Advanced Energy Industries Inc (AEIS) 2006 Q3 法說會逐字稿

Good afternoon, my name is [Oryan] and I will be your conference operator. At this time I would like to welcome everyone to the Advanced Energy third quarter results conference call. [OPERATOR INSTRUCTIONS]

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

Good afternoon, everyone, and thank you for joining us today. Hans Betz, our President and Chief Executive Officer, and Larry Firestone, our Executive Vice President and Chief Financial Officer, will be today's speakers. Steve Roades, Executive Vice President and Chief Operating Officer, will join us for the question and answer session later.

By now you should have received a copy of the press release we issued that we issued at approximately 4:20 PM eastern time. If you still need a copy of the release, you can contact us at 970-221-4670, or view the release on our website at www.advanced-energy.com.

Before we start this afternoon, I would like to remind everyone that, except for any historical information contained herein, the matters discussed in this conference call contain 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. These risks and uncertainties include, but are not limited to the volatility and cyclicality of the industries we serve, the timing of orders received from our customers, our ability to benefit from the continued cost improvement initiatives currently underway, and unanticipated changes in our estimates, reserves or allowances. These and other risks are described in our Forms 10-K, 10-Q and other reports that we file with the SEC.

In addition, we assume no obligation to update the information that we provide you on today's conference call. I'll now turn the call over to Hans Betz.

Good afternoon, everyone. As you have seen from our results, this continues to be a very exciting time for AE. We are operating at record levels, as we continue to win market share in the core business areas, which include semiconductor, flat panel and data storage. And we are growing in the emerging markets that support the advanced products areas, as well. In the third quarter 2006 we achieved record revenues of $107.7 million.

We continue to improve gross margin to 43.7% and we delivered earnings per diluted share of $0.38. In addition to these excellent operating results, we increased our cash position from the results of operations by $22.7 million to $116.7 million in total. Third quarter of sales were driven primarily by continued strength in semiconductor demand and we have continued to gain share through design wins in critical thin film areas.

We had a record setting quarter for matching network products and we see significant opportunities for share expansion across semiconductor applications. Sales to the semiconductor industry have increased every quarter since the third quarter of 2005, representing a year-over-year increase of 53%. As you have seen from our guidance, we expect semiconductor levels to decrease modestly in the fourth quarter, as semiconductor manufacturers carefully manage inventory levels.

In addition to the strength in semiconductor, our advanced products applications area, which includes diverse emerging markets has seen strong activity, as we have achieved double-digit increases in sales to solar and architecture glass customers. We have announced design wins for modular system power products at three solar customers in prior months, and we are seeing those relationships gain traction for both the volume production [inaudible] silicone processes and the emerging thin film solar manufacturing, which as you know, both require our products for thin film deposition.

Our current product offerings for solar marketing includes the Dressler RF generators. We experienced record sales in the third quarter Summit® and [Pennical] TC power systems, matching networks and mass flow controllers. The solar market continues to be an exciting growth engine for us, and as the solar market continues to grow, we expect to continue to benefit from that growth, too.

Sales to the architectural market increased, with expansions from our customers in China. As they grow, they are coded to glass infrastructure. Sales of our crystal high-powered solutions, specifically designed for large-area coating processes, achieved record sales in third quarter based on the strength in this market. From an overall perspective, we see sign of continued investment in this market, based on the need for energy-saving low E-coated glass.

Last week we announced a design win for our mass flow products, whereby AE will provide the complete flows subsystem package for a new gen-7.5 flat panel display facility. These wins are based on our latest design, as the market continues to recognize our Aera® flow product for reliability and repeatability. As expected, overall sales for flat panel display customers slowed in the third quarter, as manufacturers began to absorb the [inaudible] in storage and [inaudible] capacity.

