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Advanced Energy Industries, Inc. (NASDAQ:AEIS)

Q2 2010 Earnings Call

July 23, 2010 8:30 AM ET

Executives

Annie Leschin – Investor Relations

Hans Betz – Chief Executive Officer

Larry Firestone – Executive Vice President and CFO

Analysts

Bill Ong – Merriman

Colin Rusch – Thinkequity

Edwin Mok – Needham & Company

Kate Kotlarsky – Goldman Sachs

Paul Thomas– Bank of America/Merrill Lynch

Timothy Arcuri – Citi

CJ Muse – Barclays Capital

Neal Waggoner – Stephens

Weston Twigg – Pacific Crest Securities

Operator

Good morning, ladies and gentlemen. And welcome to Advanced Energy Second Quarter 2010 Conference Call. All lines have been placed on mute to prevent background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I will now turn the call over to Annie Leschin. You may begin the conference.

Annie Leschin

Thank you, operator, and good morning, everyone. Thank you for joining us this morning on our second quarter 2010 earnings conference call. With me today is Hans Betz, Chief Executive Officer; and Larry Firestone, Executive Vice President and CFO, both of whom will present prepared remarks.

By now you should have received a copy of the earnings press release that was issued last night, we also issued a press release announcing the divestiture of our core business last evening, for a copy of either release please visit our website at www.advanced-energy.com or contact us at 970-407-4670.

Let me begin by saying during the quarter Advanced Energy will be participating in the Pacific Crest Growth Conference in Vail, Colorado on August 9th, the Deutsche Bank 2010 Technology Conference in San Francisco from September 14th to 16th and the ThinkEquity Growth Conference in New York from September 15th and 16th. We’ll make additional announcements as other events occur.

I would 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 believe, expect, plans, objectives, estimates, anticipates, intends, targets, or the like should be viewed as forward-looking and therefore 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 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 obligation to update the information that we provide you during this conference call, including the third quarter guidance provided during this 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 now like to turn the call over to Hans Betz, CEO of Advanced Energy.

Hans Betz

Good morning, everyone, and thank you for joining us. This is a very exciting time for at Advanced Energy. We are seeing the results of our strategic efforts as the acquisition, divestiture and product line expansion lie perfectly with the improvement in market conditions.

We took two very significant strategic steps in the second quarter with the addition of PV Powered and we yesterday announced divestiture of our Aera Flow Controller business. First, laid out in 2005 our long-term vision of establishing AE as the premier supplier of power conversion devices has taken a giant leap forward this quarter.

The combination of these transitions has set the stage for AE to drive significant growth in all of its existing markets as well as new markets and we are even more focused on power conversion.

Advanced Energy is currently the market leader in power conversion for thin-film markets that we serve. Now in combination with PV Powered we host the number two market position in the fast growing U.S. inverter markets. Based on the momentum we are seeing in the inverter pipeline for the second half of 2010, the lead position is definitely within reach.

Exceeding 2011, our goal is to become number one in the three phase U.S. inverter markets and to continue to increase our market decision in Europe and other geographies as we expand our footprint throughout the globe.

We have taken the first step (inaudible) with our first acquisition in several years PV Powered. That acquisition was accretive in the first quarter of compliance operations. We’re also extending to take advantage of several regional opportunities in various markets.

In the inverter markets we see Ontario, Canada as an area of opportunity with its healthy exceeding turf. We have already incorporated a Canadian subsidiary in Canada and will be working with a contract manufacturer to position AE to satisfy the local content requirements to serve the Ontario markets.

We’re also opening a sales and service office in Singapore to support our OEM key customers with announced factory relocations to Singapore. As our book business for Solaron is beyond our current capacity as we anticipate shipping at levels of 130 Solaron per quarter for the second half of the year. We’re expanding our Solaron factory capacity in Fort Collins, Colorado by adding a second shift.

In Korea, we have expanded our sales and service operations to include manufacturing to serve the market locally for Korean OEMs and end users, to satisfy the local content requirements in Korea.

In addition to the strategic initiatives I just mentioned, I’m extremely pleased to announce the results of another outstanding quarter financially at Advanced Energy. But we exceeded our topline guidance and met the high-end of our earnings guidance.

Including our flow business and two months of PV Powered acquisition, we achieved the record quarterly bookings of $154 million and revenues of $115.2 million and net income doubled to $13.6 million or $0.31 per diluted shares. We ended the quarter with $128.9 in cash and investments, reflecting the reduction of $35 million related to cash at closing for the PV Powered acquisition.

We improved financial performance across the board including gross margin, profitability and cash flow from operations in phase of strong growth. Our guidance is in record territory as well even after excluding revenues from the flow business.

Let me begin by providing a quick overview of yesterday’s announcement of the divestiture of our flow business and then, I will move on to the discussion of our second quarter results.

We have entered into an agreement to sell our mass flow controller business and related product lines to Hitachi Metals Limited, a leading high technology material manufacturer for $44 million in cash. With an adjustment in the purchase price based on the inventory levels at closing, which we expect to occur in the third quarter.

Hitachi Metals currently manufacturers of mass flow controllers and sell them to the semiconductor and other industry making the Aera product lines complimentary and this is an excellent strategic fit. Advanced Energy will support Hitachi in the manufacturing and profits during a transition period up to 18 months to ensure no interruption in supply to our customers.

