Advanced Energy Industries Inc (AEIS) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Advanced Energy second quarter 2013 earnings conference call. My name is Stephanie, and I will be your coordinator for today. At this time all participants are in listen-only mode. Following the prepared remarks there will be a question and answer session. (Operator Instructions). I would now like to turn the presentation over to Ms. Annie Leschin, Investor Relations. Please proceed.

Thank you operator, and good morning everyone. Thank you for joining us today for our second 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 earnings release that was issued yesterday evening, for a copy of this release, please visit our website at www.advanced-energy.com, or call us directly at 970-407-4670.

This quarter Advanced Energy will be presenting at the Jefferies Global Industrial Conference on August 12, and Needham Advanced Technology Conference on August 13, both of which are in New York. The Company will also be presented at Credit Suisse's Future of Energy Track at the 2013 Small and Mid Cap Conference on September 17 to 18 in New York as well.

I would like to remind everyone that except for 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 technicality 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-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 today and in our press release. Guidance with not be updated after today's call until our next scheduled quarterly financial release.

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

Good morning, and thank you for joining us. We performed well in the second quarter, with total revenue of $140 million, non-GAAP EPS of $0.35, and a GAAP loss per quarter of $0.24. The implementation of our Company-wide strategic plan has taken hold over the last 18 months, and is starting to bear fruit in the form of increased profitability. The growth of our Thin Films business continues this quarter, as we further penetrated markets for our traditional products and gained traction in new product areas for applications, such as abatement and hard coatings. This led to increased Thin Film sales and improved margins in the quarter, putting us on the path to achieving our Thin Films operating goals.

Our Solar Business performed better than we expected this quarter, even as we are in the midst of integrating a large acquisition, undertaking a restructuring, and introducing new products. The integration of our newly-acquired product line is proceeding smoothly and more quickly than anticipated, leading to the prompt realization of associated cost reductions and less dilution. The large and complex integration of our new solar products, R&D and sales distribution, along with our restructuring is roughly three-quarters complete. Together with the major restructuring underway to accelerate our other planned cost reductions, we believe these efforts should be substantially finished after one more quarter of disruption. Beyond that the Solar business should resume its revenue growth and good profit contribution.

Currently we are very encouraged by our strong backlog in both Thin Films and Solar. In particular we see our planned solar shipments gaining momentum as the year progresses. Recently we won some very large utility orders and our order pipeline in the prospective business is growing in both utility and commercial.

Turning to our aspirational goals and strategic plans. Over the last 1.5 years, we have laid out a plan to improve operating margins, generate cash and accelerate revenue growth, all leading to our aspirational goals over a three year time zone of approximately $200 million in cash generation, $700 million in annualized revenues, and $2.00 in earnings per share in 2014. While these goals remain aspirational at present, we believe they are achievable, it is just a matter of timing. As we have said before there are many factors that can affect our future performance, and you should view these goals as aspirational, not as guidance.

Since announcing our strategy in the fall of 2011, we have put an action place and have been implementing operational excellence in everything we do, from Distribution, to R&D, to our centralized outsourcing model for manufacturing. We have improved our distribution channels, expanded our geographic presence, accelerated new product development, and outsourced more of our manufacturing. At the tame time, we have significantly reduced our cost structure by approximately $55 million to date, and have generated $111 million of cash to date for stock buybacks or acquisitions in order to accelerate earnings growth. We have now started to see the fruits of our labor through the dramatic shift in the Company. The results we are seeing today would not have been possible just two years ago.

Now let me take you through the most plausible way I think we can achieve our goals in a reasonable time frame. First in Thin Films, we expect revenues at the peak of industry cycles to be approximately $80 million per quarter. Depending on a reasonable mix of business there is no reason to assume that we could not add another $4 million to the bottom line per quarter, as we do not expect our costs to increase. In Solar, including our recent acquisition of the three-phase string product line, we expect breakeven in the mid to high $60 million range exiting the third quarter, and to reduce that further in the fourth quarter.

