Advanced Energy Industries, Inc. Price & Performance (AEIS)

On today's call, our financial results are presented on a non GAAP financial basis unless otherwise specified. Excluding from our non GAAP results or stock compensation, amortization, acquisition related costs facility expansion and relocation costs, restructuring and asset impairment charges and unrealized foreign exchange gains or loss.

Please refer to our detailed reconciliation between GAAP and non GAAP results in our press release today. With that, let me pass the call to our President and CEO, Steve Kelly. Thanks, Edwin. Good afternoon, everyone. And thanks for joining the call. Today, and I will discuss our fourth quarter performance, highlights from 2024, Our first quarter outlook and our 2025 priorities. We delivered strong financial results in the fourth quarter, Revenue of $415,000,000 exceeded the high end of our guidance range and return the company to year over year growth. Pockets of higher demand in semiconductor, as well as strength in data center computing drove the outperformance. Fourth quarter gross margin was 38%. Our best performance in three years. [indiscernible] benefited from higher volume, as well as improved factory efficiency. Fourth quarter earnings of $1.3 per share above our guidance and grew year on year. Before providing more details on the fourth quarter, I'd like to review our 2024 performance.

From a financial standpoint, we hit a low point in the first quarter of twenty twenty four. Due largely to soft market conditions. [indiscernible] our revenue improved every quarter. [indiscernible] rebounded strongly in the second quarter as our design wins ramped to volume spurred by demand for AI, compute, Data center demand continued to increase in the second half and remains very strong. Semiconductor revenue also grew over the course of the year as we capitalize on a variety of upside opportunities.

In [indiscernible] telecom and networking markets were headwinds to revenue in 2024. The I and M market underperformed. Due to lackluster demand, as well as elevated inventory levels at both distributors and end customers. As expected, telecom and networking revenue reverted to more normal levels after a very strong 2023. In 2024, we made major strides on the new product and design win fronts. We launched 35 new platform products in [indiscernible] In addition, we developed many custom and modified standard products in close cooperation with our customers. In semiconductor, we continue to experience strong customer pull for our best in class EVOS Everest and Navax products. We ship more than two fifty qualification units by the end of last year. And are experiencing continued strong demand this year. In 2024, we began to reap the benefits of our move to a modular architecture. The typical development cycle time for new derivative products has been compressed. To less than four months. Which is enabling our customers to deliver solutions faster ever before. Another benefit is that shorter development cycle times are allowing us to engage in more opportunities. In Industrial and Medical, our momentum on the design win front continued to build.

Fueled by a healthy stream of new products, and an improved go to market strategy. Our new customer friendly website is generating more opportunities and helping us to convert more of those opportunities into wins. In the data center computing market, we accelerated our technology roadmap twenty twenty four. And will continue to do so in 2025. This acceleration is tied to the increasing rack power requirements Of each new generation of AI [indiscernible] We are working more closely with customers to develop technology which meets not just the needs of their next generation of products, but also the generation after that Key factors in our data center success are the ability to move fast, as well as deep expertise in the design and manufacturing of highly reliable products with industry leading power density, and efficiency. In operations, we made significant progress on our 15 to five factory consolidation plan, A key part of our goal to move gross margin above 40%. On the M and A front, we acquired Arity, which brought critical GaN based high voltage power technology and expertise the AE, We are delighted with the acquisition and have already integrated Airdi technology into some of our flagship products.

Now I'll provide more color on the fourth quarter. In semiconductor, fourth quarter revenue increased 15% sequentially. Well ahead of plan across multiple customers, New product shipments were strong. Driven by evaluation and qualification activity for EVOS Everest, [indiscernible] At Semicon Korea next week, we will launch another leadership product, a matchless RF delivery system based on the Everest modular architecture. This new product called EVOLVE offers millisecond tuning multilevel pulsing, a small footprint, and no moving parts. We shipped Evolve qualification units in December and expect that technology, to drive further gains for AE in both deposition [indiscernible] In data center computing, fourth quarter revenue grew 10% sequentially, driven by strength in hyperscale, [indiscernible] and we see continued strong demand moving into 2025. Fourth quarter Industrial and Medical revenue was sequentially flat. As customers and distributors continue to work down inventories. Industrial and medical new product and design win activity was robust. We launched 12 new INM products including a number of configurable power supplies. We won new designs in Test and Measurement, Industrial Production, [indiscernible] and aerospace and defense. In the fourth quarter, we launched a new program with SAGR one of our largest distributors. To ensure speedy delivery of fully configured prototypes.

