艾默生電氣 (EMR) 2004 Q3 法說會逐字稿

Welcome to the Artesyn Technologies third-quarter earnings release conference call.

At this time all lines are in a listen-only mode.

There will be an opportunity to ask questions at the end of today's conference and instructions for asking questions will be given at a later time.

Today's conference is being recorded.

If you do not wish to be recorded you may disconnect at this time.

I thank you for your attention.

I now turn the conference over to your host, Ms. Pamela Rembaum, Director of investor relations.

Go ahead please.

Good morning everyone and thank you for joining us for our third quarter 2004 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.

A copy of this morning's press release announcing our third-quarter results is currently posted on the press release section of our website at www.artesyn.com under investor relations.

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

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

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

The dial-up replay passcode is 1471 and will be available through November 5th.

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, or 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. (indiscernible) caution 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 10, 2004, for additional information.

Now I would like to turn the call over to Artesyn's CFO, Rich Thompson, for a discussion about the Company's third-quarter financial results.

Thank you, Pam, and good morning.

Sales for the third quarter were 107 million, a 19 million or 22 percent improvement from the third quarter of 2003, and essentially flat with Q2 as expected.

Sales results were indicative of a typical third-quarter seasonal trend for the Company, as guided on our teleconference last quarter.

Orders in the third quarter were 102 million, yielding a book-to-bill ratio of 0.95 which is within our normal range of. 0.9 to 1.1.

Backlog at the end of the quarter was 92 million with approximately 97 percent, or 89.5 million, scheduled for shipment in Q4, similar to the 90-day backlog which we entered Q3 with.

For the fourth consecutive quarter Artesyn has achieved profitability, reporting third quarter net income of 3.6 million and earnings per share of 9 cents, or 1 cent better than the First Call analyst mean.

This compares favorably to Q3 2003 where we reported a net loss of 5.2 million, or a 14 cents loss per share.

Gross margin as a percent of sales was 25.8 compared to 25.1 in Q2 and 20.7 in Q3 last year, reflecting favorable manufacturing variances and positive sales mix.

Demand improved from customers in both wireless infrastructure and server and storage markets, including our embedded board products and DC to DC power supplies.

The total operating expenses in the quarter were 22 million, or 20.7 percent of sales, which is slightly higher as a percent of sales than the second quarter due to an increase in R&D investments.

R&D expense was 10.7 million, or 10 percent of sales for the quarter.

As mentioned in the earnings release we estimate R&D expenses to be approximately 42 million for the year.

Net interest expense in Q3 was 1.2 million for the quarter.

In applying the if-converted accounting methodology for calculating diluted earnings per share, bear in mind that the after-tax interest cost related to the convertible bond issue should be applied.

The effective tax rate for the quarter was 16 percent due to the elimination of tax contingencies related to tax year 2000 that are no longer required.

As previously mentioned, quarterly fluctuations in the effective tax occur because of discrete tax events such as changes in tax rates, tax legislation, or the expiration of statutes on tax filing positions.

Due to this tax benefit, the effective tax rate year-to-date is approximately 21 percent of pre-tax net income.

We expect a tax rate of 24 to 28 percent in Q4.

Turning to the balance sheet, we ended the quarter with 98 million in cash.

Overall, working capital increased to 48 days from 44 days, and accounts receivable increased to 59 million and days sales outstanding to 50 days from 47 days in Q2, a reflection of the higher revenues this quarter and timing of payments.

We continue to remain focused on working capital management as our days in inventory and days in payable remain similar to last quarter.

Inventories increased slightly by 1.3 million and inventory turns remained flat at 5.8 times.

Lastly, capital expenditures for the quarter were 7.6 million, making our investment for the year-to-date at 18.4 million.

We have refined our estimates for capital expenditures in 2004 and now expect to spend between 25 and 28 million for the year.

As mentioned previously, capital expenditures are primarily to support new product introductions.

During the fourth quarter, two more surface mount lines will be added to our China facility and one additional line in Hungary.

At year end we will have 31 surface mount lines worldwide.

Depreciation and amortization was 5.5 million for Q3 and we are operating our factories at approximately 82 percent level of practical capacity.

