Advanced Energy Industries Inc (AEIS) 2003 Q1 法說會逐字稿

Good morning. My name is Amy and I will be your conference facilitator today. At this time I would like to welcome everyone to the Advanced Energy First Quarter 2003 Earnings Results 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. If you would like to withdraw your question, press the pound key. Thank you.

Mr. Schatz, you may begin your conference.

Thank you everyone. Good morning and thank you for joining us today. I am Michael El-Hillow, Executive Vice President and Chief Financial Officer. Doug Schatz, Chairman and Chief Executive Officer and I will be today's speakers and we will provide an overview of the results. Dennis Faerber our Chief Operating Officer, Doug and I will then take your questions.

By now you should have received your copy of the press release that we issued approximately one hour ago. If you still need a copy of the release, please contact us at 970-221-4670 or you can view the release on our website 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 uncertainty include, but are not limited to the volatility and simplicality of the semiconductor and semiconductor capital equipment industries fluctuates in quarterly and annual operating results, Advance Energy's ongoing ability to develop new products in a highly competitive industry characterized by increasingly rapid technological changes. Our ability to successfully integrate the company's operations and other risks described in our Form 10-K, Form 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 introduce Doug Schatz.

Thank you Mike. And thanks for joining us this morning. As we expected, the first quarter of 2003 presented continued sluggish demand in our end markets, especially the semiconductor capital equipments sector. Sales from the first quarter were approximately $56.2m, which was at the upper end of our guidance of $54m to $57m and down 2% from the fourth quarter of 2002.

Our order pattern has remained essentially linear since late in 2002. There are no indications that this will change in the near term. While the industry remains depressed, we continue to find ways to increase our addressable markets. We have done this by reinforcing our focus on the development of products and technologies that leverage the application value of the plasma for our customers.

By focusing our research and development on our core product groups, we believe we can realize more high-value revenue possibilities, continually develop the most reliable products at the lowest possible cost and have the quickest time from concept to commercialization. These core product groups include power, flow, thermal, plasma and ion sources that enable our customers to improve their plasma manufacturing processes.

We are specifically focused on the plasma process itself because the largest point of value creation is with the plasma and laser or the substrate need. We constantly identify and leverage our process-based knowledge into exciting and new application each one of which offers a scope potential.

With semiconductors we moved to 300-millimeter and smaller alignment demands more precisely customized power, temperature, and gas management. This has resulted in an increasing demand from our customers to adapt and create products that can help one take advantage in their emerging market needs.

In the flat panel market, size, resolution, and lower manufacturing cost will still continue to drive the increase in volume. Entertainment and data storages is growing with DVD applications and demands more density and more capacity, again requiring more refined power, gas management, and temperature control.

Beyond the high volume markets deposition and surface modification of brass, metals, fabric, optics, and polymers representing increasingly large part of those addressable markets. Addressing this product group has given us some important penetration in Malaysia in medical markets. And finally, our IKOR products continue to expand its market presence in the high-end server application.

From an organizational standpoint, we significantly improved our executive management team during the quarter, with the addition of Dennis Faerber as Chief Operating Officer and Craig Jefferies, as Chief Marketing Officer. Dennis and Craig are powerful and experienced in the electronics industry. Most of their experiences are gained at Hewlett Packard, Altron, Honeywell, and the Allied Signal. They will be the key contributors both strategically and operationally.

Over the last six months, we have also driven to a simplified operating structure. We now have reduced our business in two major product releases, power systems and control systems and instrumentation, as well as two emerging product groups, IKOR and Dressler. This much streamlining the organization helps us to be more efficient and faster in new product development. As we were now able to better leverage critical mass researches and drive to a much lower breakeven in the variable operating model.

On moving to China is on schedule, but we are using China, for our final assembly and test and also to get more official access to tier one suppliers. Our factory in Shenzhen was opened and occupied by our starter team on schedule on April 2nd. Our first qualification units for power products are planned for mid May.

