Advanced Energy Industries Inc (AEIS) 2013 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Advanced Energy earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference tow over to your host for today, Ms. Annie Leschin, Investor Relations.

Thank you operator. Good morning everyone. Thank you for joining us today for our first quarter 2013 earnings conference 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, and Gordon Tredger, President of the Solar Energy business. By now you should have received a copy of the earning release that was issued yesterday evening. For a copy of the release please visit our website at Advanced Energy.com or call us directly at 970-407-4670.

I would like to remind everyone that except for the historical financial information contained herein, the matters discussed on this call contain certain forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Statements that include the terms believe, expect, plan, objectives, estimates, anticipates, intends, targets, goals, 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 or 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-Q, 10-K, and other forms filed with the SEC. In addition we assume no obligation to update the information that we provide you during this call, including our 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. Garry.

Good morning. Thank you for joining us. Overall results this quarter were in line with our expectations. Thin Films pecked up, while Solar Energy experienced a seasonal decline, and also experienced some pushouts of commercial orders. Total revenues $112 million, with GAAP EPS of $0.17, and non-GAAP EPS of $0.29.

As Danny will highlight in a moment, beginning this quarter we are adjusting our non-GAAP EPS to exclude certain items to more accurately reflect the cash earnings power of our model, and be consistent with our peers. This does not affect our aspirational goals, but does help us show you the path towards them. Our strategy to create an exceptionally efficient business model that will we expect will capitalize on the peaks and profitability managed through the troughs of our industry cycles is coming together.

Since November of 2011 we have reduced our costs by more than $30 million, with a line of sight and expectation for another $25 million. We have established a streamlined model for our manufacturing, and are maximizing our supply chain and outsourcing opportunities. We have lowered our Company breakeven, and generated $111 million of cash. We have profitably endured a trough in our Thin Films business while continuing to grow our Solar business. In short, we are successfully executing on our strategic plan and aspiring to meet our goals.

We believe that all of the steps we have taken are creating a strong foundation, from which we can now focus on accelerating profitable revenue growth. To do this we are developing more efficient R&D in select worldwide locations close to our customers, establishing more efficient localized distribution, and acquiring new technologies and product lines, such as Solvix, and our recent acquisition of REFUsol, to add to our core competencies.

REFUsol meets our acquisition criteria from its highly-rated three-phase string product line targeting commercial applications, where AE has not historically participated, to its global presence and distribution to established manufacturing models, we could not have found a better fit. Once the integration is complete, we believe our inverter portfolio will be among the best tailored to meet the needs of commercial applications large and small, as well as utility deployments, leading to a much expanded TAM of worldwide presence. We are seeing other benefits from the acquisition as well, by purchasing the product lines and distribution of REFUsol, we are not only planning to increase our solar revenues by about 40%, but our larger scale should allow us to rid ourselves of inefficiencies in our Solar Energy business, and potentially accelerate certain growth activities.

We are planning a major restructuring, not only to integrate REFUsol, but to accelerate other cost reductions originally expected later in the year, for both Solar Energy and to a minor extent Thin Films. These include the consolidation of REFUsol and ailing facilities in Germany and the US, the combination of our two product lines, and the resulting product rationalization, further streamlining of our manufacturing, and more. In total these actions should result in approximately $18 million to $20 million of expected annual savings, $14 million of which will be in cash. We expect this restructuring and the integration of REFUsol to take approximately nine months to complete. We expect the acquisition will be accretive in 12 months.

As I have reminded you in the past, experiences have demonstrated that such a large undertaking can be challenging. Obviously we will do everything in our power to make the transition as quick as possible, but we expect the initial period to be dilutive. At the end of the transition we believe we will have a business with which we can achieve our aspirational goals. As we have said before, we are focused on our strategy to improve margins, grow profitable revenues and better utilize our cash. We believe we are creating the most cost-effective way to develop, sell, and manufacture our products. That is a never-ending process.

With today's announcement of an additional $30 million to $35 million in cost reductions and other integration activities, we have a large task ahead of us. Once complete we expect to establish a level of operational excellence that is unique in our industry. With strong projected revenue growth in our Solar Energy business, especially later in the year as we introduce our 1-megawatt inverter, and optimistic signs that the Thin Films business is picking up throughout the year and into 2014, we are optimistic that we can reach our goals. We are entering new applications and geographies before both of our businesses, and looking for new distribution channels and potential acquisitions. As we do this our potential to generate cash and profits for our shareholders grows significantly. Our concept of winning is earnings per share, and we believe that things are coming together to position us for a prosperous 2014. Thank you.

Thanks, Garry. Beginning with slide nine, revenues from our Thin Films business increased 16% sequentially in the first quarter to $61.8 million. For the first quarter in more than a year, all of our Thin Films businesses save renewables showed sequential improvement.