Now I'd like to touch on our outlook for 2025. We expect first half twenty twenty five demand to be roughly equal to second half twenty twenty four demand. We believe that our full year 2025 semiconductor revenue will grow faster than market due largely to initial new product ramps the second half. We expect data center demand to remain robust in 2025 based on projected AI investments as well as customer adoption of our high value solutions. The industrial and medical market, We believe that we are close to a bottom and expect to begin growing again as early as the second quarter of this year. I'd like to close by touching on our 2025 First, we will maintain our strong new product and design win momentum. We continue to invest heavily in R and D, and go to market initiatives. And expect those investments to drive increased share as market conditions improve. Second, we will largely complete our factory consolidation plan. Which will give us a much better foundation to move gross margin above Finally, We plan to use our strong balance sheet to pursue strategic acquisitions which will accelerate our growth [indiscernible] and broaden our technology portfolio.

At our recent Analyst Day event, we outlined a 02/1930 target model which calls for doubling our revenue increasing earnings by four times and expanding gross margin to 43%. With a diverse set of attractive end markets, strong customer relationships, best in class technology, and the highly capable factory network we have high confidence in our ability to achieve those long term goals. Paul will now provide more detailed financial information. Thank you, Steve.

Good afternoon, everyone. In the fourth quarter, we executed well deliver both revenue and earnings above our guidance. Upside in the semiconductor and data center computing markets more than offset ongoing sluggishness in industrial and medical. We continue to execute our manufacturing cost improvement initiatives and delivered gross margin at 38%. The third consecutive quarter of sequential increase. Lastly, cash flow from operations was $83,000,000 just below last year's record Q4. Overall, despite a challenging start to 2024, and an ongoing inventory correction in the industrial and medical market, we finished the year on a strong note. Delivering Q4 year over year growth in revenue, gross margin and earnings. Now let's review our financial results in more detail. Fourth quarter total revenue of $450,000,000 increased 11% sequentially and 3% year over year. Semiconductor revenue was $227,000,000 up 15% from Q3 and 19% from last year. With growth across products, and service We were pleased with our ability to respond quickly and capture additional year end upside. Industrial Medical revenue of $77,000,000 was about flat quarter over quarter and down year over year.

Channel inventories continued to be above target level as markets conditions remain soft. Data center computing revenue was $89,000,000 up 10% sequentially and 41% year over year.

Of new high power products Excluding the revenue from premium recoveries during the supply chain crisis, Data center product revenue reached a new record Telecom and networking revenue was $23,000,000 down year over year but up 20% sequentially as we ramped production of a new program that was pushed out from Q3. Quarter gross margin was 38%, up 170 basis points sequentially due to higher volume, favorable product mix and improved manufacturing efficiency. Gross margins in Q4 twenty twenty four were roughly 200 basis points higher than 2023 levels at a similar revenue run rate as we are seeing initial benefits of our gross margin improvement initiatives and improved mix take effect. Operating expenses were $102,000,000 up 5% from last quarter driven largely by higher sales and incentive related expenses and timing of a few items that we do not expect to repeat in Q1. Operating margin for the quarter was 13.5%, up 300 basis points from last quarter and 120 basis points from last year, demonstrating the margin leverage of our model. Depreciation for the quarter was $11,000,000 and our adjusted EBITDA was $67,000,000 Other income was $1,500,000 down as expected from Q3 on lower cash balances following the prepayment of our $345,000,000 term loan in late Q3.

Our non GAAP tax rate for the quarter was 14.3% on favorable year end discrete items. As a result, fourth quarter earnings were $1.3 per share, up from $0.98 per share in the previous quarter and $1.24 a year ago. Turning now to the balance sheet. Total cash increased by $65,000,000 to $722,000,000 with net cash of $157,000,000 In the fourth quarter, we delivered close to record cash flow from continuing operations of $83,000,000 Inventory days came down to 126 in Q4 from 143 in Q3 and inventory turns improved to 2.9 times. DSO decreased to fifty seven days from sixty two days largely due to timing of revenue and DPO remained flat at fifty days. As a result, net working capital decreased sequentially from one hundred and fifty five one hundred and thirty three days. During the quarter, we invested $13,000,000 in CapEx, and paid $4,000,000 in dividends. Before I move on to guidance, let me briefly review our full year results. In 2024, we delivered revenue of $1,480,000,000 down 10% year over year in a challenging market environment. The decline was driven by lower revenue in both the industrial medical telecom networking markets, which were down 3353% respectively.

