Ladies and gentlemen, thank you for standing by and welcome to the Advanced Energy Industries Fourth Quarter 2020 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand today's conference over to your speaker, Mr.

Edwin Mok, Vice President of Strategic Marketing and Investor Relations. Thank you. Please go ahead, sir..

Thank you, operator. Good morning everyone. Welcome to Advance Energy's fourth quarter 2020 earnings conference call. With me today are Yuval Wasserman, our President and CEO; Paul Oldham, our Executive Vice President and CFO; and Brian Smith, our Director of Investor Relations.

If you have not seen our earnings press release, you can find it on our website at ir.advanced-energy.com. There you also find a slide presentation to follow along our discussion today. Before I begin, I would like to mention that AE will be participating at several investor conferences in the coming months.

As events occur, we will make that announcement. Let me remind you that today's call contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees for future performance.

Information concerning these risks and uncertainties is found in our filings with the SEC. All forward-looking statements are based on management's estimates, projections, and assumptions as of today, February 10th, 2020 and the company assumes no obligation to update them.

Long-term targets presented today, which include our aspirational goals and our long-term vision goals should not be interpreted in any respect as guidance.

On today's call, our financial results will be presented on a non-GAAP financial basis, unless otherwise specified, excluded from non-GAAP results, our amortization, stock compensation, integration and transition costs, unrealized foreign exchange gains or losses, and restriction items.

Detail explanation on our non-GAAP financial measures, as well as reconciliations between GAAP and non-GAAP measures can be found in a press release today. With that, let me pass the call to our President and CEO, Yuval Wasserman.

Yuval?.

Thank you, Edwin. Good morning, everyone and thank you for joining us on this call. Advanced Energy finished last year on a strong note with Q4 2020 revenue of $371 million, up 10% year-over-year, and solidly above our guidance midpoint non-GAAP EPS of $1.49 was at the top of our guidance range.

The fourth quarter results were driven by strong demand for our products across most of our markets and good execution in an increasingly dynamic operating environment. Service revenue again, set a record.

Our Q4 results built on a great year of financial performance despite the global coronavirus pandemic that presented all of us with extraordinary challenges. I'm extremely proud of our organization's response to the constant changes throughout the year, demonstrating AE's agility and operational excellence..

Thank you, Yuval and good morning everyone. Before I begin, please note that all financial measures presented today will be on a non-GAAP basis unless otherwise stated.

This quarter our non-GAAP results also exclude $5.2 million of restructuring costs, primarily related to the previously announced closure of our Shenzhen facility and $3.8 million in non-cash unrealized effects losses related to long-term lease and pension liabilities.

A reconciliation from GAAP to non-GAAP measures can be found in our press release issued earlier today. We delivered outstanding financial results in the fourth quarter with revenue above the midpoint of our guidance and non-GAAP earnings per share at the high end of our guidance range.

Despite the challenging environment, our team again executed very well delivering to strong customer demand, primarily in our semiconductor and industrial markets.

Combined with synergies and good cost control, we achieved our second highest quarter ever in operating income and cash flow generation and an annualized return on invested capital of over 20%. Fourth quarter revenue was $371 million, reflecting nearly 10% growth year-over-year, but down 5% sequentially from the record levels in Q3.

Sales in the semiconductor were $166 million, up 32% from last year and almost flat to last quarter. Our full year and second half 2020 growth outperformed the market and industry again, as we continue to extend our leadership in semi power.

Our R&D investments during the last downturn are yielding tangible results with multiple new product introductions and a strong pipeline of design wins. Looking forward, we expect semi demand to grow sequentially in the first quarter and further accelerate in Q2 on continued strength and foundry logic and increased demand in 3D NAND applications.

Data center computing revenue was $65 million, down sequentially as expected, as the market digestion that began in Q3 continued into the fourth quarter.

Looking forward, we expect cloud digestion to continue to impact our data center computing revenue in the near-term with increased investment and the benefit of new design wins driving higher revenues later in the year. Revenue from our industrial and medical markets grew 8% sequentially to $94 million.

