Participants

Edwin Mok; Vice President of Strategic Marketing; Advanced Energy Industries Inc

Stephen Kelley; President, Chief Executive Officer, Director; Advanced Energy Industries Inc

Paul Oldham; Chief Financial Officer, Executive Vice President; Advanced Energy Industries Inc

Joe Quatrochi; Analyst; Wells Fargo

Steve Barger; Analyst; KeyBanc Capital Markets

Krish Sankar; Analyst; TD Cowen

James Ricchiuti; Analyst; Needham & Co

Scott Graham; Analyst; Seaport Research Partners

Mark Miller; Analyst; Benchmark

Presentation

Edwin Mok

Welcome to Advanced Energy first-quarter 2024 earnings conference call. With me today are Steve Kelley, our President and CEO; and Paul Oldham, our Executive Vice President and CFO.
You can find our earnings press release and presentation on our website at ir.advancedenergy.com. Let me remind you that today's call contains forward-looking statements. They 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 can be found in our SEC filings. All forward-looking statements are based on management's estimates as of today, May 1, 2024, and the company assumes no obligation to update them. Any targets beyond the current quarter presented today should not be interpreted as guidance.
On today's call, our financial results are presented on a non-GAAP financial basis unless otherwise specified. Excluded from non-GAAP results are stock compensation, amortization, acquisition-related costs, restructuring and impairment charges, and unrealized foreign exchange gains or losses.
A detailed reconciliation between GAAP and non-GAAP measures can be found in today's press release. With that, let me pass the call to our President and CEO, Steve Kelley.

Stephen Kelley

Thanks, Edwin. Good afternoon, everyone, and thanks for joining the call. We had a challenging first quarter, although semiconductor revenue was stronger than expected revenue in our other markets was weaker than forecasted.
We believe that our revenue shortfall was due largely to pockets of inventory, which developed at OEMs and distributors after supply chain constraints were resolved towards the end of 2023. Although we expected inventory correction, we underestimated its magnitude.
Despite these issues, we were still able to achieve our gross margin target and deliver earnings within our guidance range. Our outlook for the remainder of 2024 is more encouraging than the second quarter.
We expect revenue to rebound sequentially, driven mostly by strength in the data center computing market. We also expect to grow in the second half of the year as semiconductor revenue gradually improves. The industrial medical market begins to normalize in the data center computing market continues to strengthen.
Although we are carefully controlling spending, we continue to invest in R&D. We are moving full speed ahead, bringing new products and technologies to our customers. Our design win pipeline has never been stronger, and we expect to make meaningful share gains as market conditions improve.
On the manufacturing front, we are executing our consolidation plan taking advantage of lower factory loading to speed, product transfers and qualifications. We expect these efforts to benefit gross margin beginning in the second half of 2024 as lower manufacturing costs start to flow through our P&L. We are operating in a dynamic environment this year.
So we need to remain nimble, able to respond quickly to upside demand to do that we are maintaining strategic piece parts inventory as well as appropriate factory staffing levels. In addition, we plan to build some finished goods inventory to take advantage of opened manufacturing capacity.
Now I'll provide some color on each of our markets. First quarter semiconductor revenue was slightly better than expected, helped by growth in value-added services.
On the design win front, I'm pleased to report that we have secured our first major wins for both the Bose and Everest next-generation plasma power products. Over the course of this year, we expect to announce more major design wins, which we believe will drive share gains in the coming years. We have already shipped more than 50 E., Bose and EVEREST systems and customers have requested that we shipped another 150 systems before year end.
We are putting a lot of effort into keeping up with the extraordinary level of demand for these new technologies, which enable our customers to operate much more efficiently at leading-edge nodes. The modular architecture of Everest has dramatically shortened the development cycle time for derivative products.
Our engineering teams have become more productive, enabling our customers to accelerate the introduction of next-generation edge in deposition systems for both iDose and EVEREST. We took a modular approach, leveraging our broad portfolio of high voltage, low power RF and advanced control technologies to bring best in class solutions to our customers, advanced energy development teams from around the world work closely together to make these products a reality.
Moving to industrial medical, where first quarter revenue was impacted by inventory corrections. Design activity in industrial and medical is extremely robust. After three years of dealing with supply chain shortages, our customers are now squarely focused on product innovation and differentiation. Design wins have been broad-based, including major first quarter wins in medical imaging, electrosurgery and warehouse automation.
In March, we launched our evergreen high-power platform which features best in class efficiency and power density. Target applications include aerospace and defense, fast charging stations, industrial lasers and large capital equipment.
Our new industrial medical products are supported by focused sales teams and our new digital platform, which now includes e-commerce capability. In addition, our quick-turn engineering team works closely with customers to modify and customize our standard products to meet specific application needs.
Moving on to data center computing, where first quarter revenue was slightly below expectation due to the push-out of a single hyperscale program into the later quarters of the year. We are forecasting a significant rebound in second quarter revenue, driven by increased hyperscale AI investments in our share gains in enterprise AI servers, telecom and networking revenue decreased sequentially, reduced infrastructure investment and high inventory levels constrained revenue. We expect these challenging market conditions to persist throughout 2024.
Now let me summarize our outlook. We expect the first quarter to be our revenue trough for the year. In the second quarter, we expected a surge in data center computing demand. We'll drive sequential revenue growth as we move into the second half our outlook remains largely unchanged from our last earnings call.
This is based on our expectation that conditions in the semiconductor, industrial and medical markets will gradually improve, driving sequential quarterly growth customers are embracing our new technologies and products and design activity is at an all-time high. We expect that these design wins will drive market share gains in our target markets. Our manufacturing consolidation plan is on track, giving us confidence in our ability to move gross margins above 40% as markets recover.
Finally, with a strong balance sheet, we continue to look for inorganic growth opportunities which make strategic in financial sense.
Looking forward, we believe that the investments we are making in R&D and manufacturing, coupled with potential acquisitions will accelerate our medium and long-term profitable growth. Paul will now provide more detailed financial information.