These results came after record years in 2023, followed by unprecedented industry wide inventory corrections in 2024. On the other hand, from the trough in 2023 achieved its highest level in two years in the fourth quarter.

In addition, data center revenues grew 14% reached record product revenue levels exiting the year. During 2024, we focused on positioning ourselves for faster earnings growth as markets recover. We reduced both fixed and variable costs, and accelerated actions to optimize our manufacturing footprint. As a result, despite lower revenues in 2024, our non GAAP gross margin was up 20 basis points year over year, and we exited the year at the highest gross margin since Q2 of twenty twenty one.

Our increased investment in R and D delivered significant wave of new prop new platforms which have the potential to drive significant growth in revenue and market share over the next several years. This investment was more than offset by lower SG and A as we drove actions to improve efficiency and scale. As a result, full year 2024 non GAAP earnings were $3.71 per share and our adjusted EBITDA was $193,000,000 2024 CapEx was $57,000,000 or 3.8% of revenue. We expect 2025 CapEx to run at or above these levels as we invest in ramping several new platforms, and execute our plan to scale the company to support long term growth, However, longer term, CapEx should normalize back to historical levels as we complete these investments. Turning now to our guidance. We expect Q1 revenue to be approximately $392,000,000 plus or minus $20,000,000 The sequential change is mostly driven by the outperformance in semiconductor and data center in Q4, as well as seasonal factors that we discussed on our last call. While lower than Q4, our Q1 guidance is substantially above last year and higher than previous expectations.

We expect Q1 gross margin to be approximately 37% to 37.5%, down slightly quarter over quarter on lower volume. We are pleased with our improvement in gross margin over the past several quarters, and expect to see additional improvements in the second half as we complete the product transfer process and close our China factory by mid year.

We expect operating expenses to come down to $90,000,000 to $100,000,000 on sequentially lower sales related costs and timing of expenses from year end. Partially offset by ongoing investments in R and D and other critical programs. We expect Q1 other income to remain in the $12,000,000 range.

As a reminder, our tax rate is expected to increase to around the 19% range beginning in Q1 due to the Pillar two global minimum tax regime, As a result, we expect Q1 non GAAP earnings to be $1.03 per share plus or minus $0.25 Let me provide some concluding comments. Looking back at 2024, we're encouraged by the progress we made in executing our strategy. Including delivering a record number of new products, capturing new design wins across our markets, improving gross margins and growing our cash position. Looking forward to 2025, we're excited about the opportunities ahead. While the market environment continues to be mixed, with limited visibility to the second half, We believe ongoing progress on our strategic initiatives will define our future. And position us for outsized growth in revenue and earnings over time. We're driving adoption of our next generation semiconductor platforms leveraging design wins and channel investment to capitalize as the industrial and medical market covers and maximizing high end opportunities in AI driven high powered data center applications. Executing our factory consolidation plan will allow us to further lower manufacturing cost, Enable scale and achieve our gross margin goals. Finally, our strong balance sheet and cash flow give us ample capacity to make strategic acquisitions to add scope, and expand our market position. [indiscernible] Thank you.

We will now be conducting a question and answer session. And the Hi there. Good afternoon. Thanks, congratulations and thanks for letting us ask.

A few questions. Maybe first question, just thinking about sort of the first half versus second half last year, commentary, I think that might put semi equipment maybe in the vicinity of sort of 10% year over year growth. And I know you talked about potential to outgrow WFE, I recall, from earlier in the prepared remarks. So is that 10% year over year even with an acceleration in the back half as you [indiscernible] That maybe the right frame of reference in terms of the outperformance?

Hey, Brian. This is Steve. What we said basically is we We were able to take advantage of opportunities in Q4 to really maximize the revenue in semiconductor So there were two real highlights in Q4. One was their semiconductor revenue and the second was [indiscernible] revenue. As we move into Q1, we're seeing the semiconductor demand moderate [indiscernible] And again, that's after a record Q4.

