艾默生電氣 (EMR) 2002 Q3 法說會逐字稿

Good morning and thank you for joining the Artesyn Technologies third quarter earnings release teleconference.

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

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

I will now turn the call over to the company.

Gentlemen, you may begin.

Good morning, everyone.

Thank you for joining us for this morning's conference call.

This is Rich Leland, Director of Investor Relations and also on the call are Joe O'Donnell, the 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 November 8th.

The replay pass code is 1028.

For those of you who have not yet seen the press release, a copy is available on the major news services and off the website.

The format for today is similar to previous calls.

Rich Thompson will provide an overview of the financial results of the quarter, followed by a business review from Joe O'Donnell.

We will then open up the call for a 30 to 40-minute question and answer 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 that involves certain risks and uncertainties.

Listeners are cautioned that these forward-looking statements may differ materially from actual future events or results.

Please refer to the most recent form 10-K, which was filed on March 8, for a list of important risk factors that could affect future results.

I would like to turn the call over to Rich Thompson.

Good morning.

Thank you, Rich.

Hopefully, you have had a chance to read this morning's press release with our third quarter financial results.

Revenue for the quarter was $86 million versus $109 million in the same period last year.

Last year's comparative revenue includes revenue from the solutions business of $12 million giving an apples to apples comparison of $86 million versus $96 million or 11% decline year on year.

On a sequential basis, revenues were down 5% due to a variety of market and environmental factors.

As Artesyn continues to be impacted by the ongoing weakness in Telecoms and wireless markets.

However, we did see improvement in revenue at our Artesyn communication products division, this quarter, as sales increased approximately $3 million from the second quarter.

Revenue in the power business was down approximately 10% versus the second quarter.

Consistent with the lower revenue expectations announced by some of our major customers, and additionally we lost approximately $1 to $2 million due to flooding in eastern Europe at the end of August which impacted our German manufacturing plant and affected deliveries from suppliers to our Austrian and Hungarian plants.

Orders in the quarter totaled $80 million, up slightly from Q2 with a book to bill ratio of .93.

The quarter ending backlog was $71 million, which approximately $66 million of this amount scheduled to be shipped in the fourth quarter.

As reported the net loss per share for the quarter was 16 cents excluding charges, compared to a 17-cent loss in the third quarter of last year.

During the quarter, we also recorded a $52 million non-cash charge for goodwill impairment.

As discussed in the press release, this charge relates to SFAS 142 accounting for goodwill.

Under this pronouncement, the company is required to periodically assess a carrying value of previously recorded goodwill.

A study conducted by an independent valuation firm determined that the current enterprise value was below current book value, therefore requiring the write-off.

As I mentioned, this is a non-cash charge.

That goodwill remaining on the books following the charge is approximately $18 million.

During the quarter we also recorded a restructuring charge of $1.4 million, related to previously announced actions.

Including the goodwill impairment and the restructuring charges, the net loss was $1.45 per share.

As in Q2, underutilization of our factories continued to impact our financial results in third quarter.

Gross margin in the quarter was 11%, approximately flat with the same period last year.

Yet down sequentially from 13.2% in the second quarter.

Capacity utilization remained low at approximately 50% in power and 33% in Artesyn communication products.

Although we are realizing the benefits from last year's cost reduction activities, these savings continue to be offset by operating and efficiency due to lower volume and negative mix impacts.

Looking forward, the closure of the Kinsburg, Austria facility is progressing on track and we are in the process of moving the effective production to our lower cost plant in Hungary.

When this facility is closed in the first quarter of next year, we will begin to realize approximately $6 million in annual cost savings and therefore expect to see an improvement in gross margin.

Operating expenses excluding charges were approximately $16.5 million in Q3 versus $17 million in Q2.

This is slightly better than our expectations coming into the quarter, and reflects our continued focus on cost and also additional foreign exchange gains due to the continuing strengthening of the Euro.

R&D investments in the quarter were $8.5 million or 10% of sales, up slightly from $8.3 million in Q2.

Looking into Q4, we are not anticipating additional movements in currency and therefore we would expect operating expenses in the 17 to $18 million dollar range.

Continuing with the income statement, net interest expense for the quarter was $1.5 million slightly below Q2 levels.

This reflects a pay down of approximately $7 million in outstanding principal during the quarter.

The effective tax rate for the quarter, tax benefit for the quarter was 10.1%.

This is due to permanent timing differences on the tax deductibility of goodwill impairment charge.

We are now estimating that the effective tax benefit in Q4 for the year will be approximately 15%.

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

We generated approximately $11 million in positive net operating cash flow in the quarter.

As we were successful in achieving further reductions in both accounts receivable and inventory.

Day sales outstanding improve slightly to 55 days, reflecting our success in reducing past due balances.

The improvement in inventory came primarily from raw material reductions, as inventory turns were flat at 3.3.

Total working capital was $141 million, down from $150 million in Q2.

Lastly, capital expenditures in the period were $1.5 million.

