Advanced Energy posted a record first quarter, with revenue up 26% to $511 million above the midpoint of guidance and EPS up 70% to $2.09, driven by record data center computing revenue that more than doubled year-over-year on strong AI-solution adoption. Gross margin reached 40.1%, hitting the company's initial over-40% milestone, while industrial and medical bookings recovered to their highest level since 2023. Management raised its full-year revenue and data center growth outlook, though it cautioned that downstream customer constraints should moderate data center revenue sequentially in the second quarter.

What went well
  • First quarter revenue of $511 million increased 26% year-over-year and came in above the midpoint of guidance, driven by record data center computing revenue.
  • Gross margin reached 40.1%, up 220 basis points year-over-year and the highest level since the Artesyn acquisition in 2019, achieving the company's initial milestone of over 40%.
  • Record operating income of $98 million produced first quarter earnings per share of $2.09, up 70% year-over-year and ahead of guidance.
  • Data center computing delivered record revenue of $194 million, up 9% sequentially and 102% year-over-year on strong adoption of high-power AI solutions.
  • Industrial and medical bookings grew 14% sequentially to the highest level since 2023, with a growing backlog signaling market recovery.
  • Telecom and networking revenue rose to $25 million, its highest level since 2023, driven by the production ramp of AI-related networking wins.
What went wrong
  • Industrial and medical revenue of $72 million fell 8% sequentially because factories pivoted to meet a late-quarter surge in data center demand, limiting INM output.
  • Demand mix volatility from downstream customer constraints is expected to moderate data center revenue sequentially in the second quarter.
  • Cash flow from continuing operations was an outflow of $6 million due to increased trade net working capital and seasonal timing of incentive and tax payments.
  • Supply and cost challenges, including tighter input availability and higher material premiums, are beginning to surface in the demand environment.
  • Semiconductor revenue of $219 million was roughly flat year-over-year, finishing just below last year's mid-cycle peak.

Management Commentary

Read the Q1 2026 summary ↗
Edwin Mok
Senior VP of Strategic Marketing and Investor Relations, Advanced Energy

Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy first quarter 2026 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 today's press release and presentation on our website at ir.advancedenergy.com. Before we begin, let me remind you that today's call contains forward-looking statements that 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 estimates as of today, May 4, 2026, 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.

Detailed reconciliation between our GAAP and non-GAAP results can be found in today's press release. With that, let me pass the call to our President and CEO, Steve Kelley.

Steve Kelley
President and CEO, Advanced Energy

Thanks, Edwin. Good afternoon, everyone, and thanks for joining the call. First quarter revenue came in above the midpoint of guidance, driven by record data center revenue. Total revenue increased 26% year-on-year, and gross margin exceeded 40%. In the second quarter, we expect to deliver record revenue, largely due to strength in semiconductor. Looking into the second half of 2026, we see increased demand in all of our markets. We are particularly well-positioned to benefit from AI-related capacity investments in data centers and wafer fabs. We are also seeing steady improvement in the industrial medical market, as evidenced by a 14% sequential increase in bookings and a growing backlog. We delivered over 40% gross margin in the first quarter, the culmination of a multi-year effort to improve our manufacturing efficiency and product differentiation.

Our investments in leadership technology and world-class manufacturing are paying off. Looking forward, we believe that we can further increase gross margin as high-value products ramp to volume and manufacturing efficiency continues to improve. Given our progress over the last few years, we are confident that we can achieve the longer-term goal of greater than 43% gross margin. Given the strong demand environment, we are executing our capacity expansion plans in Malaysia, the Philippines, and Mexico. Moving forward, we will focus on building out capacity at our new 500,000 sq ft facility in Thailand. Qualification builds for semiconductor and data center products are kicking off this quarter, with initial production slated for late 2026 or early 2027. Exiting the year, we expect to have over $2.5 billion in revenue-generating capacity.

The addition of Thailand will bring total capacity to over $3.5 billion once it is fully built out. Let me provide some color on each of our markets. Semiconductor revenue increased quarter-over-quarter and was flattish year-on-year. In the first quarter, customer forecast strengthened considerably, which we believe will drive record performance in 2026 and continued growth in 2027. We are delighted by the widespread customer acceptance of our eVoS, eVerest, and NavX plasma power technologies. These technologies enable significant improvements in throughput and yield at the leading edge and are expected to drive market share gains into the next decade. We are seeing wider adoption of these technologies across multiple generations of processes and device types.

We are also benefiting from an uptick in demand for our system power products, largely due to recent wins and test in wafer fab equipment applications. In data center computing, we delivered record revenue in the first quarter. Overall demand in the data center market remains very strong. Based on customer forecasts, we expect second half revenue to be stronger than first half. We continue to make solid progress developing next generation technology, including 800-V solutions. We are working closely with multiple customers who view AE as a technology leader in this space. The attributes which have fueled our success in the data center market, power density, efficiency, reliability, and development speed will be equally critical to our success in next-generation platforms. In the first quarter, leveraging our technology expertise and product portfolio, we secured multiple new wins with second wave data center customers.

