Advanced Energy Industries Inc (AEIS) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to Advanced Energy's fourth quarter earnings 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) I will now turn the call over to Annie Leschin, Investor Relations. Miss Leschin, you may begin.

Thank you, operator. Good morning everyone. Thank you for joining us this morning for our fourth quarter 2009 earnings conference call. With me on today's call are Hans Betz, Chief Executive Officer; and Larry Firestone, Executive Vice President and CFO. Both of whom will present prepared remarks. By now you should have received a copy of the press release that we issued approximately an hour ago. If you would like a copy, please visit our website at www.advanced-energy.com or contact us at 970-407-4670.

Let me take a moment to mention the conferences that we will be attending in the first quarter. They include the Piper Jaffray Technology and Renewables Conference in New York on February 23. The Pacific Crest Emerging Technology Summit in San Francisco on February 24, and the Goldman Sachs Technology Internet Conference in San Francisco on February 25. We will make additional announcements should additional events occur.

Now I would like to remind everyone that except for 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. Statements that include the terms believes, expects, plans, objectives, estimates, anticipates, intends, targets, or the like should be viewed as forward-looking and uncertain. Such risks and uncertainties include, but are not limited to, the volatility and cyclicality of the industry's 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 Form 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 you during this conference call, including the first quarter guidance provided in this call, and in our press release dated today. Guidance will not be updated after today's call until our next scheduled quarterly financial release. I would now like to turn the call over to Hans Betz.

Good morning, everyone, and thanks for joining us. 2009 has been referred to, in many ways, the year of global financial crisis, the deepest recession seen in years, et cetera. For companies with exposure to the capital equipment industry the credit crunch was felt across many industries, regardless of size or market exposure, but significantly in the semiconductor market already in the midst of a cyclical truck. It was a year that began with record lows and ended with unexpected highs, as it did for Advanced Energy. The resurgence of the semiconductor market in the fall of 2009, along with initial signs of improvement in the broader economy and non-semiconductor markets led to a stronger than expected end to the year. We saw a 30% sequential revenue growth in the fourth quarter to $66.4 million. Our strategic cost reduction efforts throughout 2009 were extremely effective and timely, demonstrated by our better than anticipated gross and operating margins this quarter of 36.8% and 2.9% respectively.

In the early fall of 2009, we were targeting to return to profitability in early to mid-2010. The good news is that we came in at least a quarter ahead of the plan, delivering $1.5 million, or $0.04 per share of profits in the fourth quarter. Our ability to effectively manage our balance sheet, including inventory and accounts receivable during the year, left us with a year end position of $177.5 million in cash and investments, down only $2.6 million from the beginning of 2009.

The beginning of 2010 is showing great promise, led by the surge in capital spending in the semiconductor markets. Currently, our market is facing a supply shortage, causing increased backlog at suppliers, as OEMs race to build and ship their systems and suppliers like Advanced Energy hasten to keep pace with the demand. Advanced Energy is among a select group of suppliers to whom OEMs are turning, given our ability to work quickly and collaboratively, pull in deliveries, and maintain a strong financial position, even after the effect of global recession and industry-wide slowdown of record proportions. This was reflected in our semiconductor capital equipment revenues this quarter, which grew 58% over the last quarter. With equipment CapEx, consumer demand, and IT investment all expected to grow this year, we anticipate 2010 will undoubtedly be a much better year for the industry and for Advanced Energy.

The questions remain, when will the demand begin to slow or return to a more normalized level? At the moment, we have good visibility into the first half of the year, but it becomes limited as we look in the second half. Currently we are seeing demand from virtually every region in the semiconductor market, which drives strong growth in the first quarter. This whirlwind environment among semiconductor companies began with Samsung, with capital expense initiatives opening the flood gates for investing in capital equipment mid to late last year. The most important factor now is delivery time and cost. As such, OEMs are literally working around the clock to place orders with suppliers such as Advanced Energy so they can build equipment and ship it through the channels as quickly as possible. At the same time, we continue to get orders with immediate delivery requests on a daily basis, known as drop-in orders. These are in addition to orders for spare parts required for the OEMs to fill inventories that were exhausted in the beginning of 2009. All of this has led to a strong book to bill ratio and continued increases in backlog, which are driving some noticeable market share shifts as well. Advanced Energy should be one of the beneficiaries, given our ability to deliver differentiated products on very short lead times.

