Advanced Energy Industries Inc (AEIS) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Advanced Energy Industries first-quarter 2012 earnings conference call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode.

(Operator Instructions).

We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to Annie Leschin of investor relations. Please proceed.

Thank you, Operator, and good morning, everyone. Thank you for joining us this morning for our first-quarter 2012 earnings call. With me on today's call are Garry Rogerson, Chief Executive Officer; Danny Herron, Executive Vice President and CFO; Yuval Wasserman, President of the Thin Films Business Unit; and Gordon Tredger, President of the Solar Energy Business Unit.

By now, you should have received a copy of the earnings release that was issued yesterday. For a copy of the release, please visit our website, at www.advanced-energy.com, or contact us directly at 970-407-4670. This quarter, Advanced Energies will be participating in the Barclays global technology media and telecom conference on May 22 in New York, and the BofA small and mid-cap conference on June 6 in Boston. As other events come up, we will make additional announcements.

I would like to remind everyone that, except for the 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 believe, 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, as well as other factors listed in our press release. These and other risks 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 second quarter guidance provided today and in our press release. Guidance will not be updated after today's call until our next scheduled quarterly financial release.

I would now like to turn the call over to Garry Rogerson, CEO of Advanced Energy.

Welcome, everyone, and thank you for joining us this morning. I will begin today with a few comments on the quarter, provide an update on our cost reduction efforts, and then discuss the next stage of our strategic plan, getting closer to customers and maximizing growth.

Starting with slide 4, first-quarter performance met our expectations. Sales of large-scale inverters were in line with their seasonally weak first quarter. In thin films, most of our markets remain at near cyclical lows, with the exception of semiconductors, which were stronger than anticipated, reflecting the industry momentum. Total revenues declined 6% sequentially to $106 million, and we achieved non-GAAP earnings per share of $0.06. Although we exceeded our profitability target this quarter, and improved solar energy margins, thin films operating margins were lower due to one-time occurrence that pressurized gross margins. We ended the quarter with almost $151 million in cash, and generated nearly $30 million, excluding stock repurchases.

We ended 2012 with annualized cost reductions of $12 million, a redesigned compensation plan in effect, and a new allocation of corporate expenses to each business unit. As you can see on slide 5, we again lowered our operating cost this quarter, adding another $14 million annual cost savings, and bringing our cumulative total to $26 million. Specifically this quarter, we exited several facilities related to our solar energy business, and completed an agreement to sell the remaining portions of our Aera mass flow controller business to Hitachi. The deal will close either in Q2 or Q3. Utilizing our manufacturing in Shenzhen, we also began qualifying our sub-assemblies. These sub-assemblies should be incorporated into our products and start shipping in Q2. Our breakeven is now below $100 million, mainly due to the measures we have taken to reduce our operating expenses.

In parallel with these steps has been our increasing focus on lowering manufacturing costs by establishing Shenzhen as the hub of all of our manufacturing activities. As Shenzhen starts ramping up manufacturing of sub-assemblies and sourcing parts locally, we should see some significant cost benefits. Overall, we are on track with our plans, and have made significant progress towards achieving our three main cost reduction goals. One, to balance the cyclicality of our business. Two, to reach profitability in our solar energy business. And three, to improve our margins and profitability such that we are bringing much more profits to the bottom line.

Turning now to the utilization of cash on slide 6, during the quarter we were pleased with our cash generation of $29.4 million, and took several steps to invest in ourselves. Since the stock repurchase plan was announced in November, we have bought back a total of 4.1 million shares, or about $44 million of stock, and plan to continue these efforts throughout the year. We are also seeking bolt-on acquisitions for both business units that can easily transition into our facilities, and quickly become accretive. This is an unpredictable process, but what I can say is that the active list of companies we are looking at is growing. Reflecting our mandate to invest in our people, we made a few key hires from the solar industry this quarter, and also promoted Gordon Tredger to President of the Solar Energy Business Unit. Additionally, we held our first leadership summit. We selected 30 potential leaders within AE, and began a year-long management training program. Our goal is to build, develop, and retain top talent to ensure our long-term success. This is a key piece in our transformation from a technology focused Company to a more cost and customer focused Company, positioning for future success.

Turning to slide 7, with much of our operating costs now contained, and better cash management in place, we now turn our attention to our customers, and how to best position AE to grow revenues. This quarter, we made thorough progress in establishing R&D locations for our thin films business, which will allow us greater proximity and integration potential, with key customers in San Jose and Korea. Our more disciplined approach to our R&D process is also seeing results, such as the first shipments of our 500 kilowatt monopolar inverter, and the launch of our thin film parallel VHF products this quarter. In the thin film business, we have also begun to develop products and partners to allow us to enter new markets. In solar energy, we are now fully staffed and building out our presence worldwide, as we enter new geographies well matched to our large-scale solar inverters through a variety of distribution channels. For example, in Canada, where we see a large opportunity unfolding, we made the strategic decision to establish our own, cost effective manufacturing from which to serve this market. Finally, as I mentioned before, we are seeking out acquisitions to accelerate growth.

