Advanced Energy Industries Inc
NASDAQ:AEIS
US |
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
|
US |
Estee Lauder Companies Inc
NYSE:EL
|
Consumer products
|
|
US |
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
|
US |
Church & Dwight Co Inc
NYSE:CHD
|
Consumer products
|
|
US |
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
|
US |
American Express Co
NYSE:AXP
|
Financial Services
|
|
US |
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
|
US |
Visa Inc
NYSE:V
|
Technology
|
|
CN |
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
|
US |
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
|
US |
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
|
US |
Coca-Cola Co
NYSE:KO
|
Beverages
|
|
US |
Target Corp
NYSE:TGT
|
Retail
|
|
US |
Walt Disney Co
NYSE:DIS
|
Media
|
|
US |
Mueller Industries Inc
NYSE:MLI
|
Machinery
|
|
US |
PayPal Holdings Inc
NASDAQ:PYPL
|
Technology
|
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
52 Week Range |
89.7
119.61
|
Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
Johnson & Johnson
NYSE:JNJ
|
US | |
Estee Lauder Companies Inc
NYSE:EL
|
US | |
Exxon Mobil Corp
NYSE:XOM
|
US | |
Church & Dwight Co Inc
NYSE:CHD
|
US | |
Pfizer Inc
NYSE:PFE
|
US | |
American Express Co
NYSE:AXP
|
US | |
Nike Inc
NYSE:NKE
|
US | |
Visa Inc
NYSE:V
|
US | |
Alibaba Group Holding Ltd
NYSE:BABA
|
CN | |
3M Co
NYSE:MMM
|
US | |
JPMorgan Chase & Co
NYSE:JPM
|
US | |
Coca-Cola Co
NYSE:KO
|
US | |
Target Corp
NYSE:TGT
|
US | |
Walt Disney Co
NYSE:DIS
|
US | |
Mueller Industries Inc
NYSE:MLI
|
US | |
PayPal Holdings Inc
NASDAQ:PYPL
|
US |
This alert will be permanently deleted.
Good day, ladies and gentlemen, and welcome to the Advanced Energy Industries Q4 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks we will host a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call maybe recorded for replay purposes.
It is now my pleasure to hand the conference to Mr. Edwin Mok, Vice President of Strategic Marketing and Investor Relations. Sir, you may begin.
Thank you, operator. Good morning, everyone. Welcome to Advanced Energy’s fourth quarter 2018 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.
Before we begin, I would like to mention that AE will be participating at Morgan Stanley GMT conference in February. The Susquehanna Technology conference and the Wells [ph] Conference both in March. As other events occurred, we will make additional announcement.
And now let me remind you that today’s conference call contains forward-looking statements including the company’s current view of its industry, performance, products, applications and business outlook. These statements are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks and uncertainties is contained in our filings with the SEC.
All forward-looking statements are based on management’s estimates, projections and assumptions as of today February 05, 2019, and the company assumes no obligation to update them.
Aspirational goals and targets discussed on this conference call or in the presentation material should not be interpreted in any respect as guidance. Today’s call also includes non-GAAP adjusted financial measures, which exclude the effects of discontinued operations, stock compensation expenses, amortization of intangibles, restructuring charges, acquisition-related costs and other one-time items.
Reconciliation between GAAP and non-GAAP measures are contained in yesterday’s earnings release, which is available on our Investor Relations page of our website. We’ll be referring to earnings slides posted on the investor section of our website as well.
With that, let me pass the call to Advanced Energy’s President and CEO, Yuval Wasserman. Yuval?
Thank you, Edwin. Good morning, everyone, and thank you for joining us for our fourth quarter earnings conference call. In the fourth quarter, we continue to execute on our strategic to grow and strengthen the company, while feeling the impact of cyclical weakness in semiconductor and the expected seasonal slowdown in our industrial market.
Year-over-year Q4 revenues were down 14% with solid growth in both industrial and service including the addition of LumaSense partially offsetting the decline in semi. Financially, we delivered solid profitability in cash flow even on lower revenues, while accelerating investments in new products and technologies and starting the process of diversifying our operational footprint.
Despite the significant second half decline in semiconductor market, for 2018 we grew 7% year-over-year, delivered non-GAAP operating margins of over 27% and maintain solid operating cash flow highlighting the resilience of our operating model.
