Advanced Energy Industries Inc (AEIS) 2011 Q2 法說會逐字稿

Hello and welcome to the second-quarter 2011 Advanced Energy Industry earnings conference call. I would now like to turn the call over to your host for today Annie Leschin. Please proceed.

Thank you operator and good morning everyone. Thank you for joining us this morning for our second quarter 2011 earnings conference call. With me today are Hans Betz, Chief Executive Officer and Danny Herron, Executive Vice President and CFO, both of whom will present prepared remarks. Additionally Yuval Wasserman, President, COO and General Manager of Thin Films; as well as Gregg Patterson, EVP and General Manager of Renewables are also with us today and will participate in the Q&A session. By now you should have received a copy of the earnings release that was issued last evening. For a copy of the release please visit our website at www.advancedenergy.com or contact us at 970-407-4670. Advanced Energy will be participating in a number of conferences this quarter including the Pacific Crest Global Technology Forum on August 8 in Vail. Citi Technology Conference on September 8 in New York and the ThinkEquity Growth Stock Conference on September 13 in New York. As other events occur we will make additional announcements.

I would like to remind everyone that except for historical financial information contained herein, the matters discussed on this conference call contain certain forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Statements that include the terms believes, expects, plans, objectives, estimates, anticipates, intends, targets or the like should be viewed as forward-looking and uncertain. Such risks and uncertainties include but are not limited to; the volatility and cyclicality of the 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 factors are described in Forms 10-K and 10-Q and other reports filed with the SEC. In addition, we assume no obligation to update the information that we provide you during this call including the third quarter guidance provided during this call and in our press release dated today. Guidance will not be updated after today's call until our next scheduled quarterly financial release. I will now turn the call over to Hans Betz, CEO of Advanced Energy.

Thank you Annie and welcome everyone. As you have seen from our press release last night and from our release earlier this month, Advanced Energy ran in some of the same headwinds that affected our markets in the first half of the year. So let me begin today's call by giving you a high level recap of the quarter, and a sense of what we are seeing in the markets going forward. Similar to the last few quarters, 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. Now, our outlook going forward. As you will see on slides 4 and 5, revenues for the second quarter were $138.2 million, a 38.1% increase over last year but flat on a sequential basis from $137.7 million in the first quarter.

Our expectations for our Renewables business fell short this quarter, our noteworthy year-over-year growth continues to be driven by Renewables and Thin Film sales to the semiconductor market which were in line with our overall expectations. As we mentioned in our release, our Renewables business in the second quarter was affected by several industry dynamics; rapidly declining panel prices, increased competition in the marketplace, contemporary changing incentive programs that impacted our results more than we previously anticipated. These trends also had an impact on our solar panel and glass business.

So let me begin by talking about these macro issues. As you have undoubtedly been hearing during the quarter, a combination of oversupply in the PV market is weakening demand as a result of regulatory uncertainty in the key global markets including Germany and Italy, as well as certain US markets, led to an unexpected and sudden decline in market prices in the first half of this year with manufacturers in many parts of the world slashing prices. Our initial view along with others in the industry, was that these lower prices on modules and panels could have helped encouraged demand, which we believe will be the case longer-term. The reality was that the pricing decline was so sudden and steep that in the near term many customers postponed projects and alike delayed modular purchases in the hope of securing lower prices, modules at a later date. With module prices dropping 5% a month, developers, commercial buyers and consumers were not rushing to buy panels because even slight delays would result in significant cost savings.

Going forward, we believe that purchases will resume in the second half of the year as customers begin to take advantage of these lower module prices. In fact, analysts' research predicts that panel sales will grow 30% sequentially in the third and fourth quarter with full-year shipments set to reach 23 gigawatts. This growth is forecasting our stabilized prices which should introduce greater pricing rationality in the market overall. Additionally, recovery in the second half is expected to clear some of the record panel inventory levels that were evident across the supply-chain earlier this year.

Not only did oversupply have a negative effect on pricing in the first half of 2011, but we believe it also had a spill-over effect on industry revenues that led to increased competition in our Renewables business. To make up for lost revenues, to reduce inventory, and in some cases to buy market share, we saw major industry suppliers make even steeper pricing cuts for panels and inverters in the second quarter. According to IMS, the pricing declines projected for inverters in 2011 are 10% to 11%. Given the extreme market conditions and the stage of some of the competition, we have seen more significant price pressure in certain segments of the market as companies compete for larger scale installations.

In addition to the oversupply and increased competitive pressure, another issue that compounded the difficult business environment in the second quarter, was changes in solar incentives in various markets. Similar to what we saw in Italy and Germany earlier this year, the governments put their perspective Feed-in-Tariff mechanism under review, affectively paralyzing any new development. This reevaluation of solar energy incentives had a similar effect in the US in states like Pennsylvania and New Jersey. As markets adapt to these new incentives, we expect growth to resume as that indicates in markets like Italy where [EPS] are now working hard to connect projects by year-end. In our primary market, the US, the looming year-end expiration of the up-front tax grants under 1603 should also help to jumpstart demand and could potentially cause a significant spike as the year-end deadline approaches. However the result of these industry and market issues are on us was to reduce operating margins and income for the quarter to 12.5% and $17.2 million respectively, and GAAP EPS of $0.31 per share. I will let Danny discuss all the financial results in detail.

