow us to moderate spending, while continuing to invest in our strategic efforts to drive growth. Despite a full quarter of LumaSense expense, we expect non-GAAP operating expenses in the fourth quarter to only be up $3 million to $4 million, with sequentially lower costs in native AE.

GAAP operating margin for the quarter was 23%, compared to 28.6% last quarter and 29.2% in the same period last year. Non-GAAP operating margin was 25.6%, compared to 30.5% in the previous quarter and 31.9% a year ago. Although LumaSense contributed positively to operating income, it negatively impacted operating margins by 50 basis points.

For the fourth quarter, we expect this impact to be 150 to 200 basis points on a full quarter of LumaSense revenue and expenses. Our GAAP tax rate for the third quarter was 12.7%, primarily the result of expiration of the statute of limitations on historical exposures and implementation of our tax planning strategies.

In addition, as part of the adoption of the U.S. tax reform, we updated our assertion regarding permanent reinvestment to foreign earnings, which resulted in a charge of approximately $2.4 million. Excluding this item, the non-GAAP tax rate was 8%. We expect our tax rate in Q4 to be in the very low double digits, reflecting some of these same benefits.

Longer-term, we expect non-GAAP tax rate to be in the 15% to 16% range. GAAP earnings per share from continuing operations for the third quarter were $0.90, compared to $1.17 last quarter and $2.09 last year, which included a non-recurring tax benefit of $40 million associated with the closure of the solar inverter business.

Non-GAAP EPS for the quarter was $1.05, compared to $1.25 in the second quarter and $1.19 a year ago. LumaSense was accretive by approximately $0.01 per share to non-GAAP earnings. Turning to the balance sheet. In the third quarter, we generated $31 million of cash from continuing operations.

We invested approximately $85 million of net cash on the LumaSense acquisition and $31 million to repurchase 533,000 shares of stock. In addition, since the beginning of Q4, we repurchased an additional $11 million worth of stock, bringing our year-to-date purchases to approximately $80 million for 1.35 million shares.

Since the inception of our program in 2015, we have spent approximately $160 million to repurchase 3.5 million shares. Our cash and marketable securities balance at quarter-end was $342 million. Net working capital increased during the quarter.

Days sales outstanding increased to 57 days, compared to 49 days last quarter, largely due to geographic mix and the addition of LumaSense, which added about $8 million of receivables. Days payable declined from 55 to 47 days, primarily due to the timing of purchases and payments in the quarter.

Inventory turns decreased from 3.5 to 3.2 times on roughly flat inventory levels. However, excluding the addition of LumaSense, inventory declined by about $10 million. We expect inventory to further decline from these levels in the fourth quarter.

Given the current market conditions and order levels, we expect revenues for the fourth quarter to be between $150 million to $160 million and non-GAAP earnings per share between $0.70 and $0.80. In summary, we were able to deliver solid profitability in a down market and are prepared to see leveraged growth in earnings when the market recovers.

In the near-term, we are controlling discretionary spending, while maintaining the core investments that will protect our competitive advantages and fuel long-term growth. We remain bullish about the long-term growth potential and drivers in our core markets, and we continue to innovate to maintain our leadership position.

Further, we will use our balance sheet to accelerate growth and expand our addressable markets. With that, let me turn it over to the operator for questions.

Operator?.

[Operator Instructions] Our first question comes from Krish Sankar with Cowen & Co. Your line is now open..

Yes. Hi, thanks for taking my question. I had a couple of them. Yuval or Paul, thanks for the color on Q4 and even into Q1.

So is it fair to assume in Q4 sequentially your industrials is down in the mid-single digits and semis is down double digits, is it the right way to think about it, or..?.

That – that’s the right way to think about it, Krish. And just to reiterate, we see the decline in semi in line with peer companies in the market. And we see the industrial decline in Q4 as the seasonal decline we saw during the last three years in Q4. Also more pronounced this time, we’re coming from a very strong Q2, right? So – I’m sorry, three.

So the combination of seasonal decline in industrial and in line with semi decline is resulted, as you said..

Got it. That’s very helpful. And then, I think, Yuval, in your prepared comments, you did highlight that the weakness should continue into Q1.

So I’m curious, is that given improved visibility of customers, the same thing is still going to weak, or is it more inventory digestion going on with your customers, or what gives you the viewpoint into Q1 a quarter out?.

