Advanced Energy Industries Inc (AEIS) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Advanced Energy Industries earnings conference call. My name is Gina, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. For now, I'll turn the presentation over to your host for today's call, Ms. Annie Leschin, Investor Relations. Please go ahead.

Thank you operator, and good morning. Thank you for joining us this morning, for our fourth-quarter 2010 earnings conference call. With me today are Hans Betz, Chief Executive Officer, and Danny Herron, Executive Vice President and CFO. Both of them will present prepared remarks.

By now you should have received a copy of the earnings press release that was issued last evening. For a copy of the release, please visit our website at www.advanced-energy.com, or contact us at (970)407-4670. As we announced in January, we'll be hosting an analyst day in New York City on March 2. The event will also be webcast. Advanced Energy will be participating in the Goldman Sachs Technology and Internet Conference tomorrow in San Francisco, and the Jefferies Global Clean Tech Conference in New York on February 24. As other events occur, we'll make additional announcements.

I would like to remind everyone that except for financial and historical information contained herein, the matters discussed in this conference call contain forward-looking statements, subject to known and unknown risks and uncertainties, that could cause actual results to differ materially from those expressed or implied by such statements. Statements that include the terms believe, expect, plans, objective, 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 our estimates, reserves, or allowances, and other factors listed in our press release. These and other risks are described in Form 10-K and 10-Q, and other reports filed with 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 on this call and in our press release today. Guidance will not be updated after today's call, or until our next scheduled quarterly financial release. I'll now turn the call over Hans Betz, CEO of Advanced Energy.

Thank you, Annie, and welcome, everyone. Similar to last quarter, we are going to refer to the set of earnings slides that we have posted on the IR section of our website to help walk through the quarterly results and outlook of our markets.

If you turn to slide number four, I can give some of the highlights of 2010. 2010 was a year of significant strategic and financial accomplishments for Advanced Energy.Having emerged from one of the most severe declines the capital equipment industry has ever experienced, 2010 saw an equally unparalleled rebound. Advanced Energy demonstrated speed and flexibility in responding to the changing market conditions and needs of its customers, generating nearly $460 million in total revenue and a $1.23 per share. 2010 will be a year remembered for its record-setting pace and its market-changing dynamics. Of the many milestones AE achieved in 2010, the most noteworthy came in form of a strategic endeavors.

First, we expanded our solar inverter business with the acquisition of PV Powered. The distinctive combination of PV Powered's exceptional line of products with our high-powered Solaron, has afforded us a position among the leaders in one of the fastest-growing markets for inverters, the North American solar inverter markets. Inverter revenues contributed 23% to total revenues during the year, up from 5% in 2009, a clear indication of the success and timely nature of this acquisition. The transaction validated our strategy of expanding into adjacent markets, where our power conversion experience and technology can effectively leverage. We further focus these efforts by divesting our Flow and -- Mass Flow business this far. Together, these strategic steps represent the critical building blocks from which we are our furthering our vision, become the leader in power management.

Capitalizing on our existing thin film offerings we launched new power supply offerings for the semiconductor and flat panel markets. This succession of new products has resulted in wins at key customers, some of which are already generating repeat orders and showing great promise. Importantly, we believe our ongoing R&D investment at similar levels, even during the exceptional downturn, has proven to be the right strategy, especially as adoption of new products typically can take one to two years. Additionally, we grew our service offerings and developed local manufacturing capability in important regions, where our clients have a strong presence such as South Korea. Not only is this allowing us to deepen our customer relationship, but it should also result in service becoming a growing portion of our revenues.

These 2010 achievements are reflected across our financials from top to bottom. Revenue grew an amazing 184% annually, and gross margins improved to 43% for the year. We saw EPS climb 150%, and we generated $18 million in cash flow from operations. It was truly a tremendous year for AE as a whole, as we took yet another step toward diversifying and expanding our business into adjacent fast-growing markets.

Inverter revenues have grown to a quarter of total revenue, and are fast becoming our largest growth opportunity. The inverter, or renewable, business is quite different from our thin film business. Everything from the way the power conversion flows to the end markets to the financial model, we believe the best way to address these opportunities is to align the Company along these two strategic businesses. Beginning with the first quarter's results, we will segment and report financials for each business unit. This will allow you to see firsthand the contribution of each business to the total and gain more insight into each market's specific dynamics.

Turning to slide number five, all of this culminated in the seventh consecutive quarter of revenue growth to nearly $149 million. This success was driven in large part by the strength of our growing inverter business and continued contribution of our thin film businesses. As the semiconductor industry paused in the fourth quarter to digest the massive amounts of equipment invested over the last several quarters, non-semi revenue more than made up for this shortfall by contributing more than 50% to total revenues. Inverter revenues grew to 35% of the total this quarter, the highest contribution yet. We aligned our senior management with the thin film and renewables business units. GAAP EPS improved as well, up 12% to $0.45 per share.

Moving on to thin film markets on slide number six, let me begin with semiconductors. The industry has witnessed some underlying changes as we exited 2010. The steep ramp of capital investments finally slowed in the fourth quarter, particularly in 300-millimeter. Also, levels remain high on a historical basis. The semiconductor market contracted this quarter, as this round of Samsung's investment ended, impacting supplies across the industry. We anticipate the resumption of capital investment over the course of the year, or potentially sooner, given the recent positive CapEx announcement, primarily for 300-millimeter by GSMC, Intel, Samsung, and Global Foundries.

Entering 2011, we believe a fundamental shift is occurring. Where DRAM has been the predominant driver over the last six quarters, the industry is now moving towards NAND, driven in part by demand for tablet PCs, for example iPads, and their large need for flash memories, as well as growth in solid state drives. This will impact a number of companies in regions such as Korea, and potentially result in market share shifts, those strongest in NAND and Edge. We believe some manufacturers are even repurposing in order to enter the foundry business, and thus we'll need to pre-emptively invest to retain the market share position.

