Advanced Energy Industries Inc (AEIS) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Advanced Energy fourth quarter 2013 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now turn the call over to your host, Annie Leschin, Investor Relations. Please go ahead.

Thank you operator, and good morning, everyone. Thank you for joining us today for our fourth 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 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.advancedenergy.com or call us directly at 970-407-4670.

During the first quarter, Advanced Energy will be participating in a few different conferences. First, Goldman Sachs Technology and Internet Conference on February 11 in San Francisco, and the Susquehanna Financial Group Semiconductor and LED summit on March 4 in New York. As other events come up, we will make additional announcements.

I would like to remind everyone that except for the historical financial information contained herein, the matters discussed on this call contain certain forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Statements that include the terms believes, expects, plans, objectives, estimates, anticipates, intends, targets, 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 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 10Q, 10K, and other forms filed with the SEC.

In addition, we assume no obligation to update the information that we provided you during this call, including our guidance provided today in our press release. Guidance will not be updated after today's call until our next scheduled quarterly financial release.

And now I'd like to turn the call over to Garry Rogerson, CEO of Advanced Energy. Garry?

Good morning everyone and thank you for joining us.

We ended 2013 with a strong quarter, generating $0.67 of non-GAAP earnings per share and $45 million of cash on revenues of $153 million. Operating income excluding restructuring increased 22% versus last quarter to $22.3 million or a 15% operating margin. Once again we saw the power of our R&D and manufacturing models to generate the significant improvement in profits with even a small increase in revenue.

Despite pricing pressure in our served applications over the last two years, we've improved our operating margins by implementing operational excellence initiatives which saved us approximately $80 million. Additionally with the minimal CapEx required by our manufacturing model, we have generated over $145 million of cash in the last two years.

We have put the cash to work in the form of strategic acquisitions to drive growth by increasing our TAM and through share buybacks to return value to our shareholders. In total, we are pleased with the progress we've made this year on our strategic plan announced back in Q4 2011.

During the fourth quarter, we took the final steps towards our goal of developing one manufacturing and supply chain organization. We accelerated certain actions leading to some larger restructuring charges this quarter than we previously thought.

We have now completed the restructuring that we announced two years ago. We plan to continue to find ways to become more efficient, but we do not expect to breakout restructuring costs going forward, with the exception of course of those relating to acquisition.

Looking ahead, our views on manufacturing and more specifically the supply chain as a whole are key to our future plans for success and we believe a major competitive advantage. We expect our manufacturing costs to decrease significantly as our supply chain matures and we reduce the cost of manufacturing required products and the multitude of new products introduced over the last year.

These offerings range from leading-edge RX products to our recently introduced 1 megawatt inverter. Our resolved accelerate pulsing technology has already been enormously successful, leading to more design wins, a broad array of applications including a vast etch of deposition processes.

In our inverted product line, the addition of the 1- megawatt and the 3-phase string product in the last year have to a large extent revamped that entire inverter offering, strengthening and expanding our position in commercial and utility applications. Through these product-driven efforts, we are setting the stage for a successful 2014.

Our strategy of expanding into new applications has contributed noticeably to our earnings per share growth, from our green offerings in gas abatement and low-E glass to our power solutions for PV manufacturing tools and inverter and solar that together have become a large piece of our business. Or to our more industrial applications, including hard coating products in areas as diverse as eyeglasses and car headlights, and our improved market presence in semiconductor applications, all are contributing to our earnings per share growth.

Equally as notable is our expanding geographic presence. Two years into our plan we are now capitalizing on our well-established position in North America, Europe, Korea and greater China regions. Two countries we are targeting are Japan and India.

In Japan, we have had continuing success expanding with some of our traditional products in semiconductor applications as well as preliminary success in inverters. As we release more Japanese specific products in 2014, we expect to see that country become increasingly important for us, especially in 2015.

In India, we have seen initial penetration through our 3-phase string inverters and our design center in India, where we are developing high-end inverters for Indian utilities. Again, we anticipate this becoming a more important territory in 2014.

As we establish our presence with inverters in India, we're also seeing the potential for other power products, thereby expanding our opportunities geographically. We are also exploring other regions including Eastern Europe, Thailand, Turkey, Mexico and some countries in Latin America through indirect distribution.

Finally, our position for 2014, whether in new products, design wins, new applications and geographic reach, we have never been in a better position. We are looking forward to an exciting 2014 with a continued emphasis on margin improvement and cash generation.

Combined with a significant revenue contribution from our new products, new applications and geographies, we should begin to see accelerating earnings per share growth. All together, this should contribute to solid earnings in 2014 and move us closer to our new aspirational goals announced at our analyst day in November.

With a sound first quarter, we should be off to a good start. With that, let me turn it over to Yuval.

Thank you Garry, and good morning everyone.

Turning to slide 8, in Thin Films, revenue grew 60% to $88 million as semiconductor applications strengthened this quarter, while our Thin Films industrial applications came down from higher third-quarter levels. Our investment in advancement products is demonstrating consistently design wins, increasing market presence, and enabling expansion into new applications and geographies, all of which is contributing to the bottom line.

Turning to slide 9, beginning with semiconductors, strength this quarter was driven by our introduction of new products combined with healthy CapEx, investment in VNAND, and the ramp of 20 nanometers. Our growing presence in new applications such as etch, PECVD and PVD with our advanced RX technology is making inroads with key customers and geographies. While we expect some moderation in the first quarter, we look for next-generation technology buys in incapacity investment to fuel much of 2014.

