艾默生電氣 (EMR) 2004 Q2 法說會逐字稿

Thank you for holding, ladies and gentlemen.

Welcome to the Artesyn Technologies Second Quarter Earnings Conference Call.

Today's conference is being recorded.

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

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

I thank you for your attention, and I'll turn the time over to your host, Ms. Pamela Rembaum, Director of Investor Relations.

Please go ahead.

Good morning, everyone.

And thank you for joining us for our second quarter 2004 conference call.

On the call with me this morning is, Rich Thompson, Artesyn's CFO and Joe O'Donnell, Artesyn's 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 8-K with the SEC.

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

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

Thank you for holding, ladies and gentlemen.

Unfortunately, we've just lost the feed from our presenter.

And we will switch lines to music until the conference can resume.

Thank you.

(Pause on account of some technical issue)

...and thank you for holding ladies and gentlemen.

We will now resume the second quarter's earnings conference call.

Thank you.

I apologize for the slight delay.

We had a slight technical difficulty.

And 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, another 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 event, future events or results.

Please refer to our filings with the SEC, including our 10-K filed on March 10, 2004, for additional information.

Now, I would like to turn the call over to Artesyn's CFO, Rich Thompson.

Thank you, Pam, and good morning.

Sales for the second quarter were 105.5 million, a 20% improvement from the second quarter of 2003, and a 9% sequential improvement from Q1.

Orders in the second quarter were 106.3 million yielding a book-to-bill ratio of one-to-one.

Backlog at the end of the quarter was 97.1 million, with approximately 92% or 90 million scheduled for shipment in the third quarter.

Artesyn achieved profitability for the third quarter in a row.

Reporting second quarter net income of 3.1 million and earnings per share of 8 cents, which was 1 cent better than the First Call analyst mean.

Excuse me -- EPS also compares favorably to Q2 2003 when we reported a net loss of 4.2 million or 11 cents a share.

From an operating performance perspective, gross margin as a percent of sales was 25.1% compared to 25.4% in Q1 and 17.5% in Q2 last year.

As improved manufacturing fixed costs absorption attributed to gross margin performing better than our guidance in last quarter's earnings teleconference.

Total operating expenses in the quarter were 21.2 million or 20.3% of sales, which is slightly lower as a percent of sales than the first quarter, due to a decrease in R&D investments during the quarter, caused by expense timing differences on certain new development projects.

Net income expense in Q2 was 1.3 million, similar to our expectations.

The effective tax rate as reported was 24% for the second quarter; this is lower than our prior guidance of 27 to 30% for the year.

Again, we expect an effective tax rate of approximately 27 to 30% of pre-tax net income during 2004.

And as previously mentioned, quarterly fluctuations in the effective tax rate may occur due to discreet tax events, such as, change in tax rates, tax legislation or judgmental contingencies on tax filing positions.

Before we move to the balance sheet, I would like to remind those who model the company that you should review your per share calculations, particularly, in applying the if converted accounting methodology to the convertible issue.

This quarterly treatment influences are per share calculations, as earnings approaches 9 cents per share in a quarter.

Now, turning to the balance sheet, we ended the quarter with a 100 million in cash, as we increased our net cap position to 10 million, net of outstanding long-term debt obligations.

We remain focussed on working capital.

Day's working capital for the second quarter was 43 days, similar to the first quarter and an improvement of 17 days from a year ago.

Capital expenditures in the quarter were 5.1 million, up from the prior quarter, but inline with the 2004 guidance that CapEx will be between 15 and 20 million in 2004.

The increase is generally due to the purchase of SMT and automatic test equipment to support new production introductions -- new product introductions, excuse me.

Depreciation and amortization was 5.6 in Q2, and we are - and currently our factories are operating at approximately 80% of practical - I'm sorry 85% of practical capacity, up from the early 75% in the year 2003.

Thank you.

I'll now turn the call over to Joe for his business review.

Good morning.

In January's call, we outlined Artesyn's 2004 objectives.

