艾默生電氣 (EMR) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to Artesyn Technologies first quarter 2005 earnings release teleconference.

Today's call is being recorded.

For opening remarks and introductions I would now 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 first quarter 2005 conference call.

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

A copy of this mornings press release announcing our first quarter results is currently posted on the press release section on 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 broadcast live over the Internet on our website.

A replay will be available immediately following the call on our website or by dialing 800-203-1112, and the dial up replay pass code is 7715426 and will be available through may 4th.

Before we begin, I would like to remind you that except for historical data comments on today's call containing 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 this call.

While Artesyn may elect to update forward-looking statements at some point in the future we specifically disclaim any obligation to do so, even if our estimates change.

For a more detailed discussion on such risks and uncertainties please refer to our SEC filings with the SEC including our 10-K filed on March 16th, 2005.

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

Thank you, Pam.

Good morning.

Sales in the first quarter were 102.5 million compared to 96.5 million for the same quarter last year and 120.4 million in Q4 of 2004.

The power conversion division recorded first quarter sales of 81.3 million, down 2.1 million or 2.5% from the first quarter last year and 15.3 million or 16% lower than the fourth quarter in 2004.

The revenue decline in our power group was largely due to greater than anticipated seasonality trends in our server business as well as delays in several new product introductions that have been rescheduled to later quarters in 2005.

The embedded systems first quarter sales were 21.2 million, an increase of 8 million or 61% from Q1 2004, yet decreased 2.6 million or 11% sequentially from Q4 2004.

Year-over-year revenue growth in our embedded systems group is a result of 2.5 G and 3 G wireless infrastructure deployments that were not in place in Q1 2004.

The decrease from Q4 was due to anticipated seasonality.

Orders in the first quarter were 101 million yielding a book to bill ratio of 0.99.

Backlog at the end of the quarter was 85.6 million with approximately 87% or 75 million scheduled for shipment in the second quarter.

Gross margin as a percent of sales was 25.2%, essentially flat with the year ago quarter.

Net income for the first quarter was 1.9 million and earnings per share was$0.05.

These results were approximately the same as the first quarter 2004 net income and earnings per share.

Included in net income in the first quarter of 2005 the 675,000 net of tax for the recovery of expenses under an indemnification agreement from a previous technology license.

The total operating expenses in the quarter were 22.1 million or 21.6% of sales sales, approximately 1.5 million or 7% higher than operating expenses last year, but 1 million lower than Q4 2004 that included cost of the SOX 404 compliance.

R&D expense for the quarter was 11.6 million or 11% of sales.

Most of the additional expenses this quarter were in anticipation of higher sales and new product introductions.

As a result of the lower sales volume now projected for the remainder of the year, we have taken measures to reduce companywide operating expenses by approximately 1 million per quarter.

The impact will be negligible in Q2 as we absorb the one-time cost to implement these reductions.

Net interest expense in Q1 was $1 million due to the lower net income threshold this quarter.

The if-converted accounting methodology for calculating diluted earnings per share should not be applicable for Q1 EPS calculations.

The effective tax rate for the quarter was 29%.

For 2005 the effective tax rates should range between 26 and 28% for the year.

Similar to previous years, there is a potential that unforeseen discreet events that could affect a provision during the year.

Looking at the balance sheet, we ended the quarter with 99 million in cash and short-term investments.

Overall days working capital increased to 50 days from 40 days in Q4 of 2004.

Accounts receivable decreased to 58.6 million, mainly due to the lower sales.

And day sales outstanding remained at 48 days, the same as in Q4.

We continue to remain focused on working capital as our revenues improve throughout the year we should see our days working capital also improve.

Inventories increased from Q4 last year by 2.2 million and the inventory turns were 5.5 compared to 6.8 turns in Q4 of 2004.

Inventory was impacted by the lower than expected sales during the quarter.

Capital expenditures were 4.9 million in the first quarter.

Depreciation and amortization expense was 5.7 million.

And finally, our factories are operating at approximately 85% capacity and power conversion and at 50% capacity in our embedded systems business.

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

Thank you, Rich.

Good morning.

We appreciate you taking time for today's call.

I'd like to take a few minutes to discuss the quarter, important market developments and an outlook before turning the call over to a Q&A.

The first quarter.

If I'm not mistaken, last quarter was the first in over three years that Artesyn has missed Street quarterly earnings expectations.

The first quarter was also disappointing when compared to our own expectations.

We had anticipated seasonality in the server sector in Q1.

