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Advanced Energy Industries (NASDAQ:AEIS)
Q4 2018 Earnings Conference Call
Feb. 5, 2019 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Advanced Energy Industries Q4 2018 earnings conference call. [Operator instructions] As a reminder, this conference call may be recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. Edwin Mok, vice president of strategy marketing and investor relations.

Sir, you may begin.

Edwin Mok -- Vice President of Strategy Marketing and Investor Relations

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 the Morgan Stanley TMT conference in February, the Susquehanna technology conference and Wealth conference both in March. As other events occurred, we will make additional announcements. And now let me remind you that today's call contains forward-looking statements, including the company's current views of the 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 contained on these risks and uncertainties is contained in our filings and -- with the SEC. All forward-looking statements are based on management's estimates, projections and assumptions as of today, February 5, 2019; and the company assumes no obligation to update them. Aspirational goals and targets discussed in 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 excludes the effects of discontinued operations, stock compensation expenses, amortization of intangibles, restructuring charges, acquisition-related costs and other one-time items. Reconciliations between GAAP and non-GAAP measures are contained in yesterday's earnings release, which is available on the investor relations page of our website.

We will be referring to earnings slides posted on our investor relations section of our website as well. With that, let me pass the call to President and CEO Yuval Wasserman. Yuval?

Yuval Wasserman -- President and Chief Executive Officer

Thank you, Edwin. Good morning, everyone, and thank you for joining us for our fourth-quarter earnings conference call. In the fourth quarter, we continued to execute on our strategy 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 and 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 maintained 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 but mostly out of our core etch and deposition applications. 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 our 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 road maps while expanding our leading technology and market share positions.

In the plasma-based etch and deposition applications, design wins we secured in prior quarters have already allowed us to gain share against our competitors and key customers. For example, we estimate our overall market share at one leading Korean equipment OEM has increased by 10 points in 2018. In addition, we believe we have steadily expanded our market share in other process steps. In 2018, we secured significant position in process control, including wins at the most advanced EUV inspections 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 the leading-edge semiconductor technologies firmly positioning AE as the power leader in the industries we serve. As demand stabilizes and our customers' inventory levels normalize, we anticipate coming out of this downturn with a stronger market share position and a resumption of our growth in this key market. In our industrial technology markets, revenues declined sequentially in Q4, as expected, but on a year-over-year basis they grew significantly for both the quarter and the year, driven both by our position and underlying organic growth.

This has proven to be an increasingly important balance to our semiconductor market. Over the last three years, our industrial revenue has nearly doubled, highlighting the success of our diversification strategies. Within our industrial markets, we have two major application sets. The first, which we call advanced materials, involve extending our thin film material processing technologies to adjacent markets such as PV solar, flat panel display, glass and hard coatings. Although business level declined sequentially in Q4 on lower solar PV and typical seasonal structure in glass and hard coating, we secured several new projects and design wins which expand our footprint in these markets.

Applied power is our second industrial technologies application set. These are precision power solutions serving end markets such as medical devices, analytical instruments and general industrial production applications with stringent power and thermal requirements. Applied power grew significantly both sequentially and year over year in Q4 primarily due to the acquisition of LumaSense Technologies. Beyond LumaSense, our sales into the medical and life science markets continue the long-term structural growth band, 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 our position in the analytical instruments market. During the quarter, we made progress toward integrating the LumaSense acquisition into our business. We have taken the initial steps in streamlining sales and 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 can offer now, and we are confident in the revenue synergy opportunities of this acquisition. Beyond LumaSense, we continue to actively pursue additional M&As, with targets across a spectrum of sizes, technologies and capabilities. Our service business recorded its third consecutive record quarter in Q4 and a record year in 2018. We believe our geographic expansion is driving share gains from third-party providers, and the service revenue opportunities of our growing installed base are still in the early innings.

Coupled with new service programs and the expansion of our engineered service solutions such as retrofits and upgrades, 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 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 the Q1 sequentially lower than Q4.

