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Executives

Annie Leschin - Investor Relations

Hans-Georg Betz - Chief Executive Officer, Director

Lawrence D. Firestone - Chief Financial Officer, Executive Vice President

Analysts

Colin Rusch - ThinkEquity

Weston Twigg - Pacific Crest

Krish Sankar - Banc of America

Jim Covello - Goldman Sachs

Connor Irvine - Needham & Company

Advanced Energy Industries, Inc. (AEIS) Q4 2009 Earnings Call February 16, 2010 8:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to Advanced Energy's fourth quarter earnings conference call. (Operator's Instructions) Thank you. I will now turn the call over to Annie Leschin, Investor Relations. Miss Leschin, you may begin.

Annie Leschin

Thank you, operator, and good morning, everyone. Thank you for joining us this morning for our fourth quarter 2009 earnings conference call. With me on today's call are Hanz Betz, Chief Executive Officer, and Larry Firestone, Executive Vice President and CFO, both of whom will present prepared remarks. By now you should've received a copy of the press release that we issued approximately an hour ago. If you'd like a copy, please visit our website at www.advanced-energy.com or contact us at 970-407-4670.

Let me take a moment to mention the conferences that will be attending in the first quarter. They include the Piper Jaffray Technology and Renewables Conference in New York on February 23rd, the Pacific Crest Emerging Technology Seminar in San Francisco on February 24th, and the Goldman Sachs Technology Internet Conference in San Francisco on February 25th. We will make additional announcements should additional events occur.

Now I'd like to remind everyone that except for historical financial information contained herein, the matters discussed in this conference call contain certain forward looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Statements that include the terms believes, excepts, plans, objectives, estimates, anticipate, intends, targets, or the like, should be viewed as forward looking and uncertain. Such risks and uncertainties include, but are not limited to, the volatility and cyclicality of the industry (inaudible), the timing of orders received from our customers, our ability to benefit from the continued cost improvement initiative currently under way, and unanticipated changes in our estimates, reserves, or allowances. These and other risks are described in Form 10-K and 10-Q and other reports filed with the SEC.

In addition, we assume no other obligation to update the information that we provide you during this conference call, including the first quarter guidance provided business call and in our press release dated today. Guidance will not be updated after today's call until our next scheduled quarterly financial release. I'd now like to turn the call over to Hanz Betz.

Hans-George Betz

Good morning, everyone, and thanks for joining us. 2009 has been referred to in many years; the year of global financial crisis, the deepest recession seen in years, et cetera. For companies with exposure to the capital equipment industry, the credit crunch was felt across many industries, regardless of size of market exposure, most significantly in the semiconductor market already in the midst of a cyclical track. It was a year that began with record lows and ended with unexpected highs as it did for Advanced Energy.

The resurgence of the semiconductor market in the fall of 2009, along with initial new signs of improvement in the broader economy and non-semiconductor markets, led to a stronger than expected end to the year. We saw nearly 30% sequential revenue growth in the fourth quarter to $66.4 million. Our strategic cost reduction efforts throughout 2009 were extremely effective and timely, demonstrated by our better than anticipated gross and operating margins this quarter of 36.8% and 2.9% respectively.

In the early fall of 2009 we were targeting to return to profitability in early to mid 2010. The good news is that we came in at least a quarter ahead of the plan, delivering $1.5 million or $0.04 per share of profits in the fourth quarter. Our ability to effectively manage our balance sheet, including inventory and accounts receivable during the year, left us with a yearend position of $177.5 million in cash and investments, down only $2.6 million from the beginning of 2009.

The beginning of 2010 is showing great promise, led by the surge in capital spending in the semiconductor market. Currently our market is facing a supply shortage causing increased backlog at suppliers as OEMs race to build and ship their systems and suppliers like Advanced Energy hasten to keep pace with the demand.

Advanced Energy is among a select group of supplies to whom OEMs are turning given our ability to work quickly and collaboratively, pull in deliveries, and maintain a strong financial position, even after the effect of global recession and industrywide slowdown of record proportions. This was reflected in our semiconductor capital equipment revenues this quarter which grew 58% over the last quarter.