We have third agreements in place and even though the revenue costs and expensive related to this product line reporting to the discontinued operation section of our income statement, AE will be compensated for its efforts. We are working together to ensure a seamless transition for our mass flow control business customer worldwide.

Hitachi will also leverage our service infrastructure going forward as we provide skill support services for them in countries where they do not have presence. This arrangement will ensure that all of our customers are supported long-term, the flow products and brand continue to remain the highest quality product in the industry.

Hitachi has committed to retain the majority of our workforce related to the mass flow control product line and will acquire all of the assets related to the business including our own building in (inaudible) Japan. This is an excellent fit and Hitachi is the right partner to take this business to the next level.

Let me now move on to our end markets, which for discussion purposes will include our flow business. All of our end markets showed strong growth this quarter. In particular semiconductors continue to be strong for the fourth consecutive quarter.

Non-semiconductor thin-film markets enjoyed the widespread recovery in the equipment industry as well. Our combined inverter business grew substantially as we ship several units to Europe with the first ones up and running successfully on the grid.

Revenue for the semiconductor market continued to climb this quarter moving closer to our prior peaks of 2006 and 2007. The industry witnessed a shift from operating at flow, problem to address a various DRAM over the last several quarters, pretty more balanced and sustainable growth this quarter accommodating a certain level of inventory replenishment.

Overall, the industry sentiment on the semiconductor markets remained very positive and healthy for the second half of 2010 and into 2011. The foundation for this sentiment is the strong demand for DRAM and the ramping foundry activity we have seen coupled with a growth in non-fabs as the industry continues to build capacity to satisfy the consumer electronic markets that shows strong signs of continued growth.

These market drivers are an indication for more growth and industry CapEx than the current 50% year-over-year projections in 2010 and point to continue growth in 2011 even with fewer semiconductor manufactures building fabs.

From our perspective, customers are more confident than they were just a few quarters ago when they were ordering at an incredibly brisk pace. They were tracing immediate delivery with virtually no inventory on hand.

Today customers continue to closely manage their business, operating on a order by order basis without the long-term forecast that we have operated with in the past. With this limited visibility we are employing the necessary precautions to react quickly. If any of our markets change their tone.

Having become the quarter with low inventory levels this quarter we began to see a portion of orders going starts filling the depleted inventories for just in time items. While materials positive still exists for some components, the industry is beginning to make progress restocking its shelves, driving a trend to shorter lead times and revenue in future quarters. Advanced Energy’s semiconductor revenue to reflect all of these trends driven by strong orders from Tier 1 and 2 OEM customers.

Moving on to solar inverters. The highlight of this quarter was the closing PV Powered acquisition in early May. With just two months of combined operation, PV Powered contributed over $10 million to each total inverter sales with approximately 70% of the core national market. The acquisition was accretive to the bottom line and further solidifies Advanced Energy’s presence in North American markets.

We have begun joint marketing of the broad product line and the two teams are working tremendously well together. This is an excellent combination of two of the most highly reliable product lines together in a financially strong company with a strong service network.

The market for 3-phase inverters picked up from the seasonally low in the first quarter and remained very strong especially in Europe but we just beginning to make headway. The growing U.S. inverter market continues to be our focus as we penetrate new accounts and secure key business from existing customers.

We shipped over $14 million in inverters and are targeting to more than double that for the third quarter, driven in part by shipments to Europe as the 500 kW began to be installed on the grid in larger numbers.

Although, we are gaining more traction in Europe, some ordered experienced shipping delays in the quarter, which as a result of some projects being pushed out due to panel shortages. Nonetheless, we see strong growth in inverters and with the Canadian expansion ready to shipment for fourth quarter we are poised to capture market share in the Ontario market.

In addition, we signed an agreement with Chinese contract manufacturer that currently serves the renewable energy markets to add to our capacity in China to satisfy the demand for China and greater Asian markets for our high power inverters.

Inverter backlog again reached record levels at $34 million, up from $4 million at the end of the first quarter. The vast majority of reach will ship by the end of the year. In addition, we have over 8 million in letters of intent all of which points an extremely strong second half of the year.

In the fourth quarter when we added Canadian sales, service and manufacturing capacity for our full product line, a growth will accelerate as we head into 2011. We believe that PV Powered team is on track to earn additional proceeds related to the earn-out as the momentum is very strong for the second half of the year.

In the second quarter, we saw record shipments level of solar panel equipment to customers who are investing in crystalline-silicon in this quarter. This activity was from one of our larger OEM customers in the solar equipment market, as well as, a growing number of Chinese customers. Sales for thin-film silicon production were also strong in the quarter driven mostly by the Chinese market.

The availability of panels in the broader market continues to be an issue as many manufacturers are sold out of panels as reflected in our inverter business with some installation experienced delays. We expect investments in crystalline-silicon and various thin-film application to continue to grow in the second half of the year.

In the flat panel display market, the investment cycle is building. Momentum from the first quarter continued into the second with revenues growing 57% sequentially. This activity was largely driven by China and aggressive investments of the Korean flat panel manufacturers, as well as, the market adoption of flat panels by Chinese consumers and the migration of new technology such as LED backlighting and 3-D Televisions.

