Why Is Advanced Energy (AEIS) Down 50% Since Last Earnings Report?

It has been about a month since the last earnings report for Advanced Energy Industries (AEIS). Shares have lost about 50% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Advanced Energy due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Advanced Energy Beats on Q4 Earnings & Revenues

Advanced Energy Industries reported fourth-quarter 2019 non-GAAP earnings of 87 cents per share, beating the Zacks Consensus Estimate by 24.3%. Further, the figure was higher than management’s guided range of 56-80 cents.

Further, the bottom line improved 19.2% on a year-over-year basis and 61.2% sequentially.

Revenues of $338.3 million surpassed the Zacks Consensus Estimate by 8.3% and management’s guided range of $295-$325 million. Further, the figure soared 119.4% from the year-ago quarter and 93.2% from the prior quarter.

The top line was driven by strengthening demand in semiconductor equipment market, which led to acceleration in semiconductor revenues during the reported quarter. Further, the company witnessed solid momentum in data center computing market, which is a positive.

Additionally, positive contributions from Artesyn Embedded Power buyout contributed to the results.

However, the company bore the brunt of macro-economic headwinds especially in the industrial and telecom markets throughout the fourth quarter.

Nevertheless, strong cost optimization strategy, new product design wins and robust product pipelines are likely to help the stock recover in the near term.

Further, the company remains optimistic regarding its power density, deep engineering capabilities and strong application knowledge in the data center market. Moreover, the company’s position in the telecommunication market will aid it in capitalizing on 5G related prospects.

Top-Line in Detail

Product revenues increased 149.2% year over year to $311.6 million (92.1% of total revenues) in the fourth quarter. This can primarily be attributed to growing semiconductor product revenues and multiple product design wins.

Services revenues declined 8.5% from the prior-year quarter to $26.7 million (7.9% of revenues). This was primarily due to sluggish semiconductor service business. Further, divestiture of U.S. central inverter business affected the results.

Product Line in Detail

Semiconductor Equipment revenues improved 16.5% year over year to $125.1 million (37% of the total revenues). The company witnessed growing investments in foundry/logic, which remained a tailwind. Further, solid memory demand and positive contributions from prior design wins contributed to the product line’s revenues. Additionally, strong momentum across semiconductor power solutions was a tailwind.

However, softness in North America impacted the performance of semiconductor service business during the reported quarter.

Industrial & Medical revenues improved 106.8% year over year to $96.7 million (28.6% of revenues). This was driven by momentum of the company’s industrial embedded power products across 3D printing, robotics, food processing, motion control and horticulture applications. Moreover, growing presence in the medical equipment market and solid momentum across medical device customers acted as tailwinds. Additionally, accretive nature of the previous design wins benefited the top line of this product line.

However, weak demand across industrial production and auto industries especially in the Europe and China remained a headwind.

Telecom & Networking revenues were $38.5 million (11.4% of revenues), which increased from $10.02 million in the previous quarter. The company continued to gain from 5G infrastructure and deployment.

However, sluggish IT infrastructure investments led to weak demand from both telecom infrastructure and networking equipment OEM.

Data Center Computing revenues were $77.9 million (23% of revenues), up significantly from $13.5 million in the previous quarter. Strengthening momentum across hyperscale customers aided the company in securing multiple design wins during the reported quarter. Additionally, the company gained traction across key enterprise computing and storage customers. All these factors drove the top line of this product line in the reported quarter.

Operating Results

In fourth quarter, non-GAAP gross profit was 35.9%, which contracted significantly from 49.4% in the year-ago quarter due to acquisition related costs and facility expansion expenses.

Non-GAAP operating expenses came in $78 million, up 64.4% year over year.

Further, non-GAAP operating margin was 12.8%, contracting from 580 basis points (bps) from the prior-year quarter.

Balance Sheet & Cash Flow

As of Dec 31, 2019, cash, cash equivalents and Marketable securities were $349.1 million compared with $341.1 million Sep 30, 2019.

During the fourth quarter, cash flow from operations was $19 million compared with $10.5 million in the third quarter.

Capital expenditure during the reported quarter stood at $9.5 million, up from $8.9 million in the prior quarter.

Guidance

For first-quarter 2020, Advanced Energy expects non-GAAP earnings between 40 cents and $1 per share.

Revenues are anticipated in the range of $280-$340 million.

The company expects demand in semiconductor equipment market to be up in the mid-teens in the current quarter on a sequential basis owing to strong bookings.

However, macro headwinds are likely to impact demand across industrial and medical verticals, which is expected to be down sequentially.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -5.43% due to these changes.

VGM Scores

Currently, Advanced Energy has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Advanced Energy has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.