In summary, we are pleased with the progress we have made towards our strategic plan outlined in November last year. Just a few quarters in, we are profitable and generating cash. Our focus is now on gross margin improvement and revenue growth. In thin films, we expect the semiconductor market to be flat to slightly below the levels we saw in the first quarter, and we are also seeing a slight pickup relating to flat panel display applications, while, as we all know, solar thin films remains on life support. Within the solar energy business unit, we are continuing to see strong activity in the US and Canada, in both the utility and commercial markets. We expect to gain traction with the recently released 500 kilowatt monopolar unit. With this mixed dynamic, we would expect to see sequential revenues and profit growth for the quarter.

Now, let me turn the call over to Yuval.

Thanks, Garry. Beginning with slide 9, thin films revenue increased 11% sequentially to $60.4 million, or 57% of total sales, driven by 42% sequential growth in sales to the semiconductor capital equipment market, while the rest of our thin film markets stayed at near cyclical lows. Semiconductor sales were exceptionally strong, benefiting from several fab line conversion projects, as manufacturing lines were retooled for other IC applications, and accelerated by high upgrade related activity with [TOEMs]. Both resulted in a changing tool mix, and strong etch and PECVD sales. Thin films operating income decreased from $7.4 million last quarter to $3.1 million, leading to a 5.2% operating margin. Despite our strong revenue performance, operating income was impacted primarily by the allocation of corporate overhead to each business unit, which began as of January 1, as well as a non-recurring item from our purchase of discontinued parts for long-term inventory, which, as you know, happens from time to time in our industry.

Turning to slide 10. We entered the quarter having lowered our breakeven to less than $15 million. We took another step this quarter to reduce our operating costs with the sales of the remaining assets of our Aera mass flow controller business. As part of the original sales to Hitachi Metals, we agreed to maintain manufacturing and service for a limited period of time. This quarter, we began to position the flow service operation to Hitachi, resulting in the closure of our North American flow service facility.

Additionally, Hitachi decided to take over our lease space for national controller manufacturing, and acquire our manufacturing assets in Shenzhen, which they will continue to operate utilizing the existing team. As a result, we further consolidated our footprint in China and North America by approximately 19,000 square feet, saving the associated lease and operational costs. With most of the immediate cost reductions behind us, we are focused on driving revenue growth through additional design wins for current and future applications, the introduction of superior products, and expanded market potential.

We are engaging with our customers to help meet their key inflection point transitions and cost related targets in this highly competitive market. Current industry consolidation, and the investment required to address next-generation technology nodes, underscores the importance of each and every customer relationship. Consequently, we are embarking on a new engagement model with key customers, allowing us to participate in the long-term development programs at an earlier stage, and to develop products with partners to enter new markets.

We took several steps this quarter to execute on this strategy. First, we identified a new location for our San Jose office, even closer to our Silicon Valley customers. This office hosts a team of engineers that will integrate and engage at each step of our customers' design process. We remain on track to establish a similar R&D location in Korea in close proximity to several of our important Korean customers. Second, our new customer engagement model is also leading to an increasing number of design wins across multiple industries, demonstrating the breadth and depth of our offerings.

These include new applications for flat panel display, such as flexible displays, as well as wins in dielectric and conductor etch, and deposition for semiconductor applications and non-crystalline silicon PV solar applications with new materials, such as CIGS. Third, our new streamlined technology and product development process is also taking shape in the form of more quickly released products, such as the introduction of the new Paramount VHF product for RF power delivery this quarter at Semicon Korea. This product line spans next-generation thin-film deposition technologies and processes to provide a more flexible, scalable platform for our customers. We are currently shipping the VHF on advanced RF sputtering tools to enable sub-32 nanometer technology node processes, and early adopters of 450 million for wafer processing. With the outlook for increasing content of RF sputtering, we are excited at the prospect of this product line. Additionally, we exhibited several other important products, including the Paramount HP, which is our high-powered product for advanced AMOLED flat panel display applications.

Our focus on meeting our customers' innovating technology and service needs will continue to be critical, if we are to expand our market position and grow revenues. Overall, the outlook for or thin film business is slightly improved from last quarter. After a particularly strong first quarter, the outlook for our semiconductor end market appears to be stabilizing at a slightly lower level, in-line with the roughly flat industry CapEx outlook for 2012. In our non semi thin film markets, we accept some improvement, albeit off of very low levels. The flat panel display market is anticipating Samsung investment in gen 5.5 and gen A as the year progresses.

