艾默生電氣 (EMR) 2003 Q3 法說會逐字稿

Thank you for holding, ladies and gentlemen, and welcome to the Artesyn Technologies third-quarter results conference call.

During the presentation our lines will be on a listen-only mode.

There will be an opportunity to ask questions and instructions will be given at the time.

Thank you for your attention.

I will now turn the call over to your host, Ms. Pam Rembaum.

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

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

For those of you who have not 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, www.Artesyn.com.

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

This call is also being webcast live over the Internet on our website.

The replay with 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 November 4.

Before we begin I would like to remind you that except for historical data, comments on today's call may 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 relating 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 10-K 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 third-quarter financial results.

Thank you, Pam.

Good morning.

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 third-quarter were 88 million, a modest improvement from Q-2 and from the year ago quarter.

The first nine months of the year, sales were 257.5 million, a 4 percent decline from the first nine months of last year, indicative of the year to year market conditions.

Orders in the third-quarter were 84 million, yielding a book to bill slightly less than one and within our normal expected range of 0.9 to 1.1.

Approximately 94 percent of 74 million in backlog is scheduled for shipment in the fourth quarter.

Excluding restructuring charges of 1.3 million net of tax associated with previously announced capacity reductions, and other charges of 2.7 million net associated with retirement of the 50 million convertible note due in 2007, the net loss for the third-quarter was three cents per share, which was two cents better than the analysts consensus.

The quarter's loss according to GAAP was 5.2 million or 14 cents per share.

This morning's release, which has been posted on our website, includes a reconciliation of the net loss excluding charges to the reported net loss per share.

From an operating performance perspective, gross margin as a percent of sales was 20.7 or 3.2 points from the second quarter and nearly 10 points higher than the third quarter and year ago.

As Joe mentioned in his comments in the press release today, this improvement in gross margins occurred a quarter earlier than projected as a result of savings of the closure of the Irish plant and favorable product mix.

Total operating expenses excluding restructuring charges were 18.5 million in the third-quarter compared to 17.7 million in the second quarter this year.

The second-quarter included a 700,000 gain on foreign exchange from Euro translation that was not repeated in Q3.

Research and development expenses were 8.6 million, reflecting our continued commitment to invest in new technologies and bring industry-leading products to market.

As previously discussed, Artesyn entered into a 90 million convertible note during August.

Subsequently the underlying common shares were registered VNS-3 which has been approved by the SEC during early October.

A portion of the proceeds from the offering was used to repay the $50 million convertible note due in 2007.

This action avoided the original notes January 2004 put future by extending our due date to the new note of August 2010.

Additionally, as required by GAAP, we wrote off the remaining debt discount and capitalized debt issuance costs from the note of 3.1 million or 2.7 million net of tax benefits.

This is recorded on the debt extinguishment expense line in statement of operations and is a non-cash charge.

Net interest expense in the quarter was 1.2 million and is expected to be 1.4 million per quarter going forward, as a result of the higher debt level and the coupon rate on the new convertible note.

Similar to last quarter the effective tax rate as reported was 12.1 percent and we expect this tax rate to continue for the remainder of the year.

Turning to the balance sheet, we continue to make progress on strengthening our financial position.

Cash increased to 95.8 million during the quarter from 52.5 last quarter as a result of 36.3 million of net proceeds from the debt offering.

In addition we created 7 million of cash from operations in the quarter.

This was a result of reductions in inventory and accounts receivable offset by finding of 5 million of restructuring obligations, and 3.5 million of new debt issuance costs.

Our working capital measurements improved from last quarter.

DSO improved to 44 days with a reduction in past due accounts.

Inventory levels improved by 4 million for the second quarter thus reducing our day sales and inventory by three days to 70 days or nearly 5.2 turns.

As a result of the convertible debt offering the company was able to improve our over a financial position and ended quarter as net borrower of 4.2 improvement from 4.9 million in the previous quarter.

