Advanced Energy Industries, Inc. (AEIS) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Advanced Energy Industries' Earnings Conference Call. [Operator Instructions] Later, we'll facilitate a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Annie Leschin. You may proceed.

Thank you, operator, and good morning, everyone. Thank you for joining us today for our Third Quarter 2012 Earnings Conference Call. With me on today's call are Garry Rogerson, Chief Executive Officer; Danny Herron, Executive Vice President and CFO; Yuval Wasserman, President of the Thin Films Business Unit and Gordon Tredger, President of the Solar Energy Business Unit. Gordon is returning from the Canadian Solar Show and will be joining us via cell phone. We apologize in advance for any background noise. By now, you should've received your copy of the earnings release that was issued yesterday evening. For a copy of the release, please visit our website at advanced-energy.com or call us directly at (970) 407-4670. This quarter, Advanced Energy will be hosting its analyst event on November 15 in New York and also webcasting. We hope you'll join us. Finally, I'd like to remind everyone that except for the financial, historical financial information contained herein, the matters discussed on this call contain certain forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Statements that include the terms believes, expects, plans, objectives, estimates, anticipates, intends, targets or the like should be viewed as forward-looking and uncertain. Such risks and uncertainties include, but are not limited to, the volatility and cyclicality of the industries we serve, the timing of orders received from our customers and unanticipated changes in our estimates, reserves or allowances, as well as other factors listed in our press release. These and other risks are described in Forms 10-Q, 10-K and other reports filed with the SEC. In addition, we assume no obligation to update the information that we did provide you during this call, including our guidance provided today and in our press release. Guidance will not be updated after today's call until our next scheduled quarterly financial release. I'd now like to turn the call over to Garry Rogerson, CEO of Advanced Energy. Garry?

Good morning, and thank you for joining us. I will begin today with a summary of the quarterly results and then provide an update on the progress we've made executing on our strategic plan. Beginning with Slide 4. Overall, we achieved our goals this quarter with total revenues of $117.5 million, $0.20 of non-GAAP EPS and $25 million in cash generated during the quarter, a sound result. Despite the slowdown in our Thin Film business that was by and large expected, we compensated with revenue growth and expanded margin contribution from our Solar Energy business. Turning to Slide 5, in Solar, we had large shipments of solar inverters to utilities, which drove good revenue growth and more importantly, improved operating profit. In the last year, we have transformed the cost structure of our Solar business. This quarter, we reached our 2014 operating margin target of 10% to 15%. This is a good accomplishment given we barely broke even in the first quarter of 2012. This quarter shows that with a disciplined sales approach and a passion for cost containment and reduction, we can both grow revenues and expand margins at the same time. In our Thin Films business, we continue to win a high percentage of designs at key customers in our core markets, reflecting our ongoing investments in R&D. We believe this is a differentiator in the industry and one that is enabling us to enter new adjacent markets such as gas abatement and ophthalmic lens coating. Our results are very impressive in light of the fact that we are in the midst of a major revenue trough in our Thin Film markets. The performance was due to a continued diversification in the new markets and a structured reduction in costs. Turning to Slide 6. Our efforts to reduce costs in both businesses are again clear this quarter. Operating expenses showed lowest level in 2 years and non-GAAP profitability rose to $0.20 per share. None of this would have been possible 1 year ago. We have made a fundamental changes to the structure of our business that positioned us to more profitably weather cyclical downturns and generate significantly more profits during industry peaks in Thin Films and actually make money in Solar when we grow revenues. To highlight just how significant our turnaround has been, let me compare this quarter's results with those of 1 year ago. Last year, our operating income included an incentive reversal of $3.1 million, while this year has a normal incentive accruals. After adjusting for the difference in incentives, we produced $3 million more in profits and generated $25 million of cash on $11 million less of revenue this quarter and a much less favorable product mix by Solar, a remarkable change. The potential of our financial model that we laid out 1 year ago is becoming a reality. As a more cost-conscious, cash-focused company, we've established a solid foundation from which to build and grow our business. We are driving even more efficiency improvements in manufacturing through the implementation of processes such as demand flow technology. With our new supply chain management team located in Shenzhen, we are further outsourcing certain parts and components to lower our cost of manufacturing. In fact, we reduced our annualized cost of material in the third quarter in our Solar business by about $10 million. Overall, we have just begun to recognize the significant benefits of maximizing our world-class Shenzhen facility and there's much more to come. In parallel, we're stepping up our efforts to accelerate revenue growth for a more disciplined design approach, utilizing lean and localized R&D, applying our products and technologies to new applications in adjacent markets and geographies. We're also exploring a variety of ways to utilize our cash such as investing in complementary technologies and revenue streams to fuel additional growth in both businesses and return value to shareholders. Having recently completed our buyback, our focus now is to deploy cash in potential accretive acquisitions. AE has fundamentally changed the way it operates. We're now focused directly on driving long-term sustainable growth, profitability and shareholder value. We are looking forward to seeing you in a few weeks at our Analyst Day and taking you through our path to reach $2 in earnings per share. Now let me turn to the call over to Yuval.

