艾默生電氣 (EMR) 2003 Q2 法說會逐字稿

Thank you for joining the Aretsyn Technologies second quarter earnings conference call.

All participants are now in a listen only mode, until the question and answer portion at the end of this call.

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

I will now turn the call over to Pamela Rembaum, Director of Investor Relations.

You may begin the call now.

Good morning everyone, and thank you for joining us for our second quarter 2003 conference call.

On the call with me this morning is Rich Thompson, Artesyn Chief Financial Officer, and Joe O'Donnell, Artesyn President and CEO.

For those of you who have not yet seen this morning's press release, a copy is available on the major newswire services, and is currently posted to the press release section of our Website at www.artesyn.com.

Additionally, the company filed the earnings release this morning, prior to this call, on Form 8K with the SEC.

This call is also being web cast live over the Internet on our Website.

A replay will be available immediately following the call, on our Website, or by dialing 800-839-0860.

The dial up replay pass code is 1028, and will only be available through August 5.

Before we begin, I would like to remind you that, except for historical data, comments on today's call might contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements, including projections as to revenues or earnings, and other statements related to expected future performance by Artesyn, involve risks and uncertainties, which may cause actual results to differ materially from those, discussed on this call.

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

Please refer to our filings with the SEC, including our 10K filed on March 26, 2003, for additional information.

Now I would like to turn the call over to Artesyn's Chief Financial Officer, Rich Thompson, for a discussion about the company's second quarter financial results.

Great.

Thank you, Pam, and good morning everyone.

We will follow our normal protocol on today's teleconference, where I will touch on financial highlights, and Joe will discuss significant operating developments.

Sales for the second quarter were $87.6m, a $5.8m or 7% increase from the first quarter, and the first sequential quarter-over-quarter revenue improvement since Q2 of 2002.

Sales on the power conversion division were $78m, a 6% increase from last quarter, and Artesyn communication products, our single board computer and protocol software business, recorded Q2 sales of $9.7m, a 13% increase over the first quarter.

This is the second quarter in a row that our single board business had sequential revenue growth.

For the six months of the year we reported sales of $169.5m, a 7% decline over the first six months of 2002, indicative of the year-over-year market conditions we're experiencing.

Orders in the second quarter were $93m, yielding a book to bill ratio of 1.06.

This was $5.6m or 6% increase in orders over Q1, and is the fourth consecutive quarter of improving orders.

Approximately 92%, or $77m of the backlog, is scheduled for shipment in the third quarter.

Excluding charges, the net loss for the quarter was 7 cents per share, which is 3% better than the analysts' consensus.

The quarter's loss, according to GAAP, was $44.2m or 11 cents per share, an 8-cent improvement over Q1 and a 15 cent improvement over the second quarter last year.

For further explanation of our loss per share, please refer to the financial highlights section of this morning's press release, which has been posted on our Website, for a reconciliation of our net loss, excluding charges, to our reported net loss per share.

From an operating performance perspective, gross margin as a percent of sales, was 17.5%, up 1 plus points for the first quarter, and 4.3 points higher than a year ago quarter.

As Joe mentioned in his comments in the press release, we completed the closure of the manufacturing plant in Kindberg Austria during the quarter, and expect to complete the closure of manufacturing operations in our Irish facility by the end of the third quarter.

As we complete these actions, gross margin should continue to improve, due to lower manufacturing fixed costs, and better plant capacity utilization.

Total operating expenses, excluding restructuring charges, were $17.7m in the second quarter, compared to $18.1m in the first quarter of this year.

SG&A expenses were lower, due to the next impact of foreign exchange on expenses, of approximately $400,000.

Engineering and research expense was $8.5m, as we continue to invest in new technologies, and bring industry leading products to the market.

Net interest expense in the quarter was $900,000; this is down from prior quarters because of lower debt obligations, and our recently restructured credit facilities.

Similar to last quarter, the effective tax rate was 12.1%, I'm sorry, that's a tax benefit, and we expect to maintain this rate for the remainder of the year, or until profitable.

Turning to the balance sheet, we continue to make progress in strengthening our financial position, cash increased to $52.5m during the second quarter from $51.9m last quarter, despite funding $4.8m of restructuring obligations and $3.3m in deferred purchase price related to prior acquisitions during the quarter.

Our working capital performance measurements also improved throughout the quarter.

Days working capital, a measure of working capital efficiency, improved to 60 days from 73 days at the end of Q1.