We now have adequate cash to ensure we are able to sustain our working capital needs as our key markets rebound.

Capital expenditures for the quarter were 1.9 million as we continue to replace older equipment and acquire, acquire the equipment required for our new product ramp up's.

Depreciation and amortization was 5.5 million in the quarter.

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

Thank you, Rich.

Good morning.

I will first discuss the third-quarter performance.

Following that I would like to comment on our progress in three areas of the near-term Company focus.

The same areas reviewed with you in the last three conference calls; revenue growth, balance sheet improvements and profitability.

Prior to opening the call to Q&A, we will take a few minutes to discuss progress in two new market areas, power systems and power amplification.

After three quarters it is clear that stability and predictability has returned to the communications market, as well as Artesyn's performance.

Each of the first three quarters of 2003 has unfolded pretty much as we discussed with you last January.

Revenues have been modestly up sequentially.

Margins have improved each quarter.

And operations have been cash positive each quarter.

I would like to talk about each of these.

First, revenue.

Q3 was the first time in nearly three years that revenues were greater than prior year.

While only a 2 percent increase, we believe it is an inflection point.

This quarterly revenue should be greater than prior year moving forward.

On a sequential basis, sales were essentially flat at 88 million.

With about 35 percent of our power revenue European based, we had anticipated a slight summer downturn in both revenue, which was down about 2 million and bookings.

At 84 million in incoming orders, the book to bill was 0.96, within what we consider in the range of 0.9 to 1.1.

After a difficult 2.5 years in both year to year and sequential comparisons, the revenue trends appear to be moving in a positive direction.

Looking at revenue by end market, we are continuing to experience growth in wireless, which accounted for 26 percent of Q3 sales, server and storage was down to 22 percent, as carrier and enterprise networking increased to 12.

In addition we are particularly pleased that our new higher margin distribution division continues to account for an increasing share of our revenue, 18 percent for the quarter.

As I mentioned, in addition to revenue I would like to discuss gross margin and cash.

Gross margins continue to increase as we move towards profitability.

At 20.7 percent, Q3's gross margin represents the first time since the fourth quarter of 2000 that gross margin topped 20 percent.

In addition, it is the fourth quarter of sequential improvement.

With restructuring essentially complete, we anticipate benefiting from margin improvements through '04 as manufacturing utilization reaches 70 to 75 percent.

Cash.

As I mentioned in addition to revenue and profitability I would like to comment on our current cash position.

For the 10th consecutive quarter, Artesyn created cash from operations.

In addition, the proceeds from the convertible notes issued this past quarter, give us the opportunity to continue our investment in the growth of the company.

We anticipate cash will continue to improve on a quarterly basis through next year.

As a management team we will recognize that to build investor confidence, it is critical that Artesyn's performance exhibits predictability in addition to improving metrics.

As I indicated in my introduction, the Company has performed each quarter in the key areas of revenue, profitability, and cash as communicated to you this past January.

Looking to the future, during the third quarter we were awarded 22 major design wins, estimated at $47 million in annual revenue over the life of the projects.

Year-to-date major design wins are 52, putting us ahead of 65 for the year.

We also won 115 programs each valued at less than half a million in annual peak revenue during the quarter.

Total estimate of revenue for year-to-date design wins was more than $450 million.

During the quarter we continued to invest approximately 10 percent of sales in R&D.

This commitment to product development has supported our successful entry into new markets, including wireless and point-of-load.

We entered the wireless market in 2000.

It now accounts for 26 percent of our revenue.

Industry leading investment in R&D also supported our 2001 entrance into the point-of-load market, which now accounts over 10 percent sales this year and growing to about 20 percent next year.

Our commitment to R&D has allowed Artesyn to achieve the market-leading position in point-of-load technology.

While at the same time, several of our better known competitors are just now announcing the first point-of-load product.

I mentioned point-of-load and wireless as two rapidly growing, but relatively new markets to Artesyn.

