Advanced Energy Industries Inc (AEIS) 2014 Q3 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Advanced Energy Q3 2014 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time. (Operator Instructions). I would like to introduce your host for today's conference call, Ms. Annie Leschin, Investor Relations. You may begin, ma'am.

Thank you Operator, and good morning everyone. Thank you for joining us today for our third quarter 2014 earnings conference call. With me on today's call are Yuval Wasserman, President and CEO, and Danny Herron, Executive Vice President and CFO. 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 Advanced-energy.com, or call us directly at 970-407-4670. During the fourth quarter Advanced Energy will be participating in the Raymond James Boston Fall Investors Conference on November 11th. 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 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 Forms 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. I would now like to turn the call over to Yuval Wassermann. Yuval.

Good morning everyone, and thank you for joining us for our third quarter conference call, and my first call as Advanced Energy's CEO. I am excited to take on this role, and capitalize on the progress of the last few years to accelerate our growth and profitability. As most of you know, I have spent the last seven years at Advanced Energy holding various executive positions, including President and COO of the Company, and most recently President of all Power Products. Over that time our strong team has developed an efficient business model, launched a series of differentiated products, and fostered strong customer relationships, all of which have solidified AE's position as a global and diversified leader in the industry. As CEO I look forward to continuing to build on that momentum, so that we can leverage and further optimize our product lines, global organization and manufacturing platform, to better serve our customers, accelerate growth, and create value for our shareholders.

I feel very fortunate to be taking on this role at this time for three reasons in particular. One, the long-term growth fundamentals of the broad power conversion industry are expending, with increased demand for high performance, highly reliable, application specific, precision power conversion solutions. Two, with our core competencies in Precision Power conversion technology, and our continuing investment through our efficient distributors R&D model, AE is positioned to capitalize on these trends. Three, is the incredible global team at AE, that has worked tirelessly to develop and execute on our strategy. This team has repositioned the Company, redefined our brand, brought new products to market, and demonstrated the clear advantages of our model. I believe our global team is one of the strongest in the industry, and I am privileged to lead such a compelling organization.

From where I stand today we remain committed to executing on Advanced Energy's mission of creating shareholder value through profitably serving our customers in a variety of established and emerging markets, with mission critical, highly engineered power conversion products. Crucial to achieving this are the key components of our strategy that you have heard us discuss. One, our goal of profitable growth and share gains in our core markets, through continued investment in products and technologies, our ongoing pursuit of operational excellence, and the cost conscious culture we have created. And two, our continued deployment of cash, to fund future growth by addressing adjacent and new markets through organic and inorganic means. Over the next two months, we will be completing an expanded strategic planning process, to lay out our three years' vision, growth plans, and product line strategy, to address the opportunities and challenges ahead, and to further optimize our product portfolio and infrastructure.

I look forward to discussing our plans and future initiatives in detail with you at our upcoming Analyst Day in February, where you will also have the opportunity to meet our expanded team. Once again, this quarter reflected our ongoing pursuit of those goals. Revenues and earnings per share were slightly ahead of our expectations this quarter, as we again demonstrated the power of our growing and diversified product line, to even out the cycles of our business.

Even as revenue and profit from sales of inverters continue to be impacted by the market response to US tariffs on solar panels, ASP pressure, and the transition to 3-phase string inverters, the significant increase in sales to semiconductor applications, and solid growth in smaller applications area, such as renewables and flat panel displays, combined to offset the majority of the decline in inverters in some industrial applications.

All-in-all, revenues were $143.1 million, non-GAAP EPS was $0.42 per share, and GAAP EPS was $0.30 per share for the quarter. We generated cash flow from operation, completed the integration of UltraVolt, our latest acquisition in high voltage technology, and re-organized to a single functional global organization with a product line focus. Integral to the strength we saw in semiconductors and our other applications this quarter, was our ongoing ability to maintain design win rates greater than 85% for new applications pursued. These wins are a direct outcome of our strategy to serve our global customers with an agile and adaptive approach, and they are a key driver behind our share gains and market out performance.