A few areas of potential include the migration to 3D devices and packaging as well as the adoption of new materials for logic and memory devices which are driving the need for advanced etch and deposition applications for advanced plasma processing is required. Our post RF parts suppliers with advanced reconstituting and our matching network are enabling customers to pursue challenging advanced etch processes required for 3D devices for current and new applications.

Combined with a new remote plasma source technology, we are expanding our presence in new processes such as plasma enhanced atomic layer deposition and dry etch. Heading into our bating applications just two years ago, we are already generating repeat business and penetrating new global customers.

In flat panel display, we continue to benefit from capacity buys in PVD and touch panels where our share is strong and a new DMS product is positioned for the next generation of spattering. While the fourth quarter slowed as Gen 5.5 investment tailed off, early next-generation applications for encapsulation in standard and flexible displays in touch panels are just beginning. In 2014, we expect touch panel buys to moderate while LCD investment returns in the second half after the wave of fab builds in China early in the year continues.

In Thin Film renewable's, the introduction of our new bipolar DC technology which reduces defects and increases fields in overall focus, has led to early adoption and a stronger presence at leading glass coaters and OEMs. These applications are expected to migrate to China in 2014 and beyond. We anticipate significant glass purchases in the second half of 2014, when some of the larger investments in China are expected to resume.

In our industrial business, increased penetration in global orders from specific product lines are driving growth in the hard coatings. For example, decorative and functional coatings for consumer electronics has opened up a new application for us. As dedacting processing in general becomes more affordable, new areas of coating solutions are emerging in automotive, machine tools, optical devices, and more.

In service, our fab wide solutions are resulting in increased opportunities as end users enter into long-term contracts for repair services. Our expanded offerings are leading to additional upgrades and other alternatives to extend the life of existing equipment in semiconductors and industrial applications. Just with this quarter, we saw a moderation of our typical seasonality due to strong used equipment and spare parts sales as more fabs engaging in capital reuse and repurposing and projects.

As you can see, with each and every one of our applications, the introduction of new products are enabling customers' next-generation offerings, expanding our business, and resulting in more profits to the bottom line. All of this traction began with our success-winning designs.

Turning to slide 10, in the fourth quarter, we won a combined 88% of the design we pursued. In semiconductors, we won 11 for 14 opportunities, most of which represent new applications, new tools, or new customer platforms.

Semiconductor wins to date translate to potential revenue from volume growth in 2015 and beyond. In Thin Film industrials we won 41 of 45 designs in applications ranging from new and next-generation flat-panel display processes to new glass coating for large substrate and additional hard coating applications.

Finally, in keeping with our strategy to find new ways to grow and diversify, we acquired AEG's power control modules last week. This family of products serve numerous power control applications, ranging from material thermal processing to the chemical processing, glass manufacturing and many other applications. With an established position in served markets, these power control modules add precision power control offerings to our Thin Film portfolio while utilizing an outsourced manufacturing model.

Overall, we were pleased with our results this quarter. The R&D engine we have put in place is generating important new products that are expanding our presence and position and positioning us will for future opportunities. While we expect the slide in [preem] in Q1 from the levels achieved in the fourth quarter, we believe 2014 should be a strong year for our Thin Film products and applications.

I would now like to turn the call over to Gordon to discuss our inverter product line.

Thanks, Yuval.

Let me begin on slide 12. 2013 ended with the achievement of another milestone as we revamped our inverter product line: the first shipments of our 1 megawatt's to customers. Combined with our 3-phase string inverters acquired early in the year, we now have in place new higher-margin inverters that meet the demands of utility and commercial customers.

This quarter, we generated $65 million in solar revenues and maintained a strong backlog of orders for our 1 megawatt inverter. With the transition behind us, we are ramping volumes of our 1 megawatt and developing a number of country-specific 3-phase string products and positioning us for growth in 2014 across a number of geographies.

Turning to slide 13, customer response has been quite positive. The 1 megawatt is now installed with multiple customers at several sites, including integrated power stations for some utility installations, and ground mount commercial installation.

The inverters are producing power at very strong rates, reflecting the key advantages of this product including one, the wider voltage range that enables the production of power earlier each day and also allows peak efficiency to be reached sooner. Two, higher DC loading ratios that allow power production to ramp quickly, and three, the 98% efficiency rating enables peak production to be sustained longer.

Existing and prospective customers are recognizing the additional economic benefits this product provides, including the lower balance of system costs through our patent pending integrated PV tie design. All these benefits bode well for future orders.

Last quarter, we indicated that we were looking forward to gaining access to a large number of potential projects in 2014. During the quarter, we realized initial purchase orders for a major project. We also saw certain commercial ground mount applications gravitating toward the 1 megawatt inverter, giving the compelling economics for installations in the 5- to 20-megawatt plus range.

As we complete our planned cost reductions and ramp volume, we should be able to increase yield and profitability. The transition of our supply chain management to Shenzhen should also afford us plenty of additional opportunities to lower our cost resourcing.

Our other flagship product line, 3-phase string inverters, is building a strong presence in commercial application through our range of products for roof tops, carport and larger ground mounts. Orders increased during the quarter, and we received our largest order to date in the US where we are now shipping our second generation UL listed inverter and a 1000 volt version of the product.

At present, we have product development initiatives underway for derivative 3-phase string products for Canada and Japan which are expected to launch in the first half of 2014. While Canada is already a contributor to our growth, we believe Japan and India could become important geographies for us in 2015 and beyond.

For India and surrounding countries where we see growing utility scale applications, we are developing a 1.5-megawatt inverter through our local Indian R&D team. We are expanding our distribution capability to enable us to roll out these products effectively and maintain our reliability, performance, and customer service levels in these territories as well as others including Eastern Europe and Asia.

