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Advanced Energy Industries, Inc. (NASDAQ:AEIS)

Q1 2010 Earnings Call Transcript

April 22, 2009 5:00 pm ET

Executives

Annie Leschin – IR

Hans-Georg Betz – President and CEO

Lawrence Firestone – CFO and EVP

Analysts

Srini Kopparapu – Barclays Capital

Edwin Mok – Needham & Company

Kate Kotlarsky – Goldman Sachs

Paul Thomas – Banc of America

Colin Rusch – ThinkEquity

Weston Twigg – Pacific Crest Securities

Neil Wagner – Stephens

Operator

Good afternoon, ladies and gentlemen, and welcome to Advanced Energy's first quarter 2010 conference call. (Operator instructions) I will now turn the call over to Annie Leschin, Investor Relations. Miss Leschin, you may begin.

Annie Leschin

Thank you, operator, and good afternoon. Thank you for joining us this afternoon for our first quarter 2010 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 a short time ago. If you'd like a copy, please visit our website at www.advanced-energy.com or contact us at 970-407-4670.

I'd like to quickly 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, expects, plans, objectives, estimates, anticipates, 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 industries we serve, the timing of orders received from our customers, and unanticipated changes in 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 obligation to update the information that we provide you during this conference call, including the second quarter guidance provided in our call and on our press release dated today. Guidance will not be updated after today's call until our next scheduled quarterly financial release. I'll now turn the call over to Hanz Betz, CEO of Advanced Energy.

Hans-Georg Betz

Good afternoon, everyone, and thank you for joining us. As we transitioned out of 2009, we began not only a new year, but the third consecutive quarter of robust growth in our business at over 20% a quarter, driven in large part by a surge in demand from record-setting pace [ph] in the semiconductor industry.

Additionally, the growing optimism in the worldwide economy is improving the overall outlook for the financial and capital equipment markets, and leading to new investment for equipment in our end markets.

In the first quarter, our revenues climbed 23% sequentially to reach $81.6 million, which are levels not seen since the third quarter of 2008. Strong cost controls and operating leverage from the increasing revenues drove gross margin above 40% this quarter, and nearly 4% higher than the previous quarter.

Profitability quadrupled at $6.2 million or $0.15 per diluted share, and even as we consumed working capital to secure inventory to support the ramp, we maintained our strong cash position as we closed the quarter with $163.4 million in cash. Moving to our end markets, having begun in the third quarter of 2009, the shift we have seen in the semiconductor business climate from just three quarters ago is tremendous. The industry has transitioned from a market posture where inventory reduction was the overarching theme to what is now a full speed ahead environment.

The manufacturers are securing all the component material they can acquire and testing the boundaries of the entire supply chain. Advanced Energy’s performance in this environment has been outstanding as our company was in a very strong position with our suppliers to secure inventory to support our customers’ request. We have maintained our strong commitment to the delivery of high quality products, added to our market share and continued to build our reputation as one of the stronger supplier in the industry.

As we mentioned on our last earnings call, the third and fourth quarter orders came so quickly that the response time was not fast enough, and therefore some orders were left unfilled at the quarter’s end, shifting a portion of the demand into the first quarter. In the first quarter Advanced Energy on its commitment to our customers, ensuring that the carryover to the second quarter is at an absolute minimum. Looking forward, we see several factors driving growth in the semiconductor equipment market.

Capacity expansion of existing technologies like DRAM or NAND, new technology advancements and inventory replenishment will be the keys. We anticipate the industry’s quarterly growth may begin to slow, but we expect the semi business to remain healthy throughout 2010 and into 2011, driven by a combination of announced new fabs and by OEM customers beginning to replenish their depleted inventories as business achieves a more normal run rate.

Inventory in the supply chain also will help to shorten lead times and improve the efficiency of deliveries as well. Execution excellence and investment are essential factors in the multi-decade leadership of Advanced Energy in the semiconductor market. As we implemented significant cost reductions heading into 2009, we were well ahead of some of our peers in addressing the downturn. However, we did not waiver from our commitment to invest in R&D and new product development. By continuing to spend in periods of downturn, Advanced Energy became a stronger partner of our customers, increasing our leading market position by capturing market share with the next generation of products.