Factory qualifications should be completed this year ahead of production ramps in 2027. Industrial medical revenue was up year-on-year, but down sequentially. Although demand is improving, factory priorities in the first quarter limited our output. We expect to increase our factory output in the short term, which should enable INM revenue to track bookings moving forward. In medical, we secured multiple wins in therapeutic, diagnostic, and life science applications. In industrial, we won key designs in test and measurement, factory automation, and battery backup applications. We secured many of these wins by adding custom features to best-in-class technology platforms, enabling us to meet customers' unique requirements. We have won a number of opportunities with new customers, many of whom discovered AE products on our website.

Some of these wins have been quite large, reinforcing our view that the new website is acting as a force multiplier in the INM space. Telecom and networking revenue grew to its highest level since 2023, driven by the production ramp of several AI-related wins in the networking space. I'd like to provide an update to our 2026 view. Based on strengthening demand and new product momentum, we are now expecting year-over-year revenue growth in the low to mid 20% range. This outlook represents the second consecutive year of greater than 20% growth for Advanced Energy. In semiconductor, we expect demand to start accelerating in the second quarter, supporting a stronger outlook for 2026. With some of our new products moving into high-volume production later this year, we believe that we are well-positioned to drive further growth in 2027 and beyond.

In data center, based on strong customer adoption of our high-power AI solutions, we are raising our full-year revenue growth expectation to the mid 30% range. In the industrial medical market, we expect sequential revenue growth over the next few quarters, supported by improved market conditions and the production ramps of several key design wins. For some closing thoughts. First, demand across all of our markets is strong, and we are raising our growth target for the year. While supply and cost challenges have begun to surface, we are well prepared to navigate a dynamic environment. Second, we continue to see strong pull for our new products across all target markets. Our design win pipeline is growing and is expected to drive higher revenue and profits in the coming years.

Third, we're proud to have achieved 40% gross margin in the first quarter, but we are not done. We have line of sight to 43% based on the success of our new products and efficiency gains. Finally, we have a solid pipeline of potential acquisitions and will continue to actively pursue opportunities which make strategic and financial sense. Paul will now provide more detailed financial information.

Paul Oldham
EVP and CFO, Advanced Energy

Thank you, Steve. Good afternoon, everyone. Overall, we executed well in the first quarter. Revenue of $511 million increased 26% year-over-year and was ahead of our guidance, driven by strong data center computing revenue. Importantly, we achieved our initial milestone of gross margins of over 40% despite ongoing tariff expenses and less favorable market mix than we originally modeled. It is the highest level since the Artesyn acquisition in 2019, highlighting the structural improvements we've made in operational efficiency and our product portfolio. With solid operating leverage, we delivered record operating income of $98 million. As a result, first quarter earnings per share were $2.09, exceeding our guidance and up 70% year-over-year. Now let's review our first quarter financial results in more detail.

First quarter semiconductor revenue of $219 million grew 4% sequentially, finishing just below our mid-cycle peak last year. Looking forward, our outlook is increasing based on stronger customer demand. Data center computing revenue was another record at $194 million, up 9% sequentially and 102% year-over-year. While demand remains high, we continue to experience frequent customer changes in demand mix due to various downstream constraints. While we expect this demand volatility to limit revenue in Q2, we anticipate the ramp of several programs to support a stronger second half. Industrial and medical market revenue was $72 million, down 8% from last quarter, but up 12% from last year.

We prioritized factory production to meet demand in other markets, impacting revenue for the quarter. On the other hand, demand is strengthening as bookings grew 14% sequentially, reaching the highest level since 2023. Distributor sell-through increased again and inventory levels further normalized. Telecom and networking revenue increased 17% sequentially and 16% year-over-year to $25 million. Ahead of expectations due to strength in AI-related networking programs. First quarter gross margin was 40.1%, up 40 basis points from last quarter and 220 basis points from last year. Gross margin was above our previous guidance, driven by better product mix and lower other cost of sales. Looking ahead, we expect to further expand gross margins on ramp-up of higher margin new products, improved manufacturing efficiency, and higher volume.

Operating expenses of $107 million were down slightly from last quarter and at the low end of our target range. OpEx increased 9% year-over-year, well below half of our revenue growth rate of 26%. As a result, first quarter operating income reached $98 million, and operating margin was 19.1%, up 560 basis points from last year. Depreciation was $10.5 million, and our adjusted EBITDA was $108 million, up 66% year-over-year and also a record. Other income was roughly break even versus $1 million in Q4, mainly due to higher realized FX losses. For Q1, our non-GAAP tax rate was 14.5%, below our target mainly due to timing of discrete tax items.