Turning to slide number 6, as discussed, our Renewables revenue was up sequentially and year-over-year, but not as much as we anticipated for the reasons already mentioned. In total, we shipped approximately 160 megawatts this quarter up 30% from last quarter, driven in part by the shipments to Cupertino Electric's project. Our commercial and utility scale products over 250 kilowatts remained the primary driver behind our revenue. We saw increasing demand for our 1, 1.5 and 2 megawatt power stations offerings.

As you may recall, each power station offering are our all inclusive pre-assembled pretested solutions that arrive ready to install with all the required electrical components. Sales of these products are increasing our penetration at the customers, but because they include lower margin equipment, they are negatively impacting our overall margins on a percentage base, but increasing in absolute dollar contributions. Despite the more challenging market conditions and competitive landscape this quarter, we had a number of significant accomplishments, including the introduction of the Solaron 500E high efficiency which has a 99% peak efficiency and a 98.5% EU weighted efficiency, higher than any inverter in its power class. This is yet another sign of our ongoing ability to innovate and capitalize on our technical leadership.

Combined with our comprehensive service offering and up-time guarantees, this will enable us to continue building on our leading position in the conversion and inverter markets and accelerate our momentum for large solar PV deployments for commercial and utility customers. While our geographic focus remains on North America, we are gaining traction in Europe with systems installed or in development in Germany, Italy, Czech Republic, Belgium and the UK. These markets outside of the US that remain important areas for additional growth for us, including the regions like Asia, their demand has been increasing. There we are beginning to develop a brand presence.

Although we did not see the growth anticipated this quarter in Renewables, we remain confident that our strategy and investment in this area is leading us in the right direction. But that our success in the utility market and leading position in the commercial segment in North America, leave us well-positioned for the second half of 2011. Our outlook for the inverter market and our Renewables business for the rest of the year remains positive. IMS research predicts 2011 inverter industry revenues in the Americas to grow 2.5 times 2010 levels. Going forward, the longer-term global investment inverter market looks positive with forecasts projecting that the worldwide market will surpass $8 billion by 2014 and the Americas will reach $2 billion by 2014. Up from $375 million last year.

Turning to slide 7. Some of the same market forces that effected our Renewables business in the second quarter affected solar panels and glass as well. We believe the oversupply situation in China had been building for some time. In this quarter we felt the impact. With ASP declines, excess capacity and high inventories, customers began to limit their CapEx buys, lowering sales of our power supplies. In China, [this] policy has slowed which is also reducing demand. With these orders and bookings, we continue to be impacted by the over capacity situation, deciding they are leveling off at the second half of the year. But revenue is not returning to existing levels until 2012. We do, however, believe that growth in our solar panel and glass business will return, driven in part by increased adoption of CIGS Technology for Thin Film solar. Recall that these Thin Film solar modules don't use silicon but technology based on CIGS as the active layer deposited on glass or flexible substrate. AEs DC power supplies including our new Ascent product line are used predominantly in these processes.

With that as background, let me take you through our other end margins starting with semiconductors. With worldwide semiconductor capital equipment spending on track to reach $44.8 billion in 2011 a 10.2% increase from 2010. Spending according to Gartner, it is not surprising that our Thin Film semiconductor business was up 13.5% over Q2 last year. As we mentioned during our call last quarter, we are starting to see signs of cautions in CapEx spending which manifested in a 5% sequential decline in our revenue for the second quarter. At the end of last quarter, Samsung announced it was pushing out $1 billion in CapEx. Applied Materials, the largest of the equipment suppliers, cut its outlook for chip equipment spending citing softness in spending by [TUM bankers]. And more recently, we have seen a reduction in foundry factory utilization.

And finally, Gartner also lowered its semiconductor forecast for 2011 cutting worldwide semiconductor revenue growth from 6.2% to 5.1%. We are starting to hear that Samsung may already be coming back to the table to place many of the orders pushed out in April and May. Certain industry analysts are now thinking that Samsung will take capacity for its Line 15 Phase 2 NAND DRAM and Line 15 [ERAM freight] which could equal to as much $1 billion of the roughly $1.5 billion previously delayed. Nevertheless, we continue to see a significant amount of uncertainty in the market leading us to plan for softness in our semiconductor business in the second half of 2011. Longer term, we are encouraged by our recent design win at leading global OEMs but we are increasing our product content driven by new application such as (inaudible) 3D packaging and advanced [plasma position] processes for new materials. Further, the acceleration of the development of $450 million in [tools] also presents an opportunity for companies such as AE that are willing and able to enter the race at an early stage.

Moving to flat panel displays. As we have discussed in the past, flat panel is a lumpy business by nature, demonstrated again this quarter. We saw significant growth in our flat panel display business on both a sequential and year-over-year basis. This improvement was driven by large investments in equipment for dry etch applications for (inaudible) based displays. Where AE plays a significant role with its high power RF generators. We have seen increased adoption of new technologies in flat panel displays driven by the growing demands for smartphones and tablet computers. This is causing panel makers to rapidly scale their (inaudible) technology to 10 x5.5 for the first time. In contrast, the migration to 10x8.0 in the larger sized panels for LCD panels used for large screen TVs has lowered the with softening economic conditions. Overall, AE continues to see growth opportunities in the flat panel market, as we play a significant role in both the TVD processes with our new Ascent DC power supply and with the dry etch processes with our high-powered RF solutions that we build and ship from our production line in Korea.