Based on our customers' input and current market dynamics, we believe we are in the midst of an upturn. Memory prices have been stable for a relatively long time, showing no indication of falling any time soon and foundries, which have been quiet for so long, are starting to build fabs as many of the 200 millimeter fabs are no longer competitive. All of this leads us to believe there will be a period of general stabilization over the next two years.

There's another trend happening in the semiconductor industry worth highlighting, which we expect will become the new norm in the industry. With the industry reaching historical lows in the last year, the number of IDMs who own fabs have fallen to just a few large companies. The result is that the fabs they do own and they choose to build will be larger, so-called mega fabs. These mega fabs, of course, reverberation throughout the equipment industry, leading to periods of boom as they are built following by periods of digesting afterwards, resulting in a very lumpy capital equipment cycle. The good news for Advanced Energy is two fold. If this trend accelerates, this is a very fervent ground for us to gain market share over smaller players. Additionally, we -- additionally, by applying our advanced power solution to a variety of different markets over the last several years, we have developed a package of growth engines in everything from semiconductor to solar inverter flat panel displays, making our revenue less subject to fluctuations by these semiconductor markets.

Moving on to solar, on the solar panel equipment side, it appears that the market is beginning to digest the oversupply of panels that stalled the growth in production capacity in 2009. We see this trend of panel consumption continuing in the first quarter and throughout the year and we expect expansion and production capacity for [more silicon, polysilicon], CIGS and cadmium telluride. Regionally, we are still seeing strong demand from Chinese manufacturers for added capacity of polysilicon solar cells. On the inverter side, our Solaron inverter product line also had a very strong quarter. We shipped a total of 38 units in the quarter, all to the US market, roughly two-thirds of which were 500KW product and the remainder, our 333KW. We received more orders and letters of interest for large scale multi-megawatt ground mounts this quarter and expect margin megawatt business to account for a high percent of sales going forward.

We gained traction not only in the US market, we have shipped the first Solaron 500KW to China for evaluation on a large scale project, as well as the orders for the first production units in Europe. With a reduction fee in tariffs, this will drive tremendous cost pressure in Europe forcing the market shift to a more cost effective, large inverters, which have been our focus all along. We also officially opened a new inverter manufacturing facility in Fort Collins in December, nearly tripling our available shipping capacity to 10 inverters per week. Subject to normal seasonal expectations, we typically decline in winter months when colder weather and budget resetting dampen the insulation plans. The outlook for inverter market remains very positive for 2010 overall.

While some countries such as Spain, Germany and Czech Republic are actually back feeding tariffs and evolving into a more mature market, the US has become the region of focus for the industry at the moment. We also see Europe and Asia, where we have shaped our initial inverters this quarter, as very important territories. We plan to establish a strong presence in these geographies going forward, especially at our sweet spot in the higher end of the market, where our solution still holds the number one position for efficiency. With our large scale inverters and the industry's increasing focus on large scale utility type insulations, we believe we are perfectly positioned to address the market and are excited to be in the right place at the right time.

Overall, the trend line for large scale inverters is very positive in 2010. Specifically the market's acceptance of our products is improving monthly, with announcements such as Suntech, the San Francisco Sunset Reservoir, a five-megawatt solar project, our SunEdison contract, and Aerojet six-megawatt project in California. Our execution, service, and performance are all integral pieces of our early success. With uptime at nearly 99% in the field, our product is among the highest performance in the industry. For the first time buyers, Advanced Energy's reputation as a long-time supplier to the demanding semiconductor industry is communicating the crucial, and we believe unmatched, reliability of our products and service to the industry, especially as many people and vendors move from semiconductor to solar, and later as purchasers of solar inverters. Companies understand the benefits of applying such high standards from the semiconductor industry to the solar industry. The strength of our balance sheet, as well as has been recognized giving our customers comfort that Advanced Energy will be well equipped to service our products for the next 20 years and beyond. This is especially critical as large utilities that will require large quantities of inverters in their insulations. This strength and product reliability will differentiate us from the competition.