However, in this environment we will continue to invest for growth, capitalizing in our increasing momentum of new technologies and product introductions. At the same time, we're managing discretionary costs and improving efficiency to deliver solid profitability and cash flow. Longer term, we continue to see a bright future for our semi business driven by growing complexity of devices and increased power content in our customers' 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. Although the timing may be impacted by the level and pace of recovery in the semi industry, we remain committed to our long-term aspirational goal of revenue over $1 billion and earnings of between $5.5 to $6.5 per share.

I would like to thank our customers, shareholders, partners and our valued employees for your support. I look forward to seeing many of you in the upcoming quarter. With that, let me turn the call over to Paul.

Paul Oldham -- Executive Vice President and Chief Financial Officer

Thank you, Yuval. And good morning, everyone. In the fourth quarter, we continued 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 midpoint of our guidance range.

Our non-GAAP EPS result was 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 in 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 the 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 products as industry demand decelerated and as they reduced their finished goods inventories.

Although visibility is limited, we expect a further step down in market activity in Q1, which we believe could continue through 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 films 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. For the full year, industrial revenue grew 43% in total and delivered 15% organic growth driven by a robust design win pipeline.

Looking forward, despite concerns about macroeconomic 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 the 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 our 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.

And since it's the first full quarter after we completed our acquisition of LumaSense Technologies, I'll provide additional color on the business. LumaSense revenue was approximately $12 million in Q4, the lowest historical quarterly run rate, mostly due to weakness in semiconductor which represented 13% of sales 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 drawdown in channel inventory. We expect this trend to continue in Q1 before normalizing by Q2.

While the near-term impact to revenue is negative, we are confident that this change will enable a 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 basis, gross margin was 49.4% compared to 50% last quarter. In addition to the impacts of lower volume, we also saw higher-than-average warranty and obsolescence costs on a legacy product and increased tariffs on some of our shipped components. Although we have mitigated the vast majority of the impact from tariffs, we expect the overall impact to margin to be 50 to 75 basis points looking forward.

Looking to Q1, we expect adjusted gross margins to be down 100 to 200 basis points, primarily on lower volumes and mix. As Yuval mentioned, in an effort to further mitigate our exposure to regional risks, improve our business continuity profile and lower costs, we are investing in the evaluation of additional production options in Southeast Asia. While we expect these efforts to be cost neutral or lower in the long run, we anticipate incurring an additional 50 to 100 basis points of costs 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 a full quarter of LumaSense expenses, restructuring charges of $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 a result of investments in critical engineering programs to accelerate our innovations 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 these strategic investments offset by actions we are taking to curtail discretionary spending, drive synergies through the integration of acquired businesses and improve overall efficiencies.

As I mentioned, in Q4, we recorded $3.8 million in restructuring costs related to our manufacturing footprint optimization, acquisition integration and business efficiency improvement. Including our Q3 activities, we expect these actions to yield annualized savings of approximately $10 million to be realized over the next three quarters, split between operating expense and cost of goods 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 as a result of additional discrete items we discussed last quarter, lower foreign income and higher R&D tax 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. GAAP earnings per diluted share from continuing operations for the fourth quarter were $0.50 compared to earnings of $0.90 last quarter; and a loss of $0.73 last year, which was impacted by one-time tax expenses associated with the writedown of the solar inverter business and with U.S.

tax reform. Non-GAAP EPS for the quarter was $0.73 compared to $1.05 in the third quarter and $1.31 a year ago. Turning now to the balance sheet. Operating cash flow from continuing operations was $32.9 million, and our cash and marketable securities balance increased sequentially to $351.8 million at the end of Q4.

Net working capital decreased during the quarter by $80 million. Our receivable balance declined by over $10 million, and DSOs ended out flat at 58 days. Days payable rose by 1 day to 48 days. Inventory decreased by $12 million.

And turns were 3 times, bringing our inventory levels, adjusted for 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 spent 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 and order levels, we expect revenues to be between $138 million to $148 million and non-GAAP earnings 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 have been able to and expect to continue to deliver solid earnings and cash flow. We remain bullish about the growth potential and long-term drivers in our core markets; 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? 