First quarter earnings were $2.09 per share compared to $1.94 in the previous quarter and $1.23 a year ago. Turning now to the balance sheet. Total cash and cash equivalents at the end of the first quarter was $700 million with net cash of $131 million. During the quarter, we increased inventory by $48 million, mostly in critical piece parts to support growth and improve supply resiliency. As a result, inventory days increased 10 days to 135, with turns of about 2.7x. Correspondingly, DPO increased from 68 days in Q4 to 80 in Q1. DSO increased six days to 66 days in Q1 on higher revenue.

As a result of the increased trade net working capital to support growth and to seasonal factors such as timing of incentive and tax payments, cash flow from continuing operations was an outflow of $6 million. During the first quarter, we spent $37 million in CapEx as we continue to invest in capacity and capability across our factory network. We paid $3.8 million in dividends, and we repurchased $300,000 of common stock at an average price of $209.36 per share. Turning now to our guidance. We are forecasting our second quarter revenue to be approximately $540 million, ±$20 million. We expect the majority of the sequential growth to come from the semiconductor and industrial and medical markets, while data center will moderate sequentially based on timing of customer deliveries.

We expect Q2 gross margin to improve 20 basis points-50 basis points sequentially, driven by higher volumes and more favorable mix. We expect Q2 operating expenses to increase to $112 million-$114 million, due primarily to investments in new products and annual merit increases. We expect other income to be approximately $1 million and the tax rate to remain within the 16%-17% range. As a result, we expect Q2 non-GAAP earnings per share to be $2.18, ±$0.25, on 40.6 million shares outstanding. For the full year 2026, we are raising our revenue growth target from the high teens to the low-to-mid 20s. The increased growth outlook contemplates solid customer demand, as well as some tightening in supply and increasing input costs.

In Semiconductor, we expect revenue to accelerate in the second half, with 2H revenues likely up over 30% from the prior year. In Data Center, despite a moderating Q2, we expect sequential growth in the second half and are raising our full year revenue growth outlook from over 30% to the mid-30s. In Industrial and Medical, we expect revenue growth throughout the year on higher demand and increased factory output. With continued improvement in gross margin and operating leverage in our model, we expect earnings to grow meaningfully faster than revenue for the year. Finally, we expect our 2026 CapEx will be in the $170 million-$180 million range, up slightly from our previous outlook based on initial investments in the Thailand factory to support earlier customer qualifications.

Despite higher capital spending, we are targeting 2026 free cash flow to be at or above 2025 levels. Before opening it up for questions, I want to highlight a few points. Demand is strengthening across our markets. Our diversification strategy is paying dividends as we are benefiting from accelerating growth in semiconductor, increasing investments in data center and AI infrastructure, and a recovering industrial and medical market. In addition to positive market trends, we expect our design win pipeline to contribute incremental revenue in 2026 and to support more meaningful growth in 2027 and beyond. We're excited to have achieved gross margin of over 40% this quarter and expect to further improve our margins for the full year. Longer term, with higher value new products, ongoing improvements in factory efficiency, and higher volumes, we remain confident in our ability to achieve our long-term goal of over 43%.

Finally, our balance sheet remains strong, enabling us to invest in capability and capacity to capture growth ahead while providing ample liquidity to pursue strategic acquisitions that create shareholder value. With that, we'll now take your questions. Operator?

