艾默生電氣 (EMR) 2002 Q1 法說會逐字稿

Good morning, everyone. And thank you for joining us for this morning’s conference call. I’m Rich Leland, Artesyn’s Director of Investor Relations, and also on the call today are Joe O’Donnell, Artesyn President and CEO, as well as Rich Thompson, our Chief Financial Officer. I should mention that this call is being broadcast live over the internet. A replay will be available immediately following the call at www.artesyn.com, or by dialing 1-800-839-0860 through April 26th. The replay pass code is 1028. For those of you who have not yet seen the press release a copy is available for download off of our web site. The format for today is similar to previous calls. Rich Thompson will provide an overview of the financial results for the quarter, followed by a business review from Joe O’Donnell. We’ll then open up the call for a 30 to 40 minute question-and-answer period. Before we begin, I’d like to point out that today’s call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involves certain risks and uncertainties. Listeners are cautioned that these forward-looking statements may differ from actual future events or results. Please refer to our most recent 10-K which was filed on March 8th for a list of important risk factors that could affect future results. I’d now like to turn the call over to Rich Thompson.

Thank you, Rich. And good morning, everyone. You should have had an opportunity to see this morning’s press release by now with our first quarter financial results. The results were basically in line with the update we issued two weeks ago. Revenue for the quarter was 90 million, versus 150 million in Q1 of ’01. Sales were also down on a sequential basis from 100 million in Q4. Both the Power and Communication Products Divisions were impacted by ongoing weakness in the telecom and wireless markets. Within the Power Group this impact was partially offset by solid order flow from our computing and storage customers. However, the imbedded board business, which for the most part sells into the communication markets, experienced a 20 plus percent sequential drop in revenue from Q4. Orders in the quarter totalled 87 million, representing a book-to-bill of .97 to one. Customer cancellations were minimal, however, we did experience an unexpected drop in customer forecasted demand pulled directly from our inventory hubs late in March, coupled with customer requested push-outs of deliveries during the first quarter. The quarter (indiscernible) of 89 million, versus 92 million at the end of Q4. And approximately 79 million of this amount is estimated to be shippable in the second quarter. The net loss for the quarter was $0.17 excluding the impact of a million dollar restructuring charge for actions announced in Q2 of last year. Including this charge, the net loss was $0.19 per share. Due to the adoption of the new accounting principle FAS142 in the quarter we will no longer amortize goodwill in our financial statements, and the cash and net loss figures will be the same. Additionally, we did a complete study of the curing value of our intangible assets on our balance sheet as required by FAS142 and found no asset impairment. The gross margin in Q1 was 12.4 percent, down from 14.6 percent in the fourth quarter, while we continued to realize the benefit from cost reduction activities. These savings were offset by operating inefficiencies due to the low volume. And an unfavorable shift in mix, as a result of revenue decline in the quarter, as many of our products in the communication markets place carry slightly higher margins due to their complexity. This is especially true in the Board Division where most products have a bundled software content. Total operating expenses excluding charges were approximately 18 million in Q1. This is our fifth consecutive quarterly decline, and expenses were down over 35 percent from the first quarter of last year. While we continue to aggressively hold the line on cost, we are continuing to invest in next generation products. R&D spending in the quarter was 8.6 million, an increase from the 8.2 million spent last quarter. Net interest expense for the quarter was slightly higher than expected at 1.9 million. In addition to the interest expense on senior and subordinated debt, we are also amortizing debt issuance costs in accreting the warrants as required by GAAP. While this is partially offset by interest income on the higher cash balances, investments rates, as you know, are at historical lows. Net interest expense going forward should be approximately two million a quarter. Turning to the balance sheet, the $50 million investment we received earlier in the quarter has contributed to a much stronger balance sheet for Artesyn. In addition, we continue to make significant progress in reducing our working capital, improving cash, and lowering debt. During the first quarter we reduced accounts receivable and inventory levels by a combined $21 million. Days sales outstanding remained at 60 days, however by working closely with our customers we were able to significantly reduce past due balances. The client and inventory for the quarter came primarily from raw materials, and reflects positively on the persistent efforts of our global supply chain employees. Additionally, we continue to be very cautious to avoid making any inventory investment unless backed by a hard customer commitment. Inventory turns for the quarter were 2.9, and total work was approximately 170 million. All of these actions contribute to a positive net operating cash flow of approximately 14 million in the quarter. Capital expenditures for the period were 1.5 million. As a result of these efforts proceeds of the convertible debt issuance balances increased to just under 86 million. We also reduced our senior long-term bank debt by 30 million to end the quarter at approximately 70 million. Our balance sheet profile is now significantly improved versus just several months ago, providing us with important flexibility in the current environment. I will now turn the call over to Joe for his business review.

