Advanced Energy Industries Inc (AEIS) 2006 Q4 法說會逐字稿

Good evening. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Advanced Energy fourth quarter and year end 2006 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. [OPERATOR INSTRUCTIONS] Thank you.

Ms. Kawakami, you may begin your conference.

Thank you. Good afternoon everyone, and thank you for participating on our fourth quarter and year-end 2006 results conference call. Hans Betz, President and Chief Executive Officer, Larry Firestone, Executive Vice President and Chief Financial Officer, and Steve Rhoades, Executive Vice President and Chief Operating Officer will be the speakers on today's call. They are actually joining us today from Shenzhen, China.

By now you should have received a copy of the press release that we issued approximately one hour ago. If you still need a copy of the press release, please call us at 970-221-4670 or view the release on our website at www.Advanced-Energy.com.

Before we get started this afternoon, 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 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 are filed with the SEC.

In addition we assume no obligation to update the information that we provide to you during this conference call, including first quarter 2007 guidance provided during this call and in our press release dated today. First quarter guidance will not be discussed after today's call.

I will now turn the call over to Hans Betz.

Good afternoon, everyone. We are excited to announce that Advanced Energy delivered a record year, with sales of $410.7 million, representing an increase of 26% over the prior year. As you have seen from our strong financial result during the year, our operating model is performing well, and as a result we generated more than $84 million in cash this year. As we exit 2006, we believe that Advanced Energy is in the best position to capitalize on the ongoing expansion of our market.

As you know, our Power Conversion and Flow Control technologies are enabling components for thin film manufacturing applications, specifically PVD, CVD, and etch processes. Our R&D investments have driven innovation across these applications for the markets that we serve, principally in semiconductor, flat panel, and data storage. However as we look at our emerging markets our team is focused on developing technologies in conjunction with our customers, that will help them advance in these markets they serve.

A good example of this is the solar market. Our sales in the solar market tripled in 2006 to $8.5 million. The solar panel manufacturing market is a precision tool market, and will become increasingly capital intensive, as this market continues to grow and as new technologies progress, such as thin film solar, but the solar sales are manufactures on non-silicon substrates.

Today, the majority of solar cells manufacturing uses bulk white silicon wafer as the substrate, and CVD and PVD thin film processes, that require our DC and RF power supply products to build the solar cells. Companies are investing 85 to 90% of their R&D dollars into next generation thin film solar manufacturing. What used to be an industry funded primarily by government subsidies, now is a group of over 40 well-capitalized companies focused on this rapidly emerging market. A thin film manufacturing process uses multiple PVD, CVD, and etch steps and subsequently a wider range of AE products.

As an example a typical 15-megawatts bulk silicon line uses 6 to $8 million of thin film deposition equipment, compared to 20 to $30 million in a comparable thin film solar line, which for us means around about 10 to 20% of these values. Advanced Energy is a key contributor to this next generation technology for thin film solar, as we have been expanding our presence among the leading OEMs and producers R&D initiatives. We believe we can again deliver substantial growth in 2007 on thin film solar continues to rapidly evolve and move closer to volume production.

In our more traditional markets, there are also a number of drivers that will leverage our innovation of thin film manufacturing processes become more complex and as we continue to outperform our competitors in key customer metrics, such as quality and on-time delivery. Customers in the architectural glass markets selected our crystal high-powered solutions as the product of choice for their processing needs, which drove a record year in sales to this industry.

Looking at the technology enhancement in the architectural glass market may include a machine that coats both sides of the glass at once, which would require a complete retooling of existing machines. This opens up new markets for our customers, such as low maintenance, self-cleaning glass, and other environmental coatings, such as low E, which is an energy-saving initiative.

The data storage industry, which includes both magnetic and optical storage, continues its transition to new media, which will drive a retooling across these markets. We have already begun to benefit from this trend in our sales to date, as storage customers increased 18% year-over-year. The magnetic storage, or hard disk drive market is currently being driven by transition to perpendicular recording. This is a major industry retooling that will take several years to complete.