The better than expected performance was driven by growth across several applications, including motion control, photonics, and thin film coatings. Medical revenues declined as expected from a strong Q3 due to critical care demand beginning to normalize.

Looking forward, we expect industrial and medical revenues to decline seasonally in Q1 versus Q4, but be well above the revenue level from a year ago. Near-term, the impacts from COVID will continue to pressure this market, but improved macro conditions should benefit our industrial applications over time.

Telecom and networking revenue was $46 million in the quarter, down slightly from Q3, but up 20% year-over-year. Overall, global 5G investments outside of China are expected to remain relatively muted in the near-term.

In addition, we expect our portfolio optimization actions to begin impacting revenues in this vertical as we pivot towards higher value applications. Non-GAAP gross margin for the quarter was 39.5%, down slightly from 39.8% last quarter on lower volume.

Year-over-year, gross margins increased 360 basis points, driven by material cost improvements, product mix, and accelerated synergy actions, including portfolio optimization and productivity improvements across our factories.

While we expect gross margin to decline modestly in Q1 due to lower volume and supply chain challenges, our planned synergy action should further improve gross margins over the next several quarters, enabling us to sustainably achieve or exceed our initial gross margin target of over 40%.

Non-GAAP operating expenses were $76.9 million, down $2 million from last quarter on lower variable expenses and timing of R&D project costs. Our team did a good job of controlling expenses during the quarter. As a result, operating margins for the quarter were 18.7%. Non-GAAP other expense was $2.3 million, including $1.3 million of interest expense.

We expect other expenses to remain in the $1.5 million to $2 million range. Our non-GAAP tax expense was $9.9 million or 14.7%. Looking forward, we expect the GAAP and non-GAAP tax rate to remain in the 15% range. Non-GAAP earnings for the quarter were $1.49 per share, down from $1.66 last quarter on lower revenue, but up 71% from $0.87 a year ago.

Turning to our full year 2020 financial results, revenue increased by 79% on an as-reported basis to a record $1.42 billion. On a pro forma basis, revenues grew 18% driven by 50% growth in semi and 46% growth in data center computing, partially offset by declines in industrial and telecom markets, primarily related to COVID and macro factors.

Our full year 2020 gross margin was 39%, approaching our initial long-term model of 40% after just the first full year of Artesyn integration. Gross profit dollars increased almost 70% from 2019. Leverage on sales, growth and synergies from the Artesyn acquisition resulted in operating income more than doubling to $244 million or 17.2% of sales.

As a result, 2020 non-GAAP EPS was a record $5.23 per share, up more than 110% from $2.44 in 2019. Turning now to the balance sheet, we ended the fourth quarter with cash and marketable securities of $483 million, up $51 million from Q3.

Inventory declined by $35 million and turns increase to 4.1 times doing parts of timing and actions taken to structurally improve by inventory management. This improvement was largely offset by a reduction in accounts payable on lower purchases and associated DPO of 50 days.

We expect both inventory and payables to increase in Q1, largely to manage supply chain constraints. Receivables decreased on lower sales and DSO rose slightly to 57 days. Total days of net working capital were 95, up two days from last quarter.

Operating cash flow from continuing operations was $67.1 million, just below the record level we generated last quarter. Full year operating cash flow was a record for the company at $202 million. Free cash flow from continuing operations was $56 million in Q4 and $166 million for the full year.

Capital expenditures for the quarter were $11.3 million and depreciation was $7.3 million. We continue to expect capital expenditures to be about 2% to 3% of sales. During the quarter, we also repaid $4.4 million of principal amortization on our debt, ending with total bank debt of $322 million and net cash of $161 million.

Our trailing 12-month gross debt leverage decreased to 1.2 times. During the quarter, we did not repurchase any stock. Finally, as announced last week, we declared a quarterly dividend of $0.10 per share, which will be paid to shareholders of record as of February 22nd. Now, let me turn to guidance.