Coupled with efficiency gains from our many cost reductions, operating income also grew to $7.5 million, or 12% for the quarter, up from 9% last quarter. Design wins were, once again, strong this quarter. We captured more than three quarters of the opportunities we pursued, winning 80% in semiconductors, and 75% in Thin Film industrials, leveraging a new engagement model with three OEMs, we have increased our penetration in the important semiconductor growth areas, such as etch and sputtering. As the semiconductor industry moves to triple and quadruple patterning techniques in 3D device geometry, more etch steps are required. This is opening up opportunities with various etch tool suppliers, where we are capturing new design slots. Additionally, as more RF sputtering steps are needed for advanced generation devices, we are winning designs that are positioning us for future revenue growth. These trends, along with our growing abatement business are some of the reasons behind the increases that we see in our semiconductor business.

In Thin Film Industrials, our wins stem from touch panels in Asia, to low E glass in China, and from etch applications for large area and small screen flat panel displays, where we provide high power RF generators to film depositions for handheld device touchscreens, where we supply DC and RF power generators for sputtering and PECVD applications.

Turning to our performance on slide 10, sales for semiconductor applications increased due largely to capacity buys at 28-nanometers and initial technology buys at sub-20-nanometers nodes, which requires increased etch content. Sales of abatement equipment also performed well, driven by strong orders for our remote plasma source, Litmas. The outlook for 2013 semiconductor CapEx remains mixed. Coming off of the cyclical loads that the industry has seen, key fundamentals though still relatively low as showing signs of improvement. Front end utilization rates and equipment refurbishment are beginning to return as fabs invest more aggressively in next generation advanced technology, and logic and foundry CapEx appears to be strong through at least the first half of the year. The ongoing uncertainty around memory spending is a major driver behind the industry's 2013 projected CapEx for flat to down 8% year-over-year.

In flat panel display, the expected surge in next generation AMOLED investment, and gen 5.5 line extensions continue, driven by demand for displays and touchscreens for tablet and smartphones. Investment in these areas is expected to continue throughout the second quarter of 2013.

Turning to our industrial business, revenues grew due to strong demand in automotive and consumer products manufacturing applications. Our acquisition of Solvix is expanding our higher end applications and customer base into precision RF coating applications, as new customers qualify this product line, we are already starting to generate new business. Additionally Solvix's strong engineering work in Switzerland is quickly becoming our DC and sputtering Center of Excellence in Europe.

In our service business, great fixed revenue recovered a bit this quarter, as the fab utilization rate increased slightly. Some customers believe fab utilization will increase in the second half of 2013, driving both repair and refurbishment business. Meantime, we are seeing opportunities to grow our preventive maintenance revenue for gas abatement and flat panel products. We also completed the transition to our new distribution model in Taiwan, where we have engaged Scientech as our sales channel, and CSS as our service partner. In Japan, where we have implemented a similar model, we are already gaining traction with important customers with whom we have not had relationships with in the past. These re-engagement models and local alliances should enable us to more efficiently serve our customer base with a flexible cost-effective solution, while accelerating our extension into geographies and industrial applications.

We are encouraged by the improvements we are seeing across our Thin Films business. Our revenue growth and recent design wins exemplify AE's strong position across the industry's reserve. While the Thin Films markets are showing some signs of recovery, visibility in the second half remains a bit cloudy. Our recent design win success and our ongoing efforts to drive efficiencies and reduce our costs, along with our brand strength should position us to grow across the industries that we currently serve. I would now like to turn the call over to Gordon to discuss our solar energy business.

Thanks Yuval. Turning to our Solar Energy results on slide 12, obviously the big highlight in the last month was our acquisition of REFUsol, and its three-phase string inverter product line. But before I go into more detail on that, let me first review our results for the first quarter. We shipped 217 megawatts this quarter, versus 228 megawatts last quarter, leading to revenue of $50 million, or 45% of the Company's total sales. The 16% sequential decline in revenues was a bit more than we anticipated coming into the quarter, though less than we had seen in recent years. Some commercial orders were pushed out during the quarter due to weather, while others were affected by financing and permitting delays. First quarter operating income was roughly breakeven. As expected, margins were pressured again this quarter due to one utility contract that included some low margin balance of system components.

Turning to slide 13. We remain encouraged by our prospects for the year. Especially on the commercial side of the business, with a strong pipeline of opportunities unfolding as the year progresses. On the Utility side, we see more opportunities emerging in the second half of the year, as we ramp shipments of our new 1 megawatt inverter, the AE 1000 NX, that is scheduled to begin shipping in the second quarter.

This product offers the same benefits in lowering the levelized cost of energy, or LCOE, that our bipolar product line has always delivered, with significant economies of scale on large deployments. In addition, the 1000 NX will offer a fuel suite of utility interactive controls and good support capabilities, that will be relevant to transmission connected sites in places like Arizona. These features will also be very important for large commercial projects in the US. Overall, the 1000 NX has been well received by our customers, and should allow us to be price competitive, while achieving our margin targets.