While we’ve stayed on schedule to date, the war and SARS outbreak can impact our progress with these overseas initiatives. The war has caused tighter controls on the issuance of training visas. And SARS has resulted in a restricted international travel situation. Fortunately, we already hired and trained our key managers and supervisors. With careful travel provisions and advanced interactive video training, we feel we have good shop to stay close to and we are on schedule.

I am continuously impressed with the adaptability and creativity that our team is showing during this period. And it certainly, using an optimal situation, we are making a good -- we are making good progress. And we do have contingency plans if things get significantly worse. And even then we believe we don't miss any moderate delays and minimum impact to our financial plans.

Our outsourcing to tier one suppliers has progressed favorably and quickly. The several key suppliers already qualified for production. We are also planning measurable savings from this effort and we expect to began seeing them in the second quarter and increasing drop for remainder of the year. As we continue to qualify more parts among a dozen validated suppliers. The global problems that could affect our final assembly and test facility in China should have very little impact on outsourcing changes.

Our plans to drive to a much little break-even and more variable operating model have also progressed well. We continue to implement these plans and by the end of 2003, we will have a quarterly operating cash flow break-even at $55m to $60m on sales. In addition to China and tier one outsourcing other major initiatives are exiting our PCB fab manufacturing facility by June 30th and outsourcing all of our high volume PCBAs to China.

We are rationalizing our worldwide sales, marketing, and service functions during the second quarter and reducing our related headcount by 20%. The major reductions are taking place internationally. We are also selling our industrial flow manufacturing facility in Longmont and moving the related manufacturing to China and the development part of the operation and administration to Fort Collins.

As part of our overall drive toward operational excellence, we have implemented advanced supply chain management concepts to reduce our inventories. The key element is the use of third-party logistic provider or 3 PL to dramatically reduce factory replenishment lead-time. We partnered with a global world-class suppliers of such services. We can also link our US operation with our emerging Asian supply chain and the new China facility.

The result of this effort will ultimately be lower inventory, better response by our vendors, and lower logistics costs overall. Our Fort Collins location went live on 3 PL at the end of March and is currently migrating of all supplier deliveries and the internal inventories to the new hub. We are doing a lot but a lot must be done in this industry-transforming environment.

The markets we serve are demanding new and better ways to meet their needs. Historically, AE has successfully met this challenge to revolve. Our management team has the leadership and experience needed to execute these plans as we reshape our business model in best position in the company with the opportunities ahead.

I will now turn the call over to Mike, so that he can review the financial results with you. Thank you.

Thanks Doug. I will review the results of the first quarter of 2003 and then provide guidance for the second quarter of 2003. The 2003 first quarter, revenues of $56.2m, up 31% from $42.9m for the first quarter of 2002 and down 2% from $57.4m for the fourth quarter of 2002.

Gross margin was 32% of the sales for the first quarter compared with 31.2% for the year ago period and 32.5% adjusted for inventory write-offs for the fourth quarter of 2002. Margins were down a bit quarter-over-quarter because of the lower sales volumes and our cost associated with our China facility. As the year progresses, we will begin to see the impact of our move to tier one suppliers and the overall lower cost of our China facility.

The net loss for the first quarter 2003 was $8.6m or $0.27 per share essentially the same as the $8.7m in the first quarter of 2002. This compared to fourth quarter 2002 net loss of $22m or $0.68 per share. Both the first quarter of 2003 and the fourth quarter of 2002 had certain charges associated with the operational changes that we have discussed.

In this quarter they total of $1.1m net of tax, principally restructuring charges. Excluding these charges, the first quarter loss would have been $7.5m or $0.23 per share and the fourth quarter 2002 net loss would have been $7.8m or $0.24 per share. If you look at the first quarter sales by end market, semiconductor capital equipment represented 59% of total sales or $33.1m. This is a quarter-over-quarter decrease of 3% in dollar terms. In the first quarter of 2002, sales in semiconductor capital equipment customers represented 71% of total sales or $30.4m.