As our guidance reflects, this market will likely show softness again in the fourth quarter, and we hope to see FAB investments return to the landscape following the holiday season. While continued cross margin improvements are the result of our targeted March enhancement initiatives and continued optimization of our worldwide operation, these initiatives include the transition to Taiwan Asian suppliers, the continued reduction in freight costs through global high-tech freight alliance, the completion of the supply hub in Shenzhen to streamline [statistics], and the launch of advanced manufacturing programs at the Shenzhen site to reduce lead times and cost for high-mix, low-volume parts.

They are pieces of an overall global operation framework that can create synergies throughout all levels of the organization through easier, faster and better processes and enhanced overall efficiencies. We believe we have an extremely powerful and flexible operating and support infrastructure that provides us with a unique competitive position, continue to maintain the best customer support, which will position AE for strength and potential share gains in both core and emerging market.

On the product side, we are making critical investments in new products and product enhancement to set the stage for our future, which will include a more complete range of power and flow solutions to meet next generation processing challenges across industries. We are also demonstrating a stronger presence in key global regions closer to our customers, so that we can be more efficient, effective partners, as we work together to solve those challenges. Many of our nonsemiconductor growth engine are the Asian and European markets, and these are important regions as we refocus our global sales and marketing forces.

This is part of our customer focus initiative, which is one of our key corporate objectives. Advanced energy is in a better position than ever to leverage our financial strength, [inaudible], and optimize global operations, model to a new market opportunities and deposition in that [inaudible] applications across a growing number of industries. We remain focused on a critical set of profitable growth opportunities driven by innovation and targeted where we can make a difference for our customers.

I'd like to turn the call over to Larry to review the financials.

Thanks, Hans, and good afternoon, everyone. I will review the results of the third quarter of 2006 and discuss our guidance for the fourth quarter. For the third quarter of 2006, sales were a record of $107.7 million, up 3% sequentially compared to $104.6 million for the second quarter of 2006. Gross profit was $47 million or 43.7% of sales, a 90 basis-point improvement compared to $44.8 million or 42.8% of sales in the second quarter of 2006.

We continue to realize the benefit of enhanced product quality and overall operating efficiency driven by our world-class operations infrastructure. Sales to the semiconductor capital equipment customers represented approximately 69% of the total third quarter sales, which reflects growth in our nonsemi business of 1% to 31% this quarter from 30% in the prior quarter. This is the fourth consecutive quarter in increasing sales to the semiconductor industry, representing 53% year-over-year growth.

Advanced product applications, which include sales to a variety of industrial markets such as the architectural glass and emerging technology market, such as solar, represented approximately 18% of total sales, a 26% sequential increase. Sales of [inaudible] or solar market increased 42% sequentially, primarily due to previously announced design wins on both bulk and thin film sides.

We continue to gain mine share with key OEMs on the solar cell manufacturers in this industry as part of our strategy to penetrate this and other high-growth emerging markets. Sales to architectural glass customers increased 30%, driven primarily by expansion in China and retrofit opportunities domestically. Our crystal high power product line is well positioned to continue its dominance in this market.

Sales to flat panel display equipment customers represented approximately 8% of total sales, reflecting the anticipated sequential decline. Sales to the data storage industry was approximately 5%, representing a sequential increase in dollar terms, as customers invested in facility retrofits for leading-edge process capabilities. Global support represented 11% of total third quarter sales, down 2% sequentially.

U.S. sales represented 56% of total third quarter sales, Asia-Pacific represented 32% of sales, and Europe represented 12% of sales sequentially. Sequentially Europe increased 42% in dollar terms, primarily due to the increased demand for our Dressler RF power conversion products into the solar and medical markets. We ended the third quarter of 2006 with a total backlog of $64 million, compared to our second quarter ending backlog of $61.1 million.

Even though we delivered record sales revenue, our orders during the quarter -- our order volume remains strong. R&D spending was $11.3 million or 11% of third quarter sales, compared to $10.8 million or 10% of second quarter sales. SG&A was $16.9 million or 16% of third quarter sales, compared to $14.2 million or 14% of second quarter sales.

