Advanced Energy Industries Inc (AEIS) 2002 Q1 法說會逐字稿

Good morning. My name is and I will be your conference facilitator today.

At this time I would like to welcome everyone to the first quarter 2002 financial conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time simply press star then the number one on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question press the pound key.

Thank you. Ms. Kawakami, you may begin your conference.

Thank you and thank you everyone for joining us this morning to discuss our first quarter 2002 results. Today's speakers will be Doug Schatz, Chairman and Chief Executive Officer, Mike El-Hillow, Senior Vice President and Chief Financial Officer. They will provide an overview of the results and then will be available along with Jim Gentilcore, our Executive Vice President and Chief Operating Officer to take your questions.

By now you should have received your copy of the press release that we put out earlier today. If you still need a copy of the release please contact us at 970-407-6732 or you can view the release on our Web site, www.advanced-energy.com.

Before we get started this morning I would like to remind everyone that except for any historical 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. Such risks and uncertainties include but are not limited to the volatility and of the semiconductor and semiconductor capital equipment industries, fluctuations in quarterly and annual revenues and operating results, Advanced Energy's ongoing ability to develop new products in a highly competitive industry characterized by increasingly rapid technological changes, our ability to successfully integrate acquired companies' operations, and other risks described in our Form 10-K, Forms 10-Q and other reports and statements as filed with the SEC.

In addition we assume no obligation to update the information that we provide during this conference call.

With that I'd like to go ahead and introduce Doug Schatz.

Thanks and thank you for joining us today. We're pleased to report a quarter over quarter increase in revenue, our first sequential revenue increase since the fourth quarter of 2000. First quarter 2002 sales were 42.9 million compared to 34 million in the fourth quarter of 2001. We believe this increase is part of a general theme and that the semiconductor capital equipment industry is in the early stages of a recovery.

Since the beginning of this year we've been benefiting from a general stabilization of the industry environment. We've continued to see increases in bookings and quoting activity across the board from our semiconductor equipment customers.

While we remain cautious regarding the timing of the natural production ramp, we are encouraged by the incremental order increases as we head into the second quarter. These new orders have included 200 millimeter increases and marking the first increase in product normally associated with capacity buys. These have been added in general to an increasing supporting technology content that does go into the technology buys.

We continue to expand both our technology and business leadership through some critical acquisitions that have been made during our first quarter. First was the finalization of the Japan Limited acquisition in January. Our integration plan has been proceeding through all stages extremely smoothly. Our technology teams in the flow product division are already working on next generation gas delivery systems and we have 12 integration teams working on the synergy and organizational issues and these teams are directed by a full time integration manager.

We are well positioned to capture new opportunities in this market, which is estimated to grow at a 17 percent compound annual growth rate into the year 2005. Research estimates that it will be over a $400 million market at that time.

In late March we acquired a German based company with approximately 40 employees. specializes in RF power delivery and they bring new products, new technologies, new markets and new customers to AE. design strategy for our plasma based market is to create a platform that doesn't require modification but is designed to cover a wide range of power and frequency requirements. Customers for these products are typically smaller OEMs and end users where the carefully considered standard options cover their needs. This approach allows AE to provide a two brand strategy with different distribution and support channels, which support different customer needs. At the same time we're also leveraging some of specific technologies and directing them into our large OEM customer base where the AE brand and supporting infrastructure will dominate.

also developed a leading high frequency technology. This is frequency above 100 megahertz. It has brought them to penetrate the medical market specifically for the next generation MRI equipment. They have design wins with many of the first tier customers in medical MRI and we believe that AE's global infrastructure and financial support will provide added leverage and differentiation in these markets.

Another new market and technology area that brings to AE is the laser business. has received a design win with the major equipment supplier in the metal cutting business where technology brings significant advantages compared to previous technologies. We expect this first business relationship to convert to substantial revenues within the next two years supported by a long term contract and again part of the customer's reason for selecting besides the fine product was the added strength that AE brought to the relationship and that's a win/win for all of us and the transaction is immediately accretive.

In early April we acquired the assets of Symphony Systems. Symphony develops connectivity solutions that enable tool help monitoring, e-diagnostics and advanced process control targeting the semiconductor industry. Symphony was a developmental stage company and this combined with a severe industry downturn made it difficult for the management to get to a sustainable business mode. Symphony has been working on software developments for AE for the past two years and when the opportunity came for us to acquire the company we quickly acted on it. We have now acquired 100 percent of their intellectual property, 18 of the key employees and a majority of the assets through the vehicle of the foreclosure settlement. We believe that we can accelerate the acceptance of their products and technologies through our existing sales channels and gain support from potential customers that see now that Symphony has the financial stability that they were looking for.

Symphony has products in beta at several OEM and end user customers. The Symphony technology includes tool connectivity, automatic data collection and management and a suite of network based data analysis applications. Distinguishing characteristics of the Symphony product are the rapid deployment of that it's capable of on new tools and the immediate analysis that can be performed on selected data with the advanced analysis tools and Symphony now has an installed base of over 150 units.

We've already integrated Symphony's software with some of our RFZ scan sensors from our RF group and we're laying out a roadmap for the integration of this capability with our other subsystem components.