Overall, we expect Q1 demand to remain strong, with sequential growth and semiconductor, partially offsetting seasonal declines in industrial and medical and the impact of portfolio optimization in telecom and networking. Data center computing revenues are expected to be at similar levels as Q4.

On a year-over-year basis, we expect solid growth across all our market verticals, except data center computing due to the market digestion following a strong ramp last year.

While we see strong demand for our products, the ongoing risks related to COVID-19 combined with global supply constraints in the electronics industry could impact our ability to fully meet this demand in the near-term. Factoring these risks into our forecast, we are guiding Q1 revenue to be $350 million plus or minus $15 million.

Based on lower volume and higher supply chain costs, we expect non-GAAP gross margins to be 38% to 39%. Operating expenses are expected to be up slightly on increased R&D investment. As a result, we expect non-GAAP earnings to be $1.25 per share, plus or minus $0.15.

Before I open for questions, I would like to share some of my perspective on our business. As our 2020 revenue growth demonstrated, Advanced Energy is well-positioned to benefit from the secular growth trends across our markets, while also gaining market share and expanding into new market opportunities.

The doubling of our earnings reflects solid execution by our team, our ability to deliver on our synergy plans, and the operating leverage in our model. Looking forward, we are as excited as ever about the demand prospects for our business, as we should have tailwinds across our markets in 2021.

Although the impacts of COVID and challenges in the global electronic supply chain may impact us over the next couple of quarters, we remain confident in both delivering growth in 2021 and meeting our new three-year aspirational goals of $1.65 billion in revenue, and $7.50 in non-GAAP EPS, and in achieving our long-term vision of $2.5 billion dollars in revenue and $12 earnings per share over time.

Finally, I would like to extend my personal thanks to Yuval for his vision, leadership, and commitment to Advanced Energy has he led the transformation and success of the company. I have personally enjoyed working with Yuval immensely over these last few years and wish him well in this new chapter of his life.

I equally look forward to working with Steve Kelly, and I'm confident in his ability to lead Advanced Energy to the next level of success. With that, let's take your questions.

Operator?.

Thank you. And your first question it's in the line of Mehdi Hosseini..

Yes. Thanks for taking my question and best of luck to you, Yuval. I have one question for Yuval and I want to better understand what instigated the change in the CEO role, understand the succession plan, but I'm kind of surprised given your aspirational goal. So, if you could provide us with some color will be great.

And then in terms of your report, how should I think about your traction in Japan, you talked about continue share gains, especially in semi cab? And I want to see how you're tracking with the share gain, specifically in the Japan region? Thank you..

Thank you, Mehdi. Regarding my decision to retire, it is really part of our standard succession planning process. Full disclosure, I'll be turning 67 years old this year and my plan is to spend more time with my family, friends, and pursue some of my personal interests.

I've been working very closely with the Board to identify the person that will have the right profile and attributes to continue to lead the company and pursue the strategy that we can put together. And as I said earlier, we found these attributes with Steve Kelly. We're excited about Steve joining the company.

We believe that he has all the capabilities, skills, experience, and track record, to do just that. Regarding our market share gains, as you know, 2020 was an amazing year for us. We introduced tremendous amount of products, I think, more than any other company in our space in 2020, while managing the company through COVID-19.

Some of these products are enabling, and especially, in the semi industry, some of these products will enable the next generation technology nodes, especially eVoS, MAXstream, the RFDS. We continue to gain traction, we continue to gain share. And one area that is really unique strength of Advanced Energy is our RF matching networks.

We are the world leader in RF matching, which is really critical for the ability to deliver effectively RF power into the plasma. This is another area as we continue to grow, get traction and gain share. Specifically regarding Asia, we continue to have good design wins in Asia, as I reported.

Specifically to Japan, we are an increasing player in Japan, with higher levels of traction in very advanced applications and beyond that, I cannot share any more information..

Got it. Thank you..

