艾默生電氣 (EMR) 2004 Q4 法說會逐字稿

Good day everyone.

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

Today's call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Pamela Rembaum, Director of Investor Relations.

Please go ahead.

Good morning everyone and thank you for joining us for our fourth 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 fourth-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 888-203-1112.

The dial-up replay pass code is 6064494 and will be available through February 18.

Before we begin I would like to remind you that except for historical data, comments on today's call 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 10, 2004, for additional information.

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

Thank you, Pam.

Good morning everyone.

Sales for the fourth quarter were 120.4 million, up 21 million and 21 percent from the fourth quarter of 2003.

The increase in sales was due to stronger demand for power and embedded system products from customers in the IT and wireless end markets.

Sales for fiscal 2004 were 429 million, an increase of 20 percent from 2003.

Orders in the fourth quarter were $115 million, yielding a book-to-bill ratio of 0.96, which is within our normal range of 0.9 to 1.1.

Backlog at the end of the year was 87 million with approximately 95 percent, or 83 million, scheduled for shipment in the first quarter.

Gross margin as a percentage of sales was 25.8 compared to 22.4 in Q4 last year.

For the year, gross margin was 25.5 percent compared to 19.4 percent in 2003.

This improvement is a result of improving market share, a better sales mix, and a strong focus on cost management.

Artesyn has been profitable for five straight quarters.

Fourth quarter net income was 5.3 million and earnings per share were $0.12, which was three cents better than the first-call analyst mean.

This compares favorably to Q4 of 2003 where we reported net income of 1.2 million or $0.03 per share.

For the year net income was 13.9 million compared to a loss in 2003.

Improved sales and our cost management efforts have led to achieving better leverage in our operating expenses.

Total operating expenses in the quarter were 23.1 million or 19.1 percent of sales improved from the last quarter and from Q4 a year ago.

R&D expense was 10.4 million or 8.6 percent of sales, slightly below our 10-percent investment target due to the un-forecasted higher sales in Q4.

Operating expenses were 20.3 percent of sales compared to 22.1 for fiscal 2003.

Net interest expense in Q3 was 1.3 million.

The effective tax rate in the quarter was 21.2 percent.

The effective tax rate for 2004 was 21.3 percent.

For 2005, we are forecasting the effective tax rate at 28 percent similar to 2004.

There is a potential of unforeseen discrete events that could affect the provision during the year, either higher or lower.

Turning to the balance sheet, we ended the year with 106 million in cash and short-term investments.

Overall, working capital decreased to 43 days from 48 days last quarter.

Accounts receivable increased to 61 million from the higher sales and days sales outstanding decreased to 48 days from 50 in Q3.

Inventories were 50.3 million at the end of the quarter, 2 million lower than Q3 as turns improved to 6.8.

For 2004, inventories increased 6 million, or 14 percent, to support the 20 percent growth in sales.

Finally, capital expenditures for the quarter were 3.7 million making our investment for the year-to-date of 22.1 million.

During the year we added eight surface lines and exited the year with 31 surface-mount lines operational worldwide.

Depreciation and amortization was 5.7 million in Q4 and 22.3 million for the year.

Our factories are operating at approximately 90 percent capacity in power conversion and at 60 percent capacity in the embedded systems business.

Thank you.

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

Thank you Rich.

Over the past year, we've reviewed our 2004 objectives and given your progress updates towards meeting these goals each quarter.

As a reminder, these objectives included – maintain profitability; grow market share; enter new communication market segments; and continue our industry-leading position in technology.

I am pleased to relate that we have achieved each of these goals as set at the beginning of the year.

Today I will discuss how each objective was achieved and explain more about what we anticipate for 2005.

First, profitability.

At the beginning of the year, our earnings objective was to maintain profitability.

At the end of fiscal year 2004, we reported five successive quarters of increased earnings.

In addition to revenue growth, improving gross margin has been the prime contributor to increased earnings.

In January of 2004, we told you our goal was to improve gross margins to the mid 20-percent range by year end.

Ending the year at 25.8 percent and averaging 25.5 percent for the entire year, it is clear we have reached this goal.

The second objective for 2004 was to grow market share.

The most meaningful indicator of short-term market share growth is revenue.

We track longer-term market share gains by our project wins.

Both measures clearly continue to demonstrate that Artesyn is gaining market share.

With revenue growing 20 percent in 2004, we believe Artesyn is growing significantly faster than our end markets.

For the year our fastest growth is coming from the wireless sector, accounting for 27 percent of the year's revenue.

Servers and storage were 43 percent, distribution – 17, and telecom networking – 13 percent.

Program wins.

Our goal for major program wins in 2004 was 60.

We exceeded this goal with 82 major wins valued at over $690 million in lifetime sales.

During the fourth quarter there were 19 major program wins with estimated lifetime revenues exceeding $330 million.

In addition we received more than 68 awards for smaller programs with estimated annual revenue of less than 500,000 each.

In total, 2004 program wins have estimated lifetime revenues of $775 million.

Some of our investors have questioned the value of tracking program wins.

To help you appreciate why we consider these projects a key indicator of future revenue, in 2004 fully 50 percent of our sales were from products less than two years old.

This new revenue was directly attributable to prior year program wins.