As we did in 2003, we will use the quarterly call format to keep you updated on our -- on our progress towards achieving these objectives, including maintaining profitability, growing market share, entering new communication market segments, and continuing our industry-leading position in technology.

As we entered the third quarter, I am pleased to report; we are well on our way to achieving each of these objectives.

I would like to use our time together today to discuss them individually.

I will then conclude my remarks with an outlook for the second half.

First, profitability, throughout 2003, our most visible internal objective was to become profitable in the fourth quarter.

We achieved this.

In 2004, our profit objective is to increase earnings throughout the year.

After two quarters, we are well on our way to achieving this goal.

Longer term, our objective is to re-establish Artesyn as the power sector's most profitable company.

Increasing demand in the higher margin wireless sector, growing DC/DC brick sales have both positively contributed to gross margin.

In addition, as factory utilization increases beyond the current 80% range, gross margin should be positively impacted.

In January, we discussed that you should expect to see gross margin percent increase by 4% throughout the year from Q4 2003's 22%.

At 25% for the first half, we are comfortably on the way to achieving our gross margin objectives for the year.

Second, the second objective for 2004 is to grow our market share.

The two criteria we use to judge market share growth, revenue, and project wins, clearly demonstrate Artesyn is gaining market share.

First, revenue.

Revenue is a measure of near-term market share.

With 18% to 20% year-over-year growth over the last three quarters, there is no question Artesyn is gaining significant share in a market to believe -- that we believe is growing in the mid single digits.

Our fastest growth is coming from the wireless sector, which accounted for 29% of sales in Q2.

The server storage sector declined to 41%.

Distribution remained at 18% of sales in the second quarter and telecom, at 12%.

Program wins.

Design wins are an indication of our future revenue streams.

Our goal for the year is 60 new program wins.

In Q2, we recorded 29 major wins with estimated lifetime revenue of $123 million.

In addition, we received more than 130 design awards for smaller programs with estimated annual revenue of less than $500,000 each.

During the first six months of 2004, we have been awarded 48 major program wins indicating that we should comfortably exceed our goal of 60 for the year.

Considering some investors' current interest in point of load, you may be particularly interested to know that nearly half of the major program wins were for point of load products with projected lifetime revenues of $48 million.

This $48 million is in addition to the 50 million to 60 million point of load we anticipate shipping in 2004.

When we look at Artesyn's market-leading position in point of load, this $100 million of revenue is either shipping in 2004 or tied to specific customer programs.

Compare this to competitors with minimal revenue attempting to establish a position in a point of load market, and still talking about future program wins.

Now, new markets.

The third prime objective for 2004 is to enter new communication market segments.

To remind you how important finding new segments is to Artesyn, in 2003, 35% of our revenue came from sectors in which we did not participate in 2000.

In January, we discussed that Artesyn was entering two new communication markets.

Rectifiers and amplifiers.

We believe they will account for 15% to 20% of total corporate revenue in three years, beginning the first -- fourth quarter of this year.

Finally, technology.

Through investments in R&D, we intend to enhance our leading technology position in both DC/DC bricks and point of load.

Our improving earnings position and strong balance sheet will allow us to continue investing about 10% of sales in product development.

Excuse me.

We have some feedback.

As was rectifiers and amplifiers -- all right.

I apologize for the problems we're having with this phone system today.

Let me go to the outlook.

Regarding our outlook for the balance of the year, there is no significant change to the guidance you've received over the two prior conference calls.

You should expect to see modest sequential quarterly revenue and earnings growth with year-end margins in the mid 20% range.

If we could just have the moderator answer me for a moment, are you getting feedback on the conference call or are we just getting that here?

Unfortunately, yes.

The feedback is being heard on the main call.

OK.

What we're going to do is disconnect ourselves and call back in.

And so I would ask the participants to hold on the call.

That will take us no more than 60 seconds.

And we'll see if that clears the problems.

Thank you.