In the PV solar panel market, the dynamics are unchanged, as crystalline silicon remains at its bottom, leaving any upsides to be driven by the remaining smaller piece of the market, and some investment in [CIGS]. While the current cyclicality is pressuring our performance at [first] markets, our continued execution of our strategic initiatives to reduce costs and grow revenues, coupled with AE's strong relationship with major OEMs and other key global customers should position us to grow revenues profitably in the future.

I would like, now, to turn the call over to Gordon.

Thanks, Yuval. Turning to slide 12, revenues in our solar energy business declined 22% sequentially to $45 million this quarter, reflecting our first quarter seasonality and the slow-down of installations in the winter. We shipped 179 megawatts, versus 223 in the previous quarter, driven primarily by commercial and utility scale products over 250 kilowatts. Despite our lower revenue, we achieved breakeven, with operating income of $528,000 as a result of our ongoing cost reduction efforts.

Turning to slide 13, in just a few quarters we have made significant improvements in our cost structure to reach breakeven at $45 million. But our efforts to reduce costs are not stopping there. For example, during the quarter we completed the closure of two warehouses in Bend, Oregon, and Fort Collins, Colorado, to streamline our footprint. Second, we began qualification for sub-assemblies produced at our factory in Shenzhen, ahead of plan this quarter, and expect to complete the qualification process during the second quarter.

Third, while initial savings from the manufacturer of our sub-assemblies in Shenzhen will further decrease costs, more meaningful savings will come through low cost sourcing, and outsourcing sub-assemblies to lower cost areas as we ramp production. This effort will be spearheaded by the experienced Director of Supply Chain Management we hired recently. With his experience working in the region, we expect to be running our supply chain almost exclusively through our Shenzhen facility during the second half of the year. Centralizing the management of our supply chain will reduce our costs, and also allow us to serve our markets worldwide more efficiently, as we expand and accelerate our revenues.

This quarter we began to broaden our reach by expanding our efforts in our existing North American market, and by entering new geographies with growing demand for large-scale solar inverters. First, we are adding more field personnel, particularly here in the US, where we see a growing number of opportunities. With our strong sales pipeline in the higher end commercial and utilities segments, this sales force expansion will provide customers additional field application resources to assist them in designing systems to meet their power generation targets.

And as Garry mentioned in his remarks, building upon our sales and service office in Ontario, Canada, we have began to establish our own local manufacturing presence closer to our customers. With this change, and the recent feed-in tariff decision moving the market forward, we believe that we have an opportunity to be a significant player in Canada. We have developed some important relationships with local customers, and won some important orders that should provide us with increased revenues in the second half of the year.

Third, this quarter we entered into the growing market for large scale inverters in India. Partnering with a local company, Bergen Group, to sell and service our inverters in this territory, we have began training Bergen employees in Fort Collins. Having shipped initial products, our first installation is up and running successfully in northwestern India. Current projections for solar installations in India range from 15 to 20 gigawatts by 2022, with half of those installations in Gujarat and Rajasthan, and based on the interest demonstrated at our recent conference in India, and the efforts of our local sales representatives from Bergen, we're developing a strong pipeline of opportunities, ranging from 10 to 100 megawatts in size.

We believe that India has the opportunity to be a large and important market for us. For us to accelerate our expansion into these international markets, we made two other key hires recently. One, an experienced Vice President of Marketing from the solar industry who will focus on broadening our product portfolio, and accelerating our product commercialization efforts to address the needs of customers in international markets, as well as drive our North American progress. Second, we also hired a Director of Business Development from the solar industry to lead our efforts to define solutions for customers in emerging markets, and to establish the necessary partnerships to bring those solutions to market.

As we enter new territories, it will be critical that our innovative product portfolio is designed to meet the needs of customers in each region in order to drive the future revenue growth. Specifically, our recently introduced 500 kilowatts monopolar inverter is now shipping, and is receiving an enthusiastic response from customers. Designed for the strong and growing higher end segment of the North American commercial market, this product will ultimately facilitate our success in other countries at a particularly pivotal time, when challenging market dynamics are favoring players with solid balance sheets and strong service offerings.

While the overall solar market remains uncertain, there were some positive developments this quarter that should help propel the industry forward. After months of speculation, the US Department of Commerce announced a lower-than-expected tariff on Chinese solar panels. The German government, and the government of the Province of Ontario in Canada both decided to lower their current feed-in tariffs. The German decision is leading European manufactures to accelerate their efforts to penetrate the high growth North American market. The Canadian decision is enabling previously delayed projects to move forward.