Paul Oldham

Thank you, Steve, and good afternoon, everyone. First quarter revenue declined 19% quarter over quarter, driven by a challenging demand environment in our non-semi markets despite the lower volumes. Healthy product mix and solid execution allowed us to meet our gross margin target and the steps we took to control our operating expenses enabled us to deliver earnings per share of $0.58, which was within our guidance.
The market environment in the first quarter was characterized by higher than expected customer inventory destocking and reduced demand at telecom and networking customers. Semiconductor revenue in Q1 was ahead of our expectations.
Backlog declined modestly from the end of last year and was in line with our target of slightly more than a quarter of revenue. At the same time, this was the second consecutive quarter of higher bookings, which supports our Q2 outlook for a sequential revenue rebound.
Based on some early signs of improvement, we believe our Q1 revenue will be the trough and expect business levels to increase over the remainder of the year.
Now let's review our financial results in more detail. Revenue in the semiconductor market was $180 million, down 6% sequentially and 7% year over year. Results were slightly better than our guidance with sequential growth in services, we continue to expect Q2 revenues around this level, but the second half stronger than the first half.
Revenue in the industrial and medical market was $83 million, down 23% from last quarter and 32% from last year. The impact of shorter lead times and increased inventory throughout the channel resulted in higher than expected levels of inventory rebalancing at both our OEMs and distributors. We expect revenues to remain around this level until inventories begin to normalize in the second half.
Data center computing revenue was $42 million, down 33% sequentially and 30% year over year. Although we had expected lower revenue this quarter, we also saw a single hyperscale program push out into the remainder of the year.
However, based on recent order rates driven by increased investments in AI across multiple programs, we expect revenues to meaningfully rebound starting in the second quarter, telecom and networking revenue declined 48% sequentially and over 50% year over year to $22 million following a very strong 2023 in which customers replenished inventories following the supply chain crisis.
However, demand in Q1 was even lower than our expectations due to further weakening in both the telecom and networking markets, increasing the impact of inventory destocking. We expect these market conditions to persist through the end of the year. First quarter gross margin was 35.1%, down 60 basis points from last quarter and 170 basis points from last year.
Results were in line with our expectations despite the lower volume due to favorable product mix and actions we are taking to lower costs. We expect Q2 gross margins to be at a similar level on higher volumes, but less favorable mix. In the second half, we continued to expect gross margins to increase, driven by our ongoing manufacturing consolidation activities, higher volumes and reduced material costs.
Operating expenses were $93.5 million, down from last quarter and below our target Q1 was the fifth consecutive quarter that we reduced operating spending, which is down more than 7% from Q4 of 2020 to despite the inflationary environment, we will continue to focus on controlling our discretionary spending while investing to support new product and platform activities.
Throughout the year, operating income was $21 million for the quarter, depreciation was $10 million and our adjusted EBITDA was $31 million. Other income was $5 million at the high end of our guidance, with interest income higher than interest expense.
Consistent with Q4, we expect other income to remain around 5 million per quarter until the swap instrument against our outstanding term loan expires in September of this year. For Q1, our non-GAAP tax rate was 17.7% higher than our target of 16% due to timing and geographic mix of profits. We expect the tax rate to remain in the 17% to 18% range for the balance of the year. First quarter EPS was $0.58 per share compared to $1.24 in both the previous and year-ago quarters.