Yes. I’m not sure if we said that’s going to be V-shape, I’m sorry, Krish. But we see that – this decline in Q4 as a result of our customers disposal of finished good inventories mainly. We don’t – we didn’t forecast Q1 even directionally.

We have obviously uncertainty regarding our customers’ capabilities to dispose of all the finished good inventories. As you know, we typically lag about a quarter behind our customers..

Got it. And then two other quick questions.

How much was AMAT and LAM as opportunity of sales in Q3?.

Just a second.

Paul?.

Yes, AMAT was about $60 million and LAM was about $20 million..

Got it. All right. And then a final question. Yuval, I mean, you kind of alluded to the fact about disciplined M&A process. And in the past you guys had done mostly bolt-on M&A, especially in the non-semi side. And your biggest peer has done more, I would say, bold acquisitions.

Kind of curious what is your view on transformational M&A and – versus kind of doing bolt-on looking at?.

So it’s a great question, Krish. Thank you. We do entertain a funnel of potential targets and we have both large and small tuck-in targets. Our tuck-in targets are not sporadic, they’re more of a roll-up strategy. As you recall, we had a lot of companies in the high voltage power supply arena.

LumaSense brings the area of sensors and nephrology to our portfolio very, very in line with our [indiscernible] product line. Our target acquisitions have both small size acquisitions, but also large size targets. As we continue to pursue transformational acquisitions, we will continue to do tuck-ins and roll-up strategies.

Just to reiterate, over the last five quarters, we have added to our revenue incremental more than $90 million of revenue….

And annualized..

…annualized, on an annualized base, right? And all of these acquisitions are accretive, successful, growing and delivering cash and profit. So we’re very pleased with the strategy, but at the same time, we continue to look at sizable transformational acquisitions for which we’re willing to lever the company.

However, we are extremely disciplined about the approach and want to make sure that we – we’ll be – we do the right things..

Thank you, Yuval. It’s very helpful. Thank you..

Our next question comes from Weston Twigg with KeyBanc Capital. Your line is now open. Your line maybe on mute..

Operator?.

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

Hi, good morning. Just a quick question on the semiconductor business and the design win that you saw in the advanced memory application.

Can you just expand upon that a little bit and when you expect to start to see revenue generated from that design win? And what sort of momentum you have in the advanced memory market at this point?.

Hi, Amanda. The – this specific design win is in dielectric deposition and it’s meaningful. We are displacing an incumbent. I can’t disclose the amount of the business related to that, but we’re very excited about this design win.

Just to reiterate, we continue to pursue design wins, both in our core application space, as you know, is conductor Etch, but also in adjacent applications like that lipid etch deposition and other plasma processes..

Okay.

And then on the industrial side of the business with the sequential decline next quarter, is LumaSense also expected to decline on a sequential basis? Is that sort of normal seasonality for that, or is there still sort of growth coming from LumaSense on, say, a like-for-like basis for them?.

Yes. Thanks, Amanda. It’s obviously still business sits in transition for us. And so what we would expect to see there is similar to the run rate. However, as you recall, about 25% of the business sells into the semi market, and it’s going to be impacted by the same factors we see in the rest of our semi business..

And then the last question I have is just on operating margins.

With a couple of quarters of declines in operating margins, what are you – or in revenue and then in operating margin, what are you doing to kind of help support growth in R&D, while still trying to maintain moderate operating margins?.

So two things, Amanda. We continue to invest in some critical programs that are very strategic for our future in collaboration with key customers as we work with them to develop the next-generation technology for semi and industrial applications. That investment continues even in a down market. It’s a strategic investment for the company.

At the same time, we are working on the operational side and the discretionary spending side to react to the decline in the business.

But also as you recall, we had four companies acquired over the last five quarters and we’re in a process of integrating those acquired entities into the company and it’s a process, right? It’s a process that involve restructuring, consolidation, et cetera. So that’s part of the investment we’re making.

So in one hand, we continue to invest in strategic technology development programs and at the same time, we continue to adjust our spendings and structure to accommodate the new structure of the company and the decline in revenue..

Yes, and I’ll just add to that, Amanda. We did announce a restructuring program as part of our prepared remarks. But this is really aimed at improving the efficiency of the company and driving some of the integration synergies as you’ve all described.

We continue to be completely committed to our strategic investments and don’t see any reduction in those..

Great. Thank you..

Thank you..

Our next question comes from Patrick Ho with Stifel. Your lines now open..

Hi, good morning. This is Brian Chin on for Patrick. Thanks for writing a desk a few questions.