Accounts receivable were down by over $2m, resulting in our DSO improving to 45 days from 50 days in Q1.

While inventory remained level to the first quarter of this year, inventory turns improved to five times at the end of the quarter, and we are on pace to achieve our goal of six times by the end of the year.

The second quarter was the ninth consecutive quarter that the company generated positive cash flow from operations.

Capital expenditures were $1.3m, as we replace older equipment, and acquire new equipment required to handle new product ramp ups and depreciation and amortization was $5.9m for the second quarter.

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

Joe O’Donnell: Thank you, Rich.

Good morning.

I'll first discuss the second quarter's performance.

Following that, I would like to comment on our progress in three primary areas of near term company focus.

As we reviewed with you in the last two conference calls, revenue growth, balance sheet improvement, and profitability.

Prior to opening the call to Q&A, I will take a few minutes to discuss Artesyn's momentum in Point-Of-Load.

Second quarter revenues represent the first time since the second quarter of 2002 that we have experienced sequential sales growth, increasing from 7% from Q1.

We are encouraged by the revenue increase in our power conversion segment, as well as the single board computer business.

Sales in the server and storage sector improved over last quarter, as well as, sales for ADSL and 2.5G wireless.

Sales from wireless represented approximately 24% of total revenue, server and storage approximately 50, carrier and enterprise networking, 8.

In addition, sales through distribution were approximately 18% of revenue versus 12% in '02.

This increase is particularly gratifying, as we formed a new division in January to focus on the distribution channel.

It appears demand is continuing to stabilize, as reflected in the $93m of orders in the second quarter, the highest level since the fourth quarter of 2001.

Furthermore, approximately 92% of quarter ending backlog, or $77m, will ship in the third quarter, providing coverage of over 85% of anticipated third quarter revenue.

We believe the revenue and order patterns experienced over the last couple of quarters support our strategic decision to remain focused on the communications market.

As many of you know, we continue to believe that as our target markets rebound, communications will once again be the fastest growth sector within electronics.

During the second quarter, we were awarded 16 major design wins, averaging $52m in estimated annual revenue.

Year-to-date, major design wins are 30, keeping us on track for achieving our plan of 55-65 for the year.

We also won 90 programs, each valued at less than $500,000 annual peak revenue during the second quarter.

Total estimated revenue from design wins during the quarter is $58m.

Artesyn continues to invest approximately 10% of sales in R&D.

We have seen results from these investments, including the continued expansion of the recently announced Typhoon product line.

In an effort to enhance Artesyn's already leading market position in Point-Of-Load, we entered into a license agreement with Texas Instruments to offer standardized packaging for high performance Point-Of-Load converters.

Texas Instruments, Emerson and Artesyn are members of the POLA, or Point-Of-Load Alliance, which offers customers multiple sources for truly standardized products.

Another exciting joint development was announced in our embedded computer business.

A partnership was formed with TimeSys Corporation to add a new operating system to our single board products.

This will create a carrier grade real time platform to be sold within the wireless infrastructure market.

Gross margins continue to increase as we move toward profitability.

The second quarter's gross margin is 17.5%; this is the third quarter showing sequential improvement.

This improvement is attributed to cost reductions across the company and improved efficiencies.

We anticipate seeing improvements in the second half of the year, as restructuring efforts are completed.

In addition to revenue and profitability, I want to comment on our third primary area of focus, cash.

For the ninth consecutive quarter, Artesyn created cash from operations.

We anticipate this will continue through the balance of the year.

Looking to the second half, we remain on track to be operating at a break even level by year-end on modest revenue growth.

I had the benefit of spending several days with investors over the last two months.

Before opening the call to questions, I would like to try and shed some light on a concern a number of you discussed, relative to product introductions from a couple of our competitors now entering the Point-Of-Load market.

For the benefit of those of you who have not followed power technology developments since 2000, I will review a little history.

In 2000, Artesyn and other power companies were talking to investors about the movement to distributive power, and a resulting positive impact on DC-to-DC brick volumes.

However, Artesyn was the only company, as far as I know, to forecast that distributed power would move beyond bricks and into Point-Of-Load.

Fortunately for us, many of our competitors disagreed, some publicly, and did not invest in this new technology.

To paraphrase Mark Twain, if I may, "The sincerest form of flattery is imitation".

A couple of these same companies have just announced their initial Point-Of-Load products.