Turning now to the balance sheet. Total cash and investments at the end of the first quarter was $1.02 billion with net cash of $106 million. Cash flow from continuing operations was $8 million, timing of previous year incentive payments, higher inventory on strategic investments and lower revenue impacted our cash flow.
Overall, inventory increased $25 million or 7.5% sequentially, resulting in inventory days of 153 in Q1. Dpo increased from 49 days in Q4 to 58 days in Q1 receivables declined by $35 million on lower revenue and DSO was up slightly to 68 days. During the first quarter, we invested $16.6 million in CapEx. We continued to expect that 2024 CapEx will be approximately 4% of sales. We also made debt principal payments of $5 million and paid $3.8 million in dividends.
Turning now to our guidance, we expect second quarter revenue to rebound from a Q1 trough, driven primarily by a recovery in data center computing. We expect semiconductor revenues to be at similar levels to the first quarter, and we expect industrial and medical and telecom and networking markets to be approximately flat as customers continue to rebalance their inventories.
As a result, we are forecasting our second quarter revenue to be approximately $350 million, plus or minus 20 million. We expect gross margin in Q2 to remain at around Q1 levels. On higher volumes and improved costs, offset by less favorable mix. We expect Q2 operating expenses to increase $1 million to $2 million sequentially due primarily to increased R&D investments to support new product launches and investments to scale the company.
As a result, we expect Q2 non-GAAP earnings per share to be $0.73 plus or minus $0.25 before opening it up for Q&A, I want to highlight a few important points.
Overall, we continue to invest and set priorities with the long-term view of the market while managing prudently, given near-term dynamics despite the lower results in Q1, we expect revenues to improve sequentially in Q2. In addition, we expect the second half to grow largely as we had previously projected, driven by incremental revenue across several programs and timing of market improvement.
Looking beyond this year, we believe we are focused on the right markets with strong customer pull for our highly differentiated products and technologies. As a result, we expect to deliver strong growth and market share gains as markets recover.
Second, we believe earnings for the year will continue to be largely in line with our previous projections, we are executing our plan to improve our gross margins and profitability. We continue to expect gross margins to expand in the second half of the year, reaching our target of 37.5% to 38% by the end of the year as revenue improves.
In addition, we expect operating expenses to grow modestly over the next several quarters as we manage our cost structure while investing in new products and scale to drive future growth. Beyond this year, we believe we are on track to achieve our gross margin goal of over 40% as quarterly revenue recovers to the mid 400 million range and deliver higher earnings than our prior peak as markets recover.
Finally, we have a strong balance sheet and are well-positioned to execute acquisitions that make financial and strategic sense.
With that, we'll take your questions. Operator?

Question and Answer Session

Operator

(Operator Instructions)
Joe Quatrochi, Wells Fargo.

Joe Quatrochi

Yes. Thanks for taking the question. Maybe first, just kind of a broadly speaking, maybe ex semiconductor, just trying to understand it sounds like your inventory destocking was a bit more than expected. So can you talk about just your level of visibility forward and what gives you confidence that we're kind of reaching a or finding a endpoint of some of the inventory destocking as we move through the year?