The increase in SG&A was driven by severance costs, as well as increased marketing expenses and professional fees. Amortization of intangible assets was $453,000 in the third quarter of 2006, relatively unchanged from the prior quarter. Operating income was $18.3 million or 17% of sales in the third quarter of 2006, compared to $19.2 million or 18% of sales in the prior quarter.

The increased operating expenses reflects a planned investment that will enable us to pursue critical opportunities in core and noncore markets. These programs target long term expansion into emerging markets, such as solar and other opportunities within specific applications for the semiconductor and flat panel display markets. Third quarter 2006 net income was $17 million or $0.38 per diluted share compared to second quarter 2006 net income of $18.2 million or $0.40 per diluted share. Our effective tax rate in the third quarter was 12%.

All of our tax NOLs have been -- have had full valuation allowances against them, and as a result we estimate that the effective tax rate for the fourth quarter will be 14% due to the mix of foreign and domestic income anticipated at this time. Head count at the end of the second quarter was 1,582 employees compared to 1,539 employees at the end of the second quarter of 2006. Cash and marketable securities increased $22.7 million for the quarter, and we ended the quarter with $116.7 million in cash, cash equivalents and marketable securities.

Trade accounts receivable were $72.9 million for the third quarter of 2006 compared to $74.5 million in the second quarter of 2006. Our DSOs were 57 days at the quarter end. Third quarter inventory was $58.1 million, down compared to $59.8 million in the last quarter.

Our capital expenditures in the second quarter -- second and third quarters of 2006 were $1.1 million. We continue to expect CapEx to be in the $6 to $7 million range for the full year of 2006. Fixed asset depreciation was $3 million this quarter, which is consistent with the prior quarter. Our guidance for the fourth quarter of 2006, as we expect sales revenue to be in the $101 to $105 million range and our earnings per share to be in the range of $0.33 to $0.36 fully diluted share.

And that concluded our prepared for remarks today. Hans, Steve and I will be happy to take your questions.

[OPERATOR INSTRUCTIONS] And I'm showing that your first question is from the line of Alexander Paris.

Good afternoon, nice quarter.

Thank you.

That's right.

I was just looking at an article here lately just talking about the boom in solar energy. And aside from Sharp and Kosara in Japan, they mentioned Suntech it's one of the largest that's in China and a large China, Taiwan producer and then a few in America. I'm just -- could you give us an idea where are your sales going to? Going to most of these Asian ones or the U.S.? Or what percentage of them are -- of the market are you affixiating in so far with wins?

If you look at the distribution of solar, even as there are a lot of new players coming on, the bulk is still in Europe and second is in Japan. And I think we are the main -- and U.S. is following now. And our sales goes primarily into the European and U.S. environment. We haven't been very strong yet in Japan, but this is one of the targets which is high on our list to.

Are they being supplied by Asian suppliers?

Not necessarily. Because most of the -- if you look at so solar markets these days, you see a situation in which you have a mixture out of captive and OEMs. And the Asian most of the time are still on the captive side.

And how far does oil prices have to drop? It sounds like there's a change going on in the industry, so they're are less vulnerable to lower oil prices now. Do you see the boom continuing even if oil is say in the $40 or $50 range or something like that?

I think so. Because if you look at the situation, which is the growth engine in solar used to be the subsidies. The more you're getting into the economies of scale, then the cents per watt, which is finally the decisive factor drops continuously., I think tha'is one point.

The other point is the continues improvement in getting up the efficiency and lowering down the production costs will drive again. I think the push in terms of getting into a, let's say, energy conserving mode in this [verge] is so hard and even companies like China and India are jumping on this band wagon. I think you cannot stop it any more.

And One other thing I would add to that. Alex, is the companies that are out there in today's world, and Hans mentioned the government subsidies, the companies that are out there in today's world now have capital. So they're all targeting their R&D investments at targets in the future at production in technology and targets in the future where they see the price of oil and where they see the breakover and the commercial rollout of their products. It's a little different capital structure environment, which is really friendly in companies like AE.