Symphony does report to me, is headed up by Joe Monkowksi, previously our Senior VP of Business Development.

We also completed the acquisition of Technology at the beginning of this quarter. is a North Carolina company specializing in sources for plasma abatement. was started by from Advanced Synergy and became the leader in plasma abatement or destroyed by a plasma rather conventional burning. , primarily a technology company, also has developed a new plasma source and plasma delivery system at least one of which will go into production with a major equipment manufacturer this year.

the Founder and President with join AE as the Chief Technologist of our business unit.

With these acquisitions our total market opportunity has been increased three fold. We estimated that the power conversion market would represent a $1 billion opportunity by the year 2006 when we made that estimate a few years ago but our recent acquisitions and internal product development have expanded that opportunity to the $3 billion range.

Our move into non-power categories plays on a key trend in our industry as our customer want a smaller supply base with players that offer higher value and greater capabilities. In addition, we still continued to make good progress in the power delivery market and expect continued market share gains.

We believe that by using the system level engineering capability to combine the very best components we can bring much more powerful solutions that combine higher performance in a smaller space with greater reliability at lower cost for our customers. This systems oriented engineering helps take AE to the next level of providing solutions. The more we have the more our customers ask us to do.

Looking ahead, while we would not call the current environment a ramp, we are pleased that there's been a growth in our order patterns. We are optimistic about the increases we've seen in bookings activities, which will have a positive revenue impact in the coming quarters.

That concludes my opening remarks and I'll turn the call over to Mike now so he can review the financials with you. Mike ...

el-hillow: Thanks Doug and thank you for joining us today. I will review the results of the first quarter of 2002 and then provide guidance for the second quarter.

The 2002 first quarter revenues were 42.9 million, down 43 percent from 74.7 million for the first quarter of 2001 and up 26 percent from 34 million for the fourth quarter of 2001. contributed approximately 6.7 million so on an organic basis AE revenue grew six percent sequentially. As we have told you previously, tends to lag AE by about one quarter during cycle changes.

Gross margin was 31.2 percent of net sales for the first quarter compared with 41.8 percent for the year ago period and 21.7 percent for the fourth quarter of 2001. As we discussed in February our fourth quarter margin would have been approximately 26 percent if we did not have the 1.5 million of unusual charges. The approximately five percentage point sequential increase is due primarily to higher sales covering our stable fixed cost base. We also benefited from the continuing improvement in the production process and yield of our newer product. Our 300 millimeter products continue to increase as a percentage of our business.

The net loss for the first quarter of 2002 was 8.7 million or 27 cents per share compared to first quarter 2001 net income of 5.1 million or 16 cents per diluted share. This compares to fourth quarter 2001 net loss from operations of 9.4 million or 29 cents per share excluding the five million after tax special charges in that quarter.

When you compare first quarter 2002 with fourth quarter 2001 please keep in mind that was non-stock purchase. Accordingly we do not have more shares outstanding to offset the loss that had for the quarter. As a point of reference, AE's loss per share in the first quarter excluding would have been approximately 23 cents per share compared with the 29 cent per share loss in the fourth quarter.

Also in the first quarter we restored our employees to their full salaries. Many of you may recall that as part of our cost containment efforts in 2001 our employees took a reduction in pay some for as long as nine months. This restoration of pay increased our sequential expense growth by approximately $1 million or two cents per share.

If we look at the first quarter sales by end market, semiconductor capital equipment represented 64 percent of total sales or 27.6 million. This is a quarter over quarter increase a million which is evidence of a pickup in demand from semiconductor capital equipment customers as Doug mentioned.

In the first quarter of 2001 sales from semiconductor capital equipment customers represented 68 percent of total sales or 51 million.

Applied materials, our largest customer, represented 24 percent of total first quarter sales or 10.3 million. The same percentage compared to the fourth quarter of 2001 sales of 8.1 million. In dollar terms sales to applied was 26 percent. In the first quarter of 2001 applied represented 29 percent of total sales.

Flat panel display applications represented five percent of total first quarter revenue or two million which represents a 50 percent decline in dollar terms compared to the fourth quarter of 2001 of four million. This marker represented nine percent of total first quarter 2001 sales or 6.7 million.

reports indicate that the flat panel display market returned to a pattern of price stabilization and strong demand in March 2002. replacement as well as notebook computers and flat panel televisions are strong drivers, which are expected to create a ramp in capital investment to increase capacity for large area glass panels. There has been some weakness in the small and medium display markets, which serve applications such as mobile phones, PDAs, handheld PCs and digital cameras. This segment has reportedly experienced double-digit decline although it is expected to post moderate growth in 2002 compared to 2001.

Flat panel display cap ex expected to grow over 61 percent in 2003 versus 2002 according to industry analysts. More perspective about how AE benefits from cap ex spending in this area, there were approximately 30 power supplies the typical flat panel display screen manufacturing tool. We expect to see an up tick in demand in the second half of the year from our customers in the flat panel display area.

Entertainment data storage which is comprised of digital disk and compact disk markets were three percent of total first quarter sales or 1.1 million which represents a 38 percent increase in dollars terms compared to the fourth quarter of 2001. This market represented two percent or 1.3 million in the first quarter of 2001.