Questions and Answers:

Operator 

Thank you, sir. [Operator instructions] And our first question will come from the line from Mehdi Hosseini with SIG. Your line is now open.

Mehdi Hosseini -- Susquehanna International Group, LLP -- Analyst

Yes, thanks for taking my question. A couple of follow-ups. And Yuval, if I were to look at your Q1 semiconductor commentary and guide, it suggests a quarterly revenue of $70 million to $72 million. And should we assume that 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 differently, it will be great.

Yuval Wasserman -- President and Chief Executive Officer

Well, we can assume that it remain at that level.

Mehdi Hosseini -- Susquehanna International Group, LLP -- Analyst

OK. So when you talk about the first half weak, it's you have a double-digit decline in Q1 and it would go sideways. That's where we talk about the weak...

Yuval Wasserman -- President and Chief Executive Officer

We -- Mehdi, we don't forecast Q2, but in general we believe that we saw the -- most of the change happened over the last four weeks. We saw a setting or a correction in the business last quarter, right? And we believe that right now we are pretty much at what we think is the trough for us.

Mehdi Hosseini -- Susquehanna International Group, LLP -- Analyst

OK, all right. And then just one quick follow-up on semi. Over the past couple of years '16 through '18, AE benefited from capacity at memory manufacturers, both DRAM; and then -- and some investment, technology migration on the foundry and logic. Looking forward, I see wafer capacity at a minimum and more focused on technology migration.

Does that change the dynamics for your semiconductor business, or am I just not getting that right? Any color will be great here.

Yuval Wasserman -- President and Chief Executive Officer

Sure. I think you're right. And there is a significant pull right now across the wafer industry to invest in next-generation technology when it comes to new products and processes and materials. That benefits us tremendously.

And that's one of the reasons we have invested significantly in technology development and product development over the last -- in Q4. And we'll continue to invest, especially in RF technology, in pursuing significant pull from 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 the industry to invest in accelerating our product development technology. As we mentioned in the prepared remarks, we're shipping products that are going to fabs right now for next-generation technology applications across 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.

Mehdi Hosseini -- Susquehanna International Group, LLP -- Analyst

Do the new products lead to revenue multiplier as we go through technology migration? Or do we need to wait for wafer capacity as part of the story to come in?

Yuval Wasserman -- President and Chief Executive Officer

We expect -- as you know, the adoption of new technology in the industry can range between 18 months to 24 months or even 36 months to high volume in a factory. Some of our new technologies are in early stage pilot production in fabs. We expect that to ramp, and 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 we'll realize in mass production will drive tens of millions of dollars of incremental revenue.

Mehdi Hosseini -- Susquehanna International Group, LLP -- Analyst

Got it. Thanks for a detailed comment.

Operator

Thank you. And our next question will come from the line of Krish Sankar with Cowen and Company. Your line is now open.

Rob Martins -- Cowen and Company -- Analyst

This is Rob Martins on behalf of Krish. Thank you for taking my question. Just if I look to your March guide, the revenues levels are around what you haven't seen since maybe end of 2016, early '17, where earnings came in at around $1. I know you gave some color in terms of the OpEx and the gross margins for the quarter for your EPS guide, but sort of looking out toward later part of the year, are you expecting the margins to improve a little bit? And also, what sort of level of revenue continue to decline so it'll be at break-even levels?

Paul Oldham -- Executive Vice President and Chief Financial Officer

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, post 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 it's been offset by acquisitions that we've made.

In the last five quarters, we've acquired four companies. And they, for instance -- sorry, six companies. And they bring some cost structure with them. And so what you've seen is that we've added new businesses that aren't at of same operating model, then we see an impact on earnings right now.

Now looking forward, those platforms that -- those new companies give us a platform for greater growth and in fact are contributing to earnings today. And so I guess it's simple way of saying it could be worse if we hadn't sort of diversified the company the way that we have. As Yuval mentioned, we're very excited about what's happening in semi despite the difficult revenue environment. There's a lot of investment in technology, and we'll be well-positioned as that market recovers.