Stephen Kelley

Yes, Joe, this is Steve. I'll make a few comments.
You're right.
In Q1, the destocking was a little bit more significant than we originally forecasted. There are two main areas of weakness, one was telecom and networking and second was industrial, medical, telecom and networking.
Basically what happened was a lot of inventory built up at the end of the year and then we think there's also a demand shift that we saw in Q1. And so we don't expect the telecom and networking market to come back this year.
So the real focus for us is on industrial medical and with industrial medical, it's a little bit more difficult because there are a lot more customers. Telecom and networking is just a few big customers until end industrial medical as many customers. What makes that group somewhat unique is that they suffered the most over the last three years during the supply chain issues.
So they recovered late, probably most people recovered from supply chain issues late '23, early '24. So what those customers encountered over the past three years were very long lead times a shift in mentality from just-in-time to just-in-case procurement.
And then all of a sudden, you saw some lead time contraction in the first quarter of this year. So that's really what caused these pockets of inventory. Some of those are in distribution, but many of those are at the end customer and sometimes at their customers.
And so that's why it's more difficult to track the exact level of inventory in industrial medical. And the good news is we've already seen recovery. We're starting to see recovery on the medical side, and we're seeing some encouraging signs of move into Q2 and Q3 on medical industrial, based on our discussions with customers with distributors and also analyzing trends in resales as well as orders from from direct customers.
We think that's going to start to normalize in either Q3 or Q4 this year. And as we look back, we saw the correction starting Q4 in industrial medical, Q4 23 and so we're in the third quarter that correction today. And that's why we think we'll be out of this sometime in Q3 or Q4 of this year.

Joe Quatrochi

Got it. That's helpful color. And as a follow-up, you guys are talking obviously data center computing increasing sequentially driving the revenue growth there. And you mentioned a rebound on hyperscale AI investments. Can you talk about what's driving that? Because obviously, investment in AI servers has been strong for several quarters and maybe you guys haven't quite as participated in that as much as others in the market so what's changing is it market share gains?
Is that your customer specific customers that are spending more as something related to your other component availability that pulls you in? Can you just talk about that.

Paul Oldham

Yes. Yes, I'd be happy to. You know, we think what happened was our customers first had to focus on brick and mortar. They had to build the data center infrastructure, then they had to secure the modules and primarily within video chips in them. And then they go after power supplies and other things they need to complete the data centers.
So I think I think we're okay with regards to our market share in the in the data center, in fact, we're actually selling and differentiating based on reliability efficiency and power density. And those three factors become much more important with artificial intelligence servers. Our reliability is extremely important because these servers are very costly compared to conventional servers.
The efficiency and power density metrics are very important because these IAI racks consume three to five times the power of conventional rigs. So we think we're in a good position. The other thing that's helping us is our execution. So we've been able to execute on some some near term requirements from our customers, and we think that provides some differentiation. In addition to our technical attributes.

Operator

Steve Barger, KeyBanc Capital Markets.

Steve Barger

Thanks. The comment about design activity being at an all-time high. Are you measuring that by starts or by dollar amount of activity or some other metric? And can you quantify where design is in is on a year over year basis?

Stephen Kelley

Yes, we will be happy to give you some figures of merit. When we look at 2023, our design win funnel, the dollar value in the funnel increased 50% just for the industrial medical part of our business.
And as I look to our semiconductor part of the business, our metrics, our more focused on major design wins and I talked in the opening about the progress we're making with our egos and Everest platforms, the fact that we shipped 50 those platforms already and have demand for another 150 of those platforms before the end of this year is very significant.
It means that our customers have looked at the initial units that we shipped to them and they want more. And so what we're seeing is that these units are going into not just our customers' laboratories, but also into into end user wafer fabs.
And so there's there's a race right now to be included as the process or the tool of record for the next super node, which is two nanometer and also to be included in the most advanced memory processes, whether it's DRAM or NAND. So I think we're really good shape there, and we'll see that market share increase in semiconductor based on our major design wins that we're currently working on this year?

Steve Barger

Yes, that is super encouraging. Are you ready for high-volume manufacturing for Evo Syniverse if it came to that?