Another 2010 industry driver was the retooling of 200-millimeter fabs which led to significant growth in the sales of used tools and legacy products for OEMs. This shift to older products was driven by demand for electronic components where 300-millimeter is not required, such as analog circuits for power electronics in automotives. More recently, however, 300-millimeter tools are again being shipped as fabs prepare for the next technological shift, and further capacity increases. Moving to flat panel display, we have seen several quarters of increasing revenue and capital investment, largely centered around higher-generation LCD panels, generation eight and above.

Looking ahead, there are a variety of non-traditional market factors that may stimulate the next round of investments, such as complex technologies and smaller panels for tablet PCs, as well as proximity touch screens and LED back lighting. We anticipate capacity additions for LCD and more technology advancement around OLEDs, especially in Korea. While the exact timeline of investment cycles can be challenging to pinpoint in this market, we believe they are currently running in a six-quarter time frame. We are working diligently to position ourselves with the right customers, such as those in Korea, the right products, in order to capitalize on these trends and drive sales. While this continues to be a somewhat lumpy market, we expect to see a pick up in orders mid-year, specifically in Edge tools.

Moving on, revenue from thin film renewables has another record quarter, to primarily, to the amount of investments in crystalline silicon technology and the strength of Chinese solar panel market, which continues to grow, and benefit Advanced Energy. We believe the combination of our proven process and service capability have led to our success in this region. For some applications, AE has become the best-of-breed solution, while for others, our service capability and responsiveness has stood out as a key differentiator.

Slide number seven illustrates that our inverter business was the highlight of the fourth quarter, growing another 38% and contributing 35% to total revenues. The strengths was evident across product lines and power solutions, especially our largest entry inverters, over 250-kilowatt, and our one- to two-megawatt integrated power sub station solutions. PV Powered and Solaron performed exceptionally well, shipping a total of over 170-megawatts during this quarter.

The completion of our acquisition of PV Powered set the stage for yet-to-be realized synergies as we begin to sell both product lines as one cohesive team. Manufacturing capacity was established in Canada and China, where we made our shipments in the fourth quarter. In Ontario, we are poised to participate in this market opportunity as we are one of the first manufacturers ready to ship product compliant with local content requirements. We have secured our first greater-than-one-megawatt fleet in tariff project, and larger projects are expected later in the year. We had several notable profit-take wins during the quarter, including a 23-megawatt project win. We expanded our relationship with one of the leading big-box retailers in the US to 28 stores, including one rooftop application larger than three-megawatt.

Our margin side 13-megawatt project was a leading PPA provider and a group of hospitals is expected to be complete by May 2011. Two others this quarter include a 6.5-megawatt project with a big southeastern utility, and a 4.5-megawatt project for an East Coast utility through a solar integrator. We signed a 15-megawatt contract with a leading California-based installer and distributor. Though still in early stages, the North American market is seeing an incredible fast pace of growth, tightened lead times and jockeying for positions as key players stake their claim. This remains very exciting and dynamic greenfield opportunity, with large commercial and utility-scale projects on the horizon. Overall, it's a tight race and Advanced Energy is very confident in its decision among the top players in the North American market.

In the European market, a variety of forces, including possible changes in feeding tariffs, evolving government incentives, and building inventories are influencing the market. These trends may result in some dramatic shifts in European supply and demand for inverters, as well as potential price pressure. So we may feel some of these effects because North America is our primary market, and begun to order, we expect the impact to be minimal, because the inventory in Europe is in large part, lower power, for example, string inverters.

Finally, let me give you an update on our acquisition of PV Powered. There remain additional costs and business synergies yet to be had. We are now working on leverage the combined entity, unify our sales effort and build momentum. We continue to emphasize high-end, commercial and utilities scale inverter projects, and are working to develop our channel strategy by penetrating various geographies and vertical markets. We plan to streamline the cost structure by capitalizing on our size and sourcing leverage to drive costs down and optimizing operating expenses with a high-volume, low-mix product line. We will also be introducing our products over the course of the year to fill out our product lines and ideally position us for growth.

Now, let me move on to our service business. Service revenue remained relatively constant in the fourth quarter, despite having divested our Flow service business. Our non-break fixed revenue for used equipment sales and upgrades sold into our installed base grew substantially last quarter and throughout 2010. This business feeds direct tool refurbishment and fab spare market at lower price points. We expect service to grow into the first quarter, with extremely high fab utilization rates in Korea, Taiwan and North America, and new fab budgets coming online at the beginning of the year, when companies -- we typically spend money on upgrades, featured improvements, et cetera.

On the inverter side of the service, we look at 2011 as a building year as revenues will be minimal. In North America, much of our service growth is predicted on timing and size of large projects. We more than tripled our megawatts under service to 28-megawatts in the fourth quarter. In other markets, such as Europe, the penetration of our inverter product is low, we believe we have a unique offering of extended warranties and service plans. For example, SiteGuard can provide better insights into how inverters interact with a glitch and the rest of the site. We believe a reliable efficient service offering will be a key selling point to customers as they buy more complex products and ultimately increase the content of inverters.

As I mentioned last quarter, more and more, we see the trend towards performance guarantee is slowing. One way to offer a successful uptime guarantee is to have the most powerful, reliable product out there, backed by a powerful service organization. There's a great deal of up-front investment required to build a service organization, and the pay back typically comes longer-term. The service business is a long-term annuities stream, which we expect will add to the revenue every year. With 27 years of years of experience in the semiconductor industry, we have the know-how, the tools, management systems, global distribution systems, and methodology to differentiate AE. We plan to leverage this emerging market and pursue all other inverters, where all other inverters are sold.