Just another quick question on your guidance talking about the semiconductor industry, your sales point down the fourth quarter. You have said or implied that it's mostly a temporary inventory correction among the potential users, or looking at their plans, are they saying that this is just an inventory slow down but the 2007 looks okay? What kind of feeling do you get?

It's hard for us to say whether it's just a temporary correction of the inventory. What we see is, though, is from the information we have and that's a mixture out of the OEMs as [inaudible] the end users, at least the next two quarters we don't see a dramatic downfall, at this point. As you know, it's pretty hard for us to have visibility which goes beyond two quarters. We had a discussion with -- even with the end users and especially the Korean, [inaudible] and and Samsung, they didn't cut any CapEx back for '07, at least this point in time. It doesn't necessarily mean that they going to do that somewhere in the course of '07. I think for short-term we see some softness, but not a dramatic downfall. Beyond that point, I don't know.

Do you get any encouragement from the fact that it seems the semi manufacturers themselves there, their utilization rates are still over 90%. Doesn't that mean that things will hold up better than maybe people may think in the short term?

It may be. If that rate holds that values. That's a good sign. No question about that.

I think one other component to that is we think that throughout the supply chain of the semiconductor manufacturers through the OEMs, that the semiconductor equipment, OEMs, through ourselves, we're all managing the inventory and the situation very, very well and very, very tightly. So I think the tendency in the past of buildups that created long pauses is probably pretty well vetted out of the system.

Just one quick housekeeping.Tax rate, is that going to continue to move higher next year? Or is it permanently fairly low just because of your foreign content?

Well, I think as we look forward, if the valuation -- if we continue -- as we continue to assess the valuation allowance scenario with respect to our NOLs, that would lend itself to a tax rate in the range that we are talking about for Q4. But certainly as we get to a point where we're in a more likely than not scenario that we would utilize all of the NOLs then and that valuation allowance scenario changes, then we would be in a different tax scenario but we would give guidance to that at that time.

You use 14% going forward until you hear something?

Yes, yes, I would say that's fair.

Thank you very much.

Yes.

Your next question from the line of Daniel Berenbaum.

Hi, good afternoon.Talking on some of the internal operational stuff, your gross margin is obviously scaled very well as revenue has moved off through all of your improvements there. So now that we're entering this period of softness, as you characterized it, how should we think about how gross margin scale on the way down? And then also does a potential mix shift maybe away from the semis affect gross margin one way or another?

Steve, we said in the past and we continue to believe going forward that we still have opportunities and material opportunities in other components of COGS that, even in a scenario where we saw slightly lower revenues, we would continue to see improvement in gross margin, especially in materials a percentage of revenue. Right now I wouldn't see the kinds of changes that we are seeing in mix having a dramatic affect that things tend to offset. We don't have huge swings.

I mean, if we had some very, very large drop in semi, I suppose that that would have a [inaudible] effect, because we said in the past that we have slightly lower gross margins for our semi business than we do for some of the rest of our businesses. But we continue to expect improvements, particularly on the kind of revenue run rates that we have over the next 12 months.

Then on drilling down a little further on that then maybe, can you help me understand how much materials is a percent of COGS and how much more improvement you would expect to see that's left there? Thanks.

Yes, -- go ahead.

We don't break it out in terms of the specific components of Cogs, but what we've said in the past is we can expect another 300 to 400 basis-points of improvement at the current run rates.

Great, thanks.

Your next question is from the line of Robert Maire.

By the way, congratulations on a very nice results, particularly on the solar side.

Thanks.

Given that the solar and other markets outside of semi are growing at a relatively rapid rate, yet semiconductor is slowing or softening at a relatively low rate, it seems that we're not too far away from having the growth in the new markets offset any sort of weakness or softness in your primary market. Do you think we're close to that? Or do you have a sort of view as to how far up we have to get in terms of percentage of other business to offset some of this softness that we are seeing here? I realize it's a difficult question to ask, but do you have any sense in your mind?

