艾默生電氣 (EMR) 2002 Q2 法說會逐字稿

Good Morning and thank you for joining the Artesyn Technologies second quarter release teleconference.

All participants are in a listen only mode until the question and answer portion of the call.

Today's call is being recorded so if there are objections, please disconnect at this time.

I would now like to turn the time over to the company.

Gentlemen you may begin.

Good morning everyone and thank you for joining us for this mornings conference call this is

Artesyn Director of Investor Relations and also on the call today are Joseph O'Donnell Artesyn President and CEO as well as Richard Thompson our Chief Financial Officer.

I should mention that this call is also being broadcast live over the internet.

A replay will be available immediately following the call at www.Artesyn.com or by dialing 800 839 0860 through August second.

The replay pas code is 1028.

For those of you who have not yet seen the press release, a copy is available for down load off our web site.

The format for today is similar to previous call.

Richard Thompson will provide an overview of the finanical results for the quarter, followed by a business review from Joseph O'Donnell, we will then open up the call for a 30 to 40 minute question period.

Before we begin I would 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, it involves certain risks and uncertainness, listeners are cautioned that these forward looking statements may differ materially from actual future events or results, please refer to our most form 10K which was filed on March 8th for a list of important risk factors that could effect future results.

I would now like to turn the call over to Richard Thompson.

Thank you and good morning.

Hopefully you have had a chance to see this morning press release with our second quarter financial results.

Beginning with the income statement revenue for the quarter was 91 million verses 128 million in the same period last year.

On a sequentially bases revenues where flat with the first quarter.

Both the power and communications products division continued to be impacted by the ongoing weakness in the telecom and wireless markets.

Artesyn communications products however due to it's concentration on the communication sector and narrow customer base was especially hard-hit this quarter.

The revenue fell by roughly 50 percent sequentially from the first quarter to 5.1 million.

Given the rapid revenue erosion, we were not able to take costs out of this business as quickly as we wanted to, as the SBU lost money in the quarter.

Revenue for the power group was 85.7 million in the second quarter, up sequentially from 80.1 million in the first quarter.

Contributing to the increase in our core business was revenue growth, and several of our large computing and storage customers, and growth in our Asian business.

These increases were partially offset by weakness in our telecom and wireless accounts.

Orders in the quarter were 78.4 million, representing a book to bill of approximately .86.

The quarter-ending backlog was 77 million, with approximately 71 million of this backlog estimated to be shippable in the third quarter.

As we have mentioned in the past, customers are continuing to place orders only for near-term demand needs.

When combined with the factor, we are maintaining inventory hubs for many of our customers, and lead times are shrinking across the industry, we would expect the book-to-bill ratio to remain in the .9 to 1.0 ranges in the near future.

The net loss per share for the quarter was 13 cents, compared to a 17-cent loss in both the second quarter of last year, and the first quarter of this year.

This figure excludes the impact of 7.1 million dollar restructuring charge for head count reductions and consumer

consolidations re-announced in May.

Including this charge the net loss was 26 cent per share.

As we look to the second half of the year we see a couple of factors that may slow our ability to reduce operating expenses.

First - Utilization.

The gross margin in Q2 was 13.2 percent, down from 15.3 percent a year ago, but up slightly from 12.4 percent in the first quarter.

To pass utilization is between 50 and 60 percent in power, but only 20 percent in Artesyn communication products.

While we are realizing the benefits from last years cost reduction activities, these savings continue to be offset by operating efficiency due to the low value.

Additionally sales mix influenced lower margins in Q2.

We mentioned last quarter that products sold in communication markets carried slightly higher margins due to their complexity, and a bundle software

in the case of ACP's products.

The shortfall in the market therefore had a disproportional negative impact on margins.

If this sector further erodes, it could have a negative impact on future margins as well.

Last - During the third quarter we will begin production on several new program wins from last year.

The startup costs and low initial volumes of these products will put additional pressure on gross margins in the short term.

Second - Looking at operating expenses.

Total operating expenses excluding charges were approximately 17 million in Q2, versus 18.4 million in Q1.

Expenses were lower than expected due to lower discretionary spending, and the influences of a weaker dollar on euro expenses.

We anticipated operating expenses to be in the 17.5 million range in Q3 absent these factors.

Continuing with the income statement net interest expense for the quarter was 1.8 million.

This is in line with expectations and it reflects a pay down of outstanding principle during the quarter.

Turning to the balance sheet, we continue to make significant progress in reducing our working capital, improving cash and lowering debt.

During the quarter, we were able to reduce accounts receivable and inventory by a combined $10 million.

Day sales outstanding improved at 56 days reflecting our success and reducing past two balances with our customers.

The improvement in inventory came primarily from raw materials and lower finished goods.

We continue to be very cautious to avoid making any inventory investments unless backed by a hard customer commitment.

Inventory turns for the quarter were slightly up to 3.4 and working capital was 151 million.