With equipment CapEx, consumer demand, and IT investment are expected to grow this year. We anticipate 2010 will undoubtedly be a much better year for the industry and for Advanced Energy. The questions remain when will the demand begin to slow or return to more normalized levels? At the moment we have good visibility into the first half of the year, but it becomes limited as we look in the second half. Currently we are seeing demand from virtually every region in the semiconductor market which has driven strong growth in the first quarter. This whirlwind environment among semiconductor companies began with Samsung whose capital expense initiatives opened the floodgates for investing in capital equipment mid to late last year.

The most important factor now is delivery time and cost. As such, OEMs are literally working around the clock to place orders with supplies such as Advanced Energy so they can build equipment and ship it through the channels as quickly as possible. At the same time, we continue to get orders with immediate delivery requests on a daily basis known as drop-in orders. These are in addition to orders for spare parts required for the OEMs to fill inventories that were exhausted in 2009. All of this has led to a strong book-to-bill ratio and continued increases in backlog which are driving some noticeable market share shifts as well. Advanced Energy should be one of the beneficiaries given our ability to deliver differentiated product on very short lead times.

Based on our customers' input and current market dynamics, we believe we are in the midst of an upturn. Memory prices have been stable for a relatively long time showing no indication of falling any time soon and foundries which have been quiet for so long are starting to build FABs as many of the 200 mm FABs are no longer competitive. All this leads us to believe there will be a period of general stabilization over the next two years.

There's another trend happening in the semiconductor industry worth highlighting which we expect will become the new norm in the industry. With the industry reaching historical lows in the last year, the number of IBMs who own FABs has fallen to just a few large companies. The result is that the FABs they do own and they choose to build will be larger so called mega-FABs. These mega-FABs will cause reverberation throughout the equipment industry leading to periods of boom as they are built following by periods of digesting afterwards, resulting in a very lumpy capital equipment cycle.

The good news for Advanced Energy is two forth; if this trend accelerates this is very fertile ground for us to gain market share over smaller players. Additionally, by applying our Advanced Power solutions to a variety of different markets over the last several years we have developed a package of growth engines in everything from semiconductor to solar, inverter, and flat-panel displays, making our revenue less subject to fluctuations by the semiconductor markets.

Moving onto solar, on the solar panel equipment side it appears that the market is beginning to digest the oversupply of panels that stalled the growth in production capacity in 2009. We see this trend of panel consumption continuing in the first quarter and throughout the year and expect expansion and production capacity for a more polycrystalline and silicon CHES (ph) and cadmium telluride. Regionally we are still seeing strong demands from Chinese manufacturers for added capacity of poly silicon solar cells.

On the inverter side, our solar-run inverter product line also had a very strong quarter. We shipped a total of 38 units in the quarter all to the US market, roughly two thirds of which were 500 kW product and the remainder our 333 kW. We received more orders and letters of interest for large-scale multi-megawatt ground-mount this quarter and expect multi-megawatt business to account for a high percent of sales going forward.

We gained traction not only in the U.S. markets, we have shipped the fist Solaron 500kW to China for evaluation on a large-scale process, Evat(ph) has orders for the first production units in Europe. With a reduction of (inaudible) this will drive tremendous cost pressure in Europe forcing the market shift towards more cost effective margin growth, which has been our focus all along.

We also officially opened a new inverted manufacturing facility in Fort Collins in December. It is tripling our available shipping capacity to ten inverters per week. Subject to normal seasonal expectations, which typically declined in winter months when cold weather and budget resetting dampen the insulation plans, the outlook for inverter (inaudible) remain very positive for 2010 overall.

While some countries such as Spain, Germany and Czech Republic are (inaudible) and evolving into a more mature market, the U.S. has become the region of focus for the industry at the moment. We also see Europe and Asia, where we shift our initial inverters this quarter as very important territories. We plan to establish a strong presence in these geographies going forward especially at our sweet spot at the higher end of the market, their solutions still hold the number one position for efficiency.

With our large scale inverters and the industry’s increasing focus on large scale activity type insulations, we believe we are perfectly positioned to address the markets and are excited to be in the right place at the right time. Overall, the trend-line for large scale inverters is very positive in 2010, specifically the market acceptance of our products is improving monthly, with announcements such as Suntech, The San Francisco, Sunset Reservoir, a 5 Megawatt Solar project, our SunEdison contract and Aerojet(ph) 6 megawatt project in California. Our execution, service and performance all integrate pieces of our early success without time at nearly 99% in the field. Our product is among the highest performers in the industry.