As they are just introducing their new products, Artesyn will ship approximately $40m of Point-Of-Load modules this year.

We believe we have the leading position in the market, and are committed to increasing it.

I will try to clarify a concern I also heard from several investors regarding the impact of silicon on Artesyn's Point-Of-Load business.

There is no doubt that applications for silicon technology are growing in power, and we believe Artesyn is currently one of the power leaders in the utilization of silicon, as demonstrated by the Typhoon family of DC to DC bricks.

We believe Typhoon products offer the highest density and highest efficiency of any DC-to-DC bricks currently shipping.

This was accomplished through silicon.

The difference in approach between Artesyn and some new competitors is not the promise of silicon in Point-Of-Load products.

The difference is the way we are managing the cost, flexibility and design risk associated with that silicon.

Rather than take on the risk of designing Point-Of-Load silicon alone, Artesyn's approach is to work with power silicon partners.

Working together, we will take advantage of their design expertise and production volumes, and Artesyn's application knowledge.

We are working with several partners, as no one chip or approach is appropriate for all applications in wireless, telecom, servers and storage.

You will see announcements are products are released.

With Point-Of-Load we are talking about a very significant market opportunity.

According to third party research, the market size ranges between $1-2b.

Point-Of-Load demand is currently being served primarily by discrete semiconductors.

At $40m in Point-Of-Load revenue, we believe that Artesyn is the leader in Point-Of-Load module sales.

The size of the market implies there is ample room for success for various approaches, from different companies.

We believe we have found the best approach for Artesyn, one that will allow us to increase our already leading market position in point of load, and further distance ourselves from competition.

At the same time, we will continue to minimize risk, increase flexibility, and lower costs.

I'd now like to turn the call back to David, our moderator, and open it to a Q&A session.

Thank you.

If you do have a question, please press a one, followed by a four, on your touchtone phone now.

If for any reason you need to retract a question, please press a one, followed by a three.

All questions will be taken in the order they are received.

Our first question will come from Louis Miscioscia.

Go ahead please.

Hi, this is Hardik Doshi in place of Lou.

I have a question regarding the gross margins.

Obviously they've jumped up quite a bit from 2002 to 2003.

How much more do you think they'll go up after all the restructuring is completed by the end of the year?

We said in our comments that we expect margins to go up sequentially throughout the rest of the year.

The major events for us for that to occur is, number one, in Q3 we will enjoy a full quarter of the Austrian plant cost structure being out of our cost of sales.

Additionally, in Q4 we will start experiencing the benefit from the closure of the Irish plant.

So we expect margins to go up sequentially, say a point or more each quarter, throughout the rest of the year.

All right, good, thanks.

And also, can you tell me what the utilization rate is currently, and what it will be once all the restructuring is completed, and also like your top five customers?

Sure, the utilization is currently, say in the 60-65% range.

With the closure of Ireland we should be closer to 70% utilization as measured against practical capacity.

Those numbers can be plus or minus 5% depending on mix, as you can appreciate.

So we will still have additional capacity, and as we said before, we expect our fall through rates, once we surpass break even, to be quite handsome going forward until we get to full utilization.

Talking to our top five customers, the top five as they were in the previous quarters, were HP, Sun, Dell, IBM and Nokia.

I'm sorry, and Nortel also, let's talk about the top six.

So it's basically a combination of IT customers and customers in wireless and other forms of communications.

Great, thanks a lot

Thank you.

Our next question comes from Mr. Todd Cooper.

Go ahead please.

Guys, have you seen any change in the percentage of revenue that flows through your Combon program?

Joe O’Donnell: It's pretty consistent, Todd, which would be--I said consistent, now I'm going to give you a range, anywhere from 70-80% of our revenue.

It's that high?

Joe O’Donnell: It is.

Rich is telling me it's probably 65% this quarter.

Todd, we've seen some improvements in distribution and sales through reps.

I believe Joe commented on that, so it's a little bit of a changing picture for us.

OK.

Can you detect any difference in demand between computing and communications equipment customers?

Well, communications equipment, Todd.

We've seen some improvements in distribution and sales through reps.

I believe Joe commented on that, so it's a little bit of a changing picture for us.

OK, and can you detect any difference in demand between computing and communications equipment customers?

Well, communications equipment implies telecomm or wireless.

Well, if you could break out those two also?

OK.

Where we're seeing some upside is in DSL, or ADSL applications; from a couple of our telecomm customers there definitely seems to be a pickup in that.

