AEIS Q3 2025: Data Center Revenue Soars 113% as AI Demand Drives New Baseline
Advanced Energy’s Q3 results mark a decisive inflection point as data center computing revenue more than doubled, offsetting semiconductor softness and validating the firm’s diversification thesis. Gross margin expansion and record earnings per share reflect both operational leverage and successful cost actions, while a robust capital investment cycle positions AEIS to capture further AI-driven demand into 2026. Management’s raised outlook and readiness to scale new capacity signal a structural shift in the company’s growth trajectory.
Summary
- AI Infrastructure Tailwind: Data center revenue surge establishes a higher baseline for future growth.
- Operational Leverage Materializes: Cost actions and factory consolidation expand margins despite mix headwinds.
- Capacity Readiness: Thailand facility and capital investments set up AEIS to absorb further demand surges.
Performance Analysis
Advanced Energy delivered a standout Q3, with total revenue up 24% year over year, driven overwhelmingly by a 113% surge in data center computing, which now comprises a significant portion of the business. Semiconductor revenue was flat year over year and down sequentially, reflecting near-term market volatility, but management signaled confidence in a second-half 2026 rebound as new products ramp. The industrial and medical segment showed sequential improvement, while telecom and networking rebounded from prior lows, aided by AI-related demand.
Gross margin expanded to 39.1%, up 280 basis points year over year, as cost savings from the China factory closure and better factory loading offset the dilutive impact of higher data center mix. Operating margin reached 16.8%—the highest since 2022—while earnings per share hit a multi-year high, reflecting both revenue growth and disciplined cost control. Cash flow was robust, with free cash flow more than doubling despite elevated capital expenditures focused on capacity and infrastructure for data center growth.
- Data Center Revenue Outpaces All Segments: Now a core growth engine, with new wins entering production in Q4 and Q1 2026.
- Margin Expansion Despite Mix Headwind: Factory consolidation and tariff mitigation offset lower-margin data center ramp.
- Capital Deployment Accelerates: CapEx at the high end of guidance, supporting both near-term ramps and long-term scale.
The quarter’s results demonstrate the power of AEIS’s diversified market exposure, with AI infrastructure spending now a structural driver and margin expansion achieved even as business mix shifts. The company’s ability to flex operationally and invest ahead of demand underpins management’s increased confidence in sustained growth.
Executive Commentary
"Third quarter revenue and earnings exceeded the high end of guidance, largely due to record data center revenue, which more than doubled year on year. Total company revenue increased 24% from last year, our fourth consecutive quarter of year over year growth. Strong revenue, solid execution, and cost savings from our China factory closure pushed gross margin higher. As a result, we delivered the second best quarterly EPS performance in our history."
Steve Kelly, President and CEO
"Gross margin improved quarter over quarter and exceeded our target, driven by faster than expected benefits from our China factory closure and lower tariff costs. Operating margin improved 220 basis points sequentially... we more than doubled our operating and free cash flow over last year, even as we increased capital investments to meet growing data center demand."
Paul Odom, Executive Vice President and CFO
Strategic Positioning
1. Data Center Computing: AI-Driven Growth Engine
AEIS’s data center segment has transitioned from cyclical to structural growth, with AI infrastructure investments fueling a 113% revenue increase and new customer programs entering production in late 2025 and early 2026. Management expects 25-30% growth in 2026, supported by both existing hyperscale clients and a pipeline of “second wave” enterprise customers, leveraging modular technology blocks to enable rapid customization and scale.
2. Semiconductor: Positioning for Leading-Edge Upside
While near-term semiconductor revenue was flat, AEIS is poised for outperformance as leading-edge logic and memory demand accelerates in the second half of 2026. EVOS and Everest platforms, proprietary plasma power technologies, are winning design slots with early adopters and are expected to drive both revenue growth and share gains as next-generation equipment ramps. Management sees potential to “run the table” on upcoming opportunities, especially in underpenetrated dielectric etch applications.
3. Manufacturing Footprint: Scalable and Flexible
The new Thailand factory, a 500,000 square foot site, is fully facilitized and can deliver $1 billion in incremental annual revenue. Factory consolidation, including the closure of the China plant, has improved cost structure and margin resilience. AEIS is prepared to bring on new customers and ramp production rapidly, with the ability to absorb demand spikes while maintaining operational discipline.