Although we expect data storage to remain a relatively small portion of total revenue, there are approximately 20 to 25 DC power supplies on a typical DVD manufacturing line so AE directly benefits from increased DVD production through additional cap ex requirements. One positive example recently was an announcement from Sony disk manufacturing that it plans to more than double its DVD production capacity in the U.S. by September 2002. Beginning in the first half of this year it plans to bring online 32 new DVD replication lines to increase the company's U.S. production capacity from 12.6 million to over 30 million DVDs per month. This is a positive sign from one of the major players in this market and we expect a positive impact in the second half of the year.

The computer data storage industry represented two percent of fourth quarter's first quarter sales or one million, which is an increase in dollar terms of 62 percent compared to the fourth quarter 2001 amount of 645,000. This compares to one percent of total sales or 924,000 in the first quarter of 2001. We expect relatively flat sales for this category in the near term.

Advanced product applications representing 16 percent of first quarter or seven million, which represents a four percent decrease compared to the fourth quarter of 2001 amount of 7.3 million. Sales to this market were 15 percent of total sales or 11 million in the first quarter of 2001. This category includes a variety of applications such as our power supply formerly NPSA for the high end computing market, industrial coatings and architectural glass coatings.

Global support was 10 percent of total first quarter sales or 4.1 million which represents a seven percent increase in dollars terms compared to the fourth quarter 2000 amount of 3.8 million. Global support represented five percent or 3.8 million of total sales in the fourth quarter of 2001.

Looking at sales by geographic region, domestic sales represented 62 percent of total sales compared to 64 percent in the prior quarter and 71 percent in the first quarter of 2001. Europe decreased slightly to 13 percent of sales compared to 14 percent in the prior quarter and 12 percent a year ago. Asia Pacific represented 25 percent of sales and grew 45 percent in dollar terms quarter over quarter. This region represented 17 percent of sales in the first quarter of 2001. Both the U.S. and Asia Pacific markets were much more positively impacted by our addition of when compared to Europe.

We entered the first quarter of 2002 with a total backlog of 23.4 million, which represents a 44 percent increase compared to the fourth quarter 2001 backlog of 16.3 million. Of the first quarter backlog approximately $1 million was due to and .

R&D spending was 11.2 million or 26 percent of sales during the first quarter. This compares to 10.8 percent or 32 percent of sales in the fourth quarter of 2001 and 12.4 million or 17 percent of sales in the first quarter of 2001. The quarter over quarter increase was primarily due to the additions of . We continue to expect that our quarterly R&D spending will be in the 11.5 to 12 million range for the near term, which as a percentage of sales were higher than many of the companies in the industry. Maintaining our R&D spending even at the lower revenue base is critical to further strengthen our technology lead and sets us apart from other suppliers in the sector.

Sales and marketing was 6.8 million or 16 percent of the sales in the first quarter of 2002 compared to 5.5 million in the fourth quarter of 2001 and 6.6 million for the first quarter of 2001. The increased spending was due to the addition of .

G&A was 6.8 million in the first quarter or 16 percent of sales compared to 4.8 million in the fourth quarter of 2001 or 14 percent of sales and 6.2 million or eight percent of sales in the first quarter of 2001. Again the yearly and sequential increase was due to .

Head count at the end of the first quarter was 1,386 of which there were 1,361 full time and 25 temporary employees. This head count figure includes approximately 200 employees from . That compares with a head count of 1,185 people at the end of the fourth quarter 2001.

Our balance sheet continues to be strong with cash, cash equivalents and marketable securities of 205 million. Our cash position decreased in the first quarter of 2002 primarily due to the purchase of and .

Our trade accounts receivable increase to 40 million including 9.5 million for and compared to 26.9 million in the prior quarter.

DSOs decreased to 69 days compared to 76 days in the fourth quarter of 2001 and 73 days in the first quarter of 2001.

First quarter inventory was 67 million including 20 million for and compared to 45.2 million in the fourth quarter of 2001. Inventory turns decreased to two times compared to 2.2 times in the fourth quarter of 2001 and 3.4 times in the first quarter of 2001. Total days inventory was 184 days, an increase from 164 days from the fourth quarter of 2001 and 107 days from the first quarter of 2001. The sequential increase was due to . We are committed to making substantial improvements in this area over the next year.

Our working capital has decreased to 300.5 million in the first quarter compared to 350.4 million in the fourth quarter. The decrease reflects the cash used to purchase and during the quarter.

Total assets of 479.4 million in stockholders' equity was 206 million.

Our capital expenditures in the first quarter were 2.3 million compared with 6.5 million in the first quarter of 2001. The first quarter of 2001 included the amount of cap ex related to the purchase of .

Depreciation was 2.9 million in the first quarter compared to 2.4 million one year ago. We expect cap ex to be approximately 10 to 11 million in 2002.

Although our visibility remains poor long term, current customer order patterns indicate that we will grow revenue in the second quarter to 53 to $57 million range with a loss per share in the range of 20 to 23 cents.

and will contribute approximately 10 to 11 million of sales in the quarter.

Gross margin will continue to improve and should be approximately 33 and a half to 35 percent.

With the additions of and our operating break even point is approximately 63 to 65 million.