JOE O’DONNELL: Thank you, Rich. Good morning, everyone. As in the past, I’ll address my comments towards the current state of our end markets, our competitive position, and then strategy we have put in place for managing the business in the near term, as we continue to position ourselves for the market’s rebound. We should have plenty of time at the end for questions. During last quarter’s conference call I mentioned that the server and storage sectors of the market appeared to have bottomed out in the second half of last year, while the telecom sector was still largely in search of a bottom. Unfortunately, this has become more apparent in the first quarter, as forecasted demand from several of our telecom customers failed to materialize, and scheduled deliveries were pushed-out. We were also disappointed in the erosion of the wireless sector, after a promising fourth quarter. Driving the slow-down in telecom and wireless infrastructure markets are the ongoing reductions in capital spending expectations by the major RBOC’s, exchange carriers, clechs (phonetic), and wireless providers. We recently completed an analysis of expected 2002 spending for these companies, and found that almost without exception they were forecasting year-over-year reductions. In North America, reductions for traditional wireline carriers averaged 20 percent, while wireless spending is forecast to be down roughly 10. Until capital outlays increase we cannot realistically anticipate significant improvement in our, in equipment demand. We are fortunate to have a sizeable and stable business in the computing and storage market sectors to offset some of this weakness in telecommunications. Storage and server products comprise about 45 percent of our total revenue, and performs just slightly better than expectations in the quarter. In this environment of slow end market growth it is critical that we remain committed to our long-term strategy of partnering with market leaders, while focusing our R&D investment on the high-growth opportunities with those leaders. Dell and Sun were our two largest customers in the quarter, and they are excellent examples of this point. At Dell we are in the server product line where they appear to be gaining market share. At Sun, on the other hand, we provide products across their high-end server lines where they also appear to be gaining share. The same could be said for the storage applications we are in at Compaq, currently the world’s number one storage company. Or our recent penetration of EMC and the server group of IBM. On the telecom side, examples would be DSL applications at Alcatel, base stations at Nokia, and a focus on optical networking applications with Lucent, CNF, and Nortel. From an investors’ perspective it is important you understand that Artesyn remains committed and focused to these markets. Although we have just lived through an extremely difficult year, and the near-term outlook doesn’t look too much better, there are few if any markets in electronics that promise the long-term growth rates of communications. Artesyn has become a leader in communications, and we intend to build upon that position. This leads me to my second topic, Artesyn‘s competitive position, and operational focus. During 2001 one of our most immediate objectives was to restructure the company to reduce costs, increase customer focus, and improve the balance sheet to ensure our viability as an ongoing business. The longer term objective was to strengthen Artesyn’s position for the inevitable competitive shakeout, and in preparation for the market’s rebound. As Rich mentioned earlier, the restructuring of Artesyn is beginning to pay dividends, as operating costs continue to fall, while our company-wide focus on cash management has significantly lowered our inventory and receivables levels, and allowed us to generate over $14 million of operating cash flow in the quarter. This is our fourth consecutive quarter, with positive operating cash flow. And we expect this trend to continue through the year. Our cash balances now exceed $85 million. Both of these areas will continue to get significant management attention in the future, as we strive to generate operating cash flow, and find additional cost savings to lower our break-even point even further. From a competitive perspective we continue our commitment to invest aggressively in new product development. R&D spending in the quarter actually grew sequentially from last quarter. At 8.6 million it is now over nine percent of sales. Very few companies in the industry have the financial strength to sustain this level of spending. Investing in leading edge technology is a critical component of our strategy, and a key to the future for the company. This investment has allowed us to gain market share. In a recent Micro Tech consultant report Artesyn remained one of the top five world-wide suppliers of OEM power. And we believe number one in communications. In addition, the 91 major (indiscernible) last year have positioned us well for the future. This quarter we were awarded 10 new major programs for DC-to-DC, point of load, and AC-to-DC projects. For competitive reasons it has not been our practice to discuss the anticipated dollar value associated with program wins. However, I will make an exception in this call, as the average size of these projects is over $9 million, versus a $5 million average in 2001. This is significantly above our operating plan. Experience tells us supporting wins and the standard DC-to-DC product area requires a much higher level of scrutiny. In many cases, customers will dual source standard DC-to-DC bricks on an individual project. Being approved for a design by a customer does not necessarily mean significant revenue will follow. Although we have almost 30 of these awards in the quarter, we take a very cautious approach. And don’t report them to you as wins until we receive a volume production order. I would, however, like to discuss one very important win this quarter because it represents a new market opportunity for Artesyn. In a joint development effort with one of the world’s largest communication companies we were awarded a major design win for a UMPS base station energy system. I can’t say much more at this point, but this development has the potential to be a disruptive technology to the traditional power systems market, as it basically imbeds the power system functionality into the switch itself. Just as we invested several years ago to enter the wireless and point-of-road sectors of the market, which has since become major revenue contributors to Artesyn, we are also excited about our initial success in this new area, as it has the potential to represent an important revenue stream in future years. Finally, turning to the outlook for the balance of 2002, based on our earlier comments, we believe that the current (indiscernible) in the communications market will likely last for the duration of the year. We are maintaining a cautious stance and forecasting only modest, sequential quarterly revenue improvements. The continued benefits of our cost reduction efforts should result in improved bottom line performance sequentially. At this point, it appears we will be at a break-even rate in the fourth quarter. As I mentioned earlier, our prime focus is on managing the company to be operating cash flow positive, and we believe that our substantial cash balances will increase further through year-end, providing us with the necessary financial flexibility. The ongoing slow-down in telecom and wireless will also allow us to implement actions to generate additional improvements in our cost structure. Our strategy remains to be the world’s leading provider of advanced solutions to the communications industry. Although other markets may appear tempting in the short-term our core competency is communications, and we believe the company is well-positioned to capitalize as the market’s growth returns. I’d now like to turn the conference call over to a question-and-answer session.