Before I close, let me touch briefly on our service business. Service revenues were up year-over-year, though dipped slightly on a sequential basis. This was due in part to the decline in the [end uses] repair and maintenance spending due to a decline in [trapped] utilization as well as the divestiture of our flow business last year, and subsequent transfer of a portion of our flow service business. On the Renewables side, our site guards and whole site operations and maintenance service plans for large-scale installations continued to gain traction. Site guards has been a great addition to our service offerings. In addition to helping lower LCOE and simplifying site maintenance, site guards helps reduce the costs, inconvenience and inefficiency of working with multiple service providers. This is service offering tucks in well with our overall LCOE strategy and helps to differentiate AE in the marketplace.

In summary, our growth and earnings were not what we had anticipated this quarter as we faced of some very challenging near-term headwinds in the solar market. Our Renewables business did grow, and clearly demonstrated its value in offsetting the cyclicality in other semiconductor (inaudible) markets. As panel prices stabilizes, in the second half of the year, some of the oversupply that affected our business in the first half is absorbed. We expect our Renewables business to continue to demonstrate strong growth. This will help to mitigate some of the near-term softness in the semiconductor market as a result of slow CapEx investment which we expect to resume in early 2012. As always, I would like to thank the entire Advanced Energy team worldwide for their hard work, dedication and strong commitment during the quarter. I will now hand over to Danny, our CFO.

Thank you Hans. As discussed, the oversupply situation and growing competitive environment we saw in the second quarter effected both our Renewables and our Thin Film businesses this quarter. While our Thin Film business performed in line with our expectations, our Renewables business was below previously gathered expectations. Our Thin Films business unit contributed 70.5% of total revenue and Renewables 29.5%. While our different business lines were pressured by varying industry dynamics this quarter, we believe our diversified business model should help offset some of the cyclical trends currently present in the semiconductor industry.

Turning to slide number 9, revenues were relatively flat sequentially at $138.2 million while year-over-year total revenues grew 38% from $100.1 million in the second quarter of 2010. This growth was largely driven by the near tripling of our Renewables business since the acquisition of PV Powered in May of 2010. Our Thin Film business unit had sales of $97.3 million and operating income of $20.0 million. Semiconductor sales were $43.7 million at 31% of total sales. As expected, we saw a 5% decline over last quarter due to the industry wide slowing of semiconductor CapEx. On a year-over-year basis, sales were essentially flat. Sales to the solar panel and glass markets were $17.9 million or 12.9% is total sales, a decline of 26.9% from the first quarter due to the over capacity of PV panels and significant declines in panel pricing. On a year-over-year basis, sales to this market were up 24.2% due to traction with our Chinese panel manufacturers. Flat panel sales experienced a strong quarter as well, with sales of $12.5 million or 9% of total sales. This represents more than a doubling over last quarter's $4.8 million and year-ago sales of $5.7 million. Service sales were $13.1 million or roughly 9.5% of sales. Softness in North America led to the sequential decline of 4% while year-over-year service revenues increased 23.1%.

Now turning to our Renewables business, sales were $40.8 million or 29.5% of total sales in the quarter. Sales grew 8.7% over the first quarter. While below our initial expectations as the solar panel market struggled with overcapacity, and declining panel prices, and inverter market suffered from increased competition and growing pricing pressure. The combination of these dynamics with product mix shift that we saw towards our power station products led to lower gross margins in the second quarter and ultimately lower operating income of $321,000 in the Renewables business unit. Turning to slide 10, operating margins in the second quarter were 12.5%, down from 17.7% in the first quarter.

On slide 11, operating expenses were relatively flat at $38.1 million, compared to $37.7 million in the first quarter. Specifically, R&D expenses increased 7.5% sequentially to $17.1 million or 12.4% of sales in the second quarter as a result of investments we made to ramp up product development efforts in Thin Films as we prepared for next generation tools and increasing our inverter development. SG&A decreased 4.3% from the first quarter to $20 million representing 14.5% of sales due to lower compensation expenses. The total tax rate for the quarter was approximately 22.4%, putting us in line to achieve our annualized tax rate for 2011 that is in the 24% to 26% range.

On slide number 12, net income from continuing operations in the second quarter was $13.5 million and $0.31 per diluted share. This compares to net income from continuing operations of $11.5 million or $0.26 per diluted share in the same period a year ago. Turning to our balance sheet on slide number 13, we ended the second quarter with cash and investments of $145.7 million, a $5.7 million increase over March levels. We spent $4.2 million in CapEx and increased raw material inventory in preparation for inverter shipments to ramp up in the second half of the year. Between our cash balance and our net trade working capital of approximately $180 million, our current liquidity exceeds $300 million. Stock option expense for the quarter was $3.4 million, fixed asset depreciation was $2.6 million and intangible amortization from the acquisition of PV Powered was $900,000 for the quarter.

Finally, turning to slide number 14, you can see our guidance for the third quarter of 2011. We expect revenues to be between $130 million and $145 million, EPS to be in the range of $0.20 to $0.30 per diluted share based on an estimated 44.3 million shares. Our guidance reflects our view that pricing will stabilize and growth resumes with the draw-down of inventory and an increase in activity overall. This concludes our prepared remarks for today. Operator, I'd like to open up the call for questions.