To remind you of the organization's ability to identify new opportunities within communications, enter these segments and grow significant revenue in a relatively brief period time.

As background to help you appreciate my excitement about two new wireless sectors we are entering, power rectifiers and power amplifiers.

Both are still in development; however we have already booked design wins that should by themselves account for approximately 15 percent of Artesyn's revenue in the 2005.

As with point-of-load and wireless, I'm confident rectifiers and power amplification will become significant contributors to Artesyn's growth.

Looking to Q4, we should see a similar pattern to first three quarters of 2003, stable to slightly increasing revenue and improving EPS should take us close to breakeven.

We are growing increasingly confident that revenue and order patterns over the first three quarters of the year support our strategic decision to stay focused on the communications market.

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

I would now like to turn the call over to a Q&A session.

Thank you. (OPERATOR INSTRUCTIONS) Louis Miscioscia of Lehman Brothers.

This is actually (indiscernible) in place of Lou.

I had a question regarding your breakdown between power conversion and communication products.

The power conversion actually declined slightly sequentially while the communication products were up by about 25 percent is that the seasonality or is that like an ongoing trend?

As I mentioned in my comments, we had anticipated going into the quarter that in the power sector where about 35 percent of our revenue comes from Europe, that we would see a slight downturn on a sequential basis which we in fact did.

It was down about $2 million from prior quarter.

This is power we are talking about.

I would say that is typical and being typical is what led us to expect it that it would occur again this year and it did.

So going forward you think the mix should remain about the same?

I would expect each summer quarter which has been the case in the past since it has become 35 percent of our revenue stream that we would see less activity in the summer months, particularly July and August in Western Europe than the balance of the year.

And could you give some color as to what you're seeing in terms of pricing, any pressure?

There has been pressing pressure in the marketplace every year.

The key is to be sure that our costs, which primarily are represented by material and overhead, that we are able to bring those costs down in equal rate as the price erosion, which at this point we have been able to accomplish.

Or a little better if you look at the improving margins.

It is hard to give you a number although everybody likes to hang their hat on one that says pricing is coming down 6 percent, 5 percent 9 percent.

This is all over the map depending on the type of technology and the end markets.

I would say pricing is single digit somewhere between six and seven percent erosion.

Great.

And lastly, could I get your top five customers please?

Do you want it on a year-to-date basis or quarterly, which would you like?

Year-to-date and quarterly if it is possible?

Everything.

On a year-to-date basis, there is not much of a change.

It was HP, Dell, Sun, IBM, and Cisco.

And again Q3, a little change.

HP, Dell, Cisco, Sun, IBM.

Great.

Good job on the margins.

And John McManus of Needham & Company.

Would you talk a little bit more of the components there that incrementally rose gross margins; the effect of distribution, the effect of the Irish plant, the effect of the communications products?

Maybe talk about how all those factors there in proportion there raised the gross margin?

Well, it's a number of factors, John.

You are on a part of it, no doubt and that is the margins on the products we sell.

The other part is the completion of the consolidation efforts for the last major piece being Ireland.

So it is both factors that contributed to it.

If we look at the gross margin percents, the distribution business is 50 percent plus higher than the other part of our business, so that is definitely a positive contributor.

And then the gross margins at ACP, as you well know, are significantly higher, although the revenue stream in smaller because they are heavily dependent on intellectual property through software.

Rich tells me that on balance it is about half and half, the margin improvement, meaning between cost reductions and product mix.

I would assume that you will see the full effect of the Irish plant closing in the fourth quarter?

That is correct.

Could you tell us what the utilization factor is now?

It is certainly below 70, John.

I think we're using a number about 60 to 65 percent.

Now I will tell you that is not a very precise number and there is a lot of factors or variables I should say that go into different people's calculation of utilization.

Is it square footage that is sitting there?

Is it the production equipment?

Is it the headcount?