And ladies and gentlemen, once again we'll be placed temporarily on a music hold.

Thank you.

And thank you for holding, ladies and gentlemen.

We will now resume the conference.

Please go ahead.

This is Joe O'Donnell.

Hopefully you heard the conclusion of my remarks on the outlook.

We'll now turn it over to a Q&A session.

I do apologize for the technical problems we're having.

I guess the bad thing of leading technology is you can transmit data rapidly the disadvantage appears to be it (inaudible) pass over those lines.

Can we have a Q&A session now, please?

Certainly.

Thank you.

To ask a question, please press the "one" followed by a "four" on your touch phone.

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

All questions will be taken in the order they are received and you'll be placed back in the conference following your question.

Once again, for questions or comments, please press a "one" followed by a "four".

And our first question comes from Mr. Louis Miscioscia.

Please go ahead, sir.

OK, this is Harty Schoshi (ph) for Lou.

My first question was basically more macro related.

I know your guidance was for more a normal seasonality and your inventories are fine.

But just trying to get more color on the overall demand, are you seeing more caution recently from your customers?

Give us little more detail on that.

I wouldn't say we're seeing more cautious demand from customers.

I would anticipate, you know, year-over-year, you will see the same kind of growth rates or maybe slightly better than the first half of the year.

That would be implied by the sequential improvement.

So, I think a fair comment would be there are some marketshare shifts among our customers in various sectors.

Maybe the reason we don't feel a general caution from our customer base is that being fortunate enough to doing business with each of the market leaders in our respective sectors, as long as those markets are growing, we benefit from that.

All right.

Great.

And just looking at the total R&D expenses, year-to-date, it adds up about $20 million or so.

Given your guidance of $45 million, I guess, you expect to expend 25 million in the second half, now is that all in DC/DC and embedded boards or are there some other products as well, the incremental expenditure would be in?

It's in three primary areas.

The first two that you identified, and then the third advanced telecom architecture, which is, for those that don't know, this is an area that investors really should begin to understand for subsystem suppliers particularly because it is the new architecture that we believe will be dominating the wireless and telecom markets in the years ahead.

So, we will be investing, we have been and will continue our -- increasing our investment in those three areas.

All right and just one last question.

I know I guess your guidance was to kind of exit 2004 with gross margin around 26%.

Where do you think the peak margins probably would be -- would that be like in the high 20% range?

And how long will you think you would get to take to get there?

I would suspect you will continue to see improvements next year in our gross margins for a combination of reasons.

More sales into the - higher percent of sales let me say that into the wireless sector.

More dollars in revenue in the DC/DC area.

That includes point of load.

Point of load is a subset of DC/DC.

And then finally our utilization of facilities, as that increases, that will quarter by quarter, at least that's what we anticipate, improve margins next year as well.

So it's difficult right now to give you specific guidance into margin increases for next year on a quarterly basis.

But we would fully expect to see improvements over year-end levels in '04.

All right.

Great.

Thanks a lot.

Thank you.

And our next question comes from Mr. Todd Cooper, please go ahead, sir.

Joe, it looks like your 180-day backlog relative to last quarter is a little stronger than your 90-day backlog.

Can you discuss that and tell us what you think is going on there?

It's primarily, Todd, related to the wireless sector and getting some longer-term we all like to use the word now over last year, so visibility.

Getting some longer-term commitments from customers in that space.

I think it's probably no more complicated than that.

And this may -- that may lead to my second question.

I recall two fairly large rectifier design wins in the wireless segment that was supposed to start in the second half of this year, can you give us an update on those?

Right.

They will, first of all.

So there is no change in schedule.

It's in the fourth quarter, and those are not in backlog right now, or if they are, it's very small amounts.

We shipped pre-production models on one, so we're pretty confident that the customer will be there, meaning his appetite in the fourth quarter, as planned.

And the other, their development schedule and ours is on target.

They'll certainly have to get some orders to take the product.

But we feel pretty good about both projects in the fourth quarter.