Analyst Q&A

Jacob Moore — Analyst, KeyBanc Capital Markets
Hey, good afternoon. This is Jacob Moore on for Steve, actually. Thank you for taking our questions. First, I was hoping you could provide us some more detail on the uptake of the new semiconductor products. I mean, for leading edge, of course, but also for the opportunity at nodes larger than 2 nm that I think you were alluding to. How has qualification and uptake progressed since your last update? How do you expect it to progress through the rest of the year? What milestones are you watching out for to determine different levels of success in that rollout?
Steve Kelley — President and CEO, Advanced Energy
Yeah. Hi, Jacob. This is Steve. Yeah. We're seeing quite a bit of uptake on our leading edge technologies, namely eVerest, eVoS, and NavX. What these technologies provide to fab operators are improved yield and improved throughput at the leading edge. Right now, that's where the battles are being fought, at the leading edge, and we're winning every battle that we're engaged in. We're in a very good spot. Once these customers see the improvements we can bring at the leading edge, they want to see those same improvements at some of the other nodes they operate at. We've also seen migration from one device type to other device types.
We think this is a good thing for the company ultimately, because it will allow us to basically ramp our new product revenue faster than we originally expected. We expect to see most of the new product revenue become meaningful, you know, starting late this year, but really into 2027 and 2028 as some of these node transitions occur.
Jacob Moore — Analyst, KeyBanc Capital Markets
I appreciate that. That's helpful. Second question from us, I actually wanted to focus on industrial and medical, which looks like it could represent either another leg of growth or help extend the growth profile beyond the next, call it, 12-18 months. I guess first, can you just speak to the split that you're seeing between market growth and share gains? Maybe you could touch on the status of potential M&A, rehash what you're targeting and how that landscape has changed since you first began the hunt to expand there.
Steve Kelley — President and CEO, Advanced Energy
Sure. Yeah. I think the good news regarding industrial and medical is the market has recovered. We just went through a, you know, painful two-year inventory correction period after the COVID supply chain issues. Based on what we see today, as far as our increased bookings, increased backlog, we think we're in very good shape from a market standpoint. We're seeing both the industrial and the medical markets pick up. Within those markets, test and measurement, aerospace and defense, you know, factory automation, robotics, and anything related to AI are leading the way. We think that the market share gain that we expect over the next year and a half is coming from new products. We have a number of significant design wins in our target segments.
They're gonna help us, you know, pull ahead of the competition, essentially. I think we're in very good shape in INM. As far as M&A goes, you know, I've said many times that our primary focus is to increase our breadth in industrial and medical. We think this is a pretty fragmented market where we can, in addition to our organic efforts, grow inorganically. This will be an objective for us. We think, I think some of the valuation mismatch we've had in past years, those mismatches are starting to close, and that will allow us, you know, to make an acquisition sometime in the not-too-distant future.
Jacob Moore — Analyst, KeyBanc Capital Markets
Okay. Very helpful. Thank you.
Mehdi Hosseini — Analyst, SIG
Yes, it was on mute. Thank you. Thanks for taking my question. Steve, just a clarification. You talked about two capacity expansion and talked about incremental revenue. Can you just tell me what your revenue would be once you're done with these capacity expansion projects?
Steve Kelley — President and CEO, Advanced Energy
Yes. you know, in my prepared remarks, I referred to the investments we're currently making in the Philippines, Malaysia, and Mexico, and that we expect to be at a run rate or a capacity revenue run rate of over $2.5 billion. this is our potential essentially after the—
Mehdi Hosseini — Analyst, SIG
Right.
Steve Kelley — President and CEO, Advanced Energy
—investments in the current factory network are done.
Mehdi Hosseini — Analyst, SIG
Sure.
Steve Kelley — President and CEO, Advanced Energy
The second remark I made was on Thailand. We are gonna bring up Thailand earlier than we expected based on the strength we're seeing in data center and semiconductor. We think once Thailand is built out, that adds more than $1 billion of revenue-generating capacity. In total, you know, I think, we'll be in a position to ship in excess of $3.5 billion with our current factory network plus Thailand.
Mehdi Hosseini — Analyst, SIG
Gotcha. These capacity expansion projects, when would it materialize? Would that be in the next one or two quarter, or would you need more time for the expansion?
Steve Kelley — President and CEO, Advanced Energy
Yeah. For the current factory network, it's the expansion effort is underway, and we'll have that in place in the second half of this year. That's, you know, right around the corner. For Thailand, we'll start the investments late this year. We're pulling in some of the spending we had expected to make in 2027 into second half of 2026, so that we can start up production lines for data center as well as production lines for semiconductor.
Mehdi Hosseini — Analyst, SIG
Okay.
Steve Kelley — President and CEO, Advanced Energy
We're gonna start that effort with large customers and with the higher volume products.
Mehdi Hosseini — Analyst, SIG
The 43% margin target, is that inclusive of these capacity expansion projects?
Steve Kelley — President and CEO, Advanced Energy
It is, yes. We comprehend the Thailand expansion in that number. Really that number is going to be driven by increasing new product mix. As we introduce new products, they typically carry better margins than the older products. You know, secondly, we think we get better from a manufacturing efficiency standpoint.