Turning to slide 14, entering 2014, demand for our new products is building, reflected in our backlog and the growth potential in our target applications. As we ramp production of our 1 megawatt, we look for revenue levels to continue to increase year-over-year. We are now armed with a portfolio of higher-margin products that address the needs of commercial and utility applications, resonate with customers, and provide industry-leading performance.

With our robust R&D pipeline expected to roll out over the next year, and our growing distribution capability, we look to gain access to promising geographies and customers that we did not have before. Together with the discipline we have established in our supply chain, we are setting the stage for a successful year. We expect sequential improvement of revenues throughout 2014.

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 a reminder, non-GAAP measures exclude the impact of restructuring charges, acquisition related costs, stock -based compensation, the amortization of intangibles, and nonrecurring tax items. A reconciliation of non-GAAP income from operations and per share earnings is provided in the press release table.

I will be referring to the earning slides posted on our website this morning. Let me begin with some commentary on our full-year results on slide 16. 2013 was a very successful year for AE. Total sales grew 21% to $547 million, compared to $452 million in 2012.

Thin Film sales grew 26% year-over-year to $297 million from $235 million last year as we increased our market presence and expanded into new applications and geographies. Solar energy sales increased 16% to $250 million this year from $217 million last year as we acquired and integrated our 3-phase string product line.

Total GAAP income from continuing operations without restructuring charges increased 150% to $62.3 million or $1.53 per diluted share compared to income from continuing operations without restructuring charges of $25 million or $0.63 per diluted share in 2012. Shareholder equity increased $74.3 million or 19%.

Our commitment to a cost-conscious culture continued during the year. We completed our restructuring, and by the end of 2014, will have taken approximately $80 million out of our cost structure.

We've improved our margins, accelerate our revenue growth, and generated over $35 million in cash from operations for the year. We ended the year with a cash balance of $150 million, even after completing our acquisition of the 3-phase string product line.

Importantly we met our targets and had a strong quarter of profitability on slide 17. As expected, our actual tax rate for the quarter was zero, leading to GAAP EPS less our restructuring charges of $0.55 per share. If we exclude the discrete tax items for the quarter and use our current effective tax rate of 9.6%, based on the profitability contribution of each business unit this quarter, we achieved $0.49 of GAAP EPS less restructuring charges.

Using the effective tax rate, total non-GAAP EPS would've been $0.61. As we look into 2014, we now expect our ongoing effective tax rate to be less than 20% depending on mix of profits.

Let me begin with the highlights of the fourth quarter. Total revenues were $153 million, representing a 35% increase versus the same quarter last year.

Our operating income excluding restructuring increased 22% versus last quarter to $22.3 million or a 15% operating margin. Our cash grew by $45 million to end the quarter at $150 million.

Turning to our revenue performance on slide 18. Revenues for the Thin Films business grew 16% sequentially to $87.6 million. The increase was driven by strength in our semiconductor applications.

Sales to semiconductor applications rose 38% in the quarter to $59.4 million versus $43.1 million last quarter. Data storage and industrial declined 15% to $7.9 million compared to $9.3 million last quarter, as did Thin Film renewables down 6% to $4.4 million from $4.7 million last quarter.

Service declined by 4% to $12.3 million. As expected, flat panel display applications fell 33% sequentially to $3.7 million as investment in AMOLED Gen 5.5 slowed and OEMs digested their recent capital investment. Solar energy sales decreased 4% sequentially to $64.9 million in the fourth quarter as we shipped our first 1-megawatt inverters and began to ramp production to meet the demand reflected in our strong backlog.

Turning to slide 19, non-GAAP operating expenses decreased to $30.7 million, from $33.1 million last quarter, having completed the integration of the acquisition of the 3-phase string product and further streamlining our operations. We also incurred pretax charges of $2.3 million for restructuring, $4.4 million of stock -based compensation, and $1.3 million in amortization of intangible assets.

Total non-GAAP operating margin improved significantly to 18.2% from 7.9% in the same period last year and from 15.2% recorded in the third quarter of 2013. Operating margin in our Thin Films on a GAAP basis grew to $24.7 million.

In solar energy, we reported a GAAP operating loss of $2.4 million. The loss was driven by a $1.2 million charge for a receivable that we initiated legal action on during the quarter and additional corporate allocations as a result of additional incentive compensation charges.

This loss was also impacted by the expected higher cost associated with the development and initial shipments of our new 1- megawatt inverter. Going forward, we expect these manufacturing costs to decrease as we capitalize on our supply chain and benefit from higher volumes.

Because of the restructuring activities this year and the mix of products by geography, our effective tax rate on a GAAP basis before discrete items was a benefit of 67%, which resulted in a tax benefit of $14.3 million for the quarter. Including the benefit, we achieved GAAP income from continuing operations of $34.4 million or $0.83 per diluted share. This compares to income from continuing operations of $687,000 or $0.02 per diluted share in the third quarter and income from continuing operations of $4.8 million or $0.13 per diluted share in the same period last year.

Non-GAAP income from continuing operations was $27.8 million or $0.67 per diluted share. This compares to non-GAAP income from continuing operations of $21.7 million or $0.53 in the third quarter and non-GAAP income from continuing operations of $8.9 million or $0.23 per diluted share in the fourth quarter of 2012.

Turning to our balance sheet on slide 20, we ended the quarter with $150 million in cash and cash equivalents, having generated $45 million in cash during the quarter based on our strong performance and our management of working capital. Inventory decreased by $13 million during the quarter as we shipped our first 1- megawatt inverters to customers in the fourth quarter.