Let it -- Robert, let us ask this way -- answer this way. What we see in the nonsemi market is a pretty strong growth. If you look at solar, for example, I think we will grow in '07 in a way which the solar market is growing, in particular as the [centrum] solar market is growing, which you know is growing much faster than the [inaudible] solar market. If you look at the storage sites, if you have seen what happens to the [perpendicular] recording -- I mean, in the meantime five companies on the hard disc companies entered the market. But most of them entered the market in the middle of this year, so that means in order to get mainstream on that, it's '07 and what we see right now already from the two OEMs, which probably are the biggest ones there -- it's [inaudible] early comments --t they see hot situations.

I think we will benefit from that because we are the supplier of choice, if you want. If you look at the glass coating -- and the optical storage has been all the time sluggish because of this unhealthy fight between HD-DVD and Blu-ray. Finally, it seems to me that PlayStation 3 will come on line, and PlayStation 3, as you know, based upon the Blu-ray, and we expect, because of that, that we will see strength in the optical storage in '07 itself.

The other point is glass coating. Glass coating has been pretty strong in '06 and we see continuous strength in glass coating as well, in particular because of two reasons. First, we see the need in the requirements to replace the old European glass coating facilities with upgrades. And on the other side, we will see a strong demand on the China side. This is part of energy saving element. Primarily low E-glass. If you look at the fourth point, which is flat panel, I think flat panel has been sluggish in Q3 and we expect some kind of softness in Q4 itself.

But I think if the holiday season is over, we will see some rebound in flat panel, I'm pretty sure on that. Not giving number and percentage points but I think we can reasonable decrease in semi compensate with an increase in the nonsemi markets.

And related to that, if we look at gross market in semis or nonsemi, are they comparable, or any of the gross margins in the nonsemi products better or such that they would offset a larger volume lost in semis? Can you give us a sense of that?

I think Steve just mentioned that the margins -- gross margins in the semi market tend to be a little bit lower than the nonsemi market. So certainly that -- the case you describe is the case.

Okay. Thank you. Congrats again.

Thanks.

Your question is from the line of Jay Deahna

Good afternoon. This is [R.J. Subpru] calling in for Jay Deahna. And couple of questions. First a quick housekeeping question. What is your stock option expense for the quarter?

I don't have the answer to that one off the top of my head. I'm sorry. It will be in our 10-Q.

Okay. In line with last quarter, I guess?

Yes.

I would say, yes.

Okay. the second question I have is can you comment on your ASPs for your products going into the semi space? Are they holding steady? Do you see an upward trend, downward trend? How is that going? I know your gross margins are going up, but I want to get a little bit more color on that.

We haven't seen a lot of change in ASP quarter-over-quarter. I mean, we're going to see price pressure now, next quarter, next year, for the next decade. We're always going to get the pressure, but we think that we provide a lot of value, both in the technology provide and the operational capability, our delivery, our service around the world. It's helped us, over time, to hold up our value and continues to do so going forward.

And that means the price pressure's not only bad. I mean, if you are -- what the price pressure does it forces and accelerates the consolidation. And the consolidation process, I think, ends up with the fact is strongest survives, and I think we are probably the strongest in that field. On the short term it may hurt, but long term it's something which may play in our favor.

So did I hear that you're not seeing price decreases, but you would like to see price decreases?

No, no. [LAUGHTER] No we just like --

I think all Hans means is we always see price pressure. Every vendor sees price pressure. But we think we have a better prospect of holding up our value than most. And we've shown that over time.

Okay. Just a quick follow-up on the solar side, then. What's your market share in that market and what's the size of the addressable market that you're looking at right now?

To be frank, it's pretty tough that because of the fact the change of the captive and OEM is permanent. And it's hard for us to say at this point in time what the real market is.

It's a little early to call share. Certainly suffice to say, we're advantaged in that we can sell to the OEMs and leverage our relationships with all of them, as they emerge into the market, as well as sell to the end users who are building their own equipment. We have a nice inventory of customers to go call on. And circling back, the stock option expense is about $600,000 for the quarter.