Not just in North America but in other parts of the world as well.

So, that would be a change.

Wireless, as you know the 3G, where we're selling the products, is a lot less volume than any of us had anticipated.

But there does seem to be an appetite for 2.5G, or Edge Technology, as operating companies are apparently taking an approach of enhancing their networks, but not going as far as the whole replacement that's required for 3G.

In the computing side it varies a couple of percent every quarter.

But roughly it's half our business servers and storage.

I wouldn't say we see a shift in end market, as far as total volume, but certainly a shift among the players, as one takes share from the other at different segments of the server market.

OK, and one last question if I may.

Of the 16 design wins, how many would you characterize as being custom projects, vs. standard?

Joe O’Donnell: Oh, you know, I don't have that answer--oh yes I do.

These guys are on the ball, huh?

It looks to me like about 10 of these, 10 to 11, are what I would call custom products.

The reason you're getting a vague answer from me, the way we characterize it, just so everybody knows, if there's any change at all in a product, even if it's a connector, we consider it a custom.

So, a lot of these are actually off the standard products.

We're changing a connector or a package size, a little bit.

OK.

Congratulations on the better than expected quarter.

Joe O’Donnell: Well, you predicted it, so, congratulations to you as well.

Thank you.

Thank you.

Our next question comes from Mr. John McManus.

Go ahead, please.

flow from operations flows?

Joe O’Donnell: I'm sorry; we couldn't hear the beginning of the question.

Cash flow from operations?

Cash flow from operations, or net cash flow from operations, it was $4.6m for the quarter.

And that's--OK.

And free cash flow?

After investments, remember John, we mentioned that we had to service some acquisition related costs in the quarter.

So, net cash flow after investments was approximately $300,000 to $500,000.

Could you...?

Joe O’Donnell: John, I think another way to look at it is, we spent about $9m on restructuring and finishing out the acquisitions costs of the software business and brick business we acquired.

So that was about $9m.

Cash increase, about $500,000.

So, the operation, without any other benefits, spun off about $9m of cash.

OK.

Joe O’Donnell: What you should expect, looking ahead, in my opinion is somewhere around $5m a quarter, moving forward.

Of cash flow from operations?

Joe O’Donnell: That's right.

Well, do you benefit there, on the Reguline, from the strength of the Euro?

It was just modest, John.

We benefited a few hundred thousand on the strength of the Euro, in the quarter.

We also had expenses, as I mentioned in my commentary, the influence on expenses.

So, we manage, through natural hedging, our position pretty carefully.

The net impact was with the monetary gains also.

In the P&L we had a net benefit, as I mentioned, of roughly $400,000.

Could you put in perspective the Point-Of-Load alliance there with TI and your other partners?

I mean is there something, which you think is highly significant there, and is going to make a difference?

Joe O’Donnell: I think the, well first of all, it's for very specific, at least at this point, applications within Point-Of-Load.

So, it's not across the market.

And, an example of where we think this will make a difference is in DSP chips, where this will be Point-Of-Load power for those.

TI is the designer of these parts.

After research found that a number of customers were very interested in it, a number of our customers, but were reluctant to bring on either a new supplier or a single source supplier with a unique footprint.

So, after discussions with us and Emerson, we agreed that we would take the TI technology and packaging, and become alternate sources, the three or us, for that basic design and package.

So, I think it has the potential of being a meaningful part of our Point-Of-Load revenue.

We are going to have our eye on this sector, but had been investing in memory and processor chip applications as opposed to DSP.

So, this opens up that whole sector to us.

From the order pattern to date, and your experience to date this year, do you still feel that you can double your Point-Of-Load revenues there in '04?

Joe O’Donnell: Well, I have to answer that with a little qualification.

It's a fair question, because I've said that before.

The wins would tell us that would be the case.

After the couple years we've just experienced, I think the one caveat would be will the customers really have the same amount of unit volume or close to it, that they're telling us at this point, or that we've interpreted the forecast to mean?

If in fact customers buy about what they're projecting for those wins, we have enough, a sufficient number of wins to double our revenue next year.

My last question is, when you talk to your technical people, is there anything in the Vicor ZTM announcement there, which you'll feel would be patent-able by Vicor, which would preclude other people from achieving the densities that they've indicated on paper?

Joe O’Donnell: John, I can't answer that.

Certainly, we've looked at the Vicor approach.

I think our people understand it quite well.