As we were funding only capital required for new programs, which is generally fixed years and test equipment.

As I mentioned during the quarter, we paid down $7 million in borrowings under the senior bank facility.

After this repayment, we have $56 million outstanding on the facility and $89 million cash in bank.

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

I will now turn the call back to Joe.

Thank you, Rich.

Good morning, everyone.

As all of us know, market conditions in the Telecom and computer sectors remain challenging.

The long-anticipated second half recovery continues to be delayed.

In most -- most in the industry are looking at the second half of '03 for any signs of improvement.

With this in mind, we should discuss how the prolonged downturn will affect Artesyn's approach to managing our business over the next 12 months.

To set the stage, let's first review what's happened over the last six quarters.

Beginning with a second quarter of '01, we saw signs that the slowdown in communications in the computing markets would last for several quarters.

At that point, we outlined a strategy that -- and began to take actions designed to not only ensure the company's short term viability, but also enhance our competitive position.

Looking back, I believe we've made progress on both fronts.

From a liquidity perspective we initiated a significant restructuring of the balance sheet to limit it on bank debt.

We're improving financial flexibility.

Looking back to the second quarter of '01, Artesyn had approximately $125 million in bank debt and only $30 million in cash.

A combination of strategic transactions including selling the repair division and raising private capital as well as tactical exclusion which included restructuring at a lower -- to lower operating costs and focusing on aggressive cash management has resulted in a decrease in bank debt as Rich mentioned to $56 million.

Well, cash has increased to $89 million.

If you think about it, this leads us in a position to be able to completely pay off our bank debt and still have over $30 million in cash available, if we chose.

Although that isn't currently in our plans, we are talking with several lenders about alternative asset-based facilities, which we believe would provide the company with significantly improved financial flexibility.

As Rich mentioned in his remarks we generated over $11 million in positive operating cash flow in the third quarter.

Importantly, we have generated positive operating cash flow in every period since we initiated this strategy.

Over six consecutive quarters at a total of almost $67 million in cash, having been created during that period.

We have had similar success from a competitive standpoint.

Over the last 18 months, we have maintained an aggressive investment level in research and development.

There is no question this strategy has resulted in a significant improvement in Artesyn's competitive position.

Particularly in DC to DC bricks.

In addition, our technology-leading position in point of loads has continued to increase.

Artesyn is one of the few companies that can offer customers a complete range of AC to DC, DC to DC and point of load products.

Last month, we announced a very exciting new line of new non-isolated point of load converters.

Increasingly, we are seeing evidence of customers supporting our vision that point of load products will be the preferred approach for the future board level designs.

Not only are operating voltages continuing to fall, but we're also seeing the number of volt ands beginning to multiply.

Representing ideal application for distributor power, utilizing DC to DC and point of load bricks.

Isolated point of load bricks often have purchase prices of approximately $2 per amp.

It's significant because this is what our competition offers.

The 28 different models in our recently announced point of load line in contrast have prices ranging from $1 down to 50 cents per amp.

By using advanced materials, sophisticated design, and automated assembly in our low cost facilities we are able to hit these price points and still maintain attractive margins.

We estimate that point of load products this year will account for approximately $25 million in revenue.

This is up from essentially zero last year.

Importantly, based on our current forecast, we expect that our point of load revenue could double in '03.

We remain committed to our strategy to establish strong relationships with market leaders in computer, Telecom and wireless.

And have two divisions dedicated to this effort.

However, we must be realistic.

That over the next 12 to 18 month the growth rate of these market leaders will in aggregate be about the same as the end markets.

Over the next year and a half, this means about flat.

While Artesyn can grow revenue with these customers through increased market share, it is important that we also find new revenue opportunities.

To us, this means doing more business with an increased number of companies.

And third quarter, we want several multimillion-dollar projects with new customers like Siemen's Fujitsu and Extreme Networks as examples.

In addition, we announced a reorganization that will significantly increase our efforts with mid-sized and emerging companies in our target markets.

We have moved responsibility for sales representatives and distribution channels into the standard products division, while significantly increasing the number of salespeople, even as we cut costs in other areas.

By not having responsibility for both design and sales of standard products, we believe this organization provides a closer coupling with market opportunities.

It should also allow us to maximize our standard product sales.

This group is instituting innovative approaches, just last week we announced a new pan European network of dedicated technical sales representatives and distributors.

We believe Artesyn is the first power company in Europe to roll out a broad network of this scale, similar to our network in the U.S.

These exclusive sales representatives and distributors will add hundreds of feet on the street, significantly increasing the awareness of Artesyn's capabilities and products in these important markets.

All of these actions are a further evolution of the market focus strategy that we implemented last year, and we believe gives us a real competitive advantage.

Another example is a program we call following the silicon.

Here, point of load and VRMs are sold by salespeople at the same time they're taking orders for processors and memory chips.

We are the first power company to do anything like this.

Lastly, we also judge the health of our business by the number of new program wins.