We introduced several new products in ’09 [ph], including our new RF generator platform called Paramount. A year later, we are happy to report that customer acceptance of this product has been very successful, and we are shipping Paramount and several other new products in volume, demonstrating the effectiveness of our technology investment strategy.

Besides our technology investment, we believe that our commitment to the highest quality standards and fulfilling our own time delivery commitments has positioned Advanced Energy as one of the leading equipment suppliers in our markets worldwide, which is indicative for our success in new end markets into which we are ventured, such as solar inverters.

Moving on to the solar inverter market, as expected the first quarter was the seasonally low quarter in the inverter industry and Advanced Energy inverters business, due to the decrease in installations driven by cold weather. We nonetheless shipped 19 solar inverters this quarter, most of which were 500 KW and the remainder, our 333 KW inverters. This resulted in a stark contrast between the pipeline and booking activities versus the installation and shipment of new inverters.

From a pipeline and new orders perspective, we had an outstanding quarter. LOEs [ph] for our inverters more than doubled from the fourth quarter as did our bookings. We received several orders for large multi-megawatt project in the first quarter, including our first European purchase order for projects in Czech Republic in Germany totaling approximately 12 MW.

Additionally, we shipped our first valuation unit to China, received our first order for our new 250 KW product, and were awarded a side car service contract for a 2 MW [ph] in Colorado. The pace of new orders and LOEs during the quarter should set up very strong subsequent quarters for the remainder of 2010, especially with more projects coming to fruition as financing and permitting solidify the market.

Additionally, just today we received another significant inverter order from a large European solar installation for 54 inverters. With that we have over 40 MW committed for installation in Europe. In addition to the strong order volume for solar, we were very excited to announce a definitive agreement to acquire an industry leading inverter company, PV Powered.

The combination of our product lines will give us a complete suite of products to address the entire market. The transaction is currently being reviewed by the Federal Trade Commission for HSR implication. As such, we will provide more detailed commentary after the close of transaction, which we anticipate in May.

Looking ahead, we are also planning to expand into the growing inverter market opportunity in Ontario, Canada. We are in the process of evaluating several options and in combination with the closing of PV Powered; we plan to address the requirements for local content to this market.

As for solar panel equipment, we have now categorized this with architectural glass to create the thin film renewable category. Because many of our customers that provide low coatings for architectural glass also supply coated substrates for the solar panel market. It is a better combination to classify these end markets together. Overall, the thin film renewable market is continuing its investment and capacity for both architectural glass and solar panels.

For solar panels, the oversupply situation seen in 2009 has flipped as many manufacturers are setting out accounts due to the increasing sizes of solar installations. At Advanced Energy, we are seeing increased sales of our products to OEM suppliers in Europe and to Chinese manufacturers of both polysilicon and thin film panels, where we have developed a very strong market position.

Sales to architectural glass customers have also improved. Looking to the next quarter, we anticipate strong sales in thin film renewables with solid growth across the application spectrum. Sales to the flat panel market are also improving. After very strong growth in our fourth quarter sales, the first quarter momentum continues upwards. Sales to second-tier OEM customers are growing as they win share at new flat panel tests using our technology and products.

Having had historically been well-established in PVD, we have recently secured business in flat panel etch [ph] as well. This reopens the etch segment of the flat panel display market that we have not participated in quite some time. In PVD, we continue to do very well and are excited at the interest building upon the entrance of our new (inaudible), targeting the more traditional OEMs. And we are also winning shares in Gen8 and Gen10. We expect to ship this product in volume during the second half of this year.

Finally, our service business which is still largely semiconductor focused was flat this quarter. Driven by our OEM customers as they directed us to utilize our component parts supply towards the supply of new products versus fixing older products, this resulted in a growing service backlog as we exited the quarter. As material becomes more readily available in the next quarter, we anticipate service sales will grow accordingly.

In closing, we were very excited to begin 2010 in such a strong market position with so many positive indicators on the horizon. We are also seeing evidence that our different end markets are positioned to build in the coming years. Semiconductors continued to drive the capital equipment market. Large solar array installations are driving demand for more capacity for panels and inverters, and flat panel displays continue to strengthen as well.