Thank you, and now I will turn the call over to Joe for a business review.

Good morning.

Before I get started let me extend congratulations to our many investors who are located in Boston and our many employees who are located there as well.

As a lifelong Yankee fan, I'm sure I'll be hearing from most of you later.

Now getting to the business at hand.

In January, we outlined Artesyn's 2004 objectives.

In each of this year's subsequent quarterly calls, you were updated on our progress towards achieving those objectives.

To remind you, they included maintain profitability, grow market share, enter new communication market segments and continue our industry-leading position in technology.

With nine months of results now behind us, Artesyn is well on its way to achieving each of these goals.

To help you understand the status of our business in more depth, let me talk about each of these objectives.

First is profitability.

Our objective entering the year was to maintain profitability.

Profitability has in fact increased sequentially over the last four quarters.

Looking to 2005 and beyond, as we continue to take initiatives to support our goal of increasing profitability, I am confident that we will meet our longer-term objective of re-establishing Artesyn as the power sector's most profitable company.

Gross margins have steadily increased over the last two years as a result of increasing demand for DC to DC bricks and embedded board products, along with improving operating efficiencies.

In addition, we have begun to see leverage in our operating expenses from increasing revenue, one measure we use to judge market share growth.

Our second objective in '04 is market share.

There are two criteria we use to assess growth in market share, revenue and project lengths.

We believe each is continuing to demonstrate that Artesyn is gaining market share.

We use revenue as a reflection of near-term market share performance.

There's no question Artesyn share is growing, with third-quarter revenue growth at 22 percent and year-to-date growth at 20.

Our fastest growth is coming from the wireless sector which accounted for 28 percent of sales in Q3.

The server storage sector was at 42 percent, distribution accounted for 16 percent of Q3 sales, and telecom networking was 14.

The shift in business mix between distribution and telecom networking is primarily due to a pickup in demand from our larger telecom customers.

Program wins.

Design wins are an indication of future revenue streams.

Our goal for the year has been 60 new program wins.

In Q3 we recorded 15 major wins with estimated lifetime revenue of $106 million.

In addition, we received more than 110 design awards for smaller programs with estimated annual revenue of less than 500,000 each.

During the first nine months of 2004, we've been awarded 63 major wins, exceeding our goal for the year.

Additionally, year-to-date total program wins have estimated lifetime revenue of over $400 million. 20 percent year-to-date to growth in revenue and the increasing number of program wins is a clear indication the Artesyn is growing market share both today and for the future.

New markets.

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

Penetrating new market segments is extremely important to Artesyn.

To put it in perspective, in 2003 35 percent of our revenue came from sectors in which we did not participate in 2000, including wireless and point-of-load.

In January, we discussed that Artesyn was entering two new communication markets -- rectifiers and amplifiers.

We believe these will account for 15 to 20 percent of total revenue in two to three year's time, with production ramp-ups beginning early next year.

Technology.

Our commitment to invest in new technology and product development is critical to meeting our objective to re-establish Artesyn as the most profitable company in the market space we serve.

We believe Artesyn is uniquely positioned to succeed in these investments as a result of our close engineering and supply chain relationships fostered through our status as a preferred supplier to our blue-chip customer base.

R&D spending will approximate 10 percent of sales in 2004, which includes our recent investment in open system architectures and the embedded board and power conversion businesses.

The embedded board group is investing heavily in new products for ATCA.

Advanced telecom computing architecture is a new architecture designed primarily for the wireless market sector.

With these new products we should be well-positioned to continue our growth in market share as ATCA products are widely adopted throughout the wireless infrastructure market.

Less than a year ago we announced a digital -- I'm sorry.

Less than a month ago we announced a digital power initiative along with seven industry leaders, including Emerson, Texas Instruments and Intersil, to create a new digital protocol for power system control.

This protocol is the first step in driving an industry-wide standard of onboard power management.

Once complete, this new protocol will enable customers to control all compliant point-of-load converters using the same set of commands over an industry standard I²C bus, without the need for proprietary silicon or proprietary communication buses.