As a reminder, it takes approximately a 12-month design cycle for a new project to work to enter volume production.

During the third quarter, we were awarded an additional 20 major projects.

This brings our year to date total to 49 major wins, worth an estimated $300 million in projected lifetime revenue.

We are on track for our company-wide target for the year of 50 to 60 new programs.

In addition to the 49 major program wins year to date, Artesyn has been selected for over 140 smaller projects, primarily DC to DC bricks.

As we look back over the past 18 months and out into the future, we are pleased with our progress.

Our strategy has been sound and we have been successful in returning the company to a firm financial footing.

And at the same time enhancing Artesyn's competitive posture.

Looking into the few future, we will not abandon these tactics, but you will also see us shift our focus slightly as we position the company for a return to profitability as the current revenue levels.

Now, I'd like to turn the call over to a Q & A session.

Thank you to ask a question, simply press a one followed by a four on your touch tone phone.

If you wish to retract your question, press one followed by three.

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

Our first question comes from Mr. Andrew Haynes with CIBC.

: Good morning, Joe.

Can you comment on the current pricing environment?

It's -- it's aggressive, Andrew, in the new project wins.

Awards I should say, as companies are posturing, attempting to fill their factories.

In the more typical single sourcing AC to DC applications, we're operating on longer-term contracts or agreements where we have scheduled price reductions on a quarterly or semi-annual basis.

And second source applications, you're seeing at times aggressive pricing as people attempt, again, to fill their production lines in the factories.

On balance, what you would see is probably price erosion in the high single digits.

Okay.

Great.

And in terms of the orders that you reported in the quarter, can you give us a sense of maybe the orders that were canceled during the quarter?

If -- the net cancellations were not a significant number.

The real issue is that now customers are operating as routine on very short or compressed cycle times, and what's not happening consequently is orders aren't being placed.

But the cancellations per se were not a major factor.

Thank you.

Our next question comes from Jim Savage with Thomas Wiesel partners.

Hi, gentlemen.

Can you talk about the markets for the non-isolated point of load?

Are they primarily the computing markets or do you expect you're going to get into the enterprise and service provider communications with that as a replacement of the bricks?

Initially, Jim, you're right on.

They're starting in the market per isolated is in the server sector.

I mean that would be the largest market within computing.

We believe that with the intense pricing pressure that Telecom and wireless companies are facing in their efforts to aggressively reduce costs that we'll be able to persuade them to change their typical power architecture approach which would depend on AC to DC, to going to bricks then, AC to DC to go to far fewer bricks and use point of load product.

Go to far fewer point -- DC to DC bricks, and go to point of load in many cases isolated point of load.

So there will still be a home and we're developing product in all three areas, bricks, isolated and non-isolated but we believe because of cost pressure the non-isolated will become a bigger and bigger perk.

And when you are --in the wins that you're getting for the non-isolated or have you gotten wins yet on the new product?

Yes, we have.

You have?

In the server sector.

In the server sector.

Do you also sell the DC to DC front end?

Is that part of the sell here?

Well if we did a great job, the perfect sale would be the AC to DC front end, then the multiple DC to DC bricks distributing power then into point of load devices that would be the ultimate sale that we got all three pieces.

In the power -- in the server sector, the current architecture approach is many of them go from AC to DC into point of load directly.

Others you'd go through bricks.

There's multiple approaches at this point.

But we are positioned and make an effort to get all three aspects if you will of the distributed power.

At this point, is there anybody with a competitive non-isolated point of load product?

In the marketplace.

There are people that are beginning to offer the product, we believe, that we're way ahead of the curve right now.

Okay.

Thank you.

Yes.

Thank you.

Our next question comes from Mr. John McManus of Needham and Company.

Yes.

Could you bring us up to date on the agreement there with delta?

Have you signed that sharing agreement?

We've -- we're in the midst of a joint development, John, which probably will release the information on.

But we have not made that decision at this point.

But we are working with them in a -- in an important area of future development right now.

Could you share with us where the ownership lies of these designs there in this agreement?

The initial project we're working on, the ownership of the intellectual property is Artesyn's.

The next project that we'll --that remains to be determined, depending on what's brought to the table initially by both parties or what's created by both parties together.

So in a second phase, it's yet to be determined.

First phase, again, to summarize it for everybody is it's Artesyn's intellectual property we would be compensated for that.

Well is the concept here that delta could back up Artesyn or Artesyn back up delta so that you'd provide a dual source there of these products in the market?

That's exactly right.

What we believe is that customers, as we move more and more to distributed power and we've talked about the major component, the point of load and the bricks, the customers will attempt to find multiple sourcing.

If we're able as a team to say, this is not just almost the same thing, it is the same thing, we think that that would give us a -- together or independently a great advantage versus other players in the marketplace who are competing with each other for each of those sockets.

Where we would in one case be the prime supplier and another case delta would be the prime supplier.