OEMs in Korea are also gaining share in the equipment arena and has branched out to sell towards into the rest of Asia. From an east vantage point we are seeing the clear market leader in PVD and our strategy to expand our footprint to include flat panel patch is playing out with the Korean OEMs, leaving us poised for the additional growth as the investment side continues.

Finally, let me move on to service. After only two years of composition of semiconductor fabs with some shutting down, others being decommissioned, et cetera, the markets for services now building back. Revenue is strong but have yet to return to peak levels from a few years ago.

We believe that we are now in a stabilized period where the driving force is replacement parts and inventory restocking. Industry-wide, service is running about 10% less than at the last peak in the industry.

Among the factors that are causing this is the 300 millimeter capacity that was taken offline in 2008 and 2009 during the downturn. Revenues, however, remain healthy driven by high fab utilization rates and increasing availability of components for repair and replacement parts.

The outlook for our service business in the second half of 2010 continues to be strong and should grow as we add OEM contract for the solar arrays with the backlog.

Our investments in the service business will expand our focus on largely semiconductor only repair-based business to one with a variety of service offerings from other non-semiconductor areas. Where the majority of our service business is now repairs, we are developing other products such as refurbishment, support and renewable energy products, such as [fab card], which offers preventive maintenance. These new service markets may take some time to grow before they become significant but we believe they represent a growing opportunity for us.

In closing, the results of the second quarter of 2010 demonstrated an optimal combination of strong markets with exceptional execution and the fulfillment of our strategy to inorganic opportunities.

After a tremendously strong quarter across our thin-film business with every market increasing, as well as, the growth in the inverter revenues and backlog we see new and much higher peak levels in the near future for advanced energy.

The current environment for capital equipment remains incredibly healthy for the second half. So some markets may moderate in any given quarter. The overall growth trend will be complemented by a strong [ramp] in the much less volatile inverter business, which is more of a consumption business than our traditional thin-film OEM-driven market.

The inverter business is showing signs of becoming as large, or even larger than the semiconductor business has been, which would balance out our revenue stream and lead to strong growth and long-term financial performance.

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 customer needs before excellent delivery performance in the ramp that began earnest in Q3 of 2009 and has stressed every part of the business.

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

Larry Firestone

Thank you, Hans, and thank you all (inaudible) on our second quarter earnings call. I would like to cover several topics today. Along with the financial results for the second quarter, I’m going to discuss the reporting of our financial as it relates to the sale of our Aera Mass Flow Controller business.

In conjunction with earnings press release today, we are pleased to announce the pending sale of Aera Mass Flow Controller business to Hitachi Metals Limited. While our financials tables in the press release, exclude the flow business, we have provided a reconciliation table in the press release, presenting the revenue, cost and expenses of the Aera Mass Flow Controller business for the first two quarters of 2010, with the exception of silicon financial metrics in which we call out our flow business, the results we discuss will exclude the adjustments for the divestiture.

For clarification purposes, the financial information provided on the Aera Mass Flow Controller business is in accordance with discontinued operation accounting and only includes those costs related to specific items or resources that are discreet to the business and will be eliminate on closing.

Even though the divestiture transaction has not yet been completed, now that the definitive agreement has been signed, the assets related to the flow business are held for sale and consequently any operations related to those assets will be considered discontinued and all the revenue costs and expenses will be reported on a net basis and discontinued operations below the net income from continuing operations line on the income statement.

Now for the second quarter financial results, as Hans discussed, we had a sequence of many extremely positive events and strategies take hold this quarter. The same holds true in our financial results.

We posted new records in several areas, which drove our strong results and we continue to raise the bar for future quarters. Excluding the flow business, total second quarter revenues grew an impressive 43.7% over the first quarter to $100.1 million from $69.7 million.

Given the economic weakness in the same period last year, revenues rose considerably year-over-year at 214%, this reflects the strength of the semiconductor and other non-semi thin-film markets and the inverter business. This resulted in tremendous leverage in our financial market as we achieved our gross margin and profitability targets and met the consents of CPS even after the sale of flow business.

Turning to our end markets, sales to the semiconductor market increased 9.9% to $53.5 million on gross basis, which includes $9.6 million of flow business and represented 46.4% of sales during the quarter.

Solaron revenues nearly doubled from the first quarter, with PV Powered contributing more than $10 million, with just two months of operating results, pushing inverter revenues to $14.4 million for the quarter, representing 12.5% of revenue.

We booked over 200 Solarons in the quarter, compared to 58 in the first quarter and the combined backlog for AE and PV Powered inverters at the end of June was $34 million. The majority of this backlog will ship in 2010 and the outlook for the third quarter is that inverter sale will exceed $30 million.

Our increased factory capacity in Fort Collins will be online at the end of July, which will total 1 gigawatt at Advanced Energy and we anticipate the added capacity in Canada will be ready to ship products in the fourth quarter.

Sales of the solar panel in glass markets more than doubled to $15.6 million, or 13.5% of sales in the quarter, including $1.2 million of flow. We seek continued growth in this market throughout 2010.

Flat panel sales were up 56.5% to $7.2 million, including $1.4 million of flow, or 6.2% of sales during the quarter. Advanced Energy’s flat panel display business will continue to grow over the course of this investment cycle.