With the recent introduction of our 1-megawatt solar inverter, the addition of the three-phase string product line, and our increased geographic presence, we are seeing a growing number of opportunities. The strong market demand for these new products gives us confidence that we could see Solar revenues averaging roughly $100 million per quarter,recognizing the lumpiness of this market depending on the size and timing of projects. The improved margin profile of these new products, along with the introduction of a more balance of system components should add to our bottom line.

As we have said many times before, in order to improve margins, we must constantly look for ways to reduce costs. With our newly implemented operational model, we believe there are many opportunities to lower our cost structure through better management of our supply chain and the streamlining of new product design. Finally we expect to generate more cash in the next year, which we plan to utilize for other acquisitions or future stock buybacks to further accelerate earnings growth.

In closing, the parts of the puzzle are very much in place to what we believe could be an excellent 2014. Hopefully I have demonstrated just a few ways that we can take a significant step forward in accelerating our revenue growth, achieving our profitability including the introduction of new products, and our expansion into new geographies. In the third quarter we plan to complete the majority of the integration of our recent accession, and carry out the rest of our restructuring, leading to improved results for the second quarter just exited. As we look to the fourth quarter and beyond, we see the potential for significant revenue and EPS acceleration.

Gordon and Yuval will now take through some of our growth initiatives for 2013 and beyond, and Danny tie it all together for you. Yuval?

Thanks Garry. Beginning with slide nine, Thin Films revenues grew 16% sequentially to $71.7 million in the second quarter to levels not seen since 2011. With a streamlined cost structure in place, and the recovery of our markets underway, we are now demonstrating just how quickly our profitability can accelerate, as revenues grow and costs remain constant. This quarter Thin Film's operating income grew to $14 million, or 20% of revenue, up from 12% last quarter.

Turning to our market performance on slide ten, once again semiconductor was the majority of the improvement in Thin films this quarter. Through a combination of market share gains from prior design wins, expansion in applications in Etch, PVCVD and PVD, and ongoing demand for gas abatement, we saw quarterly sales that outpaced industry growth. With the first wave of semiconductor investment behind us, the wafer fab equipment industry is expected to pause, leading to a roughly flat to down outlook for the year. The anticipated investment in memory capacity, combined with investment in sub-28 nanometer technology, and increasing utilization rates, should drive additional growth in products and services for semiconductor applications through 2014.

In flat panel display, investment in Gen 5.5 emulated display capacity continued to drive revenues this quarter. Demand for smartphones, tablet displays, and touchscreens should continue. Near term we expect AMOLED manufacturers to slow investment as they ramp volumes in capacity installed over the past several quarters. This should lead to reduced demand for our power supplies in the second half of the year. In LCD, increases in capacity should continue with investments in China, where demand for televisions remains strong, driving demand for all products in the third quarter. In our Renewables business, while solar panel capacity still far exceeds demand, we are assuming some investment in advanced PVD applications, which favor AE products and solutions. Additionally architectural glass is poised for significant growth, as China's infrastructure investment in its western provinces grows over the next several quarters.

In our Thin Films industrial business, we are expanding our product line with our Solvix portfolio, introducing new products and implementing our distribution channel strategy to address new applications and geographies. We are diversifying our industrial global market presence in hard coatings, optics, and automotive applications. In Service, we see growing interest in upgrade and refurbishment programs for fab capital reuse and repurposing, in conjunction with projected increases in fab utilization in the second half of 2013. Combined with our preventative maintenance offering for gas abatement and flat panel products, we are positioning our service business for future growth.

Finally, let me turn to our design wins. Once again, our commitment to next generation R&D investment in collaboration with our customers, enable us to expand our served applications. In total we secured more than 80% of the contracts we pursued, which were up a considerable 30% sequentially. In Semiconductors, our win rate was over 90%, and in Thin Film Industrial we won over 80% of the opportunities pursued during the quarter. As we have said in the past, our Industrial wins are typically more project based and can represent near term revenues. Our Semiconductor wins represent potential future revenue, as OEMs move to high volume manufacturing upon winning a process of record status at end users.