Moving on to flat panel, similar to other non-semiconductor markets, we believe the flat panel market began its recovery in various regions during the fourth quarter. With particular strength in the Korean market, we have gained traction with the emerging Korean OEMs that are delivering [s-tools]for the Korean flat panel makers. This has allowed us to gain market share, as the market expands, to include these equipment suppliers. In Taiwan, where flat panel display investments and capacity expansion have been on hold for at least three to four years, we have historically had a strong presence in generation five to seven. Recently, we have begun to see the initial signs of capital raising for new fab investments queueing up, which is very encouraging. Once the capital raise is complete, we should fuel a roughly three-year cycle in Taiwan. As we look at the year, while the overall flat panel market continues its recovery, our revenues will be driven largely by the return of the Taiwanese, Chinese, and Korean markets.

Finally, let me talk about the service. With the higher factory utilization rates in semiconductor flat panel, our service business was strong this quarter. While the service business was a leading indicator just three quarters ago, it has become a lagging indication with two phenomena underway. In March of 2009, we saw the beginning of an increase in service, revenue, to repair broken units as spare parts inventories were so depleted, that the moment fab capacity and utilization rates to start it to improve factories were desperate for the repair and spare parts. As expected, that dynamic played out.

Now as the business cycle resumes with a strong upturn, a completely new dynamic is emerging. While we anticipate a more continuous level of service longer term, it is currently being affected by the strong demand in the semiconductor market, due to the limited availability of raw materials and the shutdown of many older fabs. Given the pause in new fab investment over the last two years, there may be a delay in some future service revenue for repair, which may be offset by other service products as the weight for the tools and the new fabs to come out of warranty. We nonetheless believe the service business will continue to grow long-term, albeit more gradually. The addition of a new line of service from our solar business is a new growth driver for service in the future, however, and one that we expect will generate some solid recurring revenue streams, as most contracts are typically 10 to 15 years.

To summarize, where he were extremely pleased to see the recovery of our markets begin to accelerate this quarter, led by exceptional strength in the semiconductor industry. Our inverter product line continued to garner much of the intention with the shipment of our 100 units and the announcement of various wins during the quarter. With capital investment in certain industry just beginning to return and growing capacity additions, we see real industry drivers underlying the broader economy for the first time in more than 18 months. So visibility is still unclear, market trends look to sustain themselves barring normal seasonality. As such, we expect to continue the trajectory of profitable growth to continue this quarter in no small part due to our cost containment efforts last year.

We are in a unique position of being one of the well capitalized suppliers able to deliver reliable product in the midst of a margin market recovery. We believe that the environment for our power products will improve in the coming years and that we will see significant opportunities for our existing and new products under development. I would like to take a moment to thank the entire Advanced Energy team worldwide for the diligent efforts and hard work through what has been a very challenging 2009. Now I would like to turn over the call to Larry Firestone, our CFO, to provide some details on our operating results.

Thank you, Hans. Good morning, everyone. In the fourth quarter, we saw a marked improvement in our financial performance, with slightly -- with significantly higher revenues and margins. Leading to profitability for the first time in more than a year, we optimized our legal entity structure, which will lead to a lower effective tax rate in the coming years and continued our strong cash management. Finally, our backlog grew substantially, as Advanced Energy continues to be one of the leading suppliers to the industries we serve.