As I stated previously, R&D will be in the 11 and a half to 12 million range and SG&A will be approximately 14 and a half to 15 million.

One other area - one other area to point out is interest and other expense. For the quarter this was approximately two million. While it appears that we have reached the low point of interest rates, our fixed rate debt combined with our variable rate investment earnings will result in the second quarter amount of approximately 2.25 million.

Our tax rate in the first quarter was 35 percent and we believe that rate will be sustainable throughout the year.

Doug, Jim and I will now be happy to answer any questions. So operator please open for questions. Thank you.

At this time I would like to remind everyone in order to ask a question please press star then the number one on your telephone keypad. If you would like to withdraw your question press star then the number two.

Your first question comes from with Merrill Lynch.

Good morning. A couple questions - two questions. First on the recovery in the business can you give us some comments on how the trend was through the quarter in terms of gaining momentum and you know how you see that so far in this quarter in, you know, in terms of both trend of order and breadth of your OEM customers that are ordering?

And second question, when you look at the acquisitions right now particularly and coming in I guess the bigger ones, it looks like not a whole lot of margin leverage initially. Should we start to see that accelerate after you have a few more quarters of integration going on there?

el-hillow?: I'll ask Jim to talk about the recovery trend in orders and I'll take the

Yeah. on the - we have seen it fairly continuous throughout the quarter and widespread. In addition that we have a lot of less lead time orders dropped in and we're glad to say that all of our business units were able to handle that and I think that shows that there is - that's one of the key reasons behind our optimism for a fairly sizeable recovery here. So yes it would continuous grow throughout the first quarter.

el-hillow?: Regarding your question on margin I'll address first. We bought in last quarter so there's no impact on first quarter operations although we did take their full balance sheet into our balance sheet but as a point of reference, gross margins tend to be very similar to AE's, peak of cycle approaching 50 percent and in fact a little bit above 50 percent so on a go forward basis we don't see that as being a drag at all. As we said in earlier conference calls on the other hand because it's primarily an assembly house with very low fixed cost, sees very little variability in their margins, peak of cycle there about 40 percent, bottom of cycle there in the mid 30s and so we're not going to see probably much uplift in the up cycle directly although as part of the integration we're looking to combining certain components of products that we believe will give us leverage long term and also rationalize facilities. So I think the best way of looking at it is we're committed that at peak of cycle we will get back to our approximately consolidated 50 percent gross margin through more effective manufacturing. We're going into an outsourcing mode gradually, a time in the going to outsourcing where the commitments meet the ramp. We've always met the ramp in the past. We're committed to meet the ramp in the future in all areas of our - of our company whether , or the historic AE.

OK. That's great for long term. On a short term basis as you do the integration though from a modeling standpoint Mike is it - you know you gave the guidance for next quarter 33, 35 percent growth but the revenue jump is pretty large so you know do we see a stronger uplift back more towards the AE stuff after, again, after a couple quarters of moving through these ...

el-hillow: Yes and I think what we gave as guidance and that the guidance still continues that you know on incremental dollars of sales you know add anywhere from say about 45 cents, maybe a little bit north of that for incremental dollar sales. As we move forward we plan to be able to get the incremental uplift to 55 to 60 cents on incremental sales and I would look to that to begin in the fourth quarter but this is a gradual increase. So we gave guidance in first quarter of about 45 cents. We're sticking with that right now because we're still integrating. We're bringing in but we should be able to see increases to 50, 55 and 60 over the next 12 months.

I understand. Thank you.

el-hillow: You're welcome.

Your next question comes from with Morgan Stanley.

Yes. You mentioned a lot of or Jim just mentioned within lead time changes or something, less than lead time orders dropping in yet even your backlog was up significantly in the quarter with only a million of it coming from the acquisitions. So clearly the bookings remain pretty darn strong here. Can you help me - help us out here? What kind of turns are we seeing kind of cycle times I guess are going on and was the sequential increase in orders up as much as I'm seeing here, almost double?

Well what I mentioned was less than lead time and that's usually an indication to us that our OEM customers make sure the lead times are staying down in the whole supply chain so that reaction can occur and it's important for us on an operating basis through our lead manufacturing and through our ramp readiness that we go through these exercises in each of the business units. So that's what I was referring to by less than lead time being effective in the first quarter. Yes we are seeing building momentum in orders. I'm not sure what the second part of the question was.

el-hillow?: Yeah. We are seeing - as we said the quarter progressed we tend to see an increase. We wouldn't characterize it as a ramp and that's the difference . Although it continues in the very positive trend we look at rolling six weeks of orders and each of those weeks continue to increase, each of those periods and that's important to us. Rather than looking week by week we consolidate six weeks a time.

I guess it sounds like a ramp to me. What do you guys classify as a ramp then?

el-hillow?: A ramp would be sustainable more than double digit ongoing increases in orders and we have not seen that on a sustainable basis. Although I mean obviously with our - with our backlog the end of the quarter we did begin to see up tick in orders so.

Yeah. I think one of the things that we're being cautious about is that our larger customers are only giving us indications out a couple of quarters. They're being very cautious. So we're looking at definitely the volumes increasing and taking us above break even this year but we're hesitant to say that we're going to get back into the volumes or the continuous growth period that we've experienced in the past. We're just waiting for more input to come in.