In semiconductors, the capital spending environment has been negatively affected by several global factors including slowing growth in end market demand for semiconductor devices, digestion of equipment capacity and uncertainty around trade policies and global economic growth.
Our business is further impacted by inventory reductions in both semiconductor devices and finished goods inventory at our customers. The impact of lower demand was broad- based has been mostly out of our core etch and deposition application.
Despite the challenging environment we see customers pursuing new and enabling technologies that will shape the future of our market. As a result, we have accelerated our investment in new RF products and technologies and believe there are opportunities to aggressively pursue share gains and expand their offering in these critical areas.
During the quarter we shipped multiple new evaluation products to five leading OEM customers targeting various new incremental revenue opportunities. These investments support our customers accelerated roadmaps while expanding our leading technology and market share positions.
In the plasma based etch and the position applications design wins we secured in prior quarters have already allowed to gain share against our competitors and key customers. For example, we estimate our overall market share as one leading Korean equipment OEM has increased by 10 points in 2018.
In addition, we believe we have steadily expanding our market share in other process steps. In 2018 we secured significant position in process control including wins at the most advanced EV inspection and metrology tools.
And in Q4 we expanded our leading position in ion implantation by displacing a high voltage competitor. Beyond our strategy to expand our footprint within semi we remain bullish on our long term growth drivers in the market.
Demand for higher power levels, advanced topologies, and sophisticated control system in our power supplies continue to increase with a leading-edge semiconductor technologies strongly positioning AE as the power leader in the industry to serve.
As demand stabilizes and our customer’s inventory levels normalize we anticipate coming out of this downturn with a stronger market share position in the resumption of our growth in this key market.
In our industrial technology markets, revenues decline sequentially in Q4, as expect, but on the year-over-year basis they grew significantly for both the quarter and year driven both by our position in underlying organic growth.
This has proven to be an increasingly important balance to our semiconductor market. Over the last two years our industrial revenue has nearly doubled highlighting the success our diversification strategy.
Within our industrial markets we have two major application sets. The first, which we called advanced materials, involve extending our thin film material processing technologies to adjacent market, such as PV Solar, flat panel display, glass and hard coatings.
Although business level decline sequentially in Q4 when lower solar PV and typically seasonal soft growth in glass and hard coating we secured several new projects and design wins which expand out footprint in these markets.
Applied power is our second industrial technologies application set. These are precession power solutions serving end market such as medical devices and analytical instruments and general industrial productions with stringent power and thermal requirements.
Applied power grew significantly both sequentially and year-over in Q4, primarily due to the acquisition of LumaSense technologies. Beyond LumaSense, our sales into the medical and life science markets continue as a long term structural growth win supported by multiple new designs that we secured in Q4.
In medical devices we continue to be the leading power supply provider to the medical lasers market with several new wins this quarter and we expanded that position in the analytical instruments market.
During the quarter we need progress towards integrating the LumaSense acquisition into our business. We have taken the initial steps in streamlining sales distribution by integrating a portion of the business into our direct channels.
Further, our plan to achieve our cost synergies is starting to be realized. Our customers are excited with the new technologies that we open now and we are confident in the revenue synergy opportunities of this acquisition.
Beyond LumaSense we continue to actively pursue additional M&As with the target across a spectrum of sizes, technologies and capabilities. Our service business recorded its third consecutive record quarter in Q4 and the record year in 2018.
We believe our geographic expansion is describing share gains from third-party providers and the service revenue opportunities of our growing installed base are still in the early inning. Coupled with new service programs and the expansion of our engineered service solution such as retrofits and upgrade, we remain confident that our service business will sustain a greater than 10% compounded annual growth rate over the coming years.
In summary, 2018 was a year was a year of two halves, with market conditions particularly in semi deteriorating through the end of the year. Despite the market challenges Advanced Energy completed a very successful year highlighted by record annual revenues, solid profitability, robust cash flow and good execution of our inorganic growth strategy with three acquisitions.
Visibility in the current environment is very low. We expect the current conditions in our semi market to persist at least through the first half of 2019 with Q1 sequentially lower than Q4. However, in this environment we will continue to invest growth, capitalizing in our increasing momentum of new technologies and product introductions.
At the same time, we’re managing the discretionary costs and improving efficiency to deliver solid profitability in cash flow. Longer term, we continue to see a bright future for our semi business driven by growing complexity of devices and increase power content in our customer’s equipment.