In summary, we end 2010 with our highest quarter of revenue performance in the Company's history. Perhaps even more significant is the two accomplishments of one of our corporate goals, diversification and expansion into adjacent markets, while maintaining our focus on power conversion. Even with semiconductors among their highest levels, we were able to diversify the business and minimize the effect of single market cyclicality in capital investments. Non-semi revenue exceeded 50% for the second quarter in a row. With the outlook for inverters, that market alone, could reach a significant portion of our total revenues in not-too-distant of a future. We see 2011 as an exciting year in both our thin film and renewable markets, and are constantly striving to stay ahead of the next generation advances and penetrate new markets with our industry-leading power conversion technology.

I would like to thank the entire Advanced Energy team worldwide for their hard work, dedication, and strong commitment during the quarter. Now I will turn it over to Danny.

Thank you, Hans. As Hans discussed, we reported another record revenue quarter, highlighted by sales in both our inverter product line, and non-semiconductor thin film markets, which combined were greater than semiconductor sales for the first time ever.

Turning to slide number nine, revenues for the fourth quarter were up 5.5% over the third quarter to $148.7 million from $141 million. On a year-over-year basis, revenues grew 156% from $58.1 million in the fourth quarter of 2009. The robust year-over-year growth was driven by two factors, the acquisition of PV Powered, which combined with our own growing inverter business solidified the breadth of our product offerings and established our presence in the US market, and a considerable improvement in world economic conditions, which drove a recovery in all of the thin film markets we serve.

Gross margin increased to 43.6% for the quarter, operating income was $24 million, or 16.1% of revenues. Net income, $19.7 million or 13.3% of revenue, and EPS was $0.45 per share from continuing operations. For the full-year 2010, sales were $459.4 million, up from $161.8 million in 2009. Our semiconductor market represented 38% of sales for 2010, versus 39% in 2009. Non-semiconductor thin film sales were 29% in 2010, compared to 33% a year ago, and our inverter business represented 23% of sales, compared to only 5% a year ago.

In the fourth quarter, semiconductor revenues decreased 18.6% to $40.2 million, representing 27% of sales during the quarter. As Hans mentioned, this was due to the pause the industry is experiencing, as it digests the aggressive capital investment of the last year-and-a-half. More than offsetting this decline, inverter revenues increased 38.4% to $51.7 million or 34.8% of total sales during the quarter. Growth in our inverter business was driven by strength in both our PV Powered and Solaron product lines during the quarter. Sales to the thin film renewables market increased 26.2% to $25.8 million, or 17.4% of sales. Sales to the flat panel market declined to $7.7 million after a record $11.3 million last quarter, representing 5.2% of total sales during the fourth quarter. Our data storage and industrial market sales increased 5.6% to $9.9 million, driven by strength in the industrial market, especially in the USand Taiwan. Finally, in what is typically a seasonally soft quarter for service, our revenues were consistent at $13.4 million.

Now let me draw your attention to slide number 10 on gross margin. As you can see, gross profit on an absolute dollar basis grew 6.7% to $64.7 million. This led to a 50 basis point increase in gross margin to 43.6%. The higher gross margin was largely due to a decrease in warranty costs, reflecting our continued focus on delivering the highest quality products. As we reviewed last quarter, the commercial and utility scale inverter market is still an emerging and developing one. In the near-term, we expect the very strong top line growth will create a product mix shift, that will cause downward pressure on gross margins.

We're continuing to work on lowering material cost, capitalize on our supply chain, and promote operational efficiencies in manufacturing as we ramp our inverter product line and improve margins in the long term. Turning to slide number 11, our operating margin grew in the fourth quarter to 16.1% from 15.8% last quarter. Operating expenses increased 6.2% from $38.4 million to $40.8 million. This was primarily as a result of higher year-end incentive compensation and commissions as hurdles were met.

Now, let me break out our operating expenses. R&D expense declined this quarter to $15.3 million or 10.3% of sales from $16.7 million or 11.8% of sales in the third quarter. This was primarily due to decreased spending for engineering materials for the quarter. SG&A increased to $24.6 million, representing 16.5% of sales, compared to 14.6% of sales in the third quarter, and this was due to the increase in compensation expenses, as I explained earlier.

The total tax rate for the quarter was approximately 19%, the lower expectation of 22% entering the quarter. This resulted from a one-time adjustment related to tax previously provided for, and a dividend paid from our German subsidiary in the second quarter of this year. As we move forward into 2011, we expect our annualized tax rate to settle in a range of 24% to 26%, due to the increased inverter sales in the US and the percent of our total business they represent. Our lower tax rate this quarter and successful leverage of our operating model led to 11.9% growth in net income from continued operations to $19.7 million or $0.45 per diluted share.

The impact of the tax adjustment accounted for approximately $0.02 per share. This compares to net income of $17.6 million or $0.40 per diluted share in the third quarter, and net income of $1.7 million or $0.04 per diluted share in the same period, a year ago. Net income from continuing operations for the full year of 2010 was $53.6 million, or $1.23 per diluted share, compared to our 2009 net loss of $101.8 million or $2.43 per diluted share.

Turning to our balance sheet on slide number 14, we ended the fourth quarter with cash and investments of $140.6 million, the $28.2 million increase in cash was primarily due to the generation of $34.7 million in operating cash flow, as well as a $4 million net increase in cash, following the closing of two large strategic transactions, the sale of the Aeromass Flow Control business and the final payment of the earn out for the acquisition of PV Powered. Accounts receivable grew to $119.9 million compared to $112 million in the third quarter, as a result of a significant increase of 50% in revenues during the final month of the fourth quarter, as compared to the final month of the third quarter. As a result, DSO climbed to 72 days from 61 last quarter.

Total net inventory grew 16.3% to $77.6 million, and net inventory turns were 4.6 times versus 5.3 last quarter. The increase in inventory was strategically driven by the anticipated USdemand in the first half of the year. We have shown in the past that we are willing to leverage our balance sheet to ensure we could meet customer lead times, as installments ramp up in the spring. Stock option expense for the quarter was $2.6 million, and capital expenditures were $12 million. Fixed asset depreciation was $2.6 million, and intangible amortization for the acquisition of PV Powered was $920,000 for the quarter.