I guess Doug I'm just trying to reconcile you know applied to comments that our conference actually in early March that they were ramping their manufacturing build rates 70 percent, seven zero percent sequentially in Austin. So I'm trying to figure out how that impacts the supply chain. Can you give us maybe a little thoughts on that kind of number reconcile with you?

What they're saying is in volume manufacturing they're actually starting to do some volume manufacturing again and that doesn't represent the entire company shipments but they also really only have visibility I think out into their fourth quarter. They're starting to see things maybe fill up in the quarter after that but we don't have any clear commitments or indication that it's going to continue to increase after that point. It looks good but there isn't any solid data there.

OK. Fair enough. Thanks guys.

Your next question comes from with . your line is open.

Your next question comes from with Bank of America Securities.

Given your kind of cautious outlook here, what do you plan to do on the expenses into the second half of the year here?

We're committed to maintaining expense levels as flat as possible and then only increasing expenses that relate to volume changes in sales whether they be commissions, some travel. I think it's important I mean we all understand this industry that in good times the expenses do tend to go up. They tend to accelerate. While I think we as a company are committed to being more moderate in expense growth and but also changing the way our people view the industry. I mean let's be honest. Our salespeople are very committed to customer support and we have to in effect re-define the paradigm is what it takes and we believe we have a reputation in the marketplace with our customers to give them the support they need. They want the products so I would - I would ramp up expenses a bit in the second half but I wouldn't ramp them up substantially. I mean we are committed to basically maintaining expense levels. This company and a lot of companies in the industry went through a lot of pain and suffering last year reducing expense levels. We should take advantage of that pain and suffering in order to avoid as much as possible in the future.

So there's no pressure from customers to pick up the R&D spending on new programs as you see some of this pickup in business?

el-hillow?: what I - we're starting to head to the end of some of the programs that are key to first round 300 millimeter or not first round but this round of 300 millimeter expansion. So we're - as always we - as we finish up programs we keep that capacity in place and move it onto next generation programs. So we think that we're seeing, you know, we are seeing in fact in some of the business units that we're - that that freed development capacity is ready to start on next generation products already.

OK. And I'm not sure if you explained but the jump in inventories, is that just the acquisitions here or is there something else going on?

el-hillow?: Twenty million dollars is attributable to and . Inventory at the I'll say the base AE business itself about $1 million quarter over quarter, not a substantial amount but quite frankly going in the wrong direction and we are committed to work on that.

Are the inventory levels for and that much higher that they - than Advanced Energy's? Is that something that you're going to live with here?

el-hillow?: No, we will not live with it. is not substantially. is substantially higher than Advanced Energy's and no we will not live with it but it's - the purchase was mid January. I mean it's all valuable inventory. We'll work it down gradually over the next six months. We're definitely committed to doing that.

But one of the things there is that is really viewed as exceptionally responsive to the end user so they keep a lot of inventory out in remote locations so they can configure it rapidly for local needs. So it's beyond a manufacturing capacity issue. Really it's a customer support issue but as Mike says, we can bring a lot of tools to bear to make those numbers work a lot better for us.

And is there any risk given I assume they're selling mostly to semiconductors there's any in here as we shift as the things pick up to the newer technologies?

No we don't see any of that. Jim is more up to speed on these units or out and support capability and they're not going to be replacing these with new technology. The new technology typically will go into a new tool or it'll be a major retrofit so I don't - I'm not aware of any inventory at risk right now.

OK. Thank you.

Your next question comes from with CIBC World Market.

Good morning. A couple of questions actually for you. First on the NPSA product, I know we were very hopeful for the ramp in that product. Could you give us some idea of how that's progressing in terms of both design win and actually volume both from your license fees and royalty fees as well as your own manufacturing?

The second question I was hoping you could give us some idea of how central Symphony Systems can be as a core of your integration strategy.

And thirdly, and abatement, I know it's been a big question in the industry whether at all we'll see abatement be broadly adopted and are you seeing that at the 300 millimeters and could the same technology be used for plasma chamber

OK. Let's see. The MPSA, we finally came up with a name for that and that's , I-K-O-R. There have been even more design wins the majority of those with HP as we mentioned before and those will be for volume shipments and those shipments we expect to start picking up in the second half of the year. The success of this program is driven a lot by the success of our customers' platforms and the - this is the biggest thing that the HP organization is working on with their advanced servers and we've been able to get a pretty strong position there and there isn't any material flow from the - from the licensing activities but because it almost represents a parallel of manufacturing effort as the business picks up with the main HP accounts it'll also - the licensing will pick up at the same time. Again we're not looking for that to pick up until the second half of the year but we'll be in volume shipments next year.

Is it fair to say Doug that the revenues at this point are marginal in terms of contribution?

I don't - well it depends on what we call marginal more of those.

All right.