Mehdi Hosseini — Analyst, SIG
Sure. May I squeeze one more follow-up? That actually is as a follow-up to these capacity expansion projects. Just strategically, why not focus on executing on these expansion projects, executing on expanding TAM, especially on the data center? Why dilute your effort by having M&A on the side or in parallel?
Steve Kelley — President and CEO, Advanced Energy
Yeah, I think it's, you know, it's possible to do both. I think we spent the last three years basically streamlining our manufacturing capacity. You remember we broke ground on Thailand in 2023, so this has been in the works for a while. I think at the same time, it's very difficult to reach our growth targets in INM without acquisition. This is why we think in INM in particular, it makes sense to push forward organically and inorganically.
Mehdi Hosseini — Analyst, SIG
Got it. Thank you.
Steve Kelley — President and CEO, Advanced Energy
Yeah.
Krish Sankar — Analyst, TD Cowen
Yeah, hi. Thanks for taking my question. Steve, for first question is in the data centers. I understand there's like quarterly volatility in data centers revenue. If I take your first quarter and analyze it's almost like low 30% growth. You're guiding to mid 30%+. I'm just wondering, is the data center growth this year inhibited due to the fact that components are constrained, or is there something else going on in terms of the build-outs or market share or something else?
Steve Kelley — President and CEO, Advanced Energy
Yeah, I think that's a great question. As we look forward into 2026, the forecast, the unconstrained forecasts are quite strong, but our customers are dealing with downstream constraints. That's really tempering expectations for 2026. However, you know, I think we think that some of these constraints will be addressed, that would allow us to increase our forecast. I'd say in data center, there's definitely a bias to the upside in our 2026 forecast. Again, some of these constraints need to be knocked down, then we'll be able to take advantage of, you know, better short-term SAM. I think you may have noticed that our inventory is going up.
Much of that increase is us preparing to take advantage of these upsides that appear as our customers knock down these short-term constraints. You know, we are ready to respond if these constraints are addressed. Actually, there is some of that in the first quarter. We're able to outperform in data center in the first quarter, largely because some of the constraints were addressed by our customers.
Krish Sankar — Analyst, TD Cowen
Gotcha. Thanks for that, Steve. A similar question on the semiconductor side. When I look at your full year revenue guide, let's say mid 20% revenue growth, data center mid 30%, it looks like semis is probably undergrowing what your deposition and etch customers are talking about for WFE in the high 20%. I'm just curious, like, what's going on the semiconductor side. Are you just being conservative, or do you think that semi growth could be actually high 20s for you too?
Steve Kelley — President and CEO, Advanced Energy
Yeah. I think if you look over time, we had a good year last year. It was our second largest revenue year in our history. We came into 2026 pretty hot. As you look forward in 2026, actually, if you compare the second half of 2026 to the second half of 2025, our revenue in semiconductor will be up more than 30%. We're gonna be going very hot into 2027. We're, you know, we are very happy with our backlog in semiconductor, and that's one of the reasons we're gonna be opening Thailand faster than we expected.
Krish Sankar — Analyst, TD Cowen
Thanks a lot, Steve. That makes sense. Yeah.
Steve Kelley — President and CEO, Advanced Energy
Yeah.
Jim Ricchiuti — Analyst, Needham & Company
Hi, thanks. Just wanted to go back to the data center computing growth that the moderation you're anticipating in Q2. Was there any pull-in activity into Q1? As you talk about growth accelerating again, is that something we should see as early as Q3, or do the constraints of your customers that they're facing, does that mean the growth pickup is more in Q4?
Steve Kelley — President and CEO, Advanced Energy
Yeah, Jim, I wouldn't characterize the Q1 outperformance as a pull-in. I think it was us taking advantage of an opportunity that was created when our customers were able to address their supply constraints downstream. I think that's an indicator of what's gonna happen, you know, in future quarters in 2026. Very difficult to predict, we know the demand mix is quite dynamic. We're trying to stay in a position where we can respond quickly to changes in demand from our customers. I think that again, there's upside potential in data center this year, and we're positioning to take advantage of that.
Jim Ricchiuti — Analyst, Needham & Company
When you talk about the factory priorities, limiting the INM output in Q1, I'm wondering if you could size that. Maybe elaborate, were these resources shifted to other verticals? Can you talk about that?
Steve Kelley — President and CEO, Advanced Energy
We build the INM product in the same factories as we build the data center product. We had a surge in demand from data center, you know, in Q1, particularly in the last month of the quarter. Our factories pivoted to data center, and, unfortunately, we underperformed in industrial medical. You know, I'm giving my personal attention to make sure we catch up to that demand over the next two quarters. I think we'll solve this problem. The good news is we know what to build. You know, our backlog is robust now, so we're not taking a guess. We know exactly what the customers need, and we're going to build it.
Jim Ricchiuti — Analyst, Needham & Company
Okay. You expect to catch up in Q2 there?
Steve Kelley — President and CEO, Advanced Energy
Yeah, it'll be Q2 and into Q3, and I think we'll be caught up.
Jim Ricchiuti — Analyst, Needham & Company
Maybe one final question just for me is, are there semi device types in particular that you're gaining traction with the new products?
Steve Kelley — President and CEO, Advanced Energy
You're talking about semiconductor, processes and so forth, Jim?
Jim Ricchiuti — Analyst, Needham & Company
Yeah.
Steve Kelley — President and CEO, Advanced Energy