OK.

And lastly, can you give us an update on the patent litigation with Vicor?

Rich, why don't you answer that one?

Sure Todd.

As the public -- as publicly known, the Appeals Court remanded it back to the District Court to Judge Saris (ph), and there is really no more to report there.

As you may know, we have an agreement, which exonerates over 90% of our accused products in the case, and we suspect the next action will be working through a resolution on those.

But, given the amount of accused products is pretty minor.

We don't think it will have a significant impact on our balance sheet.

If the plaintiff continues to win in this action, there is a chance, though, however, that the whole suit could be exonerated.

OK.

Thank you, and congratulations on a better-than-expected quarter.

Thank you.

Thank you.

And our next question comes from Mr. Lee Zeltser.

Please go ahead sir.

Hi guys.

A few questions, first off, if you can talk about linearity in the quarter month-to-month, what was kind of the trajectory of strength?

OK.

If you look at it on a pure arithmetic basis, first of all, for people that may not be aware, the calendar quarter is four, four and five weeks.

So the fifth -- I'm sorry -- the third month of each quarter, because of that one simple fact, will be higher.

Now, there is another factor, which is a little less straightforward.

And that is demand is invariably higher in the fourth -- I keep saying that, in the third month of a quarter.

So, you'll agree in one month, for those two reasons, if you said it was 55% of revenue or something in that, you wouldn't be far off.

OK.

And it seems to be consistent, by the way, Lee.

I mean, from quarter-to-quarter.

OK.

If you took that extra week out in June, would you still be up over May?

I don't know the answer to that.

OK.

I mean looking at it that way.

OK.

Only reason I asked was because some of the vendors overall in technology have kind of talked about a weak month of June and summer seasonality starting early, but you guys have not seen that.

Not at this point we have not.

And then, if you can talk about raw material pricing.

The component markets have still been pretty strong and pricing is still nudging up modestly.

What have you seen on that front?

I think you've just described it accurately.

Yes.

In some areas, there is price decreases still, maybe in most areas, but not nearly as significant as last year.

And, the other side of that is we have very informed customers.

So, we're able to, I think, balance it properly.

Aggressive price reductions mean we end up on negotiating more with customers, and lower material costs changes, customers understand that.

OK.

But overall, raw materials, it hasn't really affected your gross margins, you guys have been able to mitigate any pressure on the raw materials side?

That's correct.

Yes.

And then, just lastly, if you can talk about pricing -- your pricing overall, how that's trending given the improvement in utilization levels?

I think -- our utilization levels have not really impacted pricing characteristics in the end markets, although it would be nice if they did.

It's less severe as far as price declines, quarter-to-quarter, on an ongoing production.

The new program opportunities are still -- certainly for the appealing ones, meaning those -- are us and our competition expect to be high growth, those are still very aggressive in the bidding.

In time to market, both in developing new products and delivery of ongoing production is very key in responding to demand, meaning customers have not taken the pressure off in that area at all.

OK.

Fair enough.

Thanks very much.

Thank you.

And our next question comes from Mr. Craig Irwin.

Please go ahead sir.

Hi guys.

Given the significant traction that you've just continued to post with the point of load products, and the good design wins sort of indicating that this traction is likely to continue into 2005 and beyond, how do you see things sort of playing out given that some of your competition is pursuing a strategy for point of load based on entirely different technology?

There are -- they've been there -- I mean we're certainly close to what competition is doing.

And I think some competitors, and I won't talk about any in particular, I think some competitors have interesting approaches.

I have no question it will properly function.

To say a different technology, however, is not -- I think, it's not as significant as that.

There's nothing that we've seen that any of us would consider revolutionary.

There's certainly been some good evolutionary steps in developing point of load architectures.

There will be a number of approaches architecturally to point of load.

At the end if the day it will come down to performance of product, performance of customer will measure by cost and the electrical parameters that you offer his product and the efficiencies, meaning the cost of operating.

And those will be the winners in the end market.