Thank you. To ask a question simply press a one, followed by a four on your touch-tone phone. If for any reason you wish to retract your question, you may press a one, followed by a three. All questions will be taken in the order that they are received. Once again, to pose a question, simply depress a one, followed by a four on your touch-tone phone. Our first question comes from Mr. Jim Savage with Thomas Weisel Partners. Go ahead, sir.

Good morning, gentlemen. Tough times. I guess the first question that I have would be in terms of the point of load products for the 64 bit microprocessor, which I know was a major push on yours in terms of the engineering. Is there any indication as to when you might actually see production orders, or meaningful production orders there? MR. JOE O’DONNELL: While Jim, on the point of load, as the 64 bit processor was the original reason we got into the business, as that market opportunity, the Intel based one was continually being pushed-out, we expanded products into the 32 bit, and then the storage, or memory side. So point of load has become as a technology, an important revenue to us. On the 64 bit Intel based processors, as it looks today, we should be getting revenue from those in the second half of this year. But I’ve told you that before, and then they’ve been pushed out. They are designed into a number of programs, but just as our customers have had to regear to other approaches as the processor has been late, you know, that’s what we’ve found ourselves doing, as well. But I want to emphasize, because those that have followed us know we’ve invested a lot of money in this end point of load. It’s become a very important revenue stream for us. It’s taken us into some new accounts, which we’ve then expanded other product offerings with. So I would consider it a success at this point, even without the 64 bit revenue.

Do you anticipate that you will be, have leading market share when the 64 bit servers do roll-out?

JOE O’DONNELL: My opinion, but there is no market data on this 64, or point of load, specifically. My opinion is we have a leading market share, and that we would continue to keep that. But there’s no market data that you can go by that would confirm that.

Okay, and in terms of your high density DC-to-DC? Were those the wins that you got during this quarter, were in the high density platforms?

JOE O’DONNELL: Any DC-to-DC wins that we were reporting, not including those 30 I talked about, would have all been high density.

So, and so you’re actually expecting to have volume production in those products sometime this year?

JOE O’DONNELL: Absolutely.

Is that why even with the ongoing softness in the end markets you’re anticipating that there will be growth during the course of the year? Is because …

JOE O’DONNELL: It’s not just the DC-to-DC, that’s certainly a major, the high density, that’s certainly a major contributor to it. It’s also because our server customers were pretty well-based in the server market. We’re executing that that market will be stable for the year.

Well, if it’s stable that doesn’t mean it’s better. That means it’s stable. So in terms of, that doesn’t provide growth. I guess the issue is if we’re …

JOE O’DONNELL: The issue would be the incremental growth off of that stable platform.

Right. JOE O’DONNELL: And that’s coming from the high density products getting designed into a number of these server applications that those companies voted distributed power.

Okay. And can you give a little more detail on this imbedded power system win that you had on the base stations?

JOE O’DONNELL: Next quarter I would hope to give a lot of detail. It’s with one of the OEM manufacturers of telecom systems. They would be the first user. And we, it’s our traditional distribution channel, where power systems would take a different channel selling to end users. This approach does not. And it gives the OEM companies longer term an advantage in that the power system function becomes a part of the switch that they sell, so it takes less floor space, lower costs.

Okay. Is that something that will, is the development program now? When does that, when do you think that could become revenue? JOE O’DONNELL: It would not become revenue, Jim, until 12 months from now, if it stays on plan.

Okay, great. Thank you.

JOE O’DONNELL: You’re welcome.

Sean Severson, Raymond James.

Good morning, gentlemen.

JOE O’DONNELL: Good morning.

Could you give a little color on the weakness in the telecom space? Are you still seeing that it’s a problem with inventory work-downs? Or is just that there’s no inventory, but obviously there’s also no demand? Or can you differentiate between those two?

JOE O’DONNELL: Well, there’s – that’s a good question. One that we spend a lot of time on. There is still some inventory in the channel, although it’s been worked-down greatly. The delays that we’ve seen in revenue, or disappointments to use the term I did earlier, have been mostly related to new programs, that they were introduced, but at levels greatly less than the customers had told us they were going to. So rather than inventory in a channel, being the primaries, and although I continue to believe there is some of that with certain customers. It’s mostly that the appetite in the end market for these new projects has been less than the customers expected.

Okay, and then kind of the same line of thought then. As you look in the enterprise computing and storage sector, is this being driven by new product introduction, or an inventory restocking? I mean obviously, we’ve heard a lot that the enterprise space had really pushed inventories low into the end of the last year. And it’s probably seen some pick-up now. Can you sort of break-out, you know, what’s driving that business in the enterprise space?

JOE O’DONNELL: Well, a great deal of it are new projects that have been introduced by customers. HP, Sun, Dell. I mean those announcements that you read from them, it would be the exception that we’re not a part of that with some of our products. So those new products coming into the market have created revenue in the server and storage sector. Also, some of the traditional products, if I define traditional by they were in production last year, the volumes have improved as they’ve worked down the – they, the customers have worked-down their inventory in the channel. But I think most of the growth, if you had to say it’s at A or B, it’s coming from the new product introductions that you’ve seen announced by our customers.

