Advanced Energy Industries, Inc.
Q3 2009 Earnings Call Transcript

Published: 28 Oct 2009

[Operator:]

Good morning, ladies and gentlemen and welcome to the Advanced Energy’s third quarter earnings conference call. I’d now like to turn the call over to Annie Leschin, Investor Relations. Ms. Leschin, you may begin.

[Annie Leschin:]

Thank you, operator and good morning everyone, thank you for joining us, this morning for our third quarter 2009 earnings conference call. With me on today’s call are Hans Betz, President and Chief Executive Officer; and Larry Firestone, Executive Vice President and CFO, both of them will present prepared remarks. By now, you should have received a copy of the press release that we issued approximately an hour ago. If you would like a copy, please visit our website at www.advanced-energy.com or contact us at 970-407-4670. Just to note, our participation in the Piper Jaffray Investor Conference today is what prompted us to move our earnings call to this early morning slot. I’d just like to take a moment to let you know that we will be participating in a few conferences during the quarter including Merriman Curhan Ford on November 10 in New York City and Barclays on December 9 in San Francisco. Additional details if available, we’ll make other announcements. Now I’d like to remind everyone that except for the historical financial information contained herein, the matters discussed in this conference call contain certain forward-looking statements subject to known, unknown risks and certainties that could cause actual results to differ materially from those expressed or implied by such statements. Statements that include the terms believe, expect, plan, objectives, estimate, anticipates, intends, targets or like should be viewed as forward and uncertain. Such risks and uncertainties include, but are not limited to the volatility and cyclicality of the industries we serve, the timing or orders received from customers. Our ability to benefit from the continued cost improvement initiatives, currently underway 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 we provide you during this conference call including the fourth quarter guidance provided and in our press release today. Guidance will not be updated after today’s call until next scheduled quarter financial release. I’d now I like to turn the call over to Hans Betz.

[Hans Betz:]

Good morning, everyone and thanks for joining us. When we ended last quarter it appeared that the economic turmoil from the first half of 2009 was beginning to turn. So revenue levels had not yet begun to recover. Barry indicated some high book-to-bill ratios and backlog to improved service revenue and fab utilization pointed to a recovery in our market. As we closed third quarter, our results exceeded our expectations. Total revenue climbed over 45% to $51.8 million. Our book-to-bill ratio rose to 1.16

[Larry Firestone:]

Thank you, Hans, and good morning, everyone. We were pleased to see total revenue grow 45.5% sequentially to $51.8 million from $35.6 million. The sequential increase was driven by the continued recovery in semiconductor sales and increases across several of our non-semi markets and traction in our solar inverter products. Year-over-year, revenues were down 38.8% from the $84.5 million in the third quarter of 2008. Semiconductor capital equipment market sales increased 70.7% sequentially, to $20.8 million or 40.2% of total sales in the third quarter. The surge in sales was driven by the improvement in factory utilization at chip manufacturers and the resulting ramp of OEMs as they worked to supply equipment with very short lead times for the market. Sales to our non-semi markets also grew, increasing 39.2% to $20.3 million, or 39.2% of total sales. We were encouraged by this pickup in sales, which we believe reflects the improving economic conditions in several of these markets. Sales for the solar market increased 3.9% to $6.5 million in the third quarter or 12.6% of total sales. The solar increase was highlighted by strong inverter sales at $3.6 million. We booked 43 units and shipped 25 units in the quarter and we saw multiple orders from large utilities or commercial building. Meanwhile, thin-film equipment sales remain low as panel oversupply and lack of project financing for capacity expansion continues to slow growth in the industry. Despite the strong sales of flat panel TVs, the lion’s share of capital investments still remains a future event. This and our share loss led our sales to the flat panel market and continues their decline from the last quarter following 29.8% to $2.1 million, representing 4% of total sales. The good news is that we do believe this market has reached its trough in the third quarter and we anticipate that we will see investment following any capital raising events in Taiwan in 2010. Architectural glass sales nearly tripled this quarter to $3.4 million or 6.6% of total sales driven by two notable orders in solar applications. This compared to 1.5% of total sales or 526,000 in the second quarter. Sales to industrial coating applications in emerging markets also improved this quarter driven by a large order in Japan. Sales grew 102.8% to $6.8 million or 13.1% of total sales versus $3.4 million in the prior quarter. Sales to the data storage market increased to $1.5 million or 2.9% of total sales versus $1.3 million or 4% of total sales in the prior quarter. Once again, data storage sales were driven by demand for initial R&D tools in pattern media in Asia. Service rebounded this quarter reflecting the high utilization in both semiconductor and flat panel fabs, which drove repair and spare part revenues to levels seen in the mid 2008 range. Service grew 21.2% sequentially to $10.7 million or 20.6% of total sales. Increased bookings in the semiconductor market drove our book-to-bill ratio noticeably higher this quarter at 1.16

[Operator:]

(Operator instructions) Our first question comes from Krish Sankar from Bank of America; your line is now open.