As we move forward in the year, of 2025, we haven't given specific guidance. But we think the second half is better than the first half. Largely because many of our Our new products are beginning to ramp the volume in the second half.

And that's what's driving our confidence in our ability to outperform the market in 2025.

Maybe just to drill down at one level, clearly some of your new new design wins for EVOS and other next gen supplies and matches should layer in over time. Tied to future technology transitions and equipment platforms. But can you just clarify or confirm whether some of your early designs are closely aligned with the NAND market? Or there clearly is some pickup in upgrade activity that's very etch and deposition focused. How do you see that contributing equipment outlook this year?

Yes, it's interesting because what we're finding is we've shipped over two fifty of these evaluation units in Everest, EVOS and NAVX, and that was through December. Of last year. Obviously, the demand continues into this year. But they're finding homes across all leading edge processes. The issue is customers Using the older technology, you just can't get the job done, right? They're losing throughput, and they're losing yield based on old technologies. So that's forcing them to move to our new technologies. And that's the same challenge whether you're talking about NAND, DRAM, or leading edge logic. So we're seeing equal interest from from all segments in those technologies.

Okay, got it. So maybe I could just ask one more question. It's actually kind of financial related. There's clearly been a lot of talk and reporting about broader weakness in industrial This isn't so much on your revenue side, but actually in terms of gross margins. I think semi cap companies tend to be classified as industrial markets. For chip companies. And so do you actually feel pretty good about the cost point and availability of chips you buy and integrate into your power subsystems, are there opportunities to actually lock in favorable pricing in supply that supports your gross margin expansion targets?

It's a great question. It's an issue we deal with every day, practically. And I would say, I tried to give a general Advanced. I think looking back over the last three or four years, we've divided our suppliers into two camps. One are the suppliers that [indiscernible] During the shortages and the other campus suppliers didn't support us very well at all. And I think we've basically focused more business with suppliers who have shown the degree of support we're going to need over time. Now when it comes to pricing, I think there are market forces at work. And certainly, speaking generally, we see prices coming down but the willingness to engage in price discussions varies from supplier to supplier. But obviously, it's a it's a positive for us if the supplier is willing to move on price to keep us more competitive.

Okay, great. Thank you.

Yes, Brian, I'll just add on to that. I think at this point, it's a little too early as we think about our gross margins plan to count on, I'll say material improvements. As Steve said, there's a lot of discussions as you know, material costs are up, excluding premiums, they're up where they've been historically. So this is an area we're working on and could potentially be a tailwind for us. Wind to gross margins over the year, but I think it's a little early to bake that in.

Okay.

And the next question comes from the line of Chris Sankar with TD Cowen. Please proceed with your question. Yes.

Hi. Thanks for taking my question. Steve, first on the traction you're seeing on [indiscernible] I'm curious like you said it's across all markets. Specifically on the edge side, where are you seeing more traction? Is it on the conductive etch or is it more on the dielectric etch? Where you're seeing more traction? And then I had a follow-up.

Yes, we're seeing traction in both areas. Because you have similar challenges mean, the basic challenge we're seeing whether it's conductor or dielectric is The ability to drill [indiscernible] with minimum damage to the wafer. So it gets to throughput and yield. And so what these technologies allow our customers to do is to increase their etch rate and to lower the defect rate as they implement these new leading edge processes. And so I would say, in general, We've seen strong edges from both conductor etch and dielectric etch applications.

I mean, is one better than the other or they kind of similar? Between conductor and dielectric?

No, I think the difference really is power levels. So when the conductor etch doesn't require the same power level we see in dielectric, but it's the same basic technique that we bring to our customers.

Got you. And then a quick follow-up, you kind of mentioned about strength in the second half in [indiscernible] I'm kind of curious what gives you the confidence, is it more I mean, I'm assuming you don't have the visibility, but is it more just design win traction pipeline or something else that's going on?

Yes, Chris. It's really design wins.

We've had some much activity across our customer base over the last that we think some of this is going to start bubbling up into revenue in the second half this year. So that's what gives us the confidence. I think the only stand we've made is we think we can grow faster than market. Don't know exactly what the market is going to be in the second half. But what gives us that confidence is our new products, plus the fact that the etch and depth intensity for these leading edge processes continues to increase.