Can you just help me understand how much of your business in the enterprise space is, you know, is a standard product versus a custom product?

JOE O’DONNELL: In the enterprise space, how much is – Sean, I don’t know that off the top of my head. And rather than give everybody on this call bad information, the best thing is to, for us to find that out and let you know.

Sure. And then just lastly, could you give an update on what’s going on with Delta, and how the, you know, the cross-selling is working? Or has that started yet? And the timetable on that as it stands today? Thank you.

JOE O’DONNELL: There were two areas we’ve talked about working with Delta. One, product development. There, where we would develop, we would create a product roadmap, agree to it together, and then decide which company does what aspect of the product roadmap. Those products then being made available to the other company. The area we believe we would see the most activity in this product development cooperation would be DC-to-DC. In cross-selling, that’s another possibility, but it has not begun at this point. We’re much further along in the product development concept of determining how we could work together.

So we may see the first project come together sometime this year, where you may be, you know, go into volume production of a product that was a part of this joint development? Is that timetable fair? JOE O’DONNELL: I don’t think we would see products in high volume production this year. This approach is a bit longer-term in the sense that we look at the evolution, the cost and evolution of the DC-to-DC market or distributed power. An updated roadmap which is, which we have to do constantly. Then buying into that, both parties, and then determining who does which piece of the roadmap. So I think realistically we’re talking about products that would enter production about 12 months from now.

Great. Thank you.

JOE O’DONNELL: You’re welcome.

Lou Escotia (phonetic), Lehman Brothers.

Okay, thank you. I guess not to beat a dead horse, but to go back on the telecom and the datacom issue, when you’re talking about very modest growth. I mean is that assuming that telecom, datacom is going to be flat to down? And the other area is going to be what’s going to give you growth, I guess growing sequentially throughout this year? And I guess, like my question really has to do with the macro concern that, you know, is telecom really, I guess hopefully getting to the point now that that’s stabilizing? Or could we see, actually see the telecom, datacom markets actually deteriorate, you know, possibly on a sequential basis throughout this whole year?

JOE O’DONNELL: Okay. Lou let me take your question, and frame it in the terms of the end markets that other investors that are on the call would be familiar with as we traditionally talked about it. So under telecom we would think of that as wireline, and then a part of it telecom would be wireless, but a different market.

Sure. JOE O’DONNELL: We, and then the datacom would, for us, as you know would be primarily servers and storage products. And then networking would fit into that as well. So routers and hubs. Now, in the telecom side we’re anticipating no improvement in our forecast. We are anticipating an improvement from the current run rates in wireless. Those are primarily, that improvement is primarily related to incremental programs, meaning programs we’re not currently in production, or maybe it’s more appropriate to say in the NPI stage, new product introduction stage, which will turn to revenue in the second half. So we would expect if you locked telecom and wireless together to see a modest improvement, but that all of that improvement coming from wireless over the current run rate. And that wireless improvement again incremental revenue from the programs. All right. On the storage and server side, we do anticipate growth, not significant unfortunately in that sector. That, as well, primarily due to new projects from companies that we haven’t sold to before in servers, IBM mid-range servers, as an example. EMC on the storage side. Those would be two entirely new customers for us. And then plus last year we had 91 program wins, and a number of those are turning into revenue in the second half of the year. So primarily, or not primarily, but to summarize the server storage side off what we think will be a stable base of revenue from this quarter, that we would see incremental revenue from new project wins.

Okay.

Jim Legepo (phonetic), Banc of America Securities.

Hi. Yes. I was hoping you’d talk a little bit about gross margins, and what the components of gross margins are in the first quarter. Can you break that out between raw materials, labor and parts, and I guess fixed overhead costs?

Yeah, Jim. This is Rich. We don’t – I don’t have that data in front of me. But that didn’t change significantly. As we mentioned, we’re working more on manufacturing overhead. We’re continually improving our pricing on components, as well. And components still represent 60 to 70 percent of our cost of product. So the disappointment to us in Q1 was basically volume driven, it was absorption of, due to lower volumes than expected. And that’s what drove the margin down, number one. Secondly, we had a larger revenue downfall in the imbedded board business, which has a software content. That software content is almost exclusively profit, or gross profit, if you like. So those two things led to our margin points going down to two full percent, or about a 10 percent drop of revenue.

Okay.

I’ll get you some more detailed cost data at a later time.

Okay. No, that’s good for now. Thank you. Just wanted to understand where the opportunities for further cost reduction might be. What are you guys seeing in component pricing?

Component pricing is still coming down. It‘s, we’re starting to see some push-back in some of the power semi's, but we’re working those very hard. I would say in general we’re pleased. We’re ahead of what our target was on reduction in component costs. We’re actively benchmarking ourselves against other competitors, and with the help of some EMS companies, and also with I-Supply (phonetic). And it looks like that we’re in a good position, and we’re getting closer to I would say the market average on component price reductions.

Joint purchasing with Delta?