And our diversification strategy make us pay dividends. Now from a profitability perspective, we still have a very solid model, we believe. At our Q1 guide, we'll still be probably profitable and generate cash. And if you look at just broadly on a breakeven point, we could see revenues dropping to the very low $100 million range before we'll be around breakeven.

And certainly, if we saw that occur, we -- there's other actions we can take as a company to sure up 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 -- the downturn that we're in today. Now I'd also say that we -- you saw that we did take some restructuring costs this quarter, and those will be implemented over the course of the year. And we think that's about $10 million in annualized savings.

A large part, that's -- actually was funding these investments in R&D. And the other natural new year costs would be aspiration, temporary measures and those types of things, but overall we would expect to 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 is -- probably there's going to be some modest investment to continue to 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 positioned stronger as the market in semi ultimately recovers.

Rob Martins -- Cowen and Company -- Analyst

Great. Thank you. That's helpful. And if just I could throw in one follow-up around your LumaSense business.

If I'm just looking at the model, it looks you guided 13% or so this quarter and semi revenue fine around like $10 million or so coming from industrial and a little bit from the service. If I'm backing out of this, it seems like the industrial is down quite a bit quarter over quarter. And now you -- it sounds like the solar business is the 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?

Paul Oldham -- Executive Vice President and Chief Financial Officer

Yes, good question. We actually guided our industrial business to be down sequentially in Q4 because seasonally it's a low quarter. In fact, it was even a little lower. And if you look at that revenue mix, industrial was actually a little below what we thought.

And semi was down oddly enough. And as the a little bit lower industrial was exactly that, it was the a little softer business from the solar PV area. And remember we got a large order, large revenue in solar PV in Q3, which sort of aggravated the compare. But solar was off a little bit.

And China was off a little bit too, just more broadly, but sequentially we expect industrial will grow in Q1. It grows seasonally. And part of the shortfall in Q4 industrial was delays 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.

Yuval Wasserman -- President and Chief Executive Officer

It had been the fastest-growing section of the company, if you look at an annual basis.

Rob Martins -- Cowen and Company -- Analyst

OK. Great. Thank you so much.

Operator

Thank you. And our next question will come from the line of Tom Diffely with D.A. Davidson. Your line is now open.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Yes. Good morning, First, a clarification. When we look at your forecast for a little step down here in the first quarter, is that driven solely by just the end markets, the noise in the end markets? Or is there a little bit of inventory -- OEM inventory correction in there as well?

Yuval Wasserman -- President and Chief Executive Officer

It's both, Tom. It's both the end market but also the drawdown of inventories.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

OK. And then basically, as you've said before, that's just finished goods working through the system.

Yuval Wasserman -- President and Chief Executive Officer

Correct.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

OK. 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 developments going forward?

Paul Oldham -- Executive Vice President and Chief Financial Officer

Yes, I'd say it's more of a new normal. We've done a careful review of our R&D projects and what were -- the opportunities are. And as Yuval mentioned, we're seeing a lot of pull from our customers for things that can have an impact in the relatively near term, not a 3-year out turn. And this is sort of more 1- to 2-year out turn.

And if you look at when the semi industry could recover, which we don't know, we think it makes sense to make these -- 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've made a step up in investment here and we'll continue that investment, but it's going to -- I would say roughly in this range is the right way to think of it.

Yuval Wasserman -- President and Chief Executive Officer

Right now -- Tom, right now budgeted in terms of R&D investment is a level that will allow us to continue to accelerate R&D and product development in conjunction with our key customers' road maps 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.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Yes, that will make 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 and a feel that might ultimately impact service over the next few quarters?

Yuval Wasserman -- President and Chief Executive Officer

We don't think so, no.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

OK. And then just finally, when you look at all that's happened over the last six, nine months, has there anything changed to your long-term view of the potential in this industry or potential event synergy in the industry?

Yuval Wasserman -- President and Chief Executive Officer

Not at all. We -- I think, 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 using this period of digestion to accelerate the development of new products and new technologies. If we look at, the industry is moving into 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 companies approach to, to deliver those technologies.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Great. Thanks for your time.