Fair enough. Thanks for that, Steve. Thank you very much. And the next question comes from the line of Rob Mason with [indiscernible] Hello, Rob. Your line is now live.

Okay. The next question comes from the line of Scott Gram with Deepord Research.

Please proceed with your question. Hey, good afternoon. Congratulations on terrific quarter. Understand your thinking around the share gains you've spelled out the whys, the three big products I'm just curious is if you're thinking kind of like more half oriented, which I think the entire market is on semi, Would the share gains be more pronounced in the second half than the first as a result Yes. I think you're referring to semiconductor in particular, right, on the share gains? Yes.

I thought I said that, but I didn't.

Yes.

Yes. Okay. So I think when it comes to market share in semiconductor, That takes time, right? Because there's a lot of puts and takes as you go through a year. And I think We commented on Initial ramps of our new products in the second half And that's really what gives us confidence that we can grow second half from the first half in semiconductor. I think what you'll see is our market share will increase over the coming three to five years. Across the board in plasma processes for semiconductor Based on the strength of these EVOS and EVOS technologies, it's going to take some time to materialize. That's just the nature of of market share in semiconductor.

Understood.

Thank you. I'm going to two other questions, if I may, that industrial and medical that's been a very difficult business for you throughout the year. It looked like it improved that much in the fourth quarter.

I mean, I think I asked this question last time. If you were to pull out what your best guess was on the destocking aspects both of those markets kind of what would the year over year revenue look like? It's if you now Yes, it's kind of a tough question to answer because we don't have perfect visibility. But I think one way to think about it is you look at the industrial and medical market historically, you don't see the magnitude of change we've seen. This year. And it might be more in the 5% to 10% range depending on the economic conditions or what's happening. We've seen much bigger gyrations than that And if you listen to us and many of our peers and customers, you could say that it's down 30% to 50% depending on who you are. We're probably on the better side of that. But I think you can attribute that delta largely to the inventory situation, which was caused by the supply chain shortage which extended lead times and caused people to buy inventory based on those lead times. Now that those lead lead times have collapsed, they're working through that inventory. So it's hard to handicap I think you can look at some historical levels to get to get some perspective on it.

Okay.

Yes. And maybe just a few more comments. We think we're we're just about through the corrections because this is our sixth quarter of correction.

In Industrial Medical. And so what we've done over the past year and a half is redouble our efforts in that area to increase our design win and to really set us up to gain market share As the industrial medical market [indiscernible] And we think that's going to happen, start happening this year. And we think when we come out into 2026, We're going to have higher market share than we did last year in Industrial Medical.

Okay. Just the last one, I hope you don't mind my sneaking in, is that we've been waiting on an acquisition in, INM for some time. You went to the debt markets almost, I guess it was like five quarters ago and I think you've been waiting on an opportunity as well.

Is it that that those businesses just need more critical mass? I'm thinking that the answer to that is no, because you're in so many different areas. But what is your perspective on that? Is it critical mass thing because I know you're saying that Your [indiscernible] down 30% to 50 I'm not seeing those numbers. So I was just kind of wondering from that perspective, is it possibly also a critical mass thing?

Yes. Maybe just comment on the industrial medical market because I think I'll answer your question maybe in an indirect way. Industrial Medical market basically is very sticky. So right now, it's a very fragmented and sticky market. So we can win an outsized number of new designs and still not move the needle as much as we would like. So that's why we're pursuing M and A in the industrial medical space. It's to build out further critical mass become more important to our customers essentially. Hurdle to buying companies right now is valuation. So we're clearly in the hunting mode got a good pipeline of candidates. And I think With the passage of time, I think some of our targets should become more realistic on valuation at that point, we could do a deal.

That's great.

You're welcome.

And the next question comes from the line of James Ricchiuti with Needham and Company.

Hi, thanks. Paul, you may have mentioned this, but on the sequential improvement in gross margin, were you able or did you attribute quantify how much of that came from the facilities consolidation actions or maybe you could just give us a sense as to how much of an impact that might have had? It sounds like it was mix mainly, but Yes. I actually think it's a combination. Obviously, we saw improvement in Q3 from the facility. We saw further improvement on the facility side [indiscernible] in Q4. We also benefited from volumes as you saw seen. And we got a little bit of help from Nick. So I think if you look at how we think about the contributors to gross margin improvement, of course, the one that's most in our control is the facility cost reduction.

