Advanced Energy Industries Inc (AEIS) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Advanced Energy first-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I will 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 first-quarter 2014 earnings conference call. With me on today's call are Garry Rogerson, Chief Executive Officer; Danny Herron, Executive Vice President and CFO; and Yuval Wasserman, President of the Precision Power Products. By now you should have received a copy of the earnings release that was issued yesterday evening. For a copy of the release, please visit our website at advancedenergy.com or call us directly at 970-407-4670.

Now I would like to remind everyone that except for the historical financial information contained herein, the matters discussed on this call contain certain forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Statements that include the terms believe, expect, plan, objective, 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 form 10-Q, 10-K 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 and in our press release. Guidance will not be updated after today's call until our next scheduled quarterly financial release. With that, I'd like to turn the call over to Garry Rogerson, CEO of Advanced Energy. Garry?

Thank you. Good morning everyone, and thank you for joining us. In a quarter that is always a difficult one for our business, especially in inverters, we generally met our expectations as a Company. We grew total revenue by 26% over last year and more than doubled our operating profit and earnings per share compared to the same quarter a year ago.

Our backlog increased, and we ended the quarter with $123 million of cash. We again put our cash to work in two strategically significant acquisitions over the last few months, both of which should contribute to near-term revenue growth, and later expected strong earnings growth. Overall, our strategy continues to prove effective as distinctive product diversification, distributive R&D, and centralized manufacturing model are expanding our opportunities for growth and profitability.

Across our Company, our precision power conversion product lines continue to perform well, growing significantly from the same quarter a year ago. The high volume of products running through our facility in Shenzhen produced excellent margins and an advantageous tax rate. Product lines including the one-megawatt and three-phase string that are currently in transition to our Shenzhen facility producing lower margins this quarter that affected our results. Additionally, we felt the impact of our particularly harsh weather that halted some projects and impacted orders and revenue. We expect to have completed the task of moving manufacturing of these products in Shenzhen by the end of the year. As we ramp production in our Shenzhen supply chain and manufacturing team, implement operation excellence and reduce material and our labor costs, these costs should decline over the next two to three quarters.

This quarter, as part of our cost reduction efforts, we took steps to consolidate more of the (inaudible) relating to this product line, and increasingly look for ways to be more profitable. The good news is that all of our power conversion products are being well received by our customers and are positioned at the heart of growing market demand. For instance, our new pulsed RF and bipolar DC products are making inroads into existing and new applications that we've not served before. Since the end of the quarter, shipments of the megawatt and three-phase string inverters into North America have increased, and that we have continued to gather large supply contracts with key customers.

Integral to our ability to have a constant flow of next-generation industry-leading products is our centralized manufacturing and distributed development model, which continues to excel. Our teams are consistently winning designs in traditional and new applications, such as etch and sputtering in semiconductors, next-generation FPD processes, and additional hard-coating applications. As Yuval will discuss, we are already seeing dramatic shifts in market share resulting from our novel approach to R&D.

With four acquisition now complete, our presence in a number of new areas should allow us access to multiple growth opportunities. Our recent acquisition of HiTek is off to a good start. Not only does it strengthen and diversify our position in semiconductors, it provides entry into an entirely new and large stable of applications, such as mass spectrometry x-ray, significantly increasing our total available market. HiTek is a tremendous acquisition, allowing us to access new applications at an advantageous purchase price, as Yuval and Danny will discuss further. Over time, we expected it to become a significant contributor to the overall Company for a minimal cash outlay.

Our other acquisition earlier this year, AEG Power Control module, contributed to our industrial expansion this quarter, deepening our penetration of precision power delivery where precise measurement and control are required. Consistent with our model, we plan to maintain distributed R&D locations for these acquired entities, while utilizing the strength of our centralized supply chain and manufacturing in Shenzhen to reduce costs and increase flexibility.

These strategies are preparing us to accelerate revenue growth from multiple channels in order to achieve our longer-term goals. From our strong inverter product line to our design wins in traditional and new markets to our recent acquisitions and our extensive customer reach, we are diversifying our applications and geographic focus to become an important worldwide player in power conversion. This should led to more consistently high-growth applications with plenty of potential opportunities.

For example, mass spectrometer is roughly a $30 billion to $40 billion market, where HiTek is gaining share. Other areas include x-ray products for both semi and non-semi applications and MRI. Already we are seeing the benefits of this diversity in our results and guidance for the future.

Finally the main priority for our cash continues to be finding acquisitions in adjacent applications that fit our R&D and manufacturing model and have the potential for growth through our powerful worldwide distribution channels. As always, we will consider stock buybacks, as appropriate.