The improvement in these end markets give Advanced Energy a diversified revenue base and balance of business from which to drove growth and dampen the effect of varying market fluctuations. Coupled with our acquisition of PV Powered, we are confident that we will drive our market leadership across all of our markets.

As you have seen in the first quarter, we continue to drive efficiency in our business to keep costs down and capitalize on our 2009 operating structure. With the Advanced Energy team executing exceptionally well, we are and expect to continue to see strong leverage in our financial model going forward. I would like to take a moment to thank the entire Advanced Energy team worldwide for their hard work, dedication and strong commitment to our customers’ needs.

Now I would like to turn over the call to Larry Firestone, our CFO, to provide some details on our operating results.

Lawrence Firestone

Thank you, Hans, and good afternoon everyone. Before I go into a detailed review of our financial performance, I would like to highlight changes in the way we will characterize sales to two of our end markets going forward. First, as glass manufacturers are producing coated substrates for solar panel market, we will combine these markets to create the thin film renewables market.

Next, because the data storage market has fallen into a consistently lower level, we will combine it with the industrial markets. Sales to the semiconductor flat panel display, solar inverter and service markets will remain the same as in the past. Upon closing of our pending acquisition, we will combine PV Powered’s inverter revenues with our Solaron inverter product line to have one inverter category going forward.

You can find a historical four quarter breakdown of these categories on the investor relations page of our website. Now let me take you through the operating results, as revenue growth, strong leverage and strong execution drove our results for the quarter.

Total revenues grew an impressive 22.7% over last quarter to $81.6 million from $66.4. Compare to the low levels experienced in the same quarter of 2009, first quarter revenues rose 150%. This was our third consecutive quarter of strong sequential sales growth as we drove tremendous leverage in our financial model as a result of significant improvement in gross and operating margins and profitability.

Turning to the individual markets, our first-quarter financial performance was again driven by strong growth in the semiconductor capital equipment market. After two quarters of nearly 60% and 70% sequential growth during the second half of 2009, our revenue from the semiconductor industry grew another 47.7% this quarter to $48.6 million or 59.6% of total sales. This noteworthy ongoing growth was driven by the fast pace of shipments to our OEM customers as well as strength in Korea, in particular sales to our largest customer, Applied Materials, grew to 31% in the quarter, up from 25% in the fourth quarter.

Revenues for our Solaron inverter products fell as expected to 2.3 million or 2.8% of total sales due to the industry’s first quarter seasonality. This compares to 4.2 million or 6.3% of total sales in the fourth quarter. Bookings and letters of intent, however, painted quite the opposite picture reaching all-time high. We booked 58 inverters in the first quarter compared to 29 in the fourth quarter, and having secured letters of intent for 74 inverters versus 35 last quarter. Our pipeline for 2010 is growing noticeably, and we expect these to convert to purchase orders in the next quarter or two and do not include the European orders received today that Hans mentioned.

Sales to the thin film renewables market, which includes solar panel and architectural glass, increased 3.8% to $7.2 million. Solar sales were slightly lower this quarter as demand for Crystal and Silicon increased, while demand for amorphous silicon decreased. This was slightly offset by an up-tick in architectural glass.

Strong demand for PVD as well as penetration in etch drove sales to the flat panel display market 23.5% higher during the quarter to $4.6 million or 5.6% of sales compared to $3.7 million or 5.6% of sales in the fourth quarter.

In the industrial market, sales grew 2.7% to $7.4 million. While this category represents many disparate and small markets, we do anticipate growth in the second quarter. In data storage, capacity additions are driving a ramp in magnetic media which will drive up revenues in this market over the next couple of quarters.

Looking at our service business, first-quarter sales were flat at $11.5 million, and this was the result of our OEM customers directing our component supply towards new products versus using the same components for repairs. In the first quarter, we were able to secure sufficient parts inventory to drive our service business going forward. And this should break loose the high number of backlog service orders that built during the quarter and position service revenue for growth in the second quarter.

Total first-quarter bookings decreased $1.3 million to $96.7 million from $98 million in the fourth quarter, and ending backlog, however, increased 22.8% sequentially to $81.3 million compared to $66.2 million at the end of the fourth quarter of 2009, reflecting the significant increase in backlog across all of our markets.