For the first time buyers, Advanced Energy’s reputation as a long-time supplier to the demanding semiconductor industry is communicating the crucial and, we believe, (inaudible) reliability of our products and service to the industry, especially as many people and vendors moved from semiconductor to solar and later as purchases of solar inverters.

Companies understand the benefits of applying such high standards from the semiconductor industry to the solar industry. The strength of our balance sheet has been recognised giving our customers comfort as Advanced Energy will be well equipped to service our products for the next 20 years and beyond. Business is especially critical as large utilities that will require large quantities of inverters in their installations, this strength and product reliability will differentiate us from competition.

Moving on to flat panel, similar to other non-semiconductor markets, we believe the flat panel market began its recovery in various regions during the fourth quarter. With particular strength in the Korean market, we have gained traction with the emerging Korean OEMs that are delivering S-tools(ph) for the Korean flat panel makers. This has allowed us to gain market-share as the market expands to include these equipment suppliers. In Taiwan, where flat panel display investments in capacity expansion has been on hold for at least three to four years, we have historically had a strong presence in generation five to seven.

Recently, we have begun to see the initial signs of capital raising for new fab investments queuing up which is very encouraging, once the capital raised is complete, we should fuel a roughly three year cycle in Taiwan. As we look at the year, while the overall flat panel market continues its recovery, our revenues will be driven marginally by the return of the Taiwanese, Chinese and Korean markets.

Finally, let me talk about the service, with the higher factory utilisation rates and semiconductor flat panel, our service business was strong this quarter. Where the service business was a leading indicator just three quarters ago, it has become a lagging indication with two phenomena on the way. In March of 2009 we saw the beginning of an increase in service revenue to repair broken units, spare part inventories were so depleted, that the moment SAP capacity and utilisation rates started to improve factories were desperate for the repair and spare parts. As expected that dynamic played out.

Now as the business cycle resumes with a strong upturn a completely new dynamic is emerging, while we anticipate a more continuous level of service longer-term, it is currently being affected by the strong demand in the semiconductor market, due to the limited availability of raw materials and the shutdown of many order fabs.

Given the pause in new fab investment of the last two years, there may be a delay in some future service revenue for repair, which may be offset by other service products as the wait for the (inaudible) and the new fabs to come out of warranty.

We nonetheless believe the service business will continue to grow long-term albeit more gradually. The addition of a new line of service from our solar business is a new growth-driver for service in the future, however, and one that we expect will generate some solid recurring revenue streams as most contracts are typically tentative in years.

To summarise, we are extremely pleased to see the recovery of our markets begin to accelerate this quarter led by exceptional strength in the semiconductor industry. Our inverted products line continued to garner much of the intention with the shipment of 100 units and the announcement of various winds during the quarter. With capital investment in certain industry just beginning to return and growing capacity additions we see real industry drivers, underlying the broad economy for the first time in more than 18 month.

So visibility is still unclear, market trends look to sustain themselves barring normal seasonality as such we expect to continue the trajectory of profit growth to continue this quarter in no small part, due to our cost containment efforts last year. We are in a unique position of being one of the (inaudible) capitalized suppliers able to deliver reliable product in the midst of a mark-to-market recovery.

We believe that the environment for our power products will improve in the coming years and that we will see significant opportunities for our existing and new products under development. I would to take a moment to thank the entire Advanced Energy team worldwide for the diligent effort and hard-work to what has been a very challenging 2009. Now I would like to turn over the call to Larry Firestone, our CFO to provide some details on our operating results.

Lawrence D. Firestone

Thank you, Hans and good morning, everyone. In the fourth quarter we saw a marked improvement in our financial performance with significantly higher revenues and margins. Leading to profitability for the first time in more than a year we optimised our legal entities structure, which will lead to a lower effective tax rate in the coming years and continue their strong cash management. Finally, our backlog grew substantially as Advanced Energy continues to be one of the leading suppliers to the industries we serve. Now I will go into more details of our performance.

Revenues grew an impressive 28.4% sequentially to $66.4 million, from $51.8 million just shy of the $67.5 million in the fourth quarter of 2008. The rebounded semiconductor sales improved Thin-Film Solar sales and the continued traction in our solar inverter products drove the increase in revenue. For the full year in 2009 sales were $186.4 million, down from $328.9 million in the same period last year. While the annual decline in revenues appears significant the widespread nature of the global financial crisis impacted all of our markets.