No, we’re not doing any joint purchasing with Delta at this time. We are considering Delta on some of our components. As you know, they’re one of the world’s largest magnetic suppliers. We normally manufacture our magnetics vertically, that go into our product. And we’re now working with Delta to see if we can enjoy some benefits from their rich product line.

Okay. And just one question on, in another area. If you can provide us some sort of a break-down of new programs, and the current backlog by end market product type, something to that, just some more detail as to what is in those two baskets? New programs and backlog, that would be interesting.

Okay. Jim, we don’t have that data readily available. We’d have to go and query our SAP database. Just say for the quarter just ended, we had about 70 percent AC-to-DC, and about 25 to 30 DC-to-DC products. We see that improving over the rest of the year. I know that doesn’t address end markets. But it is reflective of our design wins over time.

JOE O’DONNELL: Now, Jim, we’ll be happy to try to refine this for you, but I’m not too far off if I tell you that in the backlog, if you look at existing programs it’s probably the shippable backlog number. Or it would be very close to that, which is about $79 million. Backlog that we ended Q1 with that was shippable in Q2. Those are very close to being correct, but as I said, those are existing programs. So the additional revenue over that, some amount of that additional revenue would be new programs. But that’s not precise, because we’ve looked at it a little differently. But I think when we get you the final data, it won’t be too different from that.

Okay. And are you seeing signs that those new programs – are you starting to get firm orders in hand?

JOE O’DONNELL: We typically on a new program don’t get a long-term production order. What we get is a stocking order. Normally – well, I shouldn’t say normally, because it varies from customer to customer. Some of those customers as they’re filling their supply chain, the initial orders are higher than what the run rate will be. Others it’s lower. So we have to be very careful in working with the initial forecast, if you will, that we see from customers, to understand those customers, and what will that mean to us in the long-term on revenue based on their patterns. So while we’re getting some of those orders, I don’t think we’re going to see a run rate as high as some of the initial forecasts are for the pipeline piece.

Okay. Are you getting at least stocking orders from some of the new programs?

JOE O’DONNELL: Absolutely.

And can you categorize, can you categorize, or is it all by, you know, at least broadly datacom, telecom imbedded computing? Where are you seeing this?

JOE O’DONNELL: Most of those new (indiscernible) in dollars, not necessarily the number of programs. Of those orders would be in the computing and storage sector. There’s a reasonably large number of programs in the Klyber (phonetic) side, but stocking orders have not been particularly large.

Okay. Good, that’s helpful. Thanks, guys. I’ll step-out now.

JOE O’DONNELL: You’re welcome.

John McManus, Needham & Company.

Yes. Good morning.

JOE O’DONNELL: Good morning, John.

Were you able to lower your break-even revenue in the first quarter?

JOE O’DONNELL: Yes. To answer your question precisely. And we believe our break-even, and I’m saying it that way, John, because it’s a moving target as we’re looking at some other actions right now. But our break-even in the first quarter would have been 110 to 120 million rate. That we will be reducing that break-even to 100 to 110 million rate, and the reason for the range is margin associated with debt.

Is that reduction from steps you will take? Or have you taken those steps there to reduce it by $10 million?

JOE O’DONNELL: A combination, John.

Will that be – and that’ll be completed in the second quarter?

JOE O’DONNELL: No. That would be completed further into the year.

You know, have – can you talk about – you talked about some of the wireless customers. Are you on their 3G base station platforms? And have you seen any movement there of initial deliveries of 3G base stations there into the providers?

JOE O’DONNELL: I believe I’m correct in this, that there is only one 3G company that we’re not on their platform. So that would say our penetration is, has been quite successful. The – we are shipping 3G products. However, as you can appreciate, the volumes are a lot less than what was expected at this point. But for, certainly for most if not all of the projects we’re on, on 3G, we are shipping product, but small volumes.

You know, looking into the second and third quarters, is there any anticipation that that might start to tick-up there? Maybe at mid-year, or into the third quarter?

JOE O’DONNELL: Several of our customers have very healthy forecasting pieces for the second half of the year on 3G. We are discounting those significantly. And the improvement we expect to see in wireless in the second half, you know is nothing near what the customers are forecasting. So we think we’ve discounted it properly. We have yet to see.

Has the ASGA (phonetic) high-end DC-to-DC line been able to penetrate the major telecom accounts?

JOE O’DONNELL: Well, you know, before, I was trying to clarify because, you know, this is an investor call. We try to paint it, as an accurate picture as we can about what we think is going to happen. And you know, last year, we had something like 150 DC-to-DC. Some companies might call it wins, we would call them registrations. And in the first quarter this year we had 30, or something like that. Now, the distinction is the customer said ‘you’re on the design, and we’re going to use you.’ But we haven’t received high volume production orders. We count it as a win, and maybe we’ve understated the opportunity a little bit this way to our investors, but we count it as a win when we get a full volume production order. There are a large number of registrations, to use our terminology, with telecom and wireless companies for DC-to-DC, or the Ascor products specifically, and I think that’s what Jim meant when he was asking about high density. So for the rest of you, it’s probably the same product. High density and Ascor. A large number of registrations, but only a small percentage of those are we reporting to you as wins. And again, we only do that after we get a production order.

Last question for me. Would you discuss there your use of EMS, contract manufacturers, and whether you’re going to expand that in the future?