Edwin Mok -- Vice President of Strategy Marketing and Investor Relations

Thanks, Tom.

Operator

Thank you. And our next question will come from the line of Patrick Ho with Stifel. Your line is now open.

Brian Chin -- Stifel Financial Corp. -- Analyst

This is actually Brian Chin calling in for Patrick. Thanks so much for letting us ask a few question. First, a 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 -- you're going to have to relocate some of that capacity, anyways, next year? So kind of the natural order of that. So that's my first question.

Yuval Wasserman -- President and Chief Executive Officer

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 costs. 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, with just final assembly and test.

It's more about diversifying the location of origin of our products. Do you want to add anything to that, Paul?

Paul Oldham -- Executive Vice President and Chief Financial Officer

Yes. And you're right. We do -- our lease is expiring in Shenzhen. We do have extension for that actually for about a year, which gives us a nice window to, hopefully, just balance our operations.

As Yuval said, there will be a little bit of insurance costs that will be incremental, but once in place, our total costs will be neutral to lower because we'll have a balance between factories. It's not just adding a second factory. It's balancing among two to diversify our -- all of our mix really and give us more flexibility going forwards.

Yuval Wasserman -- President and Chief Executive Officer

So long term, long term, we are going to be relying on more than one factory.

Brian Chin -- Stifel Financial Corp. -- Analyst

Got it. And I'm sure it makes sense, when business is slower, to do these sorts of things and when things are kind of wrapped up, right. So another question. Appreciate all the detail on the new evaluations and certainly some breadth there in terms of product and customers.

That being said, would you put NAND and dielectric applications toward the front in terms of what could contribute sooner versus latter -- later?

Yuval Wasserman -- President and Chief Executive Officer

I'm sorry. Can you repeat the question, Brian?

Brian Chin -- Stifel Financial Corp. -- Analyst

Yes. So you talked about, I think, like five new customer evaluations, sort of breadth 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?

Yuval Wasserman -- President and Chief Executive Officer

It's -- thank you. It's across the board. It is both NAND, DRAM and logic and foundry, all across the board. Look at the industry is moving toward much more complex structures and also new materials.

These new materials require different ways of deposition and etch processes. And the -- and in NAND, for example, the increasing number of layers in the stack creates 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.

Paul Oldham -- Executive Vice President and Chief Financial Officer

The other thing I'll mention, Brian, is if you look at our platform: We address all areas of deposition and etch. And as Yuval 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 or five quarters, have been about a third each. And so as we see investment shift more toward foundry and logic, we're participating in that.

And so our business will shift a little bit with the timing of that investment flow because we play broadly in all those applications.

Yuval Wasserman -- President and Chief Executive Officer

One more comment. The adoption of EUV for 5-nanometer logic devices will require ALD and ALE processes, and we are a key supplier for those applications.

Brian Chin -- Stifel Financial Corp. -- Analyst

OK. Appreciate all the details. One last question from us. From a capital allocation standpoint, I think, based on what's authorized, you -- as you bought back a similar amount of stock here in Q1 that you did in 4Q, you might exhaust your current repurchase.

Any thoughts about continuing to look at strategic acquisition potential as well? So just kind of curious how you're thinking about capital allocation moving forward.

Paul Oldham -- Executive Vice President and Chief Financial Officer

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 may make sense. And we have capacity to do that. The -- relative to the share repurchase, the board meets regularly, at least quarterly, and reviews it every quarter. And as we consume the -- kind of the authorization, we regularly kind of refresh that.

So I wouldn't anticipate anything different going forward.

Brian Chin -- Stifel Financial Corp. -- Analyst

Great. Thank you.

Operator

Thank you. And our next question will come from the line of Pavel Molchanov with Raymond James. Your line is now open.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking the question guys. On the M&A front, you've been pursuing an industrial focus for many years now, but obviously given the pressures in 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. Is now perhaps the time to consider bulking up in some additional semi cap opportunities? Or do you think it's still too early?

Yuval Wasserman -- President and Chief Executive Officer

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 semi content in them; for example, LumaSense. LumaSense is 75% industrial, 25% semi when we acquired the company.

