Advanced Energy Industries Inc (AEIS) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to Advanced Energy's first quarter 2010 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). I will now turn the call over to Annie Leschin, Investor Relations. Ms. Leschin, you may begin.

Thank you operator and good afternoon. Thank you for joining us this afternoon for our first quarter 2010 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've received a copy of the press release that we issued a short time ago. If you would like a copy, please visit our website at www.advancedenergy.com or contact us at 970-407-4670.

I would like to quickly 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 believe, expect, 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 industries we serve, the timing of orders received from our customers, and unanticipated changes in 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 second quarter guidance provided in our call and on our press release dated today. Guidance will not be updated after today's call until our next scheduled quarterly financial release. I will now turn the call over to Hans Betz, CEO of Advanced Energy.

Good afternoon, everyone, and thank you for joining us. As we transitioned out of 2009, we began not only a new year but the third consecutive quarter of robust growth in our business, at over 20% per quarter, driven in large part by a surge in demand from record setting pace in the semiconductor industry. Additionally, the growing optimism in the worldwide economy is improving the overall outlook for the financial and capital equipment markets and leading to a new investment for equipment in our end markets. In the first quarter, our revenues climbed 23% sequentially to reach $81.6 million. Which are levels not seen since the third quarter of 2008. Strong cost controls and operating leverage from the increasing revenues drove gross margin above 40% this quarter, and nearly 4% higher than the previous quarter. Profitability quadrupled to $6.2 million or $0.15 per diluted share, and even as we consumed working capital to secure inventory to support the ramp, we maintained our strong cash position as we closed the quarter with $163.4 million in cash.

Moving to our end markets, having begun in the third quarter of 2009, the shift we have seen in the semiconductor business climate from just three quarters ago is tremendous. The industry has transitioned from a market posture where inventory reduction was the overarching theme to what is now a full speed ahead environment. The manufacturers are securing all the component material they can acquire and testing the boundaries of the entire supply chain. Advanced Energy's performance in this environment has been outstanding, as our Company was in a very strong position with our suppliers to secure inventory to support our customers request. We have maintained our strong commitment to the delivery of high quality products, added to our market share, and continued to build our reputation as one of the strongest suppliers in the industry. As we mentioned on our last earnings call, the surge in fourth quarter orders came so quickly that the response time was not fast enough, and therefore some orders were left unfilled at the quarter's end shifting a portion of the demand into the first quarter. In the first quarter, Advanced Energy delivered on its commitment to our customers, ensuring that the carry over into the second quarter is at an absolute minimum.

Looking forward, we see several factors driving growth in the semiconductor equipment market. Capacity extension of existing technologies like DRAM or NAND, new technology advancements, and inventory replenishment will be the keys. We anticipate the industry's quarterly growth may begin to slow, but we expect the semi business to remain healthy throughout 2010, and into 2011 driven by a combination of announced new facts, and by OEM customers beginning to replenish their depleted inventories as business achieves a more normal run rate. Inventory in the supply chain also will help to shorten lead times and improve the efficiency of deliveries (inaudible). Execution excellence and investment are essential factors in the multi-decade leadership of Advanced Energy in the semiconductor market. As we implemented significant cost reductions, heading into 2009, we were well ahead of some of our peers in addressing the downturn. However, we did not waiver from our commitment to invest in R&D and new product development. By continuing to spend in periods of downturn, Advanced Energy became a stronger partner of our customers, increasing our leading market position by capturing market share, with the next generation of products.

We introduced several new products in the market in 2009, including our new RF generator platform called Paramount. A year later, we are happy to report that customer acceptance of this product has been very successful, and we are shipping Paramount and several other new products in volume, demonstrating the effectiveness of our technology investment strategy. Besides our technology investment, we believe that our commitment to the highest quality standards, and fulfilling our on time delivery commitment has positioned Advanced Energy as one of the leading equipment suppliers in our markets worldwide which is indicative for our success in new end markets, into which we have ventured, such as solar inverters.