As the optical storage industry, or the CD/DVD market transitions to HD/DVD, or blue ray, our customers will have to retool for this much more complex manufacturing process, due to the additional thin film layers required. It is widely known that the demand for flat panel display manufacturing equipment has paused for the moment. However we believe there are drivers in the second half of '07 in to '08, that will reshape the industry longer-term, to include China as a major flat panel manufacturing center.

We think all of these drivers will help shape our growth in our non-semi business as we go forward. We have been a significant contributor to the semiconductor capital equipment market since our founding, delivering market leading power and flow solutions to our customers. We continue to improve our relationship and our strategic positioning with our customers in this industry.

This is demonstrated by our delivery and quality performance over the past few quarters, where we have been recognized for top achievements in quality and on-time delivery by our OEM customers. We will continue to focus on our performance, to ensure we remain in the top-ranking of suppliers to our customers. We believe that our track record will afford us opportunities for additional growth in these markets.

In summary, across our product lines and across our markets, we have a number of major growth engines, targeting a 17% growth rate over the next three years. We are proud of our track record of market expansion, and significantly improved financial performance over the last eight quarters.

2006 was a record year, and we thank our employees around the world for their focus and drive to ensure that Advanced Energy's success, is also our customer's and shareholder's success. We are well-positioned to continue that success in 2007, as we pursue an increased number of growth opportunities, which what we believe to be the most robust financial and operational leverage in our industry.

I would now like to turn the call over to Larry to review our financials.

Thanks, Hans, and good afternoon everyone. I will review the results for the fourth quarter and year end 2006, and discuss our guidance for the first quarter of 2007.

Sales were $104.5 million for the fourth quarter of 2006. That was down 3% compared to $107.7 million in the third quarter of 2006, and up 30% compared to the $80.4 million in the fourth quarter of 2005. Sales of semiconductor capital equipment customers represented approximately 68% of total fourth quarter 2006 sales, and 69% for the full year of 2006.

In the fourth quarter, our sales for the semiconductor market declined 4.5%, with a few contributing factors, one being the holiday shutdown period at the end of the quarter by our major OEM customers. However compared to 2005, sales of the semiconductor capital equipment customers grew 38%, both from share gains and strength in this market.

Our non-semiconductor business delivered excellent results as well increasing to 32% of total sales in the fourth quarter. On an absolute dollar basis, our non-semi business grew 6% in 2006 over 2005. Advanced product applications, which includes sales to a variety of industrial and emerging markets, such as architectural glass, and emerging technology markets, such as solar, represented approximately 19% of total fourth quarter 2006 sales, and an 8% sequential increase. This market represented 17% of full year 2006 sales, and a 21% increase compared to the full year of 2005.

Within the advanced product area sales to the photovoltaic, or solar market, increased 118% sequentially, as we continued to develop our relationships with key thin film solar and bulk silicon customers. For the year, sales to the solar market tripled from our 2005 run rate, up to $8.5 million. Sales to the architectural glass customers remained strong increasing 180% year-over-year, representing 6% of total fourth quarter 2006 sales.

Sales to the flat panel display equipment customers represented approximately 5% of total fourth quarter sales, as the delay in capital spending in that market continues. For the year, sales to this market decreased 20%, as 2005 was a much stronger year for flat panel capital equipment investment. Sales to the data storage industry were approximately 8% in the fourth quarter, and that is a 38% sequential increase. For the year sales to this market were 6%, which is an 18% increase compared to 2005. Global support represented 13% of our total fourth quarter sales, up 7.4% sequentially, and up 6% for the full year of 2006.

Gross profit was $44.9 million; a gross margin of 43% for the fourth quarter of 2006. Our gross margin would have continued to improve, had we not been impacted by a one-time noncash charge of $1.1 million, or 1.1% of gross margin, which is a provision for a customs assessment charges in the U.S. and Korea.

Gross profit for the third quarter of 2006 was $47 million, which was a gross margin of 43.7%. Fourth quarter 2005 gross profit was $30.2 million, and a margin of 37.6% of sales. We expect gross margin to return to the levels reported prior to Q4, and going forward continued improvement in gross margin over the course of 2007, as we continue to optimize and leverage the world-class operating infrastructure that we now have in place.

