Advanced Energy Industries Inc (AEIS) 2007 Q1 法說會逐字稿

Good afternoon. My name is Orion, and I will be your conference operator for today. I would like to welcome everywhere to the first quarter 2007 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 session. (OPERATOR INSTRUCTIONS) Thank you. Mr. Firestone, you may begin your conference.

Thank you. Good afternoon, everyone, and thank you for joining us for our first quarter 2007 earnings release conference call. Hans Betz, President and Chief Executive Officer and I will present the prepared remarks. Steve Rhoades, Executive Vice President and Chief Operating Officer will join us when we open the call for questions. 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 contact 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 financial 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 under way, and unanticipated changes in our estimates, reserves or allowances. These and other risks are described in our Forms 10-K and 10-Q and other reports filed with the SEC. In addition, we assume no obligation to update the information that we provide to you during this conference call, including the second quarter 2007 guidance provided during this call and in our press release dated today. Second 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 pleased to announce that Advanced Energy delivered a strong start to 2007 with a first quarter sales of $107.3 million, representing an increase of 14.1% over the first quarter 2006. We also achieved a significant milestone of 45% gross margin. Additionally and equally exciting, we reported an operating margin of 19% excluding the restructuring charge, which is in line with our target financial mark. During the quarter, we generated over $12 million in cash as we closed the quarter, with $156 million cash and cash equivalents. Our sales to the semiconductor market continues to outpace the overall growth in the industry through both growth in the market and market share gains. Our semisales 8% increased sequentially over the prior quarter to 71% of our overall sales in the first quarter. Although we have all heard about a slowdown in the memory spending, all indication from the market so far are that the semimarket should remain healthy through Q2 as reflected in our guidance. Led by a softness in the architectural glass market, our sales to the non-semimarkets decreased 8% sequentially over all, but there are a few bright spots in these markets too. Solar continued its strong growth paths for AE as we continue to forge supplier relationship with a growing number of OEM suppliers and solar panel manufacturers in the industry. Our sales to the solar market doubled sequentially from the fourth quarter to $7.3 million, or 7% of first quarter 2007 sales.

For AE and our OEM customers, the solar panel manufacturing market is a thin film deposition tool market, with the majority of the solar cell manufacturing uses bark silicon wafer as the substrate. This manufacturing processes uses CBD and PBD thin film processes that require our [DC and Aera] power supply products in order to manufacture those solar cells. Our growth in this market will be aligned with the growth in capacity for both the bark silicon substrate market, as well as the thin film solar cell market as it merges into mainstream production which is anticipated in 2008. As many of you know, 85 to 90% of the solar cell manufacturers' R&D dollars are dedicated to thin film solar process and product development. We believe we can continue our growth in solar in 2007 and beyond as thin film solar continues to rapidly evolve and move closer to volume production.

In the flat panel, data storage, and advance products markets, we saw results consistent with the prior quarter where the architectural glass market sales were lower than in the prior quarters. Flat panel display sales were consistent with the fourth quarter, and the outlook for the second quarters tomorrow. As we stated last quarter, we believe market drivers in the second half of '07 and into '08 surrounding generation 8 and generation 10 systems. That will drive a flat panel investment cycle and shape the industry longer term to include China as a major flat-panel display manufacturing center. Once these investments take shape, they should be a key growth driver for Advanced Energy. The data storage industry, which includes both magnetic and optical storage was very strong in 2006, as the industry continued its transition to new media. Although the pneumatic storage, or hard disk drive market is currently being driven by a transition to perpendicular recording, we experienced a typical seasonal softness in the first quarter as save to data storage customers declined 18% compared to the fourth quarter.

Looking forward, this is a major industry retooling that will take several years to complete, and followed by the transition of the optical storage industry to HD DVD and Blu-Ray. Our customers will have to invest and retool their factories for a much more complex manufacturing process, due to the additional thin film layers required. The retooling of these markets will be a long-term growth driver for Advanced Energy.