Applied Materials, our largest semiconductor capital equipment customer, represented 22% of total first quarter sales or $13.1m, up from 22% in the fourth quarter of 2002 or $12.6m. In dollar terms, sales to Applied grew 4%. In the first quarter of 2002 Applied represented 24% of total sales.

Flat panel display applications represented 12% of total first quarter revenue or $6.7m, which represents a decline of 26% in dollar terms compared to the fourth quarter of 2002 amount of $9.1m. This market represented 5% of total first quarter 2002 sales or $2.3m.

The quarter-to-quarter change was due to customers absorbing a significant amount of equipment bought in the second half of 2002. However, year-over-year this market has seen almost a tripling of growth for us, and we believe it will sustain its strength over the near term.

The data storage industry which is comprised of digital video disk, compact disk, and computer data storage markets was 7% of total first quarter sales or $3.9m, which represents 128% increase in dollar terms compared to the fourth quarter of 2002. This market represented a 6% or $2.4m in the first quarter of 2002. Both entertainment and computer data storage saw a significant sequential and year-over-year increases.

Advanced product applications represented 22% of first quarter revenue or $12.5m, which represents a decrease of 2% compared to the fourth quarter of 2002. Sales to this market were 18% of total sales with $7.8m in the first quarter of 2002. This category includes a variety of applications such as our ICore power supply for the high end computing market, industrial codings, architectural glass codings, and laser and medical applications.

Global support was $6.8m in the first quarter of 2003, essentially unchanged in the fourth quarter of 2002. Global support represents $4.1m of total sales in the first quarter of 2002, and as you can see with the acquisition of Aera (ph), we have begun to significantly increase our global support business.

Looking at sales by geographic region, domestic sales represented 52% of total sales compared to 53% in the prior quarter and 62% in the first quarter of 2002. Europe increased to 17% of sales compared to 14% of the prior quarter and 13% a year ago. Asia Pacific represented 31% of sales compared to 33% in the prior quarter and 24% a year ago.

We ended the first quarter of 2003 with a total backlog of $25m, which represents a 14.6% increase compared to the first quarter of 2002 backlog of $21.8m. R&D spending was $13.4m, or 24% of sales during the quarter, this compares to $13m, 23% of sales in the fourth quarter of 2002 and $11.2m or 26% of sales in the first quarter of 2002.

As we complete some important projects, we expect that our quarterly R&D spend will be approximately $12.5m in the near-term. Also included in this quarter spend is the licensing agreement that will help us to further expand our plasma-based technology essentially accounting for the sequential increase.

SG&A was $14m in the first quarter of 2003 or 24.9% of the sales compared to $15.8m in the fourth quarter of 2002, adjusted for certain items or 27.4% of sales and $13.5m or 31.6% of sales in the first quarter of 2002. The $1.8m sequential decrease was due to our ongoing cost reduction measures and will continue to decrease throughout 2003.

Headcount at the end of first quarter was 1394 people, of which there were 1310 full time and 84 temporary employees. That compares with a headcount of 1398 people at the end of fourth quarter of 2002. As we discussed in February, we did not expect to have any significant headcount changes until the second quarter of 2003. The first quarter also includes our initial hiring in China.

Our balance sheet continues to be strong with cash, cash equivalent and marketable securities of $160.8m. Our cash position decreased in the first quarter of 2003 by $11.5m, primarily due to our operating loss amidst of non-cash expenses and the repayment of $2.3m of notes payable in capital lease obligations.

Our trade accounts receivable decreased to $37.2m compared to $40.8m in the prior quarter. DSOs decreased to 62 days compared to 65 days in the fourth quarter of 2002 and 69 days in that first quarter of 2002. First quarter inventory was $56m compared to $57.3m in the fourth quarter of 2002. Inventory turns are 2.7 turns in the 2003 first quarter and the fourth quarter of 2002. And 2.0 turns in the first quarter of 2002. Total days of inventory were 137 days essentially the same as the fourth quarter of 2002, and a decrease from 184 days in the first quarter of 2002.