We ended the fourth quarter of 2006 with a total backlog of 56 million, which compared to the third quarter ending backlog of 64 million. This was expected, as our major OEM customers were shutdown at the end of December through the beginning of January, and the new order activity was significantly diminished for the last couple of weeks of Q4. R&D spending was $12.2 million, or 12% of fourth quarter sales, compared with $11.3 million, or 11% of third quarter sales, and $9.6 million, or 12% of fourth quarter 2005 sales.

During the quarter we spent approximately $1 million in development for our advanced manufacturing programs in Shenzhen, and the majority of our R&D spending is dedicated to investments in new platforms, as well as derivatives to existing platforms, to fill the market needs and capture share where we are not the principle player. SG&A was $15.5 million, or 15% of fourth quarter sales, compared to $16.9 million, or 16% of third quarter sales, compared to $13.7 million, or 17% of fourth quarter 2005 sales. This sequential decrease in SG&A was driven by the absence of severance costs and marketing expenses that affected Q3.

Amortization of intangible assets was 450,000 in the fourth quarter of 2006, compared to 453,000 in the third quarter of 2006, and 481,000 in the fourth quarter of 2005. We recorded the reversal of the deferred tax asset evaluation allowance, as we reviewed our reserve position against the likelihood that we will utilize our NOLs. Once the determination was made and the valuation allowance was reversed, we then taxed the full year at the approximate 35% tax rate. The net of these transactions was a tax benefit of 23.5 million, or $0.52 per diluted share for the quarter.

Going forward our effective tax rate will be approximately 35%. Fourth quarter 2006 income from continuing operations was $39.4 million, or $0.87 per diluted share, compared to $17 million, or $0.38 per diluted share in the third quarter of 2006, and $5 million, or $0.11 per diluted share in the fourth quarter of 2005. Excluding the net tax benefit of $23.5 million related to income taxes, and using the same effective tax rate as the third quarter of 2006, income from continuing operations in the fourth quarter of 2006 would have been $15.9 million, or $0.35 per diluted share.

During the fourth quarter of 2006, the escrow related to the sale of the ICORE product line that was completed in 2005 was released, resulting in income from discontinued operations of $1 million, or $0.02 per diluted share. Head count at the end of the fourth quarter was 1,671 employees, compared to 1,582 employees at the end of the third quarter of 2006.

Cash and marketable securities increased $27.5 million for the fourth quarter, both from operations and inventory reductions, as we ended the year with $144.2 million in cash, cash equivalents, and marketable securities. Trade accounts receivables were $72 million for the fourth quarter of 2006, compared to $72.9 million for the third quarter of 2006, and DSOs are 62 days at quarter end.

Fourth quarter inventory was $52.8 million, down compared to $58.1 million in the third quarter of 2006. Capital expenditures were $3.1 million, and fixed asset depreciation was $3.1 million for the fourth quarter.

Our guidance for the fourth quarter of 2007 is as follows, sales will be in the $102 million to $106 million range. Earnings per share will be in the range of $0.26 to $0.29 per fully diluted share, reflecting the 35% effective tax rate going forward. Without the effect of reversing the valuation allowance related to deferred tax assets, our guidance would have been $0.35 to $0.40 per fully diluted share, based on a 12% tax rate but we should use the 35% tax rate going forward.

That concludes our prepared remarks for today. I will now open the call for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Ajay Saproo from JPMorgan.

Good afternoon, thanks for taking my question. Question on gross margins. With this one-time charge I guess the gross margins actually came in a little bit higher this quarter. How should we look at gross margins through the rest of the year?

Yes. We have been on a pretty steady incline in gross margins. And I think what we said in prior calls and while we have been on the road is that you know, we have several major projects in-house to drive gross margins, revenue independent. Things like insourcing, things like continuing bring up supply chain in China, design work, things like that. So I would say you will continue to see a steady incline in gross margins, until we get to the point where we are at our target model, which is in our Investor presentation, which is 46%.

So should we expect to go from this 44 to 46% through the course of the year then?