In Semiconductors, our investment in advanced RF power delivery solutions over the last 1.5 years, has led to a significant increase in the global presence in Etch, PVD, and PVCVD applications. These wins allow our customers to migrate to newer platforms with value-add technology, efficiency gains and competitive cost structure, as demand for deposition etch processes increase, due to the adoption of vertical, NAND, and multiple patterning lithography. We believe we are well-positioned to capitalize on these trends given our recent wins.

In Thin Film Industrials, we had wins this quarter ranging from new low in glass lines, to flat panel display applications to technology investments in Thin Film solar, and the expansion of the served applications in cathartic hard deposition and hot coating for aerospace and industrial machine tools. As we become more efficient in the deployment of our core resources our new product development methodologies and customer engagement model, enable us to significantly accelerate the launch of new products and technology. This year alone we expect to introduce more products than we have in any of the last ten years.

Overall, we are executing on our strategy in the Thin Film business to profitably manage through the cyclical troughs, and capitalize on the investment peaks. While our revenues have rebounded from the cyclical bottom, our costs have remained low, allowing us to generate significantly higher profitability. With a more positive outlook expected for our markets in 2014, we should be able to reach the $80 million revenue range per quarter that we anticipate in the peak of the industry cycle. We are excited about our potential as we enter the fourth quarter in 2014.

I would now like to turn the call over to Gordon to discuss our Solar Energy business.

Thanks Yuval. Beginning with our Solar Energy results on slide 12, with the contribution from our newly-acquired three-phase string product line, we shipped 318 megawatts in the quarter versus 217 mega watts last quarter. This led to a 36% increase in quarterly revenue to $68 million. Although we had an operating loss of $1.8 million in the quarter, the integration of our recent acquisition and associated restructuring actions are moving along quickly, from the quick identification of redundant costs to the consolidation of our footprint, these activities are bringing a number of benefits to the organization, which we expect will allow us to regain profitability sooner than originally thought.

To give you an update on these efforts, let me turn to slide 13. Since the close of the acquisition in early April, we have recognized approximately $2.5 million of cost synergies, and lowered our operating costs each and every month, a trend we expect to continue in the third quarter. During the quarter we consolidated our two German and two US sales offices, and streamlined the operations in Metzingen, Germany into one building. We also began consolidating our Bend, Oregon factory operations into Shenzhen and Fort Collins, and we expect to finish this by the end of August. This represents an important step in the rationalization of our product line, which should allow us to focus on core growth opportunities in the commercial and utilities scale markets with our newly-expanded strong margin product portfolio.

To move us closer to a more streamlined and functional organization, our sales and customer support organization in the US took ownership of the three-phase string products this quarter, proactively introducing them to existing customers. At the recent Intersolar Conference in San Francisco, we exhibited the three-phase string inverter products which received a great deal of attention. We believe we are entering the US market with this product at an opportune time, and are encouraged by the US shipments we have already seen in our first quarter of operation. Also at the Intersolar Conference, we introduced AE's much anticipated 1-megawatt product the AE 1000 MX. This product has the potential to be a game changer for utility scale in larger commercial projects, providing PV plant owners with increased energy harvest and less down time at reduced balance of system costs. This should allow them to realize a lower levellized cost of energy, or LCLE, and improved margins for us. The initial reception to this product has been very positive, and we expect to recognize our first revenues in the fourth quarter. Already this product line has been selected for a large installation in the US, which we expect to begin shipping at the back end of the year.

Turning to slide 14. With one of the broadest and most compelling product portfolios in the industry and our growing pipeline, we are participating in and winning more upcoming projects in North America. To support our growing opportunities we continue to invest in our field sales and support coverage. This quarter we added more sales and support resources in the US to expand our geographic presence in North America, as we bring our new products to market. With our expanded worldwide distribution channel, we are also seeing more potential business in territories such as India, eastern Europe, Korea, and Latin America, and have the opportunity to expand into new areas, such as Japan, where AE has not participated in the past. We are already seeing a steady stream of business in India with the three-phase string products, and we are exploring ways to strengthen our presence in that market.

We are very excited at the prospects for the business as we position ourselves for 2014. We plan to complete the majority of our restructuring activities by the end of the third quarter, setting us up to achieve a breakeven in the mid to high-$60 million range. With our lower breakeven, new products well suited for the utility and commercial markets, and an expanding presence in large new geographic markets, we have the potential for a record year in 2014, a year of strong revenue and earnings growth.