Thanks, Garry. Beginning with Slide 8, third quarter revenues in the Thin Films business declined 12% sequentially to $56.8 million as decelerating demand across our markets impacted sales worldwide. Operating income declined to $6.1 million or 11% operating margin. Slowdowns and delays in capital spending seem pervasive this quarter, from semiconductors, flat panel displays to solar equipment, companies are facing high inventories, low utilization rates and growing challenges with next-generation technology. For example, the anticipated pickup in the flat-panel TV screens in the second half of 2012 has not materialized. With only touch panels driving the industry at present and the migration to next-generation AMOLED technology suffering from cost and yield issues, revenues and investment look to be muted for the next several quarters. The semiconductor market is also confronting myriad challenges, slower-than-expected growth in memory for mobile devices continues to cause oversupply in NAND and DRAM. The equipment needed for next-generation 14-nanometer technology node is expected to be less than what's required for 22 nanometers, and equipment we use is further constraining the outlook for capital spending next year. What we know from experience is that while the Thin Films market are cyclical, investment in next-generation technology is not. Our practice of consistently investing in R&D has solidified our relationship with large semi OEM customers. This puts us at the forefront of their next-generation designs and provide as entry into new markets. This quarter, our successful record of design wins at existing and new customers continued. We had 43 design wins this quarter, nearly 2/3 of those we participated in across all our served markets and nearly 3/4 of the semiconductor opportunities, specifically in etch and PVD content. We expect our industrial wins to drive short-term revenues, while our semi design wins will transition to high-volume ramp in 2013 and beyond. Our advanced RF pulsing capability, developed the last year, is enabling our customers to create processes for the next-generation technology nodes and overcome challenges they have seen in 22 nanometers prior to the availability and adoption of RF pulsing. This capability is fast becoming an important differentiator for AE and is allowing us to penetrate major OEMs worldwide in etch and PVD. We are also seeing more customer evaluations in new application development PVDs outside of our traditional Thin Film markets, with the creation of our Thin Film industrial team. This is affording us flexibility to pursue new markets that can generate near-term revenues. For example, the gas abatement design wins that we announced last quarter is now generating hundreds of units in shipments and millions of dollars in revenue. More recently, we won designs at a major Japanese touch panel manufacturer, an ophthalmic lens coater and an automotive headlight coater, to whom we are already shipping products. These are but a few of the many at opportunities that lay ahead for the thin film industrial markets. Finally, we developed new avenues for growth to offset market cyclicality. We are simultaneously pursuing programs to further reduce our cost internally and throughout our global network. This quarter, we took several steps to drive more efficiencies and localize resources closer to our customers. First, similar to our new localized engineering center in San Jose, we have begun to establish an engineering office in Sungnam, Korea, to go become more intimately involved in our customers' design process. Next, we're launching new distribution channel strategy to align our global support with our already existing and new customers global footprint. We are enhancing our local capabilities with select partnerships and co-locating with our partners. Beginning in October, our partner, Ebara Film Tech, EFT, will provide product and service, sales and support for AE Thin Film products in Japan. EFT's large network will aid our Japanese customers by providing broader and deeper support and engagement, reflecting our commitment to these customers. In summary, the Thin Films markets continued to struggle with various challenges and stages of cyclicality. Recent capital spending announcements by significant customers provide further evidence that the outlook for most of our Thin Films market would remain at cycle lows for the next few quarters. However, our continuing investment in R&D and the design wins that we have secured this year in both semi and the Thin Film industrial markets lay the foundation for us to accelerate the growth as customers move to next-generation technology and markets recover. We remain focused on developing new avenues to accelerate revenues, reduce costs, increase efficiencies and improve profitability. I would now like to turn the call to Gordon to discuss our Solar Energy business.