With 20 percent revenue growth and an increasing number and size of program wins during the year, it is clear that Artesyn has grown market share both today and for the future.

New markets.

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

Penetrating new market segments is extremely important to Artesyn as it is instrumental to our continued growth strategies.

In January we discussed that Artesyn was entering two new communication product sectors – rectifiers and amplifiers.

We successfully entered both of these new segments in 2004.

The products for these new segments are being introduced into production this quarter with significant production ramps anticipated for the second half.

Consistent with what we have discussed in prior calls, we believe rectifiers and amplifiers will account for 20 to 25 percent of Artesyn's total revenue in three to four years.

This is as significant to the Company as our decision to enter the wireless market several years ago.

To remind you, wireless accounted for 27 percent of our revenue last year.

Technology.

Throughout 2004, we have continued our commitment to invest in new technology and product development.

We consider ourselves to be a leader in R&D investments with nearly 10 percent of sales or last year $41 million spend on development of innovative new products and technologies.

Working closely with the engineering groups within our customers as well as the technology leaders within our community, Artesyn is uniquely positioned to succeed.

In 2004 there was an impressive flow of, in my opinion, compelling new product offerings that were added to Artesyn's product pipeline.

Across our embedded systems and power businesses, 68 new models were introduced.

Of these new product models, 31 were point-of-load.

Over the past couple years, I have spent time during our quarterly calls to talk about the DC/DC converter business with particular emphasis on point-of-load.

As distributed power develops into its third generation of products, there are exciting new opportunities available to Artesyn.

Customers are looking for faster, smaller and more efficient products.

During the fourth quarter we announced the world's first 200-watt fully-regulated quarter-brick DC/DC converter series and a remotely configurable point-of-load converter with a built-in I-square-C (ph) interface.

The I-square-C interface simplifies setup, control, and enables an open architecture for digital control.

The digital control function within distributed power is evolving from analog towards digital.

Artesyn is a supporter of digitally controlled and monitored products.

Digital control should gain acceptance within the markets over the next two to three years.

We believe Artesyn is positioned as a leader in digital control through the formation of a digital control alliance known in the industry as Power Management Bus.

Utilizing a communications protocol provided by Artesyn, leading semiconductor and power companies agreed to support an open communications standard for power system control within a digital framework.

Some of the publicly-held market leaders announcing support of the open protocol in addition to Artesyn include – Emerson, Ericsson, Intersil, Texas Instruments, Tyco, and Volterra Semiconductor.

As an advocate of open architecture systems, we believe that when this protocol is complete, the products developed from it will meet our customers' needs to improve time-to-market and streamline cost as well as offering multiple sources.

The protocol itself is expected to be completed during this quarter.

Products are planned to begin customer testing during the first half of the year.

Continuing into 2005, we intend to remain committed to our industry-leading investments in product development.

It's a frame of reference that should be around 10 percent again – 10 percent of sales.

Looking to 2005, our goals for 2005 are similar to 2004 in that profitability will increase throughout the year.

We will continue our focus on the fastest-growing sectors within communications.

We will continue our efforts of increasing market share with our blue-chip customer base.

Finally it will be important to us to expand our customer base.

The outlook for the year.

As discussed in last quarter's call, we anticipate 2005 revenue will grow between 15 and 20 percent.

To some degree this will be backend-loaded as our new rectifiers and amplifier offerings enter high-volume production in the second half of the year.

As expected Q1 will be seasonally down versus Q4, but certainly up versus prior year.

Earnings.

First-call includes a reasonably wide range of earnings expectations for 2005.

Looking at it today, the mean of the range, which I believe is something like $0.50, looks about right.

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

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

Hi.

This is RD Doshi (ph) for Lou.

I have a couple of quick questions.

I am trying to get a sense of where your peak margins would be given the sense that your embedded systems business is increasing as a percentage of revenues and that typically is the higher margin business.

Where do you think you could peak in terms of gross margins?

The only way I could answer that question, I would have to put a timeframe around it.

We think this year, that our margins will increase gradually throughout the year.

We should probably—I would say we should probably end the year a full point better than at this time.

Obviously we'll continue to work to improve that.

Alright.

Could you get into more details regarding investment in the advanced PCA field.

I believe I've seen the presentation where you said the (indiscernible) growth rate over the new few years could be 74 percent year-over-year.

Are you planning to increase market share in there?

Off what base are you starting?

Some more details on that please.

ATCA, Advanced telecom computing architecture, I believe is what the acronym represents, is in our opinion the next high-growth sector for the wireless market initially and likely to expand into other areas of telecom and networking.

We believe it will be – is a big market opportunity first for our embedded business and secondly for our power business.

We're investing heavily in it under that belief.

I'm not really sure what else to say about it at this time.

It's not – I think any company will not see significant revenue from ATCA this year.

There could be a question, will there be significant – I'm talking about revenue now – even in 2006.

But certainly towards midyear and then moving out and into 2006 what we'll see are program awards.

So like many new technologies, although this is more of an architecture than a pure technology, you're going to go through the evolution stage.

In very few customer applications right now is the customer looking to use ACTA in this generation of design.

It's the next generation.