Overall, we are moving in the right direction towards our three-year aspirational goals discussed in November of last year. Near term, we believe that our second quarter results should be sound. Rather than seeing a commensurate decrease in revenues attributed to a cyclical pause in semiconductors, we expect converter industrial sales to largely balance out the pause, demonstrating the clear advantages of our diversification strategy.

One market factor remains out of our control, the potential decision by the US government to expand the current import duties on certain Chinese solar panels and sales to include Taiwan. We believe this could have a material adverse effect on the utility inverter business if solar projects cannot move forward to due increased costs.

Consistent with market analysis and customer input, we expect a recovery in all of our markets except solar PV panels in the back half of year. OUr low-cost manufacturing model coupled with our efficient distributed R&D organization should continue to produce industry-leading products and winning new designs for traditional and new applications. Our growing and diversified global presence and emphasis on (inaudible) puts us in an excellent position to invest in our future and move us towards our aspirational goals to grow revenues, expand margins and earnings per share, and generate cash. With that, let me turn it over to Yuval.

Thank you Garry, and good morning everyone. Turning to Slide 8, revenue from our precision power product lines declined slightly this quarter, down 5% from last quarter to $83 million. While semiconductor applications moderated after the exceptional fourth quarter, industrial applications performed well, in part reflecting our strategic expansion in our addressable markets.

Within two recent acquisitions, our distributed R&D structure, and profitable manufacturing engine are distinguishing us from strong design wins across (inaudible) applications, extending our future growth platforms and enabling increase profitability. Just a few weeks ago, we announced the addition of high-voltage products and custom power solutions by acquired the HiTek Power Group. HiTek brings a portfolio that targets global OEMs in new semiconductor applications, including wafer processing,, inspection, and metrology as well as new and large industrial and analytical applications such as electron microscopy, masked spectrometry, and x-ray systems.

We plan to broaden the geographic penetration of these products in existing applications and in new areas, leveraging the strength of our global distribution network. We believe we can drive additional synergies by maintaining our distributed R&D model and leveraging our centralized manufacturing in Shenzhen.

Earlier this quarter, we also added AEG's Power Control modules to target precision power control applications in a variety of industries. This product line has begun to contribute to our industrial revenue, and we are excited at the prospect for a broader set of industrial solutions for the glass industry. These acquisitions reinforce our strategy to drive growth by investing in precision power conversion technologies and extending our presence in new applications.

Turning to the trends we are seeing in our major application areas, let me begin with Slide 9. Sales to semiconductor applications declined modestly this quarter, in line with the broader market and relatively close to the peak level seen recently. As the build-out of certain fabs and the ramp of 20-nanometers capacity at key customers near completion, some customers are signaling the end of the first phase of this investment cycle while they integrate the enormous capital investments made over the last few quarters.

Although incremental tool purchases may continue with mobility and memory the bright spots in the midst of the cycle, we anticipate a pause in CapEx spending levels during the second and third quarters. Our growing presence in high-demand applications such as etch, plasma-enhanced CVD, plasma-enhanced ALD and PVD required for next-generation technologies, and our newly added high-voltage presence in, [and implementation] wafer metrology and inspection, gives us confidence in our position when orders and shipments resume later in the year.

Flat-panel display revenues tailed off in this quarter as tool builders absorb purchases made in the second half of last year. The simultaneous slowdown of the tablet, smartphone, and large display markets reduced capacity demand.

Throughout the rest of year, we anticipate a cyclical return to growth outside of LCD CapEx, as fabs concentrate their builds in China. We look for market expansion, particularly in next generation touch-panel-related processes, where AE is well positioned for share gains, driven with our new Ascent DMS bipolar DC product. Additionally, the shift to flexible display technologies and broader market acceptance of larger displays greater than 50-inch should drive next wave of [amolin] investment, leading to new customer interest in 2015 and production line inspection at the end of 2014.

In thin film renewables, delay in glass purchases in China pushed revenues lower in the first quarter, while our Ascent DMS gained early traction across key glass OEMs and end users. Although glass investment can be lumpy and unpredictable, we believe that China's investment in its western provinces should return later in the year, along with Europe and the US. In the meantime, despite a few puts on a silicon technology purchases made this quarter, the solar industry continues its slow consolidation with limited capacity buys and hopeful optimism for a pick-up in 2015.

Industrial applications improved in the first quarter through a combination of our solid base business, the addition of the power control modules product line, and limited stock buys in our data storage business. From our expansion into new hard-coating applications, increasing demand for our optical coating products in Europe and Asia, the return of our automotive headlight coating after its seasonal slowdown, and the addition of the two new product lines for precision power control and high-voltage power solutions, we believe we are poised for a good year.