Thanks, Yuval. Beginning with Slide 11, earnings in our Solar Energy business increased 20% sequentially to a record $60.7 million this quarter, representing 52% of the company's total sales. Growth was fueled by large utility shipments, as well as large-scale commercial sales in our target U.S. market, as well as the growing contribution from Canada. During the quarter, we shipped 251 megawatts versus 210 megawatts last quarter. After several quarters of implementing our various cost-reduction efforts, we reached our 2014 target operating margin of 10% to 15% ahead of schedule. Operating profit grew to 12% of sales or $7.4 million compared to just 5% or $2.7 million last quarter. As Garry mentioned, Solar operating margins may be closer to 10% in the next few quarters due to product mix, but we are beginning to see the scalability and profitability of our model as we start to grow and build our business. To expand on our cost-reduction efforts, I'm pleased to report that we have successfully completed Phase I of our plan to transfer subassembly manufacturing to our facility in Shenzhen, well ahead of schedule. The Sungnam play will be focused on driving the improvements in manufacturing and cost of goods. Having centralized the supply chain in Shenzhen, we are looking at a variety of ways to take additional costs out of our products. We are now beginning to outsource certain components from the factory in Shenzhen and moved some of our newer products to Shenzhen for lower-cost volume production. These steps are expected to result in a significant additional savings and with the company's enhanced cash focus, we believe there will be future opportunities down the road. As our profits grow, we will be making strategic investments in our business where opportunities present themselves. For example, this quarter, we continue to increase our presence in the U.S. and Canadian markets with the addition of more customer-facing personnel, including applications engineers, salespeople and service personnel, to better serve these regions by maintaining our high-quality, differentiated customer service and support. We are also effectively evaluating organic and inorganic strategies to enhance our products, technologies and distribution channels, so as to be in the position to accelerate our expansion outside the U.S.. In Canada, we have several significant wins this quarter. Our newly established Canadian manufacturing facility is successfully up and running and is a key selling point for potential Canadian customers. This facility demonstrates AE's commitment to this market and allows us to scale with our customers. Based on the opportunities we currently see in the pipeline for the next few quarters, we expect Canada to become an important market for us. In other regions, we're making progress developing products with our various partners and establishing local relationships to position us for success in our chosen territory. In China, we are working diligently with our partner, SGEG to jointly develop a product specifically for China. Once complete, SGEG will have the license to market that product in China. With the rights of this product, AE intends to further design and modify this product as a low-cost inverter for sale in other emerging Asia-Pacific markets. To be successful in various territories, we must be very strategic in our selection of the geographic markets that are best suited to our products and our choice of partners with whom to enter these regions. In closing, we're pleased with our current performance. This quarter is just an example of how our focus on cost reduction over the last year is beginning to demonstrate real results. We have a solid backlog and a strong pipeline of opportunities that we believe put us in a good position as demand for large-scale commercial and utility scale products continues. However, we do not anticipate the same sequential increase in revenues that we saw the last 2 years in the fourth quarter, given the expiration of various cash grant and tax programs. While the better Solar industry remains in a period of oversupply, with reductions in government subsidies and ongoing consolidation, we believe our ongoing cost reduction efforts, strong customer relationships, unparalleled customer service and solid balance sheet position us for continued success in the North American market and worldwide. I would like now to turn the call over to Danny to Give discuss our financial performance. Danny?