But we've seen nothing in the market that tells us there's revolutionary technology that's been introduced.

Excellent.

And then, just a follow up question, really on point of load again, if you could talk a little bit about the POLA alliance and potential traction you're seeing through your partners, TI and Emerson, if this might help accelerate your share gains in this market and really the growth of these product lines for Artesyn.

Yes, where POLA seems to be particularly -- it has a particular feature characterized in the marketplace as sequencing.

But without getting into that, the market area that seems to be extremely receptive to that feature set is the telecom and wireless sector.

The wireless sector has been a lot slower than others to embrace Point-of-Load.

But that's only timing.

So we're seeing an initial acceptance, actually greater than I would have anticipated when we got into this, is in the telecom sector and in that primarily, the fiber piece.

So things are going quite well there.

We're getting a lot actually of program wins.

But at this point, they are falling into the smaller category that other 130 -- but there is good traction right now.

Great.

And then another thing on the wireless front, it looks like you guys saw some extremely strong growth in that market in the quarter.

Could you comment on any particular subset of the wireless market that might be contributing there?

Well, I think what's interesting for all investors on this call is they're actually -- after this long-anticipated 3G that would take over the end market, it's actually happening.

Not that it's taking over the end markets in volume, but there are lots of projects being put in place around the world, the demand in that sector, and we're fortunate that we're involved with literally every one of the leaders in 3G, has been higher than we've expected.

I think the 2G and then the various technologies under that has been pretty much as expected.

Great.

And then just another thing on the checklist is percentage of revenue from top 10 customers and then the top five customers in the quarter?

OK.

You know of all the pieces of paper I brought in the room, that one I forgot to bring in.

If you would have that, Pam, just tell me.

It hasn't changed much then.

It's still sitting at 70% for the top 10 customers.

Fantastic.

Thanks a lot, guys.

Great quarter.

Thank you.

Thank you.

And our next question comes from Mr. Alan Mitrani.

Please go ahead, sir.

Hi, guys.

Thank you.

Can you talk about the SG&A in the quarter?

It jumped up -- it's the highest level in a few years and I just want to know what was in that?

Are you hiring extra sales people?

Are there costs you are going to carry?

And what can we expect for SG&A as a percentage of sales in the second half or from a dollar basis?

Yes, Alan, this is Rich.

In the G&A area, we had higher-than-expected expenses for the quarter in G&A as we continued to respond to the needs of Sarbanes-Oxley and other matters.

Administrative matters within the company that we don't think will be reoccurring.

Additionally, our -- as we talked about on the first quarter, restructuring is now included in the G&A section of our P&L.

And there was approximately 300 K of restructuring that was in G&A in the second quarter.

We don't expect that to be appreciably any large amount of money in Q3.

So it's the end of the -- the tail end of the restructuring that we have to incur or have to -- expenses incurred was also in G&A, that was approximately 300 K.

So just to be clear, so there was a $300,000 onetime charge in essence in G&A?

Yes.

What was that for?

Basically the tail end of restructuring.

It was for the last of the facilities that we cleared out in Germany and administrative facility and we weren't able to establish a charge because the people weren't out of the building yet and that's now occurred.

OK.

So just to be clear, so the $300,000 should pull down and now you're down to 10-9 and there were other extra costs as well which should start contributing, sales people and others?

Right.

There were other costs throughout the quarter that should continue.

Should continue.

OK.

So we can use sort of like a 43 to 45ish level for the year?

You did about 21.5 in the first half?

I'm not going to get that granular on this call.

But it should be in that kind of range.

OK.

Also if I could ask on the gross margin, you had a great sales in the communication product division.

It seemed really strong.

Do you expect those levels to continue in the second half or are those sort of run rates?

Because the impact of the gross margin, obviously it was such higher margins than the other business?

No.

We don't -- we see nothing at this point that says as a percent of revenue that there is going to be much of a shift between power and computer -- the ACP division in the second half.

There should be growth in both but the balance will probably be pretty much the same.