Moving on to the solar inverter market, as expected, the first quarter was the seasonal low for the inverter industry and advanced energy inverter business, due to the decrease in installations driven by cold weather. We nonetheless shipped 19 solar inverters this quarter, most of which were 500 KW and the remainder our 333 inverters. This resulted in a stark contrast between the pipeline and booking activities versus the installation and shipment of new inverters. From a pipeline and new orders perspective, we had an outstanding quarter. LOEs for our inverters more than doubled from the fourth quarter, as did our bookings. We received several orders for large multi-megawatt projects in the first quarter, including our first European purchase order for projects in Czech Republic and Germany totaling approximately 12 megawatts. Additionally, we shipped our first valuation unit to China, received our first order for our new 250 KW product, and were awarded a side card service contract for a 2 megawatt (inaudible) in Colorado. The pace of new orders and LOEs during the quarter should set up very strong subsequent quarters for the remainder of 2010, especially with more projects coming to fruition as financing and permitting solidify the markets. Additionally, just today, we received another significant inverter order from a large European solar installation for 54 inverters. With that, we now have over 40 megawatts committed for installation in Europe.

In addition to the strong order volume for Solaron, we were very excited to announce a definitive agreement to acquire an industry-leading inverter company, PV Powered. The combination of our product lines will give us a complete suite of products to address the entire market. The transaction is currently being reviewed by the Federal Trade Commission for HSR implications. As such, we will provide more detailed commentary after we close the transaction which we anticipate in May. Looking ahead, we are also planning to expand into the growing inverter market -- growing inverter market opportunity in Ontario, Canada. Beyond the process of evaluating several options and in combination with the closing of PV Powered, we plan to address the requirements for local content to this market.

As for solar panel equipment, we have now categorized this with architectural glass to create the thin film renewable category. Because many of our customers that provide low-E coatings for architectural glass also supply coated substrates for the solar panel market, it is a better combination to classify these end markets together. Overall, the thin film renewable market is continuing its investment in capacity for both architectural glass and solar panels. For solar panels, the oversupply situation seen in 2009 has flipped as many manufacturers are getting out of panels due to the increasing sizes of solar installation. At Advanced Energy, we are seeing increased sales of our products to OEM suppliers in Europe, and to Chinese manufacturers of both polysilicon and thin film panels, where we have developed a very strong market position. Sales to architectural glass customers have also improved. Looking to the next quarter, we anticipate strong sales in thin film renewables with solid growth across the application spectrum.

Sales to the flat panel market are also improving. After very strong growth in our fourth quarter sales, the first quarter momentum continued upwards. Sales to second tier OEM customers are growing as they win share at new flat panel [traps] using our technology and products. As we have historically been well established in PVD, we have recently secured business in flat panel etch tubes as well. This reopens the etch segment of the flat panel display market where we have not participated in quite some time. In PVD, we continue to do very well, and are excited at the interest building around the entrance of one of our new DC products, the Ascent, targeting the more traditional flat panel OEMs, where we are also winning shares in Gen 8 and Gen 10. We expect to ship this product in volume during the second half of this year.

Finally, our service business, which is still largely semiconductor-focused was flat this quarter. Driven by our OEM customers as they directed us to utilize our component part supply towards the supply of new products, versus fixing older products. This resorted in the growing service backlog as we exited the quarter. As materials become more readily available in the next quarter, we anticipate service sales will grow accordingly.

In closing, we were very excited to begin 2010 in such a strong market position with so many positive indicators on the horizon. We are also seeing evidence that our different end markets are positioned to build in the coming year. Semiconductors continue to drive the capital equipment markets, large solar array installations are driving demand for more capacity for panels and inverters, and flat panel displays continue their strength as well. The improvement in these end markets give Advanced Energy a diversified revenue base and balance of business from which to drive growth and dampen the effect of varying market fluctuations. Coupled with our acquisition of PV Powered, we are confident that we will drive our market leadership across all of our markets. As you have seen in the first quarter, we continue to drive efficiency in our business to keep costs down and capitalize on our 2009 operating structure. With the Advanced Energy team executing exceptionally well, we are expect -- we are and expect to continue to see strong leverage in our financial model going forward. I would like to take a moment to thank the entire Advanced Energy team worldwide for their hard work, dedication, and strong commitment to our customers' needs. Now, I would like to turn over the call to Larry Firestone our CFO to provide some detail on our operating results.