Thank you, Gordon. During the course of my remarks, I'll refer to both GAAP to non-GAAP results. Non-GAAP measures exclude the impact of the restructuring charges recorded in the third quarter. A reconciliation of non-GAAP income from operations and per share earnings is provided in the press release table. Turning to the highlights of the third quarter on Slide 14. Total revenues were $117.5 million, an increase of 2% sequentially while a decrease of 9% compared to the same period 1 year ago. We ended the quarter with a strong balance sheet, holding $173.7 million in cash and investments, having generated $24.7 million in cash flow. More recently, we also put in place a $50 million revolving credit facility for potential acquisitions and working capital purposes. Turning to the revenue performance on Slide 15. Revenues for the Thin Films business unit decreased 12% sequentially to $56.8 million or 48% of total sales. The majority of the decline was driven by the 19% sequential drop in semiconductor revenues to $29.7 million. From a sequential basis, results across our Thin Film markets were mixed this quarter with flat panel sales decreasing to $1.9 million and solar equipment declining to $0.7 million. Our data storage and industrial sales increased to $10.9 million, and service increased to $13.6 million. Turning to performance in our Solar Energy business unit. We had a record quarter with sequential revenues increasing 20% from last quarter to $60.7 million. Growth was driven by utility scale deployment for the U.S, as well as meaningful contribution from the Canadian market. Turning to Slide 16, during the quarter, we took a $3 million restructuring charge as we further reduced our footprint by consolidating our service operation from Japan into our Korean facility. The remainder of our restructuring charges are expected to be implemented over the next 3 months as we further reduce our cost structure while consolidating certain facilities and centralizing other activities. This should result in charges of about $1 million to $2 million, principally for facility consolidation and another $1 million for severance costs. These restructuring actions, along with other cost-saving initiatives and margin improvements, are delivering annual savings in excess of $30 million. Our ongoing cost-reduction initiatives reduced operating expenses by 6% to $35.8 million this quarter versus $38.2 million in the same quarter last year. However, in the third quarter 1 year ago, we benefited from a $3.1 million reversal of year-to-date incentive compensation. Excluding that charge, operating expenses declined even more, down 13.5% year-over-year. With our lower expense structure, total operating income, excluding restructuring charges and amortization of intangibles, improved to 12.2% from 10.8% sequentially and 11.5% in the third quarter 2011. This was driven by the strong operating performance of our Solar Energy business at 12% operating margins or $7.4 million. This compares to operating income of just $2.7 million or 5% in the second quarter 2012 and 1.3% or $1.3 million or 2% in the third quarter last year. In our Thin Film business, operating margin was 11% or $6.1 million, down from $8.9 million in the second quarter due to lower revenues caused by overall industry declines. Turning back to the third quarter on Slide 17, income from continuing operations was $5.7 million or $0.15 per diluted share. This compares to income from continuing operations of $8.8 million or $0.22 per diluted share in the second quarter, an income of $7.2 million or $0.16 per diluted share in the same period last year. And from a non-GAAP basis, excluding the $3 million restructuring charge, income from continuing operations was $7.6 million or $0.20 per share during the third quarter. Taxes were $4.3 million or 43% in the quarter as a greater proportion of our revenues were generated in the U.S.. In the near term, because we expect a higher percentage of our revenues to come from our Solar Energy business, which mostly occurs in the higher taxed U.S. market, we've adjusted our full-year 2012 tax rate to 36%. This assumption does not include the potential and favorable impact of 1% to 2.5% from the R&D tax credit should it be approved prior to year end. Turning to our balance sheet on Slide 18. During the quarter, we generated $24.7 million in cash in the quarter with $173.7 million. Trade working capital decreased $2.2 million during the quarter. Stock options expense was $2.8 million, and depreciation and amortization was $4.5 million for the quarter. Before I move to our guidance for the fourth quarter, I'd like to quickly recap the actions we've taken over the last 12 months. In September 2011, we began an aggressive restructuring plan to focus our company on shareholder value and profitability. We restructured our Thin Films business in September of 2011, our Solar Energy business in December 2011, initiated a $75 million share repurchase in November 2011 and changed our compensation program in the first quarter of 2012. In addition to these actions, we have completed the move of our subassemblies to Shenzhen and reduced our footprint across the world. All of these actions have laid the groundwork to position AE to remain profitable in low revenue quarters and maximize profits when the capital equipment investment cycles return to normal levels. This quarter was a perfect example of how these cost-reduction initiatives are working. Excluding the incentive reversal that took place last year in the third quarter and the incentive accruals that we took this quarter, operating income improved $3 million year-over-year on an annual revenue decline of $11 million. Finally, turning to guidance for the fourth quarter on Slide 20. We expect revenues to be between $105 million and $115 million and non-GAAP EPS to be between $0.13 and $0.18 per share. The guidance reflects our view that sales at our Thin Film markets will continue at cyclical lows due to lower CapEx spending and the uncertain demand environment. Although we do not expect to see the sequential increase in Solar revenue that we have seen in the past few years due to the expiration of certain cash and tax grant programs, overall momentum in our Solar Energy business should help to offset the slowdown in capital spending. We expect that our operating expenses will remain at the current year-to-date run rate and believe that Solar Energy margins normalize at the lower end of our 10% to 15% target range. We also expect to recognize our final restructuring charge of $2 million to $3 million in the fourth quarter. This concludes our prepared remarks for today. Operator, I'd like to open the call for questions.

[Operator Instructions] The first question comes from the line of Krish Sankar from Bank of America Merrill Lynch.

I have 2 of them. Garry, I don't know if you can give any early view into what do you think overall you think the industry's going to do in the inverter side in 2013 and what it means to Advanced Energy? Do you expect to continue to grow revenues in 2013 on the Solar Energy side? And what kind of numbers should we think about?

Yes, that's a very good question. A year ago, we said we go, grow roughly 20% per year over a 3-year period, and that's what we think we're going to do now. The backlog is pretty high at the present time, and the activity in the U.S. and Canadian marketplace is also very strong. So -- and we are well-positioned, obviously. Very strong in utility, very strong in high-end commercial, so we expect on average over this period to grow roughly 20% per year. And this year, the year we're in now won't be exception to that, we'll be roughly there as we go forward. We're in a good position.

Got it, got it. And then in your Q3 revenues of $60 million or even in terms of megawatts shipped of 251, can you try to give us some color on the split geographically between U.S., Canada and others?

I'll pass that to Gordon in a second, because that is also a good question. I think the good thing about the quarter by the way, was that we're starting to make money in Solar. Gordon's action in choosing the customers that we take, not growing with the market, focusing on making money as opposed to focusing on growing revenues is actually starting -- we are starting to see the light. It's going to be a bumpy ride as we move forward. Clearly, we can see that it's possible to do. Gordon, you're going to talk about geography?

Yes, and at the present time, our results are driven by our operations in the United States and Canada. Canada is growing in importance, and we are looking actively at regions outside of the U.S. and Canada for next year. We're making our distribution plans. We're looking at developing the new products that are going to be required to be successful there. And as we've said, we'll continue to update as we achieve milestones in terms of our international expansion to underpin the growth strategy for next year.