Stephen Kelley

Yes, it's a great question. So so we will have two manufacturing sites for iDose and Everest. The one we have today is in Malaysia and Penang, and we're also in the process of building a second factory in Thailand. I mentioned in previous calls, that will come online in the third quarter of next year.
And the first products we're introducing there will be plasma power products that will be both Everest and some of our high running products. So I think we're in good shape. We have two very solid manufacturing sites for Eva and Everest in. I think the ramp could be more pronounced than the normal given the strong demand we've seen this year.

Steve Barger

Got it. And then for my follow up or maybe really my second follow-up.
I know it's hard to model a trough, and I don't want to parse your words too closely, but when you predicted 2Q revenue rebound, I noticed the low end of the guide is not far from 1Q, which I would just call more flat. Can you talk confidence in the rebound and whether you're leaning towards low middle or high based on what you can see today?

Stephen Kelley

Well, I would say, once burned twice shy. So I think I'd take Curragh for guidance for Q2 is relatively conservative. What we've seen basically in the data center side is a surge in orders. So where we're basically working as hard as we can to fill those orders this quarter. So I think that's very secure. And for the rest of the business, we're basically modeling flat, which is pretty low to begin with.

Steve Barger

Understood. Thanks.

Operator

Krish Sankar, TD Cowen.

Krish Sankar

Yes, hi. Thanks for taking my question. On your other question on on your semi revenues have been kind of bouncing around the $180 million plus or minus $10 million to $15 million range for like almost five quarters now and it can be done to went through a cyclical downturn.
And you know your customers were destocking of the real question is I'm just trying to wonder like, you know, I understand we might get the cyclical rebound, but it's really the two drivers for semi revenues when it comes. And then the CapEx starts flowing through? Or do you think there are other vectors within that that can help you drive semi revenues better than kind of just where we've been?

Stephen Kelley

Yes, Krish, I think one of the bigger drivers over the past year has been trailing-edge logic, right? I think that's been a big part of the TAM in semiconductor equipment. So we've been fortunate to be a part of that. Obviously, demand demand has been low for the last 18 months and D-Ram, we've also been suffering there.
So yes, I think what we see moving forward, Krish, is in the second half, we're expecting to see some mild recovery begin for D-Ram manufacturing and also for leading-edge logic. And then we expect things to accelerate in 2025 as net incomes comes back online. So that's a that's our current outlook on the products we've been producing for years, then we layer on top of that, the demand for e-books and Everest for the leading-edge memory and logic processes. So we think 2025 is going to be a real good year for us.

Krish Sankar

That is just my follow-up. I had one more question for Paul. After that, when do you expect to see a lagging edge semi to rebound?

Stephen Kelley

Okay. I'll go and take that question. The it's very difficult to say I think the way we think about lagging edge is there's China and non-China lagging edge. And I think for non-China lagging edge, things have been in a trough for a while. It's difficult to predict when that's going to come back. So we're kind of in a wait-and-see mode. I think it's similar in China. The China demand based on what we've seen from our customers is still reasonably strong, and we'll have to see how that develops in the coming quarters.

Krish Sankar

Body that had a quick follow-up for all of, you know, it kind of from the questioning of the gross margin has been stuck in this range in the 35 plus or minus. You're talking about getting like now to 53 hundred basis points higher exiting this year. And in the past, you spoke about premium pricing that as a headwind is going to become a tailwind. But obviously, volumes fell through is some gross margin rebound, predominantly volume-driven and manufacturing costs shutting down factories? Or did you ever see any of the premium pricing are being captured? And also, do you expect calendar 22 exit rates for revenues to be 400 million a quarter?