Known as the power management bus, or PMBus, this new protocol addresses customers' desires for open standards.

The digital protocol initiative is another phase in our point-of-load leadership strategy to partner with leading silicon companies and now power manufacturers to address advanced point-of-load technology that enables us to continue to provide best-in-class turnkey solutions for our customers.

The opportunity for our customers to have an open standard product that they can customize and calibrate via software is a major step toward the third generation of distributed power architecture.

This Monday we announced Artesyn's first product utilizing the industry standard I²C bus for communication.

As I mentioned before, the broadly supported I²C interface is the basis for the new nonproprietary open architecture of power systems control.

While not utilizing the PMBus protocol, the new SIL 15 (ph) incorporates the features that have grabbed the imagination of investors regarding digital pro power management, including graphical user interface, or GUI.

This decrease significantly the customer's design cycle through the utilization of software rather than hardware.

Programmability of voltages allows the customer to address a wide range of applications with one part number, significantly reducing inventory and easing supply chain issues.

This product addresses the quickly growing market for margining, demonstrates the I²C interface on which we based the new PMBus protocol, and gives customers what they need now with simplicity.

From this, it's clear that Artesyn is at the forefront of technology for the benefit of our market-leading customers.

We have consistently communicated to you throughout this year and the year before that our approach was to work with silicon partners in developing open architectures.

We also emphasized it was not our practice to discuss relationships or announce products before they were in production.

In our opinion there can be no question that October's announcements publicly reaffirm Artesyn's leadership position in today's market and the next generation of point-of-load and distributed power.

Now I would like to give you an outlook for the fourth quarter.

Forecasted demand from our customers is solid and we expect to see strong year-over-year revenue growth.

However, based on firm order patterns, we do not currently expect to experience the sequential growth typical of the fourth quarter.

Therefore, we anticipate revenues will be about flat sequentially and margins similar to those seen in the third quarter.

Before turning the call over to a Q&A, I want to comment briefly on the status of Bel Fuse's unsolicited proposal.

In short, nothing new has occurred since September 20th, when Artesyn's Board of Directors rejected Bel Fuse's unsolicited proposal.

After careful consideration, the Board concluded that the unsolicited proposal was not in the best interest of Artesyn, its shareholders, employees, and other constituencies, in that the financial terms suggested by the proposal were inadequate.

With that said, I would like to turn the call over to our Q&A session.

However, I would remind everyone that the purpose of this call is to discuss Artesyn's third-quarter results, and I ask that you keep your questions focused on earnings and the operations of the Company.

Thank you.

(OPERATOR INSTRUCTIONS).

Steven Smigie, Raymond James.

I was hoping you could comment a little bit more on some of the business trends that you mentioned.

You said demand was sort of firming, but I'm hearing a little bit of a mixed feedback on that.

And specifically if you could comment on perhaps rollouts of bay stations or other programs you are involved, and what that might imply maybe not so now but also as you look into 2005.

Okay, Steve.

First of all there's two types of outlook we get for a quarter.

One is the customer forecasts, which are non-binding.

Non-binding meaning the customer is not on the line for what he forecasts.

Those are very strong.

The second, and more reliable in my opinion, are firm customer orders.

Rich alluded to $90-something million in backlog, I believe.

Those are firm.

The customer is responsible for those products.

The forecasts again are very strong.

However, the firm customer orders at this point, I think, forces us to be prudent in our guidance and say it looks like it's going to be about flat with Q3.

But I think you are correct in characterizing firming.

We haven't seen, fortunately, some of the demand issues that a number of our competitors have talked about.

So in that respect, I suppose it's firming as well on the market share side.

Looking towards next year, while we've not given guidance nor am I right now about Q1 for example, I think ballpark what you're looking for is the same kind -- and what you'll hear is the same kind of guidance we gave for this year which is 15 to 20 percent growth for the year, something like that.

But we're not giving firm guidance on quarters at this point.

The rollouts of the new rectifiers will begin in the first quarter with two different customers ramping throughout the year, which gives us a pretty high level of confidence in our revenue anticipation for next year.

Those would be the major new products.