This quarter we expanded our share in semiconductor etch and in industrial gas coating applications in particular. With a growing presence in high voltage and thermal applications with our newly acquired product lines, we are also seeing gains. Sales to semiconductor applications grew sharply, up 17.6% from last quarter. Our investments in pulse RF technology, and specifically our pulse 2-megahertz model over the last 18 months, are enabling market share gains at new and existing customers, and to outperform the semiconductor industry as a whole. With industry's migration towards 3D device structures, advanced pulsing RF power supplies have become enabling, and our paramount RF product line is well-positioned to address this trend.

Our recent track record for design wins in etch application should allow us to capitalize on this market opportunity, with 3D device structures such as V-NAND and SiN set transition to high volume. While the market flushes out potential scenarios for the full year 2015, we expect continued secular growth in both mobile and PCs to underpin previously announced NAND, DRAM, and foundry expansion plans, while the fast-growing Internet of Things applications, such as MEMS and sensors, continue to fuel capacity growth in old technology node applications, presenting an opportunity for incremental revenue from both products and services.

In our industrial applications, the continued diversification of our served markets is allowing us to sell new products into existing customers, while simultaneously expanding our reach to new customers. By entering adjacent markets and capturing meaningful new business in areas such as chemical analysis, X-ray, medical devices, optics, and hard coating, our more balanced portfolio allows us to offset much of the cyclicality, which characterizes some of our larger markets. In fact, within our industrial applications, we have nearly doubled our historical revenue base, with over 60% of this quarter's industrial revenue coming from recent acquisitions. In our solar inverter business, strong acceptance of the advantages of our high-performing 1-megawatt central inverter by our customers, are being fueled by positive feedback around our energy harvest capabilities, and reduced balance of systems cost.

There continues to be uncertainty in the US market around the outcome of changing tariffs on Chinese solar panels, and its subsequent impact on the market. Despite these market uncertainties the expiration of the US investment tax credit at the end of 2016 is expected to serve as an industry catalyst over the upcoming year, with customers accelerating design activity for utility scales planned, to ensure favorable economics for their projects. In contrast to the challenging market conditions for central inverters, sales of our 3-phase string inverters however grew, as the industry moves more towards distributed architecture across commercial and some utility applications.

While in the US we are just beginning to see larger products above 2-megawatts move to distributor architecture, Europe has competed the transition, and numerous mega-sized string projects are already in place. This quarter we saw greater than 200% growth in our US string inverter business, and began fulfillment of an 80-megawatt project in Europe, that will be distributed across eight locations. In Korea we're seeing a similar trend play out, as our 3-phase string business was up nearly 60% in the quarter.

As we continue to address ASP pressure and decline in volume in the quarter, we also launched our new lower cost third generation 3-phase string inverter for the European market. This is the first of a series of new 3-phase inverters, that will help us expand our offering and drive toward profitable growth in inverters. We also completed the transition of our inverter manufacturing to Shenzhen on schedule, which should allow us to improve margins of these products as volumes return. Inverters are just one example where our recently announced move to a single scalable functional organization can aid our success.

Under this new structure we can continue our drive to lower our costs, and increase our worldwide sales presence, by leveraging our existing infrastructure and distribution channel. With three acquisitions completed in just the last three quarters, we are entering new applications at an accelerated rate. As we embed these newly-acquired entities into the Company, we are constantly looking for the best ways to leverage our global resources, lower our costs, and optimize our sales, in order to support these product lines and expand our markets. Already we are seeing the benefit of this approach. For example, just this quarter we saw new sales of our power control modules and string inverters in Korea, where we have had a presence for semiconductor customers for some time.

With this significant step we are becoming a much more cohesive, agile, and flexible organization under a single leadership team. With the transition to a single global functional organization behind us, our strategic focus turns to accelerating growth, and executing on our vision for the future. AE is an exceptional Company, and a clear leader across numerous markets in the Precision Power conversion industry. Our goal is to continue to strengthen our position in the powerful engine we have built, to profitably serve our customers, and return value to our shareholders. I would like to thank those customers, partners, shareholders, and most importantly, our employees for their support.