In looking to the remainder of 2012, we hope to benefit from all these market dynamics. We are clearly focused on driving sustainable revenue growth and increasing our profitability. Having made significant strides in reducing our operating costs, we are expanding our efforts to further improve margins. We are excited at the prospect of entering new, emerging markets, where our products are in high demand, and believe there is a great deal of opportunity yet ahead.

I would now like to turn the call over to Danny to discuss our financial performance. Danny?

Thank you, Gordon. During the course of my remarks, I will refer to both GAAP and non-GAAP results. Non-GAAP measures exclude the impact of the restructuring charge recorded in the first quarter. A reconciliation of non-GAAP income from operations and per share earnings is provided in the press release tables.

Turning to the highlights of the quarter on slide 15, total revenues were $105.8 million, a decrease of 6% sequentially, and 23.1% annually. Excluding restructuring charges of $2.6 million, non-GAAP EPS was $0.06 a share. During the quarter, we repurchased 2 million shares at an average price of $11.09 per share. We ended the quarter with a strong balance sheet, including cash of $150.7 million, a $7.5 million increase, even after repurchasing $21.9 million of stock.

Turning to slide 16 and the breakdown of revenues, we saw a stronger-than-expected increase in thin film semiconductor revenues during the quarter, balanced out by the seasonal slow-down in the solar energy business, and trough levels of non-semi thin film markets. In total, thin film revenues grew 11% sequentially to $60.4 million, contributing 57% to total sales. Revenue was driven by a 42% increase in semiconductor sales to $38.3 million, a 66% decrease in flat panel sales to $1.3 million, a 27.4% decline of solar equipment to $3.1 million, and roughly flat service revenue of $12 million. Solar energy revenues fell 21.8% from last quarter to $45.4 million.

On slide 17, you can see that our cost reduction efforts and ongoing expense controls continued this quarter, leading to total operating expenses, excluding restructuring, of $36.5 million, a decrease of 3.5%, both on a sequential and annual basis. R&D decreased 4.7% year over year to $15.4 million, or 14.3% of sales during the quarter. SG&A decreased 4% year over year to $20.1 million, or 19% of total sales.

Beginning this quarter, we allocated all of our corporate overhead to each business unit based on sales contribution. In total, of the approximately $6 million of previously unallocated G&A, 54% was distributed to thin films and 46% to solar energy. Obviously, this impacted operating income for each business unit. We were nonetheless able to reach profitability in our solar energy business unit, and maintain profitability in thin films, although at a lower level than last quarter, due primarily to the increased allocations of corporate G&A.

In thin films, we also made a large one-time purchase with a supplier who was discontinuing production of certain components. Therefore, we invested in future inventory to ensure we had enough material to continue to provide our products to our customers. This impacted our gross margin by approximately $1 million this quarter. I want to the emphasize that all of the cost reduction measures we've taken to date our in tact, and that none of these costs have returned.

In fact, turning December 18, we recognized another $2.6 million in restructuring charges this quarter, which will result in an additional $14 million in annual savings. We began the year with our newly designed compensation plan in full effect, which will result in $12 million in annual savings. We exited two solar energy facilities, resulting in annual savings of approximately $350,000. We began to move out of our third-party manufacturing in Canada, which will provide approximately $1 billion in annual savings. We continued with the transition of our solar sub-assemblies to Shenzhen, which will eventually lower our manufacturing costs. And finally, we are transferring supply chain management to Shenzhen to position us to do more low cost sourcing. We're well on our way to achieving the three main objectives of our cost reductions; to balance cyclicality, bring profitability to our solar energy business, and to enhance our profitability at cycle peaks.

Going forward, our objective is to maintain these cost controls while we continue to drive efficiencies and further increase margins. The next phase of our plan to be implemented over the next 6 to 12 months will be focused on improving gross margins and growing revenues. This should results in further charges of between $2 million and $6 million, as well as an additional $1 million for severance. Once complete, the two phases of our plan, and other cost savings initiatives and margin improvements are expected to deliver annual savings in excess of $30 million, well in excess of our original plan of $16 million $20 million in cost savings.

Turning back to the first quarter on slide 17, we paid taxes of approximately $268,000, or 26%, in line with our guidance of full year 2012 tax rate in the 25% to 27% range. Income from continued operations was $766,000, or $0.02 per diluted share. This compares to a loss from consuming operations of $2.6 million, or $0.06 per diluted share in the fourth quarter, and income of $18.8 million, or $0.43 per diluted share in the same period last year. On a non-GAAP basis, income from continued operations was $2.4 million, or $0.06 per share.

Turning to our balance sheet on slide 19, we ended the quarter with cash and investments of $150.7 million. This was a $7.5 million increase over Q4. Excluding share repurchases, cash flow was $29.4 million for the quarter. Trade working capital decreased by $19.6 million during the quarter. Stock option expense for the quarter was $5 million, and depreciation and amortization was $4.2 million.