The architectural glass market was strong in 2006, as we supported large retrofit products in the U.S. Sales moderated in Q1 as revenue fell to less than 5% of sales. Looking forward, low emissivity glass is continuing to become a contributing factor for energy efficiency around the world, and is driving investments in new coating capacities. Further technology enhancements, such as maintenance free glass, are driving longer term opportunities. Enhancements such as these would include a machine that coats both sides of glass simultaneously, and would require an industry retooling of existing machines, and an increase in the investment for new machines. The progress we made over the last several quarters in diversifying our business into additional growth markets beyond our strong semi-business has delivered stability and growth as our multiple markets go through different quarterly fluctuations. Within each market resides a growth engine that will shape AE's revenue landscape going forward, and we believe that our target of 17% annual growth is achieveable.

We are proud of our achievements during the first quarter of 2007, as we have built a platform that can deliver success among many markets, and we thank our employees around the world for their relentless effort and drives to ensure that Advanced Energy's success is our customers' and shareholders' success. We believe we are very well positioned to grow in our existing markets, and continue to mine new opportunities throughout the year as we grow with our customer base in multiple markets. Now I would like to turn the call over to Larry to review the financial.

Thank you, Hans, and good afternoon, everyone. I will review the results of the first quarter of 2007, and discuss our guidance for the second quarter. Sales were $107.3 million for the first quarter of 2007, sequentially up 2.7% compared to the $104.5 million in the fourth quarter of 2006, and up 14.1% compared to the $94 million in the first quarter of 2006. Sales for the semiconductor capital equipment customers increased 8%, representing approximately 71% of total first quarter 2007 sales. However, compared to the first quarter of 2006, sales to the semiconductor capital equipment customers grew 15% from both share gains and strength in this market. Our non-semiconductor business delivered 29% of overall sales in the first quarter of 2007, compared to 30% in the first quarter of 2006. Non-semi includes solar, flat panel display, data storage, architectural glass and advanced product applications or APA. As Hans mentioned, sales to the solar market doubled from the prior quarter and grew to $7.3 million, or 7% of overall sales. These were sales to both OEM manufacturers of thin film deposition equipment to the solar market, as well as to the solar panel manufacturers directly. Sales to the flat panel display equipment customers represented approximately 5% of total first quarter sales, which is consistent with the prior quarter, due to the delay in capital spending in the flat-panel market. As Hans mentioned, we are looking forward to the second half of 2007, when the flat-panel industry is likely to begin the next cycle of investments.

Sales to the data storage industry were approximately 6% of sales in the first quarter, an 18% decrease from the fourth quarter of 2006. Continued investments in perpendicular recording should drive the revenue in this market over the next several quarters, however. Sales to the architectural glass market dropped to 1% of sales from 6% in the prior quarter. In 2006, we worked through a large retrofit order for this market, and that revenue momentum did not carry into the first quarter of 2007. Although there was significant sales activity in the quarter, bookings and revenue opportunities from further retrofits and new tools were pushed into Q2 and beyond. Sales to the advanced products applications, which includes sales to a variety of industrial and emerging markets, represented approximately 10% of total first quarter sales, a 6% decrease from the fourth quarter of 2006. And global support, which is imbedded in each of these market areas, represented 13% of total first quarter sales, which increased 7% sequentially, and increased 13.5% over the first quarter of 2006. Gross profit was $48.3 million, and we're proud to say that our team continued the gross margin improvement path, delivering a gross margin of 45% for the first quarter of 2007. This compares to a 2006 fourth quarter gross profit of $44.9 million, with a gross margin of 42.9%, and a first quarter 2006 gross profit of $38.6 million, with a gross margin of 41%.