First off, could you provide the LumaSense revenue contribution in 3Q and kind of what you have embedded in the 4Q guide? And for 3Q, could you also breakdown what was in semi versus non-semi?.

Yes, Brian, thanks a lot. So the amount of LumaSense in the third quarter was $5.6 million and it was a little over a $1 million in semi and the balance in industrial. So not that different to the mix than we talked about previously. As I mentioned in the fourth quarter, we’re not breaking that out specifically.

But the general run rate holds with, like I said, the semi business is going to experience some of the same factors that we’re seeing in the broader market, sells into the same markets and it’s seeing some of the same factors..

Okay. Thanks, Paul. Very helpful. I believe also you guided 4Q gross margins, I believe roughly flat Q-on-Q, which seems impressive given the decline in volume and a full quarter of LumaSense.

I was kind of curios were there substantial and manufacturing footprint in China? Are you not seeing any drag on margins to the current tariff environment, or how are you able to mitigate these impacts?.

Yes, it’s a good question. When you look at tariffs for us, where we don’t have a lot of direct exposure to tariffs, because we don’t import a lot of parts directly to the U.S. We do manufacture in China. We also have manufacturing in other locations.

But if you look at with respect to China as we export from product from China, mostly our customers buy those products directly. And frankly, we’ve been working very closely with them to mitigate any impacts to their business.

And we think overall, that impact is going to be nominal, because there’s a number of both operational and commercial things that we can do to help mitigate that impact. The amount that we do use internally is largely for service, where we would bring a party from China to do specific repairs in the U.S., and that would be for U.S.-based customers.

So it’s minimal the impact on tariffs for us in China. Relative to our manufacturing footprint, as you know, we do have a world-class manufacturing facility in China. And that does gives us, we think a lot of advantages from flexibility perspective and from an overall cost perspective.

And part of our actions is to continue to optimize our manufacturing footprint globally..

Okay, got it. It’s very helpful. Thank you. Maybe one last question, just doubling back in terms of the semi customer inventory work down commentary, which echoes other critical subsystem suppliers. Even now it’s difficult to call for a churn up in the business right now in terms of visibility.

Are you also seeing a near-term of stabilization and the ordering rate added to that business, which I think your another company also talked about?.

Yes. We – right now, we cannot give you any guidance towards Q1 or even directionally. All of our customers are working for their own shipment from finished good inventory. Our visibility is limited and we cannot right now forecast Q1..

Okay, fair enough. Thanks so much..

Our next question comes Mehdi Hosseini with SIG. Your line is now open..

Yes. Thanks for taking my question. Paul, I look at your days of inventory, it’s almost two to three-year high. And I assume some of it has to do with number of acquisitions over the past several quarters.

When do you think your inventory is going to trend down? I mean, to what extend, how should we think about improving free cash flows just as you reduced the inventory? And again, I’m assuming that big chunk of piece and step up has to do with the acquisitions and I have a follow-up?.

Yes, that’s a good question, Mehdi. Thank you. So if you look at our inventory for actually Q3, it was about flat with Q2. But underneath that, we added $10 million of acquired inventory from LumaSense and reduced our, I’ll say, our native inventory by that basically that same amount.

So we did see a meaningful reduction and we expect to continue to see a roughly similar reduction in Q4. If you look at the overall acquired inventory, it’s in the mid-teens of millions of dollars when you look over this full-year.

When you add in that LumaSense, we only have the revenues for a quarter then that’s going to clearly impact the metric of either days of inventory or inventory turns. So we’ll see some natural pick up in the fourth quarter, because both inventories will trend lower and we’ll have a full quarter of LumaSense sales.

But the denominator matters here and low environment – low revenue environment then the metrics are going to look over important. Certainly, as our revenues recover and we look out inventory, our goal is to see those inventory turns and days come back into a normalized range, and that will probably take two or three quarters to work its way through.

But from a pure cash perspective, we’d expect to continue to see inventories both their way down from here just like they did last quarter..

Gotcha. And a question for you, Yuval. Of course, everyone is trying to better understand how your key customers in the semi are coming back and you have the questions about Q1. But I’m going to rephrase the question in a different way.

Do you think your customers are going to be focusing on managing debt inventory, and they’re going to wait and gain confidence in the rebound, or are they going to sell inventory, because they feel so good in their core business? And even if their business is not going to pick up until the second-half, they’re going to stick around their inventory as they gauge pickup in shipment? In other words, how do you see your customers’ inventory management, because they all sounded very constructive and confident that this is going to be a rebound in shipment driven by memory and logic, and I don’t get that confidence from you?.