We haven't given that granularity of guidance yet. But it is certainly on that glide path.

And stock option expense. What was the number and how do you break that out?

The number was just south of 600,000. And the bulk of that is below the line in R&D and SG&A.

Okay and then one more question just to clarify on the guidance. The $0.26 to $0.29 with an applied tax rate of 35%, is that a GAAP number?

Yes, full GAAP including all intangibles, and FAS 123-R, et cetera.

And this $0.35 to $0.40 number that you are giving, what is the difference with that?

That was just a comparison for the analysts to compare that to their prior models. So that was, you know, just directionally to point to, the fact that the only change is really in the tax rate.

Okay. And the benefit that you got this quarter, should we think of that as an actual cash benefit? Or is that just --

No. That is a noncash benefit and we'll actually get the -- as we work through the NOLs, well maybe that ends up being a cash benefit because the cash won't be going out of the Company. So as we burn through the NOLs, once we have gotten through our net operating loss, that is when taxes would actually start getting paid as cash, and you'll see that on the statement of cash flows.

So the 12% tax rate that you are talking about is simply for the purpose of comparison of what people probably had in their models before?

Yes. Yes. Our Q3 tax rate, Q3 of 2006 was 12%.

Right.

And in Q4 that jumped up to 35%. So for comparison purposes, we wanted to help everybody understand those numbers. But going forward we will be at a 35% tax rate.

Okay. Thank you very much.

Yes.

Next question from Avinash Kant, Cannacord Adams.

Good afternoon. Two quick questions, actually. You did give the level of revenues that you generated from the solar side of the business. But what was the absolute number for the full year? On the architectural glass side?

I don't know if we gave that level of granularity. Hang on a second. 17.5 million.

Just from architectural glass side?

Yes.

That's very good. And the next question is kind of a follow-up. You have seen significant growth in these revenues on percentage terms, of course, but if I sum up both these two segments they are 25, somewhere around that kind of level. Where do you see these going in '07?

I think on the solar side, what Hans talked to is a similar growth trajectory. We see you know the capacity out there, and certainly the linkage with our customers that point us to, on the solar side, you know, somewhere between two times to three times, assuming the market stays as healthy as it has been, and the momentum continues.

The architectural glass side is, as you know, is a little bit of a lumpy business. But I think that still has, with new investments in glass coaters, is still a pretty healthy run rate ahead. But I don't think we are in a spot where we can guide directionally that part of the business.

And how are your margins tracking in both these businesses compared to the corporate average?

Yes. They are stronger than the corporate average. They are in pretty good shape.

One final question. You have talked in the past about trying to reach kind of a 40% level in terms of when you have integrated products. What was that as a percentage of total revenue in '06?

Can you repeat that?

You have been trying to sell these integrated systems, right? Particularly you have talked about margin improvement, and you have kind of combined things, in some of these integrated systems.

I'm not sure I'm following. Our strategy is really focused around Power Solutions and Flow Solutions. So I don't know that, we have certainly backed away from the suite of products, if I'm understanding your question correctly. If I go to the, maybe I could answer your question, or at least make the comment that our gross margin improvement programs that are out there, really revolve around firm, cost of goods sold reductions in our business model.

So an example of that would be continuing to chisel away at our freight costs that you know, we have come through 2006 and negotiated freight channel reductions, cost reductions with an alliance that we joined. And those got implemented and signed in 2006. And some of those actually we have enjoyed the reduction pretty nicely. But some of those actually haven't taken hold, and will take hold in 2007 to continue to decline that number.

We have an insourcing effort where we are bringing in some of the components that are getting manufactured outside, where we can potentially displace a contract manufacturer or two, and bring the margin in-house. So there are programs like that, that at our current volumes, you know, we have line of sight to the target model.

So basically in the target model, if you were to have $100 million in [revenues], what kind of operating margins do you think you can achieve?

In the target model it is speaking to 19%. And as we go forward, and grow beyond that we will obviously update that model.

Okay. Thank you so much.

Sure.

Next question from Jim Covello from Goldman Sachs.