I would like to now 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 a reminder non-GAAP measures exclude the impact of restructuring charges, acquisition related costs, stock based compensation, and the amortization of intangibles. Reconciliation of non-GAAP income from operations and per share earnings is provided in the press release table.

Let me begin with the highlights of the second quarter on slide 16. Total revenue were $140 million, representing a 25% increase sequentially, and a 21% increase annually. Turning to our revenue performance on slide 17. Revenues for the Thin Films business increased 16% sequentially to $72 million. Most of the increase was driven by sales to semiconductor applications, which grew 26% to $41 million from $33 million last quarter. While sales of our flat panel display applications decreased by 5% sequentially, sales remained relatively high at $8 million. This is over three times the levels of a year ago, as we saw another strong quarter of investment. Sales in data storage and industrial applications rose 9% to $8 million compared to $7 million last quarter, since we executed on our strategy of diversifying into adjacent markets. Finally, service revenues were relatively flat at $12 million as customers continued cost containment measures. Sales in our Solar Energy business reached $68 million in the second quarter, representing a 36% sequential increase reflecting the addition of our newly-acquired three-phase string inverter for commercial market applications.

Turning to slide 18, non-GAAP operating expenses increased to $35.5 million due entirely to our recent acquisition. We also incurred pretax charges of $24.2 million for restructuring, $3.2 million of stock based compensation, and $2 million in amortization of intangible assets. Total non-GAAP operating margin was 12.8%. Similar to the same period last year, and an increase from 11.7% in the first quarter of 2013. As a reminder, we allocate all of our expenses to each of our two businesses, resulting in operating margins of roughly 3% to 4% lower than others in the industry.

Operating margin on our Thin Film business on a GAAP basis improved to 20% from 12% in the first quarter, in our Solar Energy business not unexpectedly we reported an operating loss of $1.8 million versus breakeven last quarter, as we worked through the integration of our recent acquisition and undertook restructuring actions. It is important to note that without our aggressive cost reduction activities this quarter which will I review shortly, the loss would have been significantly higher.

Had the first quarter of our Solar Energy business included the acquisition of REFUsol, we would have had a loss of approximately $3.8 million in the first quarter, with our aggressive restructuring we improved the profitability of our newly-aquired product line by more than $2 million. Had our restructuring initiatives been in place for the entire quarter, we would have reached breakeven for the quarter. Going forward, we believe our breakeven in our Solar Energy business will be in the low to mid-$60 million range by the end of the fourth quarter. While revenues can be lumpy depending on the size and timing of projects, we believe we are positioning our Solar business to achieve operating margins in the range of 10%, at revenue run rates averaging $100 million per quarter.

GAAP loss from continuing operations was $9.8 million, or $0.24 per diluted share. This compares to income from continuing operations of $6.8 million, or $0.17 per diluted share in the first quarter, and income from continuing operations of $8.9 million, or $0.22 per diluted share in the same period last year. Non-GAAP income from continuing operations which excludes the aftertax impact of $19.6 million of restructuring, $2.5 million of stock based compensation, and $1.6 million of intangible amortization was $13.9 million, or $0.35 per diluted share. This compares to non-GAAP income from continuing operations of $11.7 million, or $0.29 in the first quarter, and income from continuing operations of $9.5 million, or $0.24 per diluted share in the second quarter of 2012. Taxes were $2.5 million, or 20.3% in the quarter, as our effective tax rate incorporated improved profits for 2013 in our Thin Films business.

Turning to our balance sheet on slide 19. We ended the quarter with $99.1 million in cash and cash equivalents. Down from $182.3 million, due to the $77 million acquisition of REFUsol, and our investment in working capital as the velocity of our business returned.

Before I discuss guidance for the third quarter, I want to remind everyone that we are in a transition period as a Company, as we integrate our recent acquisition, and complete a significant restructuring. We are pleased at the progress we have made, and as Garry mentioned, our restructuring is currently ahead of schedule. In the second quarter as shown on slide 20, we recognized $24.2 million of the $35 million to $37 million of total charges projected,$6.5 million of which was cash.