Our industrial technologies and service offerings continue to grow nicely and our acquisition funnel remains active, as we use our strong financial position to drive inorganic growth. Overall the timing maybe impacted by the level and pace of recovery in semi industry.
We remain committed to our long term aspiration goal of revenue over $1 billion and earning of between $5.5 to $6.5 per share. I’d like to thank our customers, shareholders, partners and our valued employees for your support. I look forward to see many of you in the upcoming quarter.
With that, let me turn the call over to Paul.
Thank you, Yuval, and good morning, everyone. In the fourth quarter we continue to feel the impact of cyclical weakness in semiconductor, combined with the seasonal slowdown in our industrial market.
Despite the challenging environment, our fourth quarter revenue came in near the mid-point of our guidance range. Our non-GAAP EPS results impacted by slightly lower gross margins and higher expenses resulting from our decision to accelerate certain R&D investments partially offset by a lower tax rate for the quarter.
Total revenue was $154.2 million, down 10.9% from last quarter and 14% from a year ago. Our service business generated record revenue in Q4 partially offsetting the decline at semi and industrial.
Despite the decline in Q4 full year 2018 revenues were up 7.1% to $719 million with semi down 4% and industrial growing 43%. Our total revenue growth, despite the decline in the semiconductor environment reflects this success to-date and importance of our diversification strategy. For the year, our adjusted operating margin was 27.2% and we generated operating cash flow of $151.4 million.
Looking at sales by market, semiconductor revenue in the quarter was $83.5 million, down 13.4% from last quarter and 32.4% year-over-year. During the quarter our customers reduced ordering of our power product as industry demand decelerated and as they reduced their finished goods inventories.
Although visibility is limited, we expect the further step down in market activity in Q1 which we believe could continue to the first half. Industrial technologies revenue declined 14.3% from the third quarter to $41.6 million primarily as a result of a significant thin film, solar shipment in Q3 that did not repeat in Q4 and the expected seasonal slowdown. Year-over-year revenues grew 35.8% due to our recent acquisitions, which provide us additional platforms for growth going forward year.
For the full year industrial revenue grew 43% in total and delivered 15% organic growth driven by our robust design win pipeline. Looking forward, despite concerns about macro economic growth we expect industrial revenues in Q1 to grow sequentially. Longer term, we continue to expect our industrial products to grow at a mid-teens compounded annual growth rate.
Service revenue for the quarter was a third consecutive record at $29.1 million, up 3.1% from the third quarter and 16.3% from last year. For the fiscal year service revenue was $108.6 million, up 17.5% which is better than our long-term target of greater than 10% annual growth, driven by our ongoing progress in gaining share from third-party service providers and growth in installed base.
With the challenges in the semiconductors industry and the lunar new year holiday, we expect service revenue to be sequentially flat in Q1. Consistent the first full quarter after we completed our acquisitions of LumaSense Technologies, I’ll provide additional color on the business.
LumaSense revenue was approximately $12 million in Q4, the lowest historical – its historical quarterly run rate mostly due to weakness in semiconductor which represented just 13% of sale during the quarter.
In addition to the weak semi environment LumaSense revenue was impacted by acceleration of the transition from a third-party international distributor to our own internal sales team and the resulting drop-down in channel inventory. We expect this trend to continuing to Q1 before normalizing by Q2.
While the near term impact to revenue is negative. We are confident that this change will enable more strategic relationship with our customers and faster growth in the future. Gross margin for the fourth quarter was 48.8%. On a non-GAAP gross margin was 49.4% compared to 50% last quarter.
In addition to the impact of lower volume, we also saw higher than average warranty and obsolescence costs on a legacy product and increase tariffs on some of our shipped component.
Although we have mitigated the vast majority of the impact on tariffs, we expect the overall impact to margins to be 50 to 75 basis points looking forward. Looking to Q1, we expect adjusted gross margin be down 100 and 200 basis points primarily on lower volume and mix.
As you’ve all mentioned, in efforts to future mitigate our exposure to regional risks, improve our business continuity profile and lower cost we are investing in the evaluation of additional production options in Southeast Asia.
While we expect these efforts to cost neutral and lower in the long run we anticipate incurring an additional 50 to 100 basis point of cost starting in Q2 and lasting several quarters during this transition period.