Can you talk a little bit about how you think the pricing might go down in a joint development like this in the sense there that you would think that intuitively that delta could possibly from a scale standpoint have a lower course and therefore could be more aggressive on price than you?

Well, delta can be more aggressive on price than us right now.

The -- if they choose.

The constraint we operate under, John, is we can discuss and jointly develop product.

We can work closely on utilizing the same suppliers, but we cannot talk to each other about pricing, so we don't.

The approach we're taking on the intellectual property, protecting Artesyn's shareholders in that respect is we will receive royalty payments for everything sold that utilizes our intellectual property.

So even if delta gets a revenue, we will get a piece of that through the royalty agreements.

Last question, Joe.

Is there a time limit on the investor buy by Bruce Chen?

Well, it's five-note year.

A five-year note?

Yes.

Thank you.

Our next comes from David Dagneo at the Boston Company.

Hi, gentlemen, can you talk about next year and your comments that your customers may be relatively flat, that you do have some of the wins here that in the point of load and that you think that revenue can double.

In that product market, revenue would double, yes.

Do you think the rest of the environment is close to flat?

Say if we have 4 or 5% in tech growth?

Yeah, David, if we look back at decisions, myself as part as manager have made here, we have been over -- overly optimistic on the market's growth or recovery.

And we're taking an approach now where we're going to presume in managing our business that it's going to be flat.

And if there's an upside, you know, that would be a very positive development for profit falling to the bottom line.

It would take us possibly a bit of time if it were a significant upside to take advantage of that but we believe that the right approach for us is to presume, again, that revenues will be flat and that we'll manage the business with that approach.

That doesn't mean our salespeople won't be heavily incentivized to gain share and that that won't be our objective to do better than that, but that the cost base and the capacity will be based on revenue.

Thank you.

Our next question comes from Mr. Todd Cooper with Stephens Incorporated.

Go ahead, sir.

Which customers are most aggressive in adopting intermediate bus architectures.

The server people in the midrange.

Anything in the communications equipment area?

What's happening right now, Todd, there's a lot of dialogue, but this is different from what they're used to.

And you have the dynamics in the companies.

It's quite interesting, actually, watching it develop.

The dynamic between the design team that's been assigned responsibility to drive costs out of the 2 1/2 or 3 G cell site, for example, the materials people who were driven to lower cost selected suppliers and then the engineering -- the traditional engineering approach in the companies that has -- for power which has -- this is totally new to.

And to -- for them to accept the concept of a non-isolated power component being in their system is something that they have not done before.

We believe we're seeing a lot of progress because the cost is overwhelmingly different.

And that it's only a matter of time.

Okay.

Where do you perceive your tangible book value going to once you've implemented your restructuring program?

Todd, the tangible book value today after we have taken the write off is around $150 million.

So the tangible net worth.

So I think that -- you know, that's as far as we're ready to go today.

Okay.

One more if I may.

Are there any covenants associated with your line of credit that could potentially restrict your restructuring efforts?

No.

We're -- we obviously have a couple covenants in our bank agreement.

One is an EBITDA test we feel comfortable with today.

As we go forward if more restructuring actions are decided to be taken, we'll certainly address it at this time.

Thank you.

Thank you.

Our next question comes from Lou Messasina with Lehman Brothers.

Good morning.

It's actually Amy.

Given the current market environment, where do you guys see break-even revenue levels these days?

Well,right now, our break even would be in the high 90s.

The comment I was making earlier Amy, is that we need to be approaching the business over the next year with a break even and the current revenue range.

I mean, to contrast for you where we are versus where we would need to be.

So projecting for the markets like you said?

That's right.

A couple more questions.

What was depreciation for the quarter?

About $7 million.

Okay.

And then just a couple more housekeeping questions.

The top ten customers as a percentage of revenues?

Just bear with me a minute.

Sure.

Top ten on a year to date basis, about 70% of revenue.

Okay.

And then 10% customers for the quarter?

There are three.

The combined HP -- this is the year to date number is that what you want or do you want the quarter number?

Um, the quarter would actually be great.

Okay.

I have the wrong chart out, Amy.

I thought I anticipated you right.

The combined HP, Compaq and Dell would be [inaudible], would be 10% customers.

Okay.

That's for the quarter.

And then the top 10% customers as a percentage of revenues year to date, you said 70%, what would that be for the quarter?

About the same.

Okay.

Great.

Thanks so much.

Our next question comes from Ramkrishna Kasargod with Morgan Keegan..

I have a couple of questions for you, Joe.

Can you talk about the global manufacturing set-up you have right now, earning at 50% of capacity in power and 30%-plus in ACP and you want to get your break even down to this revenue level.

What do you have to do with your manufacturing and your head count?

Well, first thing we have to do is complete the action in Austria, so when Richard is giving you those numbers it include Austria and it will until it's closed, which would be early in the first quarter of next year.

So that's the first step.

Then the next step is continual consolidation as we've done in the past, and we have to keep, you know, moving towards more efficient utilization of our facilities.