I think really important, our products are designed for the U.S. and Canada. That's why we're successful in the U.S. and Canada. It's very difficult to bring a European product in and sell it, so we're in a good position. The flip side of that sadly, is it's very difficult to get out of the USA. We need to design products for the different countries, and virtually, every country has different requirements and different regulation. And that's why you're seeing people hit brick walls when they try and enter new countries because the regulations are different and the products are different and of course, the cultures are different. But that's probably the third part of that puzzle.

Right. But is there anything like -- you did $61 million in Q3, is it like 90-10 split between U.S. and Canada or is it like 80-20, 50-50? I just want to get a sense of those.

They're good numbers. I mean, the first numbers are good numbers, mainly the U.S. and other [indiscernible] Canada. The [indiscernible] Canada is growing.

Got it. And then just a final question from my end. The product you're developing with SGEG in China for the Chinese market. Is that the target to be in the 10% to 15% up margin range or would that slightly lower?

So to be clear about the SGEG product, it's a product that we're collaborating with them so that they can sell it in China. We'll receive some royalty income associated with their sales in China. The exciting part of that relationship for us is, we have the rights to that product, for all regions outside of China. And as other countries are demonstrating that, they're very price sensitive, having access to a high-quality, low-cost product that we can commercialize specifically for some of these lower cost regions is going to be very important for our success in the future.

Yes, I think this collaboration we announced with SGEG, 3 or 4 months ago is one of the keys to our growth in 2014. The product they have developed is spot on in cost. It's a really, really low cost. They know how to design low-cost product. And we will adapt that and take into other low-cost markets, for instance, India. I mean, India is a country where we're learning at the present time. We're not going to crow about big orders in India. We are learning. We've got an excellent distribution in India. We now have -- need to develop the right products in India. And then, we'll grow in India. So an SGEG is a company that's absolutely going to help us. And we've seen some wonderful things and design come out of that shop. And by the way, just -- I shouldn't say it one way, because we're also adding a lot to their product. Gordon has done a...

Yes, our expertise in controls is really going to help them come up with a world-class product.

The next question is from the line of Joe Maxa from Dougherty & Company. Joseph A. Maxa - Dougherty & Company LLC, Research Division: On that SGEG product, when is the ballpark timeframe that will be available?

Well, as we just said, for us, we're thinking it's going to help us in 2014. Joseph A. Maxa - Dougherty & Company LLC, Research Division: Okay. And you'll get royalties if they sell something before that in China?

We have an agreement with them that when they sell in China, we will get something, yes. Joseph A. Maxa - Dougherty & Company LLC, Research Division: So overall, in Solar, if you're looking for 20% growth next year or average, when do you anticipate you'll be a reasonable to reach the high end, if at all, on that operating margin?

Well, I think at the end of this time period, we said we'd be somewhere between 10% and 15%, and that's where we'll be. We'll probably near the high end if we grow at 20% per year. But we're very happy with our progress so far. Actually, if you look at our progress in everything we said we would do, it's not been bad. So I think you should start to believe us. Joseph A. Maxa - Dougherty & Company LLC, Research Division: And on the competition that you talked briefly, you touched earlier, can you give a little more on what you're seeing on pricing pressure if at all? Sounds like it's not very significant given your results but I just want to get an update on what you're seeing out there.

Obviously, we don't talk about competition. I mean, they do their thing, we do our thing. What I'd like to say is that we are focused on making money or attempting to make money and to grow the business at a reasonable rate. So that's what we're doing. Gordon, do you want to say anything else?

Yes. I mean, there are definitely competitors out there that like to lead on price. And as we've said before, we feel that we've got a good product, strong product offering for people in the industry, in the markets that we serve. We also support our products very well, and so we've been very successful with that.

The next question is from the line of Edwin Mok from Needham & Company. Edwin Mok - Needham & Company, LLC, Research Division: So first question is on the guidance, just to be really clear. Are you guys expecting, call it, flattish Solar and better business is in the fourth quarter and that would imply, call it, maybe low double-digit or a little more than 10% decline in Thin Film?

Yes, Edwin, we -- our guidance assumes that we will probably flat to slightly down in the semi and Thin Film area and probably flat to up in the Solar business unit. Edwin Mok - Needham & Company, LLC, Research Division: Okay, okay, that's helpful. Now...

Just as a point, as we get more into the utility area, and it's really a warning because it gets much more lumpy, the business. So you're going to expect to see lumps from us as we go forward. Probably, I mean, the shipments in Q3 were a touch over -- they weren't overstated, they were the numbers, but we had a few strong shipments into utility, so you're going to see lumpy business. On the other hand, for Q4, as we said, there's no regulation of forcing Q4, forcing anyone to buy in Q4. So last year, that was probably artificially high. So we're thinking we'll be a touch up this -- in Q4 from Q3. Edwin Mok - Needham & Company, LLC, Research Division: Okay, that was a good call. Actually, that kind of leads to my follow-up question. So it sounds like, at least based on what you guys are seeing, there's no cash grant for this year, right, unlike last year. And therefore, you're not going to see a big comp ramp-up in the fourth quarter, right? So should we expect less seasonal decline than the March quarter then as a result of that, barring all these if there could be a lumpy order in there?