Finally, turning to guidance for the second quarter on slide 20, we expect revenues to be between $114 million and $120 million, and non-GAAP EPS to be between $0.11 and $0.14 per share. We expect to recognize a restructuring charge in the range of $300,000 to $500,000 during the second quarter. This guidance reflects our views that sales to the semiconductor market will moderate, and capital spending in our other thin film markets will improve, although all flow levels. Additionally, we expect a slight pick-up in our solar energy business after the seasonally soft first quarter.

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

Thank you. (Operator Instructions) Our first question comes from Joe Maxa with Dougherty & Company. Please proceed.

Thank you. I wanted to ask a little more about the solar market. You talked about increasing competition, or potentially coming to North America, given what's happening in Europe. What are you seeing right now, and what are you expecting as the year progresses?

Hi, Joe. We're very comfortable with the prospect list that's out there for us. Not much problem there. Yes, there are companies coming in, but as we said last time, they are really not designed for the US market yet, so they are having a difficult time. Gordon do want to add anything?

So the one thing I would say to clarify is we are focusing on the utility segment in the high end of the commercial market. So we aren't seeing too much of what's going on in the residential market right now. But we are feeling very comfortable with the prospects that we have going forward in those first two segments.

So as they come and get more experience in North America, are you anticipating stronger pricing pressure? Are you seeing anything yet?

We will have new products at lower costs, so I'm sure we will be in a good situation.

Okay, I understand. I wanted to ask about operating expense line, Danny, it does look like your operating expenses ex restructurings and what not. I think there was some bad debt, maybe, last quarter. It looks like your OpEx has increased over the last couple of quarters on the lower revenue --

Joe, what you have now, is you do have anticipation of hitting our plans for the year, which causes us to accrue bonus compensation, which was a big reversal in Q3 of last year, and was non-existent in Q4. That's the primary thing. If you took out, you'd get a good apples and apples reduction comparison.

I see. That's helpful. Then I just wanted to get a little more clarity on your thin films market segments. You're expecting some, basically, flatness in semi. Were you thinking that's Q2, or the rest of the year? What is your outlook on that?

This is Yuval. Our Q1 was very strong, and in comparison to Q1, we see a slight decline in Q2, but it's coming off a very, very strong Q1. We expect for the rest of the year to behave just like the market, and we don't see, right now, any pressure that will impact that assessment.

So it's fair to assume most of the revenue growth in Q2 is coming from the solar piece?

On the thin film business?

On the thin film business, you're going to see a little bit of growth from flat panel display.

I'm sorry, I switched gears on you. I meant your solar SBU --

We're certainly going to see some growth in solar. I think we've said it's going to edge forward throughout the year. We've got a good prospect list at the high end in commercial and utility. We feel quite comfortable that we can grow this next quarter from a low third quarter. Q1, as we've said before, is always relatively low. So we are in good shape.

All right, thanks. I'll jump back in the queue.

Our next question comes from the line of Krish Sankar with Bank of America-Merrill Lynch. Please proceed.

Thanks for taking my questions, I have a couple of them. One of the things I wanted to find out is, when you start looking at getting into inverters outside of the US, can you talk a little bit about what the priorities are for the India and the Asian customers are? Is it more in terms of reliability service? What are you looking at, and how should we think about the pricing outside the US?

Well, I think it's fair to say that India is the first market that we've focused on, and what we're seeing there is actually a market that's in its fairly early stages. There's certainly pricing pressure, but there are a lot of customers that we've talked to that see the value in a reliable product, and a Company that can stand behind its warranty.

So the warranty is similar to the US warranty?

I think the market is bifurcated really. There's a really low cost market in India, which obviously we don't want to play in, and we won't play in, and there is equality market there, which wants a product that will last a long time. So we are clearly not going for the cheapos. We're going for the quality product and the quality customer, and that is what we do across the world, of course. We do that in the US, and we do that now in India. So there is a low cost market there. We don't want it. We would like the other people to go and get that one. Give it to them.

All right. And then just a final question from my end. Given the move to Shenzhen, and if you bake in potential pricing decreases and new order side of pricing pressures. What you think is a good gross margin, long-term gross margin, for your new order business? Would it be in the low 30s, or do you think it can get beyond that? Thank you.

That's an outstanding question. The Shenzhen facility, we're really fortunate to have that facility, and we're moving very quickly, as the sub-assemblies are already being built into our products to a certain extent. So, we're moving we there. We will get the costs out, and we will start to see that probably in Q3, Q4. Then there, of course, is pricing pressure that could take a little bit of that away. But we expect to have gross margin over a long-ish period of time to creep up slowly.