Even with the significant ramp in revenues, our book-to-bill ratio continued strong at 1.19:1 compared to 1.48:1 in the fourth quarter. Gross profit for the quarter was $33.1 million or 35.3% improvement from the $24.5 million in the fourth quarter of 2009. Gross margins also rose nearly 4 percentage points in the quarter to 40.6% from 36.8% last quarter. The strength in gross margin was driven by the increase in revenues, resulting in improved operating leverage of our manufacturing overhead, as well as continued cost improvements in materials and other areas.

Let me switch now to the operating expense portion of the income statement. Overall operating expenses rose sequentially as we reversed approximately $1.1 million in temporary cost productions from pay cuts and shutdowns made over the last 18 months. In addition, we had $325,000 or roughly one penny a share in legal, banker and filing fees related to the PV Powered acquisition.

R&D increased 3.2% to $11.6 million, but fell as a percent of sales to 14.2% compared to $11.2 million or 16.9% of sales in the fourth quarter. This absolute dollars increase was related to additional engineers that were hired to develop new products and the reversal of temporary cost measures from the last 18 months.

SG&A increased 19.3% to $13.3 million from $11.1 million last quarter, but declined as a percent of sales to 16.3% from 16.8% in the prior quarter. The absolute dollars increase was related to costs associated with PV Powered acquisition, and the reversal of temporary cost measures implemented over the last 18 months.

In the first quarter, we had an effective tax rate of 27% driving income tax expense to $2.3 million, up from $923,000 in the fourth quarter. As a reminder, we reorganized our corporate entity structure in the fourth quarter of 2009 and going forward a greater portion of our future profits will be reported lower tax jurisdiction, outside of our historical operations in the US, Germany and Japan.

At the start of the year, we anticipated our effective tax rate would be in the 30% to 33% range, however, the sharp increase in revenue for the first quarter – with the sharp increase in revenue for the first quarter we are beginning to see the benefits of this strategy earlier than expected. As a result, and given the growth that we expect to see in the first quarter of 2010, our effective tax rate dropped to 27%. We currently expect our estimated effective tax rate for the remainder of 2010 to be in the range of 22% to 24%.

We reported an over 300% sequential increase in net income this quarter to $6.2 million or $0.15 per diluted share, and this compares to net income of $1.5 million or $0.04 per diluted share in the fourth quarter. In the same period a year ago, we had a net loss of $79.8 million or $1.90 per share, the majority of which was related to a non-cash goodwill impairment charge of $63.3 million or $1.51 per share.

Headcount at the end of the first quarter grew to 1474 employees versus 1316 employees at the end of the fourth quarter as we added people in Shenzhen to produce additional revenue, and a small group of engineers in Fort Collins for new product development.

We ended the first quarter with cash, cash equivalents and investments of $163.4 million and increased accounts receivable and inventory to support revenue demand led to the $14.1 million decrease in cash. Accounts receivable increased to $61.9 million from $50.3 million in the fourth quarter, and DSOs were relatively flat at 64 days compared to

63 days last quarter.

Total net inventory grew 28.5% to $47.7 million and net inventory turns were 2.3 times. Stock option expense for the quarter was $1.9 million and capital expenditures were $800,000, fixed asset depreciation was $1.7 million and our intangible amortization was $122,000 for the first quarter.

Our guidance for Advanced Energy’s business for the second quarter is as follows. We expect revenues to be between $92 million to $102 million and gross margins to be in the range of 39% to 41%, and as the anticipated mix of business includes a higher concentration of low margin products, EPS to be in the range of $0.21 to $0.31 per diluted share.

As we stated in our press release, we will update our guidance to include the expected results of PV Powered for the second quarter after the closure of the acquisition, which we anticipate will occur in early May.

And that concludes our prepared remarks for today. Operator, I would like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from C.J. Muse from Barclays Capital. Your line is open. Again that is C.J. Muse from Barclays Capital.

Srini Kopparapu – Barclays Capital

Hi, this is Srini calling in for C.J. Muse. My question is basically regarding the supply chain problems, are they basically you over at this point or is there still some problems in supply chain that is preventing you from getting all the products out?