All of these actions contributed to a positive net cash operating cash flow for the second quarter of approximately $10 million.

Capital expenditures for the period were managed to 1.3 million and we made a required payment of 2.5 million to shareholders of Spider from the 2000 acquisition.

Our balance sheet profile continues to strengthen and provides us with important financial flexibility in this current operating environment.

I will now turn the call over to Joe for a business review.

Thank you

.

In keeping with the past practice I'll direct my comments towards the current state of our end markets, operational issues, and execution against the strategy we announced to you at the end of the first quarter last year.

We're going to have plenty of time for questions.

During last quarter's conference call I mentioned that the

towards segments of the market appeared to have stabilized, although Telecom and Wireless sectors were still largely in search of a bottom.

In the most part, the situation remains unchanged, as we are with second half.

If anything, recent developments with several large Telecom and Wireless operators we'll extend our market downturn we've been experiencing within telecommunications.

As

mentioned, the embedded computer business was slightly, was significantly affected by this slow down in the second quarter as the

of their revenue is in Telecom and Wireless applications.

Given the current environment we initiated a series of cost reduction actions in this division during the quarter.

These actions are intended to ensure positive cash flow from this decision.

However, consistent with our corporate strategy, we are maintaining a significant engineering investment to position us for the future.

We are fortunate that the power business has a large and stable presence in the computing and storage market sectors to offset the current telecom weakness.

Storage and server products comprise about 55 percent of our total revenue in the quarter and perform slightly better than expectations.

HP, Sun and Dell were all over 10 percent customers in the second quarter.

As we discussed in last quarter's call, it is extremely important in this environment of swollen market growth, to not only partner with the market leaders but to also focus ourselves and R&D efforts on high growth opportunities with those leaders.

This quarter, for example, we will begin shipments to IBM on their new E-server X235 product, a program we were awarded in mid 2001.

This server is a dual processor Intel- based system targeting the mid-market range.

We've provided

redundant AC/DC finance through system and Point-of-Load converged to follow the processors.

Based on this platform and other Point-of Load program wins at IBM, we expect our revenue with them to grow by over $10 million this year.

Looking into the future, we should be in a position to make a similar statement about

in 2003 based on products currently in design.

Even as, even in this increasingly volatile environment we remain committed to the computing and communications end markets.

While the decade of the 90's witnessed unprecedented period of growth in the communications market, many believe we are still largely in the early stages of a digital revolution.

Which began with the rise of the internet, email and wireless communications, will expand dramatically in the future as broadband eventually become a reality.

Research indicates that many cities back bone connection are running near capacity as use of the internet continue to grow these networks will quickly become saturated and require significant additional investments in infastructure.

We continue to believe that they are few if any markets in electronic that promise the long term growth rate of communications and those companies that continue to focus and invest will be the dominant market leaders.

These leads me to my second topic, operational focus and execution. those of you who have seen our investor presentation know that we have a chart outlining our short and long term objectives.

In the short term we are focusing on the four objectives. managing for cash, reducing our break even, investing in technology and increasing market shares.

During the second quarter we made progress on all fronts continuing to aggressive cash management allowed us to generate over $10 million in operating cash flow in the quarter , we used approximately $6.5 million of this cash to reduce long term death as Richard mentioned.

We now have over $87 million in cash and long term bank debt is below 63 million.

The significant balance sheet improvements made over the last 15 months has greatly improved our financial position and has provided a cash cushion to survive protracted down turn.

Cash will continue to be first priority for the balance of this year.

Good cash management techniques, however, can only take us so far. at the same time we are making structural cost improvements.

This includes reducing excess capacity where possible and moving productions to our lower cost facilities.

It also includes identifying efficiency saving through steam lining process and reducing

.

During the second quarter we announced cost reduction actions to further steam line our manufacturing operations, including work force reductions at several facilities and the closer of our Austrian manufacturing plant.

Projected saving are expected to exceeds $10 million annually when full implemented.

Not only does this help us to reduce cost and help restore the company to profitability but by consolidating production into our lower cost facility it also provides a significant operating leverage when volumes do return.

From a competitive prospective we continue to our commitment to invest aggressively in product development R&D spending in the quarter was $8.3 million remaining over nine percent of sales, very few companies in the industry have the financial strength to sustain this level spending.

As I mentioned earlier we believe it is a critical component of our strategy and a key to the future of Artesyn.

This commitment allows us to be one of the few companies to offer customers a completed range of products AC to DC, DC to DC and

.

The example that I discussed with IBM earlier on the new server is a example of the advantage of offering

products.

Looking at the business a longer-term prospects we have typically reported programs wins, as many of you know, it takes approximately a 12-month design cycle for a new project award to enter volume production.

The company light target for the year is 50 to 60 new programs.

After six months our businesses have received 29 major new project awards.

Where Artesyn has typically not discussed smaller projects, some of our competitors have started to report these.

Several of you who participate on this call have requested that we also comment on these smaller wins.