I'd really rather -- I'd rather you not get more specific than that because it's premature.

Secondly, Joe, what impact will any intellectual property litigation within the industry -- does it have an impact on Artesyn and then what might one expect?

Well, it's had one impact, I think as everyone knows, certainly those that follow us closely we're in the midst of a lawsuit with Viecore.

Finalization would be the right word of that, at least in our opinion, is a year away.

And the word is that at least or the phrase.

So I wouldn't begin to project what that conclusion might be, although I would say we're highly confident in that -- and that confidence continues to grow of our position.

As far as a broader answer to your point, we've over the last two years become very aggressive at seeking patent protection for intellectual property.

And I believe our competitors would probably be doing the same thing.

IP is a more and more important part of the technology world, so we think over time that will prove to be to our advantage because we've clearly been spending more money on it than most people.

How much have you been spending for this year?

Is that a number that you could disclose?

Spending for IP you mean?

Yes.

And for -- and defending yourself in litigation.

Probably for the -- you know, for the reason of the litigation I'm just getting Rich shaking his head here we shouldn't give you the amount of money we have been spending on that.

You know, coming back to capacity utilization, not only do you have manufacturing plans due and what have you got to do with head count at these locations to -- you know, to get the company making money at these revenue levels?

Well, we have our largest facility, about 70% of our head count and production comes from it, and that's China.

The second largest facility or on its way to being the second largest is Hungary.

Probably actually as of today.

Then we have a manufacturing facility in Madison, Wisconsin, for the computer business.

One in Minnesota for the power business.

And one in Ireland and one in Germany, for power.

It's in a former east Germany for power.

So that's a pretty cost effective location.

As far as head count, as we move closer to the -- you know, we were talking earlier, a break even at this kind of revenue number, we obviously will have to take actions to improve our cost structure which would include head count.

Finally, Joe, can you talk about in this current slow down that we've had, what is happening with captive power supply, and then what is happening with some of the larger conglomerates, like an Emerson or a Tyco that have gotten into power supplies?

You know, what are they doing relative to independents like yourself?

Well, okay.

There's a long list of the captive power supply companies or larger companies that have gotten into power that now have those businesses officially for sale.

And it truly is a long list, so we expect that you'll see significant shifting in the makeup of the power business over time as the, you know, final resolution to those efforts to sell the company sort out.

When we look at an Emerson, it's very difficult except through indirect information to understand how they're doing in the power business.

Certainly the corporation is well funded.

Tyco, you know, in their power business they're primarily a captive -- or they were primarily a captive supplier to Lucent at the time.

And primarily a Telecom wireless supplier in addition to that.

So while I don't know what their numbers are, I'm sure they have been dealing with a lot of challenges.

We think this will all serve us well and the other established players that have been improving their competitive position.

You know, even with our terrible numbers which they are over the last year and a half, they have not -- it's a disappointing way to have to talk about it, but they have not eroded nearly at the rate of the competitors, the public companies that you can see and some of the ones that we have been able to recently digest that are for sale.

As difficult as it may be to believe, it would appear that we are actually gaining pretty significant market share.

So we think that this construction going on will be to our ultimate benefit.

Thank you.

Our next question comes to Mr. Shawn Severson of Raymond James.

Thank you.

Good morning.

Good morning.

Could you give an update of what you sense the channel inventories are?

I mean, are you seeing direct sell through with most of your customers at this point, or are they still working through some of your inventory, but more importantly some of their inventory?

Shawn, where we're seeing direct sell through now -- let me say it differently.

Where we think the inventory issues have been flushed out of the channel is in the service sector and storage sector.

That doesn't mean in a given quarter you might not have a disruption because they anticipated higher demand and materialized or vice versa.

But generally speaking, there aren't channel problems In the storage or service sector, our two biggest pieces in computing.

In the Telecom sector, there's still some channel problems not nearly as broad-based as they were but where these problems exist are a combination between us still sitting on inventory and supply -- our contract manufacturers sitting on inventory.

That hasn't cleared out nearly as fast as, you know, we might have thought it would have earlier in the year.

And in terms of your inventory as well into the server and storage market, you feel you're in decent shape there?

You feel it's the telecommunications sitting on your books as well?

That's correct.

Okay.

And in terms of trends in the quarter, you know, how did it shape up?

Obviously its been pretty widely publicized, a slow down in September.

Did you experience, you know, similar trend or anything -- you know that varied from there?

No, I would say on a run rate basis, September wasn't too different.

There was certainly -- I mean on a daily basis.

There were certainly some major disappointments in September, primarily in the wireless sector where we had anticipated revenue that was delayed by customers.

And most of the delays were coming from Europe or North American customers?

Well, I would have to say Europe, but that's a bad answer because as we all know in the wireless world, the revenue of any of the market leaders is really worldwide.

So the fact they're European headquartered doesn't necessarily mean it wasn't a problem in Asia or North America that caused a revenue to be pushed out a little bit.