As shown on slides 21 and 22, we recognized $2.3 million of pretax restructuring charges during the quarter, bringing the total charges related to these activities over the last two years to $53.9 million, $37.9 million of which was non-cash. The current actions coupled with previous cost reduction activities should bring our total cost savings to approximately $80 million by the end of 2014.

We are quite pleased with the results this quarter and the progress we've made over the last two years towards our strategic objectives to run a more effective, profitable, and streamlined company that continues to return value to our shareholders. Having completed a large restructuring and two acquisitions, and announced a third, we introduced more new products last year than in the previous two years combined.

We are seeing more and more opportunities for incremental revenue growth and profitability. As we begin 2014, we are encouraged by the gains we are making in certain Thin Film applications, the robust semiconductor market, and our expansion on the new Thin Film applications as well as the strong backlog and demand we are seeing for our new 1- megawatt inverter.

Before I talk about guidance, I'd like to take a moment to highlight what we believe is a key differentiator for AE. If you turn to slide 23, you can see how we think about our business. By continually optimizing our current supply chain, capitalizing on our manufacturing model and investing in R&D, we are developing a distinctive portfolio of power products that leverage our corporate infrastructure and add incrementally to our overall earnings-per-share.

While we segment our earnings for reporting purposes and allocate corporate overhead to each segment, we see the business as a combination of these various product lines all of which contribute positively to our EPS. With our platform in place, our results are demonstrating just how powerful the AE model is.

Our guidance for the first quarter on slide 24 is once again an increase over last year, a trend we hope to continue throughout 2014. In total, our first quarter moderates after the particularly strong result of Thin Films in the fourth quarter. We also expect some solar seasonality partially offset by demand for new products.

We anticipate revenues to be between $138 million and $146 million. We anticipate an effective tax rate of less than 20% for 2014, given the expected geographic breakdown of our profits.

Based on this, we expect GAAP EPS to be between $0.36 and0.42 per share and non-GAAP earnings-per-share to be between $0.41 and $0.47 per share. Non-GAAP guidance includes stock -based compensation of $2.2 million and amortization of intangibles of $1.3 million.

In closing, we are excited about the potential for AE in 2014. Our first quarter should be well ahead of last year's Q1 results, and we believe 2014 should be a strong year.

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

(Operator Instructions)

Edwin Mok, Needham & Company.

Congrats for a great quarter. So first question I have is, did you guys -- I noticed that you guys stop providing megawatt shipment for the quarter.

Can you give us some color for that? Did it increase, decrease? And if you could give a number, that would be great.

Yes, firstly, thanks for saying it was a good quarter. The key to the quarter is actually what happens when we get just a little bit more revenue, how much falls to the bottom line.

It is pretty incredible what happens. I hope we are starting to recognize the power of that model.

We did start shipping the megawatt. I said I think in November at the Analyst meeting. we took revenue there for the first time. It is starting to ramp up quite nicely.

It will ramp up through this quarter, and we will probably get to a steady state in Q2 on that product. The demand for that product is great, and the efficiency of the product is good.

Gordon, would you like to add a bit about the product itself?

Yes, the product itself -- I think I outlined in my remarks some of the advantages of the product. The benefits are resonating really well with our customers, and we are looking forward to some nice wins in 2014.

The key is the high efficiency of the product. I think it's getting outstanding results in the field, and we are getting great feedback from them.

Great, thanks. Can you disclose how many watts you shipped in the quarter?

312.

312, great. So I was wondering, if I look over last few quarters, your revenue actually has been coming down a bit on the solar side, right?

And you guided for seasonal decline in first quarter, right? What gives you confidence that you can grow sequentially over the next few quarters beyond the first quarter?

Wow, it is an exciting time for us. I think you remember at the Analyst Day, we talked about the new products and new geographies and the applications we're in. So we are in good shape.

The megawatt, as we just said, is hitting the ground nicely; and the three-phase string also. We got our first large order for a three-phase string last quarter in the US, and so that is now happening as well.

So we've got the products. We've clearly got the products, the utility and the commercial. We are moving into new geographies as well, so that gives us a great feeling that sequentially we can grow the product line from the first quarter.

The first quarter is always a bit dodgy for solar; but after that, we would expect there to be nice growth because of new products, new applications, new geographies. At the same time, those products will be moving into our supply change in Shenzhen; and the costs will be coming down. So we feel at the moment we are in a very good position in solar.

Now, you know my but, Edwin. My but is I know we can get to $100 million; I know that. And the business is out there, but I don't want to lose $10 million.

At the moment, this product line is probably giving us $0.20 to $0.30 of EPS per year; so it is accretive for us, which is great. I don't want to get into a situation where we've got revenues and it becomes dilutive for us.

So I've often said we will grow it slowly. I've used the word tad in the past. We are going to be very careful.

I know we can get there, and it is just a matter of time. So, we are in good shape. Good shape.

Okay, but if I look at the quarter on the operating profit point of view, you have a negative operating profit. And I assume a lot of that comes from low gross margin on this product because you were just ramping it and you expect that margin to recover slightly in the March quarter>

I'm going to pass you over to Danny, Edwin. But remember, even last quarter, it was accretive to our earnings per share. There was no way without it we would have got the earnings per share that we actually got.

Danny, why don't you say a few words?

Edwin, as you know, we allocate all of our corporate cost out. There is always an argument to be made, and I tried to represent it on the next-to-last slide that shows we have a group of infrastructure costs for being a public company that cost the company so much money. All of our product lines contribute margin to that.

Segment reporting forces you to put some of those numbers to a segment. But if that business went away, the corporate costs would not go away. So, when you strip that out, as Garry said, this business contributes $0.20 to $0.30 per share of earnings at a breakeven level.