In addition to the 29 major program year to date, major programs one year to date, Artesyn has also been awarded 90 smaller projects.

Nearly all of these in the DC to DC work area.

Finally turning to the outlook for the balance of 2002.

Consistent with our earlier comments, we believe that the current slowdown in the communications market will likely last into early next year.

We are therefore maintaining a cautious stance, forecasting

performance in the second half of the year, relative to the first.

profits will continue to be negatively impacted by approximately 5 million dollars in manufacturing inefficiencies.

As we close the Austrian factory, and move productions to Hungry.

For the third quarter, we anticipate revenues of approximately 90 million dollars, and a loss between 15 and 20 cent per share.

As I mentioned earlier, our prime focus will be on the balance sheet, and improving Artesyn's liquidity through cash management, giving us the ability to weather a continued downturn, or positioning us for the markets return.

I would now like to open the conference call for questions.

OK.

At this point, we're ready to start the question and answer period.

Thank you.

To ask a question, simply press a one followed by a four on you touchtone phone.

If for any reason you wish to retract your question, you may press a one followed by a three.

Our questions will be taken in the order that they are received.

Once again to pose a question, simply press a one followed by a four on your touch tone phone.

Our first question comes from

.

Go ahead sir.

Yes.

Good morning.

Good morning John.

Could you bring us up-to-date there on your progress there with Delta, as far as say, in the last three months, as far as marketing agreements or

agreements, or any progress there with, with that company.

There has actually been a lot of progress on multiple fronts John, from a cost prospective, let me get that out of the way first, but we're, we've been able to find a number of areas where they can help our cross structure, and the procurement of components, keeping in mind they're large component supplier, and before we entered our agreement, they were our seventh largest supplier.

We would envision that would probably grow, reducing cost.

Now getting to the more exciting product development areas, we're, I'm not sure you'll actually see an announcement, because I'm not, I don't know what that would accomplish, but we are quite close to entering into an agreement on product development, and when I say quite close, I mean in principle, the agreements have been reached, and we're getting ready to assign the various design teams to joint developments, though, for the most part, we'll be working on distributed power products off of common platforms, where one company does a certain number of the products, and another company does other products, and then they are jointly available to each other.

The advantage to us there, as you well know, is bringing more products to market sooner than competition with the resources of both companies applied towards it.

So we're actually progressing quite rapidly and maybe the most encouraging part is the technical people on both sides of the organization are really excited about working together.

who owns the designs there, for example, in this agreement?

Are they jointly owned?

Who owns the product designs?

Both companies would own the product designs John.

And have the right to market those product designs under their own name, or, I'm sorry, under their own manufacturing or purchased from the other partner as a private label.

No those two issues would just be driven by pure cost.

And these are all going to be DC-to-DC products.

At this point, everything that we're working on is related to distribute power and the back end of that being DC-to-DC, not the Point-of-Load, however, but the D, typical D, or classic, if you would, DC-to-DC

.

And can you give us some idea of when, these products, they might be, you know, available for first a sampling and then for actually in production?

I would, you know, I would love to tell you that, but because of competitive purposes it's probably better that I don't.

We would like to really catch some of our competitors asleep here.

OK.

And one last question, could you comment on the ability for

to penetrate with their DC-to-DC line, some of the major, especially the major telecom and wireless accounts.

Well, you know, a lot of these smaller program wins that I talked about are with those types of accounts and they're standard products so there's no incremental engineering investment involved.

Almost all, not all, but almost all are in distributed power applications, but, you know, we, I think it's appropriate that we call them smaller based on what's going on in those end markets right now and in actually a number of the projects, particularly in the wireless side, have been pushed out and the

side as well as, now that I think about it.

Where we've been designed in but the volumes are just trickling through, or there are no volumes, there's the customer, for whatever reason has pushed out introduction.

But I think

, we're act, not across the board we have not penetrated every company that we would like to, but we've actually done pretty well penetrating them, in that category, of what I would call the 90 wins here to date on DC-to-DC.

Thank you very much.

Welcome.

Thank you, our next question comes from Mr.

with CIBC World Markets.

Go ahead Sir.

Good morning gentlemen.

Morning Andrew.

Just a couple of quick questions.

First, you know, if you could give us a little more detail on the design wins I would appreciate it.

You basically have two categories down, major and small, and I was wondering if you'd give us a sense of

size between the two.

Important, and that is important, to however you want to look.

Now again Andrew, I'd to say we typically have not discussed the smaller wins.

This is not something new to us, and we've been, this is kind of business as usual and I only did that at the request of a number of participants on this call.

OK.

So, you know, I don't want to stand here and say I'm going to keep that up because I don't want to, you know, see you all undo enthusiasm.

The, we've been very careful because of competitive reasons.

I mean, I would, I have no problem that the investors know, but we also have competitors that listen to these calls, describing the size of project wins by various categories but we are reluctant to help the guys we see out in the field know what these wins are how the customers are, what I would tell you and I apologies for that what I would tell you is that they are with our targeted customers the sizes of wins are larger than they have being in the past, now that is a conscious effort on our part to target with our engineering teams on our custom projects large projects and not spend time on the smaller ones.