Lastly, look at last year in December around the holiday period we saw a lot of extended shut downs both by OEM's as well as the manufacturing base.

Do you expect a similar trend, you know this year, where we get a 2 1/2 week shut down as opposed to a week or -- a week to ten days?

You know, indications in our customers would indicate that there will probably be extended time off during holidays.

To be -- I'm not close enough, Shawn to tell you if that's going to be averaging a week and a half or 2 1/2 weeks, but clearly you're correct that there will be extended time off during the holidays, at least based on what we're hearing from customers.

Great.

Thank you.

Our next question comes Mr. Bill Fogel with Wachovia Securities.

Thank you.

Good morning.

Just a couple of questions.

Most of them have been answered but with all these companies for sale I was wondering if you guys would consider a acquisition?

I think that's a fair question because our cash position is --has improved significantly.

You know, I heard you this a lot $89 million, but we're proud of that.

We expect it's going to continue to improve.

So one might say why don't you take advantage of all of this?

I would say we're single minded in that we're going to eliminate the debt from our company.

And the -- to do that, we're not going to be distracted by potential buy backs of stock in the near term or acquisitions.

Does that mean we might not get involved with a very small technology company?

No, that's different.

But, you know, that wouldn't be noise level kind of acquisitions.

That makes sense.

Also, I was wondering if you can break out the sales per at market in a little more detail?

These guys have everything ready, Bill, very impressive.

Let's see, in the computing sector, which the way this is broken off does not include networking that's 62% of our revenue.

In the carrier sector, which is Telecom and networking companies 14%.

And wireless, 15.

Okay.

Thank you.

And then there's another category for the difference.

Thank you.

Our next question come Mrs. Mike Harris with Robert Baird.

Go ahead, sir.

Good morning.

A couple of questions here.

First off can you give us the operating loss by segment?

Operating loss by segment.

Yeah, Mike, we don't have that information.

We haven't really disclosed that.

Okay.

Fair enough.

The other question related to cash flow from operations, you guys have been doing a nice job working down both receivables and inventories thus far this year.

My question is on a going forward basis considering the run rate level in sales, can you continue to generate operating cash flow at levels seen over the last two quarters or is the working capital benefit going to start dwindling here going forward a little bit?

I think what you have to look at is cash from asset management, if you will, which is what you've just talked about.

We believe in our budgeting process that there's probably about another $5 million a quarter, that's an average that can come out of that.

Going forward.

Over the next four quarters.

The other factor is that while we're generating operating losses currently there are significant non-cash charges that are impacting our P & L. So on a net-net basis after the non-cash charges, we're actually generating a small amount of cash from the P & L, if you will, distinct from asset management.

We have been doing that for three or four quarters now.

Great.

That's helpful.

Thank you.

So for everybody that -- the key point is from the operating side of our business, as opposed to managing the assets, we are creating cash.

Not a lot, but we are creating cash as opposed to using cash.

So we don't have a burn rate.

We have a creation rate.

Thank you.

Our next question comes from Larry Liten with Second Line Capital.

I want to come back to a prior question and your answer.

Obviously you're focusing your energies on asset rationalization and you can't control the end markets, but regarding acquisitions and, for example, there's some non-viable businesses and stand-alone entities out there, you're saying you won't purchase them for cash.

If those businesses could be combined with yours to become viable, it's conceivable the seller would be interested in stock.

Two parts.

Is it that you just can't take the distraction of merging another business into ours or there would not be the ability to create any near term economic advantages by merging those businesses in?

Larry, the ones -- and we have looked at pretty much of all of them, as far as seeing the information is what I mean by looked.

These companies are in big trouble, and it's not just that larger companies have lost interest in them.

You know, let's go do something else.

It's these things are bleeding.

And to make them stop bleeding, it takes a huge cash investment.

Severance costs of closing the facilities which are in non-competitive areas might be an example of that.

Moving productions.

So these companies are not expensive, but the problem with it is what I was just talking about is going to take a lot of cash then to make that -- that a viable business, you know, when you fold it into Artesyn or somebody else.

Larry Lighten Okay.

Joe, on the other side when you look at companies that are very viable like ourselves, are there opportunities theoretically at least to combine businesses that would create very sufficient economies in terms of R&D, distribution and manufacturing?

Given that we can't control the end markets, is that a theoretical step for this industry that would create much more vibrant business enterprise?

I believe there is little question that this sector of --of this sector of the technology business meaning power will follow the kind of traditional consolidation curve that happens after or through a prolonged depression in the markets and it's beginning right now with these companies being for sale.

It's been ongoing with smaller companies.

So there will be consolidation.

There's no doubt about it.

But the -- but do you see opportunities for us, for example, on a pro forma basis, if you will, to dramatically improve the profitability if demand stays where it is or are you only creating an entity that's more effective if a much more robust environment?

Well, again, Larry, if the possibility for us means being acquired, that can always happen.