Finally in service, we saw slightly lower than expected volumes this quarter, driven by temporary maintenance budget constraints at certain customers. With those resolved, we expect to return to the level seen in the last several quarters by capitalizing on non-break fix and geographic opportunities. As fab reuse more equipment, we believe our expanded retrofit, refurbishment, and used equipment sales programs and our reputation are leading to share gains at the important customers.

Turning to Slide 10, during the first quarter we won 86% of all of the designs we pursued. Once again, our significant presence in the semiconductor segment was evident, as we won 16 of 19 opportunities. These wins focus on etch and advanced 3D etch applications for VNAND and MEMS etch for mobile applications, demonstrating that our technology is an enabler for the latest device architectures. We also won 41 of 47 industrial designs this quarter, spanning glass coating, industrial and hard coatings and new flat-panel display processes, including touch panels. Semiconductor wins translate to potential revenue from volume growth in 2015 and beyond, while industrial wins can generate revenue in a shorter timeframe.

Our business model is clearly working. Our investment in lean and distributed R&D is resulting in a quantifiable market share gains across all of our served application and product categories. In the recently released 2015 VMSI Research Market Share Analysis Report for semiconductors, flat panel, solar PV, and data storage market, AE has gained six market share points in RF power subsystems, 16 market share points in DC power subsystems, and 3 market share points in remote plasma sources.

Our precision power product lines did better than expected this quarter, even as many of our industries faced cyclical pauses. We continue to deliver on our strategy to diversify into new applications and geographies, and drive an extremely efficient business with differentiated profitability. Despite the anticipated pause in semiconductors, we continue to believe 2014 should be a strong year for our precision power product lines, driven in part by improved performance across our industrial applications. I would now like to turn the call over to Danny to discuss our financials.

Thank you, Yuval. On today's call I will refer to both GAAP and non-GAAP results. As a reminder, non-GAAP measures exclude the impact of acquisition-related costs, stock-based compensation, amortization of intangibles, and nonrecurring tax items. As stated last quarter, we have completed the majority of our restructuring activities and do not expect to have further charges, except as they relate to acquisitions. A reconciliation of our 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.

Turning to Slide 12, let me begin with the highlights of the first quarter. Total revenues were $140.9 million, representing a 26.1% increase versus the same quarter last year and a 7.6% decrease from last quarter of $152.6 million. Non-GAAP adjusted net income increased 55% versus the same quarter last year, reaching $18 million, while decreasing 34.8% from $27.8 million last quarter. We ended the quarter with $123 million in cash and investments. The decrease of $27 million, due primarily to the acquisition of AEG Power Solutions, Power Control modules, and the settlement of performance stock units in cash versus shares, as disclosed in our proxy statement.

Turning to our revenue performance on Slide 13. Sales to data storage and industrial applications rose 40% to $11 million from $7.9 million last quarter, due in part to the addition of the Thyro-Family product line from our acquisition of AEG's Power Control modules in January. Flat-panel display applications fell 40% sequentially to $2.2 million, as touch panel buys slowed and tool builders integrated recent PPD shipments. Inverter sales decreased 10.6% sequentially to $58.1 million in the first quarter, due to a confluence of market forces including severe winter weather delays and product transitions. Sales to renewable applications declined 64% sequentially to $1.6 million from $4.4 million last quarter, due primarily to delayed glass buys in China. Sales to semiconductor applications decreased 5.1% sequentially to $56.3 million as we came off the peaks seen in the fourth quarter. Service sales declined 4% to $11.8 billion in the quarter as volumes decreased due to temporary fab maintenance reductions.

Turning to Slide 14, non-GAAP operating expenses increased to $31.8 million from $30.7 million last quarter. We also incurred pretax charges of $260,000 of acquisition cost related to the purchase of AEG Power Control modules and HiTek Power, $1.8 million of stock-based compensation, and $1.9 million in amortization of intangible assets. As anticipated, stock-based compensation returned to more normal levels as we came out of the fourth quarter accrual of $4.4 million.

Total non-GAAP operating margin improved significantly to 14.8% from 11.7% in the same period last year, and down from 18.4% recorded in the fourth quarter. Our first quarter tax rate was 12.5%, or $2.1 million compared with the large $14.3 million tax benefit recorded in the fourth quarter. As you may know, the US R&D tax credit has not yet been passed for 2014, so that is not reflected in our tax rate.