(Operator Instructions) Colin Rusch, ThinkEquity.

So your pricing on an ASP basis looks flat quarter over quarter. You mentioned some mix shift. Can you walk us through how the operating margins ended up being down 6.5%? And how you can start reversing that, frankly going into the back half of the year? If it's just a mix shift towards different products or if there are some additional things that we need to be thinking about from the OpEx side?

The op expense decline of about 6% is -- about a third of it was our Thin Film business declined a couple of percent, if you look at the release, and our Renewable business declined the remainder. The key thing there is we saw some pricing pressure and some mix shifts both in our Thin Film business and Renewables. Renewables, the mix of products that we sell, has shifted to more power stations and solutions that have auxiliary equipment added to them that bring down the overall margin of the product per se. The key thing though is we have maintained our Op Expense in check. Our Op Expense has been flat for the last 3 or 4 quarters and that is where operating leverage will come. As we see the second half grow in the Renewables business, we should get operating leverage on our Op Expenses, because we basically invested in the infrastructure and the R&D necessary to deliver a more robust second half than the first.

So how should we think about the trend line on that leverage? You have got a fairly wide range on the revenue guidance and a pretty wide range on the EPS guidance. What can you tell us about what you're going to see in the third quarter and how we might see that play out over successive quarters?

Yes, we think that the margin pressure will get more rational in Q3 and Q4 than it was in Q2. You have the situation where panel prices declined so quickly that everybody sort of hit the pause button. And initially there were some pricing actions that were tried to be taken to try to move inverters as an industry. That was really a result of people didn't see the significant drop in panel prices staying, so they tried to move the inverters. I think that has eased off some. In fact, Gregg can answer that a little bit later if that question is still lingering.

So we think the margin pressure will subside on the pricing. And we think our operating leverage will kick in. As we have talked about many times, we see a 50% leverage, that is our internal goals, and so far for you look at the last 3 quarters, where revenue has been relatively in the ballpark of $140 million to $150 million, we have maintained our Op Expense constant at about 24.5%. So as revenue kicks in, in the second half of the year, we think our Op Expense will go down as a percent of total revenue and our margins will improve.

All right.

Colin, I would like to give a bit of a flavor to that too. As far as the margin pressure is concerned. I think as you know we've got a few very big projects. And what we realized in those projects, that we had to modify, because there were some requirements on that which we have not had originally in our inverter. So what we did was to put some add-ons on in order to comply with those requirements. But these add-ons are being designed in the inverter going forward, so that means that this kind of margin pressure, which is substantial, will go away. So this was something we didn't expect in the first place.

Great. And then just 1 question on the solar capital equipment. You mentioned CIGS, can you give us a sense of the magnitude of how you see the CIGS factories rolling out? And then secondly, are you seeing any orders from additional amorphous silicon lines? We've seen Oerlikon actually doing fairly well and being able to place some new lines here in 2011.

This is Yuval Wasserman. What we see is the orders coming for CIGS lines around the world. We plan a CIGS area in our PVD process technology where we supply DC power supply, especially our Ascent new product that has been adopted for CIGS applications. We don't have good understanding or visibility of how fast these CIGS lines will ramp up. But we collect right now, receiving POs and sending products.

And Colin as far as CIGS is concerned, remember that 1 of the biggest foundry in semiconductor, TSMC last year announced the build up a fab which is based upon CIGS. So what we see, CIGS gains traction.

And then on the amorphous silicon side are you seeing any serious orders on new lines?

It is fairly flat for us right now.

Perfect. Thanks.

Timothy Arcuri, Citi.

A couple questions. First of all, Danny, was the full 160 megawatts, was that all recognized as revenue this quarter or that was just what got shipped?

Hi Tim, this is Gregg Patterson. Yes, all 160 megawatts was recognized as revenue.

Great. Okay. So, that would imply that pricing was down 22% versus Q1? So, I'm wondering, at the $0.26 level pricing, you are not making much money in the inverter business. I'm wondering how you can cost down? So if you even assume that pricing stays flat from there, what is the trajectory at which you can cost down in that business, so that you can start to make some more money?

You bet. No, part of that reduction is not all pricing. To large when reviewing our mix, it is really representing our success in the utility market. And our growth in the segment, clearly, as you go through a dollar per watt from resi through commercial through utility, so that is not nearly as pricing driven as you might have think at first pass. But if you look at how are we going to deal with the industry movement towards grid parity and where you've got to get to. First and foremost, as we continue to grow and take share, we are going to get tremendous OpEx leverage. We're going to be able to have the ability to leverage our existing infrastructure as we add the top line revenue. But there is quite a few other things that we are going to be going after and it is a clear and very deep focus for the Renewables business.

But we are going to be able to -- as this market evolves, and it is very dynamic -- as Hans mentioned, there's a lot of features and functionality that are showing up real time. That in order to stay at a market rate, we literally have to implement those features and functionality in a relatively costly manner. But they're easily integrated over time into the base product platform, and literally as we're seeing some of the synergies that came from the PV Powered and AE merger, those are going to start showing up in the second half through 2012 as we leverage the best practices and technologies of both companies that are now 1. And then finally, we see a very strong trend in some of the evolution of the core technology building blocks that will drive performance up and cost down.