This is Amanda Hindlian in for Jim Covello. A few questions. My first question is several of the semi-equipment companies have talked about customer shipment pushouts from Q1 of '07 in to Q2. Your Q1 revenue guidance is about flat. I am wondering if you are seeing that at all in your business in Q1, or what you are seeing is a lot of growth in the non-semi-related markets making up for any softness that you are seeing in the semi business?

This is Steve Rhoades. We have seen some small amount of pushouts, and also some small amount of pull-ins in that space. We haven't really seen a big impact on the overall whole number for the quarter.

So is the semiconductor business then basically flat in Q1?

It is.

It's in that range. We haven't given that level of granularity in the guidance.

Okay. And then you have talked a lot about the improvements that you can make on the cost side with margins in 2007. Is there any amount of margin improvement that we should expect to be coming, just from the fact that you are getting growth in these non-semi businesses, where if I have understood your comments in the past correctly the margins are a bit higher?

Yes that's clear. And as non-semi continues to build and grow as a function of our overall revenues, I think there is strength and margin that will come from that.

Okay what percentage of your Q4 sales came from applied materials?

I haven't seen that level from the - oh, it's 30%. It's right on-track with where we were in Q3, I believe.

Okay. That's it for me. Thank you.

Yes.

Next question comes from Timothy Arcuri from Citigroup.

This is [Sharmini] calling in for Timothy Arcuri. My first question is regarding solar, your current exposure to solar tools is through the DC and RF power systems for PVD and CVD. My question is, what are the size and gross margins of potential other opportunities that you are looking at in the solar space?

I think, if I got your question right, we are looking in the solar space in everything which has to do with power. So that means we have concentrated our efforts so far on the --

Tooling.

-- on the tooling and on the everything which has DC or RF power for thin film deposition and etching. But of course everything which is in the solar space, and is close to our product portfolio, which means power conversion, is of interest for us. We of course explore every possibility to grow in that business. But we cannot give any kind of gross margin at this point in time because we don't have a product yet, except beyond the DC and RF power supplies.

Suffice to say our focus right now is on the tool market, and you know, any other opportunities we would certainly explore. But that is our primary focus right now.

How about the size of the opportunity?

Of the tooling market?

No. Of the other markets.

I don't know what the overall power --

I think as a matter of fact, the other parts of power conversion in this market is bigger than the tooling market for thin film solar.

We are not ready to quantify it in any areas of the market like that.

Okay. One other question. Relative to your penetration of a major Japanese OEM, is the trajectory you are seeing so far going to something like $10 million annual rate by the end of 2007?

I mean, if you are specifically pinpointing to one customer, like TL.

Right.

But we do not breakdown to this granularity. In general, I can tell you we are on-track in getting TL as a customer. But this is a, as you know, Japanese customer. That means it's a long-term avenue we have to go down. But we are on-track.

Okay. Thank you.

Thanks very much.

Next question comes from Mark Fitzgerald from Banc of America.

I am first curious on your guidance of 17% CAGR for the next three years, the thought process behind that, and particularly you are obviously embedding in that some call on the semiconductor cycle. Any explanation for the 17%?

Yes, we have got a breakdown of our different markets, and where they are directionally headed, as we have done some bottoms-up work as we look at it. So between 2006 and 2009 you know in the forecasts, that's the stack-up average, if you will, on those markets, which are the markets that we serve today, add up to a 17% CAGR.

And some of those are healthier than others, on the semi-side that is probably in the lower single digit range. In the solar side that is probably in the 20% kind of range, and maybe even a little bit higher than that. And then of course, you've got as Hans mentioned, you've got tooling initiatives going on in data storage which are driving capital.

We have got flat panel display which is not going to lay flat forever, especially as China emerges on the landscape. And then, if you think about, you know, architectural glass and the tooling that's happening there, and then you know, other products that are in our advanced product, and as well growth and service. So, you know, the bundle to us looks like a 17% CAGR.

But embedded in that doesn't sound like there's any big contraction you are forecasting in semiconductors at any given point.

It is over a three-year horizon. It has certainly an industry trend aspect to it.