So maybe I honestly cannot comment about our customers’ inventory levels and how they manage our inventories. The one thing that we all need to understand that is not just having inventory with machines, finished good in boxes, it’s also a change in product mix and customer mix that happened over the last two quarters.

So the way that they dispose of their equipment depends on which end customers is investing and when and which IC technology is being invested upon a chip, memory and logic, DRAM or NAND. So that mix affect the way that – they manage their finished good inventory.

So from our perspective, you all need to understand that because of the [Technical Difficulty] just in time relationship with us, they pull our products when they need our products to finish the building of their finished good machines.

So the inventory that they have right now is in inventory not of AE raw, but of their own finished good machines that could be on the floor or in boxes, right? And if they ship those products out in the market, they will basically pull products from our inventory. So – and that’s why I would say, we lag a little bit behind them.

And until they finish addressing the mix change that they have and they finish good inventory per application that they have, we will basically lag behind..

It’s very helpful. Just one follow-up to that. How are you thinking about your overall head? And I’m assuming that theirs is some commonality in your overheads between semiconductor and industrial.

But as you think about the leverage following – operating leverage following these recent acquisitions, is there a minimum threshold in semiconductor revenue that you’re focusing on beyond which you would take a more drastic action?.

Yes, it’s a good question, Mehdi. As you recall, we did announce some restructuring costs, that goes largely continuing to consolidate the acquisitions we’ve made and improve efficiencies. And I’ll say that manufacturing that overhead is common to both our industrial and our semiconductor businesses.

And as you know, many of the, I’ll say, semiconductor like products actually sell into industrial applications for Bintom [ph]. So there’s a lot of overlap and there’s a lot of commonality, and we think of it as kind of as one business serving these different markets. So we are taking actions to reduce near-term cost.

But remember, we in our prepared remarks said, although it’s hard to predict exactly the quarter, and I know there has been a lot of questions about that. We continue to feel confident that this is a temporary pause in semiconductor investments and have a lot of confidence in the underlying drivers in the market.

And as a result of that, we’re going to continue to invest in the strategic elements of our semi business, because we believe that will, in fact, bounce around these levels, but then it will grow. And as it begins to grow, we’re going to see significant leverage in our business. In fact, we’ve historically seen 40% to 50% leverage.

As sales have grown, we’re going to see that same leverage once we work our way through this temporary pause in semi and we’ll see a lot of acceleration on EPS if that occurs..

If I may to that maybe in spite of this temporary pause in semi, we need to all remember that 2018 is a growth year for Advanced Energy, and we expect 2019 to be a growth year for Advanced Energy, in spite of that temporary pause in semi..

Got it. Thank you so much..

Thanks, Mehdi..

Our next question comes from Tom Diffely with D.A. Davidson. Your line is now open..

Yes, good morning. Maybe just one more on the inventory side.

Is there anyway to quantify what’s the impact of the finished goods just for this versus the end market demand for you, or do not have the level of visibility?.

We don’t have that level of visibility. And also, Tom, I mean, we cannot even analyze our customers business for you. So I mean, it’s a transition that happens in the market. It involves demand changes, especially in mix and also shipping from finished good inventories our customers that already happened.

And the question is, when they will resume the ramp-up demand for our products is just a question of timing..

Yes.

And there’s no reason to believe that once that ramp starts again, the inverse happens where they have to kind of build finished goods along the way that you would grow faster than them during that period of time?.

Well, it’s a good question. And because of gist [ph] structure, the relationship we have with them, we have the flexibility and the agility to respond to demand changes, both in volume and mix very quickly..

Yes, okay. And then this is different than what we saw a couple of cycles ago, where you would actually or they would hold inventory and not just the time as just they would hold inventory.

So it’s a less of an impact this time around than it was a two cycles ago?.

I agree with that, yes..

Okay. And then many question those on the service side.

What is the typical warranty of your products? And when does it come off-warranty and when does it become eligible for service? And just curious about the large slug of business [Multiple Speakers] a couple of years?.

Yes. Tom, it really depends on the product and on the relationship – contractual relationship we have with customers. So I would say, it’s between one to three years, depends on….

That we still….

Go ahead..

…that we still haven’t seen the kind of the big slug of service increase from what’s been the big business I was curious?.

You’re spot on..

Okay, okay..