Thank you, Mehdi..

Your next question is from a line of Scott Graham with Rosenblatt Securities..

Yes, hi and good morning. And Yuval congratulations, I know, we've only known each other for a short while, but obviously, the track record here has been terrific and you've really transformed this company. So, congratulation and best of luck..

Thank you so much. Thank you very much..

So, I wanted to maybe talk about the three-year goals as well and maybe kind of piggyback onto the prior question. So, why would we be putting these out now in front of the change at the top, particularly since if I may that the EPS growth target, which I assume is for 2023 is a pretty healthy target.

Could you talk through why we would be releasing this today rather than maybe waiting a quarter for Steve to have full input?.

So, really, really good question. So, as I said earlier, the hiring of Steve was driven by a process that is a standard succession planning process. When we talk to The Street about updated aspirational goals three years out, we at that point, did not conclude on a successor.

So, in terms of timing, our decision to onboard Steve to the company came after our announcement of the aspirational goals. So, there's nothing shifty or tricky about it.

The decision about my timing of retirement was driven by identifying the right successor, right? And if we didn't identify the right successor, I probably will stay here for a longer period of time. So, the timing of my retirement was driven by identifying Steve.

Does that answer your question?.

Yes, it does. Yes, for the most part. If I could just sneak maybe one more in here. Again, you're hearing the not ask questions about the results, which I think are very straightforward. You had a nice quarter and all that, the guidance is very clear.

Again, maybe one on the longer term, so, you're way ahead of plan on the integration of Artesyn and your balance sheet is, kind of, back to on a net leverage basis, really being liquid. Does this change from you to Steve, slow down potentially, the M&A process as Steve kind of gets his head around everything.

Do you think there's a potential slowdown here? I was -- I guess I was thinking that 2021 would be a big year for M&A for you guys again?.

Yes..

What are your thoughts there?.

Yes. Good question. So let me let me give you a little bit of background, right. Board, the board has approved our strategic plan. The board has approved a long term goals. The board has approved the transition of CEO. And me and the board together decided on hiring Steve and bring Steve to the company.

Steve had a great opportunity to review the company strategy, to review our strategic goals, to review our aspirational goals both 3 years out and the 7 years out. And after doing that, excitedly decided to accept our offer and join the company. I do not expect to see any major deviation from our strategy going forward.

Our business model, our financial model, our operational model have proven themselves over the last 6 years to be extremely capable, yielding results normally ahead of plan. And, yes, we are very acquisitive, and we do have a very healthy balance sheet with a dry powder that will allow us to continue to pursue inorganic growth.

Steve has a great experience in his previous position at EMCOR to go and pursue inorganic growth, acquiring companies, effectively integrating them, increasing value and delivering really strong shareholder value.

So from my vantage point, and after talking to Steve during the process of hiring him, Steve is fully aligned with our long term strategy and our long term aspirational goals and, again, supported by the board. Last comment, Steve, and the management team compensation plans is linked directly to our long term goals and objectives..

That's very clear. Yuval, again, congratulations, thank you for the answer and great job in transforming this company..

Thank you very much. I really appreciate that..

Your next question is from the line of Tom Diffely of D.A. Davidson..

Yes, congratulations from me as well. Yuval clearly--.

Thank you, Tom..

…a nice turnaround at the beginning of the story, and then really impressive growth in recent years, so a job well done..

Thank you, Tom..

My pleasure.

Looking at the end markets, it sounds like it drop off a bit in industrial medical, is that purely just seasonality? Is there anything beyond that? And then adding to that, on the telecom networking side, it sounds like you're trimming your portfolio a bit any more color on that would be helpful?.

Sure. So yes, indeed, the medical industrial definitely seasonality. And also, our medical business was really strongly affected by COVID-19. As you recall, last year, we saw a burst of demand coming from critical care equipment that required our power supplies, when the whole world was chasing ventilators and critical equipment.