Let me add the products, RD, that we have in the marketplace today include a processor blade, an AMC module, and a packet-processing blade in our embedded systems division.

We additionally have DC/DC converters that are designed specifically for these types of products in our power portfolio.

So in the embedded system business we are already in early customer involvement.

We would expect that would lead to orders throughout the year.

Alright.

Thanks a lot.

Todd Cooper with Stephens Incorporated.

Joe, turns in the fourth quarter in year 2003 were a little over 25 percent, the same as last quarter, but they dropped off in the first quarter to about 18 percent.

I've got a couple questions around that.

Is that what you expect this quarter?

What did turns in the month of January look like?

Can you comment on the Chinese New Year in February and the impact that will have on you?

There will be a Chinese New Year in February; there is no question about that.

It will impact us.

Our factory – I believe it's in the expectations – it's certainly in ours because it's a part of our normal business process.

We'll be closed to close to 10 days in production.

So, nothing unusual there.

That is part of why it's seasonally down for us.

The turns business.

It's a really interesting question, so I think it's a good question.

Investors talk about backlog and bookings.

They do because those are measures companies typically put out.

The problem with those – and we use them as well.

But the problem with those measures is they're historic.

If the market is stagnant – no problem.

You can use history pretty accurately as a predictor.

But this market is not stagnant, at least the space we're in.

It's growing pretty well right now.

What that tells you is customers are more confident about their expectations.

They're expecting and able to get delivery cycles that actually are shorter because you are building to forecast more now.

I would say – this is dangerous because it's just an example.

Clearly, customers are using shorter ordering windows with us.

Instead of booking for 60 days, they may be booking for 30 days or 45 days.

This is an area – again, a good question.

It's hard for investors to get a handle on it for different companies because it moves around all the time.

Your last part of it was 25 versus 18 percent.

I think it's working just about as we would expect.

If we're around 20 percent required turns, meaning book and ship within a quarter, that feels about right to us.

Are there any trends to be drawn from the turns that you did in the month of January?

Trends?

I think not.

Because January just ended.

There is really nothing that we have reported to the outside world about January.

(indiscernible) the guidance that you gave is quite a bit higher than what we've got modeled.

I guess I should model that to grow more backend loaded in the second half of the year?

This is – I'll tell you.

When our general managers talk about backend loaded, we have a term.

It's called the old hockey stick.

Everybody knows, don't do that.

The danger with backend loading is it is at the back end.

In this case, it's a little different in the sense, it's specific products and programs that have planned ramps that are geared around primarily the two areas I discussed, amplifiers and rectifiers.

Production beginning now.

Slow ramps.

The forecast includes significant production volumes in the second half of the year.

It is specifically related to those two new product areas for us.

Okay.

Are you prepared to break out for us the revenue and maybe operating income for the communications products division?

We do that when we file our Qs and Ks.

You'll see it at that time.

Okay.

That's all I have.

Congratulations.

Very good quarter.

Thomas Dinges with JP Morgan.

Just another quick one on the design-wins.

Can you give us a little bit more flavor on exactly what end markets those design-wins ended up in.

Are they geared in any way more heavily towards any one in particular end market?

Also, relative to your goals for '05, in terms of gaining market share and expanding customer base, any wins there with new customers that could move up the rankings significantly?

I have a follow-up.

Okay.

The program wins.

There were major program wins in the wireless sector for us.

Just in absolute numbers of dollars, that would have been the biggest area in the fourth quarter.

Servers and storage also represented two significant wins for us.

Do we increase market share in servers and storage because of those wins?

It's not clear because it's with market leaders that we're already very well established with.

In the wireless and servers side – so, in the storage side because your firm has just recently picked up coverage of our Company, which we appreciate – the storage side – we're very well entrenched with every one of the market leaders.

Our strategy there is not to gain market share, but to preserve our position with one exception where we do want to gain share.

However, in wireless, which has been a new market for us – we've only been in it several years.

It's already more than a quarter of our company, we have huge upside with customers that we've established relationships with, but we have no where near the bulk of their purchases.

Again, the bulk, the majority of the revenue in bookings of the large program wins in the fourth quarter was from the wireless space.

Okay.

Then real quickly just a quick question on the margins.

I was expecting, especially considering that you had about a 10 percent—or you were about 10 percent higher than The Street estimates on revenues for the quarter, the gross margin on a sequential basis ended up just a little bit flat.

Was there something in terms of the mix?

Or were there some additional investments done relative to some of the programs that are going to be ramping and so forth that tempered that margin expansion a little bit?

Just a little color would help.

Thank you.

Okay.

I attempt not to use program ramps as an explanation of cost.

But we are incurring a lot of cost and not much revenue to offset it on a number of these new projects.

That started in the fourth quarter on some of them.

That would have had some downward draft effect, there is no question about it.

Most likely the biggest effect you should think of as a mix issue – higher margin products one quarter versus the next quarter.

Our mix was a bit down – not dramatically – in our distribution channel, which is a much higher-margin channel for us.

Okay.

Thank you.

Steven Smigie, Raymond James.

Great, thank you.

Could you give us a breakout between AC/DC and DC/DC in the quarter.

The AC/DC in the quarter was 65/35.

For the year, it's 62/38.