As expected, sales to the data storage and industrial market were up a strong 78.4% to $13.2 million, or 11.5% of sales. These results included $2.2 million business from our flow product, and we are currently seeing demand for magnetic and optical stores products, which are partially driven by Blu-ray and we are anticipating growth in this market through the remainder of 2010.

Our service business was relatively flat this quarter at $11.4 million versus $11.5 million in the first quarter. Allocation of raw material was less of a concern this quarter and this allowed us to reduce the backlog that was built up in late 2009 and early 2010.

A record second quarter booking of $154.3 million included $15.3 million for the flow business and that was increase of 60%, compared to $96.7 million in the first quarter. Our book-to-bill ratio for the total business continues strong at 1.34 to 1 compared to 1.19 to 1 for the first quarter, reflecting the ongoing strength revenue and our sales pipeline. Excluding the $15.3 million in bookings and the $15.1 million in revenue related to the flow business, our book-to-bill was 1.38 to 1. Ending backlog continues to grow and was up 52% sequentially, to a record $123.6 million including $14.4 million for the flow business.

Gross profit for the quarter increased 52.6% sequentially to $44.6 million, leading to a 260 basis point increase in gross margin, to 44.5% from 41.9% last quarter. Gross margin benefited from the leverage from the increase in sales and factory absorption. R&D increased to $13.5 million. However, as a percent of sales was down to 13.5% compared to $11.1 million or 16% of sales in first quarter.

The increase in absolute dollars was attributable to the additional head count and spending associated with two months of PV Powered operational results, as well as engineering materials for continue product development programs. SG&A increased to $17.2 million from $12.2 million last quarter, but declined as a percent of sales to 17.2% from 17.5% in the prior quarter. The increase in absolute dollars was partially driven by expenses associated with the newly acquired PV Powered acquisition.

Incentive compensation accelerated by $800,000, with the growth and revenue and the amortization of intangibles related to PV Power Acquisition was approximately $767,000 for the quarter and will continue at that rate.

As we discussed last quarter, we anticipate the analyzed effective tax rate of 22% for 2010. In the second quarter, we recorded a 19.5% tax rate to offset the 27% effective rate that was recorded in the first quarter, putting us in line with our analyzed expectations of 22% for the remainder of the year. After strong profitability last quarter, we were pleased to report that our total net income this quarter more than doubled sequentially to $13.6 million or $0.31 per diluted share. This compares to $6.2 million or $0.15 per diluted share in the first quarter and a net loss of $16 million or $0.38 per share in the same period a year ago.

Headcount at the end of the second quarter was 1597 compared to 1474, is at the end of the first quarter and the majority of this thing was a result of the additional headcount associated with the acquisition of PV Powered. We also continued to leverage our workforce, as we only added a small number of production employees in our factory in Shenzhen, China to increase capacity and deliver over $20 million in incremental revenues, over the first quarter to meet the current demand from our customers.

We entered the second quarter with cash, cash equivalents of $128.9 million and the $34.5 million decrease in cash, was due to our $35 million payment for PV Powered which closed on May 3, 2010. We are happy to report that we sold our auction rate securities at the end of the quarter and repatriated approximately $42 million in cash from our German subsidiary.

At quarter end, over a $100 million of our cash was in U.S. Accounts receivable decreased $14.1 million to $75.2 million, compared to $61.9 million as a result of higher revenues. However, we were able to maintain consistent cash flow from our largest customers and DSOs improved to 62 days fro, 64 days last quarter. Total net inventory grew 44.2% to $54.5 million, from $37.8 million in the first quarter and that inventory turns were 3.8 times.

As demand is expected to increase even more sharply in the third and fourth quarters and in certain areas of supply chain been constrained, we increased our inventory in order to meet our customers very tight delivery expectations. Stock option expense for the quarter was $1.9 million and capital expenditures were $2.4 million. And fixed asset depreciation was $1.9 million and our tangible amortization, including tangibles related to the flow and the newly added amortization of PV Powered was $0.9 million for the second quarter.

Our guidance for Advanced Energy in the third quarter, excluding the flow business is as follows. Revenues will be between $130 and $140 million. Gross margins will be in the range of 43 to 45% and EPS will be in the range of $0.36 to $0.44 per diluted share on 44 million shares.

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) Our first question comes from the line of Bill Ong from Merriman. Your line is open.

Bill Ong – Merriman

Yeah. Good morning. Congratulations on a very solid quarter.

Hans Betz

Thanks, Bill.

Bill Ong – Merriman

Sure. In U.S. inverter market, what states will be driving your growth in the second half and what states, you expect to be the larger opportunity in 2011?

Hans Betz

As far as the growth is concerned, the main driver for the inverter business is of course, U.S. But we are having strong orders out of Europe as well.

Bill Ong – Merriman

Hans, [you return to] what particular states are driving from the near-term growth. I know that California is obviously one of the states, but perhaps you can give me more color within the individual states?

Hans Betz

It’s hard to me to say at this point. I think what we see is of course, California which is well known for being the most aggressive. We see something in New Jersey now, in particular

to PV Powered.

Larry Firestone

Yeah. I mean, Bill, we really don’t have that kind of granularity to give that kind of perspective outlook for you.