Now I will go into more details of our performance. Revenues grew an impressive 28.4% sequentially to $66.4 million from $51.8 million, just shy of the $67.5 million in the fourth quarter of 2008. The rebound in semiconductor sales, improved thin film solar sales and continued traction in our solar inverter products drove the increase in revenue. For the full year of 2009, sales were $186.4 million, down from $308.9 million -- $328.9 million in the same period last year. While the annual decline in revenues appears significant, the widespread nature of the global financial crisis impacted all of our markets. With the exception of service, most of our markets maintained a similar percent of total sales in 2009 as in 2008. The semiconductor market represented 41% of sales for 2009 versus 40% in 2008, and non-semi markets were 39% versus 42% a year ago. Specifically, sales in the solar market accounted for 16% of total sales versus 17% a year ago, and service was 21% of sales versus 18% last year.

Revenues to the semiconductor capital equipment market increased 58.2% sequentially to $32.9 million, or 49.6% of total sales in the fourth quarter. Sales improved across all regions, as OEMs worked to supply equipment as quickly as possible, given the strong increase in demand across the industry. Because OEM inventory levels were taken to extreme lows in 2009, in order to conserve cash and maintain the financial health of the companies, the recent surge in demand has put immense pressure on the entire supply chain. Sales to our non-semi markets increased 8.6% from the third quarter to $22 million, or 33.2% of total sales. Sales to the total solar market increased 55.7% sequentially to $10.1 million in the fourth quarter, or 15.3% of total sales.

The thin film equipment sales to the solar panel market recovered nicely in the fourth quarter with sales doubling over last quarter to $6 million, mostly driven by sales in China. The solar increase was once again highlighted by strong inverter sales of $4.2 million. We shipped 38 Solaron units in the quarter driven by initial traction in large multi-megawatt projects. We are pleased with our customer growth during the quarter and we now have sold our inverter to over 25 customers. We booked 29 inverters in the fourth quarter and have built a pipeline of business for 2010, as we have secured letters of intent for 35 inverters that have not yet turned into purchase orders, but where the Solaron has been selected for future installation. These will turn into orders in Q1 and Q2 and some later in 2010.

Sales to the flat panel market increased a substantial 80% off a very low base, reaching $3.7 million, or 5.6% of sales, as we gained traction with the Korean OEMs selling into the flat panel market. This overall industry will continue to grow in 2010, but will exhibit some lumpiness while we await the completion of the capital raising efforts from Taiwan and the next generation capacity upgrades in Korea and China.

Going forward, for comparative purposes, and given the small nature of the sales, we have decided to combine the architectural glass and data storage markets with the industrial coating market. Industrial coating applications and emerging markets fell 16.3% from third quarter -- from the third quarter to $5.7 million, or 8.6% of sales. As expected, sales to the architectural glass market declined to $1 million for the fourth quarter, or 1.5% of sales from $3.4 million last quarter. In the data storage market remained relatively flat at $1.5 million, or 2.3% of sales.

Reflecting the high utilization rates in the semiconductor and flat panel display markets, service was once again strong in the fourth quarter, growing 7.6% to $11.5 million. We saw growth across all regions, particularly Japan and North America. Bookings in the fourth quarter were $98 million, led by strong bookings from the semiconductor capital equipment market, which drove our book to bill ratio noticeably higher to 1.48 to 1 this quarter, up from 1.16 to 1 in the third quarter of 2009. We ended the fourth quarter with a sequential increase of 91.2% in backlog to $66.2 million. This dramatic increase in backlog was driven by accelerated orders by semiconductor OEMs, as they scrambled to restore exhausted inventories and spare parts depleted during the downturn.

We delivered a nearly seven-point sequential improvement in gross margin for the quarter due to higher total revenues, better factory absorption and reduced freight costs. Gross profit was $24.5 million, or 36.8% in the quarter compared to $15.6 million, or 30.1% in the third quarter, and $18.4 million, or 27.2% in the same period last year. R&D rose 10.1% to $11.2 million compared to $10.2 million, or 19.7% of third quarter sales driven by an increase in payroll costs, R&D materials, and purchase services. As a percent of sales, R&D decreased on both a sequential and a year-over-year basis to 16.9% of fourth quarter sales. This is compared to $13.4 million, or 19.9% of sales a year ago. SG&A increased slightly to $11.1 million from $10.8 million last quarter, but declined as a percent of sales to 16.8% from 20.8% in the prior quarter. This is compared to $9.5 million, or 14.1 % of sales in the same period last year.