We have learned particularly during this slow down that the smaller projects are more likely to be canceled or turned into really insignificant revenue where there are larger programs even though they have not necessary achieved the revenue that where expected as least they are profitable piece of business.

So we very much limited the size of programmable after now in these larger ones.

The net result of that is that they are bigger than they were last year or the year before.

And without naming any of the customers would you say that a major design win is more than a million dollars of annual revenues?

Oh much more.

OK great.

The second question I had was with respect to profitability do you have a target revenue rate break even point and do you have a idea of when that might happen?

Well we believe the revenue break even point and I am going to give you a range cause it is depend on mix of course is 100 to 110 million dollars.

OK and does that break even on a cash EPS bases?

It's on a well it's on a bottom line net income bases.

OK.

I get confused cause I think a lot of people do on the various terms people use cash EPS, so just to be clear to people on this cal net income bottom line is what we are talking about.

OK thanks a lot.

OK and our next question comes from

with Lehman Brothers, Go ahead sir.

Sure could you just maybe give us some thought to when there might be the opportunity to hit that 100 to 110 million I know that you obviously give guidance to which is very

for the second half cause some companies aren't going that far, but do you think it is going to take

the June quarter of 2003 to back to a level like that?

Yeah that is a good question, I wish I could give you a solid answer on that right now customer forecast would say that is what we will se in the first half next year but customers forecast has not being accurate, I wish I could give you a better answer that that we are dealing closer and .

OK think of the guidance that you had given you talked about the difference between the computing and obviously seems to be holding up better than the comp space for the second half I guess

for the year.

That assuming I guess that computing and storage is actually going to be up and unfortunately the other areas are going to be down I guess on a sequential bases and I guess second half over first half do you think that, that is zero to five or five to 10 percent range for both groups?

Your observation is correct and I would say it is five to 10 percent range.

And for those that follow both sub system companies like us and our customers you would know that the storage and the server markets a lot of research say's they are down by single digits we understand that .

The reason that our revenues are growing there is purely a market share issue, gaining more business at more of the server and storage companies.

OK.

Great, and if you could just spend another minute on capacity utilization, I think you gave it a 50 to 60 percent for the power side, and I didn't catch the other half, and I guess with the restructuring that you're doing, does that kind of change in the second half, or does the restructuring take into consideration, that we would expect probably those two measurements to remain about flat throughout the year, given the revenue balance.

The balance of the year, you would expect to see them about flat, we're doing our best to pull in the consolidation in the Austrian factory, which is our largest single cost action currently going on.

It's been scheduled for the end of the first quarter, and we're doing the best we can to pull it into the end of the year, to, you know, to give the efficiencies sooner, but you should expect to see it, you know, as the point Richard was making to the balance of this year.

Right.

I would add on the ACP which is a single manufacturing site, it's kind of hard to reduce costs, if you're only, going down one dual-headed circuits

line.

So, that production capacity, or utilization is very low right now, in the 20 percent, so we expect

return for that to increase.

Very hard to take much more cost out of that business.

OK.

Thank you.

Thank you very much.

Question comes from

with Wauchovia Securities.

Go ahead sir.

Thank you, and good morning.

Thank you, Bill.

Just a couple of questions.

I was wondering what concentration of sales in the quarter were AC/DC products, versus DC/DC.

It was 60-40, 70-30.

In that range.

In other wards 30 to 40 percent DC/DC, 60 to 70 percent AC/DC, and I'm giving you a range on purpose again, its, from a management, I hope a lot of you appreciate, from a management's prospective, with calls open to your competitors, lots of issues you wouldn't care about, or you would encourage investors to understand, its not as comfortable for us to have competitors understand it.

So when we get this specific piece of the data that maybe two years ago, I would have clearly talked to investors about, I'm not quite as comfortable doing that today.

So that's why instead of giving you a precise number, I just gave you ranges.

OK.

Great.

Well, then I won't ask margins on each segment, but I will ask, you know, could you talk about, you know, which sector's weaker, and which one's stronger, based on what you're saying.

If we look at it by market sector, what I would say, the strongest ones for us are, first the server sector.

Although, as they mentioned earlier, its not the end market necessarily, that's stronger.

It's a market share issue.

On the storage side, there, it's the same customers we've been doing business with, but more programs at those customers.

We're fortunate that HP has selected us to be one of, if not their prime supplier on the storage side with their combined businesses.

So that'll be very positive for us moving forward.

If we look at it from a product prospective, I would say without a doubt the hottest product area for us is Point-of-Load and as you recall this is something that we take a lot of pride in, actually pioneering it a few years ago, and it turned out that others now are in the process of entering the market.

It's clearly going to be the highest growth sector within DC to DC without a doubt, and right now, it is our fastest growth sector.