We believe we're on track there. And we talked about 200 basis points of improvement related to that. I think broadly speaking, we've achieved at least half of that. Already to date, maybe a little bit more. And the next leg of improvement comes in the second half of this year as we way and we feel very good about our progress there. I think mix is helping us a little bit. Obviously, we had just some better product mix this last quarter. But one of the elements of mix that's helping us is that [indiscernible] Our mix in data center is actually better. We've talked about as we focused on more differentiated solutions. And so while that market is performing well, it's not nearly the drag it's been historically. And then on a year over year basis, we certainly saw, say, net improvement in margins, which we would attribute to mix in that regard. And then lastly, we're pleased that the improvement from margin is tracking right on our model of roughly 100 basis points of improvement for every $50,000,000 of quarterly revenue. So everything seems to be coming together. Obviously, as our new products start to have a bigger impact that will contribute to mix as we exit this year and more pronounced perhaps in 2026.

But we feel very good about the gross margin progress across the key elements.

Got it. And if I may follow-up just on the two areas of the non semi business that I think been focusing on. You guys do sound a little bit more optimistic about the continued strength in data centers. Is that a fair way to characterize it? And in terms of your line of sight, when you talk about demand remaining fairly robust through the year, Is that how much of a change is that versus a few months ago? Based on what you're talking to customers? Yes, I think you're right, Jim.

We have changed our position on data center. We become more positive since the last earnings call. Based on what's in front of us, what we're hearing from our customers, also what they're saying in public, I think there's going to be a lot of money spent on data center this year into next and we're in a very good position to continue grow that business over the course of 2025.

Yes. And Jim, maybe I'll add. If you kind of look at our guidance And the comments earlier, we are more optimistic on 2025. We would expect the data center market to grow and for us to grow with that. When you look at what we've said across our other markets, within semi we will grow faster than the market. The market we think is our operating assumption is flattish if you look at WFE. So new products will help us grow faster than that. And industrial and medical, while we think we're bottoming right now, there will clearly be some recovery in that market this year as early as the end of Q2. When you put that all together, we think the full year is going to be up high single digits. And obviously, data center is is a part of that.

Got it. That's helpful. Thank you.

And the next question comes from the line of Rob Mason with Baird. Please proceed.

Yes, good afternoon.

Hear me?

Hey, Rob. Yes. Sorry about that earlier. Just wanted to Steve, I mean, could you talk about any is there any distinction between what you're seeing in industrial versus medical just in terms of the underlying demand? And the maybe the willingness or pace at which some of these design wins that you've locked down can start to move into production.

I think most of my comments apply equally to industrial medical. I would say the big difference between the two is that medical our medical revenue tends to be concentrated in some large customers And those large customers, many of them are working through inventory issues.

But the demand in medical, the inputs we're getting from our customers, demand is picking up.

And that's encouraging for their ability to eat through the inventories they currently have and start placing orders again. I think in industrial, it's a wide variety of customers, some big ones, some small ones. A lot of medium sized customers. And so it's so it's a very broad market, thousands of customers literally So I think the ability for that market to recover is probably a little bit better just because it's so broad.

As a follow-up, I don't think this has come up yet, but I was just, could you address your manufacturing footprint with respect to potential tariffs, Mexico and obviously you're exiting China, but in my understanding, within Mexico, a lot of those products don't shift directly to The U. S. They may go elsewhere, maybe stay within Mexico, but to the extent your customers have to deal with that. Are you seeing any need to move where you ship and hence maybe where you produce or is that part of the conversation?

Let me make a few general comments on that and then turn it over to Paul to make some other additional comments. But I think there are basically two areas that we look at. One is our manufacturing footprint, And the second is our supply chain. And so from a footprint standpoint, we started pivoting out of of China several years ago. It will be out of China from a manufacturing standpoint by June of this year. So That's a check mark. The second issue is Mexicale. So the first thing to understand about Mexicali is it represents less than 10% of our [indiscernible] And you're right, most shipments are to non U. S. Locations. That said, we still have shipments coming into The U. S. So we're looking for ways mitigate any potential tariffs. And ultimately, If we can't mitigate it, then we could build these products in other factories in Southeast Asia. There's nothing magical about that. From a supply chain standpoint, we've had a multiyear effort to reduce dependence on Chinese suppliers. And that's also motivated by some of our customers making that request. So at this point, we have very limited imports from China into The U. S. It's primarily for engineering builds And in spare parts for our service centers.