But consistently with our approach, at least we know it is improving because we haven't changed the measures and you should calculate it at 60 to 65 percent right now.

You seem to be on your goals on the (indiscernible) load marketplace that you would do close to 40 million this year and close to 80 million next year.

Is that correct that you are putting much on your plan as far is revenue growth from that area?

We certainly are this year, John, up from 20.

These are round numbers, but they are pretty close.

Up from 20 million last year to 40 million this year.

At this point, it looks like it would be 80 million next year.

Thank you very much.

Lee Zeltser with Needham & Company.

If I could follow up on pricing, can you give us a sense if it's disproportionately higher pressure in any one product group, perhaps on the front-end versus D.C. productline or anywhere disproportionately?

Well I suppose there would be a product group, but I think it is driven more by end market, and that would be the high-volume server applications.

That is clearly where we see the greatest price pressure.

In those applications we sell what we called gray boxes.

Those would be the AC or silver boxes, I'm sorry.

Those would be AC to DC custom designs, custom for IBM or Sun or HP or Dell.

And then we also sell quite a lot of point-of-load.

And the point-of-load is because there is far more technology involved.

It is a better margin product, even within that market sector than the AC to DC is.

Turning to design wins, can you give us a sense of how they were distributed on a growth market perspective?

I apologize.

We did not provide that information for this and we look at it by product.

Certainly we look at it by division, but I would just be pulling numbers off the top of my head to try to answer that right now.

I would be happy to get back to you with it.

Sure.

That would be fine.

Thanks very much.

Todd Cooper of Stephens & Co.

Noticeably absent was any fourth quarter revenue and earnings guidance.

You care to offer any?

Actually, Todd, I tried to convey at the end of the call that looking to the fourth -- I will read it again for everybody.

Looking to the fourth quarter, we should see similar patterns to the first three quarters of 2003.

Stable to a slightly increasing revenue and improving EPS that should take us close to a breakeven.

Okay, very good.

And in the third-quarter, what percentage of the turns business?

Let me see if somebody can calculate that, Todd, while we are on the call.

I do not know that number off the top of my head.

One more if I may.

Can you talk about the linearity of orders as you progress through the third quarter?

The order rate let me make sure I understand the question.

The order rate going through the quarter, did it improve, change or decrease?

Is that what we are asking?

Exactly.

Was September better than July and August?

On the order rate, September was definitely better than the earlier part of the quarters.

There is no doubt about it.

And has that trend continued so far in October?

Actually October -- are we talking about orders?

On orders October started out pretty positive for us.

Thank you very much, Joe.

Craig Irwin with First Albany.

Could you help us understand what drove the improvement in the communications products segment and potential contribution from that segment to gross margin in the quarter?

Sure.

What contributed to the growth was or is I should say because it is ongoing, the wireless applications at their end, the typical market leading customers we sell into.

And that is anticipated to continue.

At least it looks at that right now, and the margins are a little better then twice what the company average is and that was primarily due to the intellectual property and the software.

Are you expecting modest sequential improvements here?

Or considering the 25 percent sequential increase the possibility of a pullback in revenue there for the next quarter?

Well, when you are project drive, which our customers are, there is always the possibility of lumpy performance from one quarter to the other.

Nobody can guarantee it is going to be up in a linear direction.

Right now there is nothing that tells us this quarter should be less than the prior quarter.

And if you could talk about the closure of your Irish facility, do you still expect about 1.8 million in savings from operating expenses from the closure of that facility?

Numbers have not changed.

The numbers have not changed, excellent.

And what exactly was the timing of the closure of that facility?

It was completed in the month of September.

Okay, excellent.

And if you could talk a little about your design wins, what are the things that -- it would be really helpful if you could give us some color on -- you gave great metrics on the dollar value of your wins year-to-date, but how many of these wins are for Next Generation of existing products where Artesyn is not included?

Which we represent a nice incremental opportunity for you where you can be pretty sure that the products at least have some volume in the market today?