Thank you.

Our next question comes from the line of Weston Twigg with Pacific Crest Securities.

Sure. I have a couple questions here. On the thin film operating margin, it was pretty low this quarter. I know there were some one-time expenses, and some changes in terms of corporate allocation. But the cycle peak goal is 23% to 35% op margin, and I'm just wondering, since arguably we're at a cycle peak range for the semi business, when you might expect to get there, and maybe would you get there later this year?

It's a good question. Obviously, if you add back the additional allocations, and you add back the one-time, end-of-life buy, you're back up to the 13% or so that we showed in Q4, and that's on a revenue basis of $60 million. If you recall, back during the peak last year, our thin film unit was delivering about $100 million of revenue. So if you took another $40 million of revenue and used an appropriate gross margin, you would be right up into those cycle peaks that we've talked about.

Okay, good. Then just moving over to the inverter side. What do you think the op margin might be by Q4 this year?

We haven't disclosed that, as you know, but we have given you what we hope in the three year period, and we hope to be getting to about 10%.

All right. Finally, related to the inverter piece. On the Canadian manufacturing, so just to clarify; you have an outsource manufacturing partner. You are moving away from that, and establishing your own facility for manufacturing? If so, does that get away from your plans to manufacture and everything in Shenzhen? Is this a little bit of a change in plans?

Not at all. We have a facility already in Canada, and we are utilizing that facility. We are not increasing our square footage. We are doing assembly in countries where we are required to do assembly. So that's what we are doing there.

Got it. All right, thank you very much.

Our next question comes from the line of Timothy Arcuri with Citigroup. Please proceed.

Hi. This is a Kevin calling in for Tim. I had a couple questions on the inverter market. What is your revenue breakdown by geography? Do you give that? Maybe just roughly, Europe, Asia, North America?

Can I just correct a question I answered before? I said the solar business, we're getting to 10%. It's between 10% and 15% over the three year period, is where we hope to be. My apologies for screwing up. Our solar business is mainly US. It's not really worth dividing up our geographies at the present time. It's mainly the US.

Okay.

Noise level everywhere else.

I see. Then do you have any interest in entering Japan? Is that a potential market for you in the second half of the year?

We love Japan. Japan is a good market. The obvious ones are Japan, India, and China. I've already told you we would not go into China. It's not worth the bother. But we are going into India, and we will try to find a way into Japan. Great question. Other areas, of course Latin America and South Africa.

Then lastly I noticed ASP is still trending down a bit. Do you have the guidance in terms of percent, and in terms of what you're expecting in Q2?

The ASP math that you are referring to is just a [watt] shipped in revenue dollars. Remember the revenues have a different balance of system parts in there than they used to have, so it's really not a good measure over time.

And our services business is continuing to increase as well.

Okay. So are you seeing more stability, then, from last quarter to this quarter, Q4 to Q1, ASP wise?

We're always seeing pricing pressure. But we have been doing an effective job of maintaining our ASPs.

Okay great. Thank you for taking my question.

Again just to repeat there, we are not going after all the business. We're only going after what we think of as the good business. As you know, as you look backwards with us, we haven't made money. We are pleased that we got over the breakeven last quarter, and we are still seeking out customers that fit our product line. We're not going for anything at all. That's probably why we don't see these European competitors who are coming in at the low end, because we're actually just going for the, I'll call them the Rolls-Royce companies.

Okay, great. Thanks.

Our next question comes from Edwin Mok with Needham & Co.

Hi. Thanks for taking my questions. By the way, congratulations on a great result in guidance. First question I have is on the restructuring. How much of that $26 million NOI saving that you have achieved total so far, how much of that is reflected in your first quarter result? How do we think about that, your cost model going forward beyond the first quarter?

Edwin, this is Danny. The $26 million has all been structurally put in place. But I would say, of the $12 million in compensation that added this quarter, $6 million of that is a short-term incentive, and since there was no short-term incentive paid out last year, accruing for that would actually be an increase year-over-year, but structurally, the program has been redesigned to pull the $6 million out. On the long-term incentive, structurally it's been redesigned to pull out the $6 million, but because we have a tail of options and RSUs that are previously granted, those will wind down over the next three years. So you will see a decrease in amount each quarter, but it will take three years for the tail to wind down on the long-term incentive. The rest of it is in our run rate today.

So your stock comp jumped to $5 million this quarter, was just -- (multiple speakers)

That's right. It did. But that's because of the wind down of the tail on the new program that was put into place this year. When the tail is totally eliminated, our stock compensation will be over $6 million less annually, and the dilution will be down to 1.5% from what was previously 4%.