I see, okay, that is fine.

Edwin, just again, I am very happy with the situation we are in. Obviously, I want to push the foot down on the accelerator a little bit, and we will do that. But we will do it and make a bit more money out of it as we're doing it.

So we are in a good position. It is a growth marketplace, and there is potential for us to make earnings per share out of it. We just want to be careful in what we're doing.

Okay, that is fair. On your guidance, I think $142 million, that implies a little more than 6% declined sequentially.

Are you expecting solar also to decline at that rate if you try to compare which one would decline more, which one would decline less? Just some color on that, please.

Just to make sure we are on firm ground, here. Sales from the same quarter a year ago, so let's get rid of seasonality; I do hate this seasonality thing, but let's get rid of that. We are growing 28%.

On our non-GAAP earnings, we are growing 48% if you take the midpoint. So compared with the same quarter a year ago, it's not so bad.

You've always talked about semiconductor dropping a little bit; that is obvious. The machine that we have really responded incredibly well to the pool of some of our OEMs last quarter.

It is amazing how when we get a product in our machine, how it pops the product out; and the profit comes to the bottom line. So you expect that to come down. Other product lines, other applications within this marketplace, are popping up. And we imagine that solar will be similar to Q4.

I see, great. That is all I have. Thank you.

Thank you, Edwin.

Shahriar Pourreza, Citigroup.

Let me shift over to a little bit of bigger-picture questions. Curious on your strategy in India. It's been relatively a challenging environment to operate in. National solar mission has been a little bit of a disappointment as far as how many bidders have bid in. We still hearing that it takes developers 8 to 9 months to get paid.

I'm wondering as you shift some resources into India how you're allocating those resources? Do you see the issues in India abating? And then what kind of a product are you going to create for that market?

Firstly, over a year ago, I said India is a slow -- a market you have to be careful in. I said that people do not get paid in that marketplace. And now, people are saying -- Oh, we're not getting paid.

It is a no-brainer. You know it's a no-brainer; I know it's a no-brainer. So the key for us is to not get talked into that situation. And again, we are slow and we are conservative.

As a Company, we are building up the infrastructure in India to sell all our product lines, not just inverters, but all our product lines will go into India. It is a great marketplace. We have to be careful that we get paid. And we have to be careful on the government's issues as well, and I can assure you that we are.

So I assume that we will not get burned, but we will be out to move forward in that market quite happily.

And it is a good solar market for us. It's a good thin-film market for us. And actually with our new product that we just acquired, they've got a little foothold there which is actually going to help us grow some of our other thin-film products and package products into India.

So India for us, as I think we said in the remarks, is a key geography for us as a Company. So as you step back, as a Company, India is important and Japan is important.

The one that we would love to say we have direction on, but we don't, is inverters in China. And I've stood up and said to you that before. We don't have a solution for inverters in China, yet. We are trying to work on one.

We certainly don't want to buy companies in China for that; that's a little bit of a difficult road to go up. So we are working on ways that we can sell into China.

One question for Gordon. Shifting over to the North America utility scale market, are you seeing opportunities starting to pop up in nontraditional states outside of California, Arizona, and New Jersey?

Maybe as the utility scale market starts to slow down a little bit, I'm curious whether you are seeing new states open up to solar.

Yes, we are seeing new states opening up to solar. And I think overall, we have some nice opportunities in the 100 plus megawatts range that are on our radar.

They are progressing. But it is very interesting to see the number of projects where we are looking at, say, 30 megawatts or somewhere around that range; and a nice portfolio of those projects is setting up. And as you said, some of these are in nontraditional states outside of the traditional utility hotbed in the Southwest.

Got you. And then --

By the way, we are also seeing utility projects in Canada, in Mexico. So, as a whole in the region, we are starting to see utility projects. I think we took our first order in Mexico last quarter, didn't we?

Yes.

And we've been in Canada for quite a time, and there are a few utility projects there. Will we get them? I don't know, but they are there.

Got you. Historically you have obviously shied away from talking about your market share.

But I am curious as Satcon continues to lose market share in the US, have you been able to capture a lot of that business? Can you just directionally point us to where your market share has been as a result of the Satcon bankruptcy a while ago?

There is going to be like IMS that are in the business of trying to measure market share. It is not something that -- we said it publicly for the two years I've been here.

It is not something that we use to steer our business. It doesn't influence our decision-making. What we are interested in is looking at opportunities to grow the business in a profitable way and a sustainable way.

And I think the cautionary tale with Satcon was they were chasing market share. They weren't interested in holding their pricing. They chased every opportunity, and they chased it right down the drain.

The gains or losses from Satcon, that happened as that business degenerated over the course of a year; but that was a story from two years ago. Today we are out there; we've got our revamp product line; we've got the flagship with the 1000NX or the megawatt in the utility scale. And the three-phase string products are setting up very nicely to take care of the needs of customers in the commercial space.

So, we think we're doing fine. We've got a nice pipeline of opportunities that will allow us to reach the objectives that we set out.

And I think you can see the smaller companies now struggling and slowly going away, which is good. And we are very bankable, which is a key point here.

And we remain bankable, and that is what we want to be. We want to be the trustworthy partner to these EPCs in the future.

One smaller question. Remind us, are you selling the 1 megawatt inverters to the [separate] expansion in Nevada?

We don't answer specific questions on specific projects. But to say we are getting a nice lot of orders for that product in that area.

Okay, perfect. Thanks a lot.

Jim Covello, Goldman Sachs.