It's actually an architecture.

It's not just replacing chip for chip, it's a unique design approach that the customer would have to embrace.

We'll see how that happens.

While some of our products are unique we're taking a more traditional approach to this, traditional in the sense customers will be able to work with other companies as well, with the architectures that we're promoting, which is an intermediate BUS to power the Point-Of-Load devices, or the not isolated, Point-Of-Load.

I'm reluctant to say anything more specific about competitors.

Thank you.

Thank you.

Once again, if you do have a question, please press the one followed by the four on your telephone keypad.

And, our next question comes from Mr. Steve Smigie.

Go ahead please.

Yes, congratulations on a nice quarter.

Actually, my first question, I was wondering, Joe, if you might be able to comment on how the acquisition of Ascom by Delta affects your relationship there with Delta?

Joe O’Donnell: Well, if I were Bruce Chang who, for those of you don't know is the Chairman of Delta, I would've acquired Ascom as well.

Ascom offers them access to, not so much North America but European telecomm systems market.

They, Delta, have been trying to break out of Asia.

The telecomm systems business is a big revenue stream to them, but in Asia, and they've been attempting to expand that without success.

Their belief is that Ascom, and I agree with them, will help them do that.

We are not in the power systems business.

That aspect of it shouldn't have any impact.

Anything else, we'll just have to see how it evolves, Steve.

OK.

With regard to, with the technology feed that you have with some of the Typhoon products, I imagine that some of the competition, obviously, will be trying to leapfrog you there.

Is it that you see that as a potential threat?

Or, is it more an issue still of trying to just develop the market with the advances that you've made in the technology?

Joe O’Donnell: I think we have to presume that competition is going to take a step ahead of us in their next product introductions; and that we're going to take a step ahead of them as we introduce ours, with our next generation.

What I would say is we're working diligently right now, not just to finish out the Typhoon product offering, but to go to the next version of it, which is higher density, higher speed and smaller packages.

So, that's kind of the way technology works.

A few years ago, Artesyn was the leader in DC-to-DC.

We lost that leadership by not staying at the forefront of technology.

We're not going to make that mistake again.

But that doesn't, for one moment, mean we think that a competitor can't hire smart people and introduce good products.

OK.

I have a question back on--so the mix in the server market, you know IBM obviously has been doing fairly well for you.

And, I think you commented on this a little bit, but just to clarify; is it just an issue of IBM capturing share from perhaps some of your other customers?

Or, is their growth also there in the market?

Joe O’Donnell: Well, servers are interesting.

They're not as straightforward as all of us would like it to be.

Because, market data invariably talks about the server market.

But there are three distinct and almost unrelated segments of the server market, and there are probably actually more than that.

One is the low-end server, and then you have the mid-range and the high-end servers.

The price range from one extreme to the other is under $2,000 to $1m.

So I mean, there's a huge range in technology and who the players are in those respective markets.

There is no doubt, within each of those sectors, there's a shift in share from who the leaders are.

But, it's among the same four companies.

The key for us is, if we enjoy increased revenue in a certain sector, is that we're on all the platforms of each of those companies.

The other aspect that's happening in servers that you read about is volumes are increasing.

This is the end market now.

Volumes are increasing in the low double-digits, but the dollars are increasing, if at all, in the low single-digits.

So, there's significant price erosion in the server market, at the end market level, which means it's very important to us to continue our move to low-cost manufacturing in Asia and Hungary, to make sure that that remains an advantage for us, as opposed to a disadvantage.

The last question is, we saw, from the success in your computer board business, I was just wondering if you could comment if that's just a particular customer, or how that came out to be?

Thank you very much.

Joe O’Donnell: You're welcome.

It's a sector, as opposed to a customer, and it's the wireless sector.

They're doing very well, with a number of wireless customers.

That pick up in 2.5G has definitely benefited them.

Thank you.

Once again, if you do have a question, please press the one followed by the four on your touchtone phone.

And our next question comes from Mr. Sanjay Shrestha.

Go ahead, please.

Thanks a lot.

First of all, congratulations on a good quarter.

The first question here is, Joe, you talk about the book-to-bill is up about one, but you're remaining conservative and not changing the outlook beyond modest revenue growth, even though you see the signs of demand picking up.

So, are we implying here that if all goes well, we could actually see a pretty nice profitable quarter by the fourth quarter of this year?

Can you talk a little bit more about that?