Tim, there is another point too, which we did not mention so far. Part of the margin pressure came from the auxiliary elements which we have to put in the power stations. We shifted and we postponed to a certain degree, because of the big projects and the adaption we had to make, the 1 megawatt out, but the 1 megawatt will come online in middle of next year. And this is another point in order to reduce prices substantially.

Got it, Hans. Gregg, on the pricing comment, so how should I think about sort of blended pricing, because it's difficult for us to determine how much is going into utility versus resi. So how should I think about your reported blended pricing in Q3 and Q4. Because I'm just trying to ascertain how big the US market will be, because you had previously said the US market would be 2.5 gigs to 3 gigs. Obviously it won't be that big, but I'm trying to figure out how much share that you will have within that pie, because I think, you were thinking 25% to 30% before, but it sounds like it might be little lower than that now.

We'll see how the overall market is doing. It is hard to predict share as all of the dynamics in the market, so the actual size of the US market, we'll have to see. But it's going to be a very strong second half. So to answer your specific questions, if you look at it, our residential business is as planned relatively small. I have to go -- it's in that 10% to 15% of the total revenue. And so, it is still a small portion. And the other part of our business is very well balanced between the commercial and utility. It had been more commercially-centric in 2010, but again our success in penetrating with those big project wins that we see and we continue to do builds over time, is balancing out our commercial and utility. And so, we are going to continue to see, I think, a nice blend just given the market sizing between commercial and utility and our positions in both, and I actually do expect that we will continue to grow share this year.

All right, so can I think $0.25 pricing throughout the rest of the year? Is that sort of the right range?

Probably. I would not say it's going to be a big shift from there. I mean, a lot of the things that we are seeing that happened in Q2 is a really sudden and steep price and I would say unsustainable and irrational pricing from a few competitors. What is driving that is I think to a large degree our success in taking share is driving several to try to protect their business. And it has been, I think -- I don't believe it's sustainable. There's other players that are trying to enter the North American market and trying to build a beachhead. So I see the pressures, they're real, but the beauty of our strategy is that a lot of the success of our strategy is causing these. Because people see there are markets going away. And we have not bought business. To a large degree, we have passed on some projects that were just truly irrational for us to go after. But the beauty of it is, we are seeing some of those same customers that have tried the alternatives, they are coming back to AE. We've won some of those accounts back. And so like I said, the value of our LCOE and differentiation is really being proved out.

Tim, I'd just add 1 thing on your math, on the $0.25. Remember, the majority of the push-outs that we referenced were really in the commercial scale. And that has a higher selling price per watt, so that's going to bring your mathematical average down. Just a thought for you.

Yes, if you look at the fundamental miss on the revenue, Q2 was literally -- having spent some time talking to customers, they really see about -- up to a $50,000 per megawatt per month reduction if they wait. And that's driving a lot of rational behaviors to let's delay, push out and see where these panel prices are going to stabilize. But they have to get them in by the end of the year. With the 1603 grants likely expiring and the broad consensus is that they will, there is a dramatic imperative to get projects in the ground this year.

Yes, sure is. Okay. Thanks.

(Operator Instructions) Mark Bachman, Avian Securities.

First, you mentioned the Renewables segment here that the second half revenue growth here is going to be triggered by 2 things -- 1 is the stabilization in modular prices and 2, is the reversion from a cash grant into a tax credit. So my question here is in 2 parts. First, we are still seeing module prices decline here, albeit at a slower pace. And given that we are 3 weeks here into Q3, are you starting to see orders pick up here despite these slower module price declines? And then, second, is there any increased activity yet with regard to the expiration of the cash grant?

I think, let me go to the module prices first. I think on the long-term, and we were counting on that, on the long-term, the reduction of the panel prices is just good for the inverter business. No doubt about that. What we didn't realize that the steep fall of the panel prices made a couple of -- most of the developers [just too porous] in order to see. And what we see right now is a deceleration of the steep and fast fall. On the other side, these guys are getting more and more squeezed between the expiration of 1603 and panel prices, which is on the good side for them, are not falling that strong as they did. So we have seen, by the way, an up-tick in order intake in the beginning of Q3, in the last couple of weeks. So this is a sign for that we believe the second half will be much stronger.

How do I think then about the downward revenue guidance? If you're starting to see an uptick in order intakes, can you give us an idea of what you think your megawatt shipments are going to be in Q3?

Mark, on the overall revenue guidance, remember that's for the total Company, so we see a decline in our Thin Film business in the order of 20% or so. And we're making that up in our Renewables business. So that's why we're remaining about flat. So we are seeing a significant uptick in the Renewable business in Q3.

And by the way, the decline in the Thin Film business is mainly driven by 2 elements. 1 is semiconductor, and we are in concert with our biggest customer because all of them guided down around about 10% to 15% on the semi side. And because of the fact that we had a very, very strong Q2 in the flat panel side, this comes back to normal. So therefore we have a decline overall in the Thin Film. But again, it's been completely compensated, at least as far as the top line is concerned, by the increase in the Renewables.

Excellent. Thanks for the clarification on that.

Jim Covello, Goldman Sachs.