In the first quarter, January, February, March, on both accounts will be a tough quarter. So Thin Films, we are not -- sorry to jump from Solar to Thin Film, but Thin Film is not going to have a -- it's not going to be a joyride in Q1 of next year. And Solar, of course, it's winter, and we are in the U.S., so we expect to see a seasonal dip. So I can imagine that Q1 will be a hard slope for us. But because we've got our costs in control, we feel we can get through these things quite nicely. We're not taking any actions internally at the present time. A year ago, we scaled ourselves to the business we expect to get. So we feel in good shape to get through this without touching our R&D, without touching our sales. In fact, we in Solar we're increasing ourselves. In fact, in Thin Film, we're increasing our distribution in countries like China. So we're actually investing through this period. So I don't know what the question was, but that's the answer. Edwin Mok - Needham & Company, LLC, Research Division: Actually, very good answer. So one more question related to Solar. On the operating margins, our last quarter was very strong, at 12%, right? And I think in your guidance you said roughly around 10% in the coming quarter, probably just the result from kind of the revenue level. But you also mentioned that product mix play a factor, can you -- just some color on that?

Yes, we can. We don't tell you what the product mix is, so let's not go there. But there was a shift into the utility side, and a few minutes ago, I said it's lumpy, the business is lumpy. So we had shift into utility, and that meant our margins improved a little bit, so, yes. Now this quarter, we'll probably get more of a balance towards commercial, which would mean the margins would come down a little. In general, our margins are improving as the volume is increasing and the costs come under control. Last quarter, I mean, just to give you an example, last quarter, we obviously review every quarter. And in the last quarter, our supply chain in the Solar business to cut $10 million of cost annualized on product they buy, the product they're buying. In 1 quarter, they took out $10 million. So when Danny says, we've taken out $30 million so far, it's actually north of $40 million. Obviously, the cost of manufacture and price erosion go together. So we always say the $30-odd million that's gone will never come back. I suspect some of the cost that we are taking out of the products today will be lost in pricing erosion, which is normal on any piece of capital equipment. But that's where we are. Edwin Mok - Needham & Company, LLC, Research Division: Great, very helpful color. And lastly, on the Thin Film side. Thanks for giving some kind of description on some of the market opportunity you guys targeting such as a gas abatement, right? Any chance you can give us color on what you're thinking about market sizing, in terms of how big you think those markets are? Where do you see you can get to in 1-year time horizon or beyond that, that would be helpful.

Edwin, this is Yuval. They've abatement, the gas abatement business that we started delivering to this year, we started with just between $1 million to $3 million type of revenue per quarter. But that will materialize to north of $10 million a year as a first step to this market. The market is very large because of some regulations associated with the PFC abatement requirements. And our product is a point-of-used product that is being used on the -- the vacuum line goes from processing chambers as opposed to large products that are more centralized. So the cost of ownership of this product is very attractive. But the market is very large, north of $100 million. It'll take us some time to get there, but we're making good progress right now. And I will annualize right now the opportunity for the short term, north of $10 million a year.

Edwin, can I just continue that answer in a more general way. Firstly, at the moment, we feel we've built -- we are building a great foundation for the company, whether it's on our margin improvement program, whether it's our focus on cash. We think we've got a nice foundation, and we've got a nice structure to grow in. And Yuval is taking us into new markets and obviously, in power, there are many, many new markets we can go into. We have to be selective and not be all things to all people. But at the same time, in both businesses, we will be utilizing cash to grow the business. So before I used to say, we are starting to look at acquisitions. Year 2 of our strategic plan, we need to grow our revenue base. We need to position ourselves for year 3, and that will mean utilizing some of our cash, hopefully. Little bit -- we have to be realistic here to grow the top line and get us into new markets. So what I think you're going to see is Yuval pushing into new markets organically, or you're going to see Gordon pushing into new countries in effect, slowly, carefully. We don't want to get bloody noses. And at the same time, we're going to layer on top of that acquisitions. And we can do that because we've now got a decent foundation from which to grow from. So just as a comment.

The next question is from the line of Mark Bachman from Avian Securities.

Garry, can you clarify one thing for me. You had made mentioned about the SGEG product coming about in 2014, but Gordon's slide says first half of 2013, can you just kind of clarify those 2 points?

Let Gordon explain that to you.

So Mark, the product is going to be released in China. And we anticipate launching the product sometime in the second half of next year. But what Garry is talking about is when you'll actually start see a substantial revenue impact.

For us.

Yes, for our sales into places like India. We're -- Garry and I are just addressing 2 different aspects along the timeline.