Okay. Maybe I'm a little confused, here. Are you saying that you will start to be see that in the second quarter, or does it take a few quarters --

It will take a few quarters for you to see it. You will see little change in 2012. You will see more of a change in 2013, and the tail is totally unwound in 2014.

Great. That was extremely helpful. On the mass flow control business that you guys talked about, was it just a facility sale, or was there actually any revenue that was tied to that?

Edwin, this is Yuval. We basically transitioned the whole business, and the recent agreement we came to with Hitachi Metals as that they will assume the lease of the space that was used for manufacturing for mass flow controllers in Shenzhen. We'll hire all the employees, and we'll continue to run the operation with the current team. The main driver was the flood in Thailand that changed our plans. We are now on track to transition our service of the flow business to Hitachi Metals. That will be concluded in Q4, and we do it a country at a time.

So, the good news story here is that we are not having to close down a facility. They are taking the facility from us, and the good news for our people, thank goodness, is that they are taking our people. So the employees continue to work, but they just continue to work for Hitachi, and the floor space just goes to Hitachi. So it's actually good news for us and good news for our people. It could have been that we would have had to close the facility ourselves. So the saving for us is cost saving. It is shutting things down. It's a win-win for everyone, actually.

The customers continue to enjoy a high-quality, continuous supply, with the same team and the same systems.

Great. That was very helpful. Lastly I have this recording your guidance. So if I assume just a modest growth in the thin film business, that would imply 20 percentile growth for your solar business sequentially. Can I ask what is driving that growth? Is that the US market? Is it these international expansions you talked about, or is it just your share gain within the US market? Thank you.

I think we've always said that Q1 is seasonally weak quarter for us. And Q2, we would be back to a more normal revenue that we would see tracking for the rest of the year.

We have got good traction in the US. We spoke about India, but India is a project. It's a long-term project. At the moment we are enjoying the US, and that high-end commercial utility spot, where there is a lot of business to be had. I know we were reviewing the prospects last night, and they are extremely good. Clearly we have to win them, and that's the risk. But we are in good position with our products and services, and the customers are there for us. So I think we are in as good a position as you can get.

Can I make a quick follow-up question on that? In terms of maybe think about -- one way to think about is maybe like backup coverage, or how much of your businesses is booked for the quarter. For the second quarter, at least in both solar and thin film. How should we think of business that's booked? One month of the quarter is behind us.

That's a very good question, and as you know, we don't answer at. But what we are very comfortable for the quarter. Very comfortable. At the present time that's where we are. We are comfortable.

Great. Thank you.

Our next question comes from the line of Jim Covello with Goldman Sachs.

This is Mark Delaney calling for Jim Covello. Thanks very much for taking the question. I was hoping you could help me understand a little bit more on the restructuring activities that you are putting in place, and I know that there's been a lot of work done, and exceeded the initial goals. When I look at the operating expenses going forward, if revenues are going up, should we assume that OpEx is going to be flat to up, but just at a slower rate, or can it still come down on an absolute basis?

Mark, all of the problems we put in place, and as I commented in my remarks, they've been put into place with the intent of them not going up when we return to a higher revenue levels. That will be a difference from what we used to do as a Company. We've cut our workforce to the right size to be able to be profitable in [Mitrol] and we don't expect to add cost as we increase in revenue.

Okay. That's helpful. Then I was hoping you could talk on the inverter, the solar energy business unit in the United States, or actually, maybe more broadly, the breadth of the customer base. If you looked at your top, say, two or three projects, what percentage of your overall solar energy revenues are coming from those larger projects?

We don't disclose that, but there are a lot of large projects going on at the present time. So it's very much black-and-white. You win or you lose. We seem to be in a good position.

We've said the majority of our business is in the category that's above 250-kilowatts. We are very confident in the projects that we are executing now, and the ones that we have lined up as prospects.

Mark, I know your concern is on concentration, but if you think about it, the largest solar project of the US was the Zachary project down in Southwestern Arizona, and that was a 150-megawatt project, and that was over 18 months. So that's only, if you divide that out, that's 20-megawatts of concentration in one year. That's all.

What you're describing as concentration, internally, we call it focus.

That's helpful. Lastly, if you assumed, say, an even mix of thin film and solar revenues, what overall top line number would you need to get to, say, by the fourth quarter this year in order to have a 10% or greater operating margin?

I would have to think about that, Mark, and do some math, instead of spouting it off the top of my head. If you look at this quarter, if we held our cost constant, and we just grew from where we are, you can do the math to get to the 10%, because you really aren't going to have any cost increases, other than growing the margin.

Got it. Thank you very much.

Our next question comes from the line of Medhi Hosseini with Susquehanna International.