GAAP operating expenses in Q4 increased by nearly $10 million over Q3 primarily due to the full quarter of LumaSense expenses; restructuring charges at $3.8 million and higher amortization and stock compensation expense.
Non-GAAP operating expenses from continuing operations were $47.5 million or 30.8% of revenue. This compares to $42.2 million or 24.4% in the prior quarter. Excluding the addition of LumaSense, operating expenses increased approximately $800,000 primarily the results of investments in critical engineering programs to accelerate our innovation and drive long-term growth. These expenses were partially offset by the temporary cost control measures we took in Q4.
Looking forward, we expect operating expenses in Q1 to be about flat sequentially as we continue this strategic investment offset by actions we are taking to curtail discretionary spending, drive synergies to the integration of acquired businesses and improve overall efficiencies.
As I mentioned, in Q4 we’ve recorded $3.8 million in restructuring cost related to our manufacturing footprint optimization, acquisition integration and business efficiency improvement.
Including our Q3 activity we expect these actions to yield annualized savings of approximately $10 million. We realized over the next three quarters split between operating expense and cost of good sold.
GAAP operating margin for the quarter was 12.7% compared to 23% last quarter. Non-GAAP operating margin was 18.6% compared to 25.6% in Q3. Excluding the acquisition of LumaSense adjusted operating margins were 20.6%.
Our tax rate for the fourth quarter was 6%, primarily the results of additional discrete items we discussed last quarter, lower foreign income and high R&D cash credit. Our non-GAAP tax rate was 5.5%. We expect our tax rate in Q1 and looking forward to be in the 14% to 15% range.
Capital earning per diluted share from continuing operations for the fourth quarter was $0.50 compared to earnings at $0.90 last quarter and a loss of $0.73 last year which was impacted by one-time tax expenses associated with the write down of the solar inverter business and with U.S. Tax Reform. Non-GAAP EPS for the quarter was $0.73 compared to a $1.05 in the third quarter and a $1.31 a year ago.
Turning now to the balance sheet. Operating cash flow from continuing operation was $32.9 million and our cash and marketable securities balance increase sequentially to $351.8 million at the end of Q4. Net working capital decreased during the quarter by $18 million, our receivables balance decline by over $10 million as DSO remains about flat at 58 days. Days payable rose by one day to 48 days.
Inventory decreased by $12 million and turns were three times bringing our inventory levels adjusted per acquisitions back to historical levels. During the quarter we spent $26.1 million to repurchase 575,000 shares of stock at an average price of $45.36. For the year, we spend approximately $95 million to purchase 1.7 million shares.
Since the inception of our program in 2015 we have spent approximately $175 million to repurchase 3.8 million shares. Looking forward to the first quarter of 2019, given current market conditions in order levels we expect revenues to be between $138 million to $148 million and non-GAAP per share to be between $0.40 and $0.55.
In summary, we completed a very successful and profitable year that started strong and ended weak. We expect 2019 to be a challenging year for our semiconductor business as the industry reduces investment.
However, even during the weak quarters we’ve been able to and expect continue to deliver solid earnings in cash flow. We remain bullish about the growth potential and long-term drivers in our core market and are committed to executing on our long-term plan to drive profitable growth, strong cash flow and earnings per share.
In the interim, we will continue to invest in critical programs while driving synergies from our acquisitions and improvements in efficiency across the company. Further, we will use our strong cash position to pursue new growth opportunities and expand our addressable market.
With that, let me turn it over to the operator for questions. Operator?
Thank you, sir. [Operator Instructions] And our first question will come from the line of Mehdi Hosseini with Susquehanna. Your line is now open.
Yes. Thanks for taking my question. Couple of follow-ups. Yuval, if I were to look at your Q1 semiconductor commentary and guide, it suggests quarterly revenue of 70 million to 72 million. Should we assume this is reflecting the kind of maintenance inventory at your OEM customer and also maintenance CapEx by semiconductor manufacturers? Or if you want to answer it differently it would be great?
Well, we can assume that it remain at that level.
Okay. So when you talk about the first half week, you would have a double-digit decline in Q1 and it would go sideways. That's where we talk about the weakness?
Yes. Maybe we don’t forecast Q2, but in general we believe that we saw that most of the change happened over the last four weeks. We saw a set of setting or correction in the business last quarter, right?
Sure.
And we believe that right now we are pretty much at what we think is the trough for us.