So SGEG is, with us, is designing a product that they're going to release sometime next year into the marketplace in China. We will get a royalty from that, but don't get carried away with the royalty. The reason we're wanting this is because they know how to design low-cost product that we have the right to take out of China, probably modify it because the Chinese product doesn't work as is in an India or wherever. So we're going to have to, in parallel, do other things to it to get it there for the Indian market. And then we've got to take our time in these markets. I really stress we don't want to get a bloody nose as we go into these places. It is so easy, and we've all been to these countries, have very, very different, payment terms are different, where the products are located is different. Everything is so different there. And we don't want to get a bloody nose on it. And all those happens and certainly I have in the past. I mean, I've bloodied my nose and thought it's very easy to get into -- in India, and it's not easy. And we don't want to do that. We want to learn from our experiences and get it right.

Excellent. And Gordon, can you explain the SGEG product a little bit more in detail? In other words, which end markets are going to go after there in China?

Yes, as I said, I think that something that SGEG is working on. I mean, they will distribute the product in China. They're responsible for the distribution plan in China. And frankly, as Garry has alluded, we will receive a royalty stream, but it's not going to be something that has an enormous impact on our P&L. So we're more focused on the technology, understanding how we can adapt it to these other markets that we've been talking about so that we can sell -- we'll make our margin selling that product directly into territories outside of China.

Okay. I guess I was trying to just get some color what an odd you're are going to go after, say, commercial-type installations. Do you expect to go after utilities-type installations? How do we think about what this product is going to address?

Well, we think about this product as something that would support ground-mount installations. It's not intended to be a product for -- it's certainly not a product for rooftop commercial business.

The utility type.

Yes.

Low-end utility.

Low-end facility, okay. And then lastly, Gordon, does the Japanese market -- does that hold any promise for you given where the Thin Film business has gone? Does it -- does the Japanese market in inverters open up some doors for you at all?

Yes, we are -- Japan is an interesting country. As you know, AE has an established presence there that we are leveraging. It's also a very complex market. Layers of distribution and very specific technology requirements and very demanding customers. So as -- along with the theme of our bloody noses, we want to make sure that we understand the requirements, we understand the customer needs, that we have products that line up with those, and we are organizing our distribution so that we can make a big push into Japan. It's not going to be a significant contributor to our revenues in the short term. And as I've said, we'll -- as we achieve milestones along our plan, we'll constantly be updating you.

Yuval, could you comment on Thin Film in Japan and what we're doing now?

Sure. Mark, we have now modified, as we indicated in the call, we modified our business model in Japan and developed hybrid model. When -- in addition to our direct sales and service in Japan, we have teamed up with Ebara, which is a very powerful company in Japan, that has a very broad footprint in Japan, which will increase our localized presence and increase the number of service and sales offices in that country. That infrastructure will allow us to drive more products into Japan and also can be the starting point for the inverter business when it's ready to take the inverter products also to Japan more quickly and effectively when we're ready.

That's very helpful. Just, Gordon, just one last question for me on the Japanese market. Should investors expect any jet certifications then on your inverter products in 2013 for the Japanese market?

Jet certifications in 2013, I would say that would be a realistic goal for us. I mean, we won't be able to sell into Japan unless we're ...

We have to. Yes. I mean, the answer is yes is we want to sell into Japan.

Your next question is from the line of Mehdi Hosseini from Susquehanna International.

A follow-up to Thin Films business. How should I reconcile the operating margin profile? Back in Q4 of last year, you had $54 million but operating margin of 14%. And in Q3 of this year, a few million more in revenue but operating margin, 300 basis points lower. Is that a mix issue in the Thin Film or something else?

Mehdi, this is Danny. It's actually a corporate allocation change from last year. If you recall last year, we weren't allocating all our corporate expenses out, this year, we are. So that's where 3 or 4 points of operating margin to the business units. And it impacts both Solar and our Thin Film. So actually, because of the actions Yuval took last September, our breakeven is considerably less than it was in the past. And we're actually doing better today than we would have been doing 1 year ago. If revenues return to where they were we're 1 year ago, we'd be certainly above the operating income, and that's with a higher corporate allocation.

Got it. And Danny, why did DSO go up almost 10 days? I'm sorry, inventories?

Well, inventories, certainly, as we get ready to -- for shipments in Q4, we had some increases in inventories in our Solar unit as that business has accelerated in volume. You can't grow your volume 20% sequentially quarter-over-quarter without making more product and you have more tied up in working process and finished goods as the quarter end incomes. Overall, all our inventories may have slipped up a little bit. I would look at the overall cash generation for the company this year. We're up to $85 million since the beginning of the year in cash generation. This was another good quarter at $25 million of cash. So year-to-date, before the share buyback, we've actually generated $85 million of cash this year.

But I think you said Solar business in Q4 is not going to follow the normal seasonality year end, rush to finish installation. So...