No, I'd like to have 20 more of those but yet it - from - it's not material. It's not 10 percent but it's definitely real. It's increasing and it's adding to profitability. To your - the Symphony question about does this fit in with the core strategy, we really believe that software's going to have a larger and larger percentage of the total deliverable that we bring to our customers. Symphony represents connectivity. Connectivity gives you access to the data flow and the tool and the tool level controller. We have to get data out of our subsystems in order to do advance things. Our customers and their customers need to get connectivity into the tool in order to increase tool productivity and lower cost of ownership. So a Symphony like product or that connectivity capability will become more and more important. It'll become more important to us at the same time.

To it's a good question. The abatement growth really has been mostly outside of the United States. The regulatory issues that were viewed as driving the potential upside to the marketplace didn't come home to roost in the U.S. but they might somewhere in the future. Most of sales have gone into Asia and particularly in Taiwan and some into Japan and I think a lot of that business has been waiting for a compelling reason to put in abatement. has the best products and the largest installed base of this particular type of application and they'll be coming out with more but one of the interesting things about is as I mentioned they've been a technology development company and the core capability that rests with their engineers fits right in with what we're doing in sources and yet - we're not in it yet but we're also being able to add them to AE's portfolio of technologies a lot of these other technologies that they've been developing that have patents or are behind them and one in particular has been designed into a customer in a niche in the semiconductor industry and this is for a plasma chamber. It's the whole process chamber. So we're - it fits in with AE's theme of further integration and that's not just the plasma chamber. It's the power supply and flow controls and everything that go along with it.

OK. One question a follow up also to Jim about the business. Last couple of calls we've spoken a lot about the digital controller from and the potential through the distribution channel. Could you give us an update as to customer response and self-education of and where you think can come from other than outside the ALD market?

Yes . First of all the - one of the important integration goals for us was to make sure that we had assay capabilities for the mach one and operations of . That's on track right now. We have dual capability in visual facility and Austin. The evaluations are strong but still early. I think until we see some of the new tools - some of the new tools take off we're not going to see any real volume in the mach one and then the last part of it, we also as a part of our integration plan the sales force has been - the sales force has been introduced to the mach one capability and so we're positioning it strategically. They understand where it's being positioned and that's the way they're presenting it to our customers.

So this is something that you see more of a 2003 potential for the company.

Yes.

Great. Thank you very much.

Your next question comes from with Thomas Weisel Partners.

Yeah. Hi. A couple of questions, first on the gross margins, how much of the increase was from an increase in some of your more mature 200 millimeter related products and then the second question with regard to , can you talk about the order trends or sales trends through the quarter and if in fact some of that sales was back end loaded perhaps in the month of March?

el-hillow?: I'll answer the gross margin question . We continue to see an increase in 300 millimeter products and we've made some improvements in our productivity there. I would say that the improvement in the margin quarter over quarter was due to the higher overall sales in improvement 300 millimeter as opposed to I'll call it the legacy product which is manufactured very efficiently so we at the February we talked about showing the improvement with our newer products and we were able to accomplish that.

From the standpoint of the order trends with I'll ask Jim to address that.

Yeah. It was the same we saw in our power business but as we said several times it tends to lag by about a quarter but the trend was up each month of the quarter and our expectations are for that to continue.

OK. Great. Thank you.

Your next question comes from with Lehman Brothers.

Hi. Thank you. Some continued question on the gross margin and more on the mix shifting at 300 millimeter. One of your key competitors indicated that there's more pricing pressure in the 300 millimeter products and I was just wondering how you've been able to, you know, offset that with the improvements in margin, you know, the significant gross margin increase that you posted in the quarter.

, I think that's a fair statement. There is increased pricing pressure on the 300 millimeter programs as our OEM customers are getting pressure from their customers. In most cases we're bringing more value per whatever the denominator happens to be whether it's delivered power or you know mass flow, whatever, and generally speaking the newer products are proving their performance and you know we have - we do have the same price pressures others are seeing but the value that we're delivering with the new products is holding up. We are working very closely with our customers to identify cost reduction programs on both sides, the way we deal with each other and in the costs of our products and as always we're committed to share that with our customers.

And what was the guidance for gross margin going forward for the second quarter?

el-hillow?: Thirty-three and a half to 35 percent .

And then what's at the break even level of 63 to 65 million, what type of gross margin would you hit at that level?

el-hillow?: We started - we'd be approaching the 40 percent level.

And then finally on , maybe I have the incorrect number for the fourth quarter. It looked like excluding that core AE revenues declined sequentially by a percent I think but I think you mentioned earlier in the call that they increased six percent.

el-hillow?: Yes.

What were the - I thought was like 9. - Wasn't at 9.7 million in the fourth quarter?

el-hillow?: - we gave you fourth quarter numbers during our analysts days but there were no sales in the fourth quarter for us. We bought in January.

Right. So went down sequentially in the quarter.

el-hillow?: That is - went down sequentially Q4 to Q1. As we put in the speech, tends to lag AE in cycle changes so when the cycles are going up, they go up maybe a quarter longer. When the cycles are changing again it takes about a quarter to change basically because while we're adjusting business in the power area and the thermal area, those products tend to be ordered a little bit earlier. My understanding is and I'll let the technologists really refine this is that they attach the very much towards the end of the production process. So we're expecting to see about a one quarter delay but you're right. sales went down quarter over quarter from about 9.7 million to about seven million.