Over the next three months we plan to finish the transfer of the remaining supply chain activities to Shenzhen, and complete the product rationalization of our inverter portfolio. On slide 21 this should lead to total savings for the entire restructuring of $18 million to $20 million annually, roughly $14 million of which will be would cash savings. The current actions coupled with previous cost reduction activities to bring our total cast savings to $70 million to $75 million by 2014. As we enter the third quarter, we are encouraged by the increasing backlogs in both of our businesses. Our balance sheet remains strong, as we pursue additional acquisitions and build momentum for 2014.

Finally, turning to our guidance for the third quarter on slide 22. We expect revenues to be between $140 million and $150 million. Our guidance assumes flattish performance of our Thin Films, Semiconductor and Industrial applications, and growth in our Solar Energy business, driven by our newly-released 1-megawatt product for utility applications, and our three-phase string inverter for the commercial market.

We expect the third quarter tax rate of approximately 23% to 25%, and GAAP EPS to be between $0.28 and $0.32 per share before restructuring charges. Non-GAAP earnings per share expected to be between $0.36 and $0.40 per share. Non-GAAP guidance excludes restructuring charges of approximately $12 million,$10 million of which will be noncash charges. Other non-GAAP charges include stock based compensation of $2.8 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 comes from the line of James Covello with Goldman Sachs. Please proceed.

Thanks so much for taking the question. Good morning. If I look at the Thin Films business, as you commented you are getting back to the 2011 levels. Seems like you are getting there faster than peers in the Thin Film business. If you could give us some color, and obviously I know you have the breakdown on slide 17 in the presentation, in terms of how you are getting there faster than peers, do you think that is because of the non-Semi markets, is it share, mix, customer exposure, if you could give us some perspective on that, that would be helpful?

That is a great question, James. Let me pass that straight over to Yuval.

Hi Jim. We see the benefit of historical design wins that we have managed to close last year, and we see additional products in applications that we penetrated across-the-board practically. With expansion also to new geographic regions and we see growth coming also from technology buys, as some of our customers are sending products for demonstration and evaluations to end users using our components. The continuing demand for the abatement products that we have also helped us to grow faster than the market we serve. Overall you are right, we did better than the market.

Another thing that by the way, James, that should be commented on, is the profit that has come down to the bottom line with the incremental growth. I think the machine that we put in place that Yuval has put in place is incredible, we only need to get a little bit of growth and we can put a lot to the bottom line. As I said in the comments, I think just another $8 million of revenues, or $8 million to $9 million of revenues, we can put another $4 million to the bottom line there. The machine is really geared to getting that volume.

That is great. If I could ask a follow-up. Again sticking within the Thin Films business, if I look at Semiconductors as a percentage of the total Thin Films business, it has been running anywhere between half to a little bit more or less than half in a given quarter. If you project out a couple of years with the efforts and initiatives within Thin Film that you have, what would you expect semiconductor to represent say three years from now on average as a percentage of the total Thin Films business?

The first thing to remember is we are continuing to win and gain market share in Semi. So we are being very, very successful. We had some big wins in the US. Yuval might want to explain more, and in Japan, so we expect to move forward quite nicely within Semiconductor gaining market share. I hope that the industrial side beats the growth of the semiconductor side. We are already seeing that in hard coating, and I think of abatement as environmental, not Semiconductor, even though it is within the Semiconductor marketplace. So Yuval?

That is very correct, Garry. Jim, the abatement business that we started basically selling to the Semi industry will be extended beyond Semi and beyond the current customer base that we serve. It is a significant potential for growth, and it takes us outside of Semi, outside of Thin Films with the new approach for point of use abatement, and that is a totally new business for us. Additionally I expect to see the Thin Film Industrial part of the business continuing to grow organically and inorganically as we continue to look for power conversion solutions for other industries and other applications, while at the same time continuing to invest significantly in new applications and solutions for next generation inflection points in Semi.

That is very helpful, thank you so much. Good luck.

Thanks.