Now let me turn to the REFUsol acquisition, and provide you a few updates on our progress with the integration on slide 14. As you know, our primary purpose in acquiring REFUsol was the addition of its three-phase string products portfolio. These products range from 8 kilowatt to 24 kilowatts, and should allow us to increase our penetration of commercial applications, helping to offset the lumpier revenues associated with large utility projects. Our three-phase string inverters officer commercial customers a compelling price performance ratio, low installation costs, and a lower LCOE than competitive converters..

The compact lighter weight nature of our product, affords customers design flexibility, ease of installation, and scalability. Less than a month after our announcement, we are already seeing strong interest in booking orders for these products in the US, clearly demonstrating the respect for this prudent technology backed by AE's established reputation. We believe that the potential for these three-phase string applications in the US commercial market is around $235 million for 2013.

Another reason for the acquisition the expansion of our geographic distribution. Obviously we are well aware of the forecasted decline in the German market where REFUsol products have enjoined a strong position. We have taken what we believe to be an extremely conservative view of European revenues as a result, and are reducing our costs accordingly. The enormous opportunity we see lies in REFUsol's presence in the rest of Europe and Asia, especially in emerging territories, such as India, the Mediterranean, and eastern Europe. For example, in India, where REFUsol is currently selling the three-phase string products, we plan to expand our product offering through a combination of our collaboration with STEG, and our newly-acquired local R&D group. This should increase the size of our market opportunity in India, and accelerate our penetration of this promising region.

This model is similar to our Thin Films business, where we are establishing R&D close to our customers, outsourcing our localized manufacturing as needed to satisfy customer requirements, and building effective sales channels to create strong relationships with our customers. Overall, we are excited about the prospects for this product line, as it positions us well to meet our objectives for 2014, as outlined in our strategic plan. Progress toward meeting these objective will occur in stages. The next step is the integration of the product line and the people, which we expect to complete over the next few quarters.

During this crucial period we will manage our business very carefully, and be conservative in setting our expectations. Our focus is on making the right strategic decisions to ensure that this acquisition will benefit our customers, reduce our operating costs, and improve our gross margins,so that we achieve profitable sustainable growth. Some of the early decisions that have been implemented include the consolidation of our German office into REFUsol's, and REFUsol's US locations into ours.

Another important action is the consolidation of our remaining US manufacturing operations into our facility in Fort Collins, where we will focus only on final configuration, burn in, and testing of our inverters. Shenzhen will be the hub for assembly operations and execution of our outsourcing strategy. We are continuing to work towards achieving a fabless business model, similar to REFUsol's approach, by utilizing strategic relationships with contract manufacturers, outsourcing sub assemblies, and working down costs over time through efficient supply chain management. This established business model is the third compelling rationale for the REFUsol acquisition.

The final area of potential cost reductions is the acceleration of our product line rationalization. To date, we have seen our strength in larger scale commercial and utility installations based on 250 kilowatt and 500 kilowatt central inverter products. Now with the clear advantages of our three-phase string products, we are able to offer alternatives to fit the needs of all commercial customers. While we will continue to offer the legacy PV powered central inverter products to commercial customers in the near term, given the strong margin profile of our three-phase string products, we plan to develop that offering further to better serve this important customer base longer term.

In summary, the pipeline of large projects in the US market remains active, and we are enthusiastic about the prospects for the AE 1000 NX in the utility segment. The addition of REFUsol's three-phase string products and the added global distribution should enhance our opportunities for profitable growth. With the steps we have already taken to establish our low cost model, and the further cost reductions anticipated through the integration and associated planned actions, we are now well-positioned to achieve our aspirational strategic plan targets of 20% to 22% CAGR, and 10% to 15% operating income in 2014 in this business,as revenues expand the rest of the year.

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

Thank you Gordon. In today's call I will refer to both GAAP and non-GAAP results. As you saw in our press release, in order to give a more accurate picture of the cash earnings power of our financial model, and be more consistent with our peers, we are adjusting our non-GAAP description. Beginning in the first quarter, non-GAAP measures will exclude the impact of restructuring charges, acquisition-related costs, stock-based compensation, and the amortization of intangibles. A reconciliation of non-GAAP income from operations and per share earnings is provided in the press release table. Once again, I would like to reiterate that the changes in our non-GAAP definition does not impact our $2.00 per share aspirational goal.

Beginning with highlights of the first quarter on slide 16, total revenues were $111.8 million,a decrease of 1% sequentially, and an increase of 6% compared with the same period last year. We ended the quarter with a strong balance sheet, including $182.3 million in cash and investments, up $10 million from last quarter.