From the new announcements that we've made on the point of load, those will not impact revenue in the near-term but certainly will have a big impact beginning roughly 12 months from now.

Could you also talk -- I guess you use a little bit of R&D guidance.

That basically implies $11 million of R&D spending then in the fourth quarter?

I think if you look at 10 percent for the year you're very close.

Lee Zeltser, Needham & Company.

Just a little more clarity on your guidance for Q4.

First off, if you can talk a little bit about the assumptions for a flat quarter.

What are you seeing on the inventory side at your customers and how is that baked into your guidance on the revenue line?

We've certainly attempted to take that into consideration, our customers and the contract manufacturers.

So I think we have addressed it properly in the guidance.

We saw an impact from that in the third quarter, meaning customers in some cases had a disconnect between the OEM's forecast -- or the OEM's appetite let me say and the contract manufacturer's forecast.

It appears to us that on the programs we are involved with that has become resolved.

So I think it's difficult to give you specifics point by point, but I believe we have properly addressed what had been somewhat of an inventory issue in certain programs.

So your sense is that there probably won't be too much of an overhang in the December quarter from any excesses that existed?

I think when we said flat that that certainly took into consideration the -- it's an overhang not going into the quarter, that that certainly took that into consideration.

And I know our customers are working extremely hard as we are to not have any overhangs leaving the quarter.

Joe, what about pricing?

Have you seen any kind of return to what were worsening of the pricing environment?

And in your guidance for 2005 what are your expectations for pricing there?

I think what we've said (indiscernible) how valuable is (indiscernible) I'm going to tell you I'm not sure, because there's all types of exceptions to it and in product areas and market areas.

But I think if you said we'd have mid to lower single-digit price erosion, that would be about right for what we see right now and what we see at this point for next year.

So that's actually a pretty decent environment for you.

Just a clarification.

You mentioned margins would probably be similar in Q4 relative to Q3.

We're talking about gross margins or operating margins here?

I was describing gross margins.

Because I guess with the ramp in R&D spending, the operating margins could possibly be down a little bit.

Well actually R&D spending, correct me if I'm wrong, Rich, I think it's percentage-wise, a percent of revenue it's pretty consistent.

Lee, we had gross -- I'm sorry -- R&D as a percent of sales in Q4 -- I'm sorry -- Q3 was approximately 10 percent, so we are talking very -- in the very close range in Q4 spending, just up lately.

So we will end the year, we said, approximately 42.

It could be a few 100,000 one way or the other.

(OPERATOR INSTRUCTIONS) Craig Irwin, First Albany.

We're seeing continued solid growth in the communications product business.

I was hoping maybe you could give us a little more color on what's driving that growth potentially, how big do you see this business potentially heading in the next few quarters, and really what the R&D commitment is on that side?

The business is growing, Craig, for the same reasons that the power business is growing, because we address the same customers.

In many cases we're literally on the same project as that customer, providing the embedded computer aspect and the power systems aspect.

As a slight diversion to your question, if we accomplish our strategy properly there will be a high percentage of platforms where we're doing both.

So the reason for growth is the same in each business, and I would anticipate that what you will see out of each of our businesses next year is in that ballpark of what I just talked about earlier, 15 to 20 percent revenue growth year-over-year.

That's pretty good.

That's very good.

On the development spending in that business, can you talk roughly what Artesyn's contribution might be to the overall development spending for the communications product business?

I think it's consistent with the rest of the Company.

While we don't break it out publicly division by division, if you model it and say it's about the same spending as the Company in total you're going to be very close.

Excellent.

(multiple speakers) rate is what I mean.

Okay.

And then, one of the things that I guess stood out in the quarter was the sequential growth in service and storage.

I guess it's sort of been a difficult environment over the last several quarters, but is there anything in particular, here any particular programs that you won from competitors or anything like that that we should pay attention to?

Our share -- when I look -- it's interesting, I had a meeting with our board a little while ago and we were talking about share in different markets.

And what's happened for us in the server and storage, with the three largest server companies our share continues to increase.

So I would expect to see that sector do well for us in the near-term, meaning the rest of this year and next year as we benefit from the growing share.