In fact, this was conveyed in the Q4 earnings call when we said Q1 would be down sequentially.

What we did not properly anticipate was the magnitude of customer pushouts for several new programs from Q1 into latter quarters of 2005.

Well, it would be inappropriate to discuss a customer specifically, these programs are with indus -- with the industry market leaders.

We are confident when in production the initially anticipated volumes will be realized.

Market share.

We believe Artesyn is continuing to improve its market position.

In servers, we are well established as a preferred supplier with literally all the market leaders.

In Q1, this sector represented 42% of revenue.

The wireless sector continues to grow for us.

And up to this point without the benefit of meaningful rectifier or amplifier revenues.

In Q1, wireless accounted for 28% of revenue.

Our expectation is that wireless will grow to about 35% of sales by year-end.

Distribution is a market channel we've been focusing on over the last couple years.

It allows us to expand our customer base while realizing significantly better margins.

In Q1, distribution grew to 18% of sales.

Our year-end objective is 20%.

First quarter design wins.

We are very excited about the outstanding quarter we experienced from new program wins.

Some of you may think it sounds ironic to be excited about new program wins when customer delays so negatively impacted us in the past quarter.

Keep in mind that new markets and new products are key contributors to Artesyn's growth expectations.

To remind you, last year 50% of our revenue was from products two years old or less.

As I mentioned, the number and dollar value of design wins was exceptional in the first quarter.

There were 30 major program wins with estimated lifetime revenues of 357 million dollars.

To help put this in perspective for all of 2004, which we considered a good year, major program wins were valued at $690 million.

Over the last two quarters Artesyn has booked 49 major programs with estimated lifetime revenue of $586 million.

Artesyn has unquestionably established significant market momentum and was without -- and is without a question gaining market share.

Now to the outlook.

We remain enthusiastic about the year.

Seen a significant ramp in the second half as new rectifiers and amplifier products reach full production.

With modest growth in the second quarter the Company expects 2005 revenues to increase between 8 and 12% and EPS growth between 20 and 35%.

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

Thank you. (OPERATOR INSTRUCTIONS) We'll go first to Louis Miscioscia of Lehman Brothers.

Hi, this is actually Hardiek Goushi for Lou.

Just had a couple of questions.

First regarding your -- the pushback that you saw in this quarter, was that mainly due to, like, with the customer side in market weakness or was that just like in the specific delays with -- with the customers introduction of new programs?

Yeah, I'm sorry if I wasn't clear about that, Deek.

It -- it was program development delays where, for example, one customer ran into a software problem he couldn't resolve.

Another customer ran into a interface problem between two different suppliers in his system integration.

Those would be examples.

But they were not -- from the reports we get from our customers, they were not related to end market demand, but related to product development delays.

All right.

And -- but -- but regarding your operating expense cuts, I -- I'm guessing most of it would be focused in R&D.

What -- is your long-term target still to maintain the 10% of sales, or is that now going to become a bit lower?

We don't really target a percent to invest in R&D.

It's turned out over the last couple years.

It's been around 10%.

What we do is determine how much is an appropriate investment level for the opportunities that are available to us.

So I think looking forward for this year what you should model, if you will, would be something around 10%.

The first quarter was about 11%.

All right.

My --

But -- but again we don't manage it as a percent.

It's -- that's purely coincidental that that's how it sorted out the last two years.

Okay.

And then could you just go over once again as to why your interest expense declined and also I like to know how the affect of the convertibles works on the if-converted accounting methodology?

Sure, Hardiek.

On the -- this is Rich.

On -- on the interest, the interest was slightly lower this quarter largely due to the return on our excess cash investments.

So that was a significant change.

As you know the -- the converts, the interest rate it's fixed on that instrument.

So it was due to interest income if you like.

On the as if converted method, as we've shared before, the earnings have to reach a certain level to where the method kicks in and you add back the internet net of tax and that's at approximately the 8 to $0.09 a share a quarter number is when the higher shares come into play.

If you want to do that off line we can walk you through the calculation again if you'd like.

All right.

Sure.

Thanks a lot.

Thank you.

We'll take our next question from Steve Smigie of Raymond James.

Great.

Thank you.

I was wondering if you could talk a little about the -- the product mix within the -- the pushed out programs.

Is it more heavily weighted to the power conversion versus the embedded business, embedded board business?

Well, dollar wise it would have been more heavily weighted to the power business.

But clearly we were impacted in the embedded business as well.

Okay.

And would it be -- is it something like -- to a certain extent trying to understand the gross margin as you go forward.