Okay. All right. And then just one quick follow-up on the semi, over the past couple of years 2016 through 2018, AE benefited from a capacity at memory manufacturers, both DRAM and then some investment technology migration under the foundry logic. Looking forward I see wafer capacity at a minimum and more focus on technology migration. Does that change the dynamics for your semiconductor business? Or am I just not getting it right. Any color would be great here?
Sure. I think you’re right. And there is a significant core right now across the wafer fabricated industry to invest in next-generation technology when it comes to new products and processes and materials. That benefit us tremendously and that’s one of the reasons we have invested significantly in technology development and the product development over the last Q4 and we’ll continue to invest especially in RF technology in pursuing significant pool for customers that are designing the next generation tools with our technology.
This is an exciting time for us, that it’s an opportunity during the slowdown in industry to invest and accelerating our product development, the technology. As we mentioned in the prepared remarks, we’re shipping products that are going to fabs right now for next-generation technology applications. Of course, a very broad space of applications, from etch, deposition ALD, ALE and so forth and so on, and our technology has been recognized as enabling. And for that reason and to accommodate the strong demand we get from OEMs around the world for our technology we continue to invest and accelerate the investment in product development.
Would those new products lead to revenue multiplier as we go through technology migration? Or do we need to wait for wafer capacity at part of a story to come in?
We expect as you know the adoption of new technology, the industry can run between 18 months to 24 months or even 36 months to high volume in the factory. Some of our new technologies are in early stage. Pilot productions in fabs, we expect that to ramp. We expect to exit this year with a stronger market position and with much higher opportunity for incremental revenue creation. Some of these design wins will realize in mass production will drive tens of millions of dollars of incremental revenue.
Thanks for detail color.
Thank you. And our next question will come from line of Krish Sankar with Cowen & Company. Your line is now open.
Hi. This is Rob Mertens on behalf of Krish. Thank you for taking my question. If I look to your March guide, the revenues levels are around what you haven't seen since maybe the end of 2015, early 2017 where earnings came in at around the dollar. I know you gave some color in terms of the OpEx and the gross margins for the quarter for your EPS guide. We’re sort of looking now towards later part of the year, are you expecting the margins to improve little bit? And also would sort of level of revenue do you need to decline so it will be a breakeven levels?
Yes. It’s a great question Rob. I think the first thing that I would note is that if you look at our revenues they are down at those levels as you mentioned late 2016. But if you actually look at the mix of revenues you could argue that our semi business is actually down lower than that, and its been offset by acquisitions that we made in the last five quarters we’ve acquired four companies and they bring some – I’m sorry, six companies and they bring some cost structure with them. And so what you’ve seen is this we’ve added new businesses that are at same operating model then you see an impact on earnings -- on earnings right now.
Now, looking forward those platforms give us – those new companies give us a platform for greater growth and in fact are contributing to earnings today. And so I guess the simple way of saying, it could be worst if we hadn’t sort of diversified the company the way that we have. As you’ve all mentioned, we’re very excited about what happening in semi despite the difficult revenue environment. There’s a lot of investment technology and we believe we’ll be at well positioned if that market recovers. And our diversification strategy, we think has paid dividend.
Now from a profitability perspective, we still have a very solid model. We believe at our Q1 guide we still be solid profitable and generate cash. And if you look at just broadly at a breakeven point, we could see revenues drop into the very low $100 million range before we’d around breakeven. And certainly if you saw that occur, there’s other actions that we can take as a company to ensure the financials. So we think this continues to be a time to take advantage of the environment to position ourselves to be a stronger company as we exit this downturn that we’re in today.
Now, it also say that we saw that we did take some restructuring cost this quarter and those will be implemented over the course of the year. We think that’s about $10 million in annualized savings. A large part that actually was funding these investments in R&D and the other natural mid-year cost we’d see temporary measures and those types of things. But overall, we would expect be able to keep expenses about flat even on growing sales. And we could see a little bit of margin improvement. Although as we mentioned, there's probably – there’s going to be some modest investment to continue diversify our manufacturing footprint. So net-net we think there’s still a lot of room in the model. We think it’s a robust model and we think we’ll be position stronger as the market in semi ultimately recovers.