So without getting specific, because that's inappropriate, by customer, our three biggest server customers -- not necessarily in this order -- but they're Dell, IBM and Hewlett-Packard.

Great.

I guess more a big picture question.

One of the things that you've discussed in the past is potential outsourcing for (indiscernible) shaving of demand to sort of expand the overall capacity there.

Have you been engaged in any discussions to sort of formalize relationships or anything along those lines?

The answer is we're working aggressively to implement an outsourcing strategy.

We have not announced any relationships at this point.

But you should expect to see that down the road.

Excellent.

And then I guess a housekeeping question.

Point-of-load has really been growing very nicely.

If you could give us the product mix breakdown (indiscernible) DC and DC to DC, and then point-of-load for the quarter?

What we have done due to some competitive reasons which I'm sure you're sensitive to, we've backed off at least for a while providing detailed product information.

In the past we provided a lot more.

What I will tell you is that point-of-load -- when we entered the year we talked about you should expect to see point-of-load going from 40 million to 50 or 60 million.

And that seems to be happening.

Okay, fantastic.

I guess one question that's outstanding is certain realms out there have been talking about your cost structure and the contribution of magnetics to COGS.

I was wondering if you might be able to give us a little more color there.

I've been hearing some pretty crazy things.

Our magnetics is -- as a total cost is something in the higher single digits.

And we build those magnetics -- that's our total cost.

And we build those magnetics in China with low-cost labor, low-cost overhead.

Does that get to the issue you're talking about?

That's hits it exactly.

Great.

Thanks a lot guys.

Great execution.

Jim Savage, Wells Fargo Securities.

Can you talk a little bit about where you think margins are going, particularly with the ramp of the new rectifiers, whether there's -- and also, obviously, as you grow your business with better utilization of capacity what you think can happen with gross profit margins over the next six to 12 months?

Jim, you should expect to see -- what's happened over the last eight quarters has been a steady improvement in margin performance.

And I think probably we won't see the same rate of improvement because the low-hanging fruit if you will has been taken to the P&L.

But there will be continual improvement and we're just not providing '05 guidance at this point.

Now, what I will try to explain is where better margins come from.

The better margins come from wireless, first of all, as a market.

Secondly, rectifiers, because there's a much higher software content than the hardware exclusive of a lot of our other power businesses, is higher margin.

It's one reason we made those big investment decisions.

So that will enhance the performance.

The growth in our market space -- or where we get revenue is a better way for me to say it -- next year will come in large part out of wireless.

So that will help as well.

And both of our business units, ACP and power, target the wireless space.

And in fact, that's where a lot of our growth has been coming from.

What did we report, that it was 27 percent of our revenue this quarter, or year-to-date?

It's a growing percentage.

I'll get that exact percentage again for you. (multiple speakers) 27 percent.

That's 27 percent for the quarter or year-to-date?

Year-to-date.

And that's going to continue to increase as a percentage of your overall sales?

Yes it will.

But the computer products division is going to be growing at the same rate as the rest of the business, so that's also a -- if it grew faster, that would enhance margins as well I assume?

That's another correct statement.

Even if it grew at the same rate it would enhance margins.

Generally then, is there a strategy, obviously, with the rectifiers, the software content, the embedded computers software content -- is that at this point a strategy on your part, to have more software content in your new products and your new strategic directions?

Absolutely.

As you noticed, the discussion that I had earlier, or monologue about the new point-of-load open architecture -- what is driving that open architecture is our heavy investment that we've made in the last, let's call it two quarters in software for the protocol.

So more and more of our business in all parts of it is moving in that direction.

Todd Cooper, Stephens Company.

Either Joe or Rich, can you discuss the linearity in bookings and orders by month in the third quarter?

Todd, I would just say that it was similar to what we have seen historically.

It was -- usually we expect slow, slow, fast, if you like.

The fourth quarter -- I'm sorry, the third quarter entering into the fourth.

The only difference we have seen is that backlog from 90 days-plus was lower than we have experienced in recent quarters.

So we see our customers being a little more cautious about placing longer-term orders.