As we look at the semi world, being a pure-play power leading company and a leader in the critical power supplies that go into these applications, the number of potential light targeted semi for us is almost zero, especially if you consider antitrust, all right? So most likely, acquiring a power supplier to the semi industry will be a -- either none -- a risk 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.

Pavel Molchanov -- Raymond James -- Analyst

OK, that's helpful. I remember this topic was also discussed on the last quarter call, and I think your comments about your cash flow breakeven probably lend themselves to ask the question again. Any updated thoughts on initiation of a dividend as a way of perhaps kind of accentuating your return of capital to shareholders?

Paul Oldham -- Executive Vice President and Chief Financial Officer

Yes, it's good question. Thanks, Pavel. We do regularly review our capital allocation strategy, including a discussion of the dividend. At this point, the strategy remains the same, which is to use our opportunistic share repurchase plan as the method of choice to return value to shareholders.

Pavel Molchanov -- Raymond James -- Analyst

All right. Appreciate it guys.

Operator

Thank you. And our next question will come from the line of Quinn Bolton with Needham & Company. Your line is now open.

Quinn Bolton -- Needham & Company -- Analyst

Hi, Yuval and Paul. Thanks for letting me ask a few questions. I 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 a lower revenue in March is coming from inventory drawdowns versus just the overall level of lower demand.

Paul Oldham -- Executive Vice President and Chief Financial Officer

Yes. It's a good question and a tough one to answer. Obviously we don't have perfect visibility into our customers' plans and what they see, but clearly the market activity, as you've seen, Quinn, in the last three or four weeks, all of our customers and peers have kind of reset at a lower level. And to some degree, it's related.

If their business is lower, 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 there'll continue to be impact related to that. And we said in our prepared marks we -- remarks we expect these kind of conditions to persist through the first half.

And then we'll see things go from there.

Quinn Bolton -- Needham & Company -- Analyst

I guess as sort of a follow-up, Paul, on that. I think Lam, on their call, talked about WFE in '19 being front-end loaded. Some of the other OEMs have talked about more of a back-end load. Do you guys have any thoughts, as you look out, speak to your customers, what does -- 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 drawdowns that you're currently seeing?

Yuval Wasserman -- President and Chief Executive Officer

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 their 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 and -- or when you read their 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'd call target-rich environment for us when it comes to design wins and take advantage of the kind of a slowdown in the industry when everybody is focusing on accelerating product development to basically be fully aligned with the customers to make sure that we help them go to market earlier, as everybody is anticipating the resumption of growth both in capacity and also in technology nodes as we exit from this downturn.

Quinn Bolton -- Needham & Company -- Analyst

Great. Then last question from me. Just wondering if you might be able to level set us on the timing of your long-term model of $5.50 to $6.50 in EPS. How dependent is that on a recovery in WFE spending? How dependent is it on your improved share position exiting 2019 or other factors?

Yuval Wasserman -- President and Chief Executive Officer

So obviously the timing of the recovery in 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 of 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 in the future of this company. We're very confident and stay behind our strategic, aspirational goals.

And again, as we said earlier, right now it seems like we are in a kind of a lull position in the semi, but we believe that it's just a temporary situation and we expect to see the recovery with a much stronger market position and much stronger footprint around the world.

Quinn Bolton -- Needham & Company -- Analyst

Great. Thanks for letting me ask those questions.

Operator

Thank you. And I am 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.

Yuval Wasserman -- President and Chief Executive Officer

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 a note if you look at 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, in 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.

Operator

[Operator signoff]

Duration: 52 minutes

Call Participants:

Edwin Mok -- Vice President of Strategy Marketing and Investor Relations

Yuval Wasserman -- President and Chief Executive Officer

Paul Oldham -- Executive Vice President and Chief Financial Officer

Mehdi Hosseini -- Susquehanna International Group, LLP -- Analyst

Rob Martins -- Cowen and Company -- Analyst

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Brian Chin -- Stifel Financial Corp. -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

Quinn Bolton -- Needham & Company -- Analyst

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