Turning to the revenue performance on slide 17. Revenues for the Thin Films business increased 16% sequentially to $61.8 million. The majority of the increase was driven by sales to semiconductor applications, which grew 11% to $32.7 million from $29.5 million last quarter. Sales to flat panel display applications showed a marked improvement as well, more than doubling to $8.7 million from $3.2 million in the fourth quarter. Sales in data storage and industrial applications rose 18% to $7.4 million, compared to $6.3 million last quarter,as we saw an increasing contribution from adjacent markets due in part to our recent acquisition of Solvix. And finally, service revenues had a healthy increase of 7% to $12.5 million. Sales in our solar energy business were $50 million in the first quarter, a decrease of 16% sequentially. The seasonality was not as pronounced as we have seen in the past few years. Commercial sales were slower than anticipated in the first quarter, as Gordon commented.

Turning to slide 18, our various cost savings initiatives, coupled with our continuous focus on cost reduction, led to GAAP operating expenses of $34.1 million, a 12.7% decrease from $39.1 million in the same quarter a year ago. Although we had no restructuring charges this quarter, GAAP operating expenses included $2.2 million in amortization of intangible assets, $2 million of stock-based compensation, and $1.1 million in costs related to the acquisition of REFUsol. Total GAAP operating margin was 6.9%, compared with 4.9% in the fourth quarter, and 0.1% in the first quarter of 2012. As a reminder, we allocate all of our expenses to each of our two businesses, causing our operating margins to be 3% to 4% lower than others in the industry.

Operating margin in our Thin Film business on a GAAP basis improved to 12% from 9% in the fourth quarter, and operating margin in our Solar Energy business was breakeven versus 6% last quarter. As Gordon explained, we anticipated some margin pressure in our Solar Energy business from one utility project that included some lower margin items outside of our inverters. GAAP income from continuing operations was $6.8 million, or $0.17 per diluted share. This compares to income from continuing operations of $4.9 million, or $0.13 per are diluted share in the fourth quarter, and income from continuing operations of $766,000, or $0.02 per diluted share in the same period last year.

Non-GAAP income from continuing operations which excludes the aftertax impact of $2 million of intangible amortization, $1.8 million of stock-based compensation, and $1 million of costs related to the acquisition of REFUsol was $11.7 million, or $0.29 per are diluted share. This compares to non-GAAP income from continuing operations of $8.9 million, or $0.23 in the fourth quarter. And income from continuing operations is $6.5 million, or $0.16 per diluted share in the first quarter of 2012. Taxes were $700,000, or 9% in the quarter favorably impacted by the retroactive treatment of the R&D tax credit for 2012, which was credited entirely in the first quarter.

Turning to our balance sheet on slide 19. We ended the quarter with $182.3 million in cash and cash equivalents, an increase of $10 million from last quarter.

Turning to slide 20. Before I talk about guidance for the second quarter, I want to remind everyone that we are in the midst of a major transition, as we integrate the acquisition of REFUsol, and undertake a significant restructuring. We have already begun to move the remainder of our US manufacturing to our Fort Collins, Colorado facility, and to consolidate certain facilities, including REFUsol's office locations in South Carolina and California, and AE's German office. Over the next nine months, we also plan to transfer the remaining supply chain activities for our Thin Films business to Shenzhen, and to rationalize our inverter product line to most effectively meet the needs of our customers. For the next few quarters, there will be a lot of noise in numbers, as we execute on these cost reductions, and work diligently to integrate REFUsol into AE. Our job during the balance of the year is to blend our companies together as effectively as possible, by turning over every stone in both organizations, to find any possible duplication, so that we enter 2014 with most of the charges behind us, and an extremely efficient solar energy business to help us achieve our strategic goals.

On slide 21, we expect these actions to result in total charges of approximately $30 million to $35 million, with approximately $8 million to $12 million in cash charges, leading to total savings of $18 million to $20 million annually. Approximately $14 million of which will be cash savings. Basically we should be able to recoup our cash outlay in just one year's time. This will bring our total cash savings including actions underway and already taken to approximately $70 million to $75 million by 2014.

Finally turning to guidance for the second quarter on slide 22. We expect revenues to be $132 million and $145 million. We assume that our Thin Film semiconductor and industrial applications continue to improve. Based on a more normalized second quarter tax rate of approximately 27%, we anticipate earnings per share for the second quarter to be between $0.10 and $0.20 per share before restructuring charges. Our non-GAAP earnings per share is expected to be between $0.18 and $0.28 per share. Non-GAAP guidance excludes restructuring charges of approximately $23 million to $26 million, $20 million to $23 million of which will be noncash charges. Other non-GAAP charges include acquisition-related costs of $700,000, stock-based compensation of $1.7 million, and amortization of intangibles of $1.6 million.

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

Thank you. (Operator Instructions). Your first question is from the line of James Covello of Goldman Sachs. Please go ahead James.

Mark on behalf of Jim Covello, thanks very much for taking the question, and congratulations on a good quarter. I was hoping you could elaborate a little bit more on the inverter product portfolio, now that you have REFUsol, I know Garry you talked about wanting to augment the product line, and do you feel comfortable with REFUsol that you now have the products that you want going forward?