OK.

And can we -- just so I'm clear, you talked about 85% utilization.

That's normally I had thought where the magic number is, where margins start picking up.

You're still talking a mid 20% more as I know it's difficult to forecast but given where you are on communication products and almost two times gross margin that it has, is there room then for margins to be much higher in the second half versus the first half?

Well, you've heard different numbers on utilization.

If you saw reports in the company, they're going to range anywhere from the high 70's to the low 80's, because you measure utilization in any number of different ways.

Now, what has happened is you have seen steady margin improvement throughout the quarter -- I'm sorry, throughout the year, as we've said.

When we entered the year, we tried to lay out...

Hello?

Hello?

One moment, please.

Once again, ladies and gentlemen, unfortunately at this time, the line will be placed on a music hold.

Thank you for holding, ladies and gentlemen.

I would now like to turn the time back over to you Mr. Joseph O'Donnell.

Please go ahead, sir.

OK.

So could we have -- again we apologize for this -- the problems we're having somewhere on the conference call.

Could we have the next question, please?

Thank you and once again for a comment or question, please press a "one" followed by a "four" on your touch-tone phone.

And our next question comes from Mr. Ted Moro (ph).

Please go ahead, sir.

High, guys.

Hello, Ted.

Just a couple of follow up questions maybe Joe rest a couple for you.

But first, I believe you mentioned wireless was 29% of revenue.

Its correct.

In the quarter.

And you also mentioned that rectifiers and amplifiers, you're looking for 15% to 20% of revenue within three years.

Where would wireless be a couple years out?

Don't you have a projection there?

I know amplifiers are part of that.

But would wireless get up to 40% or more of revenue conceivably?

Ted, if we kept the same current call at 30 just to make the arithmetic easy percent and then added 20% because the vast majority -- all of our initial success with rectifiers and amplifiers is in the wireless market.

OK.

So that would tell you that wireless if nothing else changes would be 45% -- call it 45% of sales.

Right.

And then conceivably you would have growth in just -- just the overall power conversion aspect of it besides just the new market.

So wireless could be even greater than that.

That's correct.

OK.

And then secondly just getting back to this point of load win question here, where you had expecting $50 million to 60 million in point of load in '04 before you add in the $48 million of new wins, do I have that right?

Right.

Now those will not impact '04.

That was my question.

Would that be all '05 would you figure?

Or...

That would impact '05.

It's the standard -- and this is an approximation about 12 months later, you see the revenue.

Right, right.

OK.

And finally, even though -- I don't need specifically the breakdown on customers.

But just from your traditional top 10, and especially in the -- Hewlett, Dell, Sun, IBM, as example, just a little bit of a caricature of how -- what their quarters that have come in, of how that market is, is the server market, just talk about some slowdown there.

But just a little bit of characterization of what your key customers in that sector have seen.

Yes.

First of all, I recognize what you just said.

You could conclude when I talked about percent of sales.

We didn't necessarily see a slowdown in servers.

It's that as a percent of revenue, it became a smaller percentage because of the more rapid growth in wireless primarily.

Right, right.

The two customers that are plus 10%, I had trouble with that one, like our phone system, are Dell and HP, both over 10%.

Right.

And then our other top 10 names would be IBM, Cisco, Sun, Nortel, Motorola, Lucent, Alcatel, and Nokia.

Not necessarily in that order.

Right.

And just in the computer -- computing area, just based on the results, for example, Hewlett or Dell.

I mean I know there is lot of discussions on the PC area, which is not what you, address but just the overall environment there just from what you've seen from these customers.

Is it moderately growing?

Has there been a slowdown as one person thought, conceivably that June started to see a slowdown just here overall?

If you look at total, we've not seen a slowdown.

But I will tell you this without using the names of the four largest server guys; we supply all of them.

And we're a major supplier at each one.

So we get a good sense of what's happening.

Right.

And there is a significant share shifting.