I look forward to meeting many of you in the coming months, and at our Analyst Day. Danny.

Thank you Yuval. In 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, non-recurring tax items, and executive severance. Reconciliation with non-GAAP income from operations and per share earnings is provided in the press release table. I will be referring to the earnings slides posted on our website this morning.

Turning to Slide 12, we had a strong quarter with total revenues of $143.1 million, exceeding our expectations, the sales to semiconductor applications rose significantly, as a result of our share gains, and penetration with our RF pulse products, as well as small increases in other applications. The third quarter revenues performed better than expected, slightly higher than the same quarter last year. Non-GAAP adjusted net income decreased 22% versus the same quarter last year to $16.9 million, and increased 9% from $15.5 million in the second quarter. We ended the quarter with $106 million in cash and investments, a decrease of $24.4 million, after spending $35 million to acquire UltraVolt, and pay down the European credit line.

Looking at our revenue performance on Slide 13, sales to semiconductor applications rose 17.6% sequentially to $57.9 million, due to our strong penetration at existing and new customers with our advanced RF technology, aided by a semiconductor order late in the quarter. Service sales increased 9.5% sequentially to $12.8 million in the quarter, as we also gained share in Japan, and increased RMA volumes from key OEMs. Sales to data storage and industrial applications declined 17% to $13.7 million, from $16.6 million last quarter as expected, coming off of the second quarter highs. Flat panel display applications increased 40% sequentially to $3.6 million, with particular strength in Korea and China, as they continue to rebound off their cyclical lows. Inverter sales decreased 19.4% sequentially to $52 million in the third quarter, as the lingering impact of the solar panel tariffs leave uncertainty in the market, delaying utility scale projects. Sales to renewable applications increased 83% sequentially to $3.2 million, due primarily to strong business in China, including a large competitive project that we won as a result of our product's strong performance and reliability.

Turning to Slide 14, non-GAAP operating expenses decreased to $33.7 million from $35.7 million last quarter, due to various cost savings initiatives. We also incurred pretax charges of $1.2 million for restructuring associated with our recent acquisitions and severance charges. $60,000 in acquisition costs related to the purchase of UltraVolt, $1.5 million of stock-based compensation, and $2.2 million in amortization of intangible assets.

Total non-GAAP operating margin decreased slightly to 9.9%, from 16.1% in the same period last year and down from 11.5% recorded in the second quarter.

Now let me review our taxes. During the third quarter we generated a $3.7 million tax benefit, compared with $891,000 tax expense recorded in the second quarter. During the third quarter we had discrete tax items related to our actual tax return for last year and statute expirations, which gave us a $3 million benefit this quarter. In addition, our changing product mix and geographic profits are resulting in a lower overall tax rate. Even without the discrete tax benefit, we would have met our earnings expectations for the quarter. One outstanding item remains as we head into the fourth quarter, because the R&D tax credit has not yet been passed for 2014, it is not reflected in our tax rate. If it is passed during the fourth quarter, it would reduce our taxes for 2014 by approximately $1 million.

GAAP net income was $12.3 million, or $0.30 per diluted share in the third quarter, including $1.1 million for restructuring, and $60,000 in acquisition costs. This compares to $10.6 million, or $0.26 per diluted share in the second quarter, and $687,000, or $0.02 per diluted share in the same period last year. Non-GAAP adjusted net income was $16.9 million, or $0.42 per diluted share in the third quarter. This compares to $15.5 million, or $0.38 in the second quarter, and $21.7 million, or $0.53 per diluted share in the third quarter of 2013.