Bill Ong – Merriman

Okay. That’s fair. And then I realize that revenue levels are still, are fairly small and the base numbers but what type of sustainable growth rates can be expect in inverter business, as well as in the solar and Solaron both going forward?

Hans Betz

I mean on the inverter business, the CAGRs – The market CAGRs that we are looking at – I mean on the utility side and these are overall CAGRs are in the 85% range, so they are pretty huge in the commercial side, the CAGRs are in the 40 to 50% range. So we are seeing and actually, we are pretty fortunate, especially with the timing of the PV Powered Acquisition, is we are hitting market in the U.S. with complete suite of products, at a time when the US market is growing very fast. But as far as forecasting or giving you a number on sustainable growth rates, I will point you back to the CAGRs on the overall market expectation.

Bill Ong – Merriman

Okay. Thank you very much. Nice job, gentlemen.

Hans Betz

Thanks.

Operator

Your next question comes from the line of Colin Rusch from Thinkequity. Your line is open.

Colin Rusch – Thinkequity

Thank so much for taking the question. Can you break out solar capital equipment sales for us, specific number and bookings for the quarter?

Hans Betz

We don’t break out the bookings that way. I think we broke out the revenue numbers for you on the call. But you are talking about the solar panel revenues?

Colin Rusch – Thinkequity

Just the capital equipment, I think it was lumped in with the some of the other thin-film numbers or is that, the number you quoted was all solar.

Hans Betz

For glass and solar?

Colin Rusch – Thinkequity

Yeah.

Hans Betz

The glass part was $1.6 million and the solar part was $14 million.

Colin Rusch – Thinkequity

Perfect. Thanks a lot. As you move more into the power management, are you expecting to integrate volt, voltage right through reactive power, any volt market built in your large scale inverters?

Hans Betz

Yeah, yeah. It’s on our road map and I think that’s important for the next generation of inverter or things, because one of the key elements and one of the driving forces for the next generation is how to stabilize the grid and in order to do that you have to exactly do, what you have mentioned.

Colin Rusch – Thinkequity

And when do you think those products might hit the market? Is that a 12-month kind of program or is it more of a 24 to 36 months type of program?

Hans Betz

No, no, it’s a 12-month.

Colin Rusch – Thinkequity

Excellent. And in the smaller orders, we are seeing a movement afoot to adjust you UL 1741 and IEEE 1547 Standards, are you guys involved in those efforts and what are you expecting in terms of seeing those adjustments?

Hans Betz

At this point in time I cannot answer this question.

Colin Rusch – Thinkequity

Okay. Great. And then one final one from me, in terms of the geographic breakdown in Europe, do you guys have a sense of where the inverters are ending up? You are already selling direct into the Czech Republic or any of the Eastern European countries or you’re looking mostly at Germany and Italy right now?

Hans Betz

Now, to give you a color for that, not the exact number, I think, the bulks goes into Czech Republic and we have strong orders out of Germany as well. We have not yet in Italy.

Colin Rusch – Thinkequity

Perfect. Thank a lot, guys. Congratulations.

Hans Betz

Thanks.

Operator

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

Edwin Mok – Needham & Company

Question on you divestitures, just curious, well, two things, one is logistically do you expect to get the deal done within this quarter, the third quarter of 2010 and second thing is how do you come to the $44 million price?

Hans Betz

Yeah. We will close the deal in this quarter. And because of the fact, there’s no problem on the HSR sides, so we expect that there are no major hiccups in order to close in this quarter. The $44 million price tag, I mean it is, obviously, negotiation settlement.

Larry Firestone

We did it. We actually, we worked with – We mentioned in the press release, we worked with Savvian, GCA Savvian and we worked up the valuation on the business and arrived at that, Hitachi Metals.

Edwin Mok – Needham & Company

Okay. That’s fair. And then besides the MSC product, you guys also have some thermal instrumentation and some other pressure products that you sell to, within the market and your focus seem more on power conversion right now, any thought about those product lines? Would that be on the market? How do we think about that?

Hans Betz

Of course, I think we have determined instrumentation. We don’t have any kind of pressure sensors. So this is a small very self standing independent business, which serves the semiconductor key customers and at this point in time, we have no intention and no plans to sell it off.

Edwin Mok – Needham & Company

I see. Great. And then Larry, just a quick question on optics. If I take your guidance, it sounds like optics are increased to may be around $37million in that range, I wonder how much of that is amortization and intangibles and is that the cover on rate, we should expect going beyond the September quarter?

Larry Firestone

Yeah. The amortization of intangibles is about $900,000 and that’s the level that we should expect going forward.

Edwin Mok – Needham & Company

And then what about just the overall mix level?

Larry Firestone

Yeah. The overall OpEx, the growth will be in the $37 million range and that will be a sustainable level for us as well, since we’ve combined PV Powered into the overall mix.

Edwin Mok – Needham & Company

Great. And then just one last question on your guidance of $130 million to $140, for your, very strong guidance and congratulations on that. If I take your comment on the inverter which you said, over $30 million of revenue in the third quarter, you still have probably an increment of $15 to $20 million from other business line. I was wondering if you can kind of give us some color, in terms of where do you think is driving that growth. Is it semi, is it – I know the solar equipment grew a lot sequentially last quarter or any color will be helpful? Thank you.