Finally, turning to slide 15, you can see our guidance for the first quarter of 2011. Revenues are expected to be between $132 million and $142 million, gross margins are expected to be in the range of 41% to 43%, and EPS is expected to be in the range of $0.32 to $0.38 per diluted shares, based on an estimated 44.3 million shares. And one last thing, as Hans mentioned, beginning with our first-quarter financials, we'll be segmenting our results into two business units, and we'll focus on what we believe are the most relevant financial metrics for those units. In the business units, we'll be talking about revenue and operating income, and on a full Company basis we will continue to talk about EPS.

This concludes our prepared remarks for today. Operator, I'd like to open the call up for questions, please.

(Operator Instructions). Your first question is from the line of Colin Rusch from ThinkEquity. Please go ahead.

Thank you. And congratulations, on solid execution. Can you talk a little bit about the sales expense trend and the R&D investment you're expecting to see going forward. It seems like lowering that R&D investment, which some of you've already done, may be something we see over time, can you confirm that and talk a little bit about the seasonality of the sales expense?

Colin, good morning. Our sales expense, what happened is obviously, we had a very strong year, and there were some accelerated commissions that kicked in at the last part of the year by meeting certain hurdles, and that's why you see an increase year-over-year in the fourth quarter versus the third. As we look forward into 2011, we fully expect to leverage our operating expense. As I've discussed before, if we see a 10% increase in sales, we expect to only have a 5% increase in our op expense, and that will vary quarter over quarter, but on a long term basis, that's our internal target. That's what we commit to our Board about.

Great, and then on supply chain, I know there are a lot of folks that are a bit concerned with inflationary pressures on components, given there's such a high portion of the cost of goods. Can you talk about how you're mitigating those risks and talk about some specific areas where you're seeing some supply chain spend with PV Powered?

I think because the first thing which we tried to unify was the PCP boards, and this is a pretty big portion of the inverter, which we buy material for. So therefore -- but there are others. It takes time because, in some cases, you have specific components which are directed to specific designs, and in order to unify and align all these components for Solaron as well as for PV Powered, I think in some way, you have to decide which is on the road map anyhow, we would like to have the next platform as a unified platform between the PV Powered as well as the Solaron.

Perfect, and just one final question on the extended warranty, can you tell us what percentage of inverter sales have the extended warranty at this point?

I think what we started off is to get into this extended warranty, in those cases in which we are being confronted by the performance guarantee, which is coming very, very strong, and we didn't do that at the beginning at least, at least not proactively, but it's getting more and more, and we are pretty solid in offering that proactively now in Europe, so in order to pave the way for European business more than we had down in US.

Perfect, thanks a lot.

Thanks, Colin.

Your next question comes from the line of Weston Twigg with Pacific Crest Securities. Please go ahead.

Hi again. First of all, just on the semiconductor revenue line, $40 million seems a bit low to me. I'm just wondering, I know you said you expected it to pick back up in 2011. Can you give me an idea of the magnitude of the pick up?

I think it's hard to give you a magnitude. What we have seen, and this was surprising for everybody, all these new announcements starting from GSMC, Intel, and Global Foundries, and I think what we expect is a significant pick up at least in the second half of this year, as all of those announcements are materializing in new fabs.

Wes, we're already seeing some pick up in Q1, and it looks like the pause was a little bit less extended than we thought it would be.

Okay. Is it possible that revenue line gets back up above $50 million this year?

I think it's possible.

Okay.

And part of the dent we have seen in Q4 was because of the fact that a lot of companies have been refurbishing their fabs in order to build devices, which are most of the time power devices, analog devices, and those don't need 200-millimeter, and historically, AE was less strong in 200-millimeters than it is in 300. But as you have seen from all of these new announcements, all of those are 300-millimeter, so therefore we are probably growing stronger in this kind of new semiconductor, as maybe some of the competitors, two which have been let's say benefiting from the 200-millimeter.

Okay. Just one more question. Can you give us your current inverter production capacity, and let us know if you're still on track with that capacity expansion scheduled as last quarter?

Yes, we currently, if I remember the chart correctly about 1.2-gigawatts of capacity. We're still on track as the industry expands, we'll still meet that number, if that number is required, obviously. We're going to throttle our capacity to what the industry demands are, but at this point, we see US inverter demand to be pretty robust in 2011.

Thanks.

In addition to that, I think because of the contract manufacturers in Ontario and in China, I think the flexibility to adapt to increasing demand is pretty high.

Okay. Good point. Thank you.

Your next question comes from the line of Bill Ong with Merriman Capital. Please go ahead.

Yes, good morning, gentlemen, congratulations, nice quarter. So just a couple of questions. I know that you are well-positioned in your inverter business in North America, but maybe talk about some of the countries and regions where you expect meaningful growth this year. Particularly in China, what percentage of inverter sales mix do you expect from China this year?

I think China is a very interesting situation because, just recently, the government has been postponing how they can structure the incentive, and nobody knows exactly what kind of pathway China has been following, either the RPS like in US, or the feed and tariff and what we are seeing in China at this point in time is, I think the announcement of big projects. But this announcement is not necessarily immediately turning into some kind of projects which are being issued for us.

On the other side, in China, we are entering a new market for us in terms of a new product, because as you know, we have been concentrating at the beginning of North America. North America has 60-hertz. China has 50-hertz, and we just have one product on the 50-hertz, but we're working very, very hard to get in the middle of the year, the rest of the line on 50-hertz as well. This is kind of inline. As much as China is a bit shifting out their solar investments, we are able to have those products online if they are really at the end, decide which kind of incentive they will replace.

Okay. Good. And then my last question, bookings were down 30% sequentially. What was the bookings mix between the inverters and non-inverters, and my understanding is that you think your bookings qualitatively should be up in the first half, unless I got that wrong?

Bill, the major decline was primarily inverters. We don't give the specifics on it. Let me explain what happened in inverters. You had a very strong fourth quarter due to the uncertainty of the tax incentives in the US, obviously, we're more focused on the US, and the European market. The European market had the feed and tariff uncertainty.