Hans-Georg Betz

I think it is not fully over yet. But it has improved dramatically, and we do not expect any more that we have substantial or significant delays in our shipment because of that. And we would assume that the next quarter this problem has been solved completely.

Srini Kopparapu – Barclays Capital

Great. If I can add one more question, what do you think of the visibility in the semi cap area, especially with respect to the first half or the second half of 2010?

Hans-Georg Betz

I think generally speaking, we see 2010 and 2011 as a very healthy situation in the semi cap equipment. However, because of this very, very strong pace in the first half and in Q4 last year, it is probably that semi cap equipment takes a breath, which will not result in some kind of you know, significant reduction but the growth may slow down a bit. But this is the kind of undulation, which is not changing the growth potential of semi going forward.

Srini Kopparapu – Barclays Capital

Okay. And one last question, what is the lead time for getting one of your solar inverters running these days?

Hans-Georg Betz

It is in the range of 8 to 10 weeks.

Srini Kopparapu – Barclays Capital

Okay. Thank you very much.

Operator

Your next question comes from Edwin Mok from Needham & Company. Your line is open.

Edwin Mok – Needham & Company

Hi, thanks for taking my question. I guess first thing I want to ask is, if I see the midpoint of your guidance, you are guiding for around 19% sequential growth in revenue, can you help us out in terms of which group you expect to outperform that and which group you expect to be underperform or even shrink in the coming quarter?

Hans-Georg Betz

I wouldn't say underperform, as I said before we expect the semi slows a bit in the growth at least in the coming quarter. What we see and what is kind of you know, acting against that is a very strong increase in the solar business in general, which means inverter as well as the thin film business. And all the other end markets including the flat panel is growing very healthy. So, this is easily compensated, this kind of slow down in the semi equipment.

Edwin Mok – Needham & Company

Great. That is a good call, and then I guess I will go back to the last question regarding component constraint, have you guys seen your lead time being improved, now the component constraint has somewhat abated and what is your lead time right now?

Hans-Georg Betz

Yeah, I don't know that we have necessarily a standard lead time across the various thin-film deposition markets comment, but certainly as we have secured inventory and brought it in-house and also secured part supply longer term as we looked at long lead items, we have improved our turnaround time to our customers. So suffice to say we hit all of our ship commitments for Q2.

Edwin Mok – Needham & Company

Great, and then on the flat panel display side of the business, I think like two quarters ago there was some chatter about your position in a new PVD equipment supplier, which I think was supplying (inaudible), can you update us on the status there.

Hans-Georg Betz

Still going through the qual process. I think things are going actually according to plan.

Edwin Mok – Needham & Company

Any idea if you can – any idea when you might get qualified?

Lawrence Firestone

No, not really. It is a – we will tell you when it is complete kind of a range.

Edwin Mok – Needham & Company

It is an ongoing process. Okay, and then maybe on the LED side, you had talked about that as being a new market, and that may be an opportunity for you guys. Any update there on that side?

Hans-Georg Betz

No, I mean, we are still working on new products in the power side in order to get into the LED market, particularly on the MOCVD side, and we are starting to have some kind of collaboration, which allows us to test our new power supplies for that purpose. But as far as the business is concerned, we still have of course no revenue stream out of the LED side. But it is in the focus and we will get into this market for sure.

Edwin Mok – Needham & Company

I see. Okay, great. That was helpful. And then, one last thing is related to the solar inverters’ higher business, you guys talked about this – actually this very sizeable order from Europe, right, 40 MW orders. Can I ask you I guess a multiline question, first one is, what size inverter are you guys shipping for those orders, and then the second part of the question is related to PV Powered, do you guys intend to bring the PV Powered product to Europe market and if so any idea how that be worked out through the year?

Hans-Georg Betz

For your first question, we only have one product for the European market, which is the 500 KW. The more surprising it is how successful we are just providing one product and again 500 KW is the only product we sell for this 40 MW. To your second question, as you probably know we have an earn out agreement with PV Powered, which of course allows us to have a let us say mutual supporting of the sales activity and the service activity but we let them on a pretty long leash until the end of this year.