Turning to our balance sheet on Slide 15, we ended the quarter with $106 million in cash and investments, down $24.4 million from $130 million at the end of last quarter. During the quarter we purchased UltraVolt for $30.2 million in cash, and paid down $4.7 million of a European credit line. Without these two significant transactions, we would have generated approximately $11 million in cash. Inventories rose slightly, up about $700,000 from last quarter, reflecting the build-up of some inventory, amidst the uncertain outlook in the utility inverter market. As we mentioned last quarter, we wrote off $3.5 million of our older European inventory, which is reflected this quarter as a noncash item. We believe we have taken sufficient reserves at this time, but will continue to assess the current market environment.

In total we had a strong quarter with results that were better than our expectations on the top and bottom line. The last few quarters demonstrate the power of our model to modulate the cyclicality of our end markets, with semiconductors and some of our smaller applications balancing out industrial applications this quarter. Our ongoing success designing advanced next-generation technologies, continues to be crucial in capturing key design wins, and gaining share in various applications. The advantages of our diverse portfolio of products and growing list of acquisitions are allowing us to grow faster than our markets.

Turning to our guidance for the fourth quarter on Slide 17, we anticipate revenues to be between $140 million and $150 million. We expect an effective tax rate of approximately 7% to 8% for 2014, given the expected geographic breakdown of profits. Based on this we expect GAAP EPS without restructuring to be between $0.29 and $0.37 per share, and non-GAAP earnings-per-share to be between $0.37 and $0.45 per share. Expected non-GAAP charges for the quarter include stock-based compensation of $1.4 million, and amortization of intangibles of $2.1 million. This concludes our prepared remarks for today. Operator, I would like to open the call for questions.

(Operator Instructions). One moment for our first question. Our first question comes from Edwin Mok with Needham.

Hi. Thanks for taking my question. Congratulations for a great quarter. So first question on semi cap, very strong, looks like you guys are definitely gaining share with your pulsing product. I was wondering do you expect the strength to continue into the fourth quarter, and is that baked into your guidance, and how should we think about at least the first half of 2015 and visibility out in the first half of 2015?

So, Edwin, obviously, we are carefully listening to our customers. Our forecast is a function of the blend of our end customers' market share at the end users and their investment timing. What we hear from our customers and from the forecasters as well, is they're in anticipation of continuing growth in the semiconductor wafer fab equipment. Our capability to be extremely agile to respond to changes and the dynamics in the market, helps us to be extremely responsive as we demonstrated in Q4, where we managed a lot of drop in orders and increase on demand, due to the adoption of our RF product supplies.

Edwin, if your last question was, was it included in guidance, let me just say, that we always include everything that we know about at the time that we make management judgments on our guidance. And I think if you look at the last 13 or 14 quarters we've been pretty good at coming in between the ranges that we have given you.

Okay. Great. That's helpful. And then just quickly on the industrial, as you guys talked about, down a little bit this quarter but it looks like you guys have made great progress on several fronts here. I know that business, maybe not as volatile as the semi cap space, but any color you can provide us, in terms of how to think about the business next year, and with these acquisitions now integrated, it looks like they have started integrating into your organization, how do you think about the growth of that segment?

So Edwin, the power of the last few quarters was the ability to diversify our product lines. We are spread across many more industries, many more applications, and we have a higher mixture of what I would call custom products, derivatized products, and off the shelf cathode products. So we have now added hundreds of new product part numbers, and thousands of customers to our portfolio. To be able to manage that, obviously we have restructured our global sales organization, to allow us to manage key accounts, where we need to work on design wins, with dedicated account teams, but at the same time to expand and grow our distribution channels around the world, to manage more of the standard product, the off the shelf products that go to thousands of customers. We expect to see less volatility obviously, because we are now serving a much broader base of customers and applications.

I see, but you don't have targets or the account growth rate that you expect for the coming year, or that for us?

Not that we can share right now.

Okay. That's fair. And the solar side, it looks like you guys did have some under pricing pressure. If I recall correctly, your gross margin actually dropped about 10% on the solar side, right? And please correct me if I'm wrong on that, but is that all coming from pricing pressure, and now that you have moved your manufacturing, it sounds like both the 3-string as well as the 1-megawatt into Shenzhen, do you expect that to start recovering in the fourth quarter, or it more like some time in 2015, and you have to wait for pricing to stabilize? I'm just trying to understand what are the drivers of gross margin, and if there's anything you guys can do on your end?