GAAP net income was $14.7 million, or $0.35 per diluted share in the first quarter, including $260,000 acquisition-related expenses. This compares to $34 million, or $0.83 per diluted share in the fourth quarter, and $6.8 million or $0.17 per diluted share in the same period last year. Non-GAAP adjusted net income was $18.1 million, or $0.43 per diluted share in the first quarter. This compares to $27.8 million, or $0.67 in the fourth quarter and $11.7 million, or $0.29 per diluted share in the first quarter of 2013.

Turning to our balance sheet on Slide 15. We ended the quarter with $123 million in cash and investments, down $27 million from $150 million at the end of last quarter. During the quarter we utilized approximately $30 million to purchase AEG's Power Control modules in late January and $11 million to settle performance documents in cash. Inventory remained largely flat in the first quarter, decreasing less than $100,000, primarily due to the transition to the 1-megawatt. As acceptance of our new inverter products continue, we may face some potential product obsolescence.

Overall, our results largely met our expectations in the first quarter. Even under difficult conditions in some of our end markets, we still increased our non-GAAP profitability from $0.29 to $0.43 year over year. This performance reflects the ongoing execution of our strategy to deploy our cash and diversify our product portfolio by developing and adding adjacent power conversion product lines to enable us to more profitably ride out market cycles.

With the recent acquisition of HiTek Power Group, a high-voltage and custom power solution company based out of the UK, we are doing just that. This unique transaction was essentially cashless. However, we did assume a pension liability up that brings the total consideration to roughly four to five times EBITDA. The clear advantage of this structure is that, in essence for no money down, we purchased an ongoing revenue profit and cash flow stream that we believe has the potential to grow significantly over the next few years, more than balancing out the investment.

Turning to our guidance for the second quarter on Slide 17, we expect revenues to be between $135 million and $145 million. We expect an effective tax rate of approximate 12% to 14% in 2014, given the expected geographic breakdown of profits. Based on this, we expect GAAP EPS without restructuring to be between $0.26 and $0.31 per share, and non-GAAP earnings per share to be between $0.34 and $0.40 per share. Non-GAAP guidance excludes restructuring charges of approximately $2 million to $3 million as we integrate our recent acquisitions. Other expected non-GAAP charges for the quarter include stock-based composition of $1.8 million and amortization of intangibles of $1.8 million, with acquisition-related costs of approximately $400,000.

In closing, we continue to execute on our strategic objectives to return value to our shareholders. Through a combination of our many precision power applications, our recent acquisitions, and our strong position in the inverter market with our new products, we are diversifying our revenues and contributing to the profitability of our business. Even with the downturn in some of our end markets, our year-over-year performance continues to distinguish us from our peers as a cyclical growth Company. This concludes our prepared remarks for today. Operator, I'd like to open the call for questions.

(Operator Instructions)

Edwin Mok, Needham and Company.

Hi, great. Thanks for taking the question. My first question is on the Precision Power business. I guess first is just a basic question. How much revenue do you guys expect to generate from the acquisition -- two acquisitions that you have done, let's say in the first half of this year? And is that expected to be higher in the second half?

We don't usually say revenues. These are a small acquisitions, and both -- thanks, Edwin, for the question. These are small -- they're certainly going to give us significant revenues in the first quarters, and they're certainly going to help us in a second half of the year with earnings, perhaps before then because these are both very good acquisitions. I have to say the HiTek acquisition is really central to us, and Yuval will speak more, but we can really build on that acquisition strongly.

Right. Hi, Edwin. The HiTek Power acquisition takes us to a technology, product lines, industries and applications which we never served before. Applications within semi and other industry, but also a new industry we never were involved in. Such as we mentioned before, the analytical metrology and industrial applications of analytical equipment for quality insurance -- assurance, et cetera. It is a cornerstone of a growth initiative that we put together that will take us outside of semi, outside of thin film, and expand our TAM.

Yes. Just one other thing on HiTek. HiTek allows us into the analytical industry. And the one key analytical product there is mass spectrometry. As an end user market, that's probably somewhere between $30 billion and $40 billion. So we are now into a another very, very large marketplace, which we can get into at global distribution, at global support, will help them grow those product lines. We think this product line could become another leg of the Company over time, significant leg of the Company over time.

The previous acquisition, Edwin, Power Control Modules, take us to the implementation of power in heavy industries, and it goes from glass float processes through metal treatment, steel industry, chemical industries, oil and gas. Really a very broad and diversified applications in numerous industries whenever Precision Power is being implemented for thermal or other applications.

Clearly the revenues which kept -- are keeping up, which is surprising when we look at around us. Our revenues next quarter, they're essentially flat with this quarter, which is not bad. Why has that happened? Because of the unbelievable market share gains we've had in semi -- in the thin film type products. If you get those reports, I don't know if they get these reports.