I think we've basically focused on the leading-edge processes, both in memory and in logic. We've been working with our customers very closely for the past three years. Also our customers are also involved in the equation. A lot of iteration going on. What it's leading to is the realization that these technologies provide real benefits at the leading edge. That's why we're excited about the potential to grow share, you know, based on these new technologies. We can grow share in both memory and in logic.
Jim Ricchiuti — Analyst, Needham & Company
Are you willing to share any kind of revenue, expectation for this year from the new products collectively?
Paul Oldham — EVP and CFO, Advanced Energy
Yeah, we haven't really guided to that, Jim. We said we made our goals last year. We expected to increase that significantly this year. Based on the timing of when these nodes start to ramp, we said there'd be more significant growth in 2027.
Jim Ricchiuti — Analyst, Needham & Company
Thank you.
Scott Graham — Analyst, Seaport Research Partners
Hey, good afternoon. Thanks for taking my question. I have a couple follow-ups on data centers, and maybe I'll just ask you all at the same time. Your sales in the first quarter were above your thinking, and it looks like that's gonna sort of, you know, stabilize, you know, kind of go a little bit the other way in the second quarter. I understand it's a customer thing, but I guess my question is, why wouldn't customers, I mean, data center demand is so dynamic right now, as you guys know, and it seems like these same customers face some challenges, yet were able to kind of, for lack of a better term, fix them in the first quarter. Why won't that happen in the second quarter?
Steve Kelley — President and CEO, Advanced Energy
Yeah, it's possible that happens. I think we do tend to guide conservatively. You know, we see what's in front of us. We take the forecast into account, and we typically will not include the upside in our forecast. Again, you know, we're trying to stay as flexible as we can so we can respond quickly to our customers' changing forecasts. You know, I think if there is an upside, we can take advantage of it.
Scott Graham — Analyst, Seaport Research Partners
I also know that your guidance for the quarter and the year in data centers was not including new customers. I'm wondering if you have a slack period in 2Q, does that enable some revenues harvested from new customers to backfill?
Steve Kelley — President and CEO, Advanced Energy
I don't think so. The position we're in right now with the second wave customers is that we've completed a number of qualifications in the first quarter, and we're working on additional ones this quarter. Those second wave customers are now qualifying our factories to produce those products. That's typically a six to nine-month process. Right now, we expect the second wave customers to begin contributing meaningfully on the revenue line in 2027. There is some potential to pull some of that revenue into the fourth quarter of 2026.
Scott Graham — Analyst, Seaport Research Partners
Understood. I guess my last question is, on the gross margin. I think your conference call last quarter, you talked about, "Hey, we think we're gonna hit a 40% gross margin this year," implying one of the quarters. Now it looks like you're gonna not only hit it in the first quarter, but now you're gonna hit it again the second quarter off of your guidance. I'm just wondering, is now a 41% gross margin, a point higher, doable for one of the two quarters in the second half?
Paul Oldham — EVP and CFO, Advanced Energy
This is Paul. I think you're right about that. Clearly we're a little bit ahead in Q1. We think we can build on that going forward, 'cause we are seeing traction on some of our new product mix. We're making progress in some of the factory optimization and other things. In general, as we have higher volumes, we should get some benefits. When we look forward, we see that we should be able to improve gross margins modestly each quarter, which could definitely mean that we could get to 41% by the end of the year.
Scott Graham — Analyst, Seaport Research Partners
Thank you.
Elizabeth Sun — Analyst, Citi
Hi, good afternoon. Thanks for taking my question. I guess my first question is on the 800-V transition. Steve, you mentioned in your prepared remarks you are working with multiple customers, working on some solutions. I was just wondering if you could double-click into what kind of solutions you are working on and what kind of customers you are working with, and the ramp of the timing of the ramp in 800-V. I think your competitor is talking about second half ramping as actually. Also, what will be the do's and don'ts for AE's demand when the transition happens?
Steve Kelley — President and CEO, Advanced Energy
Yeah, thanks, Elizabeth. Right now, we're sampling our solutions to key customers, and we have, you know, a number of different options. We have developed some 800 V-50 V modules that provide 4,000 W power, 6,000 W output power, and 8,000 W output power. We have different options for our customers. What differentiates us is very high efficiency, around 98% efficiency, high power density and high reliability. These are very important to customers. We've been told that we're leading from a technology standpoint. We've got a number of customers that are very interested in technology. We're sampling it. We expect the initial production revenue, most of that will start next year.
I think you'll see some small amount of revenue this year, but really it's starts in earnest in 2027 and becomes more meaningful in 2028. We think it's also good news for us because we think it increases our dollar content per rack. Generally speaking, these types of changes in technology are good for AE because we have a lot of the knowledge already in-house. We're I think very well positioned as some of these data centers transition to 800 V.
Elizabeth Sun — Analyst, Citi
Got it. The follow-up on the second wave of customers in data center. First question is just a clarification. If the demand pulls in into later half of this year, would that be incremental to the 35-ish% data center growth? How should we think of the size of the ramp or the size of the volume potential? If it pulls in, do you have enough capacity to support the ramp if that pulls in early?