As you remember, we passed the tax legislation the last couple of weeks of the year. So you've seen a fall-off of orders in the first quarter, because everybody was really trying hard to get those into the fourth quarter. And we've had an unusually tough winter as most of the people back east know, you've had storm after storm and that has had some impact on the market. Most of the drop was in inverters. We're not concerned on full-year basis. We still see the same projects in the pipeline, the activity is very robust. We just had a seasonal pause in Q1.

Now, I think another contributor to that was, we have been very strong in entering Europe in Czech Republic, and as everybody knows, Czech Republic was just imploding. And Czech, interesting enough, was one of the first countries which was moving towards the center inverter, and remember, Europe, mostly, in particular Germany, is still on the low-powered side, in which we're not playing into. So the more the feed and tariff has been reduced, the more we see it already, the more the people go into the more cost effective standard inverter. But the set back on the Czech Republic, of course, hit us in Q1.

Thanks for the insight and thanks again, gentlemen.

Thanks, Bill.

Your next question comes from the line of CJ Muse with Barclays Capital. Please go ahead.

Hi, this is Srini, calling in for CJ Muse.

Good morning.

Good morning. I have a couple of questions on the 2011 year, what is your view on the total year inverter revenues?

Srini, we don't give an absolute number on that. But if you look for the fourth quarter and you look at what our revenues were, and what we expect is growth and we're primarily focused in the US, and there's lots of growth projections out there ranging from 50% to 100%. We certainly believe we'll get our share of it. If you took our fourth quarter numbers and annualized and put a growth factor on there. You'll get very comfortable. We think 2011 has a lot of upside opportunity. We're in on the major projects. We're making key wins, as Hans went through several of the wins in the quarter. We're really getting traction on the lowest cost of energy over the lifetime of the project, as some of the project ownership shifts to the end user that will own this property for 20 or 30 years and really focus on lowest cost of energy, and we provide a great solution there with our central inverters.

And my next question is per IMS, you get top market share holder in the US, in the first half, do you have some idea as to whether you're still the top market share holder for the whole year of 2010 in inverters?

Those numbers keep moving around. The latest data we saw shows that it's really a very close race between the top three contenders. As Hans mentioned, as these projects get larger and larger, the lumpiness is going to be there. So if you have a win on the project in one quarter you're going to see market share bounce back and forth. What we do know is we're right there neck and neck with the top three players in the US inverter market in three-phase.

And I think generally speaking, if you would like to define a market share, you have to have a certain number of projects, which are distributed evenly over the years. If they are huge projects coming online, lumpiness is something which is hard to define any kind of market in. The first three could jump immediately from number three to number one position, and vice versa. So what we think in the second half, in which we have a much higher number of projects, it's much more sensible to define the market share, which is very hard at this time.

Okay. Finally my last question, do you -- can you give me a semiconductor to inverter revenue mix in the first quarter and the first half of 2011.

We haven't broke that out. We do expect a decline in the first quarter in inverters, that's where the softness is coming. So it will decline slightly to 35%, will drop somewhat. But for the full-year, we still expect both markets to be very robust, as Hans mentioned.

Thank you very much.

Thanks, Srini.

Your next question comes from the line of Krish Sankar with Banc of America-Merrill Lynch, please go ahead.

Hi, I had a few questions. Danny or Hans, the first quarter decline in inverter business, is it being driven by seasonality or pricing?

It's driven by seasonality and as I mentioned just earlier by the Czech Republic downfall. It's not driven by the pricing side at this point.

Dollar to dollar, okay. I was just trying to figure out, can you help us quantify in 2010 and what you expect in 2011 the megawatts of inverters you ship and what you expect to ship?

That's a product mix question and we really haven't disclosed that level of detail. At our analyst day, coming up in a couple of weeks, I'm sure Greg will have a little bit better color around that, and we'll try to address that for you.

Okay. In terms of the semiconductor business, it seems like Q4 was probably slow for you. Could we expect given all of the CapEx announcements, your semi revenues to grow sequentially through the year?

Yes.

Okay. And what about the flat panel business from 2011 you did say the solid back half of the year, middle of the year, it will pick up. But year-over-year, do you think flat panel will be up or down or flat?

I think -- I would kind of flattish, so that is what we see, even though we had a very, very nice increase in the flat panel investment in the last -- in 2010. But I think there are a couple of new technologies coming online and the question is, when the new fabs are being built in order to satisfy the demand of that, but it's for sure, it's going to be in 2011, but it's probably spilling over to 2012 as well.

Final question, I mean, just wanted your thoughts around, wonder if your confident talking about a potential inventory glut for the inverters in the system, the channel. We just want to know what your view is on this, thank you?

On the inventory I know there's been a lot made recently about the inventory. I think the thing to consider is that inventory is primarily, European inventory is primarily string inverters, low power inverters. Where we play, obviously our strongest suit is in the commercial and utility scale. And those are build-to order, you design those into your project, so there's not a glut of inventory. These products are upwards of $100,000, and you just don't build them to sit around on the shelf. The low power inverters, yes there's some inventory in Europe and we're not worried about them coming to the US because of the different technical specifications of those products.

Not only the technical specifications, but the drivers and the market dynamics in US is not favoring in anyway the low powered stuff. It has to do with the different kind of incentive. Feed and tariff in Europe always has been preferring the low power. The RPS in US has from the very beginning, has been driving towards the center inverter, because this is the most cost-effective element. The inventory which has been built up in Europe will remain in Europe, and will be consumed in Europe at the first place, but just a few things in US. So the effect in US isprobably very minor.

Got it. And if I could just squeeze in one last, what kind of pricing dynamics are you taking in for your inverter business for 2011? Thank you.