I don't think so.

They don't get them? These are incredible step-wise market share gains, which I have to believe come from our distributed R&D. The way we are now doing R&D is very different, and we are getting products out very fast. We've gained market share within a lot of the market segments we are in. We are expanding into new markets, and we are acquiring. This has always been part of our strategy, a strong part of our strategy, and it is working. I'm very happy with it.

Great. That was great color. Just [can't see to Precision Power], I think you've already mentioned on the second half, you expect business to improve across your product line. I was wondering how much visibility you have into semi-cap and also flat-panel display -- customers, and what give you confidence that you will see a recovery in the second half?

As I mentioned in my script, basically what we hear from analysts, forecasters, and our customers is that we are going to see kind of a lull in Q2 and Q3. And the implication of -- I mean, basically the result of the absorption of the equipment that was acquired during the last quarter's -- the equipment, the 20-nanometer fabs and the push-out of the V-NAND investment, especially second phase. What we expect to see is a Q2 and Q3 kind of a lull, and then for us, we anticipate the beginning of the recovery in Q4. This is based on information given to us by analysts, but also our customers.

In the flat-panel display area, we expect to see the recovery in the industry towards the end of the second half. Again, it is all public information. Some of the wins that we have recently are associated with flat-panel displays, and we are really, really strongly positioned in the touch panel area where our Bipolar DC power supplies is getting a lot of traction. So we are looking forward to the recovery in 2015 -- by the end of 2014, and the installation of equipment in fabs in 2015, because we're going to leverage in some of the design wins and the market share gain we have accomplished.

Edwin, just to step back there a little bit. One thing on the last question. On this AEG acquisition, we did disclose -- or it was disclosed, it was about $20 million of revenue there. But if you just step back and look at the Company as a whole, whenever the markets come back we are in a great position, whether it be in our -- in any of our position, power conversion products, we are in a good position. If you look at the inverters, the three-phase string and the megawatt, one of the things that got us into trouble in the quarter we've just had, is the success of those new products. In fact, over 50% of the inverters that we shipped last quarter were of those new products that aren't under the control of Shenzhen. And therefore we had a margin issue there.

But if I look forward, whatever product line we are in, we seem to be in good shape. When the markets come back, we are in good shape to take them, and the machine we have can just gear up very easily. We are in very nice position, whenever the markets pick up. In some ways, I think your guess is probably better than ours.

Okay, great. So that's a good lead into the inverter business. Take a look at the inverter margins. It came in quite a bit less than -- or below 10% of the operating losses for the quarter. And you talk about bring costs down by moving the products in Shenzhen, but it sounds like it would take a few quarters before you come back, right? Are we going to assume -- should we assume that you'll remain operating loss for a few quarters before you start to improve (multiple speakers) to how we should think on it?

Yes. Just firstly, and I've said to you before. If any product line dilutes us, and we look at them as product lines by the way, we will take action to stop the dilution. We don't like dilution in this Company. We are focused on earnings per share, as you know.

So let me give you some color to what happened. We released the megawatt last year. We started shipping it in December, or I think November of last year. Anyways, November, December of last year. It was under the control of the US. The components were coming in from the US, and it is now moving towards Shenzhen. Our issue was that the megawatt was, I'm not going to say so successful, it was successful. We started to get orders for it and it put pressure on our high margin -- higher margin products coming out of Shenzhen. So we had a disappointment because of the success of a product.

In the quarter we've just had, obviously it is winter, I know it is winter, we all know it is winter, made it a little bit worse, but that wasn't the issue. Pricing pressure wasn't the issue. The issue was we released a new product that actually stopped one of our older products. It had a higher margin coming out of Shenzhen, giving us some benefits. Yes, it will take a little bit of time for the megawatt and the three-phase string to get into the control of Shenzhen. So you will see a steady improvement over the year.

Great. One last question, and I will go away. How many megawatts did you ship last quarter? And can you tell me roughly about what mix you have on one-megawatt versus --

You know I hate that question. Danny's going to answer that question.

Edwin, the number is 324 megawatts for the quarter, slightly up. But the reason we always look at this question -- it really doesn't give you a meaningful picture is our mix of product shifts so much. And we don't disclose the mix of products. Obviously the three-phase string sells for more per watt than the one megawatt does. So it's real hard with just the megawatt number to get an accurate depiction of what's going on in pricing.

Great. That's all I have. Thank you.

Mehdi Hosseini, SIG.

Yes. Thanks for taking my question. Going back to the commentary that weather had some adverse impact on the inverter shipment. Should we assume that you're guide in Q2 captures what was pushed out from Q1?