I will ask Danny to answer the question. Go ahead, Danny.

Yes. Edwin, that was three or four questions, so let me try to address all of them. The first one, obviously we don't give out margins, so in your model you can calculate what you think it is, and that's your model, so we're not going to comment on the margins, but the math is pretty simple. In terms of the move to Shenzhen, we have completed the transition of the manufacturing of the product to Shenzhen, but as we have said many times, the cost reductions will come through as the supply chain balances out, and we start using the new production. Obviously with some decreases in revenue, that hasn't totally flowed-through yet, so we're not yet seeing the full benefit of the moves to Shenzhen.

Okay. Great. Last question on the tax. I just want to understand correctly. You said that the discrete tax credit was $3 million, so what was the rest of it, because I think you guys reported a bigger tax benefit on that, so I'm just trying to understand if there was something else in there, and for the 7% to 8% tax rate that you guided for the full year, is that excluding the discrete tax benefit, or is that all-in tax?

Yes. Good questions. First of all, the discrete tax benefits are due to filing your actual return for last year, and then rolling those items through how you calculate your tax return, as well as the expiration of statutes for previous years tax positions you have taken and that's with the $3 million. Without the $3 million we are still comfortably within our range of guidance that we gave. Of the 7% to 8% is our effective tax rate, so that would be without any discrete items, and obviously that effective tax rate is determined by your geographic split of profits, as well as your product split of the profits, and given our current expectations for the full year, that 7% to 8% applies this year, given the situation in solar versus the extreme profitability we are seeing in Precision Power.

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

Thanks Edwin.

Our next question comes from Pavel Molchanov with Raymond James.

Thanks for taking the question. Clearly the solar results are not what you want it to be. What are specific steps that you guys are taking, to kind of remedy both from a top line perspective and from a margin perspective?

Thanks for the question, Pavel. Obviously, we're not happy with the performance of the inverter product line. Right now it's a highly focused area for the management team. We are addressing it both tactically and strategically. On the tactical side we talked about the transition of the manufacturing to low cost areas. We have a new organizational structure that will increase our efficiency and reduce our costs, and as I mentioned in my prepared notes, we have a series of new products that we're launching, during the next six to nine months, with lower cost and lower cost of ownership. We continue to work on those, while at the same time working as part of our strategic planning process on our long-term strategy, which we will share with you in Q1 during the Analyst Day.

Okay. And not trying to kind of front run ahead of the Analyst Day, but one of the things that the Company has traditionally said, is you want to stay away from the residential rooftop market, and yet that's where so much of the growth, particularly North America, as far as solar goes seems to be currently. Are you re-evaluating that part of the strategy among others?

Pavel, what we see in North America at least to our product portfolio, is growth in the rooftop commercial, and this is exactly where we place our 3-phase string inverters. We have seen growth in this area, as I reported in my previous notes, and we continue to see growth in the area, not only in the US but across the world. Obviously, various regions around the world on the commercial space with the 3-phase behave differently, but as you know, the two main product lines we have are the central 1-megawatt inverter we right now continue to drive to market, and the portfolio of the 3-phase string inverters that we focused on positioning for rooftop and commercial, and small scale utilities, if they choose to go with a distributed architecture.

Okay. I'll leave it there. Appreciate it very much.

Thank you.

Our next question comes from Joe Maxa with Dougherty and Company.

Thank you. On the solar side, I mean it's been a struggle for quite a while now. I mean does this make sense for you guys it keep this long-term, or is it something you're considering time to move on, or what's the longer-term? Can you get back to profitability? Can you keep that profitable and maybe a sense of when you think you can get there?

Well, obviously we're not sitting on our hands right now, and a huge effort is being put in place to increase the profitability of the inverter product line. And I mentioned before, the measures that we take on a short-term tactical level. Obviously, we're looking at the strategy for the Company, is part of the rigorous strategic planning process we have in the Company, and a critical component of that strategy, is the strategy around the inverter product line. And we're looking at all of the options ahead of us, and we will share them with you in Q1.