Looking forward, our gross margin improvement plans still have more to deliver as we look to freight, component cost, design, and supplier transition to carry us to our target model of 46%. Backlog returned to typical levels as we ended the first quarter of 2007 with a total backlog of $61.8 million, compared with a fourth quarter ending backlog of $56 million. Backlog exiting Q4 was seasonally low as expected, as our major OEM customers were shut down at the end of December through the beginning of January, which affected new order activity. R&D spending was $12 million, or 11.2% of first quarter sales, compared to $12.2 million or 11.7% of fourth quarter sales and $10.5 million or 11.1% of total first quarter 2006 sales. 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 principal player. SG&A was $15.2 million or 14.2% of first quarter sales, compared to $15.5 million or 14.9% of fourth quarter sales, and compared to $14.4 million or 15.3 million of first quarter 2006 sales. (sic - see Press Release) The sequential decrease in SG&A was driven by lower facilities cost and lower information technology cost as well as lower professional fees. Amortization of intangible assets was $324,000 in the first quarter of 2007, compared to $450,000 in the fourth quarter of 2006, and $477,000 in the first quarter of 2006. This reduction was the result of the full amortization of the intangibles related to the Aera acquisition. We recorded a restructuring charge of $2.8 million in Q1, related to the closure of our Stolberg, Germany factory. Looking forward, the Q2 and Q3 restructing costs will be approximately $400,000 per quarter.

First quarter 2007 income from continuing operations was $12.7 million or $0.28 per diluted share, compared to $39.4 million or $0.87 per diluted share in the fourth quarter of 2006, and $12.8 million or $0.28 per diluted share in the first quarter of 2006. Last quarter's net income was positively impacted by a reversal of a DTA, or deferred tax asset valuation allowance, which created a large tax benefit. Headcount at the end of the first quarter was 1,755 employees, compared to 1,671 employees at the end of the fourth quarter of 2006. The majority of the increase in headcount was in China, where we are staffing for the transition of product from Stolberg to China. Cash and marketable securities increased $12.1 million for the first quarter $156.3 million from $144.2 million in the fourth quarter, due to cash generated from operations. Trade accounts receivable were $73.5 million in the first quarter of 2007, compared to $72 million in the fourth quarter of 2006. Our DSOs were 59 days at quarter end, and our first quarter inventory was $57.7 million, up compared to the $52.8 million in the fourth quarter of 2006. However, I'll point out that inventory turns remained at 4.1 for Q1, which was consistent with 4.1 for the fourth quarter of 2006. Capital expenditures were $1.5 million, and fixed asset depreciation was $2.6 million for the first quarter.

Our guidance for the second quarter of 2007 is as follows: Sales be in the range of $102 million to $106 million. Earnings per share will be in the range of $0.26 to $0.29 per fully diluted share, using a 35% effective tax rate. That concludes our prepared remarks for today, and I'll now open the call up for questions.

(OPERATOR INSTRUCTIONS) We will pause for a moment to compile the Q&A roster. Your first question is from the line of Timothy Arcuri with Citigroup.

Hi, guys, this is actually Brian Lee calling in for Tim. Just had a few quick things. First off, if you guys had to -- let's say if you had to guide revenues just a month ago, would it be different than what you're giving in terms of revenue guidance today? I guess what I'm trying to get at is -- are things trending incrementally better or worse in your opinion over the past 30 days?

Although we look at our contracts, and we look at our business on a weekly basis, we certainly don't roll up to a guidance level a month ago. I wouldn't even give you directional guidance on that one, just because we don't spend time doing that.

To ask it another way -- in your sense, the customer sentiment, is it incrementally more positive or negative versus any time in the past three months?

Well, I think what you can see from our guidance is very similar to what we guided for Q1. So sentiment-wise, without going into things like body language -- sentimentwise, the business appears to be in reasonably the same kind of zone as what we guided for the last quarter. So I don't know if that gives you enough of a horizon, given the fact that Q1 guidance and Q2 guidance were very similar, so that covers a six-month period.

Okay. That's fair enough, it gives me a sense. Maybe moving on to the solar business. I just had a few questions there. Can you give us a sense of how concentrated your solar business is today, OEM customers versus solar cell manufacturers?

It's pretty spread. It's a combination, I think, as Hans and I both said, it's spread between OEM customers and end users, and the number of OEMs are growing. It's really starting to encompass anyone who is currently working in thin films, thin film deposition equipment, and some of the end users are developing some of the technology in house, so we're getting a shot at a variety of end user customers right now.

Would be be fair to assume that there are maybe one or two top customers in that particular portion of your business which represent 10, 20%, or is it much more spread out than that?