Income tax expense was $923,000, down from $3.2 million in the third quarter. During 2009, we took significant steps to optimize our legal entity structure, which will lower our future tax rate. By changing our legal entity structure, we realign our Company -- our inner Company transaction structure such that our profitability will shift to lower tax regions that we operate in. Going forward, this new tax structure will lower our overall effective tax rate, as reported on the financials, as a higher portion of our profits will be reported in low tax jurisdictions outside the US, Germany, and Japan, where we have traditionally reported profits.

In 2010, we anticipate our effective tax rate will be in the range of 30% to 33%. Going forward for modeling purposes, when annual revenues increase to the range of $400 million, our effective tax rate will be in the range of 16% to 19%, and as we move to the range of around $500 million or above, the effective tax rate will drop to the range of 12% to 15%. In accomplishing this restructuring, we have utilized a significant portion of our net operating losses and therefore have removed the valuation allowance against our deferred tax assets. These changes are also reflected on the balance sheet.

We were very pleased with our GAAP net income of $1.5 million, or $0.04 per diluted share compared to a net loss of $8.4 million, or $0.20 per share in the third quarter. It was also an improvement over the net loss of $19 million, or $0.45 per share in the fourth quarter of 2008, which included an $18 million noncash charge for income taxes related to the valuation allowance against deferred tax assets. The net loss for the full year was $102.7 million, or $2.45 per share, primarily due to a $63.3 million goodwill impairment charge in the first quarter of 2009. This compared to a net loss of $1.8 million, or $0.04 per share for 2008. Head count at the end of the fourth quarter increased by 5.1% to 1316 employees, due largely to an increase at direct labor at our factory in Shenzhen, China.

We continued to manage our working capital very efficiently in the fourth quarter to end the year with $177.5 million in cash and investments, up from $177.3 million at the end of the third quarter. We were especially pleased that even in the challenging 2009 environment, cash and investments were only down $2.6 million from the $180.1 million at the end of 2008. Accounts receivable increased to $50.3 million there $37.2 million in the third quarter due to the higher revenues, and DSOs also rose slightly to 63 days from 60 days last quarter, due to the ramp of sales late in the quarter by the semiconductor OEMs. Total net inventory grew slightly to $37.1 million from $36.5 million last quarter, and inventory turns were 3.4 times versus 3.6 times last quarter. Capital expenditures were $2.8 million. Fixed asset depreciation was $1.7 million and our intangible amortization was $150,000 for the fourth quarter.

Our guidance for the first quarter is as follows. We expect revenues to be between $77 million and $83 million, gross margins to be between 39% and 40%; and EPS to be in the range of $0.13 to $0.17 per diluted share. That concludes our prepared remarks for today. Operator, I would like to open up the call for questions.

(Operator Instructions) Your first question comes from the line of Colin Rusch from ThinkEquity. Your line is open.

Good morning, and congratulations on the performance.

Thanks.

Can you give us a little bit more detail on the solar inverter bookings and traction in Europe, just in terms of the backlog numbers you gave? How much of that is coming from Europe?

On the orders that we had in Europe, we've shipped our first, our first production units into the European market and we've got letters of intent for additional units into Europe. But I don't think we can give you much more color than that.

Okay, and can you give us a breakdown on the solar CapEx equipment? You mentioned 6 million in sales. Was that all from amorphous or can you give us some of the crystal and silicon break downs for that segment as well?

I can't really break it exactly in the amorphous and the poly, but it's a combination of both, because we've seen the Chinese market coming back in, where I would say in the -- for the most part in 2009, the investments were in amorphous, but now we've seen a shift in the market towards the poly side. So it's a mixed bag of both.

Great. And on the solar demand in China, can you talk a little bit about what you're expecting in terms of the shape of the ramp for the inverters? We've seen some fairly substantial activity on the project development side and when do you think you'll be able to start seeing meaningful revenue from the inverters in China?