Larry Firestone

Yeah. That’s really – in the thin-film market. That’s really across the board. We see it in semi-flat panel, mix of renewables which is glass and silver and also on the industrial side.

Edwin Mok – Needham & Company

Great. That’s all I have. Thank you.

Hans Betz

All right.

Operator

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

Kate Kotlarsky – Goldman Sachs

Good morning. This is Kate Kotlarsky for Jim Covello. Quick question on your lead time, I was wondering if you’ve seen any meaningful changes in your lead times, particularly in the end part, Hans had mentioned some capacity constraints that you are now facing, so we hope you could gives us a little bit of color on that.

Hans Betz

The Solaron lead times are still probably in the 10 to 12 week kind of range. PV Powered lead times are in the 4 to 6 lead time range. So it hasn’t been a big shift in that.

Larry Firestone

As far as the capacity constraints are concerned, I think we have enough measures put in place in order to cope with that. And this is going to happen in Q3 and Q4 but reaction to that is in place.

Kate Kotlarsky – Goldman Sachs

And I know you had mentioned, your plan on expanding capacity in Fort Collins, can you help us quantify how much capacity is going to expand there?

Hans Betz

Yeah. We are actually doubling the capacity in Fort Collins from 130 Solarons per quarter, approximately up to 260 as we see shipping beyond 130 in Q3.

Kate Kotlarsky – Goldman Sachs

Okay. That’s very helpful and maybe the last question. Larry, do you have an update on the target model kind of given, along the moving parts with PV Powered, now, the divestiture of the mass flow controller business?

Larry Firestone

Yeah. The target model stay in the same and we think, we’re heading to achieve it right now. We got – As you mentioned, we have some moving parts, so we are going to let the business settle down and then we’ll take a look at it going forward.

Kate Kotlarsky – Goldman Sachs

Okay. Thank you.

Operator

Your next question comes from the line Krish Sankar from Bank of America, Merrill Lynch. Your line is open.

Paul Thomas– Bank of America/Merrill Lynch

Good morning. This is Paul Thomas for Krish Sankar. I want to confirm just on the semi-side that you said that it sounds like the tailwind we’ve been getting from inventory restocking, you guys considered that to be pretty much over and now we should expect the semi-business to move pretty much along the shipment growth that we see from the OEMs.

Hans Betz

Yeah. That’s true. But what we see so far, the inventory has not been replenished totally. Because what we see though is that they are starting to replenish the inventory. On the other side because of the situation in the semiconductor market, which is mainly driven by the fact that being announced cannot be build at this point in time, because of shortage of lithography, we see and we expect that the semiconductor growth, by bringing new [path online] next year is continuing to grow through 2011.

Paul Thomas – Bank of America/Merrill Lynch

Okay. So may be not completely done, but a little less of the tailwind than it’s been in the past.

Hays Betz

Correct.

Paul Thomas – Bank of America/Merrill Lynch

And then on the PV Powered side, I guess you said a little more than $10 million in the quarter or so, I guess just doing the straight math, you get to kind of low end in the $40-$50 million range that you guys had talked about in the past. You are comfortably saying that you are, you think you’ll be higher than that low end for the year or be still in the range?

Hays Betz

I think we see some similar pattern as we see in our Solaron business. The second half is dramatically stronger. So from that vantage point, I think we expect at least that they fulfill their business plan. It may even come to the point that they exceed that.

Paul Thomas – Bank of America/Merrill Lynch

Okay. All right. That’s all I got. Thank you.

Hays Betz

Thank you.

Operator

Your next question comes from the line of Timothy Arcuri from Citi. Your line is open.

Timothy Arcuri – Citi

Hi, hi. Couple of things, as I look at the semiconductor revenue, it’s a little bit light relative to the last peak. And if you look at some of the, the customer shipments, they are all shipping close to the prior peak and you’re still 30% below. I’m still wondering whether there’s something going on in the semi-business, may be for the entire component supply chain or if there is some customer specifics going on there.

Larry Firestone

Yeah. Our prior peak was $60 million in the quarter. So we are running about 10% off peak right now for Q2. So, I’m expecting that to grow. Of course, the numbers will get adjusted in Q3 as we remove the flow business. We are running close to peak in semi right now.

Timothy Arcuri – Citi

I guess based on your former disclosure, I had something more in the mid70s but we can talk about that. What was the flow business at last peak?

Larry Firestone

I don’t have that number off, the top of my head. I’d have to dig that one out for you.

Timothy Arcuri – Citi

Got it. And then, clearly, sounds like the inverter business as you move into December probably osrt of moderates a little bit because you have a big slug coming in Q3. So I’m sort of wondering, I know you don’t want to give guidance that far out. But, how do we think about the moderation of the inverter business as we head into December. So, what sort of portion of the September revenues maybe is the result of push-out from June because folks couldn’t get product?

Larry Firestone

Yeah. We actually see strong growth through the end of the year in the inverter business. So I don’t think we’re seeing really much moderation at all in the second half of this year.

Timothy Arcuri – Citi

All right. So you think December revenues in the inverter business will be up, actually?

Larry Firestone

Yeah.

Timothy Arcuri – Citi

Great. Thanks.

Operator

Your next question comes from the line of CJ Muse from Barclays Capital. Your line is open.

CJ Muse – Barclays Capital

Hello.

Larry Firestone

Yeah. Go ahead.