It's more spread out than that. I think if you look at the solar landscape, there's probably now -- I would say 50 funded companies out there in the end manufacturing space that are producing in any kind of volume, and certainly more coming online as every day goes by. And then there's probably now -- call it -- oh, I wouldn't even call it. I think everyone knows the major OEMs that have carved out their initial foray into the solar business, but now there's a lot of other folks that are on the fringe or just putting their toe into the water with respect to organizing equipment offering for the solar market.

Sure. That's fair enough. And then maybe one last one and I'll go away and maybe come back. Given that solar is now at 7% of rev, it doesn't seem that much of a stretch to be envisioning, I guess, a 10% of total revenue base in calendar 2008 coming from the solar market. Would that be a fair assumption, or are we stretching there a bit?

I wouldn't give any aspect of calendar '08. I would point you back to the growth in the solar market, and have you work up for AE and the growth aspirations that we have with our alliance with the tool makers, and I think I would let you roll the math. It's probably too much of a touchy subject for us to talk about '08.

Okay. Thanks a lot, guys.

Sure.

Your next question from the line of Robert Maire with Needham.

Congratulations on really nice numbers.

Thanks, Robert.

A couple of questions -- in terms of in the gross margins, you had some really nice improvements here. Would this suggest or imply that the final target gross margin could actually be higher, or that you'll achieve that target a little sooner rather than later?

Well, our guys are -- our operations team, I've certainly been pretty vocal when I've been on the road talking about how awesome they are. And I'm not saying that because Steve is sitting in front of me, but they continue to achieve higher heights every quarter, and the published target model that we have out there right now is 46%, but as our guys work and work on their programs, the bandwidth that they work within, is -- certainly has higher expectations. The issue there is you could land -- it's kind of like the freight one. You could land a gross margin improvement now that's going to take over a year to get fully absorbed in the P&L, so in the four main projects that we have for gross margin improvement, they're all sort of mid-stream, and so all I can really talk about right now is our target model of 46.

So the margin improvement is really broadly based across all of these different endeavors?

Yes.

Okay. And in terms of the non-semibusiness, it was down 1%. I would assume, given that solar doubled here, and data storage was off a little bit, do you expect that trend to continue? I'm not looking for projection in terms of solar, but that was quite significant improvement, and given that you're saying that solar was pretty broadly based and not concentrated in any customer, it would seem that you might get to that 10% number a lot sooner, and any sense as to the solar opportunity over the next couple of quarters, or is this sort of a one quarter doubling that you don't expect to repeat?

I wouldn't give granularity to that, but maybe talking about the first part of your comment, I mean I would recognize also that semi -- we had a really strong semi quarter, so part of the shift in the percentage of business was related to the nice volume we got out of the semi customers. I think as far as solar goes -- and Hans talked about where we ended up last year at $8.5 million, and the opportunity to triple that '07, and I think we're probably still sticking by that story. We had a nice pop this quarter, but I don't think we're out -- we're ready to talk about rest of year line of sight in the solar business.

And one last thing. The improvement in the semibusiness that you saw -- was that broadly based across your customers, and are you expecting flattish in the current quarter, or slightly continued improvement in the semibusiness?

That was broadly based, and in our guidance we didn't break out the semicomponent of that.

Okay. Great. Congrats again.

Thanks.

Your next question from the line of Vishal Shah with Lehman Brothers.

Hi, guys. Quick question on solar again. Can you talk about the opportunity in terms of what the size would be for you in terms of a 10 megawatt solar line, how much revenue can you expect from from that, and what targets do you have longer term for this business?

On a 10 megawatt solar line -- that's in a silicon based substrate, that's probably, call it $6 million to $8 million in deposition tools. This is not the thin film side.

Yes, really depends on whether we're talking about bulk silicon or thin film.

Yes, bulk silicon would be $68 million worth of deposition tools. So whatever guidance you guys would put those tools at, based on your relationships with the OEMs, we get about 10% of the bottom cost on that. So back out your margin and give us 10%. That would give you your opportunity for that. On the thin film side, it's probably call it $25 million to $30 million worth of deposition tools, and then same math -- whatever you would back out as the margin, we would probably get about 10% of the bottom cost on that.