Starting on the semi side, so your revenues are up 2 times year over year, obviously a tremendously profitable business for you.

On the semi side, the roughly doubling in revenues year over year, how much of that in your mind is the market versus market share? And of the market share, how much of that is new applications that you are serving versus taking sockets, if you will, from competitors?

I think it is a combination of both of them, Jim. What we did is we started winning design wins for advanced applications, both in the etch area and the PECVD area with new products that we launched in the market.

That allowed us not only to capture new applications in our traditional market, but also to expand to new geographies and to new customers in new geographies, which we never had business before. So, what happened is that a combination of going up with the tide, but also accelerate the growth by new applications, new customers and, as you said, new sockets.

Terrific. And then while the revenues overall in semiconductor have exploded, the service piece has stayed relatively flat. One would think there should be an incremental opportunity to service a lot of these opportunities. Is that right?

The service has been fairly flat for a long time and growing up independently or flat rate independently of the capital equipment purchases. What we have seen recently is a slow increase in our market share in service because of a different engagement model we have with the end users that allows us to take business away from the third-party, the mom-and-pop shops all over the world, and go with a fab-wide solution with fabs and sign long-term contracts. That allows us to drive the quality in a very good turnaround time with our services.

Also, it opens the ground for us for retrofits, upgrades, used equipment; and that allows us to serve and help the customers as they go through capital reuse and capital repurposing. And we will continue to do that.

Part of our strategy is in addition to the traditional just repair the box, we would like to develop and launch service products in the market that will allow us to grow faster than the traditional utility capacity-driven repair job.

Okay, thank you for that. And then final question for me is going back to something that Edwin was touching on.

I understand that with some cost accounting dynamics that there is some EPS associated with the solar business right now. But at the end of the day, the driver of the EPS, and the EPS is very significant, is the semi business.

I understand you think there is $100 million revenue opportunity out there, but we haven't grow that revenue in a year. And on an operating profit basis, the business loses money. Is it time that would cause you to rethink this business, or would there have to be some kind of change in the dynamic of the market?

There have been a lot of companies that have promised a lot in solar over the last decade; and frankly very, very few have achieved that. I understand there is this theoretical big opportunity out there. But this is a market that continues to be subsidized, and subsidies are at risk from time to time.

That creates risk in that market. And then, B, because of pricing and other issues, this market has not delivered over the last decade what anybody thought it would.

On the other side of that, you have an incredibly profitable semiconductor business that theoretically, if you use some of the capital that was being dedicated to solar, you could probably grow even faster. So is it time, or is it some kind of market dynamics that would ultimately cause you to rethink the solar opportunity?

Firstly, that is wonderful question.

You've got to think about all the product lines. I know you focused on semi just then; but think about environmental products, hard coating products, think of the whole product line that we have.

And you could poke holes in any one of them and say -- Oh, we don't need that one; let's invest in this area. We look at the total Company; solar does contribute earnings per share. It does contribute cash.

It's helping us. And as long as it is helping us, we will keep it and continue to try and grow it.

Semiconductor has had a wonderful time. But you know that is cyclical, and we need to get out of that ups and downs of that world. Not that we are not going to invest in there; in fact, we do.

We continue to win; it is embarrassing how much we win, actually. It's great. But we need to move into other markets as well as we move forward.

So, yes, I understand where you're coming from. And as you also know, I'm pretty hard on this type of stuff. If the product line is not contributing, it will go; I can assure you. At the end of the day, product lines that don't contribute will go. It's as simple as that.

But we are very comfortable at the moment with our inverters. We are comfortable with our environmental products. We are comfortable with our flat panel display hard coating products and our semiconductor products. Immediately we are not, I would be doing something. We will be doing something. So please be assured that we continue to watch our pennies and watch what we are doing.

Thanks very much. Good luck.

It's a great question, Jim.

Pavel Molchanov, Raymond James.

Two questions on with relation to solar. First on inverters. What do you think will be the average industry-wide price decline in 2014, and how will your price decline compare to that?

Gordon will answer that specifically. The wonderful thing about our Company is our huge competitive advantage we have as we put product solutions and as we outsource solutions; and then will have, should have, the lowest cost in the industry. There is no question in my mind. We are fighting a lot of vertically-integrated companies that have a difficult time being nimble, moving around. We don't.

I believe we will have the lowest costs of anyone as we move forward, and we should see our costs coming down at quite a rapid rate. As for instance the three-phase string moves into our Shenzhen facility, as the megawatt gets more and more through our supply chain and goes through our Shenzhen facility.

To come back to the question on pricing, there's experts out there who purport to be able to predict these things. And all I know is that in 2013, they got those horribly wrong.

So what we focus on, as Garry said is we are pulling costs out of our products every day through new designs, through new products, through sourcing, through our supply chain management machine. And so, we are in a position to be competitive on a project-by-project basis. So that is what we are looking to do.

Our pricing typically comes down a little softer than what the industry looks at because we are not out there, as Garry said, chasing revenue at any cost. We are very focused, as I said before, on trying to grow the business in a profitable, sustainable manner.

Okay, and then to the thin-film segment, is there any revival in the solar element of your thin-film revenue? Or is that still pretty much on the sidelines?

It is still pretty much depressed, and we right now do not see any significant investment in the area.

In Q3 though, we had some investment that was driven by technology as companies were investing in new sales development for efficiency gains. But that was some R&D business that happened in Q3 and did not repeat itself; that is why we saw some decline in Q4.

We do not anticipate in 2014 to see any significant growth in the sale manufacturing equity investment.

Okay, and just last quick one. You obviously highlighted the cash -- big cash build inQ4. Given how much cash you are throwing off, would you consider activating your buyback authorization at some point in the next 12 months?