Joe O’Donnell: We're expecting that, leaving the year we will be break-even.

And, we're not projecting anything beyond that.

So, if revenue--OK, now that's predicated on modest revenue growth.

If, in fact, there was significant revenue growth, you know, that break-even would have a meaningful fall through, which would help profits a lot.

But that's not what we're suggesting people should anticipate.

Not at this point?

OK.

Fair enough.

And, given the cost reductions, it seems like it's going pretty well.

For you guys to get back to the mid-20s kind of the gross margin level that you had in the previous cycle phase, I guess, what sort of a revenue run-rate do you need to see for you to get there?

Joe O’Donnell: Well first of all, leaving the year, we're not going to be too far from that.

So, it's going to clearly be within our grasp.

What will help us is to spend the full year in China and Hungary, as opposed to not just the one-time cost of shutting down but what are ongoing inefficiencies from doing those shutdowns.

I would expect, although we're going through the budgeting and planning processes now, so keeping in mind we've not finished that, I would expect leaving next year we should be at the rate you just talked about, which is in the mid-20s.

OK, and that would be on what sort of a revenue run rate that you need to see $100m-plus in a quarter revenue?

Joe O’Donnell: Well, about a 10% increase over where we are now, should allow that to happen.

OK, great.

One more thing, out of the 16 significant design wins that you talked about, can you give us a little more sense in terms of what sort of the end market they were coming from?

Joe O’Donnell: Well, our traditional end markets, except one new market, which I would love to talk about, but we're excited about keeping it quiet from our competitors.

It's within, however, wireless and there are several wins in that area.

It's a whole new product area for us.

To me, the exciting part is it's a direct result of a technology investment, but with our existing customer base.

So, there are four wins in that area, which I find very exciting.

Aside from that, the rest are from our traditional applications within either server and storage, which would've been the bulk of those, and then telecomm.

OK, fair enough.

Great, thanks a lot.

Thank you, and we do have another question from Mr. Steve Smigie.

Go ahead, please.

Yes, I have just a couple of quick follow up questions.

On the Point-Of-Load increase that you're talking about in 2004, does that include revenue from the new Point-Of-Load related to the DSP?

It does.

OK, and then just in terms of a look at the industry, obviously you guys are taking some capacity offline.

Do you see a lot of that from some of the smaller players?

Or even some of the larger players out there, that might help bring overall industry capacity back to a more reasonable level?

Joe O’Donnell: Yes, we do.

We see it, certainly from the more rational competitors that talk about what they've done, and, either shutting their factories or moving to contract manufacturing.

So, let's say that's similar to the approach we've taken.

The other aspects of capacity coming offline are consolidations.

Now, there hasn't been very many among major players yet, but there's a large number of $100m to $200m--a large number meaning five to six--$100m to $200m companies for sale right now.

These were much bigger companies once.

So, certainly their capacity has been coming down, and would change a lot if they were acquired or go out of business.

It took longer than I would've expected, but I think we're at the point in that classic capacity curve related to a slow market where we're starting to see it, in big chunks, come out now.

OK, and my just last question for housekeeping, could you give a breakout of what AC/DC vs.

DC-to-DC would've been as a mix?

OK, Steve, this is Rich.

In the quarter our AC-to-DC revenue was actually about 60% and DC-to-DC about 40%.

So, as we stated before, our goal was to get to 60%/40% by year-end and we're seeing that currently.

OK, great.

Thanks a lot, guys.

Thank you.

We do have a follow up question from Mr. John McManus.

Please go ahead.

So, could you give us the top 10, the percentage of the top 10 customers?

Yes.

It's 71%, John.

Could you give us the percentage of the top five customers, which is more relevant?

In a second.

Joe O’Donnell: He just has to add things up, John.

That's all.

It's 49.7% or 50%.

And, did that change a lot there, from the quarter before?

Did that change from the quarter before?

Joe O’Donnell: Not significantly.

What has changed, John, are the top-- 10% customers.

It's the same players, HP, Sun and Dell.

But, I guess I'm comfortable with 70% of our business coming from 10 companies, because there's a huge consolidation in market share going on in our end markets.

And it would only make sense, then, that a smaller number of companies would account for a larger piece of your revenue.

So, I have no problem with that.

Where we've been concerned is the amount of revenue we had in our top three customers, or the top 10%-plus customers.

Now, we're getting that.

We've been working hard not to do less business there, but to do more business in the other seven in the top 10.