Other than that the 90-day backlog was identical to Q2.

Did business pick up a reasonable amount in the third quarter versus -- I mean the third month of September versus the two previous months?

Yes it did, but that's more a function of the seasonality of the quarter.

The European summer, if you like, is a pretty flat period, and it picks up in the fourth quarter when people get back to their offices.

And regarding your digital initiative, do you plan to work exclusively within this consortium of companies you put together or will you also develop digital products outside of that group?

That's an interesting question.

What we are doing is offering leading -- working with, however, you choose to characterize it, a group of seven companies.

Six of those are the silicon control chip leaders, one other is a -- which is Emerson -- a power company.

And we will all be using the same protocol to communicate from the silicon to the module and back.

There is nothing in this that dictates people will be building the same products and making them available to each other.

There is nothing in it that precludes -- once the silicon companies are offering products with these protocols that will preclude another company from getting involved in using it.

The benefit though, and we think there will be one or two others, and that would probably be it -- the power side is a part of this -- the benefit of it is the time-to-market issue for those that are close to the protocol development.

But after that, I would imagine you should think of it as being truly an open protocol, which means people can buy the silicon and use it.

Now a big advantage to this -- and I'm actually glad you gave me the opportunity because I should have done it before.

A large part of the point-of-load market is the discrete market.

Another -- the fastest-growing part of it is the module market.

That's what we and the other power companies do.

The discrete portion is addressed by silicon companies.

What this does, the open protocol, you could name any company you want at the OEM level, so say a large server company.

In one case, you may choose to use a discrete solution because of spacing, cost, whatever.

In another example you may choose to use a module.

Well today, that's an awkward decision, because they're two different approaches.

Using this open protocol, the company can use exactly the same software, even if he charges a hardware solution using discrete components one time and a hardware solution using modules the next time, or even mix-and-match in the same larger system.

That's what I meant by earlier when I said customize; there's all types of customization available with this open approach that you can't do today or you couldn't do with an approach that wasn't open.

You laid out in the press release a timeframe for when you plan to have the specs ready for people to comment on.

Following that, how long do you think it would take before you get a fully functioning digitally-controlled point-of-load device?

First of all, they've had these specifications, so the press release could have talked about which version.

But I assure you before people signed up they all had these things and taking a look at them.

The schedule we have is that we should be in full production, I mean sampling before that and preproduction before that, but in full production by the second quarter of next year.

Brad Zoltak, Robert W. Baird.

Can you speak to some of the reasons why you think you're gaining some market share against some of your competitors?

The numbers would seem to indicate, Brad, that we are, first of all, so that's important.

In other words, data that supports that our growth rates versus other people's growth rates in the space that we're in.

So with that data as background, we think the reasons for it would be our focus in communications.

That's the largest sector of power and the largest sector of embedded computers.

And that's all we do.

So we are benefiting from our focus on the major part of the market.

Second would be our heavy investment relative to the competition on product development, examples being what we just finished talking about with Todd about point-of-load.

A better example as far as real gaining of market share that's purely incremental to us would be our entry into the rectifier and amplifier markets, took a lot of technology investment over a period of two years, which we'll see the profit benefit from in '05.

And then -- excuse me -- our cost structure.

It allows us to be effective in the server market space.

And then taking that cost structure and applying it across all of our products helps us be competitive in gaining share.

And do you think that's going to be in all of the various markets you address, or is there certain areas more so than others?

Are you talking about the cost or all of the things I just talked about?

No, as far as whether it be in telecom, whether it be in server storage, etcetera, how you think you can gain more so?

We've clearly gained huge share in servers because of what has happened -- our good fortune of what's happened with the three big server companies.

So as they continue to gain share in their markets we're really benefiting from that.

On the wireless side, that's growing faster than our company as far as revenue for us, because the percentage of our revenue is increasing in wireless.

And that will continue partly because of rectifiers and amplifiers, but also because of the growth of wireless versus other sectors.

I think the area it would be hard to measure from a financial perspective, the impact of share growth, is the telecom space, because that space just isn't moving along very well.