We haven't disclosed that obviously for competitive reasons. What we're seeing on the pricing is obviously, it's a total cost of energy over the life of the project, and that's an ongoing negotiation with each customer. While we expect to see some pricing pressures, it becomes more and more focused on the US market as we mentioned, we do have some supply chain opportunities as we consolidate the businesses into one, and are able to leverage our supply chain more effectively.

Thanks.

Your next question comes from the line of Steve Sanders with Stephens Incorporated. Please go ahead.

Good morning. Good quarter.

Thank you.

Just a follow up on the inverters. Can you talk a little bit more about the competitive landscape? I think on the prior call, you said it's essentially USMA and Satcon that you're seeing for most of these large projects. Is that still the case? Are you seeing some of the bigger industrials and some of the other companies start to show up more consistently?

Generally speaking, the landscape hasn't been changed dramatically from the last year, and exactly, those you just named, those companies we see that we've bid on bigger projects. Of course Siemens and ABB, they're still trying to get into. The degree in which they have won bigger projects is still pretty low.

Okay. Okay. Thanks. And then on the semi side, just to be clear, are you still thinking for the year it will be flattish, just heavily weighted in the second half. Is that the way I should interpret that?

No, I think, on the semi side we are more optimistic now to have an up and it's, of course, more towards the second half as opposed to the first half.

Okay. Okay. Thanks. Last question, I know you talk about the Czech Republic and some issues there, can you talk a little bit more about the markets in Europe? Were you seeing good growth opportunities on the central side?

Yes. The interesting point is, the more the feed and tariff is being reduced, the better our opportunities are, because we have and we went into this inverter business from the very beginning, with the high-power stuff. As soon as the it's very generous, you don't need the most cost-effective inverter. But what we see right now, there are two trends which I think are very much in favor of our offering.

The first thing is, people getting more and more on the leverage cost of energy that meets the harvesting of the energy over the lifetime, which means you have to have something which is not only a cost-effective inverter at the first place, but also you have to give uptime guaranteed performance guarantee, stuff like that. So that means all of a sudden, it plays in our strength on the service side, and interesting enough, a lot of people now coming up. And we recognize services are going to be very important thing. But as I mentioned in my script. It's not easy to build from the scratch a very powerful service organization, it is a lot of experience, a lot of know--how and this is what we already have.

The second thing is, with the reduction of the feed and tariff, the cost pressure goes up and we see them very clearly, so there's a trend from the low power very costly to the high power much more cost effective element, and this is where we play in. So I think for us, Europe was not extremely attractive at the beginning, but it's getting more and more attractive.

Okay. Thank you. And last question, for Danny. Can you give us a sense under the new segment reporting that you're going to start in the first quarter, of how the segment margins would have been in the fourth quarter?

We haven't disclosed the gross margins. What I would suggest to you is that our businesses run in the neighborhood of the 15% to 16% op income. They just get there in different ways. It's pretty interesting when you go through the real details.

Okay. So effectively at least for the fourth quarter, there weren't dramatic differences at the operating line between the segments that you're reporting going forward.

That's correct.

Okay. Thank you very much.

You're welcome.

Your next question comes from the line of Timothy Arcuri with Citigroup. Please go ahead.

Hi. Good morning. This is Wenge Yang for Tim. Couple of questions. First, just continuing on the inverter side, if some of your competitors saw the weakness in Europe, and saw some inventory issues, do you think they might turn around and try to enter US market and bring more competition to the US side?

I think they will and we see it, already. As you remember last year, the second half of last year, both SMA and PowerOne have been launching high power inverters. But this is very, very new and this means you have a product portfolio which is heavily towards the low power side. As I mentioned before, low power is not the sweet spot in US. US is very preferring to high power.

And I think the biggest or the best slate of products in the high powered stuff is in our portfolio, and as well, in the Satcon portfolio. What is the difference between the Satcon portfolio and ours? It's pretty much the same but we are extremely strong in the service side of the business, and the service side, and just to repeat that again and again, the service side of the business becomes much more important because of the uptime guarantee and there's another factor which plays more and more of an important role, which has do with the balance sheet, because uptime guarantee extended warranties is fine, but all of a sudden, you have to be sure that this company is around for 20 years from now, otherwise it doesn't make any sense.

Understand. So with the dynamics, what do you see as the pricing outlook for 2011? I would assume it would be issues, that pricing would be under more pressure for 2011?

I think we will see some pricing pressure in the US, but I wouldn't drive it by the inventory. The inventory issues that we're having in the industry are not based in the US, and they're not based in at least in the markets we play in the most, which is commercial and utility scale. I don't think you're going to see the European inventory pressure in the US market pricing, and I think the US market that we are focused on, those customers are willing to pay us for the lowest cost of energy that we provide over the lifecycle of the project. So while we will see pricing pressure, we don't think it will be as severe as some might think.

It's a very clear trend getting from the upfront investment costs to the FCOE or the ROI over the lifetime of the installation. So therefore if you have something which mitigates their risk, if they have put a lot of money up front as an investment, and are coming back to the uptime guarantee, you have some kind of ancillary elements, which may to a certain degree defend against two high a price erosion.

Okay. I understand. What have you seen on the pricing for Q4 and what do you expect for Q1 at this point?

I think we haven't seen too much price drop at this point in time, slightly, of course. But remind, every industry which is starting, has to have some kind of price reduction over the time. And in particularly, in the solar business, this is something which I will call a lifeblood that the prices are steadily going down. And the question is, are you prepared, in order to reduce the costs or having ancillary offerings in order to keep it at bay or not. And I think we have.

I understand. That's very helpful. Just one last question on the semi side. So your revenue for Q4 on the semi is down about 20% but most of the OEMs, they actually reported a shipment up 10% to 15%, so just want to understand you mention about a pause in equipment spending, is this the pause at the fab side, or a pause at the equipment maker side.

I think I mentioned it before, that the key contributor that we have gone down and the equipment manufacturer have not, is because the trend from, at least the temporary trend from 300-millimeter, because all the 300-millimeter fabs which have been announced last year are running now. And all of a sudden, there was a huge and still is a huge demand on having these kind of power components, and we had this kind of shortage.