Hi, this is Mark Delaney calling for Jim. Thanks very much for taking the question. I was hoping you could provide some more color on the $102 million in orders this quarter and how you reconcile that with shipment guidance of $130 million to $145 million.

Yes, certainly those were the bookings for the quarter, we carried some backlog in. Obviously we have 2 very different businesses here. 1 works on a substantial backlog in future orders. And the Renewable business, as we talked about 4 or 4 weeks ago, is a very volatile business that has 3 to 4 week lead time. So the $100 million we recorded as bookings for that orders that came in for the quarter, most of those obviously are the Thin Film unit, but there are some that are in there for the Renewables. But we don't break out the details between the 2.

Okay thanks. And then secondly, I was hoping you could provide some additional color on how your levelized cost of energy compares with your competitors. And how that gives you confidence for the second half? Thanks very much.

So I think our strategy, I mean there's a lot of our competitors that are starting to talk LCOE deeply. But what we have seen over and over again is their ability provide the end-to-end solution cradle-to-grave. Where we actually show industry-leading performance and efficiency, as well as dramatic improvements in uptime and service and support including our services portfolio of SiteGuard, where we take on literally system wide O&M. Customers really like it. And the classic trajectory is they try the AE products, the uptime, the performance and the service and support, be it on a tactical measure or on a full system O&M package, they like that a lot. And they see the returns and they stay. And so they believe us and as a result of that, we gain share and we just don't lose many customers over time.

I think, there was a clear sign in the Intersolar, just a week before, in San Francisco. And in particular, the big utility guys are coming back to us and seeing what they can harvest over the lifetime of the panels and the installation. They much more interested in order to have the return of investment and therefore to mitigate the risk by having some kind of uptime guarantee is a very strong competitive advantage on our side. Is was not that important in beginning this year and last year, but it's becoming more and more as a very powerful tool from our side.

Mehdi Hosseini, Susquehanna International.

Hans, I understand the need to get projects done before end of year to benefit from some of the incentives. But what does it say about Q1? Should we expect directionally, should we expect a significant decline as your customers and the customers of customers try to figure out how to proceed forward? And I have a follow-up.

I think what we see, there are 2 things. First in Q1 there's always a kind of a parsing. That has been the last couple of years. But I think you are right, because of that, it might be that this downfall in Q1 might be a bit steeper because of that. But on the other side, don't forget, because of the strong reduction of the panel prices, I think we are getting in a situation which all the big installation becoming more and more cost effective. And therefore, the attractiveness to put that in place is growing. And in particular, the big utilities, I think for them, it is not that important. And therefore, they are coming strong and I don't think that we see some kind of strong retraction in the first half next year because of that.

This is Gregg. We're aligned, in a sense that you are going to have the classic seasonality. But especially in North America, the utility segment of projects are continuing to grow. As the maturation and comfort with solar increases, the utility is going to buffer some of that classic seasonal decline that is going to be exacerbated by the expiration of the 1603 and accelerated depreciation. So, you are going to see seasonality. We don't predict a cliff in Q1, but likely similar trends that you have seen for the last several years.

Okay. And Hans, just 1 clarification, did you say in your prepared remarks that we are not going to see that kind of revenue you generated in Q2, we're not going to see that in the second half?

So you mean on the Renewables side?

No, just for the Company.

I think what we see is -- as we have already guided for Q3, we see a softening on the Thin Film side, and we see a strong growth in the Renewables. And this will probably be in Q4 in the same way. But, because of what we think, the Renewables is growing in Q3 and Q4 very strong, it will overcompensate in Q4, the softness of the Thin Film side.

Got it.

Mehdi, if you go back and look at the last 3 years historical data for the US industry, Q4 has just been very robust. In the last 3 years. We're expecting similar things to happen to 2011.

Sure, should we also assume seasonality impacting the Thin Film into Q1?

This is Yuval Wasserman. What we see right now is Q4 could be flat to Q3 and we anticipate resumption of investment at the beginning of 2012. The underlying demand to our products has now disappeared. It's just been pushed out as some of the major investment in some of the biggest fabs are still in plan. But we see a push out towards the Q4, Q1 and Q2 next year. So we anticipate -- we don't anticipate the seasonality or a deep decline at the beginning of 2012 right now. All the indication we get from our customers and their customers, that we see a pause right now and some of the investments are being pushed out to the beginning of 2012. At the same time, with that, there is an interesting opportunity opening up to the key players as there is an acceleration of the R&D activity around 450 millimeter, as well as the transition of 3-D packaging into beginning of a ramp at the beginning of 2012. These trends will level the playing field and those who are able and willing to invest and participate in this next generation product family if you may, will gain share even faster.

I think there is a very clear consensus among our customers and I think among the industry. The next wave of consolidation in the semi will come and it is being driven very hard by 450. And as a fact, after the consolidation, the strong players getting even stronger, and in that respect, AE is by far the strongest player in semi. So therefore, we first have the capability in order to invest in these new technologies, and I think we come out after the consolidation as the strong player.

Got it. Thank you.

(Operator Instructions) Edwin Mok, Needham & Co.

Danny, just to clarify, did you say that on the September quarter that you assume 20% decline on the Thin Film business or the semi cap equipment business? I just want to make sure?

Our Thin Film business in general, we expect to see about a 20% decline. That, as Hans mentioned, is offset by our growth projections in the Renewables.