Paul Oldham — EVP and CFO, Advanced Energy
Yeah. Elizabeth, this is Paul. Yeah. We don't have any forecast for our second wave customers in our guidance for 2026. Any of that we're able to pull in would be upside to the 35% growth. I think getting started on the, you know, winning some of the designs, and getting started on the actual manufacturing line qualification on that, I think is pretty exciting for us because we're seeing in general that pull in. We haven't quantified what that is. These aren't gonna be customers, you know, that are the same size as our, you know, kind of primary customers, but they could be meaningful, and there's several of them.
On balance, we see this as a pretty significant, you know, driver or supporter to growth in 2027 from, you know, from a data center as we essentially expand our penetration across a broader set of customers.
Elizabeth Sun — Analyst, Citi
Got it. Thanks, Paul. Thanks, Steve.
Quinn Fredrickson — Analyst, Baird
Thank you for the question. Just as we think about the data center outlook that you've outlined for 2Q and the back half. How should we think about supply constraints playing out from here? Are you anticipating those sequentially ease at all or stay the same in order to hit the guide that you've discussed?
Steve Kelley — President and CEO, Advanced Energy
Quinn, the supply constraints I've discussed so far, have been downstream supply constraints. They're really constraints our customers are dealing with. That's been the limiting factor, I think, in our forecast. So far, I think we're doing a pretty good job of managing our supply chain. That's not to say we won't run into issues, but so far nothing has really stopped us from shipping product. I'm hopeful that our customers can knock down some of the supply chain issues later this year, and we can increase our forecast.
Quinn Fredrickson — Analyst, Baird
That's helpful. Thank you. Second, just on the new products, curious if there's been any move forward in the timing of your dielectric etch wins converting to revenue at all? I know one of your larger customers was recently discussing a pull forward of NAND conversion spending. Is there a potential that could move up the timing of new equipment orders and your wins in dielectric etch at all?
Steve Kelley — President and CEO, Advanced Energy
Yeah. On dielectric etch, we haven't been too specific about wins, but I'm very confident that we'll be able to communicate wins later this year. You know, I think that what we're doing probably has little connection to the NAND upgrade exercise. Has a lot to do with next generation nodes in DRAM and logic.
Quinn Fredrickson — Analyst, Baird
Great. Thank you.
David Duley — Analyst, Steelhead Securities
Yes, thank you very much for taking my questions. I guess the first off, as far as the improvement in gross margins in the March quarter, that was done with the semi-revenue being down. I'm kind of curious if you could just elaborate on why the gross margin was better in Q1 given the semi mix was down. I guess a second question I have is regarding your new growth rate for semi in the second half. It was accelerating, I think, by 30%. Do you think that's more driven by your products actually starting to ramp up, you know, or is it more driven by just 2-nm spending is broadening out definitely beyond TSMC, as we've seen in the news lately with both Samsung and Intel kind of joining the party?
Paul Oldham — EVP and CFO, Advanced Energy
Yeah, good questions, Dave. I'll take the first one. Yeah, margins were up in Q1, and I think the thing that we saw that was pretty encouraging was that at the product level, the mix was better. We're seeing a little better traction on our new products, you know, kind of across the portfolio, which carry better margins. Even though, as a proportion, data center was higher and semi was a little bit lower, at the product level, we saw improvement. I think that's encouraging because as you know, we're counting on, you know, that being a driver of gross margins as we move towards our 43%.
Frankly, we think that can carry on through the year, and we should get some benefit given the, you know, what we see accelerated growth in semiconductor right now. We also saw a little better what I'll call other cost of sales. Just a variety of things were a little bit better, including some cost of quality, you know, made a little bit of progress on some of our ramp costs and efficiency. We had a very modest pickup from tariffs. On balance, we had a few things kind of go the right way, and that offset, you know, kind of more broadly our factory ramp costs and slightly higher material premiums. On balance, we feel good about the progress we're seeing.
We think that can carry forward, which is why we've, you know, essentially, you know, mulled up slightly our gross margin outlook for the year.
Steve Kelley — President and CEO, Advanced Energy
Maybe I'll make a few comments on the revenue increase. I think as you look at our forecast for second half and the growth that we're forecasting, it's primarily due to growth in our flagship product revenue. When I say flagship, I mean the older products that have been designed in for a while. We're also being helped by wins in the system power space with semiconductor testers as well as with wafer fab equipment. The new products become significant starting in Q4 this year, but they become a bigger factor in 2027.
David Duley — Analyst, Steelhead Securities
Maybe you could comment a little bit on what your customers are saying about, you know, growth in 2027 and, you know, if the 2-nm kind of ramp is spilling over into 2027? I would think that your semi business would perhaps grow faster in 2027 than it grows in 2026.
Steve Kelley — President and CEO, Advanced Energy
Yeah. Yeah. Our customers in semiconductor are very enthusiastic about 2027. I think one of the key factors is, at the leading edge, there's a lot of new clean room space coming online in 2027, and so they'll have a place to put all this new equipment. You know, again, if you combine that with new product revenue becoming more significant in 2027 due to the node transitions, I think it's gonna be a very good year for Advanced Energy in the semiconductor space.