Great, and could you just elaborate a little bit -- this is my final question, on market share and the competitive environment, what you're seeing out there?

Well, we believe our market share is growing.

Frankly, it's a tough thing to get a handle on right now with people, meaning competitors, revenue moving around until we see some year-end data.

Program wins, if we measure it on dollars, would tell us that our market share is growing.

Again, maybe not the absolute number of major programs, but that's because we've raised our threshold significantly of what programs we participate in.

But in dollars, I think there's little doubt it's probably improving there as well.

Competitive environment, what you're seeing are a lot of what I would call the mid-tier companies are having significant problems in the market, and as a result, we're seeing aggressive pricing.

Our approach has been to not lose market share due to that for, you know, short term thrusts from -- call that again mid-sized companies.

So typical of a protracted downturn like this, I think what we're seeing is aggressive pricing from various competitors for different reasons.

Thank you, Joe.

Yes.

Thank you, our next question comes from Mr.

with

.

Go ahead, sir.

Good morning.

Good morning,

.

Based on the backlog order and sales information you've disclosed, I'm assuming that order cancellations during the quarter was minimal.

Yes they were,

.

It was just around $1 million.

OK.

So not appreciably different from Q1, almost a run rate.

OK, great.

And then, did you sell any inventory during the quarter that was previously charged off?

No, we haven't.

Basically, the inventory was reduced through really good management of raw materials that are entering to our products, and as I may have mentioned, to lower finished goods.

OK, great.

I also noticed that accounts payable and accrued expenses increased $10 million sequentially.

I was wondering if you could give us further detail on that.

On accounts payable, our days in payable went up -- actually, went down, so our date payable went down almost 9 days from a year ago.

And they're about the same as Q1.

What's in the accruals,

, is the restructuring accrual that we just made of roughly $7 million, so that would have caused accrued expenses to go up.

OK, great.

And then, last quarter, you had mentioned a new product development that you had in the works, basically an embedded power solution as part of a bay station switch.

And you said you couldn't comment too much on it at the time, but you expected to comment on it this quarter.

Can you tell us anything about that?

Well, the customer has still not made an -- there's one major customer we're -- that's signed up to the project.

In fact, it's a dual development, and it's one of the largest, as far as market leading position, wireless companies.

But they have still not introduced their product, and they're attempting to -- surprise might be the wrong word, but get a head start on competition.

Until they do that, we've made an agreement we wouldn't be too specific about it.

But it is a new market area for us, we're really excited about it, and we believe that it could be as significant as Point-of-Load has turned out to be for us.

OK.

Fair enough.

You briefly

to pricing a couple of minutes ago, can you quantify the level of pricing decline on both existing and new program wins?

Yeah.

It's primarily in the new area because an existing, while the trends may be changing today, we're still primarily single sourced on projects, not totally, but primarily.

So, where you see it is in the new bidding areas and the area seem prices, I'd, the range again, but 10 to 15 percent lower than they would have been a year ago.

OK.

Great.

And then last question here, can you just give me D&A for the quarter?

Sure.

D&A was around seven million for the quarter.

Great.

Thank you gentlemen.

Welcome.

Thank you and our next question comes from Mr.

from Raymond James.

Thank you.

Good morning.

Good morning, Sean.

Hi, could you tell me today about how much of your sales go through, you know, vendor managed inventory?

Oh, I can give you a pretty close approximation.

You'd be impressed when you see all of the pieces of paper we have weighing around this table, Sean, thank you, we could answer every question off the top, but like the complete grasp of every data point, but that one we didn't have a piece of paper on.

I would say it's probable about 60 to 65 percent of our revenue flows through vendor-managed inventory.

And is that primarily, then I mean, I know your exposure to the EMS companies aren't, you know, isn't that high, I mean, I assume is that then direct sales to, on occasions that have been held at OEMs or just kind of where are those pockets of inventory sitting at?

It would be between our warehouses, warehouses that we pay for handling the product and, in some cases, on the customer's premise, so all three locations.

It, the companies, it would all start with OEMs, in other words, Dell, HP, Cisco.

Some of those agreements then that we've made with an OEM are extended to their contract manufacturer.

OK.

In a typical deal, you know, deal with EMI deal that you're striking these days, what are the, you know, the terms and the risks that you're dealing with in terms of pricing, do they have minimum draws on this stuff if you allocate this inventory, you know, just kind of give a rough outline of what you're seeing in that deal structure?

Yeah.

There's, that's a good question actually.

There's not much of a risk of pricing if you're thinking of, you know, you have inventory out in a long supply chain you'll reduce price so that the distributor gets price protection.

Typically what you would see at these companies is the inventory in meant to ensure they don't loose production time, plus they don't pay for the inventory.

So, what you have is an agreement that you continue to tighten up over the period of the project or the relationship with the customer, and what I mean by that is you may start out with 30 days of usage in the, what we call them hubs, or the

site and then as they become more comfortable with the production flow on that project, our typical objective is to work that down to two weeks of use.