That's a good question.

We figure this is a little conservative approach, but we product average is about three years and obviously that varies by end market so that we need to regenerate revenue through new projects.

One-third of this year's revenue just to stay flat.

Now we are ahead of that pace comfortably at this point which is comforting.

The incremental area that is pure incremental, would be the amplifiers and power systems I mentioned which are in those looking numbers I discussed, or most of them are.

Some will be in this quarters.

But the 15 percent revenue is all incremental because those are two new markets for us.

The point-of-load wins, a lot of it is incremental because it is new designs that would have been centralized power the last time around, and the AC to DC silver box is now going towards distributed power.

Excellent.

If we could just touch on the breakdown of your Power Conversion segments products sold in the quarter, could you break it down AC to DC, DC to DC, point-of-load for us?

Yes.

Bear with me.

I have to figure out how to read this thing.

Okay, thank you.

I needed help on that one.

On the AC to DC I'm going to do the round numbers.

Six percent, and DC to DC, 40 percent.

And what percentage was point-of-load in the quarter?

Again I'm giving round numbers for competitive reasons I don't want to be exact.

But about 15 percent.

15 percent, excellent.

Great.

Thank you very much.

For people if they try to numbers up even I could figure out that was more than 100.

The point-of-load we treat as a subset of DC to DC, so when you ask me numbers or I talk about it, point-of-load is again a subset of the DC to DC numbers.

Excellent quarter,

Going back to a question earlier from Todd Cooper at Stephens, he asked about the turns business in Q3.

It was approximately 15 to 18 percent in the third-quarter.

We would expect those kinds of numbers to continue to go forward.

If you recall during the down cycle we had some quarters where relied on turns as much as 40 percent, so the order to shipment window, while it is still short, we have seen a pickup in orders obviously.

Next we have Mr. Steve Smigie with Raymond James.

I was wondering if you could comment on the progress of the Typhoon products?

The products -- okay.

To make sure I answer the real question.

You are asking about the market progress of it?

Yes, exactly.

The product is being sampled at a few places.

We have orders for what I would call -- the production parts, a perspective but they are preproduction for the customers because they are going into their engineering samples or prototype samples, so we're not shipping any high-volume Typhoon products at this point but we are again shipping small volumes into what we think would be important projects at the good number of customers.

Okay and how has the design activity been?

Those would products where the customer has designed us in or applications.

So from that perspective design activity is going well from a customer Artesyn perspective.

As far a Next Generation Typhoon, it would be a mistake for me to tell our competitors on this call what we are doing.

There will be a Next Generation in the not too distant future ensuring that we stay -- there is no question we are at the leading edge of the technology right now versus competition and our intent is not lose that lead.

Okay.

Could you talk a little more about the rectifier and power amplifier markets that you are now focusing on?

I'm very excited about this, as I tried to convey in my prepared remarks.

It is a good example, I believe it will be a very good example of what Artesyn has done before within communications, identified applications we're not in, and then to invest in those.

And these are the two most recent, which are about to come to revenue.

They open up -- if you add them together, they open up and two women $2 billion if our market numbers are correct, of additional market space to us that we have just not been in before, with our existing customers.

So we think that we will continue with these products to get the same kind of success we have had with wireless and point-of-load.

So it is our incremental business for us as wireless was when we got into it and as point-of-load was.

Okay.

Could you talk a little about maybe about customers like Nokia and Nortel?

I think one of your stated goals is to become a dominant player in the communications side and I was just wondering if you had seen any pickup in the end market that suggests any sort of substantial recovery maybe in '04?

Without being customer specific, because I learned that lesson about five or six years ago, that customers don't appreciate you talking about what is going on in their companies.

I will talk about it generally.

Nokia, for those that may not know, is our sixth largest customer and Nortel is our seventh-largest customer.

The wireless business, which both companies participate in, is clearly seeing an upward trend.

That there is no doubt about.