Thank you, Hans, and good afternoon, everyone. Before I go into a more detailed review of our financial performance, I would like to highlight changes in the way we will characterize sales to two of our end markets going forward. First, as glass manufacturers are producing coated substrates for the solar panel market, we will combine these markets to create the thin film renewables market. Next, because the data storage market has fallen into consistently lower levels, we will combine it with the industrial markets. Sales to the semiconductor, flat panel display, solar inverter and service markets will remain the same as in the past. Upon closing of our pending acquisition, we will combine PV Powered's inverter revenues with our Solaron inverter product line to have one inverter category going forward. You can find the historical four quarter market breakdown of these categories on the Investor Relations page of our website. Now let me take you through the operating results, as revenue growth, strong leverage, and strong execution drove our results for the quarter. Total revenues grew an impressive 22.7% over last quarter to $81.6 million from $66.4 million. Compared to the low levels experienced in the same quarter of 2009, first quarter revenues rose 150%. This was our third quarter -- this was our third consecutive quarter of strong sequential sales growth as we drove tremendous leverage in our financial model as a result of significant improvements in gross and operating margins and profitability.

Turning to the individual markets, our first quarter financial performance was again driven by strong growth in the semiconductor capital equipment market. After two quarters of nearly 60% and 70% sequential growth during the second half of 2009, our revenue from the semiconductor industry grew another 47.7% this quarter to $48.6 million, or 59.6% of total sales. This noteworthy, ongoing growth was driven by the fast pace of shipments to our OEM customers as well as strength in Korea, in particular sales to our largest customer, Applied Materials, grew to 31% in the quarter, up from 25% in the fourth quarter. Revenues for our Solaron inverter products fell as expected to $2.3 million or 2.8% of total sales due to the industry's first quarter seasonality. This compares to $4.2 million or 6.3% of total sales in the fourth quarter. Bookings and letters of intent, however, painted quite the opposite picture, reaching all-time highs. We booked 58 inverters in the first quarter, compared to 29 in the fourth quarter, and having secured letters of intent for 74 inverters versus 35 last quarter.

Our pipeline for 2010 is growing noticeably. And we expect these to convert to purchase orders in the next quarter or two, and do not include the European order received today that Hans mentioned. Sales to the thin film renewables market, which include solar panel and architectural glass, increased 3.8% to $7.2 million. Solar sales were slightly lower this quarter as demand for crystalline silicone increased while demand for amorphous silicon decreased. This was slightly offset by an uptick in architectural glass. Strong demand for PVD, as well as penetration and etch, drove sales to the flat panel display market, 23.5% higher during the quarter to $4.6 million, or 5.6% of sales compared to $3.7 million or 5.6% of sales in the fourth quarter.

In the industrial market, sales grew 2.7% to $7.4 million. Though this category represents many disparate and small markets, we do anticipate growth in the second quarter. In data storage, capacity additions are driving a ramp in magnetic media, which will drive up revenues in this market over the next couple of quarters. Looking at our service business, first quarter sales were flat at $11.5 million, and this was a result of our OEM customers directing our component supply toward new products versus using those same components for repairs. In the first quarter, we were able to secure sufficient parts inventory to drive our service business going forward. This should break loose the high number of backlog service orders that built during the quarter, and position service revenue for growth in the second quarter.

Total first quarter bookings decreased $1.3 million to $96.7 million from $98 million in the fourth quarter. And ending backlog, however, increased 22.8% sequentially to $81.3 million compared to $66.2 million at the end of the fourth quarter of 2009, reflecting the significant increase in backlog across all of our markets. Even with the significant ramp in revenues, our book to bill ratio continued strong at 1.19 to 1, compared to 1.48 to 1 in the fourth quarter. Gross profit for the quarter was $33.1 million or a 35.3% improvement from the $24.5 million in the fourth quarter of 2009. Gross margins also rose nearly 4 percentage points in the quarter to 40.6% from 36.8% last quarter. Strength in gross margin was driven by the increase in revenues resulting in improved operating leverage of our manufacturing overhead, as well as continued cost improvements and materials in other areas.

Let me switch now to the operating expense portion of the income statement. Overall operating expenses rose sequentially as we reversed approximately $1.1 million in temporary costs reductions in pay cuts and shut downs made over the last 18 months. In addition, we had $325,000, or roughly $0.01 a share, in legal, banker and filing fees related to the PV Powered acquisition. R&D increased 3.2% to $11.6 million, though fell as a percent of sales to 14.2% compared to $11.2 million, or 16.9% of sales in the fourth quarter. This absolute dollar increase was related to additional engineers that were hired to develop new products, and the reversal of temporary cost measures from the last 18 months. SG&A increased 19.3% to $13.3 million from $11.1 million last quarter, but declined as a percent of sales to 16.3% from 16.8% in the prior quarter. The absolute dollar increase was related to costs associated with PV Powered acquisition, and the reversal of temporary cost measures implemented over the last 18 months.