Our capital expenditures in the first quarter were $3.4m similar to the fourth quarter of 2002 and higher than the $2.3m in the first quarter of 2002. The higher spend was due to investments in China. Depreciation was $3.2m in the first quarter compared to $2.9m one year ago. We expect CAPEX to be approximately $10m to $12m in 2003.

Although our visibility remains poor long term, current customer order patterns indicate that revenue in the second quarter would be in the $56m to $60m range with a loss per share in the range of $0.18 to $0.21. Gross margin will continue to improve and should be approximately 32% to 33.5%.

As we stated previously, R&D will be approximately $12.5m and SG&A will be approximately $13.5m to $14m. For the quarter, we expect our cash burn to be $6m to $8m. Also in the second and third quarters, we will take additional charges totaling $1.5m to $3.5m as we complete our operational changes. Including the $1.5m in the first quarter, the total for 2003 is in line with the guidance we gave in February of $3m to $5m.

Doug, Dennis, and I will now be happy to answer questions, so operator please open the line for questions, thank you.

At this time I would like to remind everyone, in order to ask a question please press 'star' and then the number 'one' on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from James Covello of Goldman Sachs.

Good morning, thanks very much. Couple of quick questions. Can you talk a little bit about your perceived inventory levels at some of your equipments customers? I guess we’ll start there.

Yeah, we monitor that constantly. We don't think there is any problem with inventory build up. Well, that few years ago several companies in this industry got burned on that. So, we can just tell you every month we look, we talk, we talk to our sales people, and we actually increase at the end of the quarter, they get ready for an earnings call. So, we haven't seen any build up to speak of.

Terrific, that's helpful. Second question would be Mike, you commented during the analyst meeting that you talked about 10% of the manufacturing would be in China by July of this year. And if I am not mistaken, you said it would ramp linearly to about 80% by the end of '04. Is that still the time frame?

That's roughly the time frame except for the starting date. It slipped a bit, I guess because of SARS. Dennis, I wonder if you would address that.

Yeah, I think, we are pretty much on track for our plan to FY04. The worst case right now, we would see probably not more than on the front end, a two to four weeks slip in the project that we are going to be able to make that of very, very quickly.

Okay, terrific. And then in terms of the cash burn, Mike, you said, $6m to $8m for the June quarter, when do you expect cash flow breakeven?

Well, we drive into the $55m to $60m breakeven by end of the year. So, so many in that we, -- a vast level of sales at the end of the year, we should be cash flow breakeven by the end of the year. If sales are higher, the earlier sales a little bit less. We will make some other changes, but we are right on schedule. We expected to reduce our cash burn by about $2m to $3m a quarter -- each quarter this year. So we started that about in $6m to $10m cash burn. In this first quarter, we did burn little more than $10m, we paid off the notes. So, we are right on schedule. So, by year-end at the latest.

Great. And then final question. You talked about the order patterns being pretty linear and stable. How about pricing? Is pricing going along with this stability of the orders or is there still some pricing pressure?

We are seeing the pricing, all pressures has been on pricing. It is pretty much leveled out.

Terrific, thanks so much and thanks again.

Thanks Jim.

Your next question comes from Mark Fitzgerald of Banc of America.

Just curious how the forecasting is coming from your customers, if they’re being any more consistent with you then they have been in the past?

Mark, we typically don't talk about customer order pattern, but that's all we have said that our order patterns have continued to be linear, and we know that over the last two or three months, there have been some announcements from the major OEMs, wouldn't comment directly on that, but as to our company since just after Thanksgiving of last year, we have pretty much seen stable linear order patterns.