JOE O’DONNELL: Okay. We’re not using EMS contractors at this point. We certainly have them as customers, and we’ve formed a sales, a small sales group to service them as customers. But as far as suppliers to us, they’re not at this point.

Thank you.

Ken Mortenson, Robert W. Baird & Company.

Good morning. Just a clarification question. When you’re talking about reducing your break-even to $100 to $110 million are you talking – I think historically you’ve been talking about operating break-even. Are you now talking about net break-even?

JOE O’DONNELL: We’re talking about net break-even. That’s right.

Okay, great. And if you can also just talk a little bit about your pricing with regard to new contracts. Is that, I think last quarter you talked about that being down in the 10 to 12 percent range. Is that still a relevant number to use?

JOE O’DONNELL: Could you frame the question one more time so I make sure I answer the right one?

Pricing for new platforms? How is that, you know, how is pricing for new platforms shaking-out? I think last quarter you said that in new platforms you were saying pricing degradation of around 10 to 12 percent.

MR. JOE O’DONNELL: Oh, versus the current production?

Right.

JOE O’DONNELL: Yes. That would still be about right.

Okay. And then just what your mix of standard or modified standard products were in Q1?

Yeah, in Q1 standard and modified standard products were about 15 to 18 percent.

Okay. And then just a general technology question. I’ve been reading a little bit more about the penetration of non-isolated designs. Do you view that as a threat or an opportunity? Or is that, is that gaining any traction at this point? JOE O’DONNELL: Yeah, well non-isolated – I mean we have non-isolated products first of all. So it’s not new. The reason you’re hearing a buzz about it now is it’s new to a lot of our competitors. And the second part is that non-isolated – a number of these, by the way Ken, a number of these point of load products and VRMs are not isolated.

Okay.

JOE O’DONNELL: I don’t know the percentage off the top of my head, but it’s an important percentage. And we’ve been shipping those. The reason that people are talking about it is – actually, what we’ve been saying for a couple of years. That the market would move from the traditional brick for DC-to-DC to a point of load, or VRM. Under that point of load there’s two types, isolated and non-isolated. So I mean I think that this was something very consistent with what we’ve been talking about as we got into that point of load business years ago.

Okay. And the push-out in orders, was some of that due to the Sunfire push-out? I think it was their V88 program?

JOE O’DONNELL: Actually, it was related, I mean there may have been some push-outs in the computing side, but the ones that hurt us were in the telecom or wireless side.

Right. And then any, any comments just on consolidation trends at this point in the industry?

JOE O’DONNELL: Well, certainly the weaker players have become more and more vulnerable. That’s the reason that we focus so much on the cash. And you know, from our perspective we’re not particularly interested in looking at companies as opportunities to buy. We think we’re on the right track, but with our product development and customer relations. But I would suspect we’re going to see an accelerated rate of consolidation or companies going away.

Very good. Thank you.

JOE O’DONNELL: You’re welcome.

Andrew Hane, CIBC World Markets.

Good morning, Joe. Just a couple of housekeeping items first. Could you give us the current headcount for the quarter, depreciation and amortization, and the tax rate we should be using going forward?

Let me – this is Rich, Andrew. On the D&A for the quarter was about 6.6 million. That’s down significantly because we are no longer amortizing goodwill. The depreciation was down slightly as we’re not adding (indiscernible) as quickly as our depreciation rate is. So that covers depreciation. Joe?

Okay.

The headcount, we ended the quarter with a headcount of around 5,000 employees. That includes our associates and our China plant of almost 3,000 employees. So that’s down significantly, obviously, from a year ago.

Right. And then the tax rate we should be using going forward?

Well, I wish – that one’s the toughest question. That’s probably why I left it till last. I would assume it’s going to continue to be a tax benefit in the loss situation of 20 to 25 percent. I’d like to have a qualifier on that. It all depends on where towards year-end we become profitable. Which jurisdictions, what we have losses in, and which will we have profit in. So unfortunately, I can’t give you a more precise number, but I would use that 25 to 27 percent.

Okay. And then the last question I have is can you talk a little bit about your current capacity utilization? And you know, whether or not you may have plans to further consolidate capacity?

JOE O’DONNELL: We definitely will be taking – it’s kind of a play on words – but we’ll definitely be taking advantage of the slow-down. We do not anticipate in wireless and in telecom to, again, reduce the cost structure of the business. The utilization going out of the quarter was less than 60 percent. So we have a lot of opportunity to do that as far as grouping cost structure. We still have plenty of that.

Thank you.

JOE O’DONNELL: You’re welcome.

Ram Caserguard (phonetic), Morgan Egan & Company.

Joe, I have a couple of questions for you. The first one is in your first quarter your revenues were up about 35 percent, and your orders were down 23 percent. Can you try to give us a perspective for how your different business segments were doing? And give us a perspective on some of your storage and server customers? Can you talk about what was the year-to-year trend in storage and servers and then telecom? And then also, when you look at last year versus this year in telecom, you know, what are you, what changes are you seeing in your customer mix over the last year?