[Paul Thomas:]

Good morning, this is Paul Thomas for Krish Sankar. Thanks for taking my questions. First half congratulations on strong results.

[Larry Firestone:]

Thank you.

[Paul Thomas:]

Yes, first on the cost cuts, so you’re saying that the $1.1 million in the temporary reductions are going to come back in Q1. Are there any other temporary reductions on the horizon that will come back after that you can kind of see now, or is that the most we’ll see sort of near term?

[Larry Firestone:]

I think that’s the bulk of what we’ll see near term. We have things like 401(k) contributions and ESPP plan, things like that are still on hold, but those are longer term decisions for us.

[Paul Thomas:]

Okay and then, on the inventory levels of the semi OEM customers, do you think at this point that your shipments are tracking pretty much in line with their shipments or do you think you guys are still at a steeper slope?

[Larry Firestone:]

It feels like we’re very immediate term with our semi OEMs. I think, their inventory levels were taken down to pretty low levels and given the lead time requirements that we’re seeing from the semi market, that’s a pretty good indicator that we’re pretty immediate to going from our shipping dock straight into a tool.

[Paul Thomas:]

Okay. Thank you.

[Operator:]

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

[Kate Kotlarsky:]

Good morning. This is Kate Kotlarsky for Jim Cavallo. I was hoping to ask a follow-up question on the share loss you talked about on the flat panel side of Applied Materials. Maybe if you could give us a little bit more color as to why you think that might have happened, whether that’s more pricing related or whether that’s a technology issue, that would be really helpful.

[Hans Betz:]

I think in this specific case more on the technology issue because we have been working on a new power supply for this application, but because of the strong demand, which came up very quickly, we have not been ready with this new product, but as you know, our relationship with applied materials is pretty strong and as soon as we have finalized this new product, I think we will capture back this kind of share loss.

[Kate Kotlarsky:]

Do you guys have any targets as to when you would expect to regain some of that share?

[Hans Betz:]

I think we will have this product probably by the way, it’s in evaluation already. So it depends very much when applied is ready with the qualification and evaluation. It’s hard to say, but it’s not too far in the future.

[Kate Kotlarsky:]

Okay, and then maybe one other question, kind of related to the previous question, which is, obviously it seems like your semi equipment customers have turned on their orders to you guys pretty quickly and your revenues to them are increasing pretty significantly. Just curious if there’s been any change in your lead times and how you feel about your capacity and your ability to meet sort of this increased level of demand now that you’re seeing?

[Hans Betz:]

Of course it has dramatic influence on the lead time and because of the fact that we have been using the time in the downturn in order to improve efficiency in every corner of the company. I think we could meet, fortunately, all these reduced lead time effects by being on time delivery and we don’t have at this point in time no major hiccups in that respect.

[Kate Kotlarsky:]

Okay, great. That’s it for me. Thank you.

[Hans Betz:]

Thank you.

[Operator:]

Your next question comes from C.J. Muse from Barclays Capital; your line is now open.

[C.J. Muse:]

Good early, early morning to you guys. I guess first question on the FPD side, hoping to probe a little bit deeper there. I guess first, why wouldn’t applied take your old product? Do your competitors have a new product that’s superior there?

[Hans-Georg Betz:]

I think it’s not necessarily a question of superior. It’s more a question as our product, which we had at this time fit exactly the requirements of the flat panel manufacturer, which of course is moving forward as well and on the other side, I think decisions being made on, which supplier brings part supply on the equipment is not only whether or not you have a superior technology, but it’s also something, which companies behind that. As far as we know, the actual supplier is a pretty small company and therefore AE from that perspective as far as the service is concerned, as far as the balance sheet is concerned, everything. We are the much stronger position, but again, if you don’t have exactly the right product at the right time, you have to work hard to get back on track, but as soon as we have it, I’m pretty sure that we are gaining back the shares.