Douglas S. Schatz And there has been a sense of urgency Mark like push ins and push outs, which usually indicate change, but I think with our guidance that you saw from Mike, there is enough pressure at the end of the pipe, enough demand that we feel pretty comfortable with things staying that way that may be slightly up.

Okay. And then in the flat panel and data storage market, do you think the strength can continue through the balance of the ear in those markets, any evidence of that from your customers?

I wouldn't want to go that long Mark to the end of the year, but that's not to say we don't believe that. Our visibility in that market and some other semi-market, but certainly over the next quarter or so, we think that will stay fairly strong.

Okay, thank you.

You are welcome.

Your next question comes from Brett Hodess of Merrill Lynch.

Thanks. Two questions. First following up on the flat panel display market, you said that looks like it is going to stay strong. Is that an area where you can capture more customers and applications as well as whatever natural strength is in that market?

Yeah, I think the thing that we have looked at is we've got a very strong position in PVD and we intentionally stayed away from looking at both of the RF applications, now we are starting to shift that and some of focus there and we take this quite a bit of opportunity. So we are pretty excited in picking up market shares there as well.

Okay. And then on the quarter itself, I think in the last quarter, you talked about R&D to be in more like in the $12m range, and it came in a little over $13m. So are there some programs being accelerated in R&D at this point?

One of the things that Mike said was that there was and it's really significant, a payment for a license that will give the last payment for this license for this year, which opens up a new area for us, which we hope to commercialize in some aspect within 12 months. So that’s a one-time event. We have driven down a lot of the costs inside of R&D that were travel related and discretionary, but we actually have a demand for even more R&D. We are just trying to contain that. But yes, there was some more investment in R&D for some more opportunities for us.

Very good. Thank you.

Your next question comes from Stuart Muter of Adams, Harkness & Hill.

Hi good morning, a couple of questions. One on the data storage strength. Is that really market strength or is it market share or a combination? So if you could elaborate on that, that would be helpful and also a question for Mike. In terms of when you get to the breakeven what do you think the R&D spending level would be like?

First question Stuart; I think it's probably more market strength than market share gains. We are seeing some market share gains in that part of the business. As to the R&D spend, the model that we envisioned we talked about this so the sales were $55m. We want to have a gross margin of about 40%, so that will give this $22m of gross margin. We are driving down our SG&A to $11m and as you see we made significant progress in the last several quarters. We had taken it actually from about $17.5m to less than $14m. We would expect R&D to be in the $11m to $11.5m range in the breakeven model.

Excellent, thank you.

You are welcome.

Your next question is from Martin Teng of Needham & Company.

Hi. Quick question on the breakeven number. What is the breakeven in the June quarter?

Breakeven in the June quarter should be around $62m to $65m or operating breakeven. That's the one I want to stress. This is operating cash for break-even, we are taking out the amortization of the intangibles which is about $1.5m a quarter. While we are not taking out depreciations so we have to fund CAPEX. In this particular quarter it was about, in the first quarter, about $68m. It will probably go down to about $63m to $65m and on its way down. The major changes will occur at the end of this quarter when we close on our PCBA facility and rationalize our sales force. So we should see a significant drop in the third quarter breakeven.

And which line would that be in, is it in costs?

Cost will be one part of it. Our overhead will go down quite a bit but there also will be the continued reduction in R&D and continued reduction in SG&A. As we said later in the year, as we get to the end of the year we would expect our below-the-line spend to be about $22m to $23m down from the north of $25m that it is now. So it is across the entire income statement.

Okay, you said orders are kind of leaner so I mean going forward you know we saw like, you know, you said there was an increase in sales for Applied by up to a 22% from last quarter.

Correct

Is that in inventory replenishment or what was that about?

No I think it's just normal Martin. It was a very modest increase quarter over quarter, $12.5m to about $13.1m, so nothing out of the ordinary. Business as usual.

Okay, and when do you expect orders forming semiconductors to churn up?