JOE O’DONNELL: Okay. The trend in storage and servers would have, the comparison year-to-year would be that last year we were coming off an extremely high appetite in the market for product. So even in the first quarter most of our customers did not recognize that the downturn was for more than a quarter, so they were continuing to have us build product and secure material on very aggressive forecasts. Now what we’re seeing are extremely conservative forecasts, or at least our customers portray them as conservative, extremely cautious forecasts from our customers in the storage and server market, but stable to slightly up in total. The telecom sector on the – well, last year would have been the same, as far as the appetite. And the difference now, if you’re looking across the board as a generalization on the wireline side you’re seeing their forecast for current product, things in production, down. And smaller than anticipated forecasts for new products that are beginning to enter production. So I’d say trend-wise very cautious relative to a year ago on telecom. Wireless has been very bear, very optimistic up until this quarter. I’m talking about the wireless customer base. And I think our wire -- well, I don’t think, I know – our wireless customers are still sorting out where their volumes are going to come from over the next nine months. Will it be continual build-out of existing product technology in the field, or will their customers be buying more 2.5G to fill the gap before 3G becomes important. Which now most of our customers are saying won’t be until next year, the latter part of next year, when 3G becomes important. So I think that’s the trend. In telecom we’ve been well-established with all of the customer base, so maybe the only difference is that our penetration of a company like Lucent is much, much higher than it was, a number of new programs, and the same would be true at Alcatel. Those would be the differences.

And Joe, if you don’t mind, what I was trying to figure-out was if your revenues were down 35 percent in the first quarter, would storage and servers have had less declines than the overall company? Or?

JOE O’DONNELL: Absolutely. Storage in the first prior year, storage and servers were less of a decline than the telecom, without a doubt.

And that’s where you expect the growth to come this year? Storage and servers?

JOE O’DONNELL: What we would expect the growth to come from storage and servers. That’s correct.

You know, just for feedback. I asked you, you know, what kind of customer base you had in telecom last year, versus this year. I listened to a conference call yesterday from a company that does power amplifiers. And they are forecasting 30 to 40 percent growth this year. I’m not sure if it’s reasonable or not. But coming mainly out of capacity additions to existing, you know, existing networks like 2.5G, you know.

JOE O’DONNELL: Well, I hope they’re one of our customers if they’re going to have that kind of growth!

And then the final question I’d like to ask you, Joe, is do you some business through distribution, can you give us a handle on what was the percentage of your business going through distribution rather than directly to OEMs? And then, what is your perspective at least on inventory at the distribution level? And at the OEM level, as it stands today?

JOE O’DONNELL: Okay. Distribution revenues have been down further than our total revenue erosion. And obviously, that’s impacted by slower end market. It’s also impacted by the significant inventory they were sitting on. Distributors own the inventory when they buy it from us. But we still have the issue of a clogged channel, even though we don’t have an inventory exposure. So those, their bookings now are beginning to return. But we have to wait and see what their sell-through is before we know if their market is really getting better or not, or that channel of the marketplace. You had a question which I neglected to write-down as I was listening on the OEM aspect?

What is, you know, what is your perspective right now on inventory levels at the OEM? Have they worked down most of their inventories, or gotten rid of it, written it off, or?

JOE O’DONNELL: I think that varies. Certainly it’s a company specific answer, so without naming customers what I would say on a more general basis is the computing, meaning the server and storage guys seemed to have worked their inventory issues down and our inventory issues. In the wireless there’s not really an inventory issue for us, meaning in the pipeline. And in telecom there is still some inventory in the pipeline, although we think it’s not significant at this point, as far as how it’s impacting future revenues.

All right, then. Thank you, Joe.

JOE O’DONNELL: You’re welcome.

David Daglio, The Boston Company. No response.) Sean Severson, Raymond James.

I just had a quick follow-up question, guys. Could you tell me how much of your business or sell-through is now using a vendor managed inventory model, or a hub model, however you want to look at it? JOE O’DONNELL: Yeah, I would estimate – and we can get you the precise number – we’re probably dealing with 60 percent of our revenue flowing through vendor managed inventory.

Okay. And then can you break-out distribution, EMS, and OEM?

JOE O’DONNELL: Well, I’m not able to give you the EMS piece, because we look at that as the OEM, who is, you know, our customer, in the sense of who designed us in. I would say that a bigger piece of our OEM business is being sourced directly through contract manufacturers, however. On the distribution side, the revenue traditionally is about 20 percent, and it was probably closer to 15 percent this quarter.

Thank you.

Jim Legepo, Banc of America Securities.

Well, a couple of quickies on the balance sheet. Capex in the quarter, and estimates for the year?

Yes, Jim. We finished capex in Q1 of 1.5 million. And we suspect for the year we’ll be between eight and 10 million. That’s all predicated on customer introduction of products. Those generally require fixtures as they get into production volume, and that’s what governs our capex at this level. Expenditures on fixtures to service customer, and also on testing equipment.

JOE O’DONNELL: And as far as squeezing more improvement out of the balance sheet? Does that come from further progress on inventory management? Is it on DSOs? Is it extended payables? What happens to get further from here?