Do you anticipate margins bouncing back in the fourth quarter, as well as sentinel revenue as well in the fourth quarter versus the third quarter, or should we be looking at similar type results?

I will ask Danny to address that.

So Joe, as we have said, I mean our transition to Shenzhen will allow us to have lower cost production. As you have all mentioned we are introducing a series of new products, that have designed lower cost into those products, but they will take time to flow through the supply chain. We have completed the transition to Shenzhen for the production, but until the older inventory flows through the system, you won't see the benefit of the savings. So obviously, at this time we have a pathway to getting to improved margins with our newer products, and with the production in Shenzhen, but it will need to flow-through the supply chain, and we need to continue to work in the marketplace with ASP erosions that are out there.

Right. And do you expect revenues to be up or down in the fourth quarter sequentially?

I don't think we give individual guidance. It's been our practice in the past, Joe, but we continue to focus on profitable growth. We could increase revenue substantially, but we're trying to focus on profitable growth, not just market share.

Got it. Thank you.

Our next question comes from Josh Baribeau with Canaccord.

Could you provide maybe a little bit more color in the solar business on pricing effects versus potential reductions in volume, what kind of led to the decrease in the FX?

I think both contributed to the impact on the quarter. The volume, the decline in volume mainly because of pushouts of some of the utilities scale projects out, affected the efficiency of the operation as the volume declined. We also saw a decline in ASP in the market, that affected our gross margins. In addition to that, we continue to invest in some of the new products that we're launching to market soon, and did not stop the investment of those products, which allowed us to launch the products according to the product road map, and also increase our R&D spendings, but all-in-all, it's a combination of declining in volume that affected efficiency and erosion of ASP.

Well Josh, I would add just going back to the total Company, because we're tending to focus on the solar question. The total company is doing quite well. We continue to focus on profits, which continue to improve, our cash generation is there. Fortunately, we have diversified our Company into many different product lines and aligned ourselves that way. So we have a very good financial profit generating machine, that one of our product lines solar is having some challenges, but the strength of our model of everything else is clicking quite well.

Okay. And maybe just sorry to stay on that topic with those previous comments, but is there any way you can help us kind of quantify the operating margin effect? I know you don't talk about gross margins, but the operating margin effect of the lower pricing versus the lower volumes over in Shenzhen?

We don't give out our individual pricing, but there are some third-party studies that you can look at, and they will show price erosion offset by production volume increases, megawatts are up, pricing is down, but we play in the industry. So I wouldn't say that we will be that different than the industry, but you can certainly go to those third parties and get some more data if you desire.

Okay. And then lastly for me how much did UltraVolt contribute to the growth in the power business this quarter?

We don't break that out. Obviously UltraVolt was only in for a couple of months. We will have some additional expenses for UltraVolt in the fourth quarter, although that will be offset by their products and their margin. So UltraVolt will be a nice addition to our product line, as Yuval mentioned, it gets us into a whole new application of products.

And actually sorry, if I could just squeeze one more in there. I'm seeing a lot of, and a lot of folks are seeing a lot of sort of the resurgence, or the continuation of the 28-nanometer node in the foundry space, certainly in some of the lower cost regions. Are you guys, you talked about a lot of leading-edge wins, but are you also starting or continuing to benefit from more legacy build-outs as well?

Yes. We do. Obviously, there is a lot of repurposing of older technology and older wafer size factories, to address things like MEMS and sensors, that opens a new opportunity for us to serve this demand, in both products and services, including refurbishment, upgrades, repurposing, extension of the lifetime of equipment, et cetera. So it's an exciting opportunity for an incremental growth in the business, as the industry continues to reuse 200-millimeter fabs and older technology.

Great. That's it for me. Thanks.

Our next question comes from Krish Sankar with Bank of America.