And for the coming year they are more integrated, but that does not mean that we integrate the Bend as a facility. We will keep the facility there because the products which are being produced in Fort Collins and in Bend are so different because of the lower power versus the higher power that we don't see any kind of need in order to have a very rigorous integration of the manufacturing situation.

Edwin Mok – Needham & Company

I see. Okay. And then, any chance you can provide us in terms of how much revenue they did in the first quarter, and any kind of guidance in the second quarter, and should we wait for the call…?

Hans-Georg Betz

Let us wait, until we get to the point of closure, then we will give you color on that.

Edwin Mok – Needham & Company

So, you guys (inaudible) are supposed to do it, it sounds like?

Hans-Georg Betz

Or we will put it in a press release, either way.

Edwin Mok – Needham & Company

Okay, great. That was helpful. Thank you.

Operator

Your next question comes from Jim Covello from Goldman Sachs. Your line is open.

Kate Kotlarsky – Goldman Sachs

Hi, this is Kate Kotlarsky for Jim Covello. I had a question on the semi business, you sort of talked about a couple of drivers of the business during the quarter, technology transition, some capacity buying maybe and then sort of inventory replenishment. I was just curious if you can characterize sort of what drove most of the strength during the quarter, and to the extent that you guys talked about inventory replenishment, is that more your semi equipment customers replenishing inventory of your product or just broadly speaking in the semiconductor supply chain?

Lawrence Firestone

I think the last question first; I think it just broad in the supply chain. It goes from the IC manufacturers to the OEMs, across the entire board. And first question was, yes, what was the main driver for the semi? I think at this point it was capacity and as you know in particular which build up the new capacity. And I think at the same time we see some of the technology investment, because most of the companies getting to the 22 nm and some even try to skip that and go to 20 nm.

And as far as the replenishment of the inventory is concerned they have to, because everything we build right now is being immediately transferred to the end-user. So somewhere in time, they have to build up their inventory.

Hans-Georg Betz

And we think, Kate, the inventory build starts in Q2 and probably continues a little bit into Q3. It is really going to depend on the product and what the demand curve looks like.

Kate Kotlarsky – Goldman Sachs

And then with respect to your comment about potentially the second half cooling down a little bit versus the first-half, is that sort of premised on the view that you know, you have seen may be a little bit of capacity buying. There may be a large chunk of it sort of coming at the tail end of the year may be in 2011, and so you know you will see some kind of a pause ahead of that. Just curious if you are getting any indications from customers already that there might be a pause, or you are just you know kind of thinking given how robust things are; we are poised for a slowdown?

Hans-Georg Betz

I think, as I said before, I think it is not a real slowdown. What we see is some kind of, you know, a short breath and the reason for that is because even though Toshiba has announced, at least the budget has been approved for the next big megafab by Toshiba, but the problem is at this point in time most of the lithography has been sold out to Samsung. They have to wait for a while until this fab can be built because building without a lithography doesn't make that much sense.

So it has not kind of really slowdown, it is just kind of you know an undulating element, which has nothing to do with the real cooling off of the semiconductor equipment.

Kate Kotlarsky – Goldman Sachs

That is very helpful. Maybe just one final question from me on the solar side, you know, you mentioned that there is a big disparity between sort of what the revenues are today and what the orders took like. And I was just curious as you look into the order – into the orders that you have today, and they seem to be pretty robust, how should we think about that translating into revenues and is there any risk of potential cancellations to the extent that these are kind of orders placed today that perhaps slow revenue for some time? And that is it from me. Thank you.

Hans-Georg Betz

Yes. We don't guide the individual markets for revenue potential next quarter. It takes us about 8 to 10 weeks to get the inverters out the door. So they will be – we are looking at the inverter market as a pretty strong growth driver in Q2. As far as cancellation potential, I would say you know we haven't seen any – we have seen more inbound I would say. Maybe there is some – if you were to characterize it, where would you find it? Maybe out in the LOI [ph] space.

But the reason these companies are placing LOIs with us is to get their position in line in the production cycle. So, you know, as things like financing and permitting are in the works, obviously businesses is still coming our way. So, things look relatively strong and with the announcement that Hans made today about the European inverter sale, you know, they just – they are coming and they are coming in bigger blocks than they have been in the past.

Operator

Your next question comes from Krish Sankar from Banc of America. Your line is open.