The landline business -- and I'm not being customer specific -- the landline business is not seeing an upward trend.

I think what most analysts, and us included, and customers included are trying to figure out, will the landline business be flat or will it be down modestly next year?

And frankly we don't know.

But again, what we do is that the wireless is clearly picking up.

Okay, the last question is to housekeeping.

You talked a little bit about end market breakout, but I think but I didn't get numbers added up to 100.

Maybe I missed something.

I wondered if you could go through that again?

If you talked about to servers, storage, wireless, etc.?

Basically the numbers were up.

Carrier enterprise networking was 12.

Dish, 18.

Wireless, 26 and computing was 44.

We may have said 42, so that adds up to 100.

There could be some rounding by one number from segment to segment.

Great, thank you so much.

Mr. Roger Norberg with J.P. Morgan.

Could you talk, you have got a lot of moving parts in your product and end market mix right now and going forward.

Assuming that business demand in general doesn't backtrack over the next four quarters, could you take a little stab of what you think a good long-term gross margin target range is going to for Artesyn with the mix and change in capacity footprint, etc., etc.?

How far out do you want me to use as a frame of reference?

Say if you are exiting a year from today?

At this point we should be -- it would look -- let me use all the right kind of caveats.

It would look like it should be in the mid 20 percents.

So that would say if you step back a year -- we talked about the time last January or a year ago today we talked about investors should expect a one percent about sequential improvement per quarter from us.

I would expect to see that kind of things through '04.

Okay and just another question.

As you mentioned there was a lot of dynamics going on for you with your server customers, both from the technology and a mixed standpoint in terms of how their end markets are pulling product.

Can you take a stab at between the translation of where their end market mixes are going and where your product mixes are going in terms of more distributed power?

Would you say that you are generally share with all your major server clients gaining or slightly losing?

I think there's no doubt we have gained share.

Some places I wouldn't be as comfortable saying that, but in the server sector I think it is no question these companies have been very aggressive at reducing their supply base and one of the market leaders who a little over a year ago we didn't even sell to, we took great pride in penetrating and now it's become one of our top five customers.

And the share on that customer is growing rapidly.

So we are selling to the top four server people as one of their key suppliers and the direction is positive for us.

Thanks very much.

David Fondrie with Heartland Funds.

The restructuring that you have done over the last several quarters including charges, are we going to see any impact on SG&A at all or do you anticipate that SG&A will stay at this kind 9.8, 9.9 level going forward?

Sequentially it has been -- if you adjust for the currency translation in Q2, it has been right there for four quarters.

We took out our SG&A costs earlier in the restructuring mode in 2001 and 2002.

We are expecting it to continue at this level or slightly below.

The don't see any step functions occurring throughout the same through next year.

So the restructuring that has been accounted including the closing of the Irish facility gets reflected in cost of sales?

Generally most of it is cost of sales and some of through IT, which gets allocated or spread throughout the whole P&L.

So geography-wise on the P&L, most of the improvements are going to be in gross margin.

And lastly, related to that, if we look in Q4 with the Irish facility being completely closed, you saw great improvement in gross margins from Q2 to Q3.

Can we expect about the same -- which I think you've defined as 50 percent due to mix and 50 percent due to the Irish closing -- could we expect the same type of improvement in Q4?

On margins as a result of the Irish complete closing of the Irish facility?

I don't think we will see a full 2.5 points step up that we saw from Q2 to Q3.

I think you will see improvement in gross margin in Q4.

I guess the Irish facility will be about half of that, so maybe it would be 1.25 or something like that?

And we should see some improvement from the Irish plant extending into Q1.

As you might remember, these plants had ongoing production.

As the production was shifted to other plants, it was the equivalent of a new product introduction into that plant, which adds cost.

So we expect to gross margin improvement throughout 2004 from the closure of all of these plants.

Great, and lastly, are there any significant new programs that you ramped up in the third-quarter or are anticipating ramping in the fourth quarter?