Thanks for taking my question. I have a few of them. First, you guys mentioned a couple of times how the tariffs and the higher module price is impacting utility scale business. Curious, why is it not impacting the commercial inverter business?

Right now from our perspective what we see with the customer base we have, we see pushout of utility scaled projects from Q4, Q3 and Q4 out into early next year. The anticipation right now is that we'll see a renewal of interest in investment next year, as people are preparing for the end of 2016, the end of the ITC. We already see a pipeline of opportunities ahead of us in utility scales, as some of the customers that we have are preparing for capacity growth next year.

Krish, the other thing to consider. A utility scale project runs 18 months to 2 years. It takes a lot of permitting, and sometimes that permitting is based on the engineering design and panels are different. So the re-permitting process takes a little time in utility. On a commercial rooftop, you generally start and finish that within a month or two. So it's a whole different process.

It's a much shorter cycle time.

Got it. Alright. Fair enough. And then the other questions I had on the inverter side, obviously given the lack of profitability there. I'm kind of curious if you look at typical inverter ASPs, they kind of decelerate for the industry, at least 10% year-over-year. I am curious, once you do the move to Shenzhen, and all of these low cost activities start flowing through, can you maintain a cost reduction greater than 10% year-over-year, so you can still be profitable at some time in the future?

Well, this is the aim. What we're trying to do is reduce our costs faster than the erosion of the average ASP in the market, and as I mentioned before, we do that both in transitioning to a low cost area, reducing the content or the cost of the goods we have through some of the new products we are launching, and using a much more efficient organization.

Got it. Alright. And then just last question from my side. This is just a hypothetical one. If I look at your Q3 inverter sales of about $52 million, and an operating loss of $12 million, if you assume, if you take the Q3 numbers, and keep everything like the same, once you do your cost reduction what does the operating income look like?

Danny, do you want to answer that?

Yes we obviously haven't given that level of detail. Obviously we're doing everything we can to reduce the cost, and once again, I will point you back to the total Company is doing quite well. We're generating plenty of cash, and we are using that to fund our operation, to move stuff into Shenzhen. We have certainly benefited from putting everything through our business model that has everything going though the Shenzhen facility. It has helped us not only in our solar products, but it's also helped us in our Precision Power products, and we will continue to put more and more of our production through Shenzhen, and continue to focus on lowering our costs and improving the profitability across the Company in all product lines.

And just a final question. If you decide that the inverter business the way that it is, is not going to be profitable for a while, how easy or how difficult is it to get out of the inverter business?

There are lots of different ways that could happen, and we are not at a point where those are under discussion on a public basis. That is part of our strategic planning process is to always look at various options.

We're looking at our options long-term for the Company, we're working on a strategy for each of our product lines, and we'll be happy to share it with you in Q1 at our Analyst Day.

Thank you very much guys.

Thank you.

(Operator Instructions). Our next question comes from Jairam Nathan with Sidoti.

On the solar side, a couple of questions here. First, is there a gross margin differential between a 3-phase string and your 1-megawatt product? And was that part of the reason why the gross margin came down?

Well, the answer is yes there is, and also, it depends on the solution we sell to our customers. Our central inverter is sold either in individual inverter or a part of an integrated solution, where we sell a single inverter or skids with balance the system components, or multiple, two inverters on a skid with multiple additional balance of system components. Obviously, the dollar per watt price we get for the contract, or for the project, depends on the offering we have. So it's not, obviously it's product-related and solution related pricing. When we talk about our ASP in general, we're talking about a blended number, but the answer is yes, it depends on an actual offering we sell.

Okay. Just a second question was regarding if based on your own internal IRRs, or return characteristics, what over that year do you apply for an acquisition, what is the return, EBIT margin that you would need to get, to justify a solar business, if you were buying it today?