You can assume what you want, I guess. Clearly our guidance in Q2, we will expect all our product lines except semi to fill the hole. So we think all the product lines will step up a little bit. Most of the product lines will step up a little bit to help the drop in semi, and that's the beauty of the diversification of the Company, isn't it? It's all of them are picking up, and we would expect the inverter product lines to pick up as well in Q2. In fact, I think I said in Q4 that I would expect sequential pick-up from Q1 to Q2 to Q3 to Q4. As a business is lumpy, but I would imagine there is going to be a pick-up, yes.

Sure. For your sense of -- I'm trying to get to understand how your customers in various segments manage their inventory. Should we assume that it is a more of a just-in-time inventory management and there is basically no visibility for you, and you see these quarterly fluctuations? It is not so much of the cycle, it's your customers have consolidated, and you're, to a large extent there is no visibility that you can go by?

I think that's a good comment, but perhaps it is not entirely true. We do have visibility of our bigger customers and how they're controlling their inventory. So we do have some visibility. By the way, the diversity of applications we are going into now starts to mitigate the risk. So what you are seeing in the next quarter is really no downturn in revenues because of the diversity of the business.

Sure.

We do have some visibility. We do have some -- Yuval, do you want to comment more?

Yes, we do. Maybe, obviously we supply -- in the semiconductor world, we supply to multiple OEMs around the world. And as the industry continues to consolidate, and the dynamic in the industry becomes such that expectations are for shorter lead times> We do have agreements with our key customers that are just-in-time agreements, and I think we mentioned that before. So that it is more of a -- it is it combined system, if you may, where there is a push/pull or demand/pull that we replenish.

So we do have regular forecasting alignment with our customers that allow us to plan and forecast our programs very carefully. There's some level of uncertainty comes from more volatile or dynamic customers in some world regions or specific applications that we basically need to do our homework to understand where the dynamic is going. Historically if you look at the Advanced Energy as a company, we did a pretty good job forecasting by really working closely with our customers.

In the non-semiconductor application space, obviously depends on the nature of the industry we serve. The industrial world is extremely fragmented. When you have tremendous amount of small customers around the world, obviously in that specific part of the business it is much more dynamic and much more challenging to forecast. But again, we have developed our own tools, mechanism, and demand flow technology and operation that allow us to react very quickly to changes and turn on a dime when we need to. I think a lot of what we do is stay really close to our customers through the distributed engineering organization that we have around the world. Our engineers -- application engineers, and people are intimately connected to our customers which allow us to do a better job forecasting.

Got it. Very helpful. Thank you.

Pavel Molchanov, Raymond James.

Hello, guys. A couple housekeeping ones, if I may. Danny, you guys have obviously made a number of acquisitions. I think it would help if you can give us some sense of how OpEx should trend in Q2 versus Q1, and in the second half, given the additional headcount?

Pavel, we really haven't disclosed that on the OpEx. As with most of our acquisitions, we do expect them to be accretive within the first year. I might mention on HiTek, because I know cash flow is key. We basically bought this company -- we paid out about GBP2 million of cash and we inherited a balance sheet that had over GBP4 of cash. And for that, we assume the pension liability. But this total deal was about a four to five multiple of EBITDA. But when you think about it, it was basically buying a company for no money down, acquiring a revenue stream, a cash flow stream, and a profit stream for really no risk, other than the pension liability.

Okay. Then, can you mention what cash flow from operations was in Q1?

Depending on how you back into it, I think about it like this. We spent about $30 million for the AEG acquisition. We paid $11 million, as disclosed in our proxy statement, to settle some performance share units. So we used about $41 million. Our total cash grew about $17 million. If you net out the effects of where we started at $150 million minus the $41 million, and where we ended, it is about a $17 million growth for the quarter.

Okay, understood. And then lastly on the share buyback. I took note of the fact that you sound more open to it then perhaps you were several quarters ago. Is that -- am I inferring correctly from your comments at the intro, or not?

I think you are reading too much into my voice. (laughter) The reality is that, number one, is acquisitions. And we see the benefits now of acquisitions. You've seen them -- you've seen what's happening. Our revenues are not going down. Our profitability is not going down as much as you might expect. So this strategy is working.

Buybacks, we will always consider them, always consider them. If you look at my history, buybacks have always been part of my life, and I believe in a company like ours is it is got a lot of hidden value, that a buyback is a good thing in the future, absolutely. But we will balance that with acquisitions. And we have -- there's a tremendous, a lot of companies out there that we are looking at, high-margin companies that we can put down our distribution channel, that we can get into the control in Shenzhen to reduce their costs. It is quite exciting, and we have to balance that. I think we did a $75 million acquisition -- buyback -- (multiple speakers).