Paul Oldham

Yes. So good questions on the on the gross margin, the first thing I'd say is we're pretty pleased that we were able to defend the gross margins of 35% on down revenue. And I think that's a function of we had we had good mix, but we're also starting to see some of the benefit of some of our manufacturing costs actions.
And we think that will sort of be in the same range in Q two as we see revenues come back to roughly the $350 million and the mix kind of shifts back to where it was before. But as we look towards the end of the year, the big thing I think that's changing on is first, we are starting to see the benefit of more of our manufacturing consolidation activity. It's a transition.
We're moving products from one site to another, which means we have to build up on the second site before we can take products out of the first site. And so we start to see the benefits of that really come in towards the latter part of this year.
That's worth just I say, on a general basis, 100 basis points of the improvement, you're right, getting higher volume probably is another 100 basis points of that. And our model, as we mentioned last quarter is that that comes in at about 400 million of revenue.
So we said we we think we're on track to the same projections we had last quarter, which means generally we see we see that 400 million within range by the end of the year. The last piece is the material costs and a lot of the benefit that we've seen has already come through. As you recall, if you go back four or five quarters that was running 300 basis points of bad news to gross margin that's been trending down is down into the 50 basis points or so.
And we expect that to largely wash through in the next quarter. So I think the material cost in terms of the premiums is largely getting back into a normal range. We always have some the some fits and starts with the piece part here or there. So I think that's getting largely back to normal. Now it's coming down to our manufacturing cost improvements, recovery in volumes and then over a longer period of time.
Our portfolio improvements, our new products, Steve talked about the design wins we're seeing both in industrial and medical and in semi with our egos and Everest, all those should contribute to better margins.
Also make one other comment, and that is, as we see the data center market recovering, as Steve mentioned, that's driven by a lot of the AI investment that really demands the capabilities that we've been focused on.
As you recall, we've had a more selective strategy there to focus where customers value our differentiation and and are willing to pay for that. So while margins in that part of the market, you know, aren't as strong as the others, they're much better than they used to be because of where we focused. And so I think that's also helping us as we go forward as well, where figures will look.

Krish Sankar

Very helpful. Thanks.

Operator

James Ricchiuti, Needham & Co.

James Ricchiuti

Thanks. Good afternoon.
As we look out to the second half and see more of these markets beginning to recover, a question about OpEx. You mean what kind of OpEx will be required to support the higher revenues? Do you see a need? It sounds like your you guys are increasing R&D spend, but just in general, as we think about OpEx and the markets recovering?

Paul Oldham

Yes, I think a good way to think about that, Jim, is that on We guided to $1 million to $2 million higher in Q2 to I think based as volumes pick up, we'll see some a little bit of variable costs continue to accelerate our efforts on getting these new products qualified. So probably reasonable to think about a similar increase in each of the next couple of quarters.
And I think that's lower than maybe we talked about earlier because we've taken some near term actions to help mitigate the growth of spending on as we get all these new products and everything else out into the market. So that's probably the way to think about a similar increase in Q3 and Q4 relative to kind of the guidance we gave in Q2.

James Ricchiuti

Got it. Hey, Steve, I wanted to go back to some of the commentary you provided on design wins in industrial and medical markets. Can you talk a little bit about whether you may want to split the two, starting with Medical first or a design win activity that you're seeing COMING, I presume it from mainly from existing customers. Is that fair to say?

Stephen Kelley

Yes, Jim, I'll start with medical. And I think you're correct when we purchased SL power a couple of years ago dataset of medical customers that complemented our set of medical customers. So what we've been doing for the past two years is cross-pollinating the products between these two sets of customers. And I think medical is got a relatively well defined set of big customers and then a lot of smaller, smaller offices go to distribution. So yes, most of the big design wins are coming through established customers, either SL power brought to Advanced Energy or advanced energy processing power as I look at an industrial up in industrial.
Yes. Yes. So industrial is a little bit different, right, because it's a very, very broad set of customers. So what we've done there. We've done a number of things differently over the past, let's say, year year and a half. The first is we dedicated roughly half our sales force around the world to selling only industrial medical products to industrial medical customers. So this has really been a big factor behind the increase in the design win funnel.
The second is we developed a new website, which makes it much easier for customers to specify the right product for Advanced Energy and to receive products very quickly from us. So I think we're a much friendlier company to do business with fewer industrial medical customer.
The third thing we've done is we've increased the size of our our quick-turn engineering team. What this team does is they take our standard products. And based on customer request, they will customize or tailor those products to the specific application. And so we've seen roughly a 50% increase in those those spin-offs from standard products and we could we could do those. Those custom products very quickly typically between four and eight weeks is the development time. And so how this activities leading to a higher market share, industrial medical and a lot of optimism as we look forward about our ability to become much more significant player in industrial medical.

James Ricchiuti

Got it. Helpful color. The last question, if I may, if I may ask a broader question just on semi. But yes, we sit today. Would you say you're more or less optimistic about the improvement in the second half, I see say three months ago?