Thanks for that question. Firstly, we have now got a really good foundation. The foundation we described of manufacturing in Shenzhen, our localized R&D and distributed sales is really in place, so that has allowed us to now move forward to accelerate the revenue growth. If you remember we were talking about a good foundation, generation of cash which of course we are doing, and accelerating revenues into the future. That is the basis of where we are.

On the REFUsol acquisition, it is just beautiful for us. If you think about the products we bought, and the distribution we bought, they really dovetail into where we are today. We are strong in utility and high end commercial, they are in lower end commercial moving up. So we fit well there.

Geographically they are strong in Europe, which is of course is a weak area, and we recognize that, but they have also got a foothold in some very nice growth areas, including eastern Europe, Mediterranean countries, and probably more important for us is India. India is so important for us. We talked about it a year ago, and said that we really want to make inroads into that country. We do now have revenues in India. And we have manufacturing or the potential for manufacturing in India, and we have the potential for R&D, or we have R&D in India. So we are in a nice position to get a good foothold in the Indian marketplace.

So to answer your question, and Gordon can fill in the holes for me, but product-wise it is a great acquisition. Geographically it expands us. We are still not worldwide. We have still got to find a way into Japan. Fortunately, we are developing products for Japan now, so we will get a foothold there, and we have got to find a way to work with our partner in China, to see if we can get some revenues out of that country. All-in-all it is a super acquisition for us. Gordon, anything you would like to fill in?

No, we are very excited about the prospects for the three-phase string products. It is a nice complement to the central inverter portfolio that we have in the US, and we will be able to leverage, as Garry said, the distribution into some of the other growing markets around the world,particularly eastern Europe and India, as Garry suggested.

I think we have said it now, we think we will be in a position in 2014 to have roughly $400 million of revenues, but what I like about those revenues, first is they will be profitable revenues, but secondly, they are with growth products into growth countries and growth applications. So we are positioned well. We have discounted the European revenues as we move forward. So we positioned ourselves for a really nice acceleration of growth from 2014. We think in 2014 we can get to roughly $100 million a quarter, and from there we think we can grow.

That is helpful, thank you. Looks like your ASP per watt came down in the quarter. Hoping you can elaborate if that is just a change in your mix, or if there is any increased competitive pressure?

No, I mean we have always said you have to be a little bit careful looking at our revenues in terms of cents per watt, because things do shift around between the utility segment and the commercial business on a quarterly basis. We aren't seeing anything unusual in terms of price pressure. We all know that over time prices are going to come down, and that is why we have been so focused on getting our assembly and outsourcing activities out to Shenzhen, so that we can remain profitable even in a competitive circumstance.

Just to comment here again, and I am not sure it gets across all of the time. The model we have for manufacturing is so different to anyone else. I believe it is a very strong competitive advantage. We are moving to Shenzhen, but we are outsourcing from Shenzhen. We are continually aiming for a fabless model. REFUsol doesn't have a manufacturing, so fits in well with us. But our aim is not to manufacture. It is to keep pushing out from our Shenzhen facility. We have employed some really top notch supply chain people, and it is working for us. So we have got to drive our costs down. We know that. We believe that we are in a great position to do that.

Understood. Thank you very much.

Thanks.

Thanks.

Thank you. And your next question from the line of Joe Maxa from Dougherty & Company. Please go ahead.

Thank you. Danny, I want to clarify on the $2 aspirational goal, is that based on how it was originally designed, or now on the pro forma numbers as you were pointing out?

As originally defined. We haven't changed anything. We are still talking about a GAAP aspirational goal. The reason we went to the pro forma was so that you could get a better feel to how we are going to get to that GAAP number, or the pro forma we have described. But the GAAP goal is our aspirational goal, and the reality is we are putting the things in place to get there.

If you look at our cash goals, our revenue goals, and our earnings goals you cansee we have done very well on cash. We are positioned well on revenues, and now have got to continue to get our cost structure, in order to sort out the earnings per share. I think we have a reasonable track record of getting costs out the system, which we will continue. Danny, I'm sorry to-- No, the only thing I would add is Joe, so Garry's point, the goal hasn't changed at all. It is still GAAP-based, and if you look at our current restructuring plan, it is expected to be complete by the end of this year, so you have a good apples-to-apples for 2014, that we have been focused on for the last 1.5 years.

Right. Thanks for that clarification. I did want to ask, you did have a big sequential pickup in Q2, and obviously the new acquisition is part of that. Can you give us a rough breakout of where you expect your Solar versus your Thin Films business to be for the quarter?

What we have said is the Thin Films business is moving forward, it is getting a little bit stronger, and our Solar business we have added the REFUsol product line. I think you can read in the literature, people have broken out numbers for REFUsol. It is very difficult for us to do that, because there are some puts and takes. There are some areas where our product will be substituted for the three-phase string, and vice versa. We just need to be a little bit careful there.