So that would imply a pretty aggressive growth in the Renewables. And you guys mentioned the expiration of the 1603. Is it possible that some of your customers might delay and just wait until the fourth quarter before they actually go in and aggressively ramp of those projects?

Yes, Edwin. This is Gregg. There is, I think the only uncertainty really is, what is going to be the detailed behaviors on a customer by customer basis on how they are playing this whole panel price declines. And how they trade-off. So we are going to provide conservative guidance on Q3 just because that is the single dynamic that is still hard to predict, I think across the industry. But it will be a great second half and the exact balance between Q3 and Q4 is the biggest uncertainty going forward.

I see. And then just 1 quick follow-up question for the margin side. I think the midpoint of your guidance range would imply that, I'm assuming the Thin Film margin would have to come in because of lower revenue level. But that would also imply that your Renewables operating margins were still in the mid-single digit range. Is that how we should think about the model in the third quarter given your guidance? And do you guys talk a little bit about improving the cost by integrating some of the options as well as some operating leverage, often operating leverage will come as revenue improves. But what about the improvement of the cost side, is that more longer-term or do expect to stop and see some of that benefit the second half?

Well Edwin, in general, I think your assumptions are right, in terms of your operating margins for the 2 business units. We will have a decline in margin in Thin Films due to deleveraging of operating expenses as volume declines, and we will get some operating expense leverage on the Renewables business. And as Gregg said, he thinks the irrational pricing, some of which occurred in Q2, we just don't see that continuing into Q3. So there will be some improvements there. But I think your overall approach to modeling is correct.

And then just on the cost reduction side, how fast do think that will come in and what kind of -- any numbers you can you quantify there?

In terms of what we are going to see, we are gearing up and we look at this is a 5-year cost reduction road map. And the goal is to, at the end of that 5 years, to be able to get to a sustainable business without incentives. Because clearly we cannot stay focused on an incentive-rich and incentive-driven market. That's what's going to grow this market long-term. So we look at it. So we're going to see some improvements clearly in the second half as we do that. But I really look at 2012 where we are able to roll to a lot of our what we would call our Gen2 products and platforms, is where you're going to see significant help. So we are going to see clear benefits in the second half, and clearly with the expected boom in Q4 that is going to show up the most. But you are going to see a continuing string of cost reductions and value add that we will be bringing to the market through 2012 and 2013.

So the designing of the add-ons, the costly add-ons is a game which is 2012?

Yes. Yes. The ability to take the features and functionality and deliver the most integrated and lowest-cost really is going to show up primarily in 2012.

Great. Thank you.

Zach Larkin, Stephens.

I just wanted to follow-up on your discussions about the investment for the next gen in Thin Films. Looking at the R&D expense which ticked up a fair bit in the quarter, should we assume that for the next couple of quarters, as you continue to prepare for the next gen of products that R&D should be kind of comparable to what we have seen in this quarter? How should we think about that?

The investment in R&D for next generation applications is already included in our current run rate. We have started to invest in multiple solutions, power solutions for various applications in semi and non-semi. If you look at what's happening in all of our end markets, we see a shift to new technologies.

In the semi area, we see an acceleration of investment in the 450 millimeter tools for R&D. We see an acceleration of migration for 3-D packaging to future mass production. We see the investment in new materials for next generation device architecture. And the dual and triple patterning will require more deposition and etch processes. All these will drive the need for customized or special power solutions for these processing tools.

In the PV solar area, we see a migration and increase in focus on CIGS which will drive from our side, more demand for DC power supplies for sputtering. And in the flat panel display business, we see a migration from Gen5.5 OLED to Gen 8, larger substrate that, although it was pushed out to early next year, it will require additional power solutions to manage the large area processes required. So in those specific areas, we have already started to engage our R&D teams in developing power solutions and the current run rate on R&D is expected to stay pretty much flat as we start releasing these new products early next year.

Okay. Thanks. Appreciate the color. And then also, you continue to have a very strong balance sheet, a lot of cash sitting there. What are your thoughts regarding that and then have you thought about ways that you might deploy that capital?

This is Danny. Certainly we look at our cash balance constantly and we are continuing to be on the lookout for the right combination that would help grow our Company pretty quickly. But at this point, that is all a matter of having the right target at the right price and that has not materialized yet. But we continue to look. At this point we don't currently have a redeployment plan to do any share buybacks at this point.

And I think, if you look at the situation in the inverters, let's say in the Renewable business, this is completely unsustainable. Every day, literally, new inverter companies are popping up, and this is a very, very clear sign for a starting consolidation. And I think as soon as consolidation starts, there are opportunities for us to grow inorganically our Renewable business. And until we don't see this in a larger scale, we keep our cash in order to be prepared for taking advantage of those opportunities.

Okay. Thank you very much.

Krish Sankar, Bank of America Merrill Lynch.

A couple of questions. In the past you have said that your Renewables business can exit 2011 at the 15% op margin. What do you think is a realistic target for the Renewables business exiting this year?

We still believe that exiting in Q4, based on what we think will probably happen in the revenue, allows us to exit with the Q4 run rate in the mid-teens if our volume assumptions hit. We still think long-term, both of our businesses are 20% op income businesses over the long-term. That obviously assumes a certain level of revenue. We think probably with the growth projections out there for 2012, that our Renewable business could go up significantly again in 2012. Obviously that revenue growth will help leverage the operating expenses and get us into the mid-teens as we had talked about earlier.