The change in the fourth quarter was simply due to mix, particularly in the servers and storage area.

Okay, great.

Could you talk a little bit more about the amplifiers and rectifiers and what customers you're planning on ramping that with, if it's a significant ramp, and gross margin we might be able to look at for that business.

Okay.

Being in a competitive environment and the benefit our competitors have of listening to these calls, we've made an internal decision that in the rectifier particularly and amplifier space, we going to stop talking about – we're going to stop associating program names with particular customers.

We've given some competition too much help.

What I will say about it is we are ramping, which means we're well past the win stage.

We're ramping production for two of the three largest wireless guys right now in the rectifier area.

We're ramping production for what I believe are the two largest players in the amplifier space.

We've been fortunate, in entering these two new markets, to develop the wins with the really large market leaders.

That is working very well for us.

Again, because you've been very close to this story, I've said that it'll be – there is no reason to believe that anything has changed – 20 to 25 percent of our Company two to four years from now.

So far we're exceedingly pleased with the progress we're making at it.

Okay, Thank you.

Could you give us a time also on possible ramp for the new Typhoon product you released on the configurable point-of-load product?

Okay.

The new Typhoon products – we're real happy about these.

It extend technology lead for us.

The application for these new products, as you know, is for the intermediate Bus piece of distributed power where our product offering, I think frankly, was not the industry-leading offering in that one space within distributed power.

We think it is now the leading offering.

As you know, significant revenue in anything we do – it doesn't matter if it's a small point-of-load module or large rectifier rack, we have a year lead time from the time we get wins or introduce products until we see important revenue.

However, for those that haven't followed us over the last couple years, two years ago approximately—maybe it was three – we stated we were significantly increasing investment in DC/DC because DC/DC offered us higher margin – one factor.

Second factor, that was in our opinion, the growth area within power, point-of-load being a subset of that.

DC/DC, to support something Rich mentioned – it was 38 percent of our revenue as a Company.

That is up from something like 30 percent.

That's very important to us because of the two things I just said.

We intend to continue investing in that Typhoon area, which I am sure is why you asked the question.

It's going well for us.

You asked me about the digital power.

This is revenue a year or more from now.

I am talking about significant revenue for those same reasons we just talked about.

What we think has been accomplished, if you think about the names of the companies that have said they are going to follow this approach using one standard communication protocol from semiconductor controlled chips to discrete solutions to Artesyn and Artesyn's peer companies – Emerson, Tyco as examples, Ericsson – all these things will communicate together over this protocol we're making available to the group.

The products will all be interchangeable.

At least that's the intent.

We think what we've done – we know from a customer perspective, we've given them exactly what they want.

We think from a competitive perspective, that this open architecture – because all the market leaders, almost every one of them – are a part of it.

We think there is no question.

This is the way it's going.

There is too much momentum to have it not happen now, in our opinion.

Okay, great.

Congratulations on a nice quarter.

Thank you.

Jim Savage with Wells Fargo Securities.

I have a few questions.

You've talked about the long-term goal on the amplifiers and the rectifiers as being 20 to 25 percent of your revenues.

Where do you think it's going to exit calendar '05?

Obviously much, much lower than that.

I don't have that number in front of me.

Do you think that there are actually going to be meaningful revenues, though, in the back part of the year?

Absolutely.

It's going to be significant revenue for us as a company.

I don't want to throw out, say 5 percent, or something like that.

That would be careless without having the number in front of me.

That will be the biggest part of the incremental ramp in volume in the second half of the year.

Okay.

Your expectation is that you actually begin to have sales in the digital power management sometime in 2006?

Your beta will be in the second quarter – second/third quarter?

To be clear in answering your question so people understand what we mean when we say beta at Artesyn is we will have production-ready – this is our plan – production-ready samples that customers can put in their hands or put in their equipment—I'm sorry, and test by the end of the second quarter.

Okay.

Just a couple of questions on the operating model.

Do you still anticipate that you are going to increase your engineering headcount, I guess would be the way you would keep 10 percent of revenues in R&D, substantially during the course of the next year?

If you are going to be growing your top line 15 to 20 percent, does that mean that we need to be anticipating that your R&D expense will grow similarly?

Similarly.

In a close fashion.

I didn't give a precise percentage.

There are still some unsolved issues.

It will be about 10 percent of sales.

Okay.

Is there any opportunity to get operating leverage on the SG&A line?

Absolutely.

Do you think that there is – we saw a pretty big bump-up in SG&A in the December quarter on a dollar value.

Is that just sales commissions primarily?

Why don't I let Rich answer that.

I guess part of that has to do with Sarbanes-Oxley compliance as well in terms of what the expectations are going to be for '05.

Right, thank you, Jim.

That was a good straight-line.

The variable part of our SG&A is commission, so there were some variable costs on the higher revenues.

Secondly, we did have significant spending in the fourth quarter to continue our compliance program with Sarbanes-Oxley 404.

That certainly impacted the quarter.

Our goal is to now, since we're very close to compliance, to finish the project and to obviously look at ways to minimize that cost going forward.

While our total operating expense was a little bit under 20 million, our goal is to get it consistently below 20 million.

As you know, the R&D investment is more tied to 10 percent.