At the same time, we saw a decline in elective procedures that was a little bit of headwind. Just to remind everybody, three years ago, our medical business was zero, right. So we have entered the medical industry just a few years ago, and it started growing and expanding and is part of our strategy.

Going forward, we expect to see continuing growth in the medical space, driven by design wins and entrance into new applications, just like the one we announced about entering into more diagnostic, very sophisticated diagnostic equipment. And also, I'm very excited about the acquisition of Versatile Power.

If you recall in our -- in analyst day about 18 months ago, we talked about an area in medical that we are going to pursue which is RF power supplies for medical applications. Versatile Power brings to us deep knowledge experience and capabilities in RF power supplies are used for highly invasive procedures.

The reason we acquired Versatile Power was to accelerate our time to market, right. They are a bonafide player supplying RF power supplies for one of the leading companies in the world in these procedures.

And now as a result of this acquisition, they brought us the scope, and we bring them the scale to accelerate the growth and to leverage on the global infrastructure that AE has. In general industrial, you should expect to see our business operating and growing at GDP plus.

As we said earlier, we are pursuing a portfolio optimization strategy that is a combination of in some areas, terminating end of life in products and some other areas, increased prices in some other areas, shifting the focus to higher value add products, so that the mix will result in shifting of the gross margin bell curve to the right and we are making great progress.

The area that we mentioned earlier today in telecom and networking is an area that is more of a focus area in 2021. Although, our strategy is to go across the board, implementing a classical 80-20 process to weed out the -- as I call the not very healthy products and continued to shift to high value solutions.

Did I miss anything, Tom?.

No, that's helpful.

Maybe just as a quick follow-up, Paul, can you give us a feeling for how much lingering cost there is from COVID, both in your OpEx and maybe even in your supply chain?.

Yes, we've talked about that kind of running in the 50 basis points range, and it bounces around a little bit more a little bit less.

As I mentioned in our prepared remarks, we are seeing some headwinds on supply chain costs specifically related to some of the logistics and shortages as a key part due to higher global demand and in part due to the fact that COVID still has many suppliers running below full capacity. So it is continues to be a bit of a headwind focus in that range..

Okay. Thank you..

Yes..

Your next question is from a line of Quinn Bolton of Needham & Company..

Thanks for taking my question, and Yuval, congratulations on your retirement, and thanks for your leadership over the past several years.

Paul, wanted to start with you on your comments about the costs in the supply chain, potentially some shortages, wondering if those component shortages are limiting your ability to meet demand in the first quarter? Or does your operations team able to get all of the semiconductor components you need for the power supplies to meet customer demand? And then I've got a follow up question..

Yes, I think when we talked about the guidance; we tried to be pretty open that our demand continues to be strong. But we do see risks in the operations around the supply chain, just getting enough parts. Obviously, that's something you're always dealing with and continue to deal with. It's a daily battle.

But we tried to have our guidance reflect the environment we're operating in which, it's not us it's a broad set of -- there is a broad problem across the microelectronics industry and electronics industry. And in the near term, we think that will impact our ability to ship product and that's contemplated in the numbers we have put out..

So, the forecasts and the guidance are risk adjusted to reflect that Quinn. And we have the benefit of reporting later in the month. So we have I think a better visibility of what's happening in the market. And it's not across everything in the supply chain.

It's really a few components, just a few components, IC components that affect us, the automotive industry and other industries. Obviously, you need all the bonds to be able to build the product. So the good news, we have really strong demand. And as I said earlier, our semi demand is growing at Q1 and we expect it to accelerate in Q2.

Short term, our guidance reflects the risk adjustment related to shortage in ICs..

Great.

Just a follow-up on that, just wondering in your conversations with supply chain, how long do you think that they will be capacity constrained, if they can take probably six to nine months sometimes to bring on additional way for supply, so I'm wondering if you think it could be an issue, you're facing for most of year? And then my second question was going to be just around, Yuval that you update on the 48-volt power shelf business, it sounds like you're securing some additional design wins.