Three years ago.

Three years ago. We are always ready to do buybacks, always ready to do them. Please don't read too much into my voice, but I'd like buybacks but I also like acquisitions.

All right. Appreciate it.

Shahriar Pourreza, Citigroup.

Good morning, everyone. Let me just ask you on the inverter, the weakness that we're seeing. Around the US, you are starting to see very large utility-scale solar projects by like the looks of Dominion and Duke and Southern Company, Excel issuing very large RFPs in very nontraditional solar states. But the inverter business still remains weak. So when you think about it, how much of that weakness you attribute to fundamentals versus weather versus seasonal factors?

Yes. I think when you look out on the utility business that there is out there, there is a lot of business. There's a lot of business out there the back end of 2014 into 2015, but it does tend to push out. Permits and all this type of stuff, financing, whatever it is tends to push these sites out. But there certainly is a lot of business out there. And the megawatt is actually fitting in very nicely into that business. It really is, and we've got a lot of interest and we've had a lot of contracts to buy, commitments to buy the products from us. But the business needs to close at the end user end before it gets to us. We are in good shape to take it. Our costs have got to come down on the megawatt. We've got to move the assembly, or most of the assembly of that product to Shenzhen. And it is coming down. But yes, there's a lot of business out there, Shah, which we are in a good position to get.

Again, I put that little caveat in there about this panel issue. I just, where the government is interfering, rightly or wrongly, that's up to them, but that is clearly slowing down some of these plants. And the rationale there is, they're not viable. The pricing that the panels will go up to, the sites become not viable. So it could be that some of these could die, depending on whether the government -- depending on what the government chooses to do.

Garry, that's actually an interesting point with the anti-dumping countervailing tariffs. Do you have any sense on what you think the government will go, because you find very few participants in the solar industry that are actually vying for this tariff -- these tariffs? So the question is, is you did make a comment that you see significant impact in the solar industry on the utility-scale side.

Yes.

Can you maybe give us a little bit of an insight on where you think this is going to head?

No. I'd love to say I do, that I've got the inside track, but I don't have the inside track. We are clearly trying to help as much is we can, but we are not lobbyists. We are not into that. But what I can tell you is there are sites that are viable at the moment that won't be viable if the government goes one way.

Got you. Very hopeful.

That is to in effect tax Taiwan. If they choose to merge Taiwan and China together, that will absolutely have an effect on panel pricing, and that will absolutely have an effect on that business.

Got you.

Certain sites won't [go].

Okay, very helpful. One last question. On the acquisition front, so as you look forward --

Sorry, can I step back there?

Yes, please.

That did not affect our Q1 results. I just want to make sure that, that is a future issue. In fact, I think decisions are going to be made this quarter at the government level. I think sometime in June, if I remember right, June 2 is the date they've said. I don't know if that's in stone, but that's the date that apparently we're going to be told whether we are going to -- whether Taiwan and China is one country or not.

Got you, got you. And then one last question, acquisitions. As you look forward, and you are looking at to potentially make acquisitions, are we more focused on Precision Power or on the inverter side?

You know what we're focused on? We are focused on earnings per share, cash generation, and things that fit with our model. And that's a really good question, because we don't get hung up on -- so much on the marketplace. What we get hung up on is does it affect our model? Because our model really works. You've seen it today with the R&D. This distributed R&D, having isolated R&D groups focusing on their application and their application only, means that they do better work and products come out faster. The Shenzhen facility is just marvelous. It is just a cash generating machine.

So what we are looking at, really, is power conversion -- Precision Power conversion products, and inverters are a part of that. All our products are part of that. So we are looking at them all. We've got this very powerful distribution. We've got great brand recognition across the world. So we want to work on that. So we are looking both at inverters and peripheral products around inverters, of course, and other Precision Power conversion products. We are open to the products that we're going to. We are not closed on inverters. We are not closed on other Precision Power conversion products.

Got you. Thanks Garry, Danny.

Joe Maxa, Dougherty & Company.

Thank you. I wanted to ask also on the inverter side of the business. I think in the past, I think a couple quarters ago, you talk about a pretty strong backlog towards the end of 2013. I'm wondering if you can give us a little update on where that looks today with that one megawatt?

That's good question, and our backlogs are significantly higher for the Company than they were a year ago. Our backlogs in megawatt are higher. Our backlogs in three-phase string are higher than they were a year ago. In fact, again reflecting back on the quarter, we did well. As I said, over 50% of the products shipped out of the inverters was either three-phase string or megawatt, which is pretty amazing actually, the shift that's occurred.

