Advanced Energy (Nasdaq - AEIS) -- Straying From Semiconductors

Advanced Energy, Inc. (Nasdaq: AEIS $12.00) announced second quarter 2012 results that were in line with our expectations. Revenues of $115.7 million were up 9.4% sequentially, from $105.7, but dipped 16.2% year-to-year ($138.2 million). Gross margins should improve from this point, though, as the company completed a series of cost cutting measures to eliminate roughly $30 million of operating expenses annually. Advanced Energy hopes to slash another $15 million to $20 million in manufacturing costs over the next year.

The company is de-emphasizing its semiconductor segment. Thin films accounted for 70% of sales in the second quarter of 2011; in 2012, thin films comprised 56% of sales in the quarter. Thin film sales were down 33% from the previous year, from $97,331 in 2011 to $64,843 in 2012. Non-semiconductor thin film sales (architectural glass, displays) advanced. Thin film revenues were up 7% sequentially from $60.4 million in the first quarter of 2012. They were up 19% from $54.4 million in Q4 2011. Semiconductor sales suffered due to an oversaturated market. The segment will still be important, but AE thinks more opportunities exist in its solar inverters and non-semi thin films.

Solar sales improved 24% year-to-year. Revenues totaled $50.8 million for the second quarter, compared to $40.8 the year before. It was also a sequential improvement of 12% over last quarter ($45.4 million). The solar segment should continue to perform well the rest of the year, as the third and fourth quarters tend to be the strongest. Advanced Energy is trying to level out the cyclicality in its sales, but that might prove tough considering solar tends to slow in the first quarter, when winter weather limits installations in the United States and Canada, where the company primarily operates.

The company seems more concerned with reducing costs than it does with increasing sales. This is kind of concerning given the stiff competition AE faces in both thin films and solar. Their products are praised by their customers, but the company cannot rest on its meager laurels in this environment. The non-semi thin films are performing adequately, and the solar backlog is the largest in company history. One wonders if the cost reductions in manufacturing will affect the quality of the products. Obviously, that remains to be seen. The company’s backlog could be larger, but AE only goes “for the business we want to go for,” according to CEO Garry Rogerson. Other companies have begun introducing microinverters, which are generating lots of buzz and claim to be more efficient than central inverters. Advanced Energy is content (for now) to continue with central inverters. While they may be of the highest quality, it won’t matter if there’s better technology out there.

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