With the exception of service, most of our markets maintained a similar percent of total sales in 2009 as in 2008. The semiconductor market represented 41% of sales for 2009, versus 40% for 2008 and non-semi markets were 39% versus 42% a year ago, specifically sales in the solar market accounted for 16% of total sales versus 17% a year ago and service was 21% of sales, versus 18% last year.

Revenues to the semi-conductor capital equipment market increased 58.2% sequentially to $32.9 million or 49.6% of total sales in the fourth quarter. Sales improved across all regions as OEMs worked to supply equipment as quickly as possible given the strong increase in demand across the industry. Because OEM inventory levels were taken to extreme lows in 2009, in order to conserve cash and maintain the health of the companies, the recent surge in demand has put immense pressure on the entire supply chain.

Sales to our non-semi markets increased 8.6% from the third quarter to $22 million or 33.2% of total sales. Sales to the total solar market increased 55.7% sequentially to $10.1 million in the fourth quarter or 15.3% of total sales. But Thin-Film Equipment sales to the solar panel market recovered nicely in the fourth quarter with sales doubling over last quarter to $6 million, mostly driven by sales in China. The solar increase was once again highlighted by strong inverter sales of $4.2 million, we shipped 38 Solaron units in the quarter driven by initial traction in large multi-megawatt projects.

We are pleased with our customer growth during the quarter and we now have sold our inverter to over 25 customers. We built 29 inverters in the fourth quarter and have built a pipeline of business for 2010 as we have secured letters of intent for 35 inverters and have not yet turned in the purchase orders, but whether Solaron has been selective for a future installation. These will turn into orders in Q1 and Q2 and some of them later in 2010.

Sales to the flat panel market increased a substantial 80% off a very low base reaching $3.7 million or 5.6% of sales as we gained traction with the Korean OEMs selling into the flat panel market. This overall industry will continue to grow in 2010 but will exhibit some lumpiness while we await the completion of the capital raising efforts from Taiwan and the next generation capacity upgrades in Korea and China.

Going forward for comparative purposes, given the slow nature of the sales we have decided to combine the architectural glass and data storage markets with the industrial coating market. Industrial coating applications had emerging markets fall 16.3% from the third quarter to $5.7 million or 8.6% of sales. As expected, sales to the architectural glass market declined to $1 million for the fourth quarter or 1.5% of sales from $3.4 million last quarter, and the data storage market remained relatively flat at $1.5 million or 2.3% of sales.

Reflecting the high utilisation rates and the semiconductor and flat panel display markets, service was once again strong in the fourth quarter, growing 7.6% to $11.5 million. We saw growth across all regions, particularly Japan and North America. Bookings in the fourth quarter were $98 million led by strong bookings from the semiconductor capital equipment market, which drove our book-to-bill ratio noticeably higher from 1.48 to 1 this quarter, up from 1.16 to 1 in the third quarter of 2009.

We ended the fourth quarter with a sequential increase of 91.2% in backlog to $66.2 million. This dramatic increase in backlog was driven by accelerated orders by semiconductor OEMS as they scrambled to restore exhausted inventories and spare parts depleted during the downturn.

We delivered a nearly seven point sequential improvement in gross margin for the quarter due to higher total revenues, better factory absorption, and reduced freight cost. Gross profit was $24.5 million or 36.8% in the quarter compared to $15.6 million or 30.1% in the third quarter and $18.4 million or 27.2% in the same period last year.

R&D rose 10.1% to $11.2 million compared to $10.2 million or 19.7% of third quarter sales driven by an increase in payroll costs, R&D materials, and purchase services. As a percent of sales, R&D decreased on both a sequential and year-over-year basis to 16.9% of fourth quarter sales. This is compared to $13.4 million or 19.9% of sales a year ago. SG&A increased slightly to $11.1 million from $10.8 million last quarter, but declined as a percent of sales to 16.8% from 20.8% in the prior quarter. This is compared to $9.5 million or 14.1% of sales in the same period last year.