OK. But if - you're saying if you exclude that, if you don't adjust the fourth quarter for they were up.

el-hillow?: That's correct. You wouldn't because the fourth quarter was all the historic AE companies.

Yup. OK. All right. Thank you.

el-hillow?: You're welcome.

Your next question comes from with Deutsche Bank.

Hi guys. Can you give me some idea of how your business will change as we - as we kind of move from an end user spec for components to more of an OEM spec?

Well let's see. I'll address part of that . The - one of the things that we've learned and I think we've described this to some of you before is that AE has been really in a different position than from what we can tell all of the other component suppliers as far as a category goes and the easiest way to describe it is the others are part of a supply chain and suppliers of components and we're really more of a supplier of engineering and of course the engineering winds up being embedded in or embodied in the products that we ship but we're really an outsourced engineering capability and so the OEM has always us anyway and there is almost no option that's given to the end user to go for customer preference and part of the reason for that is the power, the plasma delivery system is just so intimate to the process that it's actually part of the process that's being sold to the customer. Now that's not the case with some of the other components and particularly components like flow control components. There's an over the next several years that the end user will not have the abilities to specify preference. We think that that'll - we have both a gas delivery strategy that will provide I guess an ability to respond to that, to the changing customer preference requirements and we think that we'll become more of an integrated designed in capability with the OEM through performance and system level engineering so it'd be - we'll get included as the OEM makes the shift to providing a more integrated solution. We'll be included because we're part of that integrated solution because it's really close to our heritage but the end user is still extremely powerful in determining what the flow control components are that get placed into those systems.

OK. Great. Thanks for that. I guess as a - I guess as a follow on to that, how will - how will it then change further given the, you know, power of to kind of control specification of components? Will that - will that change things in the ability for, you know, some to kind of components and to specify their own?

You know Jim might have some opinions on that too but I think when you get into performance and we're talking about intelligent high speed new technologies that we're bringing into the picture. They're going to have a hard time cherry picking something else to replace it if it's not only a customer preference but it's an operational performance issue with the subsystem because that means all of the other guys that are supplying these other components have to be just as fast as we are, just as precise as we are and it's going to be interesting to see if they can integrate all of the technologies into a plasma delivery system that we can. So if you get into the commodity level components, they're going to have an opportunity there but then the customers' going to have to live with a mix of components that they have to support in the field somehow so it's not - it's not clear how this is going to play out.

Yeah. I would just add to that that we agree that the are bringing the real value to the OEMs in terms of a configuration service if you will to be able to configure a standard more common legacy subsystems as they've been defined in the past but our strategy and the indications we're seeing from our OEM customers is that these more critical subsystems, they want to see the level of integration and performance that are the centerpiece of our - of our convergent technology strategies. So in legacy areas there'll probably be more participation by , future generations we see that less though.

There's another piece of this too that's just purely financial. It's the are operating with gross margins in the good ones in the 20 percent and above level and they just don't have the R&D culture or the funds to put into the investment of components to keep up with an intense technology race. So I think they've got a disadvantage from that point of view as well as long as the technology is needed and useful.

OK. Great guys. Thanks.

Your next question comes from with Goldman Sachs.

Good morning. Thanks very much. Can I just ask one quick question? Based on all the acquisitions that you and some of your competitors have made, has that changed the competitive environment at all and if so how?

Yes. It's - the - where we are going is the approaching the whole value that's delivered to the customer as delivering much more of a part of a system and it's not clear to us that any competitors are approaching the integration with the same thought process where we're really looking at providing not just components but the integration of the components and the capability or the embedded understanding of how they inter-operate. We don't see our competitors addressing things that way but there's an awful lot of opportunity for everybody in this market so I think what I'd said earlier about those that have more will be asked to do more I think is to the heart of the matter and clearly if you're just a component supplier now and you have only components you're at a tremendous disadvantage unless you really have a technical lock on a particular niche and I think that's what's really changed in the past few years is that single component manufacturers just don't have the leverage that they used to have.

Great. Thanks very much.

Your next question comes from with Capital Group.

A question on your e-diagnostics has e-diagnostics, MKS has e-diagnostics, a lot of the stuff going into the same equipment. Do we - do we really need three, four different communication systems to the same tool or is there going to be some way to reach a standard and have one communication line to a piece of equipment so to speak?

Yeah. I - I think there's going to be two. One of them is going to be the standard MES manufacturing interface, recipe downloading, factory logistics, instructions to move wafers, et cetera. The other one will be for processed diagnostics, access to tool data streams and it will probably run typically at higher speeds where the other one will be more what they call deterministic. So the other question is will there b a standard and we think so. I know we're co-chairing the semi standards committee for software right now. We're also working on helping to write the standard that would be an open standard the e-diagnostics port and some of the tool control and clearly the industry needs it and a lot of this work has been developed and other industries incept sect's information that's flowing through the regular sect's protocol and to be able to access the data on the tool particularly the tools that have already been and so you've got an installed base of tens of thousands of these tools out there that are all potentially targets for this kind of improvement and so once you have and so we're looking at that as being a part of an extension that we would just include with electronic infrastructure of what we're supplying to the customer. Whether we design it and build it really at the beginning wasn't that important. It's just that it existed and it was robust and there was nobody else that did it and if you look at the other kind of "suppliers" they do not have a strong connectivity solution. What they really have is an old connection into the system and these old connections are not multi-point solutions. They're typically point to point. They typically weren't optimized for networks and they typically can't handle the arbitration and security issues that are going to be required and the industry is going to definitely be using this within a couple of years.