We are going to walk out of the room until you get that answer ,Martin. We are not sure.

Right, you know what we are hearing today is, a lot of, some of the decisions that are going to be made in December at the end of the year-end. Have you heard something like that too?

I'm sorry can you repeat the question again.

Yeah, what we are hearing is that a lot of decisions for investments, are pushed into December are you hearing the same thing too?

I don't know that we are hearing anything into that granularity quite frankly Martin. Sometimes we get things that at eight o’clock in the morning that by four o’clock in the afternoon have changed. It's a very dynamic environment. We’ll just get back to what we said that from our own particular situation our order patterns remain fairly stable over the last five months.

Okay, and you say flat panel display, would it continue to go down in the next quarter-June?

We think we will continue to see some strength but you have to understand that we've seen significant increase in flat panel specially in Q4 last year and Q1 this year. So we don't see it change significantly one way or another sequentially. So plus or minus 10% quarter over quarter would make sense to us.

Okay, and the last question, you had a $175,000 equity impairment, which line does it go into?

That will go into non-operating expense.

Okay, thank you very much.

You are welcome.

Your next question comes from Alexander Paris of Barrington Research.

The question on backlog, to put something in backlog, do you have to have a purchase order and a specific delivery date?

Yes, Alex. We also will age that so to speaking it if we get, this isn't simply happen for us we get orders out fit, you know two or three quarters out, but if something would occur there, we would not include in our backlog numbers. Generally speaking, this is shippable in the next quarter.

I understand the trend throughout most of the industry of many costumers giving more indications rather than specific numbers, so in that respect could your backlog actually be better than what it looks?

For one thing, Alex, that’s taken into account is a large percentage of our volume shipments, have the same characteristics as the current business.

Okay.

They are all set up just in time and so; we can add awful lot of revenue outside of the any backlog numbers.

Okay. You mentioned the capital spending for 2003, what would you estimate the depreciation for 2003?

Depreciation right now was about $3m a quarter. I would expect that it would continue to go up. And for the year -- to be an add of about quarter of a million dollars a quarter. So by the end of the year, near $4m a quarter.

Okay, you did not buy back in any more of your convertibles during the quarter?

We did not.

Okay, what is the outstanding at the end of the quarter?

$188m at the end of the quarter, the 5% which converted about $50 have a balance of $121m, the 5.25% converted about $30 have a balance of about $56m - $67m.

Okay, and then your headcount had dropped by the second quarter?

Alex, it should be 5.25 for the ones that converted 50. I may have said that, I may have that backward.

Okay and the other ones; you already; right. Okay and your headcount you say it's going to be stable until you get towards the end of the quarter when you close your facility then it will fall by how much?

We didn't say how much it will fall, but I will tell that by the end of the year it will be down significantly, we prefer not to go into the percentages until it actually it does happen. But most of that will occur in this quarter.

Right. Thank you very much.

You are welcome.

Our next question comes from Steven Pelayo from Morgan Stanley.

Question, I am curious in your end user business, I just can't see them as e-type business with utilizations rates picking up, are you guys seeing that flow through?

We see significant increase in end user business over the last couple of quarters and quite frankly we do expect this trend to continue. We are making significant penetration leverage in the era end user connections. By the same token, while it is growing significantly it's still a small part of our business, but I do know our service organization is very excited about their opportunity to continue growing that part of the business.

And then I may have missed part of this, but in your guidance of I guess, where do you see the incremental growth coming primarily from semiconductor equipment side?

Probably across the board.

Okay, fairly evenly distributed.

Evenly distributed, correct.

All right. Great, thanks, Mike.

You are welcome, Steve.

Your next question comes from Kevin Vassily of Thomas Weisel Partners.

Quick question on inventory with your move to China. How would you expect inventory management to improve, or would you see the inventory come down, the turns go up etc.? Because as I look at kind of the nature of the business which is increasingly coming a turns business for you, I would think that you would be able to turn your inventory a little bit faster. So I am wondering if this at all part of the hope for improvement with the move to China in terms of manufacturing?