Income tax expense was $923,000, down from $3.2 million in the third quarter. During 2009 we took significant steps to optimize our legal entity structure which will lower our future tax rate. By changing our legal entity structure we realign our intercompany transaction structure such that our profitability will shift the lower tax regions that we operate in. Going forward, this new tax structure will lower our overall effective tax rate as reported on the financials as a higher portion of our profits will be reported in low-tax jurisdictions outside the US, Germany, and Japan, where we have traditionally reported profits.

In 2010 we anticipate our effective tax rate will be in the range of 30%-33%. Going forward, for modelling purposes, when annual revenues increase to the range of $400 million, our effective tax rate will be in the range of 16%-19%. And as we move to the range of around $500 million or above, the effective tax rate will drop to the range of 12%-15%.

In accomplishing this restructuring we have utilized a significant portion of our net operating losses, and therefore have removed the valuation allowance against they're deferred tax assets. These changes are also reflected on the balance sheet.

We were very pleased with our GAAP net income of $1.5 million or $0.04 per diluted share compared to a net loss of $8.4 million or $0.20 in the third quarter. It was also an improvement over the net loss of $19 million or $0.45 per share in the fourth quarter of 2008 which included an $18 million non-cash charge for income taxes related to the valuation allowance against deferred tax assets. The net loss for the full year was $102.7 million or $2.45 per share, primarily due to a $63.3 million goodwill impairment charge in the first quarter of 2009. This compared to a net loss of $1.8 million or $0.04 per share for 2008.

Headcount at the end of the fourth quarter increased by 5.1% to 1,316 employees, due largely to an increase of direct labor at our factory in Shenzhen, China. We continue to manage our working capital very :-efficiently in the fourth quarter to end the year with $177.5 million in cash an d investments, up from $177.3 million at the end of the third quarter. WE were especially pleased that even in the challenging 2009 environment, cash and investments were only down $2.6 million from the $180.1 million at end of 2008. Accounts receivable increased from $50.3 million from $37.2 million in the third quarter due to the higher revenues, and DSOs also rose slightly to 63 days from 60 days last quarter due to the ramp-up sales late in the quarter by the semiconductor OEM.

Total net inventory grew slightly to $37.1 million from $36.1 million last quarter and inventory turns were 3.4 times were 3.6 times last quarter. Capital expenditures were $2.8 million, fixed asset deprecation was $1.7 million, and our intangible amortization was $150,000 for the fourth quarter.

Our guidance for the first quarter is as follows. We expect revenues to be between $77-$83 million, gross margins to be between 39%-40%, and EPS to be in the range of $0.13-$0.17 per diluted share. That concludes our prepared remarks for the day. Operator, I'd like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator's Instructions) Your first question comes from the line of Colin Rusch with ThinkEquity.

Colin Rusch - ThinkEquity

Good morning and congratulations on the performance. Can you give us a bit more detail on the solar and rotor bookings and the traction in Europe just in terms of the backlog numbers that you gave, how much of that is coming from Europe?

Lawrence D. Firestone

On the orders that we had in Europe we've shipped our first production units into the European markets and we've got letters of intent for additional units into Europe, but I don't think we can give you much more color than that.

Colin Rusch - ThinkEquity

Okay. And can you give us a breakdown on the solar CapEx equipment? You mentioned $6 million in sales, was that all from Amorphous or can you give us some of the crystal and silicon breakdown for that segment as well?

Lawrence D. Firestone

Yeah. I can't really break it into the Amorphous and the poly, but it's a combination of both because we've seen the Chinese market coming back in where I would say for the most part in 2009 the investments were in Amorphous, but now we've seen a shift in the market towards the poly side, so it's a mixed bag of both.

Colin Rusch - ThinkEquity

Right. And on the solar demand in China can you talk a little bit about what you're expecting in terms of the shape of the ramp for the inverters? We've seen some fairly substantial activity on the project development side, when do you think you'll be able to start seeing revenue from inverters in China?

Hans-George Betz

I think we just shipped the first one for evaluation for a pretty large product and it's a question how this is satisfying the requirements, but we are pretty confident and I think in China we see some kind of upcoming larger project and one of the most famous ones is the 2 gigawatt which has been signed by (inaudible) and the Chinese government. So I think we are pretty confident because we have seen a very strong success because of our performance of the inverters in US and because of the fact that we are pretty strong in China for a pretty long time. I think we are pretty optimistic to gain business and traction there too.