CJ Muse – Barclays Capital

Yeah, sir. Good morning. I guess, first question, how do you expect your percentage of semi product revenues and portfolio to change overtime given your outlook for an inverter business. And then given this outlook, how should we think about on your gross margin?

Hans Betz

Well, as I stated in my written script, I think what we see in terms of growth in the inverter business we could assume that within the next two years we have a business of the inverter side, which is equally or even bigger than the semiconductor has been. So therefore I think what we expect is a very clear balance between semi and non-semi business.

CJ Muse – Barclays Capital

And what the gross margin looks like in that change of mix?

Larry Firestone

The gross margins in the inverter business right now are similar to semi but growing. So we’ve, as the business grows, we’ll see the additional inverter revenues being accretive to gross margin.

Hans Betz

And as we discussed earlier, I think, they are becoming more and more functionality into the inverter and therefore, we expect that there is a higher growth margin with these new functionalities.

CJ Muse – Barclays Capital

That’s helpful. And then, trying to baseline your core semi-business XMSC, what was MSC in 2009 to try to get through growth here in 2010?

Larry Firestone

I don’t have that. I’ll have to get back to you with that -- on that one, CJ.

CJ Muse – Barclays Capital

Okay. And I guess, lastly, can you just highlight the timing of your decision to sell MSC today, what drove your thinking there?

Larry Firestone

Yeah. We looked -- we engaged an investment banker early this year and looked at marketing the business and just seeing what was out there. But, and then we found the right partner, we found a great partner, one that’s going to take care of the business and grow it and also take care of the customers. So, we’ve certainly got momentum around that once we’ve got engaged.

CJ Muse – Barclays Capital

Okay. Thank you.

Larry Firestone

All right.

Operator

Your next question comes from the line of Neal Waggoner from Stephens. Your line is open.

Neal Waggoner – Stephens

Hi, guys. This is Neal. Thanks for taking my questions. Larry, sounds like gross margins for PV Powered little better than you’re expecting in the second quarter, what drove that outperformance?

And then secondly, what’s the timeline for getting PV Powered gross margin up to the corporate inverter gross margin average and what is in the leverage you think you guys can pull to get there?

Larry Firestone

Yeah. Neal, they did really well with the concentration of commercial versus residential. 70% of what they delivered was commercial, so that drove -- that mix drove higher gross margin for us in the quarter, so outstanding performance from the team.

On the -- from the standpoint of gross margin leverage, where we’re going to go combined company, right now we’re running PV Powered as an independent subsidiary while they get to the earn-out period.

But there is really nice, I’d say significant opportunities in the material costs, in the building material as we combine and integrate PV Powered that we get into 2011, opportunity, for many certain points those opportunity for other components to really drive their costs down. So, I would say, the gross margin increased in a meaningful way is more than a 2011 story than it is immediate.

Neal Waggoner – Stephens

Okay. And what were gross margins in the quarter for PV Powered? Can you tell us that?

Larry Firestone

Yeah. We didn’t break that out for you guys.

Neal Waggoner – Stephens

Okay. And then, Hans, just one last question. You mentioned some delays in shipments in the second quarter in the inverter business due to lack of panel availability. What was the impact in the quarter and do you expect that trend to continue in the second half of the year?

Hans Betz

I think, it has a good side of the coin and the bad side. The good side is that, it drives, of course, a business into the panel and the equipment for building those panel primarily in China and I think capacity will catch up until the end of the year, so we do not expect any major delays going forward.

Neal Waggoner – Stephens

Okay. Thanks, guys.

Hans Betz

Yeah.

Operator

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

Weston Twigg – Pacific Crest Securities

Hi. Just a couple of quick questions. The inverters that you have letters of intent for $84 million, I think, is that all shippable by the end of the year?

Larry Firestone

It’s $8 million.

Weston Twigg – Pacific Crest Securities

Oh! $8 million.

Larry Firestone

$8 million.

Weston Twigg – Pacific Crest Securities

A difference.

Larry Firestone

Yeah. And then the letters of intent, Wes, are -- they need to close into purchase orders before they can head out the door, so we’re building the order right now. We are just characterizing that in our order pipeline. They’ll need to turn in the hard orders before we can move on.

Weston Twigg – Pacific Crest Securities

Okay. The 1 megawatt inverter, Solaron product you have new timing on that?

Hans Betz

Yeah. It’s a story which goes probably in the second half of 2011. and I think, the reason why it’s being delayed as, it’s two fold. First, we have seen other opportunities in order to get into the European business, which we put a higher priority on.

And on the second point is, we don’t see at this point in time not that much immediate need for 1 megawatt and 1 megawatt will be much more important, if we see that the installation goes into the 10-megawatt plus or 20-megawatt plus, which is not fix.

Weston Twigg – Pacific Crest Securities

Okay. That’s helpful. And then, just one more question on Canadian inverter operations. Do you have any projection about how much revenue that might contribute beginning next year?

Hans Betz

It’s hard, what we can see is that there is round about 1.5 gigawatt which is a last one, Ontario. But because there are some incumbents there already, so this is combined with the growth in the Ontario market in general, but at the same time market share gain is always hard to make a prediction when we gain the market share and therefore, when we have a certain revenue stream out of that.