I think we've just shipped the first one for evaluation for pretty large project and it's a question how this is satisfying the requirements, but we are pretty confident and I think in China, we see some kind of upcoming larger projects and one of the most famous one is the two gigawatt, which has been signed by for solar in the Chinese government. So I think we are pretty confident because we have seen a very strong success because of our performance of the inverters in US and because of the fact that we are pretty strong in China for a pretty long time. I think we are pretty optimistic to gain business and traction there, too.

And can you talk a little bit about the next generation product development and the progress you're making there and any information that you're sharing with the street on what the next generation products will look like?

You mean on the inverter side?

Yes, please.

We have under development which is due for launching in the market in 2010 is the one megawatt, which is on course, and again, I think we will finalize that maybe at the end of Q2, maybe somewhere in Q3.

Perfect. Thanks a lot. And again, congratulations.

Sure.

Thanks.

Your next question comes from the line of Weston Twigg from Pacific Crest. Your line is open.

Yes, just first question on the semiconductor side. Wondering high revenue guidance and wondering how much of that is coming from an additional bump in the semiconductor revenue versus the other segments.

Yes, I don't -- we're not going to give you that level of breakdown, but what I will say is we do expect the semi market in Q1 to grow pretty substantially again. So it's going to be another up quarter for semi in Q1.

Okay, and then how should I look at OpEx growth? You talked about some costs coming back. Is that all -- has that all been rolled in as you had to back salaries and bonuses or do we expect some more in Q1, Q2?

So far, that's all been rolled back and I think we mentioned on the last call that the salaries, the salary restoration and the reversal of the shutdowns would be about a $1.1 million a quarter additional cost throughout the P&L. So in cost of goods, as well as R&D and SG&A.

Okay, and one more question on the inverter piece. Looking out for the whole year, can you give us an idea on the number of units you might ship in 2010?

No, I think it's hard to give the number of units, but what we do expect qualitatively is having a slowdown in Q1 because of seasonality, as I mentioned before. I think we are expecting a pretty strong rest of the 2010, but it's hard to give you an exact number.

Okay, thanks.

Yes.

Your next question comes from the line of Krish Sankar from Banc of America. Your line is open.

If you look at the semiconductor side of the business, where do you think your OEM customers' inventory levels are today versus, let's say, six months ago?

I think it's pretty clear because we are running like hell in order to fulfill all of these drop in orders. This is very indicative for us, they have no inventory at this particular time.

Got it. And the second one is on the inverter business, can you tell where your ASP side now, do you see any ASP degradation or is it still holding pretty steady at this point?

Still in the same range that we've talked about, around $0.25 a watt. I would say generically. There's volume deals and bigger projects and things like that that influence that, but I would say generically, around that range.

And can you give us some color on if you are willing to break it down, how do we think about going forward, the inverter margins, let's say maybe not 2010, but in 2011?

Well, I think we are still on the very front end of running inverter and high volume production. In any kind of volume, last quarter we shipped our hundredth inverter, so that's indicative of still pretty low volume. So our supply chain management team and our operations team are still working at driving the costs out of the inverter. So what I think we see or what we've said is that over the course of the next -- the rest balance of 2010, we'll see inverter margins increase from south of the corporate average, which is where we are today to north of the corporate average.

Got it. Okay, and then the final question, how do we think of the incremental margins going forward? Do we have any [goal for it] or a certain range that you're targeting?

They are probably just north of 40%.

Okay.

Just past the breakeven point.

Got it. Okay. Thank you.

(Operator Instructions) And your next question comes from Jim Covello from Goldman Sachs. Your line is open.

Great. Good morning. Thanks so much for taking my question. Just a couple of them. On the solar side, how concerned are you looking forward with the German subsidy issue and then how concerned are you about the balance sheet of some of the companies that are making the orders today, in particular, maybe some of the China companies where there hasn't been as much financing available recently for some of those companies in the IPO market? Then on the semi equipment side, I certainly understand the idea of very good visibility in the first half, limited visibility in the back half, what are you looking for, whether it's segment wise or otherwise, new fab wise in the back half of the year to give you better visibility? Thank you.