Great, thank you. And in terms of I believe the prior question asked you in terms of what the size of the business will be going forward -- I mean, is it fair to assume that this solar opportunity is fairly lumpy, or do you think it's going to stay there for the next couple of quarters?

Well, it's hard to say. It's moving from a pretty small base. We're excited to see it up in the 7% of revenues range, and certainly have our eye on it for a nice growth trajectory from here, but it's a little early. If you characterize or if you look at the way the business is happening and evolving, you've got the OEM players that are booking the orders with -- for both the bulk silicon lines to get initial capacity into some of these new players, as well as additional capacity into some of the more established players. And then you have R&D projects that are creating some capital spending on the thin film solar side at many of the players as well. So it's coming from a small base. Lumpy -- you think about lumpy in some other industries. There's a lot of activity in the solar business right now with lot of the customers, so I'm not sure if I would classify it as lumpy or not lumpy. You could classify it as it's an emerging business, so it has all of the characteristics of that.

Thank you. And one follow-up on gross margins. It seems your guidance is calling for revenues to decline, and you are still maintaining your 46% gross margin targets, so my question is -- is it because it's going to be a function of mix, where your non-semibusinesses are going to improve, and that's going to help your margins, or is it that your margin targets are revenue independent?

As we've talked--when we've been on the road in conferences -- revenue independent, the projects that our operations team is working on for margin improvements, they can deliver that at these revenue levels, so I think it's a function of living long enough to get to the point where we've implemented the further improvements, and they've absorbed themselves into the P&L.

Okay. And what is your assumption on the pricing environment in these targets? Do you assume that nominal pricing environment?

Yes, it's a normal price. Our customers wouldn't be our customers if they didn't put pricing pressure on us, so we're always facing that, we're always looking for ways to improve the cost of the product and lineup with our customers for their deliveries and all those things that give us a nice streamlined product. So I would say it's very much a normal pricing environment.

Has the pricing pressure increased over the last couple of months? Has it changed at all?

No.

Not in particular.

Okay. Thank you.

Your next question is from in the line of Brett Hodess with Merrill Lynch.

Hi, it's Brett Hodess. I was wondering if you could give us a little insight into the 2Q semiconductor trends, given that's 71% of your business? And the dip in revenues that you're seeing overall, does that come from the semi side? In particular, given that Lam and Novellus have given shipment guidance that's up about 14 or 15% sequentially. Can you explain about maybe a little bit of a disconnect between what's happening with you relative to some of the OEM semi guys in the short term?

We've said this on previous calls. We don't track exactly in terms of our revenue with the shipment guidance from our OEMs. They have modest amounts of inventory that they have. We have slight disconnects in terms of what they're shipping and what tools we happen to be on for the products we have, so we don't have an exact track between our revenues and their shipment guidance.

And especially in the same quarter.

Okay. So your semi is declining in this quarter then? Is that correct?

Yes, we gave similar guidance, which I think is the top end of our guidance is $1 million under what we delivered, so I don't think the spread on that is too severe. So I think it's really in the mix of business, and we also have them broken down the semi business as a carveout in the guidance.

So is it reasonable to think that maybe your customers are working down -- some of the OEM customers are working down inventory this quarter that might allow them to increase their orders after that?

Most of our customers have pretty good inventory management practices these days, nothing like what we saw in previous upturns and downturns in the business. And so when we take about inventories, we're not talking about very large amounts. It's just that even a small amount can lead to a disconnect inside the given quarter between their shipment guidance and our revenue projections. We don't see big buildups of inventory inside of the OEMs that we're serving right now.

Okay. And then just a quick question on R&D. It did come down some in the quarter, a little bit sequentially. Can you give us an idea of how we should think about R&D as we go forward? Is it going to stay around these levels, or are there some plans that push it up or whatnot?

Yes, it will be around these levels as a percentage of revenue. I would say that it will move up as we go forward. We've got some money -- we've got some projects to deliver. We've got some money to spend in R&D. So I certainly don't see R&D going down. The Q4 R&D I think we talked about -- there was some one-time investment costs that we made in there that hit Q4, so it dipped down a little bit, but I think you'll see it move up on a normal curve.