We're adding engineers in all of our businesses.

We've begun adding engineers now into China.

We have over 85 design engineers associated with the design center next to our power factory in China.

We have plans to add design engineers for ACTA also in China.

That is becoming a very important technology center for us.

The 10 percent should hold fast.

It may change as a percent of revenue based on variability of sales throughout the year.

Then, SG&A, our goal is clearly to get it below 10 percent.

Okay.

To get it below 10 percent for the full year, I would assume, not just for----

That's correct.

If you go forward in terms of the operating model, you are having a higher growth rate in your embedded systems business, which is a more software intensive business.

You will start having the ramp in the amplifiers and rectifiers, which you've indicated in the past is a higher gross margin business.

As you exit '05 and go into '06, do you think that there is fundamentally a higher margin mix that you will have – in addition to just better utilization and greater efficiencies – that will drive higher overall operating margins as a normalized margin for you going forward?

If you allow me to not give you specific numbers, but an answer in our strategy, what you've just outlined is, if not the key, one of the key aspects of our strategy both on the investment side and market-focus side.

Consequently our investments in ACP, primarily the ACTA space with ACP, are heavier investments in the wireless area.

The rectifiers and amplifiers are all consistent with the path you were just walking along about both markets and products with higher margins.

It's very key to us to accomplish that in order to continue our progression in margins.

Okay, great.

Thank you.

Craig Irwin, First Albany.

Congratulations on the solid quarter.

My first question is, I want to return to the size of the program wins.

You mentioned the couple of large wireless contracts in there.

If we assume that's 100 million, it still indicates the rest of your wins were pretty large.

Can you give us a little more color on the size of the wins relative to past quarters and whether or not they're increasing in certain markets or if this is just related to specifically the large wireless equipment contracts.

I think part of it is related to the rectifier business.

A unit is much more expensive.

There are multiple units in every single cell site.

When you win a project it, by definition, ends up being much large revenue streams, which is a very good thing.

Great.

Just to follow-up.

Those large contracts – I know you report in lifetime revenue.

Can you give us a flavor as to how long the assumed lifetime is for those contracts?

Yes.

This is a rule-of-thumb.

Obviously there are a lot of variables that impact life on a customer's program.

A pretty good rule-of-thumb would be if it's a wireless or telecom or networking application, we're planning on five years of important production.

Okay.

Can you repeat what you usually say for the rest of your general product mix.

If we talk about the biggest sector of our revenue right now, which is the server/storage area, servers would be – I think it's fair to say two years, maybe 18 months and some.

Storage would again be closer to the five-year area.

Okay, excellent.

Could you give us a little more color on the PMBus coalition.

I understand you've done the alphas (ph).

Obviously you worked with your customers.

Do you have some further feedback you could give us about what the customer is saying, maybe what they are asking for, and the potential.

The customers – you've been following us, so you know we were silent about this whole thing until we had it organized.

Part of the organization process was a lot of involvement from customers on what they are looking for.

So what do computer guys and telecom guys look for?

They look for open architectures in almost anything they do if it's at all possible.

They look for time-to-market, multiple sourcing, and maybe as important as all of that put together – the technology and market leaders supporting it.

What have we got here in this coalition?

We have, if I'm not mistaken, the two biggest control chip guys in the entire world, i.e., Texas Instruments and Intersil.

A company that is coming on very strong in the power control chip side is Volterra Semiconductor.

There are a number of others.

These names were just the public companies and who have done news releases.

On the module side, we believe the three biggest DC/DC companies, Artesyn, Tyco, and Emerson are driving this.

In our opinion, those are the market leaders, the dominant part of the DC/DC market.

So you have the control chip leaders.

You have the market leaders in modules saying this is the approach we're all going to take.

The customers are hugely supportive of it.

Okay, excellent, excellent.

Since you mentioned DC/DC, obviously it's about 38 of the year, up from 31 percent last year.

Where would you like to see this go optimally over the longer term?

What are your expectations for the further – may shift towards these higher margin products over the next year?

There are a couple of things working against what I would like.

I'd like to see it 60 or 70 percent of our revenue because of all the positive characteristics that come with it.

The marketplace is still 60 to 70 percent AC/DC – marketplace meaning what our customers buy.

We're going to still be in the AC/DC business.

We will invest heavily to have a higher percentage of our business in DC/DC than the market in total.

You have to work within the reality of what is purchased by your customer base.

I don't have an answer.

Is it 50 percent?

Is it 60 percent?

What I will assure you is, we're going to continue investing heavily to increase the percentage each year.

Okay, excellent.

Could you give us an update on your capacity utilization at the moment and what your capital plans are for this year and how you see potentially leveraging your increasing utilization going forward.

Okay.

First, the capacity issue that Rich talked about, I think he said 60 percent for embedded and 90 percent for power.

We're doing a couple of things on the power side.

The first is, we've just commissioned the approximately 250,000 square foot addition to our Chinese factory.

The second part, we are in the midst of an outsourcing program.

The first phase of that program will – let's do it in the equivalent of headcount.

We'll take 700 jobs that are currently in our facility.

They will be subcontracted out.

We're following a two-prong approach now.

It's time for us – we'll improve efficiencies with this expansion in China.