Paul Thomas – Banc of America

Hi, good afternoon. This is Paul Thomas for Krish Sankar. I guess with the Q2 guidance to the mid point at $97 million, you guys are getting back towards the $100 million plus quarterly revenue you saw back in ’07. I know you are not going to have the PV Powered in there yet, until you close the deal, but kind of where you guys stand right now, do you see yourself getting back up to the 15% or greater operating margin right now as you get up to that $100 million. Should we be seeing better operating margin this time around at similar revenue levels, and then I guess PV Powered being incremental on top of that, down the road of course, not in the next couple of quarters.

Hans-Georg Betz

Yes. I wouldn't care about a direct operating margin at a specific revenue level, but I think you will see in the guidance range that it provides for those kinds of levels Paul. And certainly we are driving a lot stronger leverage this time around than we were the last time we were at these levels. And then you are right, once we bring in PV Powered that will drive an additional set of metrics in the model.

Paul Thomas – Banc of America

Okay. And then maybe on the legacy side of the solar business, the power supply business, are you guys thinking that second half might be a little lower than the first half at this point, maybe as end customers might have a little bit of weakness in the second half versus the first half?

Hans-Georg Betz

For the solar panel market?

Paul Thomas – Banc of America

Right?

Hans-Georg Betz

Yes, that market is looking actually pretty strong right now. We have got activity in Europe and in China. So in Europe we sell principally through the OEM channel, and in China we sell direct to guys that are making their own equipment for producing panels. So, it is – we’ve got a pretty wide spread customer base there.

Paul Thomas – Banc of America

Okay. That is all from me. Thank you.

Hans-Georg Betz

Thanks.

Operator

Your next question comes from Colin Rusch from ThinkEquity. Your line is open.

Colin Rusch – ThinkEquity

Thanks so much, and congratulations on the solid quarter.

Hans-Georg Betz

Thanks.

Colin Rusch – ThinkEquity

Can you help us understand or think about pricing going forward as you move into smaller inverters and into Europe, should we still be using the same kind of metrics that we have used historically?

Hans-Georg Betz

Yes, I think the pricing that we have been sort of calling out which is in the $0.22 to $0.25 range is still holding.

Colin Rusch – ThinkEquity

Even as you go into the new product?

Hans-Georg Betz

Yes.

Colin Rusch – ThinkEquity

Okay. And then you know we have seen a backlog of a lot of solar equipment in the market through the end of 2010, are you starting to see indications that you are going to continue to see Capex build out in solar into 2011 yet, or how much visibility do you have in that market space? Just give us a little bit of guidance on that?

Lawrence Firestone

I think as far as the capital equipment for the panel manufacturing is concerned, as in all of those OEM businesses it is pretty tough to have a view which goes beyond three quarters. And it is always a volatile business because depending on how many fabs are being built the business goes up, and if there are no fabs being built it is going down. So we see in the remainder of 2010 pretty strong business, which has some kind of line of sight. But as soon as we cross the border to 2011 it is going to be difficult.

Colin Rusch – ThinkEquity

Great. And just coming back to the European inverter market, can you guys talk about how when you are winning, where you are winning and why? You know, the thesis has been that you are producing more electricity on the systems than using our inverters. Are you seeing that as the real selling point or is price the selling point at this point, if you could just give us a bit more color on that?

Hans-Georg Betz

Yes. I think we are betting heavily on the LCOE [ph], which our customers can achieve with our inverters, and again in those cases in which we win the business, people are a bit advanced in order to take this LCOE or harvesting of energy the more important. Sometimes you have some kind in which the capital equipment at the first place is the deciding factor.

But by the way, going forward the LCOE is the only thing, which is a reasonable decision for us, the decision-making process for buying inverters or operating a field. So, yes, most of the time it is a very good selling point.

Colin Rusch – ThinkEquity

And one just final question from me on France and Italy, and Spain and Europe for the inverters. Are you seeing any interest at this point in terms of potential customers, and if you could just characterize kind of what level of demands are in those two markets?

Hans-Georg Betz

The thing is you know Spain came to a screeching halt. I think for anybody else who is coming from the outside as a newcomer, Spain is probably not a market, which is providing some kind of opportunity. Italy, it is. But as Italy is concerned, I mean they are a strong player in Italy as well, which is (inaudible). So, of course, we tried, but wait and see.