But just wondering if you could give some more color on the 48 volt power shelf opportunity and sort of design win status? Thank you..

Yes, it's a good question, Quinn. Obviously, that's a difficult one to answer. That clearly everybody top to bottom in the supply chain working together to get in more parts. And of course, the demand continues to grow, as you've all said. So we -- this isn't going to be solved in a week, but we don't see it as a long-term issue either.

So, we'll be monitoring it closely. We saw something a little similar last year with COVID onset, where it took us a couple of quarters to catch up, if you will in the factory to the demand. So we'll see how it goes, but clearly this is a big area of focus for us and I think for the whole industry.

Quinn regarding the 48 volts, these are two separate wins. A number one is a new hyperscale customer for our 48-volt power shelf. And as you recall, the power shelf is a really a power supply that goes into rack and support multiple servers, right.

The second design win is a board mount in 48 volts that convert from 48 volts to 12 volts DC-DC converter. And this one is designed into the server itself, not in the shelf. So, these are two -- in a way you can look at that as two different application spaces.

We have been designing 48 modules in the past in the telecom networking space for many years. And for that reason, we have the expertise, the technologies and the experience that we can put that very quickly into data center application space. It takes time to go to mass production.

But this wins really prove our technology and support our long-term targets of adding an annualized revenue of over $100 million incremental by 2023..

Excellent. Thank you and congratulations again, Yuval..

Thank you, Quinn..

Your next question is from the line of Krish Sankar of Cowen and Company. .

Hey, hi. Thanks for taking my question. And Yuval congrats on the solid term at AE..

Thank you so much..

Thank you. And I have two questions. First was on semis. You spoke about sequential growth in Q1 and Q2.

Is it mainly a function of NAND spending moving through the system? Or are you seeing like other aspects of WFE giving you the strength in Q1 and Q2?.

I think it's the semi market drivers that you all see in terms of both NAND and foundry. But at the same time, we see a few -- we have a few unique drivers to drive our business in semi. As you know, we have grown our RF matching business faster than the market with new products that we launched to the market, we expect to see growth.

And also, we continue to gain share in cross-selling the embedded power supplies into the $300 million SAM of the embedded power application space in the semi industry. So we have multiple drivers that will grow our business.

But I can tell you that from our vantage point, right, and the information we gather, demand is going to be, I mean, strong in Q1 and accelerating in Q2. And obviously, as I mentioned earlier, everybody's challenge right now is going to be based on, can we all get the IC components to deliver those products on time to market.

But the demand is strong and very excited. We expect 2021, as we said earlier, in general to be a growth year for us. Obviously, what we see right now in the semi space is an accelerated growth in demand..

Got it. Very helpfully Yuval. And then a quick follow-up. Today you gave some color on data center and the dilution that you're seeing there. I think you mentioned in your prepared comments, it should pick up later this year.

I'm kind of curious where -- what is the catalyst or leading indicator you're looking for? Is it more like IT enterprise budgets improving or what are the key drivers for data center to recover in the second half?.

Well, you know, the industry is launching new microprocessors and adopting new microprocessors. So a lot of the buying demand in data centers, it's driven by the microprocessors or the GPUs that are being launched to the industry. Now, we are in a very unique position, Krish.

We came from zero just two years ago, and have grown the business as you saw a growth rate in 2020 was 250%. As we came from nothing to becoming a viable bonafide leading player, displacing incumbents and gaining market share. We are -- as a laggard, we do not have the presence among all the hyperscale -- the Tier 1 and Tier 2 hyperscalers.

And for that reason, we saw this surge in growth in 2020. But at the same time as the industry go through digestion, our presence is still small, right. So we expect the industry to grow later this year. And we expect our growth rate to continue a few years out, as we transition our design wins into mass production into growth.

And as we reported, we have additional design wins at top tier hyperscalers that we expect to convert to revenue later this year..

Got it. Got it. Thanks Yuval, and congrats again for everything you've done for AE..

Thank you, Krish. Appreciate it..