Colin Rusch - ThinkEquity

And can you talk a little bit about the next generation product development and the progress you're making there and any information that you're sharing with the street on what the next generation approximately will look like?

Hans-George Betz

You mean on the inverter side?

Colin Rusch - ThinkEquity

Yes, please.

Hans-George Betz

So we have under development which is due for launching in the market in 2010 is the 1 megawatt. It is on course and again, I think we will finalize that in maybe the end of Q2, maybe somewhere in Q3.

Colin Rusch - ThinkEquity

Perfect. Thanks a lot, and again, congratulations.

Operator

Your next question comes from the line of Weston Twigg from Pacific Crest.

Weston Twigg - Pacific Crest

Yeah. First question just on the semiconductor side, wondering high revenue guidance and wondering how much of that is coming from an additional bump in the semiconductor revenue versus the other segments?

Lawrence D. Firestone

Yeah. I mean we're not going to give you that level of breakdown, but what I will say is we do expect the semi market in Q1 to grow pretty substantially again so it's going to be another up order for semi in Q1.

Weston Twigg - Pacific Crest

Okay. And then how should I look at OpEx growth? You talked about some costs coming back, has that all been rolled in as you added back salaries and bonuses or do we expect some more in Q1-Q2?

Lawrence D. Firestone

So far that's all been rolled back in. I think we mentioned on the last call that the salary, restoration, and the reversal of the shutdown would be about a $1.1 million a quarter additional cost and throughout the P&L; so in cost of goods as well as R&D and SG&A.

Weston Twigg - Pacific Crest

Okay. And then just one more question on the inverter piece, looking out for the whole year can you give us an idea on the number of units you might ship in 2010?

Hans-George Betz

I think it's hard to give the number of units, but what we do expect qualitatively is having a slowdown in Q1 because of seasonality, as I mentioned before, I think we're expecting a pretty strong rest of 2010, but it's hard to give you an exact number there.

Weston Twigg - Pacific Crest

Okay, thanks.

Operator

Your next question comes from the line of Krish Sankar with Banc of America.

Krish Sankar - Banc of America

If you look at the semiconductor side of the business, where do you think your OEM customers' inventory levels are today versus let's say six months ago?

Hans-George Betz

I think it's pretty clear because we are running like hell in order to fulfill all of these drop-in orders so this is very indicative for us that they have no inventory for us at this point in time.

Krish Sankar - Banc of America

Got it, okay. And then the second one is on the inverter business, can you tell where your ASPs are now? Do you see any ASP degradation or is it still holding pretty steady at this point?

Lawrence D. Firestone

Still in the same range that we've talked about, around $0.25 a watt I would say generically. There's volume deals on bigger projects and things like that which influence that, but I'd say generically around that range.

Krish Sankar - Banc of America

And can you give us some color on, if you're willing to break it down, how do we think about going forward the inverter margins maybe in 2010 or 2011?

Lawrence D. Firestone

Well, I think we're still on the very front end of run-in inverter and high-volume production or in any kind of volume. Last quarter we shipped our 100th inverter so that's indicative of still pretty low volume so our supply chain management team and our operations team are still working at driving the costs out of the inverter. So what I think we see or what we've said is that over the course of the rest balance of 2010, we'll see inverter margins increase from south of the corporate average which is where we are today to north of the corporate average.

Krish Sankar - Banc of America

Got it. Okay, and then the final question, how do you think of the incremental margins going forward? Do you have any goal for it or a certain range that you're targeting?

Lawrence D. Firestone

They're probably just north of 40% to get past the breakeven point.

Krish Sankar - Banc of America

Got it. All right, thank you.

Operator

(Operator's Instructions) And your next question comes from Jim Covello with Goldman Sachs.

Jim Covello - Goldman Sachs

Great, guys. Good morning. Thanks so much for taking my questions. Just a couple of them; on the solar side how concerned are you looking forward with the German subsidy issue, and then how concerned are you about the balance sheet of some of the companies that are making the orders today, in particular some of the China companies where there hasn't been as much financing available recently for some of those companies in the IPO market. And then on the semi equipment side I certainly understand the idea of very good visibility in the first half, limited visibility on the back half. What are you looking for whether it's segment wise or otherwise, new FAB wise in the back half of the year to give you better visibility? Thank you.