Well, China is one element. I think, on our strategy on asset management, but we have some very, very aggressive plans in place to move to what I characterize as model world class supply chain strategy. The move tier one suppliers is one element of that, use of third parties, as well as we go to China. We are also of course having an opportunity here to really build a factory which is centered on a lot of world class principles. So, we are seeing a plans at least for very dramatic improvements in our turns over this year and continuing on in the next year. China is just one piece of that overall supply chain strategy.

Given that you've -- use of the word of dramatic, can you quantify kind of where these things might be headed by the end of the year?

We have plans in place, but we are not sure of those numbers in the color right now. We unfortunately have said in past meetings, Kevin, and that is by the end of 2004, we want minimum turns of six times a year. You got that? And when you consider that last year it was about two, two to six is fairly dramatic.

This is by the end of 2004.

With gradual improvement, I mean, we just go on and put it quarter-by-quarter but the six minimum and we hire the people that if you comfortable doing that both Dennis and then Scott Burton, and I think you have met Scott, head of Worldwide Operations.

Okay, thank you.

Your next question comes from Jay Deahna of JP Morgan.

Thanks very much. Good morning, couple of questions. The first one is, Lehman (ph) gave pretty divergent guidance for the June quarter and you are talking about continued linearity. What do you make of that and does it just come out in the mix for you guys, little strength here and little weakness there, and it all kind of plays out from the flat-to-slightly up? Then I got a follow up.

Jay, you know we don't talk about individual customers but I think your way of characterizing is right. When you get a reasonable market share, you get the aggregate benefit of wins and losses. And when the overall demand level is as low as it has been, things tend to come in lumps. And the lumps average themselves out on an average demand and when you got a reasonable market share. So, I think you are right.

And then the other follow-up I had is, can you talk about some of the incremental opportunities you are targeting in the advanced products applications segment of your business? Are you looking to grow that as a percentage over time? And then the other part of it is, give us an update on where you stand with the migration towards integrated subsystem? Thanks.

Jay, well on the advanced products we got the IKOR; we got like three major components. One of them is IKOR, which continues to grow. It's got a lot of the characteristics of the beginning product. This is custom designed into a few platforms and those platforms have to take off to really drive that business. But we've been getting good increase there.

Another one is Dressler, where Dressler has targeted well over half of their business at laser and medical and they have got a pretty significant design win last quarter. It was a first major chance for them and they got a good job. I think they made an announcement of that last quarter on the Siemens medical application.

And then we have a range of new applications; a lot of which can involve combination of sources and power supplies and for new kinds of applications. Some of the classifications for those sometimes they are industrial.

So, we're looking at all three of those areas increasing far into the horizon and I think they will become a larger part of the business. Of course, that gets driven down as a percentage as semiconductor picks up. In total absolute dollars, you will see that continuing to increase at a pretty positive rate.

As far as the integrated subsystems, we try to quantify this in a lot of ways what we do with power and with these new sophisticated matches, where integrated instrumentation and our control systems that are wrapped around all of those. But that's turning into a larger part of our business anyway.

We have new platforms that I still can’t go into detail about, but it is a new way of delivering power and providing lot of more sophisticated capabilities in a much larger package both power wise and physically. That's coming along really well.

We've also got multi-instrument controls for the control of deposition of materials and reactive sputtering processes, which we are starting to bring into the marketplace and we also have these integration of in concept of both source and power supplies with specialized industrial applications, which if you look at the package when it goes out the door is dramatically different than anything people have seen before. And this would include linear sources that are almost 10 feet long for glass applications and really sophisticated reactive controlled power supplies for helping them deliver these new architectural films.

So, there's a lot of work going on in that way and actually a larger and larger percentage of our business now has much more than one box or one standard component associated with it.