In the first quarter, we had an effective tax rate of 27%, driving income tax expense to $2.3 million up from $923,000 in the fourth quarter. As a reminder, we reorganized our corporate entity structure in the fourth quarter of 2009, and going forward, the greater portion of our future profits will be reported in lower tax jurisdictions, outside of our historical operations in the US, Germany, and Japan. At the start of the year, we anticipated our effective tax rate would be in the 30% to 33% range. However, the sharp increase in revenue for the first quarter -- with the sharp increase in revenue for the first quarter, we are beginning to see the benefits of this strategy earlier than expected. As a result, and given the growth that we in the first -- that we expect to see in the first quarter of 2010, our effective tax rate dropped to 27%. We currently expect our estimated effective tax rate for the remainder of 2010 to be in the range of 22% to 24%. We recorded an over 300% sequential increase in net income this quarter, to $6.2 million or $0.15 per diluted share. And this compares to net income of $1.5 million, or $0.04 per diluted share in the fourth quarter. In the same period a year ago, we had a net loss of $79.8 million, or $1.90 a share, the majority of which was related to a noncash goodwill impairment charge of $63.3 million, or $1.51 per share.

Head count at the end of the first quarter grew to 1,474 employees versus 1,316 employees at the end of the fourth quarter, As we added people in Shenzhen to produce additional revenue and a small group of engineers in Fort Collins for a new product development. We ended the first quarter with cash, cash equivalents, and investments of $163.4 million, and increased accounts receivable and inventory to support revenue demand led to the $14.1 million decrease in cash. Accounts receivable increased to $61.9 million from $50.3 in the fourth quarter, and DSOs were relatively flat at 64 days compared to 63 days last quarter. Total net inventory grew 28.5% to $47.7 million, and net inventory turns were 2.3 times. Stock option expense for the quarter was $1.9 million, and capital expenditures were $800,000, fixed asset depreciation was $1.7 million, and our intangible amortization was $122,000 for the first quarter. Our guidance for Advanced Energy's business for the second quarter is as follows. We expect revenues to be between $92 million and $102 million, and gross margins to be in the range of 39% to 41%. And the anticipate -- and as the anticipated mix of business includes a higher concentration of low margin products, EPS to be in the range of $0.21 to $0.31 per diluted share. As we stated in our press release, we will update our guidance to include the expected results of PV Powered for the second quarter after the closure of the acquisition, which we anticipate will occur in early May. And that concludes our prepared remarks for today. Operator, I'd like to open up the call for questions.

(Operator Instructions). Your first question comes from C.J. Muse from Barclays Capital. Your line is open. Again that's C.J. Muse from Barclays Capital.

Hi. This is (inaudible) calling in for C.J. Muse. My question is basically is regarding the supply chain problems, are they basically over at this point? Or is there still some problems in supply chain that is preventing you from getting all of the products out?

I think it's not fully over yet. But it has improved dramatically, and we do not expect any more than we have substantially significant delays in our shipment because of that. And we would assume that the quarter -- the next quarter this problem has been solved completely.

If I can have one more question, how -- what do you think of the visibility in the semicap area, especially with respect to the first half versus the second half of 2010?

I think, generally speaking, we see 2010 and 2011 as a very healthy situation of the semicap equipment. However, because of this very, very strong pace in the first half and in Q4 last year, it is probably that semicap equipment takes a breath, which will not result in some kind of a reduction -- a significant reduction, but the growth may slow down for a bit. But this is a kind of undulation which is not changing the growth potential of semi going forward.

Thank you. One last question, what is the lead time for getting one of your Solaron inverters (inaudible)?

It is in the range of eight to ten weeks.

Thank you very much.

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

Thanks for taking my question. I guess the first thing I want to ask is if I see the midpoint of guidance, you're guiding for 19% sequential growth in revenue. Can you help me out -- help us out in terms of which group you expect to outperform that, and which group you expect to be underperform or even shrink in the coming quarter?