Okay. Thanks.

Yes.

Your next question is from the line of Tim Summers.

Thanks for taking my question. With regard to the slowdown in the semi side, are you seeing a slow down in business from all of your OEM customers and is it pretty much across all of your semiconductor equipment components?

Interesting enough it's a mixed situation. Some of the customers are in still increasing their forecast and some of them are decreasing. It's tough for us to have a situational or judge the situation whether this is a reflection of the intramarket or something which is more individual for our customers. It's very mixed.

Is it across all of your product lines and focused in one or two product categories?

Same answer. It's a mixed bag.

Okay. And just a housekeeping question. Traditionally, Larry, you guys give your business with your 10% customers. Did you have any 10% customers this quarter?

Yes, we had one. Applied Materials was about 30%.

Okay, great. Thank you.

Yes.

Your next question is from the line of Brett Hodess.

Good afternoon. I was wondering on the semiconductor side most of the OEMs that have reported so far, so your direct customers for a lot of the power supplies and MFCs, have given guidance for the December quarter shipments to be up anywhere from 1% to 9%. So all -- they're all seeing sequential growth in their shipments.

The fact that you're seeing a little dip down, is that because those OEMs are reducing their inventory at this point in preparation for some -- a slower period? Because in the past usually you will see growth rates that are similar to what your customers are shipping.

They're at the high end. We're at that low end that you just guided. We've had a couple customers, as you know, guide lower than that. And we have different concentrations of our products into different customers. I don't think there is a huge disconnect between us and them.

You have some of them reported that they'[re going to be down, a couple of them reporting it's going to be up, and we have different mixes of the amount of share we hold in different customers. So I don't think we were terribly disconnected from them right now.

Okay. Thank you.

Your next question is from the line of Ken Araki.

Hi, guys. This is actually Brian Lee calling in for Ken. And I jumped on to the call a little late, so I apologize if you've covered some of these issues. With respect to the revenue decline that you're seeing for December, can you frame how much of that is going to be from flat panel and how much of that would be from the semi side, in your view?

We haven't given -- we haven't given a deeper drill down of that decline -- or that level of the decline, so I would say we're not in a position where we would discuss that.

Would it be fair to assume that the magnitude is going to be steeper to the down side in FPD or is it roughly the same, would you say? I guess from a percentage stand-point.

We were talking -- if you think about Q3 to Q4, it's really not a lot of dollars. So, I mean, it's -- even then you're in a pretty small distribution. I'm not sure I would read drama into it. Flat panel was, as we mentioned, was soft in Q3, continued softness in Q4. And semi kind of following along the lines with what Steve just said.

Fair enough. And I had a follow-up. You guys have talked of this in the past and I just wanted to maybe circle back and see if your thinking has changed here. With respect to the big Japanese OEM that you're trying to penetrate on the power supply side, do you still think the right opportunity there by, I guess, end of '07 is about $5 million run rate per quarter? Is that the right way to think of it?

I don't know if the run rate will be in that ballpark, but I can tell you how we make progress with [Intel]. So we have, as you know, some [inaudible], tools and power at Intel. We just recently got an order on power for R&D system, and we expect some more orders to the same area in Q4.

So that means we made track -- we gain traction at Intel and the business relationship has been improving significantly. So we think we will have a revenue stream in '07. How big that's going to be, that's too early to judge.

Sure. Maybe to ask it a different way and maybe this is also a difficult question to answer. Maybe exiting '07, would the target at that $5 million run rate, it's not necessarily linear throughout the year. But maybe as we exit of '07, is that kind of a target number you guys --

We would really never give a drill down target on a specific customer that far out in the future. I mean, that's certainly not the way we work our guidance. We're a lot more near term than that.

Can't fault someone for asking. Thanks a lot, guy.

All right.

Your next question is from the line of [Krish Van Core].

Hey, guys. I had a couple of questions. Can you just tell me briefly what the target model is right now?