So you can see there's not a lot of inventory, as far as exposure, sitting at these hubs.

And they own it, by the way.

They own the inventory or the hub

At some point they own what we've put in the hub.

I mean it shows on our books but we you won't see a write off from us on that inventory.

Right so they're contractually obliged to purchase whatever you put in the cage over a certain period of time?

And what we put in the hub that's right.

OK and then as you look forward you know I mean that's a you know I know you guys have spent a lot of money and time on your IT systems and things like that have you found that as you're approaching 65, 70 percent of your revenue you're getting a better grasp through a VMI program of in terms of instantaneous sell through and you what's going out everyday versus what you're putting in or is that something that we should look forward to in the future or is it the way it is today?

: Well yes

this is Rich remember that we've put in a sales and operations process tied in with our IT system so we're actually doing a spending a lot of management energy to balance demand with supply, supply being the factories.

One of the buffers obviously is this vendor managed inventory we do see the sell through they are easy to manage, most of our hubs are connected through

so we just look at it as an extension of our inventory and the sophistication of our systems are allowing us to get better data.

And then just one last question looking back into your supplier base and obviously problems

are in tight supply where does that stand today in terms of how you're managing your supplier base and I'm sure encouraging them to adopt similar practices but just what are you doing on that side of the business these days.

o'donnell?: Right now our vendor managed inventory as a percent of purchases is 28 percent.

Our goal is to be at 40 percent at year-end.

I'm not sure we're going to accomplish that goal but we will be close to it.

How would that compare with let's say during the real peak of the

Joe?

o'donnell?: At that point we were probably, not probably we were a lower percentage of revenue in the VMI approach from our supply base.

I think we were behind the curve relative to our customers and going to vendor managed inventory now it's a very high priority for us and it's also helped us the fact that now 28 percent of total purchases flow through it, it helps our inventory management levels.

And we will get to 40 the point I was making I'm just not absolutely comfortable in telling you we'll do that by December 31st and then next year I do know that our goal is 60 percent.

And commensurate with that then we should see your cash management your working capital improve as well I assume that as of that succeeds and gets towards 60 percent.

o'donnell?: Absolutely you should see it improve as it gets towards 40 percent at the end of this year.

Thank you our next question comes from Mr

with Morgan Keegan go ahead sir.

Joe

I've got a couple of questions for you the first is you talked about

being weaker than expected and you're taking steps to get that under control you told us earlier on your break-even level was 100 to 110 million is there a need for you to lower that break-even level go forward and what specific steps would you have to take to do that.

: Well it's a question we struggle with frankly the approach we've taken to managing the business is a cash focus and to ensure that we're cash positive from the operation of our business which I won't go through all those numbers again but clearly in the last

months, we have been, and we will continue to be.

So if we look at the break-even on the P&L.

If we look at two pieces of it, the efficiency side, we're taking no prisoners, or attempting to, in the sense of, we will continue to ratchet back the cost side of our business in manufacturing production materials.

That's what I would characterize as efficiency, G&A.

However on the selling and the R&D side, this is where it gets a little harder, we really believe that these markets are going to come back.

We could easily be making money on the bottom line, as in that income basis, if we choose to significantly reduce product development cost, and sales and marketing expense.

We've made a strategic decision that the right way to manage the business through this downturn, just to get to a reasonable break-even level, and then ensure that that level keeps us cash positive, to not put the business in jeopardy, but at the same time be able to make these investments and product developments, that more and more of our competitors are finding it difficult to be able to fund.

So I frankly don't see us making significant reductions, in what you would call the expense lines of sales, marketing, and product development.

I do see us continuing to make aggressive consolidations on the operation side, being manufacturing, production, and material related aspects of our business.

If I can ask a question on headcount.

You're closing down, one of the

overseas, over the next couple of quarters.

So where are you on headcount for the total company today, and specifically in China, and what would you expect your headcount to be by the end of the year?

You know.

if you can wait a minute, because I've got a slide on that, I don't have it in this room, which talks about headcount percent by location, because I think that's really what you're getting to, and if you have another question, go ahead and ask that, and I'll pick up that slide.

This one is for

.

If looking at the good will on your books, are you still making the contingent payments on the acquisitions that you made.

Are there any steps on asset and payment for the goodwill, or any talks on that?

No we, as required by 142, we'll continue to look at

as the market conditions change, and if we have an

, we'll certainly recognize it as required by GAP.

We do those reviews constantly, and we'll do it again in the third quarter.

Obviously if we do book an

it's a non-cash event.

.

And then, you know,

, Richard would you want to give us the business segment breakdown you talked about, storage and computing being roughly 50 percent in the quarter?

55 percent was storage and computing roughly.

The rest of the business is security enterprise networking was approximately one fourth of the business, the wireless and access markets were about 12 percent of the business, and other, which is Artesyn product sales through distribution was approximately 8 percent.