Colin Rusch – ThinkEquity

Great. Thanks so much.

Operator

Your next question comes from Weston Twigg from Pacific Crest Securities. Your line is open.

Weston Twigg – Pacific Crest Securities

Hi, just a couple of questions. On the inverter pipeline, I think you said that the orders should ship over the next few quarters, can you give us an idea on the units that are in – that have LOIs and the European order that you just mentioned, you said wasn’t included in the books business. Does that ship this year?

Lawrence Firestone

Yes. The one that Hans mentioned for 54 inverters. That is I believe slated to ship Q3, Q4 time frame. And the LOIs of currently 74 units and LOI are expected to ship Q2, Q3, and Q4. It is really spread over the next three quarters.

Weston Twigg – Pacific Crest Securities

Okay. So really everything in the pipeline is expected to ship this year?

Lawrence Firestone

That is correct.

Weston Twigg – Pacific Crest Securities

Okay. And can you update us on the timing of the 1 MW inverter?

Hans-Georg Betz

Yes, the 1 MW inverter is slated for hitting the market at the fourth quarter this year.

Weston Twigg – Pacific Crest Securities

Okay. It seems like last quarter you talked about a Q3 launch, is that…

Hans-Georg Betz

That is soon, but we came to the conclusion that we be extremely conservative and testing and getting out with a system, which is extremely reliable and extremely and fully tested in every respect and this caused a quarter delay.

Weston Twigg – Pacific Crest Securities

Okay. And just one more question on the inverter business, the European customers that you are getting, does that include some of the same relationships that you have developed in the States, or are these new partners entirely?

Hans-Georg Betz

They are new partners entirely.

Weston Twigg – Pacific Crest Securities

Okay. It sounds good. Actually, if you don't mind, gross margin you mentioned on the PV Powered call that the gross margin on those products is a little bit lower, is there some risk to the current guidance, that gross margin guidance might go lower when you update us after the acquisition?

Hans-Georg Betz

Yes, the guidance that we gave is AE native guidance. So, you know, as we get to the closing of PV Powered and really understand how much PV Powered revenue will be constant this quarter, then we will give you an update on that.

Weston Twigg – Pacific Crest Securities

Okay, thanks.

Hans-Georg Betz

Yes.

Operator

Your next question comes from Neil Wagner. Your line is open.

Neil Wagner – Stephens

Hi guys, this is Neil Wagner from Stephens. Thanks for taking my question. As you guys begin to more aggressively target inverter opportunities in China and certain other European markets, you know, how are you guys expanding your sales distribution channel to take advantage of some of these opportunity?

Hans-Georg Betz

I think we have a pretty good sales channel at this point in time. But if we see more opportunities of course bring additional strength to the bench.

Lawrence Firestone

And we have also got, you know in the post acquisition combined sales force will have additional horse power in the total population, if you will of the sales team.

Hans-Georg Betz

This holds true for, let us say, Europe. In China, we have a different situation which is even more comfortable, because we have very good cooperation with the company which provides balance of system for classical power plants, and these guys have an extremely well-established network, and we are tapping on that and benefiting from that.

Operator

(Operator instructions) At this time, there are no further questions. I would like to turn it back over to Larry Firestone for closing remarks. There are no questions; I will turn the call back over to you.

Annie Leschin

Operator…

Lawrence Firestone

Okay. Thank you, operator. In summary, the recovery in the global economy is beginning to drive strong growth across our end markets. Based on our guidance, we are continuing to improve on the strong leverage of our financial model, and we look forward to closing the acquisition of PV Powered, which will drive further diversification and growth, and in a strong position to meet the ever-changing demand of our market.

Let me take a moment to mention the investor events that we will be participating in during the second quarter. We're hosting an analyst day at our facility in Fort Collins on June 3, and we will be participating in the BoA Merrill Lynch Small and Mid Cap Conference in Boston on June 8 and 9. And we like to thank everyone for joining our call.

Operator

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

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Source: Advanced Energy Industries, Inc. Q1 2010 Earnings Call Transcript
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