Our projected target model?

Yes.

Is 46% -- 46% gross margin. 11% for R&D. 16% for SG&A, deriving a 19% operating margin. And we haven't give an targeted revenue number or targeted time line for that, but you can probably get to some of those numbers by backing through the numbers.

Okay. And you have any OpEx guidance for 4Q?

Not, specific OpEx guidance. But in similar levels to with a we saw in Q3.

And just one of the last questions. Hypothetically speaking, if you remove the MSC from your semi side of the business, [inaudible] power supply on the semi side, does it [inaudible] your gross margin to the nonsemi level to exceed it?

I think it's a mixed answer. Materials and percentage revenue for MSC is higher but the LOH cost is lower. It's a bit of a mixed answer when we look at the gross margin.

Okay. All right. Thank you.

Thank you.

Your next question is from the line of Vishal Saluja.

Hi, guys. I had a question on the semi side of the business. I think you said Q4 you're revenues are down sequentially. How do you see Q1 next year? I know it's too early but some of the OEMs customers that have reported so far have suggested that shipments in Q1 will be up sequentially from Q4. Do you expect your business to be up high and accordingly, or do you think it's going to be down?

We will follow them and I think the probability is there. But it's very hard for us to give you a number in that.

We aren't at a point where we are ready to guide the direction of the business out in Q1. We were kind of watching the same information bites that you're seeing.

Okay, great. And then as you look into '07 for your flat panel business, where do you expect most of the business to come from? Will it be gen-7.5 or -- I mean, I missed the first part of your call, so I apologize if I'm asking this question. But is it going to be gen-7.5 or is it going to be gen-5, 5.5?

What we are seeing in this year and the first three quarters, it's -- most of that was gen-5 and gen-6. And I think it's fair to say that this trend may continue in '07, at least part of that. It's hard to give you a better answer on that.

And as I look at some of the forecasts for '07, you know, flat panel industry outlook, CapEx, it seems that the outlook ranges anywhere from down 10% to down 30% next year. In that environment, how do you see your flat panel business sort of -- is it going to track accordingly, or do you think that you'll benefit from some of the share gains in the businesses that you penetrated so far this year?

It's really a mixed question. It's going to depend on the geographies that are ordering. And the [full size] of the OEMs that get sponsored. It's a tough one to really characterize.

Great, thank you.

[OPERATOR INSTRUCTIONS] I'm showing your next question is a follow-up from the line of Tim Araki.

Hi, guys. This is Brian calling in for Tim again. Just had a quick follow-up. Can you speak to what you guys are seeing in terms of component inventory levels of AEIS products at your customers at the moment? Maybe is it in line, above or below normal levels or anything you can speak to there?

You know, I think that our large OEM customers become increasingly skilled at managing their inventory levels and we don't see any particular large buildup of our products that's different from other quarters.

And I guess lead times are kind of -- have been relatively stable compared to what you've seen maybe three or four months ago?

Yes. I mean, a very large fraction of our product is on JIT and, obviously, that's instantaneous lead time. And another big chunk is in the four to six-weeks range and we haven't seen a lot of change in that.

Okay, thanks.

Your next question is a follow-up from the line of Krish VanCore.

Who are your competitors on the solar side of the business?

It's the same cast of characters, so we see the same power supply companies in geographies that we see for our semi and flat panel business.

Okay, and just one question. When you look at the Japanese OEM parts of the business, is that a trigger point where, if power supply business exceeds MSC business you rethink MSC position within Advance Energy?

As we've said many times, we think the MSC business is a good business for us. It's a business give us entry into a lot of new technology opportunities at places where we are strong in flow and maybe not as strong in power. And it's just a business that we're going to continue to invest in and continue to win in.

Okay.

[OPERATOR INSTRUCTIONS] And I'm show no further questions at this time.

Thank you very much for joining us this afternoon. We look forward to speaking with you again in the future.

This does conclude today's teleconference. You may now disconnect.