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

Thank you and good morning.

Good morning.

Question on the Solar side, at $100 million per quarter you are talking about potential for next year. That is a long way from where you are today. Just maybe and I am sorry, but I missed the first part of the call. I am just curious, how do you get there from current levels, I know that you have had some acquisitions, how much of that is going to be part of that $100 million?

We said when we made the acquisition that we would get to $100 million a quarter, and we still believe that. We are getting some large orders in the utility marketplace now, which will add, so if you add it all together we can get to that $100 million market. Gordon, if you would like to?

The two key things are the new product lines that we are going to be ramping up in the second half of the year. We made the acquisition recently, which has given us a really nice range of three-phase string products, that are going to be very, that US customers are already demonstrating considerable interest in. It will also take us into some new geographic markets that we haven't been in previously, places like Romania in eastern Europe, or Korea, and parts of Latin America. Canada as well later this year.

The second product introduction at the Intersolar San Francisco conference was the megawatt product, which was extremely well-received by customers. In the prepared remarks, we discussed a major project win, we have other very significant opportunities that we expect to close in the second half of the year. So we think we are pretty well set up for 2014.

Okay. And a then a follow-up. Describe the pricing environment in North America on your utility and others? And then another one is, as you move to different geographies, what is the profitability profile in these new markets you haven't been in?

I think the first thing to say is that the machine that we put in place I believe gives us a competitive advantage. Our Shenzhen facility outsourcing from Shenzhen, assembly locally as necessary is a competitive advantage to the Company. I am very pleased with that, and there is lots we he can do to reduce our costs further in the supply chain, and by design. But we are also picking and choosing the type of orders we go for. We are not going for everything at all. Market share is not our driver. Our driver is to get this thing to be sustainably profitable. Gordon?

Yes, the market in North America I mean nothing has really changed overall at the macro level. There are still people out this that are going to lead on price. It is a competitive market, but we think that the new product offerings we are bringing forth position us extremely well to continue to succeed in North America, particularly the megawatt in the utility market, where our bipolar design gives us some unique advantages in terms of balance of system costs for energy production, and then outside of North America the three-phase string product line is the horse that we are going ride hard in the second half of the year, and I mean the pricing varies very significantly as you move from markets like India, to Latin America, over to Japan. The good news is that we are coming up with products that are well-suited to the needs of these local customers, and we feel that we have got the right combination of distribution products and strategy to succeed in those places.

Maybe to just say it in another way the 1-megawatt has hit the sweet spot of the utility. The utility is picking up in the US. The three-phase string is picking up in the US. I believe in our first three months, and Gordon correct me if I am wrong, we had more sales of three-phase string than REFUsol had in all its time --

In the US, yes.

So the three-phase string just in the US is picking up for us. In Canada, it should pick up for us. In Latin America, in India, and later in Japan. You will see a series of releases from us for three-phase string, which will really help the growth. So the products fit well. We are greatly positioned to get into new geographies, and we have got the utility picking up. At the same time, I want to keep on saying it, we have an engine to produce low cost product, we believe our costs can be lower than anyone else that we see in the marketplace at the present time. So we have the efficiency and the cost.

Thank you very much.

(Operator Instructions). The next question comes from the line of Edwin Mok with Needham & Company. Please proceed.

Hi guys. This is Tony Grillo calling in for Edwin Mok. Had a couple of questions for you. Looking at guidance and Thin Film versus solar we see about a 4% Q-over-Q guide. I wondered if you could talk specifically about the drivers, and where you expect to see growth here on either side?

Yes, okay. Within the Thin Film business unit, we are saying we are going to be lat to a tad up. Probably a tad up in the third quarter in revenues. Now costs keep coming down so that is good. Within our Solar, we will see growth in the US with the three-phase string. We will see growth with our megawatt product in the US in the second half of the year. Then we will see growth in new geographies. We are in good shape for revenue growth.

The other thing I would add on the profitability if you recall in my remarks, if we would have had the full quarter benefit of all of the changes we made in our Solar business, that would have been worth a couple of more million dollars in profit for quarter, so that is where the EPS growth is coming from also.