I mean is it like 80% power business versus the higher margin embedded?

I think that's probably as -- as good a way to -- to look at it as any, Steve, yes, because of the -- just the volume impact.

Okay.

And could you -- you talk a little about the mix AC to DC -- AC/DC in the quarter?

Not too different than what we typically have and that would be 60-40 about.

Okay.

And -- and again on the new program wins is it largely tied to AC to DC for that part that is power or DC to DC or again similar mix?

A little heavier -- let's see, a little heavier on the DC to DC, but it's mostly power because of again it's 80% of our revenue stream.

And a large part of those wins clearly are AC to DC products.

Okay.

And last question I'll let somebody else.

Can you talk a little bit about point-of-load growth and -- and how maybe that was in the quarter?

Or, I mean, that was just a difficult quarter, how that -- the growth might look over the '05 relative to say the -- the guidance expectations?

Thanks a lot.

You know, Steve, we've started to consolidate point-of-load and DC to DC under one grouping, but point-of-load if we look at it is doing extremely well for us both in revenue and in the number of design wins.

It -- it accounted for five major programs, but unusually large dollar value associa -- for point-of-load associated with those programs.

I -- I guess I look at our point-of-load investment and I'm -- I'm very pleased with the return we're getting out of it.

Okay, great.

Thank you very much.

Thank you.

We'll take our next question from Thomas Dinges of J.P. Morgan.

Hi, just a real quick one for you here.

The power conversion division obviously fell into -- into a loss at the operating line this quarter because as you mentioned that's where the bulk of the dollar push outs happen for the quarter.

As you look out over the next quarter and then into September, obviously you are expecting, especially in -- in this back half of the year expecting some good growth.

You look at the -- the savings program that you talked about this morning already.

Does that get that division back to at least a break even level for what you're thinking that division's going to grow at least this next quarter, or are you thinking there's still going to be a small operating loss there perhaps next quarter and then we're going to make it up in the back half of the year?

And then I have a quick follow-up.

We -- we.

Go ahead, Rich, if you want to.

Yes, Tom, this is Rich Thompson.

In -- in Q2 we would expect that the operating income before corporate expenses for power, we would expect that to be level or slightly profitable for the quarter based on -- on our -- our current revenue outlook.

So -- so the actions that we took were -- were heavily weighed towards the power business.

They won't have much of an impact in Q2.

That's why I'm not telling you earnings will be a lot higher in Q2 for that division because of the one-time cost associated with it.

Okay.

And then quickly, just can you talk a little in greater detail about what's going on on the -- on the backlog side in your coverage for this next quarter?

Is that more so just related to the pushouts that you saw with some of the programs or some of the scale backs?

Because, I just use -- go back through my notes this is the first time that you guys have dipped below sort of a 90% coverage on the next quarter out on backlog in some time here.

Okay.

If you look at what coverage we had in the 4th quarter, the coverage does bounce around a bit in the 4th quarter.

We were in the high 20%s I believe in turns business which is booked and shipped in the same quarter.

I -- I -- I understand or I -- I look at the numbers now and it would suggest a turns based on analyst forecasts that I see out there of about 30%.

I think the only phenomena to add to it is particularly in the embedded board business.

Number of customers have gone to very short order to shipment windows and it's causing us to -- to obviously report lower backlog entering into a quarter.

This was with two of their largest customers.

We -- we think that the process has caught up with its -- itself now and we should have a 1 to 1 book to bill in that division going forward.

So there is a bit of phenomena in the marketplace.

Again, the turns business is impacted certainly by the -- the orders window and that did have an impact in us in Q2 and a little bit in Q4 also.

I'm sorry, Q1.

Okay.

Thank you.

Great.

Thank you.

We'll take our next question from Ken Muth of Robert Baird.

Good morning.

Just a follow-up on the -- the loss of the power conversion unit.

Is there any pricing or gross margin issue there that caught you off guard this quarter?

Have you seen any new disruptions in the -- in that market?

Ken, no change from the prior several quarters.

It I think is simplistically it related to the volume shipped in the quarter.

Okay.

And then on the outlook for the wireless side, is that more dominated with outside of the -- the U.S., or is that kind of a -- a split between U.S. opportunities and international opportunities?

Yes, I think the way we look at it is our customers' decision making points.

The -- the two largest wireless companies as -- as far as OEM's are European companies.

Siemens, I'm sorry, Nokia and Ericsson.

Those companies are also our biggest, or will be our biggest, customers through the balance of the year.

Is that European revenue or is it North American revenue if they ship it in a North American or Asian revenue?