Right, and just the final follow-up. I think last fall we were talking about a fairly meaningful integrated subsystem data in the mid-year time frame 2003. Is that still pretty much on track?

Yes.

Okay, thank you.

Your next question comes from Robert Maire of Semiconductor Equipment.

Yes, hi. Could you give us a little more detail about reaching break even at the end of the year? What could pull that in or push that out? As an example, moving 10% of production to China that gets pushed out a quarter or so. And also you mentioned in your comments that going to a more variable cost environment, would that mean going to more contract employees or contract employees in China and give us that end? One last little question, if we stay at current level, I know you probably constantly re-evaluate your position in the business, but do you have any plans or thoughts of periods of time in which you go re-evaluate where your break event is and, perhaps decide to take it down further or will change everything?

First of all, we are driving our break even down on a continuous a basis. Our drive, for the remainder of this year is not a drive to an end point. This is something we are going to continue to be driving, I think going forward. We are looking at every aspect of our operations in terms of our opportunity for outsourcing. Clearly as we go to China with a lower wage base, it gives us a much higher degree of flexibility. Inherently overtime that becomes a larger and larger part of our operations. That will also help specifically to lower the break-even point as well. The other thing around China is we have already factored in the slippage that we think is possible in this, in our plans and I think we have contingencies already in place. So, I don't anticipate any impact due to earnings slippage in China for the remainder of this year.

So, basically you factored in most of the issues and feel that break even by end years is very doable?

Yes.

Okay, thank you.

And next question comes from Bill Maromen of Loanstar Asset Management.

Hi guys. When you acquired Aera, one of the potential benefits was going to be cross-selling opportunities for the current power supplies into Aera. I just want you to comment on how that is going and when we might see top line benefits from that in the revenue line?

Okay. It is very real. We are getting benefit of that right now at the end user. We have gotten benefit of that already of the OEM, those have been mostly design-win oriented as you can imagine it takes roughly a year to go through the whole process before you see any revenue. We expect to see some revenue show up from those design wins somewhere in 2003, but we will have uplifts there and we believe it will be significant with 2004.

Okay. But it sounds like that things are going well. And you are saying the benefits appeared initially in vision with the acquisition?

Absolutely.

Okay. Great, thank you.

Thank you, Bill.

You have a follow up question from Kevin Vassily of Thomas Weisel partners.

Yeah, following on that last question with regard to Aera, do you foresee or can you foresee at some point Intel being above 10% customer in the next six to eight quarters? Thanks.

We'd like to see all of our customers get about 10%.

Well that's mathematically impossible.

Okay, we will continue to see good progress into the follow up of our Aera customers. Obviously, Intel’s the second largest equipment manufacturer in the world. It would be our intent to have them be a much larger part of our business. Whether it can exceed 10%? Certainly the possibility is there. We haven’t made great penetration before with our power supplies, the indoors have been opened and over the next six months I'm sure there will be some in that area. But it does take some time and as you know, design doesn’t always translate into revenue. But that’s the goal and it was a stated goal when we bought Aera and it continues to be. I know we're all very pleased with the progress that our power group has made working with our mass flow group to penetrate that. It’s a very important customer.

Well maybe now what I ask is, do you believe there are enough applications with Intel for that potentially to happen, 10% customer?

Yes.

Okay, thanks.

Your next question is a follow up from Bill Maromen of Loanstar Asset Management.

Sorry about this. I should have asked someone in my previous question. But are you also are seeing benefit of getting the MFC there, MFC's into your current policy like, go from a domestic policy like Novellus, and Lam. I mean is that a possibility going forward and kind of comment on that.

Bill though they are already current customer.

Yeah they are Okay.

But the follow on question then would be do we expect, we could expand our market share and I think is the answer you gave us.

Okay, great thank you.

Gentlemen at this time there are no further question.

Okay. Thank you very much who ever joined us on this call and looked forward to seeing you.

Ladies and gentlemen this concludes today's conference, you may now disconnect.