Thank you.

OK.

I thought I could tell where you were heading with this question.

So one of the ways we tracked our head count is the movement of it towards lower cost areas.

So if we look at China, currently our head count is 63 percent.

I said that badly. 63 percent of our head count is in china.

Seven percent is currently in Hungary keeping in mind that's a new factory that we're in the process of ramping up, and 17 percent is in other places.

Now what you would see is a higher percentage in Hungary in other words seven increasing, and a higher percentage over time in china.

This is that's production people who are other percentages for other head count like engineering, sales, marketing for example.

So our total head count to give you a prospective a year ago was 7,827, and today it 4,961.

Now what that does not include is the sale of our solutions business, which had over a thousand employees, so that's not in either number.

And then would you expect that 4,961 to go by year-end you know would it be up or down?

o'donnell?: It would be down slightly by year end in total because we will be moving people to Hungary, moving people to China so there will be fewer facilities so you'll get some efficiencies from that.

And in a last question

your cash is building up nicely, congratulations on that.

Any thoughts on as you go through the end of the year where your debt levels could be or your cash could be?

o'donnell?: Well you know I'm not promising this to people on the phone because we will continue to manage it quarter to quarter.

We would expect cash to continue to improve, and to reduce debt on a quarterly basis.

I'm reluctant to tell you that the five million a quarter or some other number but obviously as we can afford it we will continue to pull debt down.

We reduced it about seven million last quarter.

Thank you.

Thank you our next question comes from

with CIBC World Markets.

Go ahead sir.

Thanks.

Two quick follow on questions.

First

if you could characterize inventory levels that of your customers.

That'd be great.

It's something we work on quite a lot.

The inventory in the server and storage side is actually showing up on our books, so from finished goods prospective, our finished goods, so I think that's pretty well managed and understood.

The problem we have is in the telecom side were there's inventories spread out at the customer, and at their contract manufactures.

At the customer it's typically not in the form of our product but in the form one of their finished goods, and worse, I know it baffles me that we're still talking a year later about inventory bubbles amongst some of our customers but they do exist in the telecom side to a lesser degree but they are there now because they were built up towards the end of last year in the wireless side.

The wireless was actually going quite well long after the telecom or landline piece was.

So in those twos sectors, we're still dealing with inventory of customers in the computing or let's say the server, and storage side for the most part we're not.

: Great, and for Rich if you could give us the net income excluding the one-time items that would be great.

Ah, I see net income, well I haven't looked at that in a long time.

Excluding one-time items net income would be approximately $5 million lost.

Thank you.

Once again to pose a question simply presses one, followed by a four on your touch-tone phone.

Next question by Mr Sean

with Raymond James, go ahead sir.

I said a quick follow up, but I just wanted to clarify about what percent of your sales in this first quarter were going into telecommunication space?

In the areas that you view, it's still announced and a down turn under on an inventory correction.

I think it was about 12 percent, the wireless and access market.

OK, OK, so.....

So buried in a cherry enterprise network shine there is still another 25 percent, so I don't have that broken out what it's carriers, but you properly presume half of that is carriers, so there is properly around 20 percent exposed to that while there is landline space.

For those of you that don't know the way we characterized our market traditionally, computing storage, meant servers and storage, access meant products like ADSL, for getting on an off the internet.

Carrier and enterprise storage is a combination of the backbone from telecom companies and network companies.

OK, so that would be like a Nortel or Lucent, or Cisco.

There are different trends right now between, or within that market, so we're in the process of declassing our markets because clearly even though we keep focusing on both, the trends are currently different between companies like the net working guys and the telecom guys.

So that's why it was a little hard to give you a precise answer on that, I would think next quarter the whole company will be operating with a slightly different market definition.

OK, and then again just touching again on a VMI aspect.

Do you know when, obviously you know when a customer takes something out of one of your hubs, are you able under the current system to track when that shipped out of the finished good ships that was used in or do you only normally take out of your hubs?

That's a mix bag.

Some customers what we get ours, their in market sales data, their forecast which would be several months out, and then their MRP numbers.

So we get three pieces of data at different times, then our job is to maintain the level of inventory in the hub, so if we have agreed to two weeks of inventory, we determent when we produce it, when it gets shipped into that hub, the customer doesn't worry about that.

In other customers we don't get all three pieces of data, but more and more we are getting what we all the appetite, what they're actually selling, because if you don't get that information there is a leg between what there materials people maybe saying has to happen and what's actually happening in the market, and then there is a leg between us reacting to there materials people.

So all of us through the supply chain, I mean these tough times as who I think improved most every company's management supply chain, all of us are trying to get rid of the days of lag time on information flow, that's where the problems come from.

So it's getting much better but there's still a distance to go.

OK, and what was your mix in the quarter between custom and standardized products?

OK, about 70, 30.

OK and distribution versus direct sales?

Distribution is still about 10 percent of our business.

10 percent, and then EMS versus OEM do you know that?