Danny, do you want to answer that? Obviously, with the business that is challenged like solar is right now, that's not something that would pass a hurdle rate on an acquisition target. And we know that, we are focused, as we have said during this case, we are focused on taking actions that improve that production cost, that improve the ASPs, and make us more relevant to our customers, and grow that business. It is a product line. We have many product lines in this Company. This Company is doing quite well. This is a challenged product line, and we have always put in resources against this, to try to improve this product line But obviously to your first question, it's not something that is on the open market that we would probably--

Yes. Let me add to that. We continue to diversify the Company. As you remember, we migrated from business unit structure to a product line structure. We drive a highly efficient organization, we continue to diversify, and part of our growth strategy is to add more markets, more applications, more product lines. So the blended outcome is something we're very, very proud of. But at the same time, as we look at each one of the product lines, we want to make sure that we have healthy product lines with good contribution, and right now, we're not happy with the inverter product line's performance, and it's a high level of focus on addressing that on a short-term, and at the same time looking at a strategy going forward, which we will be more than happy to share with you in Q1.

Okay. Thanks. Just last question. With regard to the ASP declines, like would there be inventory charges from things that we should expect in the next quarter, or has it already been taken?

As I said in my prepared remarks, we wrote down some inventory in some European central inverters to fair market value, for what we thought they were. We will closely monitor that, but obviously as we demand shape going out in the future, we think we will be fine, but we will constantly monitor it, and if adjustments are needed, we will make those entries into the books.

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

Thanks.

Our next question comes from Mehdi Hosseini with SIG.

Thanks for taking my question. First one is for Yuval. Can you explain to me, or help me understand, to what extent increased content is helping you in the semi cap segment of the business, and I ask you that, because you are definitely outperforming the overall double your FEA spending, and I'm just trying to understand how is that possible? Is that increased content, shaking, mix of the two, and if there's anything else you want it share with us?

Thank you, Mehdi. If you look at the growth in Q3, there are three drivers behind that growth. Obviously, share gain and the very fast adoption of our pulsed-RF power supplies in multiple applications, mainly etch, but also we added the content of high voltage power supplies, that we right now serve the semiconductor wafer fab equipment with into the equation, and that added additional incremental revenue to the picture. And lastly, in Q3 we saw a significant amount of drop in orders in the middle and the second half of the quarter, that was basically driven by our customers positioning critical components for their own ramp plans, and if you look at the whole thing together, these are the three contributors. Obviously, our ability to be agile, and to respond very quickly to market changes, to demand profile changes, helped us really to serve our customers with what they needed on time. So these are the three components.

Got it. And then one more follow-up for you quickly on the panel side. This year seems to be revenues for 2014 to be less than last year, but in Q3 you saw a nice pickup, actually it was a nice pickup that started in Q2, and then up again in Q3. How should we think about the revenues in Q4, and beyond Q4 what are the key drivers, or if there are any drivers for growth into next year?

So the driver we saw, I cannot talk about next year, but the drivers we saw are mainly capacity installation in China, and also investment in OLED capabilities. One area that we see continuing growth is in the touch panel side of the business, where we have a very strong position with our power supplies across-the-board, and across many customers and regions.

Okay. Great. And then my final question for Danny. How should we model gross margin and OpEx for Q4? If you cannot discuss absolute percentage or value, you can at least help us directionally, please?

Yes. Mehdi, I would expect OpEx might be slightly higher in Q4, as we have the full impact of UltraVolt for the quarter. Other than that, we will continue to maintain our focus on striving to keep OpEx flat. As far as gross margin that's going to depend on your product line assumption model, and what that drives. As I said earlier, we have got a really good track record of falling within our guidance range that we have given. I think it is 14 quarters in a row, so that should give you some comfort that the numbers we gave you will be close.

Got it. Thank you.

And I'm not showing any further questions at this time. I would like to turn the conference back over to Yuval for closing remarks.

Okay. Thank you all. In closing, we know as we shared with you that we have a challenge with our inverter product line. We're taking quick steps to address it, both tactically and strategically, as we shared with you. Meantime we remain committed to our vision of profitable growth, cash generation, and deployment in ongoing investment in our technology and products. We are aimed at generating cash, and deploying the cash to fuel our growth. Thank you very much.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.