That's a great question. Obviously, this is a great cash-generating machine. In fact, the recent acquisition we just made, again, there was no manufacturing. So we have no manufacturing as we go forward, which means we are continuing to find ways to be a cash-generating machine.

What will we use that cash for? Number one is to invest in ourselves to make the company more efficient. Number two is acquisitions, and number three is absolutely buybacks.

If we feel it is time or we've got nothing to do with the cash, we will buy back; but saying that, there are acquisitions there. We are finding lots of little spots that can add to our machine, where there is no manufacturing, where our Shenzhen facility can take control of the supply chain.

We are seeing lots of opportunities. That is not to say they will come; but there are lots of opportunities out there, and we are working on them feverishly to try and land a few more as we go forward.

Again, you know, I know, we are too small. We need to get bigger and get into more applications.

If you think about our recent acquisition, it came with, as Garry said, no manufacturing. The working capital will be a net zero because it is contract manufacturing. So we will pay for product at about the same time we get paid for it. So it is a great impact on our return on net assets.

Thanks very much.

Mehdi Hosseini, SIG.

Danny, can you elaborate on book to bill for thin-film and inverter?

Well, what I can say is that our backlog has increased over the year.

Is that correct, Danny? I just want to make absolutely sure.

Our backlog has increased over the year.

How about the past quarter?

I don't think -- we don't report. It's a good question, and I would ask as well; but we don't report it on a quarterly basis.

I think we have given you color. And the megawatt backlog has increased significantly over the last six months or so.

And we are now ramping up to ship that backlog out. We have shipped a few out in Q4, and it's stepping up into Q1. As I said before, we think we'll get back to the number we want to be at in Q2.

Got it. And then for purposes of modeling looking to 2014 and looking at some of the restructuring you have done, I see your revenues in 2013 are up 21% on a year-over-year basis, but gross margin improved by only 130 basis points. Your operating margin improved dramatically, but I see a lot of cutting in or moderate spend on R&D.

If I were to compare 2013 to 2011, revenue up 5%, but gross margin actually down. And you get operating margin improvement by reducing R&D spending.

And I do understand you have the slide in; it talks about how cost-cutting is impacting, and the big impact or the biggest dollar of cutting happened in 2013.

So as I look at 2014 and if I make certain assumptions for the revenue growth, how should I think about gross margin and operating margin expansion because it seems to me the past trend is not really applicable going forward?

First, just as a comment, our R&D is more efficient than it's ever been. We are producing more products, more derivatives that we ever have.

So I am pleased if we are spending a little bit less and producing more, and I hope your world is pleased with that as well.

The $60 million of cost savings in 2013, is that going to show up in gross margin improvement in 2014? How should we think about operating margin and so forth?

I understand. On the gross margin side, I think it is amazing that we've kept our gross margins flat.

Every quarterly meeting I'm in, you are asking about -- Oh, the pricing has gone down our inverters. The pricing is going down here; the pricing is going down there. There is pressure in semi because of the consolidation. But our gross margins have stayed flat.

Well done, AE. We've done a good job.

So that is good. Our gross have stayed the same, and our R&D has gotten more efficient. That is pretty good as we go forward.

Danny, would you like to say a few comments?

Well, I would say our quarterly EPS has grown consistently over the last two and a half years as a result of that cost-cutting, as a result of focus on new products, as a result of expanding into new markets.

The guidance we gave today, if you take the midpoint of the guidance on a year-over-year basis versus last year's first quarter, we are up almost 30% in revenues. We are up over 200% in GAAP earnings, and we are up about 60% or 70% in the non-GAAP earnings. So every metric I look at seems to say that the machine is working. We are running more and more products through Shenzhen.

We just did an acquisition last week that actually comes with no working capital, and we have to add zero G&A. So if it has any gross margin at all, it improves our EPS; and that is what our focus is on.

Our gross margin is great, and we do focus on it. We are focused on earnings per share, and they continue to move up because of the cost-cutting that we've taken and the new products we're introducing.

I guess the difference between us and others -- and it's taking a lot of people time to get used to it -- we have little interest in market share.

We have an interest in earnings per share and cash generation; that is what we are interested in. We had an average year for cash generation last year.

What was it, about $40 million?

$40 million.

It was an average year, but we are coming along. I think over the two years, we've generated about $140 million or $150 million.

Sp that is what we are interested in -- cash generation and earnings per share. And that comes from us winning in semi, going into new applications in semi.

As I said before, it is embarrassing how well we are doing in semi; going into new applications; going more into inverters, stepping on the accelerator a little bit there. And that is what is going to happen as we go forward.

Should I assume margins would be in the high 30%? If you have sizable revenue growth, the majority of your earnings growth from operations is going to come from just a better -- a scaling of OpEx?

Our gross margin, what you're going to have to do is guess the mix of products because we don't tell you the mix. So you're going to have to guess the mix of products coming through here. And that is the key for you, and I think we try to give you enough color.

We have said over the year that the inverters should grow. And we have a backlog there of megawatt product. We have the three-phase string, which we are starting to release into more and more countries, which should grow.

At the same time, we've got a very high margin semi business and an excellent margin other products in the thin-film. So you're going to need to make a judgment there. What we try and do is give you a smorgasbord to choose from and come out with where you think we are going to be.

What we have said is that we think we're going to continue to grow this year. We are in good shape. We have done everything -- we haven't done everything we can; that's ridiculous. We've done a lot to put us in a good position to win this year. And our win is earnings per share; our win is earnings per share.