No that's much harder because some times that OEM, EMS billing is going is going through the OEM other times it's going through EMS guides, but a bigger piece of our business, I will tell you this, is from a relationship side, is flowing through the EMS people.

Thank you.

Thank you; and our next question comes from

with Stephens Inc. go ahead sir.

Joe can you give us a quick update on the litigation with

?

There's really no status change on that one Todd, no we certainly feel comfortable as we shared before with our opposition on it.

Any idea when it might go to trial if it makes it that far?

I haven't got the slightest idea, you now there is no date.

You know no one does.

Right.

And one other question is your gaining market share, who do you think is losing market share?

I will not use company names because I think that wouldn't be appropriate, but without a doubt the mid tier guys are losing share.

And what's helping, I mean helping guys that have the ability is this move to distributed power, you have to invest money and it gets tougher and tougher in a slower market so some companies feel they do that so right now the guys that are really vulnerable are the mid tier companies, some of the Asian companies that have not made the investment in large engineering groups to be able to do distributing who are also loosing share.

What about some of the very large guys that have been in the news a lot lately?

I would image if you asked any of the competitors we're all happy about focus issues that a couple of large companies are trying to deal with right now.

OK.

Thank you very much.

Our next question comes from

with

go ahead sir.

Joe, you know you've made the move in Austria are there any other consolidation efforts you could make which would not destroy the very core basic fabric of the company?

John there are but it would not be, you know we have not talked about this with employees in our company, there are no specific plans in port right now so it would be premature for me to give you anything specific on that but the answer in general terms is yes, there are opportunities for further efficiency consolidations.

Thank you.

Our next question comes from

with Morgan Keegan, Inc.

Go ahead sir.

Just curious to get your thoughts on these big rich companies like Lucent, Nortel telecom and Ericsson, are you supplying products to them, can you give us a view of how are you managing your risks to those kind of companies?

Well, we're managing risks at different levels, part of our inventory right now is inventory we bought for them that they're not using, its' become very slow moving, so we're working diligently with them to under one set of terms of another to get them to take that but that's a risk it's cash we have tied up, receivables are another risk we've been very aggressive on putting these companies on credit hold and that has worked for us.

Its not that they cannot afford to pay it's in order to keep there attention and we're extremely careful and extremely being the operative word on the engineering investments we are making with some of these companies and new programs so for example we would take pretty strong positions if we think that there is a standard product coming down the pipe that we could put into a application as opposed to spending money on custom a whole bunch of our project wins that we announced a year and a half ago that should have being revenue now out of that sector has just being canceled projects or worse has actually gone into production at very low volumes and that way we get the privilege of spending all the money you can possible spend and not have much revenue.

So we are being extremely careful and again receivables inventory and investments in new projects with those companies.

But lets not forget the world of technology in communications will make a rebound its going to be those large companies that are going to be leaders and when it does come back they may be configured differently you know consolidations here or there, spin offs and merging wireless business together but these will be the core to who the saviors and the market leader are.

So it is important to us maintain our relationships with them and get involved with the projects that we will believe will be or the technologies that will be the high growth ones.

If I could have one last question

this whole

wireless effort in Europe what are you seeing out for the

efforts are you seeing accelerations by carriers or OEM or are you just seeing a slow down?

Well instead of shipping about $20 million a quarter in 3G is where would have thought we would have being we are shipping under $5 million a quarter in 3G products so I mean it is a huge difference.

We are still waiting as our customers are for the massive roll out you keep reading about the

happening into later periods and we are working on next generation 3G if you will meaning improve products , that is what this one project is all about that we are involved with.

Cost reduced higher density products for customers.

It will happen or our version of it will purely because wireless traffic demand it but it's not happening any greater than this four to five million a quarter that we are shipping right now over the rest of this year.

OK thanks a lot.

Thanks you our next question comes from

with (Thomas Weisel Partners) please go ahead sir.

Thank you good morning.

I did jump on the call a little late so I do apologies if this has being covered but did you talk about major customers earlier and what your top 10 where and may be if you could go over the top five?

Top 10 customer

, the top five customer those are 10 percent customers and the five customers you would add

to that.

Right and would you give me out the top 10 in what percentage they where over all.

unid;

The top 10 we didn't but we will the top 10 represented about 74 percent of revenue well that is a year to date number but it is not much different in the quarter...

OK.

Great.

And finally, if you could give out your cap-ex for the quarter and what you're expectations are going forward.

Right

.

We spent 1.3 million on capital expenditures in Q2 and it may increase modestly, but I would say that 2., 2.0 or 2.5 run right from here on.

Great.

Thank you gentlemen.

You're welcome.

OK gentlemen, there appear to be no further questions at this time.

Alright.

Good.

Well, thank you everyone for joining us on today's call and we look forward to talking with you next quarter.

Thank you.

operator.

Thank you.

That concludes this morning's Artesyn Technologies second quarter earnings teleconference.

Thank you for your participation.