David Duley — Analyst, Steelhead Securities
Okay. Final thing for me, you mentioned it twice in your prepared remarks and the Q&A here, is the systems business for, I think you said test, semiconductor testers and other wafer fab equipment. Can you just kind of help me understand how that's different than, you know, the boxes you provide for, you know, your big OEM customers at this point?
Steve Kelley — President and CEO, Advanced Energy
Yeah. Yeah. Let me just explain that. We divide it broadly into two categories. Plasma power is basically RF or pulsed DC power we provide that's injected into a plasma chamber, and that's been our traditional business. We, when we talk about System power, we're talking about the, you know, the power that the machine uses to operate. You know, think of it as between the wall and the machine. That's System power. That could also be relatively sophisticated because these machines are very complex, and we've made a, you know, push into this area over the last few years, and it's starting to pay off for us.
David Duley — Analyst, Steelhead Securities
How big a TAM do you think this is? Excuse me.
Edwin Mok — Senior VP of Strategic Marketing and Investor Relations, Advanced Energy
Dave, what we have said is that in aggregate, all of our plasma power is over a $1 billion market opportunity for us. That's what we disclosed in 2012 analyst event, and that's, you know, what we have said.
David Duley — Analyst, Steelhead Securities
Okay. Thank you.
Brian Chin — Analyst, Stifel
Hi there. Good afternoon. Maybe two questions from us. First, on the data center. Definitely hear that the quarterly revenue progression in DC is more owed to timing and variability. Just thinking on a full year-over-year perspective, increasing power content per rack wasn't a major tailwind last year. It should still be a tailwind, but would you say it might be less pronounced this year relative to last year?
Steve Kelley — President and CEO, Advanced Energy
I don't think so because we continue to develop solutions for increased power. It's just a continuous exercise for us. I would say this is one of our advantages because the basic challenge is to continue to increase the power density at the same time, don't sacrifice reliability or efficiency. Basically, you have the same amount of space, but you have to produce a lot more power. To do that reliably and efficiently is a challenge from a design standpoint. That's one reason we've been able to be successful, you know, with our hyperscale customers, and we've been successful now with the second wave customers because we have that combination of technical features as well as good speed of development.
Finally, we've got the factory network to produce these boxes in high volume.
Brian Chin — Analyst, Stifel
Okay. Thanks, Steve. Then second question on semicap. And answer this however you're comfortable addressing it. In terms of that second half guide that you're providing, do you think you're shipping in sync with customers or perhaps a little ahead given that multi-year visibility and outlook? Then kind of second part of that is from a supply chain perspective, given the duration of visibility, you know, certainly well into next year, has that given you a lot of confidence to go out and maybe be really proactive sourcing some of those components, maybe call it chips, other materials that can be issues as you get through, like, a multi-quarter growth period?
Steve Kelley — President and CEO, Advanced Energy
Okay, Brian. On the, you know, customer demand being in sync with their requirements or, you know, are they putting in inventory, essentially, our view is that we're more or less in sync. You know, I think what we've seen is across the customer set, you know, that we've received increased orders, and that's because of leading edge primarily. We know the end market demand is there. I think the constraint right now in semiconductor is really clean room space. If some of these clean rooms come on faster than expected, then that will increase demand. If they come on slower than expected, then we may create a little bit of inventory, but I don't think it'll be much.
As far as supply chain goes, you know, it's a hot topic, right? Especially after COVID when we had to deal with so many issues. So we have been leaning in to inventory so that we are able to have some reserve in case things get tight or lead times go out. So I think we spend quite a bit of time on the supply chain topic. You know, one of the things we did during the COVID supply chain shortages was to develop more second sources, which we've done, so that gives us more flexibility. Where we couldn't develop a second source, then we put in extra inventory.
You know, I think we're going into this with our eyes wide open, and I'm pretty aggressive on the inventory front.
Brian Chin — Analyst, Stifel
Thanks. Appreciate it.
Jim Ricchiuti — Analyst, Needham & Company
Hi, Paul, you may have given this. I apologize if you did, but any color on OpEx as we look out over the balance of the year beyond Q2? Anything we should be thinking about?
Paul Oldham — EVP and CFO, Advanced Energy
Yeah, Jim, obviously, OpEx was down a little bit in the first quarter. We've done a good job controlling spending there. In the second quarter, we do have our annual salary or merit increases. We've guided second quarter up $5 million-$7 million. We continue to expect that that run rate will increase, you know, a little bit every quarter, kind of what we said before as we invest in these new programs, primarily in engineering, as well as some variable costs with higher volumes. We would expect operating expenses to be in this $460 million range for the year and kind of graduating up, you know, kind of sequentially to, you know, so to basically at that level.
Jim Ricchiuti — Analyst, Needham & Company
Got it. Okay. Thanks a lot.
Source: ADVANCED ENERGY INDUSTRIES INC earnings call transcript (2026-05-04). Management commentary and analyst Q&A are reproduced as delivered; speaker roles as stated on the call.

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