I wouldn't say underperform. As I said before, we expect the semi slows a bit in the growth, at least in the coming quarter. What we see and what's kind of acting against that is a very strong increase in the solar business in general, which means inverter, as well as the thin film business. And all of the other end markets including the flat panel is growing very healthy. So this is easily compensated, this kind of slow down in the semi equipment.

Great. That's (inaudible). I guess to go back to your last question regarding component constraint. Have you guys seen your lead time being able to improve now that component constraint has somewhat abated, and what is your lead time right now?

Yes, I don't know that we have necessarily a standard lead time across the various thin film deposition markets comment, but certainly as we've secured inventory and brought it in-house and also secured parts supply longer term as we looked at long lead items, we've improved our turn around time to our customers. So suffice to say we hit all of our ship commitments for Q2.

Great. And then on the (inaudible) private business, I think like two quarters ago there was some chatter about your position in the new PVD equipment supplier which I think was supposed to supply material. Can you update us on the status there?

Still, still going, still going through the qual process. I think things are going actually according to plan.

Any idea if you can -- any idea when you might get qualified?

No, not really. It's a we'll tell you when it's complete kind of arrangement.

Kind of an on-going process, huh? Okay, and then, maybe on the LED side, you had talked about that as being a new market that may be an opportunity for you guys. Any update there on that side?

No, I mean, we are still working on new products in the power side, in order to get into the LED market and particularly the [MOCVD] side, and we are starting to have some kind of collaboration which allows us to test our new power supplies for that purpose. But as far as the business is concerned, we still have, of course, no revenues stream out of the LED side, but it's in the focus and we will get into this market for sure.

I see. Okay. Great. That was -- okay. That was helpful and then, one last thing is relating to the solar inverters higher business, you guys talked about this, actually it was a very sizable order from Europe, right, 40 megawatt orders. Can I ask you a -- I guess, more than one question. First one is what size inverter are you guys shipping for those orders, and then the second part of the question is related to PV Powered. Do you guys intend to bring the PV Powered product your market, and if so, any idea how that can work out for the year?

Your first question, we only have one product for the European market, which is the 500 KW. The more surprising it is how successful we are at just providing one product, and, again, 500 KW is the only product we're selling for this 40 megawatt. To your second question, as you probably know, we have an earn out agreement with PV Powered, which of course allows us to have a, let's say, mutual supporting of the sales activity and service activity, but we left them on a pretty long leash until the end of this year And for coming year, they're more integrated, but that does not mean that we integrate the Bend as a facility. We will keep the facility there because the products which are being produced in Fort Collins and in Bend are so different because the lower power versus the higher power that we don't see any kind of need in order to have a very rigorous integration of the manufacturing situation.

I see. Okay. And then, any chance you can provide us, in terms of how much revenue they did in the first quarter, any comp items in the second quarter? Or should we wait for the call (inaudible)?

Yes, let's wait until we get to the point of closure, then we'll give you the color on that.

So you guys will have a call when you closer to that.

Yes, or we'll put it in the press release. Either way.

That's helpful. Thank you.

Your next question comes from Jim Covello from Goldman Sachs. Your line is open.

Hi. This is Kate (inaudible) for Jim Covello. I had a question on your, on the semi business. You sort of talked about a couple of drivers of the business during the quarter, and technology transition, some capacity buying maybe and then sort of inventory replenishment. I was just curious if you can characterize sort of what drove most of the strength during the quarter, and to the extent that you guys talked about inventory replenishment, is that more at your semi equipment customers replenishing inventory of your product, or just broadly speaking on the semiconductor supply chain.

I think that the last question first, I think that it's broad in the supply chain, it goes from the [IT] manufacturers to the OEMs, the entire -- across the entire board. And, first question was, oh yes, what was the main driver for the semi. I think at this point it was capacity, in particular -- as you know, in particular Shenzhen, which built up the new capacity. And I think at the same time we see some of the technology investment because most of the companies getting from -- to the 22 nanometers, and some even try to skip that and go to 20 nanometers, and as far as the replenishment of the inventory is concerned, they have to because everything they build right now is being immediately transferred to the end user. So somewhere in time they have to build up their inventory.

Yes, we think, that the inventory build starts in Q2 and probably continues a little bit into Q3. It's really going to depend on the product and what the demand curve looks like.