For the first question, I think the [regime backed defeat in tariff] in Europe across the different countries is in my view beneficial for AE and the reason is because Europe has been a very, let's say, proliferating solar inverter business because the feed and tariff was so hefty and so fast that prices came second. And by ratcheting back the feed and tariff, what they will experience now is a cost pressure, which automatically goes to a more cost effective inverter, which is a central inverter, which is the high power inverter because it's designed for an engine which is much more cost effective than small inverters which you have in great numbers. So from that perspective, I think it's opened up for us an easier penetration in Europe as has been before.

The second point is, because there are a lot of inverter companies in Europe which are pretty small, but they have been enjoying a very nice environment and ratcheting back this kind of fab tariffs will leave them in a kind of shaky situation. It may open up for us some kind of inorganic growth potential. All in all, it's more positive than negative.

As far as the semiconductor business is concerned, I think we feel we see a pretty strong growth in the second quarter. As far as the second half is concerned, my personal view is that there was kind of slowing down, not necessarily because they are not enough demand for it, but there's an interesting dynamic behind that, just looking at the lithography because the lithography is kind of a stalling and dampening factor because most of the lithography of ASM lithography has been sold out for years. So people are waiting to get a lithography equipment in order to build and equip the new fabs. So it's not a decrease or falling off the cliff in the second half, but it may be some kind of slowing down.

And with respect to the balance sheet to the China companies, I think what we've seen is there's certainly government money, government funding and subsidies in the like in China to support the growth of the companies in China because what you're seeing as an activity is China is growing an industry within the country to service the market, these emerging solar arrays for the years to come. So certain that these big arrays are going to have a China content and there's going to be a money supply for them to emerge as players. Not in the next -- they will install the equipment now and as they bring that equipment online, they will work the bugs out of it over the next couple of years and then they will be ready to supply the local market. Probably less as an export market and more as a consumption market within the country.

Thank you so much.

Your final question comes from Edwin Mok from Needham & Company. Your line is open.

Hi. Congratulations on the quarter. This is Conor Irvine calling in for Edwin.

Thanks.

Recently there's been some chatter of component shortages. I'm wondering if you are seeing shortages, and if so, does that impact the lead times of any of your business lines or your cost structure as maybe a result of expedited fees?

So the first half of the question, we do see some kind of shortage in supply, but the good news is all the suppliers see the same thing. So there's no loss of business because of that. But of course it's some kind of delay in the revenue stream. On the other side, in some way we have to carry a bit higher costs because of expediting fees. But it's not really severe. And the good news is really, because everybody, everybody's affected by the same thing. So we don't lose business because of that.

Okay, and on the solar side, do you have any update on when the 250 kilowatt converter will be qualified in California?

Yes, we've got the product offered for marketing right now. And I think we're, I think we're on pace to -- I think we're actively selling in the market today.

Okay, got it. And regarding applied PVD tool in the flat panel display market, do you have any update there on the progress of getting qualified?

Still, we're still working the lab qualifications.

Okay. And my last question is, maybe you could provide maybe some detail regarding the LED opportunity for Advanced Energy and if there's any way to maybe quantify the size of the opportunity in 2010. Thanks.

So it's hard to quantify the opportunity, but we are working on a new product, a new generation of products which may increase productivity on the MOCVD side, which is the core element on the LED. And at the same time, there's not only the MOCVD, which is decisive for the active layers, but there are also active layers and conductive layers which we can deal with with the same piece of equipment, which is a so-called remote plasma source approach. And I think we are very confident. Because the entire technology at this point in time is ranging back years back. So there is no new developing [maidens], we are looking very carefully in order to grab part of this market.

Great. Thanks so much.

There are no further questions at this time. Mr Firestone, I would turn the call back over to you.

Okay, thank you, operator. And thanks, everyone, for joining the call. And we look forward to seeing you at all the future events. Thank you.

This concludes today's conference call. You may now disconnect.