So there are certain customers that are -- their volumes are less than expected and others where it's up; a balance, not much of a difference.

So any of the commentary that they're making about the server market is relative to them more than the overall server market?

You don't see any change in that then it's usually low to mid single digit growth?

That's right.

OK.

Fair enough.

Thanks.

Great quarter.

Appreciate it.

Thank you.

And our next question from Mr. Craig Irwin.

Please go ahead, sir.

Hey, guys.

Just wanted to follow up with a quick question on the product breakdown in the quarter.

AC/DC, DC/DC, and point of load, how did this breakdown on the quarter and have you seen any shifts here?

Craig, this is rich.

Yes, as Joe said, we've been making more progress in DC/DC.

So DC/DC is now around 40% of our sales;

AC/DC, 60%;

Custom and standard is about the same.

Our custom revenue is about 80% to 85% and the remainder is for standard products.

Great.

Thanks, Rich.

Thank you.

And our next question comes from Mr. Steve Smigie.

Please go ahead sir.

Great, thank you very much.

I was wondering if you could comment a little bit on the Volterra partnership as well and the possibility of any new partnerships.

In Volterra, you will continue to see additional product releases under the partnership agreement.

We haven't booked any major project wins although we booked some smaller ones.

So what else would I say?

Technically, it's still the fastest -- the densest part on the marketplace.

Other partnerships, yes, you will see announcements in what I would hope would not be the too distant future meeting, one or two months, you should see one to two new announcements.

And that's probably would be the end of it for a period of time.

OK.

I was wondering, if you could comment on how your division focused on the merging accounts is going and just on your customer relationships any changes in the generating the quarter, what certainly is the large OEMS, new preferred provider status or anything like that?

OK.

Lets see and the emerging accounts were expanding our activity in that area, meaning, investing in it, heavily.

So that we will be -- on the expense side is already impacting us.

And that's more engineering and more sales resources.

This is to take us into -- for those what may not be familiar with, what you characterize as emerging, but the mid tier kind of companies as opposed to the absolute largest companies.

They account for 18% of our sales right now -- above.

So we'd intend to grow that business, as rapidly as, we can as a separate channel.

There were no major customer decisions in the quarter about supplier status of the market leaders.

So there's nothing to report there.

All right.

And then my last question is related to the DC/DC products.

Could you characterize, what you saw about this business in this quarter have been doing?

There has been some strength starting to come out of that area, I'm just wondering, if you starting to see any of that as well?.

Absolutely.

And it's driven by -- the same thing is driving DC/DC that drives point of load.

And that's distributed power, architectures and as that continues to become the prevalent design for new products, you'll see DC/DC volumes increase.

That's why we invest heavily in DC/DC.

You know, lots of people talk about point of load.

We do as well.

So we're somewhat guilty.

But it's important to remember that's only a subset of distributed power.

And if you want to be a real system player, you have to invest in the front end that would be the AC/DC.

You have to invest in the DC/DC.

And you have to invest in a point of load.

Some competitors have chosen different strategies but if you don't invest in all three and offer that to your customer, what you force the customer to do is try to design a power system for multiple suppliers.

Unfortunately, ladies and gentlemen, once again we have lost the connection.

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Ladies and gentlemen, we will again resume our conference with the gentleman, who last asked the question.

Please once again press a "one" followed by a "four."

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And we will take our last question from Mr. Steve Smigie.

Please go ahead.

Thanks.

I think, Joe, you were talking a little bit about the AC/DC space and characterizing the full spectrum that you needed to offer.

That's correct.

Thank you.

So we will continue to see growth on DC/DC because of distributed power.

That growth in our opinion will be -- follow the same trend as point of load.

And part of the reason, we invest 10% of sales on product development is the firm belief because of what our customers tell us that the best suppliers will be those that participate in all three sectors.

OK.

Great.

Thank you very much.

You're welcome.

Thank you.

And that now concludes our question-and-answer session.

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Thank you.

This now concludes today's Artesyn technologies conference call.

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