Again, I think by next year 2014, with that $400 million, or $100 million a quarter, is a good number to be thinking around. Going back, I think I ought to mention we are seeing a pickup in commercial activity, order activity at the present time. And also in the utility, there are some large projects coming along that we are competing for, and we usually get our share of those. So we have some good reasons to be optimistic in our Solar business.

Okay. And then last for me, once we get through this Q2 restructuring, which is going be the larger piece of the restructuring, how should we think about your OpEx in the second half of the year? What would be a good number to look at?

Joe, as we exit the year OpEx will probably down in the $35 million to $36 million per quarter range, as we exit 2013. But as we said, the restructuring this quarter, while the number is large remember the majority of that number is a noncash charge for intangible amortization. There is only about $3 million of cash charges. We will have some additional charges in Q3 and Q4, but as I said earlier, we expect to be totally complete by the end of this year with the restructuring program, and benefiting from the $18 million to $20 million of additional cost savings that we have identified.

Understood. Thank you, I will jump back.

Thanks, Joe.

Thank you. And your next question is from the line of Krish Sankar. Please go ahead.

Thank you for taking my question. I have a couple of them. Number one, you did say that there was some pushout of commercial orders in Q1 for Solar Energy. Is it coming back in Q2, and how much was that in terms of can you quantify that?

I think we said there was is a pushout of revenue,Gordon will correct me if I am wrong in Q1. The order activity was actually quite strong. The pushout obviously is a seasonality type of pushout. There were also some people having some difficulty getting their financials in the time that they said they were going to get them.

Krish, first of all, the orders weren't lost. They were pushed out late in the quarter, and it is just a result of some permitting and financing activity, that we are seeing taking a little longer than maybe this time last year. It is not something we are concerned about. It is just for the longer term the commercial market is very strong, or looking very strong, and we think that is going to continue into the rest of the year.

And it is an ideal time to have our three-phase string.

Is the pushout from Q1 actually getting redirected in Q2?

Yes.

Got it. Then I know it is very hard to break out REFUsol in your model, but if you tried to do that, is the core underlying inverter business still growing in Q2?

Yes. Again, as Garry said, going forward we are looking at all of our product lines, but the underlying prospects in the commercial business are very strong, and as Garry commented, we have got some larger utility projects that are looking favorable at this point in time. So we think the prospects are very strong particularly in the second half of the year for this business, and the REFUsol acquisition is going to add the three-phase string products, that should ensure that we got have a very strong platform going into next year.

Got it. On the REFUsol, I know it is primarily low end commercial. Do you guys run into any residential guys? Do you guys run into any of the micro-inverter folks?

We haven't, first of all, we are not the competing in the residential market. We do sell our products particularly these new three-phase string products through distribution, but we are focused on the commercial side of the business with the three-phase string products, and I want to make sure we don't underestimate the potential impact of this product line, because I have seen prospects for the three-phase string in the US in the 30 to 40 megawatts, as high as 30 to 40 megawatts, in terms of project sizes. So that would be a very substantial project.

Got it. Got it. Just a final question. You guys had a pretty nice bounce up in the flat panel business in Q1. Do you expect the momentum to continue through the rest of the year?

Right now what I can tell you is that we expect the momentum to continue through the second quarter of this year, driven mainly by the expansion in Korea in the Annex Two and Annex Three, and also, a significant investment in touch panel industry across practically all of Asia, Japan, Taiwan, China, Korea, where we see benefit to us coming through both etchers that go to polysilicon etch, and part supplies for metallization for PVD to go to the touchscreen, and RF parts suppliers that go to passivation, and inter reflective coating that goes to touchscreens. So with the first half is very strong, driven by the expansion of gen 5.5. The question is when the industry will go to the next level of investment. That will happen, potentially the second half of this year, and continue into 2014.

Got it. Thanks Yuval. Very helpful. Thank you.

Your next question is from the line of Edwin Mok of Needham & Company. Please go ahead.

Thanks for taking my questions. A follow-up from Krish's question on Thin Film. How do you think about how the operating margin for that business as you move forward? It sounds like you expect revenue to continue to grow, do you expect operating margin to get back to kind of the 20% range that you guys achieved previously?

Edwin, we continue to drive efficiencies in the business and we right now benefit significantly by efficiency gains as we increase our volume to the factory. We will continue to drive efficiencies, and some of that was the change in the business model in Taiwan and Japan, and some of that also in the way we operate the operation in Shenzhen. We expect to see some strength in the second half, coming from glass investment in China and industrial segment of the business, and as this business continues to evolve, we will continue to see a fairly strong level of operating margins as we continue to work on efficiencies.

Edwin, we should get much better margins now because the costs have come down, so when we hit the peaks we will have better margins than we had before. And you are already seeing that. You are already seeing with the breakevens matched lower in the Thin Film business, and we are getting the profitability at lower levels of revenue.