But it's also time for us to be going down a second path through outsourcing.

The program I gave you is the first major thrust in that.

Okay.

Could you give us a little character on the potential product groups that might move into outsourcing.

Would these be long life standard products?

Or is this likely to be something that is more of a custom solution for major customers?

Can you give us a little color.

The first stage of it are components that are used within our products.

That 700 is an about number; it might be a little more than that.

But call it 700 jobs that are moving.

The next phase is addressing exactly what you're questioning.

We don't know the answer yet.

We're out in the quoting process, the relationship process as far as supply chain, and exactly what kind of product.

Because we'll still have our own factories.

So, what is the right blend for us to outsource as we move forward versus do in house.

That will be driven by, aside from customer requirements, how do we make the best return on our investment and the highest profit?

Okay.

That makes a lot of sense.

Another question.

Could you comment a little bit about the power supply side, the pricing pressure you've seen over the last year compared to industry norms.

How much have you got back on components?

Do you have any thoughts or forecasts you could share with us for this year?

Let me try to answer that question.

We were just deciding who is going to answer it, that's all.

The price erosion varies from market to market.

I think if you modeled in mid single digits, you're probably about right.

Things are averages across our markets.

On the price agreements with our supply base, if we're successful they will contribute to improved margins for us.

We're comfortable, at the very least, that the price concessions, price (inaudible - background noise) with our supply base will offset what we're forced to give in to the end market.

It all ties together.

We have a very informed, sophisticated customer base.

They understand semiconductor costs.

Our material procurement is 70 percent of our cost.

Ken Muth at Robert W. Baird.

Good morning.

The growth rate that you gave of 15 to 20 percent, what would cause you to hit the high end of that range?

Is it penned market demand at the customer?

Or is it – can you give us a little bit of visibility on that?

Overwhelmingly, it will be how successful are the customers with the particular products that we're shipping in to them.

Okay.

Then I would assume, given what you've been talking about here, that the wireless portion of your business will be accelerating.

If that is accelerating, what part will be flat or just slightly up off of those growth rates?

The distribution side?

As we'd see it today – and not because revenue is getting smaller, but only related to growth rate – as we see it now, wireless gets to be a bigger piece this year and next year.

As a percent of our business, the server piece becomes a smaller percent.

Okay, great.

Thank you very much.

Congratulations.

Joe McGarth (ph) with G. Goldman. (ph)

Just a quick question on the guidance going forward.

I guess given the very strong revenue for the quarter, you have a bigger base to work off of with the 15 to 20 percent revenue growth.

I guess I'm a little bit surprised that some of that revenue isn't going to flow through to the bottom line.

Could you talk about the $0.50 EPS number and why we're not seeing some of that revenue flow through.

Thanks.

I think we are seeing the revenue flow through if you go from $0.34 to $0.50.

I am not sure I really understand your question.

Are you just asking, why isn't it 60 cents instead of 50?

I guess I'm asking why we're not going to see more of that incremental revenue flow through.

At this point, as we look at the cost structure in our business and the margin profile, we think – and by the way, let me digress a moment.

I understand why investors and why analysts want management teams to be precise.

One cent difference this quarter, two cents different for a year.

That's a very difficult thing for management teams to do when you are looking out over a multi-month period, meaning 12 in this case, and you're dealing with over $500,000 million of revenue, which is an effort of why we attempt to provide guidance.

I characterize guidance as about.

I've used about $0.50.

That happens to be the mean out there.

There is another approach where you use a range.

It's very difficult to try to be more definitive when you're talking about a few pennies one way or the other.

I appreciate that.

The heart of my question was, the guidance you're giving for revenues is now higher than the analysts were expecting, but you are guiding for the same earnings.

I understand the issues you're working with.

That was the heart of what I was asking.

We're not actually guiding for the same earnings.

Again, the point I was trying to make, if I'm not mistaken, the range of earnings is something like 44 cents to 50 cents or 55 cents.

It's a very wide range.

I was trying to narrow that range by using a mean.

To say we stated the same number, I really think that would depend on what analyst report you looked.

Were you were in the group that was at the lower end of the median?

Or were you in the group that was at the higher end of the median?

Okay.

I understand.

Thank you very much.

Alan Mitrani, Copper Beach Capital.

Can you give us guidance for CapEx for this coming year?

You talked about an incremental spend in China.

I know you did about 22 million this year.

Do you expect CapEx to be above or below that level for '05?

We would expect CapEx to be slightly below that.

As we mentioned we've added over eight surface mounts.

While we're starting a little expansion in China I don't think it would be available until the second half of the year to start populating with surface mount equipment.

The surface mount equipment that we're looking at has gone up in price over the last two years.

That will certainly influence.

I would expect CapEx to be in the 18 million to 20 million range.

Excellent.

Also on the interest expense line, I'm finding it hard to get there.

You had 90 million in debt, which didn't change.

It's a fixed-rate debt, as far as I know, 6 percent roughly.

Your cash is high.

How did you have the highest interest expense in a couple years?

What is going on there?

That is more of a – obviously the interest cost is fixed on the bonds plus the debt issuance amortization.

So it has to relate to interest income.

We had a situation where we had a couple investments we wanted to move.