That's the thing we've sort of screwed up, is that, that shift has occurred so fast. And we had backlog in those products to ship more, but the problem is, one, we actually couldn't have shipped more, but the issue was the cost of those shipments going through. We've still got good backlogs in three-phase string and megawatt and in our other product lines. I think you'll see it -- Dan, you want -- I think once you see our backlogs increased last quarter as a Company.

In total, backlogs have increased. They've increased versus the first quarter of last year in our businesses. And the other point, to Garry's point, the acceleration of the megawatt and the three-phase string. Just for instance, in the megawatt we doubled production during the quarter as we ramp this up on the production curve. As any new product, it is got excess cost at the beginning, and we are transitioning that product to Shenzhen. So it is a two-edged sword. It is a nice problem to have that it is been so well-received, but we want to get into Shenzhen where the costs are lower, as we ship more and more units out of there.

We are getting a lot of interest in those. I will give you another example. In Canada, I think we have contracts to buy -- which people are going to buy from, for about $4 million to $5 million waiting on shipments of three-phase string. And we have to develop the product, which we have, that we'll manufactured in Canada, which it has to get over the hurdles, and that all cost us money. We've got lots of new products coming along, and it is costing us money to do, but we are in good shape product-wise in inverters.

In fact, we are in good shape product-wise full stop. We've got to get everything going through Shenzhen, though. That's what we've got to do. Because all our product lines benefit. The margins go up on our other Precision Power products if we get all our inverter products coming through Shenzhen. So we need to push everything through there, outsource from there, just as the model says, and the model works. Whether it's R&D, whether it is distribution, whether it is manufacturing, the model we had is our biggest competitive advantage, by far. It's exciting for us. It is really -- and it's very scalable.

I believe you said on the previous call that you expected full production, or maybe near full production, in Q2. Now sounds like you may not be ready until the end of year. Did I miss something there?

No, you are correct, and you are correct, both. We will have full production in Q2. At issue will be the cost of that production. It won't be the production of the product, per se. Our customers will all be satisfied.

Okay. Lastly (multiple speakers)

To all respects.

Lastly, I wanted to ask Danny, you talked about the potential for some obsolete products. I just want to know potentially how significant may that be?

At this point, we don't have any. We know the potential is always out there when you have accelerating new products that competes with one of your older products. There is the chance that you don't get that perfectly balanced. So you end up with some parts and materials that you don't have a home for at some point in time, but we don't know where that is at this point. It is just wanted to make sure we were fully disclosing potentials, that's all.

I think maybe I'll say it a little bit stronger than that, Danny, in that the success of the megawatt has caught these lower-products a little bit by surprise. So we will see. There may be some inventory issues later on in. There might not be. Obviously, we will move them as fast as we can.

Understood, thank you.

(Operator Instructions)

Krish Sankar, Bank of America Merrill Lynch.

Yes, hi. Thanks for taking my question. Hi, guys. Two quick questions. Number one, on the order side, are you seeing any pockets of greater than normal seasonality that you think will recover, or are you seeing softer demand trend broadly across all geographies?

Firstly the seasonality. In some ways I wish we'd never mentioned seasonality, because, blimey, winter is winter and there are known -- installations slow down in winter. I apologize for doing that. The demand for our products is there across the board. I have a room that I sit in which has all the prospects on the walls of that room, and there is a absolutely full list of prospects for smaller projects and utility projects. So the demand is there. The issues are financing, which is always difficult. And in the utility area, we have this government cloud at the present time. But when I look at the gold at the end of the tunnel, or the light at the end of the tunnel, there is a lot of light there.

But I say to you again, I'm not going to let any product line of ours dilute this Company. We are focused on earnings per share. We are focused on cash generation. That's our focus, and utilizing that model of ours to get there. But I'm excited with all our products' [position]. They are all very well positioned at the present time.

Got it. That's very helpful, Garry. One last question. Would you be open to seeking like an exclusive relationship with [ADEL]? Kind of like what the GE/First Solar partnership is? Do you think that would give you better demand clarity and [certainty] or would you rather continue the way you're doing right now [in motor side]?

Firstly, let's step backwards and say my game is earnings per share. So anything I -- any way I can maximize earnings per share is something I would be looking at. So I would be happy with any partnership that would do a better job than what we are doing. So absolutely. We are open to anything and everything. This an extremely pragmatic and realistic group.

Got it. Thanks a lot guys.

Thank you. I'll now turn the call back over to Garry Rogerson for closing remarks.

Thank you for asking such good questions today. Thank you for listening. We look forward to seeing you soon and on the [street] somewhere. Thank you. Goodbye.

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