And the automotive industry has picked up again, and people don't need a 300-millimeter fab in order to produce those devices, and we as AE are very strong on the 300-millimeter side but not as strong on the 200-millimeter. What you see is a pattern even if some of our competitors or the OEMs are increasing, we are not. This pattern has been changed dramatically with the announcement of all of the new fabs, and all of them, nearly all of them, are 300-millimeter.

So when you see the orders coming down in Q4, that's the semi orders actually moving up, if I understand the trend correctly.

In Q1, we would expect an increase in Q1, and we see it continuing through the balance of the year. As Hans mentioned, we expect 2011 to be flat to up for the semi side, which is a little bit different than we saw 90 days ago.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Edwin Mok with Needham & Company, please go ahead.

Hi, thanks for taking my question. So first question is on renewable energy, or renewable equipment piece of business. If I take a look at that, and if I annualize your 4Q number, I get to like a 50% higher than what you did in 2010. Do you expect that run rate to be sustainable in the first quarter, and going through 2011?

I think in the first quarter and maybe in the second quarter it seems to be sustainable because pretty interesting projects are coming in the thin film renewables, in particular on the crystalline side. And business being fueled at this point in time, primarily by the Chinese. But it's hard to predict what happens until the second half of the year, because what we see, what the industry sees, is some kind of oversupply on the panel side too so I will expect that the second half, we will see some kind of softness on the renewable thin film side.

I see. Some moderation there. Great. Very helpful. And then on the inverter side, on the fourth quarter, can you remind us what was your shipment, that is roughly in terms of percentage, that was shipped to Europe in the fourth quarter, and you mentioned that there was big project that capped that obviously in the summer of 2011, so should we expect in the first quarter or at least first half, that Europe will be a smaller percentage as a result of the change there, and how do we think about all of that European business going forward, we believe that's one of the areas that you are driving growth?

Obviously the fourth quarter European shipments were down versus the third. And that was driven, as Hans mentioned, by the Czech Republic and their reverse tax, and it caused the market to decline there. We're making inroads in Q1, but we would expect it to still be relatively small as a percent of our total business. But where we're really gaining traction in Europe is as they shift to more central inverters, and focusing on the lowest cost of energy, we're getting very good design and lead-in times on projects over there, that we think will start coming to fruition in the second and third quarter. So we're still bullish on Europe for all of 2011, but the first quarter will certainly be probably as soft as the fourth quarter was.

Interesting enough most people are looking at the US because of the softening of the European market. But there's one European market which is still growing fast, nobody knows how long that's going to be, which is Italy. So the new battlefield is more Italy rather than North America. So -- and we have some kind of pipeline projects which are in Italy as well. And there's interesting what Italy is doing in 2011, nobody knows exactly is going to be in 2012 in Italy.

Great, that was very helpful. Last question on the safeguards for service on offering that you have on offer. Remember last quarter Hans, you mentioned that you have around 22 contracts, and if you could design more contracts on that end. Any way you can update on us if that number grew in the fourth quarter, and how do you kind of think about that in 2011 in terms of revenue opportunity?

Right. I think 22 was in Q3. 44, or 48 is in Q4. And as I mentioned the script, we have already a pipeline for 68-megawatts for 2011. So the question is, this is now. I would assume this is an ongoing element, it's gaining traction more and more. If you look at the growth rate from Q3 to Q4, I wouldn't be that optimistic to keep that growth rate during the entire 2011. Even if it slows down a bit, which I don't believe, by the way, then we have a very interesting new revenue stream.

And you will notice, we did shift to the number of megawatts that we're servicing. Actually in hindsight, the number of contracts is not that relevant but the number of megawatts that we service are.

Great. That's all I have, thank you.

Your next question comes from the line of Jim Covello with Goldman Sachs, please go ahead.

Hi, this is Kate Kotlarsky for Jim Covello, thank you for taking the question. I wanted to ask you about the opportunity in China on the inverter side that you had alluded to, and you mentioned having a new product for the Chinese market. When should we expect revenue for that product to start coming in?

I think there are two drivers, one is, we have at this point in time just one product for China. As I mentioned earlier, we are working now to turn most of our products, the high-powered product into the 50-hertz as well. So this is one delaying effect. The other delaying effect is, when China is coming finally in order to clarify what kind of incentives they're going to put in place. So I think you will have a much, much better view in, let's say, 6 months from now or the second half of this year. But I think, remember we have been in China for a long, long time. We have -- most of the renewable thin film business in China, so from that point, I think, our relationship within China, there are maybe some trends which may emerge going forward, that some of the panel manufacturers are trying to integrate vertically, and get it into the inverter ,or in the field or the EPC or integrator business, and then our relationship with those guys may help us a lot.

Okay. Thank you. And then my only other question, you talked about still having some synergies that you can realize from the PV Powered acquisition, can you quantify how much in synergies we're yet to see over the next couple of quarters?

We've not quantified it in dollar terms. The PV Powered acquisition was more about rounding out the product portfolio and being able to meet the needs of our customers. However, we know that leverage in the AE supply chain, our purchasing power across AE, and getting to some common suppliers will reap benefits, but we haven't put a number out there.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Joe Maxa with Dougherty & Company, please go ahead.

Thank you. I just wanted to confirm, did you indicate the order intake on the inverter side, and expected it to be similar to Q1 of Q4?

The order intake, the shipments are expected to be down a little bit, Joe, but most of our decline in orders for the quarter were due to inverters, and that was really driven by the tax legislation change at the end of the year, really forced people to try to get everything in, in Q4. So we've seen a little bit of softening, and obviously the weather in the first quarter has caused it to be a little bit softer.

So when we're looking at Q1 and we're looking at your order book for inverters, are we expecting that to be north of Q4's orders or roughly the same?