And in your guidance, it seems like you guys are giving a flat panel pricing environment in Q3. Have you seen what happens if the panel pricing drops let's say a few percent or down 5%? Would you still be within your guidance bracket or do you miss your numbers again?

No, we expect to take the lesson from Q2 and be within the guidance bracket. I think as I said earlier, the biggest uncertainty that this whole industry is struggling with is, it's not only the reality of the panel price declines, but what is the perceptions by customers and what they're going to do. And so we are tracking that. We are spending a lot of time talking to customers and really understanding how they are interpreting and the reaction they're taking to panel pricing trends. And the biggest uncertainty is what's going to be the mix between Q3 and Q4. But we are getting very clear feedback, is that they have to get this huge pipeline of projects, especially in North America, in the ground or started by the end of this year.

And believe we have learned the lesson of Q2, and we took, on the Renewables side, a pretty conservative stance in order not to miss any more.

The steep and sudden panel price declines, literally caught us unawares in a degree, because as we are wrapping up the integration and focus deeply on just the ERP transition, we literally spent a lot of our mind share just making that happen for the second half.

Good. Thank you.

Olga Levinson, Barclays Capital.

I guess following-up on operating margin side. Given, assuming that we continue to see the Thin Film side of the business track at these levels into the second half and beyond, any thoughts around potentially cutting the OpEx? Or how do you think about, without a huge ramp in the Renewables business, how do you think about the operating margins in OpEx going forward?

Obviously, any decision to make any drastic cuts in operating expenses would be more based on your long-term view, not a 1 or 2 quarter pause. And at this point, we see Q3 and Q4 as a pause, a slight reduction from where we were the first half of the year, but as you all have mentioned earlier, we do see the push outs in the capital investment recurring in Q1 and Q2 of next year. So this point, we don't see this, nor do our customers and their customers see this as a long-term decline. It's just a Q1 and Q2 pause, so obviously we will cut expenses wherever possible, but you don't change your infrastructure for a 1 or 2 quarter pause.

Okay.

Olga, this is Yuval. I just want to make 1 comment, to reemphasize the need to continuous investment in R&D. During the 2008, 2009 recession, 1 thing that we have decided to do, is to continue to invest in some critical strategic R&D programs. We emerged from the recession with a series of new products that became extremely competitive and we gained market share. If you look at VLSI Research, 2010, AE gained 3% market share on average. We intend to continue to invest in some critical R&D program to ensure that we continue to gain share and as the industry migrates to the next generation application, we are ready with our customers and their customers with the right products. So this Q3 pause should not stop us from ensuring that we are a significant player going into 2012 and 2013.

But believe me, it was a very painful time when we deliberately took losses in order to finance and staff our key projects, which now paying off. And gaining market share is something which is a very clear sign how the customers are valuing these new projects and new products coming online.

Got it. And then just a follow-up question. Based on the 2 big projects that you've got bookings at in the first half of the year, and based on the bookings that you have gotten so far into the quarter, how far do you think your visibility extends on the inverter business?

So I think -- we track very closely all of our customers which literally are hundreds, what their pipelines are. So we have got visibility well into Q1. But again, given the industry dynamic and lead times, there's no incentive for them to place POs literally until they decide to green light and execute the project. So we have got a lot of visibility into the pipelines with our deep relationship with customers. But the PO coverage is going to show up anywhere from 2 to 6 weeks ahead of project start.

Got it, thank you.

Joe Maxa, Dougherty & Company.

On that 1603 expiration, what are your customers saying about, perhaps -- I think that you need 5% in the ground by year-end. But could that lead to, given the panel pricing if we continue to see that decline, pushing out purchases of inverters until Q1, Q2?

Absolutely. The reality is that it's a growing comfort and awareness of that strategy Joe. The ability to -- and again, inverters is traditionally viewed as 1 of the most effective ways to lock in those 1603 into 2012. So we expect all we will have to book in Q4, but I think that could reduce the seasonality as they are going to be required to take possession and title really in Q1. But there is also the accelerated depreciation. So we are still going to see a lot of folks trying to get to project completion by the end of the year, and others like they did in 2010, are going to hedge and try to get as much of a lock on those grants going into 2012. So, it will be a great both order and revenue quarter in Q4. It's just how big will that be?

That's helpful. Thank you. And last, real quickly on the competition, you guys mentioned increasing competition in a number of new players. Can you give us a little color on who you are seeing now versus 3 and 6 months ago. Maybe some of the newer guys.

I'm not going to name any names. There's a lot of competitors out there. But our consistent share growth since we entered the 3-phase market in 2007 is clearly getting so material, that we are driving some real reactions. And it is harder for the new entrants to really build traction in our core market. So it really does -- it has been a hell of a validation of our LCOE strategy and the investments we have made in differentiating products and services.

Thanks a lot.

At this time we have no further questions. I would like to hand the call back over to Management for closing remarks.

Thank you everyone and thank you operator for joining us today. We are pleased with Advanced Energy's execution this year. And we look forward to seeing you at upcoming events. Thank you very much.

Ladies and gentlemen thank you very much for your participation in today's conference call. You may now disconnect. Have a wonderful day.