Yes. So, Mehdi, Garry has talked about the lumpiness of the Utility segment. So you're seeing a bit of an inventory bump associated with the Solar business primarily. And I suppose you should look at that as an opportunity that as those shipments flush-through, we'll be in a position to normalize our inventories.

Got it. And one question for Garry. You talked about the next phase of your plan is to grow revenue. When you look at M&A opportunities, what is the priority? Is growing horizontal high-priority has a higher priority or how should we think about the M&As that you are entertaining?

Well, again, we can only speak generalities, yes, because we have to be a little bit pragmatic and realistic about what there is out there and I wouldn't want to talk about anything in the present time. Except to say, we have a very nice active list today. So obviously, we've got to get them, and we're not going to get them if they're not accretive to us. So they have some very high hurdles to jump before we would take one. After saying that, if we go to the Thin Film business, as Yuval has said very eloquently, we need to expand into new markets. We cannot be beholden to semiconductor. We love semiconductor. We love our customers but we need other customers as well. We need to get out of this 10% of our business or 20% of our Thin Film is coming from one customer. And we need to grow the business. So we need to go into new markets.

But if I look at the mix of Thin Films, it is services and industrial that it's actually relatively doing better in terms of...

Correct, so absolutely correct.

Should we think about industrial and services as where there will be opportunities?

Yes. We need to fuel that fire. And that Industrial segment is -- I mean, it's huge, as you know. There are many, many markets with many, many applications within that broad industrial area. We need to be careful that we go to where we want to go. Let me just dwell on our model for a little bit, and so we understand what we're trying to do as a company. The company only wants one manufacturing site. And really, that manufacturing site, we really want to be our outsourcing center, first, where the supply chain cause that's where everything is. But in my ideal world, that's where everything is going to go through. We are then going to have all of these centers across the world, and for instance, I'm in Fort Collins today, this is a center of excellence for Thin Film, and they will fuel that factory. And then we'll have a go -- when we have a global distribution, that would distribute, whether it's for Solar or whether it's for Thin Film. That's the model we are having. So when we're looking for acquisitions, they've got to fit into that model. I don't want to have more factories, absolutely, don't want more factories. We're not big enough to do that, that's crazy. So we're looking for technology, product lines that our people can sell, products that can be quickly shifted into Shenzhen. That's what we're looking for. So going back to what type of products within Thin Film, we want to get more into the industrial markets. There are plenty of places to go. I don't want to say any of them at present, but you know a lot of them. Within Solar, it's a different kettle of fish really. There, it's how do we become more global with our products, can we get -- it's a make-or-buy decision. Can we buy our products and get into markets quicker than we can make them? But again, at the back of our mind, we are saying, "We don't want factories, I don't want any factories, I only want my one Shenzhen facility and I want to be outsourcing from that facility." So if that helps you, that's good.

[Operator Instructions] Our next question is from the line of Jim Covello with Goldman Sachs.

Its Mark Delaney, calling in behalf of Jim Covello. I was hoping you could give us an update on how you think your inverter market share in the USA is tracking year-to-date?

So I'm going to pass that to Gordon. But just as a quick comment, I'm not really worried about our market share. I know a lot of you are. I'm more worried about making a few dollars, growing and making a few dollars. The market is not my biggest worry. Within our little niches, we do very well. If you choose to be in utility, people will pay money for classy product. We actually do very well in that marketplace. Gordon, I'll leave you that one.

Yes, I think the focus is exactly what Garry has talked about. We've been focusing this year on building a profitable, sustainable growth. We're not interested in the short-term market share wins that some folks are chasing. What we are looking to do is increase our distribution in the U.S. and make sure that as people begin to struggle, we're in a position to thrive. And we've continued investing in distribution in the U.S. all year, field applications personnel to support the customers application and also service personnel to support customers after the installation and commissioning. So I think we're well-positioned in the U.S. right now for success in 2013, and we'll continue to invest in further growth as we move forward.

That's helpful. As a follow-up question, I understand the outlook for Thin Film is that, that market is going to be a challenge for the next couple of quarters. I was wondering if you could help us understand if order run rates are continuing to still decline or have they started to stabilize?

Right now, what we’re looking at is to flat to slightly down, quarter-over-quarter. And we don't have really good visibility towards 2013 yet.

In fact, Mark, just -- we've given a broader range of guidance in this quarter because we're a little bit unsure on that semi-marketplace. We are still a little bit unsure on what's going to happen in this quarter. So that's why we've given a broader range. I don't actually like to do it, but we have because of that nervousness about what's happening in those few customers -- with those few customers. With that -- look, thank you -- thanks, everyone, for being on the phone today. A hell of a difficult time. I hope all your families are okay and everyone is safe, but we look forward to seeing you at our Analyst Day to talk more about this financial model that we're developing, which is clearly going to be our big advantage compared with anyone else out there, a financial model that we can grow from, get that $2 per share and move forward from that even. Look forward to seeing you in a couple of weeks. Thank you, and bye-bye.

And ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a good day.