Okay. Great. Thank you.

Your next question is from the line of Jim Covello with Goldman Sachs.

Hi, this is Kate [Caplarsky] on behalf of Jim Covello. Quick question -- a followup on what Brett had asked. In terms of the comments that some of your semi-equipment customers had made recently about pushouts -- just curious to see if you're seeing anything in the memory? Based on your comments earlier, it sounded like you hadn't seen that, but just was hoping you could give us some granularity on that. And how much of the business was applied materials this quarter? Thank you.

I'm take the easy one and go backwards from there. Applied remained at around 30% of our business overall. And as far as looking through our shipments and into memory versus other parts of the business, we really don't have the line of sight to know exactly where our products end up. So to our comments in our prepared remarks, we are aware of some of the overtones and discussions in the industry, but certainly as we look inside the backlog and the health of the order book, things, as Hans mentioned, things appear to be in the same kind of shape as prior quarter.

Do you feel like the tone from your customers hasn't really changed much this quarter versus last quarter?

Not a lot.

Okay. Thank you.

Your next question is a follow-up from the line of Timothy Arcuri.

Hey, guys. This is actually Brian calling in for Tim again. Just had a few quick follow-ups. First, on the solar business, are your products -- if you can maybe help me understand a bit better -- are they going to be targeting both retail and commercial applications, or will it just be commercial?

What we've shipped to the industry in support of the tool market, so it's to the OEMs, and to the end solar manufacturers. So if you look at -- if you think about AE, you think about thin film deposition equipment makers, and thin film deposition equipment users.

There's generally no difference between the solar cells being built for residential as for the commercial, it's just the number of sales which are being connected.

Right.

Okay. So pretty agnostic between whether it's going to be on top of a house or in a commercial app. Okay. And then with respect to gross margins in the solar business, can you maybe give me a sense of how those will compare here in the early ramp, and then maybe longer term versus your corporate average?

Well, I think what we've said is the semibusiness runs south of the corporate average, and then non-semibusiness runs north of the corporate average, but we haven't really given a bandwidth on either side on that, but the solar business runs in the non-semibusiness which is north of the corporate average.

Okay. So even in an early ramp, we could expect that this is going to be accretive to margins if solar were to maybe become a bigger portion of the business faster than expected?

Yes.

Okay. Thanks a lot, guys.

Your next question is from the line of Alexander Paris with Barrington Research.

Thank you. Nice quarter.

Thanks.

Looking at the gross margin just briefly that the closing of Germany and moving manufacturing elsewhere -- is that pretty much the last of that source of your improvement of gross margins, and the rest will come from improving the new in China and so forth and freight and so forth?

Yes, the margin improvement programs that we've talked about have really been independent of the closure in Germany. What we saw in Germany was with with the ramp in Germany, we had a factory that we had to either invest in additional capacity over there, or invest in capacity in China. So when we did the evaluation on that, it looked like the better investment was instead of building a better infrastructure in Germany was to leverage a bigger part of the existing infrastructure in China. So the gross margin targets that we had been running in the past, and the gross margin projects that we have been running really went -- are continuing on and go unaffected with the activity in Germany. Germany represents about 5% of overall revenues, so I think what you'll see there is the margin accretion that will come from that move will be pretty small in the overall picture.

Long term, though, we would expect to see leverage out of China for anything we can can put in there. Since we take volumes up in China, we are going to see leverage on the margin model.

And what is your cap -- the utilization rate in China now?

We just did a look at that. In terms of people, we're pretty efficient, we're running pretty hard. But we're at about 60, 65% of utilization of the facilities that we have worldwide, including Shenzhen.

So as that goes up, you can still get margin improvement before you have to expand?

Yes, we can increase the number of shifts we run. We've got room to add manufacturing lines inside of Shenzhen right now, and we have quite a bit of room before we would have to look for another facility.

And switching to another subject -- the flat panel, once that turns up, you said you thought it was bottoming, and it would, I guess, sometime in the second half of this year, would trend up?

Yes.

And how long would you guess that investment cycle lasts before it starts slowing down again? A year or two?