Took the short-term loss to be able to extend out into the higher rates that are expected.

So you should see higher interest income going forward.

Okay, great.

Could you give us a sense of what kind of interest rates?

Now that the Fed keeps raising rates, what kind of interest rates are you getting on your cash roughly?

We're very short term today.

We expect to extend those maturities a bit.

We only invest in AA and better type of instruments.

Right now our portfolio is under two months.

We would extend that and go forward.

We would expect more in the mid-twos, perhaps approaching three.

Okay.

Can you give us what the – how many shares outstanding were there at the end of the quarter?

The shares outstanding, I used—on the additive-converted method, we used 51,403 as a weighted average.

The common shares outstanding were actually 39,305.

Okay, got it.

The interest add-back line that gets added back to this quarter?

I've just got it net in front of me.

That's fine.

I'll get that after.

I don't want to beat a dead horse.

But I do want to ask the question that the analyst from G. Goldman asked as well.

Just to be clear, you are guiding – you had a great revenue upside this quarter.

You're still comfortable with 15 to 20 percent revenue growth, which implies about 494 to 516 million off of the 430 base.

That's correct.

Okay, so in that scenario I think understanding you had about 600 basis points of gross margin improvement this year – really fantastic.

Now that you are hitting higher utilizations on your communications side, it's becoming a bigger piece and rectifiers should roll in at the back half, which have higher margins.

The implication is your gross margin should be higher in a year or even as you go forward than what it was in the past year, especially as higher revenue covers more fixed cost.

I think was his question was and what mine is, you only sounded comfortable with about 100 basis points of margin improvement off this level.

You are conservative, but shouldn't there be more?

If there is more, that's fine.

You could just tell us, maybe keep watching.

I was wondering where you think----

We attempt to provide as much guidance as is practical.

At this point, we believe it's realistic to talk about a percentage improvement in margin.

If we look at the impact of a percent improvement in margin, better leverage on some of the spending, and we talk about fall-through – so 15 to 20 percent – these are all – I'm trying to provide guidance now.

So 15 to 20 percent is a range of growth that we've talked about.

We've said the earnings number, use the mean as an about number.

If you did use that mean as an about number and talked about fall-through, essentially what you are getting is 50 percent increase in earnings on a 15 to 20 percent increase on revenue, which is when you look at the relationship, a pretty good relationship.

Right.

But most of it seems to be coming from operating leverage off the SG&A and R&D lines and not from the gross margin line in that scenario.

That's okay.

That was one of the things that I think we could talk about more off line (inaudible).

Thank you.

Jeffrey Bensik with Jefferies & Co.

Thank you.

Just real quick in terms of how did your performance rate relative to end market performance?

That's a good question.

We'll really know – well, however accurate market data is – we'll really know as we see the rest of the companies report their quarterly results that are public and then looking at market research data in an effort to compile went on with both public, private, large, and small companies.

Our opinion at this stage is that we're in a market – the power piece – that grew in the lower single digits, possibly mid single digits.

We'll find that out.

Obviously we grew three to four times faster than that within our power business.

In the embedded business, all the same qualifiers I just talked about, we're pretty confident we're growing at least as fast, but more likely faster, than the end markets.

We're not going to know all that until each of these public companies reports their year end numbers and the rest of the research reports I talked about.

Internally we're confident we're accomplishing one of those three—or four objectives we discussed, which is increasing market share across-the-board.

Okay.

Can we talk about your growth and where that came from.

What sort of percentage of it was from increasing sales at existing customers versus new customers versus new segments.

Could you break that out a little bit?

Okay.

One of the things, on one hand we're pleased with what is going on in the distribution business.

As you know, we formed that business two years ago.

It's 17 percent of our revenue.

I would have – let's say we planned on it being a higher percentage going into the year.

What happened is, it grew about the same rate that the rest of our company grew.

That distribution business and the organization we put in place is where we target getting new customers.

In our top 20 customers, who are the 20 largest communication guys around the world, we don't have the share we want in each of those companies, although we do have relationships and, almost always, we're considered one of the preferred or strategic suppliers.

This is an interesting—why we're focused so much on our current customer base, aside from adding new customers through that dedicated distribution channel – just looking at our current customer base, if we got 20 percent of their purchases, which is not a stretch at all when you are one of their preferred suppliers.

Some we have a lot more of that now.

But some we have a lot less.

In total, if we got just 20 percent of their purchases, we would double the size of Artesyn without getting one new customer.

That is a perfect position to be in.

That is not even setting an unrealistically high bar to say 20 percent when customers are trying to reduce their supply base to three suppliers or four suppliers.

We're very much focused on both aspects.

Okay.

Finally, can you talk about the convertible again and how we should think of fully diluted shares going forward.

Sure.

Basically, the convertible begets about 11.2 million shares in the calculation.

The add-back of interest—the add-back of net-of-tax of the interest is roughly 900,000 a quarter.

It's just the as-if converted method.

So it's 11.161 on convertible shares.

We're adding back 915,000 on the as-if converted method of interest net-of-tax benefit.

Okay.

I don't know if you know.

Have all the other analysts converted or switched over their '05 estimates based on the fully diluted shares including the conversion?

I would think they have.

If they haven't, they should.