[C.J. Muse:]

Was the decision to put someone else in there applied materials or was it their end customer?

[Hans-Georg Betz:]

No. Its applied materials.

[C.J. Muse:]

I guess then the question is in terms of the loss, does this mean you missed all the first round orders coming from Korea and China?

[Hans-Georg Betz:]

No. It specifically applied material because as you know, the key [Technical Difficulty] had traditionally very strong market share in the PVD portion. AKT had a traditional very high market in CDC and tale in etch and this is now starting to shift towards wide materials away from Owak [ph] and we are still the key supplier to Owak, but if Owak loses some shares so we in the course of this loss losing some shares as well.

[C.J. Muse:]

Okay and just to clarify, the share loss that applied is PVD or CVD?

[Larry Firestone:]

PVD.

[C.J. Muse:]

PVD, okay. So I mean that’s still a pretty small percentage of applied overall business.

[Hans Betz:]

Right.

[Larry Firestone:]

Yes.

[Hans Betz:]

PVD definitely dominates the...

[C.J. Muse:]

I mean that’s no more than 10$, 15% of their business?

[Larry Firestone:]

I would assume even probably not even that.

[C.J. Muse:]

Okay. So I guess, big picture if we assume that goes away, but you hold onto their core CVD plus your penetration at Owak Intel, what does your TAM look like today relative to when you had the PVD share? What’s the decrease?

[Larry Firestone:]

To be clear, we are in the flat panel so far in PVD. We have no business at this point in time on CVD.

[Hans Betz:]

For power.

[Larry Firestone:]

For power.

[Hans Betz:]

For flow, yes, we have business in…

[Larry Firestone:]

So we are working on both in order to gain market share from our key customer, which is applied, and we are working in the CVD space as well as in the PVD space too. If you ask me what the actual TAM is in having…

[Hans Betz:]

I don’t think we’ve got a slice, I don’t think we have got an absolute TAM number for you on that, CJ, but I think the TAM on the PVD side, the only shift there is the, if you will, the split of the ordering that on the front end of that one Korean customer that they’ve secured for PVD, so that’s so far the only shift that we’ve seen in TAM.

[C.J. Muse:]

Okay. I guess moving over to the solar side, do you think that SIGs and the strength and inverter can get your solar business in 2010 back to your peak levels in ‘08? Or does it require a meaningful recovery in thin-film as well?

[Hans Betz:]

As far as the PV solar equipment is concerned, it needs some kind of recovery on the thin-film side and it’s not just six fix chup by chance it’s a bright spot in this kind of stim situation which we have seen in the third quarter and it’s absolutely sure thin-film will come back and thin-film in terms of amorphous silicon, microcrystalline including six of course, but it was a utilization which we have seen a huge over supply, because the capacity has been brought up to a very high level and always it needs some kind of correction and this happened in Q3 and in particularly in China, we are pretty sure it’s going back on track again and as you know we have a pretty strong position in China.

[C.J. Muse:]

Thank you.

[Operator:]

(Operator Instructions) Our next question comes from Ed Mok from Needham & Co.; your line is now open.

[Larry Firestone:]

There we go.

[Ed Mok:]

Actually, the question relate to expense. So I have $1.1 million of expense that are in operating expense, was that from the cost of goods sold?

[Larry Firestone:]

Some of it will be in COGS. I would guess probably, or I would advise probably about 30% of that will be in COGS and the rest will be down in OpEx.

[Ed Mok:]

Great. Thanks and then, talk about the markets. Actually, the architectural markets have picked up quite a bit sequentially on this solar order. Is that more of a lumpy kind of one time deal or do you expect that to extend from beyond this current quarter?

[Larry Firestone:]

Architectural glass is per say generically, is a very lumpy business, because reason is pretty simple if you look, if they build one fab for architectural glass, they put a lot of capacity online just with one factory and this generally leads to a very lumpy business.

[Ed Mok:]

I see. Okay and then, just circle back on the same line of question regarding the flat panel display. Does your strength or your position in out back actually I heard which hands in apply given that, maybe apply want to differentiate from our back and as such they ought to pick a different supplier possibly?

[Larry Firestone:]

No, not the case I mean, that’s a product differentiation doesn’t go down to the component level. It’s as Hans said, it’s a question of is us getting past the final approvals that applied for the power supplies that we put to them.