…because we we expect to see – as you know, over the last two or three years, the installed base grew significantly. And we expect to see the service revenue benefit from that incremental increase in the installed base to be realized within the next few quarters..

Great, okay. Well, thanks for your time tonight..

Okay..

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

Thanks for the question. The last time you had a down quarter in semicap was this back in Q4 of 2015. And at the time, it was a V-shaped recovery right right afterwards.

When you compare kind of current industry dynamics versus three years ago, just thematically can you compare and contrast how they’re similar and how they’re different?.

Well, Pavel, we – as we said during the last earnings call, we do not expect the recovery to be a V-shape. This time, we said it will take longer. It could be more moderate. The fact is it’s really a different industry compared to the last cycle.

In terms of consolidation of the industry, the number the key players, the key product, the migration to 3D technology, it’s a different industry, right? So it’s hard to compare. And as we said earlier, we do not do not expect to see a V-shaped recovery. Just a reminder back in 2016, wafer fab equipment business, industry was $35 billion….

Right..

…and right now, we’re talking about a much bigger industry..

Right. You talked about potentially levering up if you see the right acquisition target. Given that your stock is multi-year lows at this point.

Would you also be willing to lever up to meaningfully accelerate share repurchases?.

Yes, it’s a good question, Mehdi. As you know….

Pavel..

Oh, I’m sorry, Pavel. As you know, our primary allocation of capital is to grow the company. We’ve said 70% roughly as a guideline is targeted to grow the company primarily to acquisition. And so we continue to believe that is the best path to create long-term value for our shareholders.

We’ve also been active on our share repurchase program, and you can see that in the numbers. And so it is a balance, but our view is we would lever the company to grow the company not necessarily to change the capital structure at this point..

Pavel, we continue to also be put cash and – in investing in our future technology and product portfolio. We invested the capital in new labs, high-technology labs in the Bay Area. We expanded our laboratory footprint around the world.

We are investing in core technologies, both organically and inorganically, and we believe some of those unique design wins in technology will accelerate the growth in 2019..

All right. I appreciate it, guys..

Our next question comes from Weston Twigg with KeyBanc Capital. Your line is now open..

Hey, sorry about that earlier. Thanks for taking my question. So one question I have is just on the industrial side, that sounds pretty good if you’re talking down just seasonally in Q4.

I’m wondering if heading into 2019 at all, are you seeing any increasing risk related to say weakening demand in China, or autos, or any of the other broader macro indicators that we’re seeing in related markets?.

We don’t see that, Wes. In fact, we have some new design wins, both in what we call hard coating applications and also medical and life science applications that we believe will be sustainable and will not be affected by temporary either geopolitical or GDP-related fluctuations.

As we said earlier, our Q4 decline in the industrial business is seasonal just like previous three years. The good news is there every Q4 is higher than the previous Q4. So we continue to grow our industrial business with that seasonal decline in the fourth quarter of every year.

And we basically stand behind our goal to continue to grow this business at mid-teens CAGR and we haven’t changed that target..

Okay, that – that’s helpful. And then just I guess, related, you talked about the fact that you’re confident this is a temporary pause in the semi side of your business.

Can you give us a feeling of particularly with the fabs, what kind of customer conversations you are having? Maybe I don’t know how much conversation you have with fab owners? But any commentary that would help us with the conviction that this is a temporary pause?.

Well, I’ll say a few things. Number one, there are many assets are been built around the world that are basically waiting to be equipped with equipment. We have a recent information about – Intel is going to start the high volume manufacturing of the 10 nanometer devices, which is new news and good news.

We look at other areas that we believe there is a pending investment in capacity, right? So we strongly believe that the long-term underlying demand drivers for the business are intact and strong. For that reason, we believe as we talk to our customers and also forecasters and end users that we’re talking about a temporary digestion.

Going back to what we said earlier, just a few quarters ago, everybody celebrated the semi WFE business being $35 billion. Now we’re in a new normal – in the new normal of about $45 million to $50 million. We are operating in a growing industry, and we expect the long-term viability and growth of this industry to be intact..

Very helpful. Thank you..

I’m showing no further questions in queue at this time. I’d like to turn the call back to Mr. Wasserman for closing remarks..

Thanks, everybody, for joining us today. Obviously, a challenging time for the same industry, we are very excited about the future. We continue to drive design wins. We have new technologies and products in the pipeline that will spur growth and leadership, and we’re committed to continue to invest in those strategic areas.

We’re looking forward to seeing many of you in the next quarter. Thank you..

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