Stephen Kelley

I'd say it's about the same. I think the forecast that we have today support a high single digit percentage, perhaps 10% increase in revenue in semiconductor first half to second half. So I think that's about the same that we saw a quarter ago. So really nothing has changed when it comes to the second half of this year. I think what's changed for us. It is really our view of next year, and that's based on our success with iDose and EVEREST. Our first design wins and the the intensity of activity we're seeing at our customers right now.

James Ricchiuti

Kevin, thanks very much.

Operator

Scott Graham, Seaport Research.

Scott Graham

Hey, good afternoon. Thanks for taking my question. And Steve, you sound better than you did a quarter ago. I noticed the revenue print was a little hard, but the gross margin held up well and you sound better on the outlook.
I wanted to ask you a question about the data center business because, you know, I so for a number of companies as others do that have a lot of data center exposure and I'm still not really seeing the declines that you guys have been seeing the last couple of quarters.
In fact, in most cases, to the contrary, I know you kind of walk us through that. You kind of see that the power conversion equipment goZing, let's say, last Is it would you color that, you know, the last couple of quarters of declines that way?
Was there perhaps some destocking involved there or was it or was it something else because you sound obviously and for August order's sake much more optimistic about data centers going forward. I just want to trying to understand what happened on that.

Stephen Kelley

Yes, Scott, I think part of it was just a sequential procurement strategy where you can't build these. These AI enabled data centers without a commitment of chips and modules for the GPU and the high-bandwidth memory. So I think once our customers were able to secure those applications, right, then they were able to come to companies like Advanced Energy and the purchase of advanced power supplies. So I think that's part of it.
I think a second part of as I look back over the last three or four quarters is first, this is a cyclical market if you look back over the last 10 years, this is the way it goes. They tend to buy a lot and then they go into an inventory digestion mode and they come roaring back, and that's it's pretty much on schedule. So we would expect to see strong demand from data center for the next four to five quarters based on the last two cycles we went through. I think the third factor is these customers were also impacted by the supply chain issues over the past few years. And I'm sure there were some inventory issues that they were dealing with as well.

Scott Graham

Fair enough. Thank you for that. I just wanted to maybe touch on, you know, the balance sheet, the liquidity there, you know you did the debt deal a couple of quarters back in the is it essentially that, you know, industrial and medical are just sort of sluggish markets for you right now that you're not looking there or you know, what is what is the outlook for the announcement of the closing of a deal or more this year?
How does that pipe locally? What's your optimism on timing of closing?

Stephen Kelley

Yes. So maybe I'll chime in here. I think we're fortunate in that we would generate cash as a company and that we had a successful convertible deal in September. So we had we were sitting on over $1 billion in cash. That said, we're not going to do a deal, doesn't make sense for the company and so we're still looking for a deal that makes financial sense for the company makes strategic sense for the Company that we can integrate quickly and it averages up our gross margin. So we're still working on it and we'll see what develops in the coming months.

Scott Graham

I guess more to the point, my question is your deal pipeline a little thicker than it was six months ago and is your optimism higher or is that that weakness in those businesses may be a bit of a balance?

Stephen Kelley

Well, I think the deal pipeline maybe slightly thicker. We've always had a good pipeline, and our practice has been to develop relationships with with our potential target companies so that we're their first in line when they decide it's time to make a make a move. And that said, I think there's always going to be issues on valuation. And so that's I think that's really where most of these discussions end up, you have to figure out what's a fair value for both parties.

Scott Graham

Right. Thank you.

Operator

(Operator Instructions)
Mark Miller, Benchmark.

Mark Miller

You indicated that the booking trends were positive during the quarter. I was just wondering, is the breakdown a little more strongly? What were your strongest areas for bookings?

Paul Oldham

Yes, Mark, it's interesting because on, you know, we typically have talked about backlog. We had expanded and now it's come down in bookings only represents part of our business. But we do think it's sort of one of those indicators that gives us confidence that things are starting to come back. And we saw increased bookings, frankly, across all of our markets with the exception of telecom and networking. And as Steve mentioned, the debt markets particularly challenged right now, given both having inventory as well as quite a bit softer market conditions, and that's pretty well publicized.