Great. Thank you. That’s helpful. And just I guess one follow-up around your LumaSense business. So I’m just looking at the model, it looks you guided 13% or so this quarter and semi revenue around like 10 million or so coming from industrial and little bit from this service. If I'm backing out of this it seems like industrial is down quite a bit quarter-over-quarter. I know it sounds like the solar business is a big reason there. But looking forward is that a business you're expecting to recover at a certain time? Or is it more of a lumpy business that you have lower visibility in?
Yes. Good question. We actually guided our industrial business to be down sequentially. In Q4, because seasonally it’s a low quarter. In fact, with even a little lower, and if you look at that revenue mix industrial was actually a little below what we thought and semi was about oddly enough. And there’s little bit lower industrial was exactly that, it was -- in software business from the solar PV area. And remember we had a large order, large revenue of solar PV in Q3 which sort of aggravated the compare. The solar was off a little bit, and China was also off a little bit to this just more broadly.
But sequentially we expect industrial will grow in Q1, because seasonally and you know part of the shortfall in Q4 industrial was delayed in shipments of some products into those markets. So we continue to believe industrial will grow in the mid-teens range overall, and it will be up sequentially in Q1. That had been the fastest growing section of the company, if you look at that annual basis.
Okay, great. Thank you so much thank you.
Thank you. And our next question will come from the line of Tom Diffely with D.A. Davidson. Your line is now open.
Yes good morning. First a clarification. When you look at your forecast for a little step down here in the first quarter, is that driven solely by just the end markets, the malaise in the end markets or is there a little bit of inventory OEM inventory correction in there as well?
It’s both, Tom. It’s both the end market, but also the drawdown of inventories.
Okay. And then basically you said before that just finished goods working through the system.
Correct.
Okay. And then Paul when you look at the R&D, the increased spending. Do you view that as mainly project based, or is this kind of a new normal where your goal is just to be a little more active on the new product development going forward.
Yes, I’d say it’s more of a new normal. We’ve done a careful review of our R&D projects and look to where the opportunities are and its evolvement and we’re seeing a lot of pull from our customers, the things that can have an impact in the relatively near term not the three year out term and the sort of more one to two year out term.
And if you look at when the semi industry could recover, which we don’t know, we think it makes sense to make continue to make these investments at this time. So I wouldn’t count on R&D dropping back down, I think around this level is the right level.
Now I don’t think we need to grow it. We made a step up in investment here and we’ll continue add investment that it’s going to. I would say roughly in this range is the right way to think of it.
We’re right now. Tom will right now budgeted in terms of R&D investment at the level that will allow us to continue to accelerate our R&D and product development in conjunction with our key customers roadmaps, and also in alignment with new customers around the world that are approaching us right now to use our technology for their next generation devices. We just have a tremendous amount of opportunities related to new design wins that we want to make sure that we fund properly.
Yes. That makes sense. And then I guess when you look at all the crosscurrents in the industry over the last several months, has there been a meaningful change in the utilization rate of your tools in the field that might ultimately impact the service over the next few quarters?
We don’t think so, no.
Okay. And then just finally, when you look at all that’s happened over the last six, nine months. Has anything changed your long term view of the potential this industry or potential advanced energy in the industry.
Not at all. We are as we said repeatedly, the underlying demand in the industry are strong. We are in a period of digestion. In our opinion, many of the players in the industry right now are using this period of the -- of suggestion to accelerate the development of new products and new technologies. If you look at you know the industry is moving to much more complex structures, new materials and new processes, all these require new product architecture. And with that, new power delivery architectures and we are the supplier that you know companies approach to, to deliver those technologies.
Great. Thanks for your time.
Thanks, Tom.
Thank you. And our next question will come from the line of Patrick Ho with Stifel. Your line is now open.
Hi, good morning. This is actually Brian Chin calling in for Patrick. Thanks so much for letting us ask a few questions. First, question about the manufacturing. I think you mentioned that you’re going to pursue some initiatives to bring up some manufacturing in Southeast Asia. I’m curious how much of that is desire to diversify away from Shenzhen in terms of the process power business. And how much of that is related to, I think you had to – you’re going to have to relocate some of that capacity anyways next year? Is it kind of the natural order of that, I mean that’s my first question?
So I think that the planning, the evaluation of our operational footprint that we started funding in Q4 aims at addressing business continuity. Allow us to have flexibility to move products from a major hub to more than just one factory and also to address cost. So it’s all of the above. It’s a project that will take some time and we believe that long term it will be cost neutral in terms of the investment. It’s a very low capital intensity project. As you know we just filed assembly and test. It’s more about diversifying the location of origin of our products. You want to add anything to that, Paul?