Hans-George Betz

For the first question, I think the ratcheting back of the fee and tariffs in Europe across the different countries is, in my view, beneficial for AE, and the reason is because Europe has been a very proliferating, let's say, solo inverter business. Because the fee and tariff was so hefty and was so fast that prices came second. And by ratcheting back the fees and tariffs, what they will experience now is a cost pressure which automatically goes to a more cost effective inverter which is a sensor inverter which is a high-power inverter because it's designed for an engine which is much, much more cost effective than smaller inviters which you have in great numbers. So from that perspective I think it's opened up for us an easier penetration in Europe as it has been before.

The second point is because there are a lot of inverter companies in Europe which are pretty small, but they have been enjoying a very nice environment and ratcheting back these kind of tariffs may leave them in a kind of shaky situation. It may open up for us some kind of inorganic growth potential so all in all it's more positive than negative.

As far as the semiconductor business is concerned, I think we feel we see a pretty strong growth in the second quarter. As far as the second half is concerned, my personal view is that they are kind of slowing down, not necessarily because there is not enough demand for it, but there is an interesting dynamic behind that just looking at the lithography because the lithography is kind of stalling and a dampening factor because of the most of the lithography of ASM lithography has been sold out for years. So people are waiting to get lithography equipment in order to build and equipment the new FABs. So it's not a decrease of falling off a cliff in the second half, but it may be some kind of flowing down.

Lawrence D. Firestone

And with respect to the balance sheets of the China companies, I think what we've seen is there's certainly government money, government funding, and subsidies and the like in China to support the growth of the companies in China because what you're seeing as an activity is China's growing an industry within the country to service the market, these emerging solar arrays for the years to come. So it's certain that these big arrays are going to have a China content and there's going to be a money supply for them to emerge as players not in the next — they'll install the equipment now and as they bring that equipment online they'll work the bugs out of it over the next couple of years and then they'll be ready to supply the local market, probably less as an export market and more as a consumption market within the country.

Jim Covello - Goldman Sachs

Thank you so much.

Operator

Your final question comes from Edwin Mok from Needham & Company.

Connor Irvine - Needham & Company

Hi, guys. Congratulations on the quarter. This is Connor Irvine calling in for Edwin. Recently there's been some chatter of component shortages and I'm wondering if A, if you guys are seeing the shortages, and if so does that impact the lead times of any of your business lines or your cost structure as maybe a result of expedited fees?

Hans-George Betz

So the first half of the question, we do see some kind of shortage in supply, but the good news is all of the suppliers see the same thing so there's no loss of business because of that, but of course it's some kind of delay in the revenue stream. On the other side, in some way we have to carry a bit higher cost because of expediting fees, but it's not really severe and the good news is really because everybody's affected by the same thing so we don't lose business because of that.

Connor Irvine - Needham & Company

Okay. And on the solar side, do you guys have any update on when that 250 kW inverter will be qualified in California?

Lawrence D. Firestone

We've got the product offered for marketing right now and I think we're on pace to — I think we're actively selling it in the market today.

Connor Irvine - Needham & Company

Okay. Got it. And regarding applied PBD tool in the flat-panel display market, do you have any update there on the progress of getting qualified?

Lawrence D. Firestone

We're still working the lab qualification.

Connor Irvine - Needham & Company

Okay. And my last question, maybe you guys could provide maybe some detail regarding the LED opportunity for Advanced Energy and if there's any way to maybe quantify the size of the opportunity in 2010?

Hans-George Betz

So it's hard to quantify the opportunity, but we are working on a new product, a new generation of products which may increase productivity on the MOCVD side which is the core element on the LED. And at the same time there's not only the MOCVD which is the device for the active layers, but there are also passive layers and conductive layers which we can deal with, with the same piece of equipment, which is a so-called remote plasma source approach. And I think we are pretty confident because the entire technology at this point in time is ranging years back. So there's no new developments being made and we are looking very carefully in order to grab part of this market.

Connor Irvine - Needham & Company

Great. Thanks so much.

Operator

There are no further questions at this time. Mr. Firestone, I turn the call back over to you.

Lawrence D. Firestone

Okay. Thank you, operator, and thanks, everyone, for joining the call. We look forward to seeing you at all the future events. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Advanced Energy Industries Q4 2009 Earnings Call Transcript
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