That's always a wildcard. The guys in Korea and the guys in Japan have a continuous investment that they seem to be going through most of in the time, and the guys in Taiwan are the ones that usually need to raise capital to make the investments happen. So capital is always a timing factor, and then -- but do I think that as the Taiwanese are looking in their rear-view mirror in China, they're starting to see China come into the same generation size space that they're in, so you could get a whole other set of flat panel manufacturers with an investment phase that may look a little different than it's been in the past.

I think it depends very much on when and to which degree the TV sets are kicking in. I mean, this is the question mark all the time, so -- and this is a coupled event. If the price goes down further on, they don't like to invest further on, but this is the opening for the TV set, and therefore that's a hard to predict situation.

Okay. Just one other question. In solar. I don't fully understand it, but you've gone from a shortage in silicon toward more -- into the more advanced thin film, using glass or other substrates?

Yes, that's what's under --

And that's where you're getting most of your business, in this latter?

That's what under development. The thin film is under development. Most of what you're seeing shipping off the lines is silicon based substrate, so I think the -- as Hans said in his remarks, the thin film solar will emerge as probably a production-ready platform in 2008 and beyond.

Oh, so you sell product to either one?

Yes.

The silicon shortage was just to a certain degree curbing the growth rate in the solar business, which was more than 40% this year, but it could have been more, if there would have been no shortage in silicon. And the R&D spending in thin film is not to get rid of the kind of shortage in silicon, but the flexibility in applications on the thin film side is much, much higher than in the bark silicon.

Okay. Just one other thing. Applied materials has moved into solar. Are there other semiconductor equipment companies that are trending in that direction, or already doing it?

Oh, yes. I mean, there are two categories of companies which are trying to get into the solar business right now. First the flat panel equipment manufacturers, because this is a very natural kind of step from flat panels into the solar. And we see in some cases other -- not only equipment manufacturers in the semi equipment, but also indication from chip manufacturers to think over, to get into the solar business, which is next further step down.

So where would you put something like Energy Conversion Devices, which I assume is one of your customers, maybe? they're kind of in between there?

They're kind of vertically integrated. They build a lot of their own equipment. They make panels and they build their own gear.

So that would be an end user customer?

Essentially.

Of that that ilk, yes.

All right. Thank you very much.

(OPERATOR INSTRUCTIONS) And I'm showing that you do have a follow-up from the line of Vishal Shah with Lehman Brothers.

Can you talk about your tax rate guidance for Q2?

Yes, 35%.

35. And given that you're increasing headcount in China, how should we think about tax rate going forward for 2007 and '08?

Yes, I would be modeling a 35% rate going forward.

Okay. No chance of lowering that number?

There's chances of lowering that number. I think the issue, given the structure of the company and where we've come from from inception to now, we've got IP, and we've got profit flow organized in a certain way, and we're going to have to retool that to push the tax number down. So that's not a short term endeavor. With respect to growth in China, and its relation to the effective tax rate, the manufacturing operation in China pulls through our P&L as an intercompany sale. So what you don't see a lot of cash collection in China. There's not a cash hoard building in China. The taxes are actually deployed in different regions as they ship too. You won't see a lot of effect there when you get to growth in China.

Okay. Great. And then any plans of using excess cash for maybe M&A or share buybacks?

Really doubtful on any share buybacks. Nothing had ever been discussed. There's probably some acquisition activity that we could better utilize the cash for, but nothing that we've disclosed.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS) And I'm showing no further questions at this time, sir.

All right.

Thank you. We are pleased with our first quarter 2007 operating results, as you have seen us continue to derive excellent results from our strategy. We are focused on profitable growth opportunities in all of our markets, leveraging our market-leading technology, our world-class cost-effective global manufacturing structure, and global customer support capabilities. We would like to remind you that our annual shareholder meeting will take place on May 2nd, 2007 at 10 A.M. Mountain Daylight time at our headquarters in Fort Collins. Additionally, we will be presenting at the Credit Suisse Semiconductor & Supply-Chain Summit on May 15th and May 16th in New York City, and at the J.P. Morgan Technology Conference on May 23rd in Boston. Thank you again for your time today.

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