OK. So if there is a standard some people are going to be disrupted so to speak but you don't see a standard the e-diagnostics because you continue to see value in the implications?

Yeah. I think that's where we're going to see a lot of embedded IT and it's - it comes from multiple directions. One is I think the tool suppliers are going to have to retain their IT and they're not going to let everything flow out through connectivity port and they put, you know, tens or hundreds of millions of dollars into identifying how to build control and process modules to be able to improve performance and they can't give that away. So I think that'll be locked in. At the same time you've got the people in the to get productivity data. They need to get - they need to put in their own custom because they're running customized processes, adapting things to what their own device requirements are and so you'll see a lot of specialized and custom work occur there and then there's just a lot of transaction based work I think that'll be done and people will sell products for that and it'd be the ordering the spare parts, monitoring where, taking a poll of system performance and doing preventative maintenance. So I think we'll see a lot of applications that can hook into a basic operating system and there'll be a lot of people that write those applications or provide suites of applications.

Yeah. And I think some of the things that you'll see people supply are based around the IT of the products that they already supply that they know much more deeply than anyone else.

And how disruptive is it going to be for some that already have e-diagnostics if the connectivity layer becomes

I think that the only thing that it'll really disrupt is whatever they use for a network infrastructure because whoever provides the connectivity layer is going to make it general purpose enough so that all these other applications tools can hook onto it and so if somebody's made a large investment in a networking system then I think they might have made a mistake but if they made a large investment in data analysis then it's a matter of repackaging it or re-configuring it so it'll hook into these other standardized protocols.

I see. One more question if you don't mind. What is your target for inventory and do you have somewhat of a disadvantage being a supplier who yourself have to deliver JIT climate keeping high inventory levels?

el-hillow?: , our goal is to be at a seven times turn by the end of next year, gradual improvement over that timeframe. One of the things that Doug was alluding to is that as you have a better understanding of what's going on within the systems you can also better manage what you have supply inventory around the world and all people in the industry are driving towards that. So I think there's some pressure that'll make it more difficult but there's also some benefits that will make it easier. So our goal is a seven times turn minimum by the end of 2003.

Great. Thank you very much.

Again I would like to remind everyone in order to ask a question please press star then the number one on your telephone keypad. If you would like to withdraw your question press star then the number two.

Your next question comes from with Bank of America Securities.

Hey Doug, your caution about using the world ramped here does that got to do with your and your customers viewed at the end market really haven't picked up at this point yet, the semiconductor industry has seen an upturn?

I think that's part of it . It's everybody is acknowledging that the world changed and they don't know what it means and so if you hear that PCs are and something happened with cell phones and that Japan isn't reacting at all and that there's huge over capacity and what's the impact of China coming online, I think there's all these tempering environmental conditions and people are just really hesitant to be too optimistic. At the same time there's - it looks like there's some real demand out there. This isn't just a momentary bubble that's coming through although there does seem to be a bubble in here somewhere. Somebody told us the other day that at .13 the world's now at 100 percent capacity and that seven percent of are at .13. So you can start looking at just the obsolesce line moving forward in time and that'll create demand on its own but yeah, I think we're just all nervous that it's not sustainable but it keeps going out in the future and it doesn't seem to be staying flat. So we're being conservative just because nobody can see very far.

OK. Fair enough. I appreciate that. Thank you.

your next question comes from with Robertson Stephens.

o'rourke: Hi Doug. A quick question for you, you had mentioned that your semiconductor shipments were about 60 percent growth in revenue quarter over quarter and when we look at the OEMs it seems that they're significantly less in revenue growth. Would you attribute this to inventory building or increased ASPs to product mix at 300 millimeter or should we expect to see more of this?

Jim, why don't you ...

Sure. At 300 millimeter especially in our power area it requires more power per 300 millimeter wafer. So the price per watt if you will is higher. So there's some of that in there but I mean it's not significant at this point because of the 300 millimeter

Yeah. And I'd make one comment too and I think you're really close to it is every time we see an upturn or a downturn the size of the pipe changes and so during an upturn people start not just filling one square they fill two and so as the pipe goes up in diameter you start putting more inventory into their storage and queuing systems rather than just out in the product.

el-hillow?: Doug I think also as we go into this up tick there are more machines that are being produced and that they really increased their machine production considerably and our product shift out of our plant we recognize revenue right away so there will be a bit of a delay I think.

Yeah.

el-hillow?: Also just a clarification, the price per watt doesn't go up. As a matter of fact in most cases it's going down but what is going up is the average selling price because there are more watts required

Sure. But just as a follow up to your question we haven't seen where this inventory build at our customers such that it'll have a negative impact on future quarters.

o'rourke: Fair enough. Thank you.

At this time there are no further questions. Sir, do you have any closing remarks?

Thank you for listening in and boy, it's great to have the signs turned in the other direction and for everybody out there we do hope it's a ramp.