(multiple speakers) you are asking for this quarter in Q3 and the Q4 any large ramp ups?

As far as new programs, the answer would be no.

As far as major ramp up where we spent a tremendous amount of energy, the answer is yes.

And that is when we moved the Typhoon line and all of what goes with that from Ireland to China.

So during the quarter, not only were we closing the Irish facility, but we were moving a new very high-tech line across the world and brought it up into production.

So that would be more of than just introducing a large new project.

That would have to be a fair amount of expense I would think it was associated with that.

Expense, pain, anguish, all of those things.

Does that reflect primarily in the cost of sales line?

A lot of that cost is in the restructuring.

Great.

Thank you very much.

Steve Smigie from Raymond James.

Just some follow-up questions.

I guess IBM was your number four customer year-to-date, but member five for the quarter.

I was just wondering if there is a reason it has shifted back down.

I thought things had been going fairly well and I just wonder if you could talk about that specifically at all?

Yes I look at where they have been.

Just to show you how things can bounce around, but it's always the same names, which I think is key, that fall in this top-10 or top-5 customer list, but from quarter-to-quarter they can clearly bounce around.

So if you look at IBM I will just lead where they said each of the first three quarters of the year.

Fourth, fourth, fifth, and then fourth on balance for the year-to-date numbers.

When I look at the difference in dollars from one quarter to the next, it is very small.

I wouldn't read anything into that at all.

I am not.

I guess regardless of that minor shift, IBM has come up quite a bit as a customer for you.

Is that representative of not just you capturing market share at IBM, but also IBM capturing market share from some of your other customers?

Or is it just simply you getting market share at IBM?

I think that is a good would question.

Again, without talking about our end customers' performance in their end markets, a key approach for us has always been when we have identified a market to then do everything we can -- we call it "target" -- the market leaders.

And if we have been successful, as we have in servers, that we are selling to each of the market leaders, then shift from one company to the other does not have an impact on us unless we are on the wrong programs.

So I have my own opinion is IBM gaining share or not, but it is not appropriate for me to talk about that.

What we are comfortable with is the growing revenue base we have at IBM and the new project wins we have at IBM.

Is your penetration on the server side, is that largely related to point-of-load or is it also other bricks and AC-to-DC as well?

Well, in the our high-end servers, the UNIX-based stuff, there are a lot of bricks.

But in the midrange servers, it is primarily silver boxes, which are custom -- that's a term we use for custom AC-to-DC -- and now in the last generation or so, a strong move to point-of-load working with a front end still being is server box, but a different kind of silver box.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Craig Irwin of First Albany.

I don't think you mentioned this yet, but do have the percentage of revenue that came through VMI (ph) in the quarter?

It is about 40 percent, I believe.

Is that correct?

Yes, 40 percent.

Thank you.

Keith Curtis (ph) at Groundpoint (ph) Capital.

I got on the call a little late, so sorry about this.

Could you just restate what your guidance was and what the book-to-bill was in the quarter?

Okay.

The book to bill was 0.96 and we for a number of years have conveyed to investors that we look at a range 0.9 to 1.1 as the appropriate range for us to be in the in a given quarter, so that 0.96 would be comfortably within that range.

And as far as guidance, when I prepared my remarks, I thought I did such a good job and you are the second guy to ask that question, so I guess I didn't.

I missed the remarks.

So, I'm sorry.

Let me read to you again and for others on the phone because I think that is the right way to do this so everybody is hearing the same thing.

Looking at Q4, we should see a similar pattern to the first three quarters of 2003.

Stable to slightly increasing revenue and improving EPS.

That should take us close to breakeven.

And we did not provide any guidance for '04, except generally talking about margins should continue show sequential improvement.

Okay, thank you.

It appears we have no further questions at this time.

Thank you all for joining us for our third quarter results conference call.

This now concludes today's conference call and thank you for your participation.