Thanks for taking my question. One for you all. If the semi cap, especially the front end, were to be flat this year, would you expect your component sale into that market to grow?

In general, maybe, the answer is yes. We have won significant design wins during the last two quarters, and we continue to launch new products to the market for both 2x nanometer technology nodes and beyond. We have started shipping products to those specific applications spaces. So if we assume that everything stays the way it is, our main business will continue to track the industry, and the new business will be generated by capitalizing on those design wins that we have landed recently.

Got it. Then on the flat panel display, you talked about increased activity. LG last week talked about building another factory. Is that what you were referencing?

Not necessarily. Right now, we see an increase in two areas. The first wave, if you may, is driven by technology migration, and there is a lot of investment driven by the AMOLED displays, for which we have a significant leadership position in the etch applications. We expect Samsung to follow that investment cycle. After that, we expect to see an additional investment in capacity. When, exactly, is still murky, but we are really well positioned to benefit from that wave, as well.

Got it. One question for Danny, what kind of tax rate should we use for the rest of the year, since it was 33% for Q1?

Actually, the 33% is the result of how you do the restructuring and the tax impact on that. Our full year tax rate is still expected to be in the 25% to 27% range. Actually, overall this quarter it was 26%, right in the middle of that range. The one thing out there, and I think we've discussed this before, Medhi, is Congress still hasn't passed the R&D tax credit for 2012. If it is passed some time before the end of the year, it will have a favorable impact of 1 to 1.5 points on our tax rate.

Got it. Thanks much.

Our next question comes from the line of Colin Rusch with ThinkEquity.

Thanks so much guys, and well done on the execution. Can you talk about how many deployments you have on the ground in India at this point? If you don't have anything up and running there yet, when you expect to have something connected to the grid?

We said in the opening remarks that we do have our initial installation completed there.

Okay. And how big is that?

It was 1-megawatt.

Okay. You've actually done a pretty good job of being disciplined on your ASPs. Can you talk a little bit about the customer dynamics, in terms of volumes of bookings, and what you are seeing a yes and no to, and what criteria you are really using to say yes and no to those customers?

I assume you're talking overall, here, and not just about India. I think what we have said is that what we are looking to do is develop relationships with customers, and develop sources of profitable, sustainable growth. What we are doing right now is we are continuing dialogue with customers. As I've said, there's pricing pressure on us all the time. But we are selling the value of the products that we deliver and the services that we provide. I think as we go along, there is obviously these situations where there are customers that are motivated by rock bottom prices, and most of the deals that Gary is talking about, where we've decided, on occasion, we'll just walk from those.

Okay. Can you help us understand what the bookings run rate was for the first quarter?

We don't disclose that, as you know, but we are very comfortable with this quarter at the present time. Q1 is seasonally weak, as we've said, and we are looking forward to a pick-up this quarter. At the moment we are in good shape.

Okay. Thanks guys.

Next CJ Muse with Barclays Capital.

This is Olga [Levinzon] calling in for CJ. Thanks for taking my questions. Just wanted to touch base on the outlook for the inverter market. I think in the last call you had talked about your expectations for the TAM to grow 20% to 22% for the year. If I factor in your results in the first quarter, and the slight increase in 2Q, it seems like you would really need to get to a $65 million run rate in the second half of the year. Do you believe that's currently achievable, based on your customer conversations?

Well that's your calculation not ours. What we've said is we can grow north of 20% this year, and that's what we expect to do.

So far, the conversations you've had with your US customers still suggests that, that growth rate is still on track?

We are very comfortable with that growth rate at the present time. There is nothing that we can say at this moment that would make us change our mind to that growth rate.

Olga, we were up in the first quarter over the first quarter of last year in excess of 20%. We were $37 million last year in Q1, and $45 million this year, which is over 20%, and to achieve 20%, we have just got to do that every quarter.

Then on the operating margin side, if you do see some level of growth, maybe in the high 60s, low 70s on the thin film slide in the second half of the year. What kind of operating margins should we be modeling in, based on the cost cutting that you are expecting to execute through the end of the year?

Well, you should hold the operating expenses relatively flat, and just grow based on your gross margin assumption that you have in your model for the two business units. But assume operating expenses stay relatively flat.

So I guess the other way to ask that, how much gross margin leverage can you get as we exit the year?

I think we've answered that question. We are going to hold our costs down as much as we can, and you should see the gross margin flow to the bottom line as the year proceeds. That's on the assumption we grow.

Thank you.

My pleasure.

Ladies and gentlemen, in the interest of time, this does conclude our question-and-answer session today. I would now like to turn the call back over to Mr. Garry Rogerson for closing remarks.

Well, thank you very much for being here and listening to us today. We look forward to seeing you at the Barclays conference in May. Thank you. Goodbye.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.