Yes, and you’re right. We do, we -- our lease is expiring in Shenzhen. We do have an extension to that actually for about a year, which gives us a nice window to also just balance our information. Yuval said, there will be a little bit of insurance cost that would be incremental. But once, in place our total cost would be neutral or lower, because we’ll have a balance between these factories, it’s not just adding a second factory, it’s balancing that amongst two to diversify all of them, really give us more flexibility going forward.
So long term, long term, we are going to be relying on more than one factory.
Got it. And I’m sure it makes sense. You know when business is slower to do these sorts of things, and when things are kind of wrapped up. Right. So another question. I appreciate all the detail on the new evaluations and certainly some breath there in terms of product and customers. You know that being said, would you put NAND and dielectric applications towards the front in terms of what could contribute sooner versus later?
I’m sorry, could you repeat the question?
Yes. So you talked about like I think five new customer evaluations. You know sort of breath in terms of the products, applications that are under evaluation. I’m curious, of those evaluations; do you think the ones that could come to fruition sooner would be on the NAND side and dielectric in nature?
It’s -- thank you. It’s across the board, is both NAND DRAM and logic and foundry, all across the board. Look, the industry is moving towards much more complex structures and also new materials. These new materials require different ways of deposition and Etch processes. And the -- in NAND for example, the increasing number of layers in the stack create unique challenges related to material processes that require a totally different approach in terms of the deposition and Etch processes that eventually require a different power distribution strategy, because RF power is the enabler of these processes.
The other thing I’ll mention Brian is if you look at our -- at our platform, we addressed all areas of deposition and Etch. And as you’ve all said, we’re now expanding into other content around the chamber. And historically, NAND, DRAM and Logic if you look at the last four quarters five quarters, have been about a third each. And so as we see investments shift more towards foundry or logic we’re participating in that. And so our business will shift a little bit with the timing of those investments as well, because we play broadly in all those applications.
One more comment. The adoption of EUV for 5 nanometer logic devices will require ALV and ALE processes. And we are a key supplier for those applications.
Thanks. Appreciate all the detail, one last question from us. From a capital allocation standpoint, I think based on what’s authorized that you bought back a similar amount of stock here in Q1 that you did in [Indiscernible] you might -- you might exhaust your current repurchase. And you talked about continuing to look at strategic acquisitions potential as well. So just kind of curious how you’re thinking about capital allocation moving forward?
Yes, Brian. Our fundamental philosophy hasn’t changed, and that is to allocate the majority of our available capital 70% to growing the company through acquisitions and then to be opportunistic with our share repurchase and that’s our strategy. And as we said we’re open to both, continued small tuck-ins or medium tuck-ins as in the case of LumaSense but also larger opportunities that makes sense. And we have capacity to do that.
Then relative to the share repurchase, the board meets regularly, quarterly and reviews it every quarter and as we’ve consumed the kind of deal authorization we have regularly we kind of refresh that. So I wouldn’t anticipate anything different going forward.
Great. Thank you.
Thank you. And our next question will come from a line of Pavel Molchanov with Raymond James. Your line is now open.
Thanks for taking the question guys. On the M&A front, you’ve been pursuing industrial focus for many years now, but obviously given the pressures and the semi cap value chain, I imagine that a lot of the middle market players are feeling the pain, in fact more pain than you guys are. It is now perhaps the time to consider bulking up in some additional semi cap opportunities, or do you think it’s, it’s still too early.
Thanks, Pavel for the question. Yes indeed, our strategy had been to diversify the company and accelerate the diversification by acquiring companies from new markets and verticals to accelerate our entry into those markets. Some of these acquired companies have also a sunny content in them. For example, LumaSense, LumaSense is 75% industrial, 25% semi when we acquire the company. As we look at the semi world, being a pure play, power leading company, and then be a leader in the critical parts supplies that go into these applications, the number of potential like targets incentive for us is almost zero especially if you consider antitrust, right.
So, so most likely acquiring a partial buy -- in a supplier to the semi industry will be a either non-risk or for cannibalization, but also risk of antitrust challenges related to that other components that go into the semi industry usually are not enabling components, and some of them are commodity products, which carry fairly low margins and different selling cycle and little effort in engineering. So for that reason, we look at semi targets very opportunistically. We look at industrial targets very strategically.