4. Industrial & Medical: Design Win Pipeline Expands
Sequential growth in industrial and medical reflects inventory normalization and new design wins, especially in aerospace, defense, and medical applications. Platforms like Evergreen and NeoPower, configurable power solutions, are gaining traction and expected to drive share gains into 2026, supported by digital marketing and distribution partnerships.
5. Capital Allocation and M&A: Focused on Strategic Fit
Elevated capital investment is aimed at capturing near-term AI demand, while M&A priorities remain focused on the industrial and medical segment, where AEIS sees a fragmented market ripe for consolidation. The company’s strong cash position and disciplined approach enable both organic and inorganic growth without compromising margins.
Key Considerations
This quarter’s results highlight AEIS’s transition from cyclical to secular growth, with AI infrastructure investment and operational execution driving both top-line and margin expansion. The company’s ability to flex manufacturing, control costs, and invest ahead of demand sets it apart in a dynamic environment.
Key Considerations:
- AI Infrastructure Cycle: Data center demand is now a structural, not just cyclical, growth driver for AEIS.
- Margin Management: Despite higher data center mix, gross margin continues to expand, reflecting cost discipline and operational leverage.
- Manufacturing Scalability: Thailand facility provides a rapid path to incremental capacity, supporting both hyperscale and emerging customers.
- Semiconductor Upside: New product wins and leading-edge exposure position AEIS for outsized growth as WFE recovers.
- Ongoing Tariff Volatility: Tariff costs remain dynamic, but mitigation efforts have thus far limited impact on profitability.
Risks
Key risks include potential demand volatility in AI and semiconductor end-markets, ongoing tariff and trade policy uncertainty, and the challenge of maintaining margin discipline as data center mix rises. Execution risk exists around scaling new capacity, especially as AEIS brings on new customers and ramps the Thailand facility. Management’s ability to balance growth, cost, and customer concentration will be tested as the business scales.
Forward Outlook
For Q4 2025, AEIS guided to:
- Total revenue of approximately $470 million, plus or minus $20 million
- Gross margin between 39% and 40%, with tariff headwinds partially offset by cost actions
- Non-GAAP EPS of $1.75, plus or minus $0.25
For full-year 2025, management raised guidance:
- Total revenue growth outlook increased from 17% to 20% year over year
- Data center computing revenue to more than double 2024 levels
- Gross margin expansion of 240 basis points and operating margin improvement of 530 basis points expected
Management cited:
- AI infrastructure investments as a durable growth catalyst
- Readiness to ramp Thailand facility and absorb incremental demand
Takeaways
AEIS’s Q3 results confirm a new phase of structurally higher growth, underpinned by AI-driven demand and operational execution that delivers both margin expansion and cash flow strength.
- Data Center Now a Core Growth Engine: AEIS’s ability to double data center revenue and sustain high levels sets a new baseline for future performance, with further upside from “second wave” customers and next-generation designs.
- Operational Flex and Margin Discipline: Factory consolidation, cost controls, and tariff mitigation have enabled margin expansion even as business mix shifts, validating the company’s diversified model.
- Watch for Semiconductor Ramp and Capacity Execution: Leading-edge product wins position AEIS for outperformance as WFE recovers; investors should monitor the pace of new customer ramps and Thailand facility utilization as key drivers into 2026.
Conclusion
Advanced Energy’s Q3 marks a structural inflection, with data center demand and operational leverage driving both growth and margin expansion. The company’s readiness to scale, disciplined capital deployment, and diversified market exposure position it for continued outperformance as AI and semiconductor cycles unfold.
Industry Read-Through
AEIS’s results confirm that AI infrastructure spending is now a secular force, with power and thermal management suppliers seeing sustained demand and elevated capital investment cycles. Gross margin expansion amidst mix headwinds signals that operational agility and factory consolidation are now prerequisites for success as data center and semiconductor cycles converge. Peers in power conversion, thermal, and electronics manufacturing will face similar challenges and opportunities as hyperscale and enterprise customers accelerate next-generation infrastructure rollouts. Tariff volatility and supply chain agility remain industry-wide watchpoints, with winners defined by their ability to scale efficiently and capture share in fast-evolving end-markets.