Okay, Jim. We’re certainly going to focus more on receivables. We’re currently at 60 days. We have improved the past due to our term significantly, but we feel we still have a ways to go on the 60 days. Secondly, inventory, we’re continuing to burn-off inventory. Our supply chain guys are doing a really good job, and we expect to continue to burn inventory. We’re certainly, have modest capital expectations throughout the year, and that’s certainly helpful. We’ve managed our vendor base well. We’re doing two things. A, the days in payables are around 45 to 50 days. We don’t believe that we want to go beyond that and be able to continue a good vendor relationship with our base. But more, secondly, we’re trying to get more and more of our vendors to do as our customers do with us, and that’s to have them supply us the materials on an as needed basis. So you’ll see some increases which impact inventory, could impact days payable as these agreements would require us, on our terms more precisely. But we’re pushing certainly to supplier manage inventory within our pipeline.

JOE O’DONNELL: Okay. And then just a last question. To what extent does the sequential decline from fourth quarter into the first quarter represent, just seasonality versus a more problematic market environment?

JOE O’DONNELL: It’s almost – well, I don’t want to overstate it. A major piece of the decline was due to the fall-off in wireless. And if we had not had that fall-off in wireless our revenues would have essentially been flat. And is that a long-term trend? Well, we think it is for the next couple of quarters, until we see some, you know, strong signs of improvement in there.

JOE O’DONNELL: Okay. Thanks, guys.

JOE O’DONNELL: You’re welcome.

Just a quick follow-up. It looks like this is the first quarter that you’ve broken-down revenues between power conversion and the communications products. Can you give us a sense of the gross margins between the two businesses?

Yeah, well, we’re doing segment reporting now, but we don’t do gross margins. I think if you look in our K you will see operating income, or net income numbers in the 10-K we just filed recently.

Okay. But just ballpark, would you say that communications products gross margins range from maybe 40 to 50 percent? Or is it just … JOE O’DONNELL: Andrew, we try not to, because of the sale of our repair business, we felt that it was required that we report on a segment basis. And so, we’re doing that. But as you can appreciate, from a competitive perspective, I mean we’re not happy about that. And we’d prefer not to have to provide any more information because of, you know, competitors get a better understanding.

Sure. Okay. And then just as a quick follow-up. Regarding kind of EMC and IBM, can you just comment on the progress there? Because as I recall, those are relatively new customers for you.

JOE O’DONNELL: Yeah, EMC is a brand-new customer. We’ve gone, as you can tell I’m excited about this one – we’ve gone from no position to five or six different products into EMC. We’ve just been awarded a – I think it’s included in our award base last quarter, and if not it’ll be the next one. We’ve just been awarded a major front end for EMC on their next generation of high-end storage products. And so our relationship there has gone from none to what I would have to characterize now as significant. In the IBM storage side, we’re across the board from no position in their mid-range servers and those are wire production in the second half of the year, which will allow me at that point to say we’re literally providing product to every one of the world’s leading server companies. So I’m real enthused about that. Oh, I should have mentioned that after that initial product win at IBM for the AC-to-DC we’ve now received a number of wins for point-of-load products from them, for processors.

And one last question, if you don’t mind. If you fast-forward to the end of, you know, calendar 2002 is there a potential for any new 10 percent customers?

JOE O’DONNELL: New 10 percent customers. Boy, that would depend on if forecasts happen. I don’t know, I’m just taking a look at the customer list from the first quarter. We had two 10 percent customers in the first quarter, Sun and Dell. The, you know, if forecasts materialize, you can see a Nokia there, a Cisco. Those are probably the two. Those would probably be the two that would have a chance to become 10 percent plus customers. But they’re not right now.

Okay. Thanks a lot.

JOE O’DONNELL: You’re welcome.

Kent Mortenson, Robert W. Baird & Company.

Hi, Joe. Just a follow-up on the 60 percent capacity utilization. I imagine that’s on the average number. At this point, how do you feel about your facilities, if revenues stay at this level for the next few quarters, do you anticipate closing any additional facilities?

JOE O’DONNELL: Well, let me just try to answer it this way. We anticipate further consolidation in the business. And you know, we, our lowest cost facility in China is not fully utilized yet, but it’s a much higher rate of utilization, and has significant capacity as far as floor space available. So we think we have a lot of opportunity to take advantage of further cost reductions. That’s really all I think, that’s probably appropriate to say at this point.

No, fair enough. And then, any type of – you had mentioned with this integrated switch and power supply configuration that you’d have cost savings. Can you give us an idea of approximately how much?

JOE O’DONNELL: Well, we’re not actually the one, to try to clarify it, that would end-up with cost savings. It would be the switch manufacturer – it would be the end user.

Right.

JOE O’DONNELL: So the telephone operating company, or the wireless company, Sprint, PCS, as an example. But what they would be able to buy is a switch from a customer – I’m sorry, a customer of ours, an equipment manufacturer. In that switch, the power would be imbedded. And so that user would use, would have less floor space, and he would pay a total cost less than if he bought a standalone power system and a wireless switch.

But today there’s a front end that’s outside of that switch?

JOE O’DONNELL: There’s a separate power system or front-end, that’s right.

Okay, and that would be incorporated inside. Okay.

JOE O’DONNELL: Correct.

Great. Thank you.

JOE O’DONNELL: You’re welcome.

Okay, gentlemen. There appear to be no further questions at this time.

Well, thank you everyone for joining us for the call. And we look forward to talking with you next quarter.