Okay. That’s helpful. I remember this. This topic was also discussed on the last quarter call and I think your comments about your cash flow break even, probably lend themselves to ask the question again. Any updated thoughts on initiation of a dividend, as a way of perhaps kind of accentuating of return of capital to shareholders?
Yes, it’s a good question, thanks Pavel. We do regularly review our capital allocation strategy including its discussion of the dividend. At this point, the strategy remains the same, which is to use our opportunity to sell repurchase plan as this method of choice to turn a value to shareholders.
All right. Appreciate it guys.
Thank you. And our next question will come from the line of Quinn Bolton with Needham and Company. Your line is now open.
Hi, Yuval and Paul, thanks for letting me ask a few questions. Just wanted to follow up on Tom’s question about inventory correction versus sort of the slower demand environment and wondering if you might be able to give us some sense how much of the lower revenue in March, it’s coming from inventory drawdowns versus just the overall level of lower demand.
Yes it’s a good question and a tough one to answer. Obviously we don’t have perfect visibility into our customer’s plans and what they see. But, but clearly the market activity as you’ve seen planned in the last three or four weeks on all of our customers and peers have kind of reset at a lower level. And to some degree, it’s related. If this business is lower, then it will take longer to work through the inventory. So there’s some element of that too. But fundamentally, the inventory is an area that we expected to be drawn down and continued to be impacted related to that. And we said in our prepared remarks, remarks that we expect these kind of condition to persist through the first half, and then we’ll see how things go from there.
I guess it’s sort of a follow up Paul on that. Yes, I think LAM on their call talked about WFE and 19 being front end loaded some of the other OEMs have talked about more of a back-end low. Do you guys have any thoughts, as you looked out; speak to your customers or what just the overall shape of WFE will be in 2019? I guess the question is, if WFE trends down in the second half, does that exacerbate the inventory drawdown that you’re currently seeing?
So it’s a great question, and the answer is different from different OEM. Different OEMs, different have different exposures to end markets and their commentary about the business for the second half of the year is affected by a view of the market they serve primarily. And without going into details, some OEMs are more memory centric, some OEMs are more logic and foundry centric, and they see different view of the rest of the year when you talk to them or when you read the commentary.
In general, we don’t believe that the visibility is good enough to even call the second half. We believe that we are right now operating in the what I call a target rich environment for us when it comes to design wins and take advantage of the kind of slowdown in the industry when everybody’s focusing on an accelerating product development to basically be fully aligned with the customers to make sure that we help them go to market earlier, as everybody’s anticipating the resumption of growth, both in capacity and also in technology nodes as we exit from this downturn.
Great. Then last question for me. Just wondering if you might be able to level set us on the timing of your long term model of 550 to 615 in EPS. How dependent is that on a recovery in WFE spending? How dependent it is on your improved share position exiting in 2019 or other factors?
So obviously the timing of the recovery and semi will impact the timing of that profile of growth. But at the same time, we are very acquisitive, and we are pursuing a pipeline to target acquisitions that may help us accelerate that, despite of the semi cycle. So it’s a combination of the M&A activity and the maturity of those targets, and the recovery of semi.
We are very confident and stay behind our strategic aspiration goals. And again as we said earlier, right now, it seems like we are in a kind of a low position in the semi. But we believe that it’s just you know a temporary situation and we expect to see that recovery with a much stronger market position and much stronger footprint around the world.
Great. Thanks for letting me ask those questions.
Thank you. And I’m showing no further questions at this time. So now it is my pleasure to hand the conference back over to Yuval Wasserman for any closing comments or remarks.
Thanks everybody for joining us today. As I mentioned earlier, we view this period right now as an exciting period for us to rejuvenate, to invest, and to develop and accelerate the launch of our new products and technologies to the market. We are being right now adopted by multiple OEMs around the world into their new process tools. Obviously, the decline in Q1 is driven by the market dynamic as we explained. Just to note, if you look at product, products that go into the semi market, our decline between from Q4 to Q1 is in line with our peer companies and in some cases we are in a better position.
So we are looking forward to a fruitful year in terms of investment, and strategic investment. And we are ready to come out of this downturn much stronger with new products and technologies. Thank you and we look forward to seeing you in the next few months.
Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.