If you wanted to model this thing, the say $75 million or $80 million per quarter number, and you have modeled the Solar the $400 million of revenues number, you can get the sort of answer that we are aiming to get. Our aspirational, we will get our aspirational goal. Shouldn't say will but we should get our aspirational goal if we can hit $80 million of revenue in our Thin Film business, and $400 million of revenue in our Solar business. That has been $100 million a quarter, sorry. That has been our aim from day one. That is the thing that we are clinging to for our aspirational goals, and at the moment we seem to have the pieces of the jigsaw to get there, so now we just have to put those pieces together.

Great. That was is actually very helpful. On the cost savings that you guys expect to realize, can you give us roughly how much of that is expected to come out of OpEx, versus how much of that is gross margin improvement that you expected?

Firstly, remember that REFUsol we actually outsource our manufacturing from our Solar for our three-phase string is outsourced anyway. So a significant amount of the costs are going to come out of the operations. And a lot of headcount will drop, and a lot of buildings will be consolidated, and that is happening as we speak. It happened on not day one, but probably day seven, and is continuing to happen. We want to have all of the pain over with this quarter. We hope to have some of the buildings exited this quarter. That isn't a guarantee, but we are hoping to get them done, or certainly get them done in the next six months.

So the painful issues relating to people and restructuring the organization should be done this quarter, and the buildings we should have exited by the end of this quarter, or some time in the next quarter. And then it is just going to be a small amount of costs from then on. Now there is a cost associated, of course, with the closure of our Bend manufacturing and transferring over into Fort Collins, so now we only have one place to test, assemble and test in the US. And that will probably be six months as well.

I see. Okay. Actually, that is great. That is helpful. And then the first question I have is just on, I guess Danny if you could help us a little bit on the model, if I get your guidance correctly, I think that your gross margin goes to kind of low-30s in the second quarter because you have the incremental OpEx coming from the REFUsol acquisition, and as you execute the restructuring plan you expect your OpEx to trend back down to the 36, 37 range. Did I get that correctly?

You did.

Great.

In fact, you said it really well.

Great.

I would like you to repeat it, actually.

I will make sure I write that in my notes, thank you.

Thank you. Are and your next question from the line of Weston Twigg of Pacific Crest Securities. Please go ahead.

Thanks. Just a couple of quick questions. Wondering first, if you could elaborate on the idea of a fabless model? In a lot of cases the fabless model can actually cost more to produce parts, as you have to pay for the outsourcing, could you elaborate on how over the long run that saves you money, versus having your own factory?

I have never seen outsourcing cost more than manufacturing our own products. If you look at it from the usage of the cash, I have not seen that. But the beauty of our outsourcing model is we can go anywhere for our parts and subassembly. We are not limited. We are very, very flexible. If I had a big manufacturing place, let's say a village in Germany that I was trying to support, that is a hell of a fixed cost, in a market that has some kind of cycle, so I wouldn't want that. I think there is a big, big advantage in the type of industries we are in. I have to be very careful and talk about the industries that we are in, which do have some kind of cycle, as the outsourcing model is by far the best model for us. Now it may be that others can do work in a different way. I love this model, we generate cash, we have low inventory, and we will have at the end of the day high margins because we are way more flexible.

Wes, I think if you cost the model based on the trade working capital that is tied up in it. Take the semi cap industry, they turn their inventories three or four times a year, you now take that inventory and turn it into a payable. It is a tremendous cash generating model to have it outsourced, and then you don't have the troughs that you have unutilized overhead and fixed costs. So it is really a lot more efficient model from a cash flow standpoint.

I think if you think about it as well, think of the components of our box. There is really not much in there. PCBAs, cables, cabinets. There really isn't that much there. There is no way we going to manufacture a PCBA, there is no way we are going to manufacture cables, and there is no way we are going to manufacture cabinets, there is always somebody out there who can do a better job than us in the area, because of their volume.

Coming back to the term fabless model, first of all, the business we acquired with REFUsol is already a fabless business model. Their parent company, former parent company is a supplier to the automotive industry. They have got just a relentless focus on cost reduction, so we see that as an extremely positive element of the REFUsol acquisition. As we begin to apply that model to the Solar side of the former AE business, we have got this wonderful spot in Shenzhen, where we have an existing presence through the Thin Film side of our business, we have augmented that with some very strong supply chain management resources, and we are seeing some excellent reductions in costs, as we move things out of our US factories through Shenzhen out to suppliers in Asia.

And the margins from our acquisition have not been dilutive. Even with the outsourced model, the margins are strong.

Okay. That is helpful. I guess just a follow-on to that idea. If you are doing everything or trying to move to more of a fabless model which you have been for some time, on the component side it sounds like there is really not necessarily a lot of technology or complexity that goes into manufacturing, so does your competitive advantage really on the inverter side then just relying on business relations that you enter in?

We have a lot of technology and a lot of science, and that is the beauty of us now. If you go back to our model, we have localized R&D in different area of the world, optimizing products for that marketplace. It doesn't really matter where we manufacture. If you think about our inverters they are actually very, very efficient inverters. The REFUsol inverter, or the new AE three phase-three is the most efficient three-phase three inverter out there. There is a lot of super technology in that, that no one else has. And that is the same for our inverters as well. So no, no, no, you could outsource and have wonderful products with wonderful technology, and if you go to the shops you can see that all of the time.