Yes, Rob. The only thing I'd add to that is it's a pretty fluid situation. So as Steve said, I think we have mitigating strategies relative [indiscernible] So we'll monitor the situation. Obviously, we're learning more about it. To be clear, there's nothing embedded in our guidance related tariffs at this point given that it's a pretty new and fluid issue. But again, I think on balance, it shouldn't be a large impact and there's a variety of strategies to mitigate that impact for us.

Understood.

Thank you.

And the next question comes from the line of Joe Quachrocki with Please proceed with your question.

Yes. Thanks for taking the questions. On the semi side, just trying to understand the commentary for 2025.

Your base case is kind of thinking that WFE is relatively flat and you should outgrow that. Just given the new product launches in the second half.

I guess, are you seeing customers add any sort of kind of additional inventory after kind of working down buffer inventory over the last several quarters? And then I guess can you remind us on the new products that you're launching Is there any sort of ASP dynamics that we should think about relative to the prior generation products?

Yes, this is Steve. I'll make a few comments and Paul will chime in. It's hard to make comments about what our customers are doing. They don't always tell exactly where the products are going. [indiscernible] Don't know. But all we know is that demand was was good. We saw growth last year and Q4 was our best quarter since Q4 of 'twenty two. So we're pretty happy with that. We think we're at a point now where the purchase of our customer are pretty close to what they need near term. So I don't we're dealing with that many inventory issues What was your second question? I'm sorry.

Yes, just trying to understand as you think about the growth drivers, the ASP, dynamic for EVOS, Everest, etcetera, just is that a higher ASP than the prior generation product to think about embedding that in your line of sight to revenue growth?

Yes. In general, the new products bring more value to the customer. They're more capable and they have a higher price tag.

Okay.

On the Industrial and Medical side, I think last quarter you talked about normalizing channel late 4Q, early this quarter. It sounds like maybe that's kind of pushed out. Is that the right way to think about it? And then what gives you confidence that we are at the bottom?

Yes. I think what we said was there's potential for us to start recovering in Q2 of this year. So yes, I think our statement was at a quarter. What gives us confidence in that is that we've seen the deceleration in the business slowdown. And so when you look at what happened in 2024, every quarter Industrial Medical was down from the previous quarter. Until Q4, Q4 was basically flat to Q3. And so that's why Paul said we think we're bottoming And at some point, we think we're going to start recovering that business. The other part that's important is to realize that half of our business in industrial medical goes through distribution. So we've had three quarters now where the sell into distribution has been less than the sell through. And so that's brought our inventory down steadily in the distribution channel. And that's I think that's one of the better indicators we have that we're about to turn upward again. But it's always difficult to to time it precisely.

Got it. Thank you.

And the next question comes from the line of Steve Barger with KeyBanc Capital Markets. Proceed with your question. Thanks. Good evening.

Steve, thinking about getting to outgrowth or share gains, Back in October, you talked about a 30% conversion rate from funnel to design wins. Does it feel like there's been any change in either the rate of additions to the funnel or maybe your win rate post election or post inauguration?

Yes. I think our win rate is going up and that that's because we've seen our pipeline increase over the course of 2024, the pipeline increased by about 20% in dollar terms. And our conversion rate is still strong, 30% to 35%. That's the right ballpark. I think probably where we're falling short is the the conversion of design wins into revenue And so I think that's probably a function of the market Our customers working through inventory before they They focus on some of the new products I think with time, those wins will turn into revenue. That's why I think as the market turns we're going to gain in an outsized way as the market recovers in industrial medical.

So when you have a design win, do you basically consider that in the bank and it's just timing until that does convert? Or do you ever have a design win go stale essentially?

Oh, yes. Yes, we have a lot of design wins that go stale. Then we have some that outperform and some where the timing either gets pulled in or pushed out. And so what we do to qualify design win, we need significant order from the customer and not just a statement that they've designed us in. So I think the design wins are legitimate. But sometimes the customer may not be successful in their market, or there may be some other extraneous factors that constrain the win from TrainNet to revenue.