We had a nice quarter from it but it's still basically flat.

And until you start seeing some revenue growth there you would have to have extraordinary share growth, revenue growth in the market I mean.

You would have to have extraordinary share growth to have a big impact on the Company's revenue.

And I don't see having extraordinary share growth, frankly, in that space.

We're really focused now on the growing markets we're in and that would be wireless as opposed to the LAN line stuff.

Jeffrey Bensik (ph), Jefferies & Co.

Good quarter, guys.

Real quickly, the amplifiers and rectifiers I know -- sounds like they're being pushed out into the first quarter of '04.

Can you give me a little more color on why that is?

The products themselves, Jeff, have not been pushed out.

But you're correct in your overall conclusion.

What has been pushed out is meaningful volume.

And it's two different reasons.

One of the customers is having or has had a delay in getting his new systems approved by the carriers who are using it.

The first carrier large order for him, but he hasn't had approval yet of his system.

It's in that process.

And he's -- totally unrelated to what we do, he's had some issues to deal with.

The other customer, it's new products designs.

One is a 3G platform and then a second is an upgrade for him of his GSM platforms.

And those are internal qualification at the customers, and it's been going a little bit slower, although not a lot, than they had told us.

So product is shipping or will be this quarter, but not the kind of volume we expected because of those two reasons.

Thank you.

Also on your new digital power alliance and control, what gives you confidence that you will be able to get around Power One patents on their current product?

Let me just say we are in a business where patents are an issue we deal with everyday.

Part of our design process, we call it PACE, that's the acronym.

It's a very disciplined process in developing product, everything from concept through high-volume, or into high-volume production, and all the steps in between and all the teams involved.

As a key part of that process, product development process, early on is an in-depth review of patents.

And then we determine is there an issue.

If there is an issue how are we going to work around it.

If there's not an issue then we determine that as well, and we've been through that.

That's about the only answer I can give you on it at this point.

Okay.

So I take it you don't see any issues?

That's what we think.

Alan Mitrani, Copper Beech.

Just a couple of housekeeping questions.

Can you give us the actual net income and the shares -- or the interest add-back to be able to get to the quarterly conference, to the quarterly earnings reported?

Yes, just if you've got another question while they're looking that one up for you.

Sure.

Can you give us the EBIT breakdown of the two businesses?

I know it's going to be in the Q. Do you have that?

We don't have that yet, Alan.

Let me give you the interest numbers, please.

What's the interest number?

On the add-back, interest add-back calculation, the interest plus DIC -- debt issuance cost to amortization for a quarter is approximately 1.4 million.

Then you take away the tax effect and the net add-back is around 850 million -- I'm sorry -- 850,000 for the quarter.

The number of shares under the if-converted method, we have outstanding shares of 39,200,000.

You add back on conversion the 11.2 million.

And we also on last quarter had CSE's -- common stock equivalents -- of 700,000.

So the total was right at 51 million shares.

If I could ask if you could just put that in the future press releases, that would be helpful to be able to do that.

A quick question then for you guys.

I don't get the margins.

Maybe I'm the only one here.

But can you explain them, parse them a little better?

Let me ask this.

Did gross margins in each of your businesses grow this quarter, sequentially?

They did.

I'm looking for the data to support that, Alan.

The answer would be -- I'm not sure I know what you mean by (multiple speakers) profile is improving.

You guys have shown great leverage year-over-year.

You went from 19.5 percent roughly last year to so far like you said in the mid 25's, mostly driven by volumes but really also driven by the communication business, just knocking the cover off the ball and growing 60, 70 percent so far year-to-date, year-over-year.

What I don't get is from the first quarter, the communications business grew from 13 million to 20.

It's up 50 percent almost in the last two quarters and your margins are only up 40 basis points, and yet that's a 50 percent gross margin business.

So somewhere there's a disconnect or your power business is doing worse.

So can you maybe enlighten me as to how the margins are going to grow from here when one of your businesses is basically carrying the entire company (multiple speakers) and less than 20 percent of sales.

Alan, we would be happy to get into an in-depth discussion with you on this on another call, but one business is not carrying the entire company.