Good. Okay. And then just finally, can you just give us your thoughts on the Power One acquisition, and maybe how that changes the competitive landscape in your opinion?

I think it is great. I think it is absolutely great. It is a validation of everything that we have said, and I am very happy. As long as we keep nimble, as long as we are nimble we will win. I enjoy a big company buying a small company, because it has validated what we have done, and now it is going to accentuate the difference between us, and the nimbleness and efficiency of an ABB. It is going to be a very interesting competition. But the really nice thing is the validation of the inverter. That is the really nice thing for me. Excited by it.

Okay. Very helpful. Thank you very much.

Thank you. Ladies and (Operator Instructions). Your next question comes from the line of Mehdi Hosseini from SIG. Please go ahead.

Thanks for taking my question. A couple of follow-ups. Garry, when I think back 18 months or so ago, when you first started with the cost cutting, the primary, the goal number one was to streamline inverter manufacturing, moving entire of the manufacturing to Shenzhen, and we still haven't seen any meaningful leverage. Am I missing something, or part of your strategy has had with acquisition that you recently did, and we should see some leverage coming in the back half of this year? And I have a follow-up.

I think if we hadn't done what we have done we would not be in the position we are today. I note that there are inverters companies out there that are not making money. I recognize it is a struggle for companies. But we are I think ahead of our competitors. Remember also that we charge our corporate costs to the inverter. We don't have corporate costs. So we are in not a bad position. It is not good. I am not saying it is good. We have got lots to do, but I think we have got the model to get there, and I think now with REFUsol, it gives us a little bit more critical mass, to continue that vicious cost reduction that we need.

Now I also think it is needed in any business, not just the Solar business. This is where I differ from a lot of you out there. I think it benefits our Thin Film business, and any business. So I am very pleased with what we are doing actually. If you ask me well, what am I worried about, my worry is we are not fast enough. You will hear that all of the time. We have got to continue our relentless move to reduce our costs, but at the same time have great technology, great efficient products for our customer. That is what we do.

Got it. And then the follow-up, I have two. If I am not mistake innocent prepared remarks, you said that you may also resize the Thin Film business. What prompted you to do that? And then the last question, given the acquisitions and all of these additional cost-cutting, are we still tracking the $2.00 GAAP earnings, or are you actually thinking of maybe even an upside to that target?

Well, just on your first question related to Thin Film, which I thought I had answered before, our reduction of costs is a never-ending process. I can't imagine in any company where it ends, because we are always working on ways to get more efficient. We have taken this opportunity with the acquisition of REFUsol, where are we have more offices, more locations, to actually shrink ourselves down, and Yuval's organization is taking that opportunity as well. To give you some feel to this, we will probably have less square footage after the REFUsol acquisition than before the acquisition. So that is how aggressive we are. We are taking on these revenues, but will have less square footage after the acquisition. So we will always take out costs. It will be a non-stop process. The reason we have broken it out this time is again because it is so large.

Okay.

And that will probably happen, if we do another reasonably sized acquisition like this, we will find ways to reduce costs again. I mean there is no doubt about it.

And we are still on track for are our $2.00 target, that is a GAAP target that hasn't changed to the math that Garry suggested several minutes ago, if you model out our Thin Film business at a $75 million to $80 million run rate. Take our Solar business at $100 million run rate per quarter, and hitting their 10% goal, you will get us above our aspirational goal at this point. And as Garry mentioned, we continue to look for acquisitions as we go forward. Our focus is growing this Company every day.

And remember, if you look at those numbers, what we talked about was cash generation, accelerated profitable revenue growth, and earnings per share. Well, cash generation we are not doing too bad on. Revenue growth, we are starting to get going. And now we have got to keep downsizing the organization's cost structure to get the earnings per share. So I think we are actually in good shape for our aspirational GAAP goal. It is aspirational. We do need a little bit of wind behind us in Thin Film. We have got to get to the $80 million of revenue, $75 million to $80 million. But we have got all of the pieces of the jigsaw now. If I was you, I would ask the question well, what else can help us get there. I think in the Thin Film business, we have got to continue to reduce our costs, but expand our applications. So our future use of money will probably be on expanding on applications within Thin Film. There may be smaller acquisitions relating to Solar, but in the main we will now start wanting to expand our Thin Film business.

Got it. Thank you.

Okay.

There are no further questions, so I would like to turn the call over to Garry Rogerson for closing remarks. Please go ahead.

Thank you so much. I think we have said a lot today. It is an exciting time for us because all of the pieces of the leg are in place, for us to try to get to our aspirational goals. We have got work to do, and I look forward to continuing to report with you on these matters. Thank you and bye-bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good time. Thank you.