We've been pretty successful at that.

So, we've brought the 10%-plus customers, in my opinion, down to a pretty comfortable level now, which is a little bit over, let's see, 34% or 35%.

It was over 40% at some point, so we brought that down to what I think is the right level.

Well, was it over 40% there in the first quarter?

Joe O’Donnell: It was right at 40% in the first quarter.

Could you give us some idea of what the utilization will be after you close the Irish facility?

Joe O’Donnell: It will be very close to 70%, John.

You had talked before about the idea that you might actually consider closing a facility in Germany.

Is this something there which you still feel that makes sense there, from what you can see now, and how would that affect your utilization?

Joe O’Donnell: It would be more of a logistics issue, John, and it's a very small facility, something like 40 people now.

We've moved a lot of the production out of there.

We did have a larger facility in Germany, which we shut last year.

So this is a small facility doing very small volumes, high mix kinds of things, mostly for central European customers.

If we shut it or not, I think from an investor perspective it would be a non-event.

Thank you.

John, let me add to your conversation on the 10% customers.

Please keep in mind that we have diversification while we have 70% of our revenue in our top 10 customers, we're in over 65 separate programs at those customers.

So we don't anticipate the loss of a program to have a material impact on the company.

Thank you.

Once again, if you do have a question, please press one, four, on your telephone keypad.

Our next question comes from Mr. David Defondry of Heartland.

Go ahead please.

Yes, good morning.

Also congratulations on a nice quarter.

Can you talk a little bit about the status of the restructuring program?

Should we expect additional charges as we go forward to the next couple of quarters?

And can you tell us if there's going to be any positive impact on the SG&A line, which has come down nicely?

Dave, this is Rich Thompson.

We expect to have further restructuring charges as required by GAAP.

There are some parts of the restructuring activity that you can't expense till incurred.

We expect to incur approximately $1.5m in the third quarter.

If we close, as we expect to, our Irish facility on time, we don't expect any restructuring charges in the fourth quarter.

SG&A, as you know, Joe has been steadfast in his investment in R&D expense throughout the history of the company in op ex, and he is certainly continuing that at a 10% level today.

We do expect SG&A to remain level or to slightly decline.

We don't see a huge step function today, as we've taken a lot of the cost out of the G&A part of the business, and still invested in sales.

So our pattern is continuous to knock down G&A wherever we find it and can do it, continue to invest in R&D and continue to invest in applications engineering, which is a very important part of our sales effort.

The cost that comes from the factory consolidations, the way we do our books, and it's consistent, appears in the margin.

We characterize almost all of the cost in factories that are indirect people as overhead, and not reflected in G&A savings, per se, but in improvement in gross margin.

Great.

I was somewhat confused, in your comments regarding margin exiting this year versus exiting next year.

I thought initially, in response to a prior question, that you said that we'd be close to those mid 20 margins going out this year, but I think you meant out of 2004.

Joe O’Donnell: What I was trying to say, I'm glad you're clarifying this, because if it wasn't clear to you, I'm sure it wasn't to others.

What I was trying to say is, keep in mind Rich said we should expect going through the rest of this year, about 1% a quarter.

Now we've been saying that since the end of last year that you should see about 1% improvement a quarter.

And, we've done a little better than that.

So if you project 17.5%-18.5%-19.5% or 20% leaving the year, my point was, that's not very far from being at the mid 20s compared to being in the mid teens a year ago.

So that if we continue our progress, which we would anticipate we would, we should be back into the mid 20s as we leave next year.

Gotcha.

OK.

That makes a lot of sense, thank you.

Then lastly, I think I understand this, but in the pre-tax restructuring charge, sorry, the after tax restructuring charge is higher than the restructuring and other charges.

Is that because you're taking a tax benefit?

Joe O’Donnell: That's correct.

OK, thank you very much.

Thank you.

We're showing no further questions for the time being.

Joe O’Donnell: One point of clarification, and then we'll wrap up.

On these restructuring charges that we were addressing, these are the same dollars that we had in a news announcement leaving last year.

So really, nothing has changed.

We are on track for accomplishing the consolidation as we had committed to our investors we were going to do.

If there are no other questions, we very much appreciate your time, and feel free to give Pam a call.

She's been with us now a little less than three months and is anxious to work with our investor base.

So thank you very much.

Thank you.

This concludes the Artesyn Technologies second quarter earnings conference call.

Thank you all for your participation.