Okay.

Alright, thank you.

Alan Mitrani, Copper Beach.

Just a follow-up question.

Can you talk a bit about plans for capital this coming year.

You do have a lot of capital on the balance sheet.

You haven't made acquisitions in several years.

Now that you've got your house in order and working capital metrics look great, can you talk about what you are thinking about with your cash.

Great.

As you know, our net cash position is 16 million.

We don't believe that that's overly generous when you review, though, the fact that the bonds are currently or the converts are currently deep in the money.

One would believe that that cash was available for other uses.

As we look strategically, as you know in the past we've been buyers of technology.

We're continuing to have our eye focused on that.

While we don't have any acquisitions clearly in mind, we're certainly looking at our roadmap and comparing it to creating technology versus acquiring technology.

Also, the communications business has been fantastic.

We haven't seen a quarterly sequential decline in awhile.

Can you talk – is there seasonality a bit in that business?

Can you help us out a bit on how to think about modeling that?

After awhile sometimes you get lulled into thinking every quarter is going up to the right.

Can you give us a sense of where you're seeing fundamentals for that business?

Earlier Todd asked the question about the Chinese New Year.

The Chinese New Year and seasonality of demand changes, which although we've missed it both between the year end and in the beginning of the next year – impacts power dramatically.

You have both the year end demand versus new year.

You also have that almost two weeks of no production for us – or no Chinese production.

However, ACP or the embedded business is not impacted by the Chinese New Year.

It is impacted, however, by that same seasonality phenomenon.

There is no question that relative to (indiscernible) it would appear to us relative to Q4 that that business would be down also, but certainly way up versus Q1 of the prior year.

Okay.

Thanks.

Craig Irwin at First Albany.

I just wanted to—I have a couple housekeeping questions.

I might have missed this.

Did you give the end market breakdown for the quarter and the percentage from top ten customers?

We actually didn't.

If we said 71 percent for top ten customers, we'd be extremely close.

They are just giving the numbers.

It's 72 percent for the year.

So 72 percent for the year for top ten customers.

You're other question was breakdown by end markets?

Yes.

Basically on end markets, we saw an influence in the Q4 of computing and storage.

We, I believe, mentioned that.

As you know, that's our more competitive revenue stream.

So computing and storage for the quarter was 45 percent, wireless 25, telecom and networking 13, and distribution 16, which matches Joe's comments about the quarter.

Looking at the year, though, which I think is a better benchmark – computing and storage at 43, wireless 27.

Telecom is 13 and distribution 17, which was very similar to the year-to-date last quarter.

Okay, excellent.

I had a follow-up question about the turns business.

You indicated a level of comfort with the recent level of turns business.

I understand your mix is heading towards a little more of the DC/DC stuff and that customers are getting a lot more comfortable in the market.

I guess the share is also helping.

Could you comment on this a little bit more and give us a little more color on what gives you the level of comfort for the turns business.

For a number of years we have felt and communicated that – I'm going back now to how investors and analysts are comfortable looking at things like backlog and bookings, book-to-bill.

We've said, if the business is between 0.9 book-to-bill and 1.1, the turns business is going to be normal within the range of what we anticipate.

So while I talked earlier about some changes in ordering patterns, orders placed for shorter periods of time, it is still falling within that range.

There hasn't been, up to this point, dramatic change.

That range is again 0.9 to 1.1.

Adding to turns again, in the fourth quarter our revenue was higher than what we expected so the turns business, to meet some unexpected demand orders from our customers, increased slightly.

So the turns business in the fourth quarter was between 25 to 28 percent.

That is a little bit higher than what we've experienced normally.

It will show you the flexibility of our supply chain and our factories.

In a short time we can respond to un-forecasted demand.

Agreed, agreed.

Obviously it shows that more customers are giving their short-term business to you, or at least there is a pickup in the market coming to you, in looking at the results of other competitors today.

What gives you confidence that this can build or stay sustainable at these levels over the longer term?

Is this dependent on the overall end market recovery that we're seeing.

Or do you think that now that you're taking such significant share that this level of turns business will just continue?

One of the things that will increase turns business as a percent will be increased revenues through some of con bonds, (ph) depending on the contractual arrangements with customers where we own it.

It's not a sale because it's sitting there.

They own it when they take it and use it.

It becomes a part of the turns calculation.

It's one of the reasons that, while the investment community because that's the data companies provide – want to look at backlog and bookings.

In the world we live in, the supply chain world, our suppliers hold inventory for us – never as much as we want them to.

We hold inventory for many of our customers.

The dynamics of the supply chain have changed the importance or significance of traditional measures.

That in itself will result in higher turns business.

Okay.

So this is an improving character of the overall business?

In my opinion, our position and our customers' supply chain management has improved significantly.

We have worked really hard to improve delivery times relative to peers.

While we're no where finished with where we want it to get, we've made a lot of strides.

Excellent.

Thank you very much Joe.

Having no further questions at this time, I'd like to turn the conference back over to Ms. Rembaum for any additional or closing remarks.

Thank you for joining us on today's call.

We invite you to listen to our first quarter of 2005 conference call on Thursday, April 28.

Thank you everyone for your participation in today's conference call.

You may disconnect at this time.