Weston Twigg – Pacific Crest Securities

Okay. Thank you.

Hans Betz

Thank you.

Weston Twigg – Pacific Crest Securities

Yeah.

Operator

(Operator Instructions) Your next question comes from line of Edwin Mok from Needham & Company. Your line is open.

Edwin Mok – Needham & Company

Yeah. Thanks. Just a follow-up. But just a few things, one, Larry, you have previously said that, your tax rate next year is expected to be 12% to 15% assuming your revenue would be at about $500 million. With the sell of MSC product, does that outlook changed?

Larry Firestone

It may change a little bit as PV Powered is going to be a domestic tax payer. So we’ll give further guidance on that, as we go forward. But it would, probably, won’t change materially but it may change a little bit.

Edwin Mok – Needham & Company

I see. That’s fair. And then just quickly on the MSC business, if I look at that business, $50 million this quarter and also wondering, how do we think about that business in the first quarter, do you expect to have similar growth rate as your semi-business or ex-inverter business or is that slower growing business?

Larry Firestone

I’m not sure I understand the question, Ed. Are you talking about the flow business?

Edwin Mok – Needham & Company

Yeah. I’m talking about the flow business, yeah.

Hans Betz

The flow business generically is always coupled with the semi-business.

Larry Firestone

Yeah.

Hans Betz

But 100% at one correlation but like it’s…

Larry Firestone

And that’s the lion’s share of our revenues.

Hans Betz

Right.

Larry Firestone

But we gave, if you’re, is the question around adjusting your Q1 up to 2010 numbers?

Edwin Mok – Needham & Company

No. I guess, what I’m trying to get to is, if you didn’t sell MSC business, you’d have slower sequential growth in the first quarter versus what you have guided, right, is that what you’re seeing?

Larry Firestone

In the third quarter?

Edwin Mok – Needham & Company

In the third quarter, I call it?

Larry Firestone

Oh! Sorry, I thought you said first quarter.

Edwin Mok – Needham & Company

I’m not. Sorry about that, yeah.

Larry Firestone

As if we didn’t sell it, but we have -- it would, yeah, if you wanted to do the math, it probably would run in the third quarter similar to what it was running, probably a little bit north of what it was running in the second quarter.

Edwin Mok – Needham & Company

Great. And then, lastly on PV Powered, you guys have previously guide $40 to $50 million, and you talked about it being dramatically stronger than second half. Is that also and then you made, ultimately compensate that you expect sequential growth in the fourth quarter. It’s PV Powered growth costs that part of the business also have this consumer cost profile or do you expect Solaron to be bigger drive because obviously Solaron is really big in the third quarter. Do you expect PV Powered to have also sequential growth and come into fourth quarter as well?

Larry Firestone

Yeah. Let me just clarify, the $40 to $50 million range that we gave was a post-closing range, so that would have been eight-month perspective. So we have the first two months under our belt. And as far as growth rates go, I mean, PV have been growth profile gross and PV Powered is in the same kind of position that AE is with Solaron. Second half of the year, I mean, both addressing the U.S. market, the U.S. commercial market and 3-phase is unfolding and getting a lot of momentum right now. So they’re going to have the same growth profile, it’s going to be second half of the year strong as well and so combined for AE, it’s a really strong second half for inventors.

Edwin Mok – Needham & Company

Great. Sorry, just to squeeze one more in. So on one of your competitor yesterday have guided for the semi-business to be more like flat in the third quarter sequentially from the second quarter. Sounds like you guys believe your business can grow. Is it more function of the power business having better growth profile or why would you think there would be a difference there?

Hans Betz

I think, if you look at the situation of the power business, it has a different profile, that’s one point. And the other point is, it depends always on the mix of the equipment being shipped by our OEM customers. Because nobody is on all of these systems, so depending on the mix when it’s being shipped it may shift back and forth a bit.

Edwin Mok – Needham & Company

Great. That’s all I have. Thank you.

Larry Firestone

Okay. Thank you.

Operator

Your next question comes from the line of Timothy Arcuri from Citi. Your line is open.

Timothy Arcuri – Citi

Larry, just last question for me. If I try to sort of fit the guidance and if I normalize for the inclusion of Aera in June but the exclusion in the guidance, you have to come up with something like $35 to $40 million worth of incremental revenue quarter-over-quarter, and you sort of indicated that maybe $20 of that comes from PV Powered or from the inverted business. So I’m wondering of the other $15 to $20 million, is that more on the semi-side or where is that going to come from?

Larry Firestone

Yeah. What we said is, we think that, the inverter business is actually going to be, at least $30 million in Q3. So, that’s certainly going to be a strong contributor. And then the rest of it is really spread. I think, we talked about semi being a growth component flat panel display, glass and solar and then also the industrial products. They are all really targeted for some pretty good growth in Q3.

Timothy Arcuri – Citi

All right. So there’s not any one slug that’s going to up, that $20, it sort of is sprinkled throughout the other businesses?

Larry Firestone

Yeah.

Timothy Arcuri – Citi

Got it.

Operator

There are no further questions at this time. I turn the call back over to Mr. Larry Firestone for any closing remarks.

Larry Firestone

Thank you, operator, and thank you everyone for joining. This was certainly an exciting quarter and we are looking forward to see you at all of our future events. Thank you.

Operator

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

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