Okay. Just curious on the solar side of the business, you are clearly more optimistic on this thin film technology. Is there evidence out there that someone's going to put some big bets on the table, in terms of investing in thin film, and I'm curious as to what those thin films, whether it's amorphous silicon or cadmium telluride, or whatever the thin films that you think will be the popular ones that get capacity investment?

I could speak to the bet side. Hans can probably speak maybe just the technology side better than I can. Are there players out there, that are making big bets? You know, there is in excess of 40 well-capitalized companies, you know, around the world, that have gotten their supply chain and their market channels open around, you know bulk silicon substrates, and the production process that goes along with that. So you have got a largely, call it a 90% polysilicon market today.

The R&D dollars is what is interesting. You look at that market and you look at the way the R&D dollars are invested, those R&D dollars are pointed at thin film solar, which is using either a glass or a metal, or some kind of a polysubstrate, and building the solar cell on top of that. So the bets are already happening.

You know the players in the market are racing to the finish line to see who can come up with a recipe that gives an efficiency level that will carry. But the nice thing for us as we look at that market is any bet in the R&D space is actually a small line which needs power, and that's where we come in. So, and then technology-wise.

If you look at the start-up companies in this field, they are most of the time indicative what the trend is going forward, and the big bulk of those start-up companies are dealing with the thin film solar, because thin film solar on the long term is supposed to be cheaper to produce, and the flexibility in the substrate, gives a lot of different application that you can't have if you have the bulk silicon.

On the other side, bulk silicon gave the solar business a jump start, because it is a very simple available substrate, which has high efficiency, and that is the reason why [in] the beginning was all of them bulk silicon, but the trend is very clear towards thin film.

Two follow-on questions. Just within the thin films, there is a number of films people are looking at. Do you guys have any visibility as to what is the most likely to succeed? And the second question follow-on is, when I asked about big bets and I understand the R&D investments going on here, and I absolutely agree with that, but is there anybody on the cusp of doing volume production where we get these megawatt facilities going in to produce thin film solar?

The first question is, AE is in a pretty good spot in that respect. Because at this point in time, there is no clear visibility which kind of technology may prevail on the long term. But on the other side, as long as you have thin films, you need exactly our RF or DC power supplies, and so far we do not have any problems which kind of technology may prevail at the end.

As far as the second question goes, I think we have pretty large investment and installments in plants already. And I think if my memory serves me right, the biggest was in Spain just recently with around 11 megawatts at a single plant.

Is that a thin film, or is that a --?

No. A power producer.

I think that that's a power producer is what that [is]; not a thin film line.

So the biggest thin film line at this point in time, I don't know what that is.

I don't know that any of them are up in production yet. I know, I think there is a couple in Japan that were homegrown over the years. But I think it's still in R&D.

But on the other side, we see from our orders we get sometimes a very clear trend, which is not a small order which we got into, which is thin film. And I think they are pinpointing towards around 10 megawatts.

So it is gaining traction. There is no question about that. But it is of course still, [well, I guess] 80% of the solar investment yet.

And as you know, the beauty for AE is we sell to the OEMS, we sell to the end users, and we sell to the R&D labs. For us the field of view is wide open as to who we engage with on the customer side, and who adopts our technology.

Okay. Thank you.

Next question from Robert Maire from Needham.

Yes, we heard from Brooks last night that they had some commentary from some of their clients asking if they would be ready, or if they could support a more aggressive ramp in the first half of 2007. What sort of indications are you getting from your client base in the semiconductor/semiconductor equipment business, in terms of sort of the next six months direction? Or perhaps run rates?

Well, as Steve alluded earlier, I think as far as our line of sight is, we do not see any kind of major changes in the semiconductor equipment business. We have some pushouts. We have some pull-ins. So all-in-all we still believe we are sort of flattish. At least at the first half of this year.

And that is what the companies are guiding you towards?

Yes.

Okay. And a follow-up question on the NOLs, and the tax adjustments and such. From your comments and from what I have seen from other companies, am I to assume we'll see another true-up at the end of 2007, to true up taxes based upon NOL usage at the end of the year?