So, you need to model backwards. And obviously, we will point out things we said that can help you get to that. But as I said, we think the inverters are going to grow little bit this year. We think semi is going to have a good time. We think we're going to get more into hard coatings.

So we're in good shape, and there may be a few acquisitions to come, who knows.

Got it. Thanks for the color. I appreciate it.

Thank you. Thanks for the questions.

Krish Sankar, BofA Merrill Lynch.

Good morning everyone. This is Andrew on for Krish.

Hello, Andrew.

I had a question on the Japanese inverter opportunity. Curious if looking at that as exclusively a three-phase market, or there is opportunity for the 1 megawatt in there as well and whether or not you will be selling in conjunction with a partner or under the AEIS brand?

I will say just a few words about Japan. We have an infrastructure in Japan for all our product lines, so that is a great start for us as we go forward.

We had wins last year. I think we told you we won some great projects in Japan the thin-film area. And I think we've also told you we got our first order for a three-phase string product line in Japan. And obviously, it is a good market for us that we need to get into more; and we have a plan to get there, and Gordon might --

So for Japan, we are excited about the prospects. We have a partnership that we will be saying more about very soon, and we are excited about the prospects for the three-phase string products because they are particularly well-suited to that market through this partnership that we've developed.

The utility scale is not something that we are currently selling into. But at the same time, as we've gone into Japan and started to talk to more people, there are opportunities that are being identified.

And as Garry said, we are very well-positioned in Japan now. We have people on the ground; we are active in the market; and as I said in the prepared remarks, we are expecting Japan will be a big contributor to our success in 2015.

Yes, again, be careful. I think we are positioned well for 2014, and we start talking about things where we will really get traction in 2015.

So, we are now really putting the pieces in place for 2015. 2014 is, in some ways, set. We have great products; we are growing into new geographies; we are off to the races.

So, be careful when you are modeling. I think we release our first real products in inverters for Japan in the second quarter some time. So, just don't get too carried away.

Got you. And then sticking to that geography for a second, any impact of foreign exchange on margins, especially related to thin-film product sales in Japan in Q4?

Well, the answer to that is no. But as we get more global, obviously we have to take much, much more interest in exchange rates.

Our employee base in Germany is increasing; we have an employee base in Switzerland; we are in the US; we are in China, of course. So exchange rate is becoming a more interesting things for us, and we have to watch it much, much more carefully than we ever have. So that is a good question, and one that should be asked every quarter, I think.

Joe Maxa, Dougherty & Company.

Wanted to just explore little bit on this acquisition you made on the power control modules. They were generating, I think, annually about $19 million. Is that the expectation we should assume this year, or is it a growing business? Is it slowing?

Maybe just a little color on why AEG parted with it and those types of things.

Firstly, Yuval is going to answer the question.

Again, remember the first quarter or so, these things are always a bit of the mess. So don't expect anything out of it in the first quarter or so; but after that, yes, we expect nice revenue from it.

We will expect a good earnings per share contribution from it and excellent [road] performance for it. Yuval can answer more too.

Sure, so it's a very lean business, as Danny said. We outsource the manufacturing. We didn't inherit any trade working capital. And from our perspective, it's an easy business to integrate; and our strategy is to grow the business further.

And the number you quoted, which came through the press release, is correct; it is about EUR14 million annually of profitable, very accretive.

And what we are going to do is to just like we did with the hard coating products, we are going to launch these products globally using our distribution network -- service locations around the world and support organizations to expand the growth of this product to other applications.

The other growth opportunity is a synergy between some of our current products and this product line, which will result in integrated solutions that will accelerate growth and provide much higher value.

The interesting part, in this specific business what attract it to us, in addition to the profitability and the structure, is the fact that this is not a thin-film per se product line, not a semi per se product line.

It is very distributed; it is very global; and it goes after many industrial applications, which is in line with our growth strategy.

When we talked about it on the Analyst Day, we talked about we need to expand beyond semi and beyond Thin Films to expand ourselves to applications, industrial applications that are less cyclical, that are more global and more diversified.

I see, how are you maintaining their sales staffs; or are you having some impact on OpEx at this point for the first quarter until you are able to grow the business?

We basically -- we retain a team of product marketing engineering and R&D in the same place where they are located today.

We have a small sales team, global sales team, that we will absorb into our organization; and we are not going to add beyond that anything else. We have enough power in our distribution channels to drive these products through the channel.

I think some of the synergies you get are absolutely fascinating.

Yuval pointed one where we are packaging it up with some of our products as well. But just them just being in India and getting a reasonable volume in India, we now have a distribution channel for our products in India, which is great.

They actually needed to do a little bit of assembly in India where we actually do a little bit of assembly in India. So there are lots of sort of hidden -- hidden benefits, I've just told you -- but there are a lot of little benefits that come out of this type of acquisition as long as we keep to our model.

If you don't keep to our model, if you buy things that have got God knows how much manufacturing and all this rubbish behind them, then you're in trouble. You cannot manage it; you cannot get the cash out of it. But the way we're doing it, I think we can do quite well.

Okay, thank you.

One other point, remember on the acquisition, it will be a bit muddled for the next month or two. And then Yuval will come out at the beginning of the next quarter to tell you where we are with it.

Right.

Is it me now? I guess you have stopped asking questions. So thank you so much for listening. We are in a great position for the year.

Our products are in better position than they've ever been; we are in good applications, good geographies, I'm looking forward to a very exciting year ahead, and we are going to keep you in formed and be as granular as we can.

Look forward to seeing you at the next conference. Goodbye.

Thank you, ladies and gentlemen, That does conclude today's conference. You may all disconnect and have a wonderful day.