So, from our perspective we haven't been looking at it geographically as much as we have customer.

And the traditional market leaders are the same companies when we look through the balance of the next nine months that we would expect to be our revenue leaders.

Okay.

I don't know if that -- that doesn't precisely answer your question.

I appreciate --

Yes, it does, because if you look at Nokia's and Ericsson's numbers on a infrastructure basis those guys were down 19 and 30% sequentially so that kind of matches up with what you just talked about.

I'm set.

Thank you.

Mm hmm.

Once again if you'd like to ask a question please press star, 1 on your touchtone telephone.

As a reminder, if you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Again that's star, 1 for questions.

We'll take our next question from Jim Savage of Wells Fargo Securities.

I'm going to beat a dead horse here on the profitability of the power supply business.

You've talked about it being at 85% capacity utilization in that business.

Now, how do you -- if -- if that's fairly substantial utilization there's not a lot of excess capacity there.

Is that because the -- the GNA expenses and the R&D expenses are so so high?

Is that why you end up with a loss -- do you have a reasonable gross margin at 85%?

Yes, we do.

Basically, Jim, as you re -- you may recall we were at 90% capacity in the 4th quarter.

So 5 points is pretty substantial in manufacturing terms of absorption.

Additionally, remember, we measure capacity as to practical capacity.

Practical capacity is about 90% of theoretical.

So, I'm sorry we have to explain those numbers as some people use different measurements of absorption.

So, we're -- we're gearing towards practical, we lost 5 points. we should have absorption going for -- forward.

Okay.

Jim -- Jim, I think that's -- I think that's a -- a valid question.

One of the points for the other listeners is capacity utilization, I know as you appreciate following contract manufacturing, is not a science.

We choose to use surface mount u -- utilization of our lines.

What that does not address are -- is 150,000 square foot of factory space sitting empty waiting for growth.

Some companies may include that in utilization where you then see huge upside on absorption.

So we consistently use machine utilization.

But the -- the assumption still in terms of the -- the 150,000 square feet of factory is that's not a -- that's not a huge impact in terms of profitability, the depreciation on that.

It depreciated over a very long period of time.

Correct.

But what you do see is when you start talking about efficiencies, what you then see is you have the factory space sitting as any good company would, waiting for growth.

You put machines in that space then.

So you -- you see a pretty significant improvement in absorption of overhead as you start adding more machines to existing space.

Okay.

A couple of other things.

There's been a lot of talk about digital controls over the last year.

Now, I just want to get a sense as to where you are, where you think you and the consortium you're involved with, or in terms of when there will actually be product on the digital control side for point-of-load.

We're sampling with customers right now software.

And I actually sat through one of the sampling demonstrations with one of the largest companies.

The hardware right now is dependent upon silicon from control chip designers.

The current schedule is the third quarter of this year we will have hardware in hand -- in the customer's hands for -- for demonstration.

And production-type product sometime before year-end.

That's where we sit today.

Okay.

And one last question, you're now a month into -- or almost a month into the second quarter.

Do you have any sense yet as to what the order flow has been since the end of the last quarter?

Whether there really will be somewhere around 30% turns business and whether there has been any pick up in overall demand since the end of the quarter?

Okay.

Yes, Jim, looking -- normally we don't talk about inter-quarter results, but the trends we talked about in Joe's comments particularly that we expected modest growth from Q -- in Q2 from Q1 tends to be panning out well and our turns business as expected.

So, I -- I think we're -- we're -- the business in the first month is supportive of our comments.

Okay, great.

Thank you.

Thank you.

We'll take our next question from David Daglio of Boston Company.

Hi, gentlemen.

I guess one short-term question, one long-term.

Just on the -- on the long-term, so you've had a staggering amount of design wins in the last six months, when can we start to see revenue conversion?

Well, okay --

From those design wins explicitly?

Is that the short and long-term question?

No, one more.

Second question has to do with -- with Bell Fuse and -- and what your plans are there as far as addressing?

They're different.

Okay.

All right, so an unrelated question.

Yes.

All right.

So, the -- David, I think what -- what we need to look at is last year some of our investor -- I'm going to talk about last year, some of our investor have asked over a period of time the same question you just did.

And why do you guys track design wins so closely?

Well, let me point out to the listeners on the phone, most subsystem companies do.

For the same reasons we do.

It's about the best visibility you have into future revenue streams.

So leading into last year we talked about design wins and we talked about the Company's growth.

Last year the Company grew right at 20%.

That was from design wins that we've been talking about.