If the possibility for us means acquiring small technology operations where you're basically -- you really like the technology, like As-com when we did that and it's a small amount of money based on performance we could well do something like that if we found a really exciting technology/product opportunity.

If it means us buying somebody larger which is the only thing that makes sense if you're looking at volumes as the efficiency factor, as I said earlier I don't see us doing that.

Now, maybe a bolt of lightning will hit me and there will be a great idea that comes to the table that somebody brings us, but right now it's not on our plate.

Okay.

Thank you.

Our next question comes from Andrew Huang from CIBC.

A quick follow-on question.

In terms of the head count today can you give us what the head count today is versus the end of the year of last year?

Do you have another question and they'll get that one to you?

Sure.

This is probably for Rich.

In terms of guidance for fourth quarter, it looks like the top line is going to be flat.

Can you give us some guidance towards the gross margin and EPS?

Sure.

You know, as we said in the commentary, we expect the quarter to be more or less flat.

We do expect a slight up tick in operating expenses.

We hope to see slight improvement in gross margin.

As you know, we're only at 11% for the quarter, so absent charges we would expect to see that to improve just ever so slightly.

So all in all, I think you're going to see a repeat of Q3 and Q4 with perhaps a bit higher on the operating expense line.

That's unfortunate.

We just don't expect to see any foreign exchange gains this quarter.

Okay.

Thank you.

Our next question comes from Mr. John McManus.

Go ahead, sir.

Yes.

Could you tell us of the 20 major wins how many of those were point of load wins?

Seven.

John McManus And, you know, if we looked at the quarter before when you had 13 major wins as I remember, how many of those were point of load?

Hold on a second, John.

Somewhere between two and four.

There seems to be a little confusion on the number here, between a brick and a point of load on two of them.

And you had mentioned I think in the last conference call wins there at major customers like IBM and EMC.

Yeah.

Are there -- are those -- were there any other wins of that kind of nature that you could disclose there here in this quarter?

We had a couple important wins in the wireless sector this quarter at Ericsson.

Q3 in addition to that there was a very large project -- actually multiple projects at sun that would be the single largest, and then Dell -- those were a number of point of loads.

And then a large wireless, I mentioned Ericsson but also at Nokia.

And I believe in the previous quarter the top five customers besides the HP and Sun included Dell, Cisco and Nokia.

Is that still true here in the third quarter?

The -- how far down did you just go?

The top what, John?

Top five.

The top five would be Dell, HP, which we now -- you know, put together, Sun, Cisco and Nokia.

And you have commented on the past there about vendor-managed inventory and not increasing there as a percent of your total.

Could you talk a little bit about what that is there relative to the level in the second quarter, and is that capable of increasing your turns by going to much higher vendor-managed inventory?

Oh, okay.

You're not talking about our vendor-managed inventory for our customers.

You're talking about the part that we have from our suppliers?

Right.

We are only now 25% of our inventory through either just on time or vendor-managed.

Our goal, which we're not going to achieve this year, which would be at 40.

So we're obviously very focused on this.

It's probably within the turn side the biggest single impact that we can have on our performance moving forward.

So it's a very high priority for us, making progress, but we're not going to achieve the 40 that we had targeted ourselves for year end.

Is is there a reason why this might be -- this might -- adoption might be delayed?

It's a combination, John, of we're going through -- and it looks to me like our guys are doing a good job of it, of consolidation of our supply base.

And as that is sorting out, it's turned out that this -- that the VMI piece is a big part of the negotiations with the suppliers.

It's going to happen, but it will take longer than planned because of the changes in the supply base.

My last question, there's been a lot of interest in ace bricks, the a idea of saving so much real estate there on the board.

Could you give us your thinking about your thinking about ace bricks there and when Azcor would be coming without a product like that?

Well, for competitive reasons we're holding this one very close to the vest, but I would be amazed if early next year at the latest people didn't perceive Artesyn as being by far the leader in that product area.

Thank you.

Your next question comes from Robert Marchen with Marchen Asset Management.

That was a good quarter on asset management.

Now we have to get cost management in gear and resize this business.

Could you address the gross margin issue?

Obviously, some of it is from the communications products segment, but one of your competitors power one just reported 29% gross margins and we're at 11.

Historically, they have been higher than us, but what could we do regarding technology and cost to narrow that gap?

Thank you.

Okay.

Robert, I think that's a good question and I'm going to answer it a couple different ways.

Power One who I think is an outstanding competitor, so let me start that and I'll end my comment the same way.

The -- they have written off probably close to $200 million of inventory, over time.

Now, their release is also talked about they revalued inventory.

I frankly don't have the slightest idea of what Power One's margins are.

When you take those kinds of write-offs on your inventory what is your cost?

And your cost is materials 70% of your cost.

Now, in my opinion, there are very tough and aggressive competitor and a good company.

That has nothing to do with it, but as a comparable, it's almost impossible to draw one.

Because we haven't done that.

Should we consider it?

I think that's a good question.

The stock market seems to approve of their reporting techniques because their enterprise value is two times revenues and we're at one-tenth of that.