I think, I mean there is always a year-end true-up as a function of FAS 109 accounting. I think the issue there is the NOLs that we unwound were predominantly U.S. NOLs. And so as you look at our tax landscape, that was the piece that we were filling in the most, which will run in the kind of corporate range - in the range of the corporate number that we gave you. So I think that actually ends up being a fairly solid number. But under 109, there is always going to be a true-up at year end.

But you would expect the true-up this year to be perhaps not as large as we saw at the end of 2006?

Yes. That's correct.

One quick -- could you just tell us how much you have remaining in NOLs, more or less?

The remaining NOLs, they are sitting in probably the 55 to 60 million range gross. Some of those are restricted around acquisitions, and parts of the countries where it will take us a little longer to unwind them. But you know the lion's share of what you saw in the reversal was $39 million in the biggest part of the valuation allowance.

So there is different pieces that will take a little longer. But certainly by the end of, or to the FAS 109 rules, we are in the more likely than not we will utilize all the NOLs. That is where we had to take the position.

Okay. Thank you.

Yes.

Your next question comes from Vishal Shah from Lehman Brothers.

I joined the call late so I apologize if this question has already been asked. For the solar business in the past you have talked about exiting 2006 at a run rate of around $15 million. I am curious to know if you were able to achieve that. And when you talk about two or three times more in 2007, is it two or three times that number?

It is three times the actual value we have at this year, which is $8.5 million.

Okay.

So we expect to have a double or triple that in '07.

Okay. And then if you look at the incremental revenue that you are expecting out of share gains and your market penetration in 2007, what would that be? Can you just quantify that? In 2007?

No. I don't think we are at the point where we can give you that level of granularity.

Okay. And if you look at Q4, Q1 guidance of flat revenues, how do you see the non-semi businesses tracking versus Q4? Are they going to be flat sequentially, or do you think there will be some growth in non-semis?

I think there is growth engines in all parts of our business. So I think we really don't breakdown our guidance at that level. But you know, certainly in the flattish range, they would have to be in the same ranges that you have seen. I guess maybe to answer your question a different way, is to say to see a dramatic shift would be pretty dramatic, I guess.

And have you guys provided any service revenues for the quarter?

I'm sorry, could you say again?

What are the service revenues for the quarter?

13%.

Okay. Thank you.

Your next question comes from Steve Pelayo of HSBC.

Thank you, my question has really been asked. But I will just throw one at you, Steve. You had talked about part of the real margin opportunity going forward was starting to in-source some of the components, if you will, that you were giving up more margins to people within your own supply chain. Could you give us an update on the progress on your in-sourcing of those opportunities?

Yes the work we are doing there is built into the overall model that Larry talked about, and we are on-track to deliver relative to our final goal there. So that's work that's going well, and work that's going to continue throughout this year.

Okay. Thank you.

Your next question comes from Tim Summers from Stanford Investment.

Your flat panel business has taken a pretty bad hit over the past couple of quarters. I am curious, as you look out to '07, what is your sort of qualitative view of flat panel spending? And how would that affect AE?

I think as far as we have view in the first half of this year, I think because of the obviously overcapacity, and because of the effect that for example, Phillips LG has some kind of reductions of product.

We probably don't see a recovery of the flat panel not before the second half. And the visibility into the second half is a bit foggy, you know? But as Larry was pointing out in his presentation, I think it cannot be quiet for too long a time. But to give you a date in which this business may recover, it's hard to say.

So you are really looking out to the second half to see any kind of recovery?

That's right.

Right.

Okay. Great. Thank you.

[OPERATOR INSTRUCTIONS] There are currently no further questions.

Okay. So I would like to thank you.

We are pleased with our 2006 operating results, which best illustrate that the turnaround is behind us. Now we are focused on profit growth opportunities in all of our markets, leveraging our market-leading technology, and our world-class cost-effective global manufacturing structure, and global customs support capabilities.

Additionally, we will be presenting at the Banc of America Technology Conference on February 22nd in New York, and at the JPMorgan Conference on February 26th in Philadelphia. Thank you again, for your time today.