Your next question is from the line of Amanda Scarnati of Citi..

Hi, good morning. First off, Yuval congratulations and enjoy retirement..

Thank you, Amanda..

You're welcome.

I just want to follow-up on that DC digestion topic that you're just talking about? Should we think about this as sort of similar to semis where we see a big step up in inventory builds in data center is followed by a large period of digestion? Or is this really just a matter of you're still early on in building out this market and it's going to be -- not be going forward? So which way should we look at this cyclicality or just lumpiness and get started?.

Yes, it's a good question, Amanda. I think it's both. There is definitely digestion in the market. As you heard from Edwin, I think, last time we talked publicly the timing of Intel, transition to Intel's new technology affected the whole market, the transition two new microprocessors effective buying decisions.

And also these are very large investments, the capital investment, and they tend to have this very static behavior of large investment digestion followed by large investment digestion. Now, if we were -- in our case, if we were present in all the players today, right, we will see less fluctuations, because not all of them are lumpy at the same time.

The fact is, we have only a third of the market and growing, make us a little bit more susceptible to the expansion and contraction as we continue to grow. As we continue to migrate our design wins into mass production, obviously, we will be more diversified and less susceptible to the lumpiness..

Great. And then switching over to the semi side.

Can you talk about any sort of pull-ins that you might be seeing or unusual demand on the OEM side and how if at all, you're handicapping SMIC and China generally in your guidance?.

I don't think that we saw any abnormal behavior in the semi business. The way we operate with our key customers in semi is based on just in time. They pulled our product from the hub when they need them. They give us demand signals and indicators going forward.

And what we see right now, as I said earlier, is real demand growth that is right now on a short-term affected by the availability of IC components that we all need, including the automotive industry, we all need to build products.

Regarding SMIC, honestly, right now as we look at SMIC, we cannot comment on SMIC and I think everybody including our customer is trying to get license to ship product to SMIC. So I don't think at this stage, we can comment on that..

Thank you..

Your next question is from a line Pavel Molchanov of Raymond James..

Yes. Thanks for taking the question. One of the things that's obviously happened since the last earnings calls is the Biden's inauguration and the prospect of, trade normalization between the US and China. To the extent that you have you faced any regulatory or other pressure in the Chinese market as a US company.

I'm curious what -- what kind of change would be meaningful from AEIS perspective specifically?.

Thanks, Pavel. So I don't -- I don't think that you're going to see any change at AEIS as a result of the change in administration.

The one thing that we are really proud about is our decision two and a half years ago, to diversify our operation around the world with a focus on business continuity strategy that led us to build our factory in Malaysia, way before even everybody's talked about elections.

And the whole idea was to ensure that, we have the ability and the nimbleness to address geopolitical changes, political changes, IP risks, et cetera.

So the fact that we have our global footprint, the way we have it today, allows us to be extremely flexible, and to make a decision together with our customers, where to build our product, and where to ship it.

So you can imagine, we can ship -- we can make in China to ship to China, we can make outside of China to ship to outside of China, and it's all in full alignment with our customers. And obviously with alignment, full alignment with local regulatory requirements.

So, one of the one of the reasons that we have done so well last year, through the challenges of COVID-19 was this ability to be nimble and flexible and agile. So right now, we're not freaking out about the change in administration. We also believe is going to take time for any decision to take effect.

And if it did -- if it does, we have the agility to respond to it..

Okay. That's helpful. Follow up question on the dividend. At the at the time that you guys were setting the rate, $0.10 a quarter, obviously, the stocks was quite a bit lower than it is today. So, the yield now is, barely 0.3%.

Are you ready at this stage to commit to a progressive dividend policy? You don't need to say how big the increases will be, but just will there be a plan to raise the dividends? You know, with earnings or some kind of annual roadmap over time?.

Yes, it's a good question. Obviously, that's a decision that we would revisit over time, and the board will revisit, but when we introduce the program, we actually said that there's room for that to grow. So, obviously, there's no specifics around that, but there's certainly room for that to grow over time..