The power business is doing exceedingly well relative to our competitors, relative to what we have done in the past.

And the embedded computer business is doing fine.

Both businesses are on the right track.

So your conclusion -- I wouldn't agree with that.

But that's only because I live this and see the numbers, and you have to work with the less than detailed numbers we provide to the outside.

So we'll be happy to explore that in more detail later.

Okay.

You talked about next year margins improving, going up.

Obviously, you don't think you're going to get, it sounds like, a 600 basis point improvement in margins like you're doing this year.

Can you give us a sense of how much, maybe to get there, how much the rectifiers and amplifiers -- how much higher margin business that is than your current base business of power?

We're not going to be able to give you better guidance on '05 at this point.

We've taken an approach which is actually probably more disciplined or taxing than a lot of public companies in providing one quarter guidance and generalization about the year.

I have received many positive comments of appreciation from investors for doing that.

But we're not going out into '05 at this point.

We'll provide more detailed guidance on '05 when we finish the fourth quarter.

We do expect margin improvement next year.

That's all I can tell you at this point.

And we expect, as I told you, the kind of revenue growth.

But I didn't break it down by quarter.

Now, rectifiers -- and one reason we invested heavily in that business is not just the hardware business.

And it does entail better margins; however, for competitive purposes I certainly am not going to tell Emerson or Tyco what kind of margins we're getting in the rectifiers, which is what these -- that's unfortunate.

I think today's style with investor calls is great.

I really do.

It's good for management, it's good for investors.

The problem is your competitors are on the phone.

And you know, it's just that would be a big mistake on my part to tell those two big players what our margins are in the business we just took from them.

Were there any onetime, what I would call cost for this army of advisers that you have lined up with you guys?

Where did that appear?

Did it appear in SG&A and how much was that?

It was in SG&A, I imagine, but it was not disclosed because we did not consider it to be significant.

Do you expect that to -- well, it could have hurt your earnings this quarter (multiple speakers) operating.

Any time you spend money it hurts your earnings, but we didn't consider it significant so we didn't disclose it.

Bill Goldman (ph), HMC (ph) New York.

Congratulations on a good quarter.

I wanted to get some clarification.

You said wireless represented 20-something percent of revenues in the communications?

27 percent, Bill.

Can you give me some guidance as to where you see that going fourth quarter and into 2005?

I would expect, but this isn't -- it's hard to tell you that I'm going to be precisely correct about this.

I would expect next year that wireless will be about 35 percent of our business.

And wireless means selling -- the way we define it it means selling to people like Ericsson, Nokia, Nortel, Alcatel, that type of thing, in their wireless applications.

That's how we define wireless.

And then on the Bel Fuse situation, since you guys have rejected the bid have you guys had any discussions with them since?

We announced our position publicly, which is the approach we've taken on this whole thing.

I mentioned in the beginning that we -- what our board decided to do.

I am one of 10 people on the board and it was unanimous, and that is that it was an inappropriate, unsolicited offer.

Inappropriate in the sense of value.

It sounds like there's willingness on their side to maybe raise the bid if the two parties could sit down and discuss valuation.

I mean, is that something you guys are interested in doing?

I will answer one more question for you out of courtesy on the Bel Fuse, but I did ask that we focus on the business results.

You'd have to ask Bel Fuse.

I can't put myself in their shoes on what they would or wouldn't do in respect to that question you just ask, Bill.

I have no idea.

It sounded like from their conference call that they were willing to raise their bid if you guys were willing to sit down and talk to them and show them where there is value at to their offer.

So that's where I was sort of going with that.

I think, again -- and this will be my last comment on it -- a couple of analysts very succinctly summarized that it's not our position as Artesyn to show our value to another company.

That's not our job.

I appreciate your questions.

Are there any other questions from the people on the call related to the operation of the business?

It appears that we have no further questions at this time.

Again, thank you everyone for your time.

We very much appreciate it.

We seem to be on a good track for the year and certainly for next year.

And I look forward to our fourth quarter call, or as is the case with many of you, calls in between.

Thank you.

Thank you.

This now concludes today's conference call.