And then with respect to your comment about potentially the second half cooling down a little bit versus the first half. Is that sort of promised on view that you've seen maybe a little bit of capacity buying but maybe a large chunk of it is sort of coming at the tail end of the year or maybe in 2011? So you will see some kind of a pause ahead of that. Just curious if you have getting any indications from customers already that there might be a pause or you are just kind of thinking given how robust things are, we are poised for a slow down?

I think, as I said before, I think it's not a real slow down, what we see is some kind of a short cut, and the reason for that is, because even though Toshiba has announced, at least a budget has been approved, for the next big mega (inaudible) by Toshiba, but the problem is, at this point in time, most of (inaudible) has been sold out to Samsung. They have to wait for a while until this (inaudible) can be built because building without (inaudible) doesn't make that much sense. So it's not kind of really slowed down. It's just kind of unrelating element which has nothing to do with a real cooling off of the semiconductor equipment.

That's very helpful. Maybe just one final question for me on the solar side. You mentioned that there is a big disparity between sort of what the revenues are today and what the orders look like. And I was just curious as you look into the order -- into the orders that you have today and they seem to be pretty robust, how should we think about that translating into revenues and is there any risk of potential cancellations to the extent that these are kind of orders placed today that perhaps won't revenue for some time. And that's it for me. Thank you.

Yes. We don't guide the individual markets for -- for revenue potential next quarter. It takes us about, eight to ten weeks to get the inverters out the door. So there will be -- we are looking at the inverter market as a pretty strong growth driver in Q2. As far as cancellation potential, I'd say that, we haven't seen any, we've seen more, inbound. I would say maybe there's some -- if you were to characterize it, where would you find it, maybe out in the LOI space, but the reason these, these companies are placing LOIs wis us is to get their position in line in the production cycle. So, as things like financing and permitting are in the works, obviously, business is still coming our way. So, things look relatively strong and with the announcement that Hans made today about the European inverter sale, they just -- they're coming and they're coming in bigger blocks than they have been in the past.

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

Hi. Good afternoon, this is Paul Thomas for Krish Sankar. I guess, with the Q2 guidance at the midpoint of $97 million, you guys are getting back toward the $100 million plus sort of quarterly revenue you saw back in '07. I know you are not going to have the PV Powered in there yet until you close the deal, but kind of where you guys stand right now, do you see yourself getting back up to the 15% or greater operating margin right now as you get up to that $100 million? Should we be seeing better operating margin this time around at similar revenue levels? And then I guess PV Powered to be incremental on top of that, down the road of course not in the next couple of quarters?

Yes, I wouldn't carve out a direct operating margin at a specific revenue level, but I think you'll see in the guidance range that it provides for those kind of levels, Paul. And, certainly we are driving a lot -- a lot stronger leverage this time around than we were the last time we were at these levels. And then, you are right once we bring in PV Powered that will drive an additional set of metrics in the model.

Okay. And then maybe on the legacy side of the solar business, the power supply business, are you guys thinking that second half might be a little lower than the first half at this point, maybe as end customers might have a little bit of weakness in the second half versus the first half.

For the solar panel market?

Right.

Yes, that market is looking actually pretty strong right now. We've got activity in Europe, and in China. So, in Europe, we sell principally through the OEM channel, and in China, we sell direct to guys that are making their own equipment for -- for producing panels. So, it's -- we've a pretty widespread customer base there.

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

Thanks.

Your next question comes from Colin Rusch from ThinkEquity. Your line is open.

Thanks so much and congratulations on the solid quarter. Can you help us understand or think about pricing going forward as you move into smaller (inaudible) and into Europe, should we still be using the same kind of metrics we have used historically?

Yes. I think the -- the pricing that we've been sort of calling out, which is in the $0.22 to $0.25 a lot range is still holding.

Even as you go into this -- into the new product?

Yes.

Okay. And then, we've seen a back log of a lot of solar equipment in the market, and it's really into 2010. Are you starting to see indications that you are going to continue to see CapEx build out in solar into 2011 yet, or how much visibility do you have in that market? If you can just give a little guidance on that.

As far as the, the capital equipment for the panel manufacturing is concerned, it's as in all of those OEM businesses, it's pretty tough to have a -- a view which goes beyond three quarters. And it's a -- always a volatile business because depending on how many (inaudible) are being built, the business goes up and if there are no (inaudible) being built, it's going down. So, we see in the remainder of 2010, a pretty strong business which has some kind of minor sight , but as soon as we cross the border to 2011, it's going to be

Great. And just coming back to the European inverter market, can you guys talk about how, when you are winning, where you are winning and why, the thesis has been that you're producing more electricity on the systems when using an inverter. Are you seeing that as the real selling point, or is pricing the selling point at this point? If you can give us just a bit more color on that.