That is a very good point. Maybe I will say that in a different way. If we just quarterrize the last month of expenses with the revenue we got within Solar, the business will be at the breakeven point. And the costs are continuing to come down this quarter.

Okay. That is very helpful. Thank you. And then there was a brief question about ASPs, and looking specifically at pricing trends given the information that you gave, it looks like ASPs decreased Q-over-Q. I was wondering if you could talk with about that maybe a little bit?

I will pass it over to Gordon. I do believe that is because of the new three-phase string products bringing average pricing down.

It is a little difficult to look at ASP comparisons anyway, given the fact that we do have our services and balance of system offerings that revenues fluctuate quarter by quarter. But more importantly, this quarter was the addition of the three-phase string product line, and we are now exposed to some different geographies, where pricing isn't the same as it has been in traditionally in North America where we have focused in the past.

Okay. Thank you. And if you guys don't mind, one more question. On margins. What are kind of the drivers for upside, and why does current guidance kind of imply lower margins for the coming quarter?

I think the guidance probably implies better margins for the coming quarter. I guess it depends on your definition of margin. I look at op income margin, because at end of the day we are driving the EPS growth, and so as we get more revenues we get more gross margin dollars, and we don't see our Op expenses go up that if going to drive to improve EPS, and that is what our focus is on.

With the same mix of products with the same revenue this quarter coming along we will do better. We should do better than last quarter.

Okay. Thank you for your help.

Thanks.

(Operator Instructions). Your next question comes from the line of Krish Sankar with Bank of America Merrill Lynch. Please proceed.

Good morning. This is Andrew Hughes on for Krish. In the Solar segment, just curious if you can quantify the contribution that the three-phase string inverter made to revenues in this past quarter, and how you see it kind of breaking down among the newer products three-phase as well as megawatt in the guidance that you are giving out for Q3?

Really hard to get that granular, because there is some taking away, three-phase string from other product lines though you can't quite see that. What we have said for the combination going into 2014, we should be able to get to about $100 million a quarter the $400 million a year. And that is because of the three-phase string, and that is because of the growth we are seeing in the utility segment with the megawatt that is just coming onboard and the new geographies. So that is about it that we can say there. The three-phase string is helping us in a lot of different ways.

In our 8 K-A that we filed after the acquisition, suggests an $80 million to $100 million a year revenue stream out of that product when it is fully incorporated.

Got you. And I am curious if you could just discuss in the US in particular, seeing a number of three-phase inverters introduced recently I think in particular in the residential sector. Wondering if you can comment on competition in that product SKU in particular, and what segments you are seeing sort of what project sizes I guess within commercial you are seeing the greatest adoption?

Firstly, we are not in the residential so let's move that one to one side. The three-phase string that we have is a very high performance three-phase string for the commercial marketplace. It was I believe the first three-phase string released in Europe, and is still the most efficient that they sell in Europe. Gordon?

And so obviously there are three-phase string competitors out there. What we are seeing is AE has had a strong customer franchise in the US historically, and that customer franchise is very interested in looking at three-phase string because of its technology advantages, and they are very interested in having the support of an established company in the US like AE to stand behind the product. And thirdly, I would say since we also have our monopole or range of central inverters, we don't have to force fit the three-phase string in every situation. We can offer the customer the unique advantages of either technology, and so there is really no pressure there.

We love having customers choose AE or AE. And we are happy for that, and we will move forward with that one. The three-phase string, remember again what we have said, we had a record quarter for three-phase string in the US. It is not saying a whole deal, but our sales people picked it up immediately, and started selling it in the US. We have traction there. I believe again Gordon if I am right in saying, this is the only three-phase string that you can have just one installer pick up and put on a wall.

It is the latest product out there.

Which is huge. It is a huge cost differentiator.

Alright. Thanks, guys.

With no further questions in queue, I will turn the call over to Mr. Garry Rogerson for final comments. Please proceed.

Thank you very much. We are really excited with the results, we have got, we are looking forward to a great 2014, and I am looking forward to seeing you in New York in a couple of weeks time at Needham and Jefferies. Thank you for listening in today. Good bye.

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