Got it.

And Paul, when you were answering a data center question earlier, I think you said you expect full year revenue for the company to be up high single digits. So first, did I hear that correctly? And then if I did, when you think about that growth in the context of your own margin Yes. And Jen, first I did that is what I said is if you take the sum of our comments by market, it implies high single digit growth for the company. So you did hear that correctly.

And I think what you're poking at if data center is growing faster or faster than the other markets, how does that imply our margins implications? The way we've looked at it, and I think I've commented on this in the past, is that we've been able to close the gap in data center relative to the company average. So it doesn't average the company up, but the gap gap is lower And as we've done our modeling, we've kind of said that mix in any given quarter can impact us up to 50 basis points When we look at what's in the hopper relative to [indiscernible] mix within data center, the product improvements there, volumes, and these other things that we're driving we believe we can still get to our gross margin objectives even if data center is stronger than the other markets in the coming year.

Got it. That's That's great color. Well, and I guess to that point, I mean, you've always talked about incremental operating contribution margin in the I think, 40, mid-40s, like so you would expect the same?

Yes, that's right. Our long term model is for operating margins is 35% to 45%. And so yes, we're saying in this window that we would expect to see that same level of operating margin leverage.

And if I can just sneak in a quick modeling question. From your comments, it sounds like you expect another year over year decline for Industrial Medical in 1Q. Do you think revenue could be up sequentially from kind of the $78,000,000 you've averaged over the last three quarters? Yes.

I don't think we were that specific. I think we were said it's bottoming.

So we would characterize it as bouncing along the bottom here. And we said that we could see revenue growth as early as Q2. Again, that's a little hard to handicap but that's how we think about it. And I think that would imply a stronger second half than the first half in any regard in industrial and Medicare.

Okay.

The next question comes from the line of Mehdi Hasani with Susquehanna.

Hi. This is Mehul Shmabov asking on behalf of Mehul Husaini. Thank you for taking my My first question is regarding OpEx. Can you offer some color on your OpEx growth for 2025 relative to your anticipated revenue growth for the year as well as against your 2024 OpEx? And second, is the pickup in your semi business reflecting an inventory refresh by your OEM customers? Or is it more a reflection of material growth across the OEMs and into And then I have a quick follow-up.

Yes. Thanks for asking the question. On OpEx, OpEx was up a little bit in the fourth quarter basically on higher volumes and incentive related costs. So we expect that to revert back in the first quarter down into the $98,000,000 to $100,000,000 range. As you look forward into the year, we do expect to see that number grow sequentially over time. We talked about it growing kind of in the $1,500,000 to $2,000,000 range per quarter. As we implement salary changes, there's inflation, clearly we to continue to invest in all these new product launches and we see some timing of program expenses affect that. But if you look at the full year, we would expect to grow operating expenses less than half of the revenue growth rate. And that's the way the best way to look at the annual number.

Great. And then regarding the semi do you see that more do you see that reflecting more of the inventory refresh from your OEMs? Or is that just more growth across OEMs anticipation of their own revenue growth? Just any color there would be really appreciated.

Yes, we really don't know. I think there's a variety of reasons we formed in fourth quarter. Some customers I'm sure were refreshing inventory, but we think most of the demand was was there to match the demand from our customers. So we think we've reached an equilibrium point in semiconductor after after a couple of years of adjustment. So we're pretty happy where we're at from a demand standpoint. Standpoint. Again, this is the best car we've had in semi since Q4 of of twenty twenty two.

So yes, I think we're well positioned.

Great. Thank you. That's very helpful. And lastly, just Any color you can offer on trends you're seeing within your networking business? Thank you.

Yes.

Our networking business we call it the telecom and networking business, [indiscernible] We've really sharpened our focus there in the past few years We've pruned a lot of the business because it wasn't reaching our margin targets. So what we see there today is it's a pretty flat business for us now. We don't see a lot of growth moving forward. So most of the action today is going to be in semiconductor, [indiscernible] [indiscernible] In telecom and network networking is fine, but it's not a growth business for us.

Got it. Thank you.

And ladies and gentlemen, that does conclude the question and answer session. And that also concludes today's teleconference. We thank you for your