What Management Said
Read the full Q2 2025 transcript ↗You can find today's earnings press release and presentation on our website at ir.advancedenergy.com. Any targets beyond the current quarter presented today should not be interpreted as guidance. Excluded from our non-GAAP results are stock compensation, amortization, acquisition-related costs, facility infrastructure and other transition costs, restructuring and asset impairment charges, and unrealized foreign exchange gain or loss. Second quarter revenue exceeded the high end of our guidance range, driven by strong demand for Advanced Energy Industries' data center power solutions.
We also benefited from increased demand in industrial and medical, posting our first sequential growth in that market since 2023. On a year-over-year basis, second quarter revenue grew 21%, our third consecutive quarter of year-over-year growth. Earnings per share also came in at the higher end of guidance. Our business diversification strategy, which is focused on three distinct target markets, is driving more consistent profitability and cash flow.
We have been mitigating cycle risk by participating in multiple growth markets, each with its own characteristics. Semiconductor has performed well for AE, with mid-single-digit growth expected this year after a growth year in 2024. Our improved profitability and cash flow are allowing us to make the technology and capacity investments necessary to fuel long-term profitable growth. This year, we have won a number of next-generation programs, which are expected to support further growth in 2026.
What went well
- Second quarter revenue of $442 million exceeded the high end of guidance, driven by strong demand for data center power solutions, and grew 21% year-over-year, the third consecutive quarter of year-over-year growth.
- Data center computing revenue jumped 47% sequentially and 94% year-over-year to $142 million as hyperscale design wins ramped and the company captured upside demand.
- Earnings per share of $1.50 came in at the higher end of guidance, up 76% from a year ago and the highest level since 2022, helped by operating margin expanding 110 basis points sequentially.
- Industrial and medical posted its first sequential growth since 2023 (up 7% sequentially) with total backlog growing for the first time since early 2023 and channel inventories declining for the fifth straight quarter.
- The company secured a record number of design wins across markets, including two new etch and deposition wins for leading-edge processes, and continued robust EVOS and eVerest shipments as early wins moved into low-volume production.
- Gross margin improved to 38.1% (up 20 basis points sequentially) despite tariff and ramp headwinds, and the closure of the last China factory in June supports the goal of approaching 40% gross margin exiting 2025.
What went wrong
- Semiconductor revenue of $210 million was down 6% sequentially and declined slightly more than anticipated as customers shifted delivery schedules to mitigate near-term tariff impact; the full-year semiconductor growth outlook was cut from prior 10% expectations to mid-single digits.
- Industrial and medical revenue of $69 million remained 13% below last year, reflecting an extended correction period with customers still working through inventory.
- Tariff costs were higher than initially expected in Q2, creating roughly a 100 basis point gross margin headwind; excluding tariffs, gross margin would have been over 39%.
- Management cited a slowdown in China and softer DRAM growth weighing on the semiconductor market, and noted small and medium-sized I&M customers are poorly positioned to mitigate tariffs, making the I&M recovery gradual.
Guidance Changes
| Metric | Period | Current guidance |
|---|---|---|
| Total revenue | Q3 2025 | ~$440 million ±$20 million (Similar to Q2) |
| Non-GAAP EPS | Q3 2025 | $1.45 ±$0.25 |
| Gross margin | Q3 2025 | ~38.5% (Up from 38.1% in Q2) |
| Gross margin | Exiting 2025 | 39%-40% (Refined, includes tariffs) |
| Full-year revenue growth | FY 2025 | ~17% |
| Data center revenue growth | FY 2025 | Over 80% (Raised) |
| Semiconductor revenue growth | FY 2025 | Mid-single digits (Lowered) |
| Tax rate | Q3 2025 | 17%-18% |
| Telecom and networking revenue | Q3 2025 | Low $20 million level |
Performance Breakdown
| Metric | YoY | Note |
|---|---|---|
| Total revenue | +21% | Driven by upside in data center computing demand, plus year-over-year growth in semiconductor |
| Data center computing revenue | +94% | Hyperscale design wins ramping and captured upside demand for new data center power solutions |
| Semiconductor revenue | +11% | Year-over-year growth despite sequential decline; partially offset by higher service revenue |
| Industrial and medical revenue | -13% | Still recovering from an extended correction period, though market has passed the bottom |
| EPS | +76% | Higher revenue, operating leverage, and a lower-than-expected 15.3% tax rate |
| Operating expenses (% of revenue) | -260 bps | Revenue grew faster than operating expenses, demonstrating model leverage |
Earnings Call Themes & Trends
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| Data center / AI demand | 50% FY growth expected, viewed as lumpy historically | Over 80% FY growth, demand sustainable into 2026 on continued hyperscaler investment and high win rate | Up |
| Tariffs | — | Dynamic environment, ~100 bps gross margin headwind in Q2, mitigation via USMCA Mexicali qualification, geographic footprint, and supply chain optimization | Headwind |
| Gross margin improvement program | Approach 40% exiting 2025 | On track, last China factory closed in June, 39%-40% exiting 2025 including tariffs | Up |
| Semiconductor new products (EVOS, eVerest, NAVEX) | Early design wins | Revenue expected to more than double in 2025 to double-digit millions, catalyzing growth in 2026 as leading-edge processes ramp | Up |
| Industrial and medical recovery | Extended correction, declining | Passed the bottom; backlog growing, channel inventory down five quarters, modest sequential growth in H2 | Improving |
| Acquisition strategy | — | Actively pursuing with a solid pipeline of potential opportunities | — |
Q&A Summary
How sustainable is the data center run rate; is this a structural change or market share gain?
Management believes the revenue is sustainable into 2026, supported by continued high hyperscaler investment and customer forecasts. Each new GPU generation typically requires more power and a more expensive power solution, AE's win rate is high, and ancillary opportunities may add to 2026.
What is content per server/rack for AI data centers, and how do you build the forecast?
AI data center content is much higher, with 5x-10x the power consumption of non-AI data centers. The forecast is built from customer forecasts updated quarterly or more often, plus additional opportunities reusing existing technology blocks. The 5x-10x power does not translate linearly to revenue but does drive higher ASPs each generation.
Why did semiconductor 2025 growth guidance drop from 10% to mid-single digits?
Management was optimistic after a strong Q1. Since then, tariffs influenced customer ordering as they drew down inventory, China appears to be slowing, and DRAM growth has slowed. Still, at ~$200 million per quarter, semiconductor revenue is at its highest level excluding 2022.
What is the margin profile of new data center design wins versus legacy products?
Historically this market was highly dilutive (Artisan acquisition margins in the low 20s), but portfolio rationalization has brought new products much closer to the corporate average. Despite data center mix rising about eight points in Q2, AE stayed on its margin target, absorbing the dilutive effect.
Are you seeing pull-ins, double ordering, or overstocking from data center customers?
No double ordering or overstocking is seen. Data center orders are being expedited because demand keeps increasing. In industrial and medical, customers remain reluctant to build inventory given post-COVID caution and tariff uncertainty, matching orders to real demand.
Are H2 I&M gains driven by recent design wins or market recovery?
Both. Market recovery is driving stocking orders and returning customers, while design wins from the past two years are starting to contribute to H2 revenue. Acceleration is expected in 2026 as customers clear inventory, with share gains anticipated into 2027.
More on Advanced Energy Industries Inc
Reported 2025-08-05 · figures from the Advanced Energy Industries Inc Q2 2025 earnings call.
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