Yes, I think we are betting heavily on the superior LOCOE which our customers can achieve with our inverters, and again, in those cases in which we win the business, people are kind of a bit advanced in order to take this LOCOE, or harvesting of energy, as the more important. Some times you still have some kind (inaudible) the capital equipment at the first place, and it is the decisive factor. But, by the way, going forward, the LOCOE gave the only thing which is a reasonable decision for all -- decision-making process for buying inverts or operating a field. So, yes, most of time it's a very good selling point.

And one just final question for me. In France and Italy, and Spain, in European inverters, are you seeing any interest at this point in terms of the essential customers and if you could just characterize what, kind of, what levels of demand are the [investor] market.

I think, as you know, Spain came to a screeching halt, I think, for anybody else that's coming from the outside as a newcomer, Spain is probably not a market which is providing some kind of opportunities. Italy it is, but as Italy is concerned, I mean they have a strong player in Italy as well, and since I'm there, so, of course we will try but wait and see.

Great. Thanks so much.

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

Hi. Just a couple of questions. On the -- on the inverter pipeline, I think you said the order should ship over the next two quarters. Can you give us an idea on the units that are in -- that have LOIs and the European order that you just mentioned you said wasn't included in the booked business. Does that ship this year?

Yes. The -- the one that Hans mentioned for 54 inverters, I believe that's slated to ship Q3, Q4 time frame. And, the LOIs of currently 74 units, and LOI are expected to ship Q3 -- Q2, Q3 and Q4. It's really spread over the next three quarters.

Okay. So really everything in the pipeline is expected to ship this year.

That's correct.

Okay. And can you update us on the timing of the one megawatt inverter?

Yes. The one megawatt inverter is slated for hitting the market at the fourth quarter of this year.

Okay. It seems like last quarter you talked about a Q3 launch, is that -- ?

(Inaudible) But, we came to the conclusion that we be extremely conservative and testing and getting out with a system which is extremely reliable and extremely and fully tested in every respect, and this caused a quarter delay.

Okay. Just one more question on the inverter business. The European customers that you're getting, does that include some of the same relationships that you've developed in this stage, or are these new partners entirely?

They're new partners entirely.

Okay. That sounds good. Actually if you don't mind, gross margin you mentioned on the PV Powered call, that the gross margin on those products is a little bit lower. Is there some risk to the current guidance that gross margin guidance might go lower when you update us after the acquisition?

The guidance that we gave is AE native guidance, so, as we get to the closing of PV Powered and really understand how much PV Powered revenue will be, the content this quarter, then we will give you an update on that.

Okay. Thanks.

Yes.

Your next question comes from Neil Wagner. Your line is open.

Hey guys, this is Neil Wagner from Stevens. Thanks for taking my question. As you guys begin to more aggressively target inverter opportunities in China and certain other European markets, how are you guys expanding your sales distribution channel to take advantage of some of these opportunities?

I think we have a pretty good sales channel at this point in time. But, if we see more opportunities, we will of course add and bring additional strength to the bench.

We've also got in the post-acquisition combined sales force, we will have additional horsepower in the total population, if you will, of sales team.

This holds true for let's say, Europe. In China we have a different situation which is even more comfortable because we have a very good corporation with a company which provides balance of system for classical power supply -- power plants, and these guys have an extremely well established network and we are tapping out that and benefiting from that.

(Operator Instructions). At this time there are no further questions. I would like to turn it back over to Larry Firestone for closing remarks. There are no questions. I turn the call back over to you.

Okay.

Operator.

Thank you, operator. In summary, the recovery in the global economy is beginning to drive strong growth across our end markets. Based on our guidance, we are continuing to improve on the strong leverage of our financial model, and we look forward to closing the acquisition of PV Powered which will drive further diversification and growth in a strong position to meet the ever changing demand of our markets. Let me take a moment to mention the investor events that we will be participating in during the second quarter. We are hosting an analyst day at our facility in Fort Collins on June 3, and we will be participating in the BofA-Merrill Lynch small and mid cap conference in Boston on June 8 and 9. And we would like to thank everyone for joining our call.

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