I'll leave it there. Thank you, guys..

Thank you..

Your next question is in the line of Paretosh Misra of BCM..

Great. Good morning. Thanks, guys.

So just wanted to circle back from this news flow about chip shortage, and was just wondering, if there's any rule advanced energy can play in terms of helping customers increase production? So anything that basically that can be done from the power supply side that can boost their productivity?.

Well, obviously, obviously, if customers decide, if end use customers decide to add capacity to manage the demand, the increase in demand for IC devices, we will be benefiting from me from that because we -- power supplies enable these semiconductor processing, tools and technologies.

We cannot influence the market, but we can respond to the market quickly.

We were monitoring, look at, over the last 38 years, as I've been in semi industry, we've been there before, when the market enter into, shortage of components, and in general, what you see is an increase in effort, and sometimes in cost of getting components through various channels.

And at the same time, increase in capacity growth, where -- with some companies that are able to respond quickly and increase capacity, really gear up, get equipment and increase the capacity of the fab.

So, it's a very dynamic environment we've been there before, we have a very nimble and sophisticated supply chain management team, and processes that will allow us to recover..

Thanks. Thanks for all these details.

And I guess, the follow-up for Paul, for modeling purposes, any changes to income statement items like depreciation SG&A, tax rate, relative to Q4 that you think is worth flagging, as we think about Q1 and beyond?.

Yes. We tried to comment on that in the prepared remarks. But there should, just I'll say, generally speaking, a lot of change. We talked about, OpEx up slightly. We talked about the tax rate staying in the 15% range. So no, no, no big changes in those -- in those various line items..

Thanks, Paul. And, again, congrats to you, all for -- all that you achieved in your career and all the best for the next phase in your life. Thank you very much..

Thank you very much, Paretosh..

Thank you. Our next question comes from a line of Weston Twigg of KeyBanc Capital Markets..

Hey, thanks for taking the question. Real quickly, the semi cap demand sounds extraordinarily strong in the first half of the year; you said it's accelerating in Q2. And I'm just wondering, I don't know what your visibility is? I know it's typically not more than a quarter or two.

But regarding the second half, do you think that acceleration continues? Or do you see any signs of moderation from your customers?.

Well, I don't think we are, we have that visibility. And I cannot comment on the second half. In general, as you heard from our partners and customers, the expectation in general consensus is 2021 is going to be a growth here, an exciting year in semi. We agree with that. We support that.

The one thing that became clear to us, as we speak, is that this demand in Q1 will accelerate in Q2 and we have enough demand, signals that that allow us to stay that. The demand is strong in Q1 growing in q2. And as I said earlier, it's all about the ability to, to deliver on time, on this demand.

And it has to do with the shortage we talked about, I can't comment on the second half, I can tell you again, 2020 year 2021 will be a growth year for the industry and will be a growth year for Advanced Energy..

Okay. That's helpful.

And then just finally, virtual power, can you tell us how much of a revenue contributor that is?.

It's -- well, it's very small. The acquisition was an example of tuck-in acquisitions of unique technology, unique product with unique capabilities. That brings a very special relationship with one of the leading surgical equipment companies in the world.

And from that point on, we expect to see growth due to our scale and footprint and market outreach..

Okay. That's helpful. Thank you..

Thank you..

Thank you. And that does conclude the Q&A portion of today's call. I will now turn the call back over to Yuval Wasserman for any closing remarks..

So, I’d like to thank everybody for your support and engagement and partnership over the last six years or six and a half years. It's been a pleasure to get to know you all and work with -- and working with you. I'm excited about the future of a company. I'm excited about Steve Kelly joining us.

He brings all the attributes to be a great success or to take the company to the next level, while I'm fading away and pursuing my personal interest. I will remain in the company until March 2022 to support the board and Steve. Thank you again, and then have a nice day..

Thank you. This does conclude today's conference call. You may now disconnect..