Mark Miller

Was wondering in terms of your current backlog, what does is it a front end back end more linear type backlog in terms of how it flows through in terms of sales, but what about the margin profiles is similar improving in terms of what you've recently been seeing?

Paul Oldham

Yes, I think the margin profile is similar may maybe improving a bit mainly because of the comments I made earlier about the strength of our portfolio. I think the second part of that is I think the characterization is still the same, if you recognize our lead times now come down to more normalized levels of eight to 12 weeks. So the backlog's pretty also front-loaded, but particularly on as Steve mentioned in medical, we're seeing backlogs filling in for the second half of the year, which gives us more confidence again, that at least that part of the market is maybe starting to work through their inventory issues.
Thank you.

Operator

Krish Sankar, TD Cowen.

Krish Sankar

Yes, I had two quick questions. One is just on the hyperscale opportunity of. I don't remember a few years ago when you after you took over like another renewed focus on I&M, I don't want to use the term defocused, but less of a focus on hyperscaler. But clearly, you know, with AI and everything, there's a renewed focus on the power management for.
So just curious, you know, you know, given the fact that you compared to some of your peers, like no other question, that was actually a kind of lagging on that. Do you think any of that deep focus in the last two years is hurting you now because in the past and it's our hyperscalers, very price sensitive. And this like normal, it's extremely winning game for you. But do you think that the focus has kind of been an issue or do you think at the end of the day?
It's really about the product quality that matters for AI servers from a hyperscale standpoint.

Stephen Kelley

Good question, Krish, and me just recap, you'll note that the decisions we made a few years ago were to invest heavily in semiconductor industrial medical and grow market share as fast as we could because all those products basically averages up from a gross margin standpoint.
So and on the data center side, we have a different a different strategy, and we articulated that a few years ago and we've executed on it. And that is we want to improve the bottom line of that business.
And then keep it there. So the good news is we improved the bottom line over the past two years in data center. And now we're in the process of keeping that type of gross margin performance is still a lot is still above corporate average and probably never will be. But we're much happier with the business today because we can deal with a surge like we're seeing this quarter without impacting our gross margin performance to any significant degree.
So we're very happy with the business. And part of that move two years ago was to start focusing our engineering teams on more differentiated opportunities. And so what we're seeing now is some of those differential opportunities are developing tend to large scale revenue opportunities for us, which is very helpful. My So less of a commodity focus and more of a differentiated focus, and I think it's paying off for us.

Krish Sankar

Got it.
And then just a quick another follow-up of all of I know you didn't give the backlog number, but it looks like it's probably in the three 50 to $400 million range. How much of that is semi?

Paul Oldham

Yes, it's some I'd say it's down. It's down slightly from last quarter. So maybe a little a little higher than that.
Krish, on I would say the semi proportion is about the same as it's been. And we've commented before that on semi and industrial and medical combined represent about 80% of the of the backlog.
So I don't think those proportions have changed very much with that.

Krish Sankar

I thank you very much.
Yes.

Operator

Mark Miller, Benchmark.

Mark Miller

Was just wondering your interest income had a nice increase. Could you describe what's going on there?

Paul Oldham

Yes. As you know, Mark, we did we did raise money from the convert last fall the good news about that is we raised money at 2.5% coupon, and we've been been able to do two things. One, we've been able to concentrate our cash globally quite quite effectively so that we get that cash in the places in accounts where we can invest it. And we've been quite successful at investing that at very good yields on money market, very short term, it notes. And so we're actually generating more interest income than interest expense right now.
Now we're also benefited from the fact that about two thirds of our term loan is still under a swap. Our agreement wherein we're only paying 1.25% interest, and that will come off for that debt amount in September so I think you'll see interest income and interest expense start to come a little more in balance, but we'll still have higher income and expense, but lower than we have today.

Mark Miller

Okay. So you expect somewhat lower interest expense in the second quarter.

Paul Oldham

I'm sure this is more like the second half this half, this happens in September, Otherwise second quarter auto looks very similar to first quarter when you look at total, other income.

Mark Miller

Lower in the second half. Okay. Thank you.

Paul Oldham

That's right.
Yes.