The same thing this year.

We -- we're -- we're comfortable or confident are the wrong terms, but we believe with the design wins that we're booking that the -- there's no question we're gaining market share and that the growth of the Company is going to be supported by those design wins.

Also I mention in my comments that half of our revenue last year came from design wins from products that were two years old or less.

So there's a constant flow in our revenue stream of product, I'm sorry, of products that are reported in these design wins.

And it's roughly, this is a approximation because it varies from win to win, but it's roughly 12 months from the time we talk about a design win until the time we see revenue from it.

Great.

Thank you.

Dave, let me add, additionally as you know these programs have varying life anywhere from a couple years to five years, so let's pick three to four years as an average.

So any company in -- in the industry we're in would have to replace a large percentage of their business that goes end of life each year.

So when you look at design wins you need to -- to factor in what is the incremental revenue growth in those future periods.

And I think, that's as Joe mentioned, about the best proxy we have for growth.

Great.

Bell Fuse?

The -- Bell Fuse on April 27th news release talked about Artesyn.

And I assure you there's nothing new.

As we said in September the board carefully considered Bell Fuse's proposal and determined it was not in the best interest of Artesyn shareholders.

And that the financial terms that were in that proposal were inadequate.

And absolutely nothing new, I will emphasize, has been put forth by Bell Fuse.

Is there a dialogue between the two companies or is this just a paper going back and forth?

Well, I think you've -- this is probably the last thing I could say about it -- there's again been something new proposed to Artesyn from Bell Fuse from the time that Artesyn's board said this is an inappropriate offer for our shareholders and it's not worthy of discussion.

So I'm -- I'm not really sure, David, there's anything more I could say about it than that.

I guess -- I guess what I -- what I'm struggling with is that if -- usually the difference between the first offer was more of a hostile one.

I would assume there's some negotiation that goes back and forth on price.

And we've seen that with larger deals recently in the press.

And I'm just curious if -- if management is willing to undertake any conversations with the company besides just exchanging -- sending letters back and forth.

There's been nothing according -- from Bell Fuse that is encouraged Artesyn's board to change its position which we believe is the right position for the shareholders.

Okay.

Thank you.

Thank you.

Once again if you'd like to ask a question please press star, 1 at this time.

As a reminder if you are using a speaker phone please make sure your mute function is turned off.

Again that's star, 1 for questions.

We'll now take a follow-up from Steve Smigie of Raymond James.

Great.

Thank you.

Obviously with the -- the 2005 gross guidance that you've put out there, it would be quite a bit of growth in the back half.

I was wondering if you could suggest a little bit whether that would be more say Q3 or Q4?

And then if -- if the programs that those are tied to extend say into 2006, I think Rich mentioned a minute ago some of the programs last two to five years.

So, just trying to look at the magnitude, is it just sort of a -- a two quarter jump there in the back and then we drop back off to normal levels in -- as we go into '06?

No, it definitely goes to '06, Steve.

And there -- this is -- I -- I'm always very uncomfortable when our guys talk about expectations that show significant ramps towards the back end of -- if it is a week or the back end of a month or the back end of a quarter even the back end of a year.

This different in that it's very -- the ramp is very specifically related to two product areas, which you know very well, rectifiers and amplifiers that are incremental dollars for Artesyn.

So it's not growth with existing customers or existing revenue.

It's growth that's purely incremental.

And then that -- once it's in place it's -- it continues.

So it gets in place in the second half and then continues through the next year.

Okay.

And -- and that -- that -- that new revenue again is more third or fourth quarter.

I mean, is it the sort of thing where they would typically say, hey, we don't expect to be roll -- rolling out our program or are customers expecting to be rolling out at this time and so this is only expected or is it a little more up in the air than that?

It's -- it's in the third and fourth quarter, more of it in the fourth because programs that started production in the third are then in production and other programs ramping in the fourth.

But it's clearly a -- a -- a meaningful impact in both in -- both quarters certainly verse the second quarter.

Okay.

Great.

Thank --

Dave, additionally I wouldn't suggest that seasonality in the first quarter would not apply next year.

I -- I would think you would expect seasonality to continue to apply in this industry.

Okay.

Fair enough.

Thank you.

Thank you.

That does conclude today's question and answer session.

At this time I'd like to turn the conference back over to Pamela Rembaum for any additional or closing remarks.

Thank you very much for joining us for today's call and we look forward to talking with you in July for our Q2 results.

Thank you.

Thank you for your participation.

That does conclude today's conference.

You may disconnect at this time.