It will probably pick up towards the end of the quarter. We had a pause in the very part of the first quarter. Once again, the inverter market too, the lead times, as everybody has got their supply chain in order,the lead times have really dropped to a four- to six-week lead time. So we don't have as much out front visibility as we had in terms of orders. But we still have the same project activity in the long lead time projects we're working on.

And then Danny, I just wanted to ask, you mentioned, you figured shipments would drop just a little bit in Q1, so that would suggest not a significant down tick in revenue. There may be 10%, we should be thinking 20%?

Yes, probably the 10% is a reasonable number.

Okay. That's fair. And in gross margin comments of I know you've got 41% to 43% in Q1. Should we be thinking of that number for the year?Is that a pretty good range to model?

We're driving more to an op income number for this year, Joe, and we'll have more highlights on that at our analyst day in terms of updating on our model. As a total Company, we're going to focus on op income, and obviously it's different in each business, but they generally arrive at about the same number.

Okay. Thanks, that's all I had.

Thank you.

Your next question comes from the line of Rafi Hassan from Susquehanna, please go ahead.

Hi, quick question. Bookings are down for inverters, did you reduce the utilization rate? What did you do?

The utilization rate's really staying the same. While the bookings went down in terms of the forward look, we don't expect, but as I just mentioned earlier, maybe a 10% decline in shipments quarter-over-quarter, so the utilization has not been a big factor in Q1.

Okay. And price differential between central and residential, where do you see it pulling, you mentioned 22% before, and my 170-megawatts on your inverter revenues comes to about 30%, and I'm trying to think where is the difference between the residential and central inverter?

Obviously that difference would be driven by the lower power inverters have a higher price point per kilowatt, and that would drive the number up on a mix basis. We do think longer term, our business will grow more in the central and in the central inverters, which is the utility and commercial scale, so on an overall basis, you will see the price per watt go down.

The last one, where do you see the tax rates going from fourth quarter of 2010 to including this year?

The major change in our tax rate, our guidance of 24% to 26% is simply the overall difference year-over-year in our US shipments versus our non-US shipments. As our inverter business grows, and as you look at the percentage it is now, it was 35% of our total Company in Q4. We expect that number will probably grow in 2011. So we'll have more US tax liability, and that's the cause for our tax rate going up.

Thank you very much.

Thank you.

Your last question is from the line of Jesse Pichel with Jefferies, please go ahead.

Hi. Good morning, Mr. Betz, nice progress on the renewables business. Some housekeeping, do you provide a geographic break out of your inverter business?

We have not, Jesse.

And then what about providing us a break out of string versus central inverters? I think you did that on the last call.

I think what we referred to on the last call was less than 20% of our volume was low powered string inverters and about 80% or more was central. That is still is a good number for this quarter. Over time, we expect that central inverter to increase as a percent of the total.

And Hans, how long do you think the low power inventory issue will last in Europe?

It's really hard to say and to be frank. This is not in our focus anyhow, because it doesn't affect us very much. The point is as how fast are in Europe, the trend towards the center inverter is and the more the trend goes to central inverter it may take a longer time to get rid of the inventory. But it's hard for me at least from this vantage point to give you some kind of label on that.

And can you comment on how the power station skids are doing?Are you seeing increased traction in that larger format?

Yes, we do. I think interesting enough, and this is part of the reason why we postponed our one-megawatt inverter development in favor of other things which are for the European market more important, because this kind of power substation gains a lot of traction, and I think as soon as the big projects like the 170-megawatts come online, and it's getting more and more the trend. I think the more the one-megawatt single engine becomes a game changer, but this is something which I would say is during the course of the year. So we have still time.

Was the bookings decline you're seeing on seasonality more pronounced in central or string?

Oh, it's of course more on the central because this is by far the biggest portion of our inverter business.

Okay. Well, I wouldn't know that, because you don't break it out. Okay. Do you have any reference module companies that you work with? It seems like when I look at Satcon, they're very close with Sun Power, and when I look at Siemens, they're very close with First Solar. Do you have any kind of reference module customers that you're partnering with to go into some of these projects with kind of a unified bid?

Yes, I think we do. We have very, very good and strong relationship.

So you're partnering more with the EPC side. Yes. And the service ability that you have, does some of that stem from your legacy business and equipment, or is it a completely new offering?

I wouldn't say from the legacy business. I would say from the semiconductor business, and because of the fact, as the drivers which are emerging more and more on the renewable side, are the same as we have already seen in the semi business, for example, the semi business has been driven dramatically by the cost of the fabs. You have to have a perfect service organization in order to keep the down time in the fab as short as possible. The same what's true going forward if you would like, performance guarantee. You have to keep the down time as short as possible. What we are leveraging from is the experience and that emphasis, it's not just the people, and not just the infrastructure. It's the know-how, how to come very close and fast from the symptoms of failures to the remedy or the means -- the root cause and how to fix that.

That's great. And do you envision a certain, attach rate. I don't know if we covered this on the call. A certain attach rate of this recurring revenue stream to your central inverters? So in other words, I mean, if you attach 90% service contracts to your inverter sales is that going to be a significant revenue stream for you in the future?

I think our SiteGuard was created out of our inverter business, but it's now getting into some kind of separate stream, if you want. Because what we are doing, we're observing entire fields and interesting enough, in some cases even those fields have competitive inverters, so of course it's fostering our inverter business dramatically. Not only customers which have the SiteGuard service offering, but also we gather a lot of additional information, how the interaction with this field with the grid is going to be, and are going forward, the next generation beyond the inverters is energy management.

There are some third parties out there that are suggesting a four- to five-fold increase in service demand for inverters over the next five years. We certainly think our current infrastructure and capabilities will allow us to play in that very well.

That's great. Thank you very much and congratulations.

That concludes our Q&A session. I'd like to turn it over to management for closing.

Well, we would like to thank all of you for joining us today. We look forward to seeing hopefully a lot of you at our analyst day in a couple of weeks, thank you very much.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a great day.