[Ed Mok:]

I see. Okay and then finally, just some question related to solar area. Inverter capacity, can you tell how about quantify what is your inverter capacity right now and what’s your plan for capacity expansion for 2010?

[Hans Betz:]

I think we have just populated a new space in Fort Collins, which allows us to have 10 inverters per week, but we have the possibility to expand that to another 10 per week so that these come up at the maximum capacity of 20 per week.

[Ed Mok:]

Yes, but at this point you haven’t decided you’re going to expand the 10; is that correct or…?

[Hans Betz:]

No, we’re still fitting within the 10 a week capacity that we just expanded to.

[Ed Mok:]

I see, great. That was helpful. And then just quickly on this, I guess weakness on the solar side, how do you tolerate that? I mean, if you look at the market is still quite oversupplied and some of the turnkey company definitely reporting lower bookings of their line. Do you expect that to actually improve in 2010 or you are more cautious on that end?

[Hans Betz:]

I think as far as the turnkey solution is concerned, it’s harder to predict, but as far as the best of fleet, which are the smaller OEMs, which are providing different equipments to entire line, I think the recovery will comeback in 2010.

[Ed Mok:]

Okay, great. That’s all I have. Thank you.

[Larry Firestone:]

Thanks, Ed.

[Operator:]

Our next question comes from C.J. Muse from Barclays Capital; your line is now open.

[C.J. Muse:]

Thanks, guys. Quick follow-ups, I guess in terms of the Q4 revenue outlook, can you comment on, I guess percentage mix by category and if you don’t want to go into that kind of detail, I guess maybe aside from semi equipment, which clearly is moving higher, what the other segments look like up or down, as a percentage of mix.

[Larry Firestone:]

We won’t really breakout our guidance to that level, C.J., but I guess just to comment on the markets that we see in a growth area, semi is certainly one, flat panel display, Hans mentioned is another, solar in both the panel side and the inverter is another and then global support, probably in the level off side just given the shutdowns and the other markets are marginally mixed a little bit up and down.

[C.J. Muse:]

To hit it kind a $60 million top line, I got to use like a $10 million solar. Is that something that you think is in the cards?

[Larry Firestone:]

Yes, we are not going to break it down to that level, but we certainly see the growth in that area.

[C.J. Muse:]

All right, about I guess, longer term 2010, is the type of business level you’re seeing, architectural glass at $3.4 million, industrial coatings at $6.8 million, is that sustainable as an average run rate for 2010?

[Larry Firestone:]

Architectural as we just mentioned is that’s the lumpy one. So there you’re seeing activity not only on flow glass lines for low E capacity, but this past quarter it was TCO front end, PVD solutions for the sigs lines. So architectural again, that’s going to have some vacillation, quarter-over-quarter. On the industrial side, that seems to also run within a range probably the ranges that we are in now. We’ve seen them as sustainable, but they as well go up and down on a quarter basis. That’s not really linked to any one specific market. That’s a collection of little markets.

[Hans Betz:]

I think that’s a key point because the industrial coating is pretty much coupled with the macro economic situation and if that is a continuous recovery in 2010, then we would see a correlated increase in reduction in market as well.

[C.J. Muse:]

All right and then I guess last question for me, Larry, in terms of OpEx, can you give a kind of range of what you think that would look like at $80 million, $100 million revenue levels?

[Larry Firestone:]

Yes, I think our target model kind of going out at pointing towards the $500 million range or the $100 million to $125 million a quarter range is 45% gross margin, 13% for R&D and 12% for SG&A driving a 20% operating model. So that’s kind of the slope of the curve that we see ourselves heading to.

[C.J. Muse:]

When do you think that the target model is achievable?

[Larry Firestone:]

We haven’t said.

[C.J. Muse:]

Well, I mean, I’m not asking you to give me the revenue number, but if you were to hit $100 million to $125 million next quarter, would that model be achievable?

[Larry Firestone:]

Yes, I think it would be. I think so.

[Hans Betz:]

Yes.

[C.J. Muse:]

Okay, great. Thank you.

[Operator:]

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

[Larry Firestone:]

Okay. Thank you, operator and thank you everyone, for joining our call and we look forward to seeing you at all of our future events, the conferences that were mentioned earlier and on our future earnings calls. Thank you very much.

[Operator:]

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