Another way of saying it is one and half times plus the revenues plus the net cash that they have on the balance sheet.

So clearly, there's a humongous valuation discrepancy between Power One and us right now, which ties our hands from an acquisition perspective in my mind anyway.

-- It certainly ties it realistically if you were going to talk about doing something with stock.

Absolutely.

You better not sell stock at 20% of revenues.

That would really tick me off, but go ahead.

The margins will improve with a combination of two things.

With us.

Further consolidation of facilities, margin will improve when Austria's closed, which, you know, is early next quarter when it is finished.

The other thing is as our sales become more and more DC to DC and point of load which is a huge piece of what Power One does relative to us as a percent of revenue TDC to DC, those have inherently been higher margin products.

And certainly the current activity in the market suggests that that they will stay that way for a period of time.

So the combination of those two things will improve our margins.

Okay.

Thank you very much and good luck.

Thank you.

Our next question comes from Mr. Jim Savage.

Go ahead, sir.

Sequentially, your single board computer business was up fairly substantially.

Is that something that do you think is a sustainable trend or are there new customers there or customers with new products?

What where do you think that's going at this point?

We're not -- we're not anticipating even though the local management of the business is that the revenues will get better from here.

But in the near term.

But we do believe that there's -- they're sustainable where they are.

And it is from exactly what you said.

New products into the marketplace that are shipping.

And are the customers the same customers as you've had historically?

Their major customers are the large wireless and Telecom guys.

Not the best place to be in right now.

But they haven't expanded that base appreciably, so what it is, new programs or projects at those existing wireless and Telecom companies.

Thank you.

Thank you.

Our next question come Ramkrishna Kasargod with Morgan Keegan.

Go ahead, sir.

Thanks a lot, Joe.

I think the question on valuation got answered.

And it will be interesting to see the valuation go up finally.

Thank you.

Thank you.

Our last question comes from Mr. Larry Liten with Second Line Capital.

Just a follow-up to the gross margin question and Power One as a comparable.

Obviously, the accounting is not transparent for anybody, but as best you believe if you look at the inherent profitability of the business if everybody was using identical accounting applications, is there -- if you look at it over a couple of years is there anything that hinders our ability for the gross margin to be the same as Power One, the is the goal to be half of the Power One's gross margin, 80%?

What is your view the real capability of the business?

Before the slow down hit, revenue slow down hit or erosion however you want to characterize it, towards the end of 2000, we were running in the mid 20s to higher 20s.

There's absolutely no reason at volume base there's no reason that we shouldn't be right back there.

And still that constitutes given the mix of business, you'd still be at a significant discount to what Power One is capable of doing given their mix of business?

Well, if the mix of business remained unchanged what you just said is absolutely correct.

However, we've invested a huge amount of money into what we believe is the future growth of the market.

That's where revenue comes from, if you're right on where the growth is going to be.

We've been right on point of load, we believe now that the next evolution of that, the nine isolated, the others will remain isolated as well but higher volumes moving to non-isolated.

The transformer functions of DC to DC bricks, to power those, plus the new line of DC to DC bricks, we feel -- that Artesyn will have a much higher percent of the revenue in the high margin areas.

I know you're pushing and you don't have to answer, but over the course of the next cycle, do you see our margins being comparable to Power One's?

If the next cycle means when the market volumes improve, I don't know what Power One's margins are going to be at this point.

I don't know what their product mix is going to be.

Our margins will be better again because a higher percent of our revenue stream will be in point of load and DC to DC which you can differentiate yourself from competition with technology, which we're pretty good at.

And you get higher margins doing that.

Let me ask you one lats one and then I'll give up.

Over the next course of the cycle, what do you think the target will be in gross margins?

Second to higher 20s.

Thank you.

Thank you.

Our next question comes from Mr. Robert Marchen with Marchen Asset Management.

Go ahead, sir.

-- 50% of the revenues in profits.

Why are we still attached to that business and what could we do to close it or monetize it?

Robert, the first part of your question, we didn't hear.

So -- we picked it up at 50%.

But we didn't hear anything else. : The communications product segment seems to be a serious drain on profitability including gross profits.

What kind of outlook do we have for that business and why can't we close it or monetize if it is going to be a serious drain on profitability for some time to come?

Is there any strategic importance to it?

Thank you.

We firmly intend to not have it be a drain on the company moving forward.

And we believe the revenues at the -- discouraging but still improved $8 million a quarter will allow us to implement a plan that does that.

And it is a strategic business area for the company in that it addresses the same marketplace, the same product applications as Power.

It's really not that different from selling a power system to a customer.

Again, the same customer as it is one of the single board computers.

Thank you.

Thank you.

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

Okay.

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

Great.

Well, thank you, everyone for joining us for the call.

Both Rich and I will be around following the call if you have additional questions.

Thanks.

Thank you.

This concludes this morning's Artesyn Technologies third quarter earnings release teleconference.