Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Advanced Energy Industries Earnings Conference Call. My name is Lacy, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Ms. Annie Leschin, Investor Relations.

Thank you, operator. And good morning, everyone. Thank you for joining us today for our Third Quarter 2013 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. By now, you should have received a copy of the earnings release that was issued yesterday evening. For a copy of this release, please visit our website at advanced-energy.com or call us directly at (970) 407-4670. On November 20, Advanced Energy will be hosting an Analyst Day in New York. This will also be a webcasted event, and we hope you would join us. I would like to remind everyone that except for the historical financial information contained herein, the matters discussed on this call contain certain forward-looking statements that are 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, goals 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 forms filed with the SEC. In addition, we assume no obligation to update the information that we provide you during this call today, 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 would now like to turn the call over to Garry Rogerson, CEO of Advanced Energy. Garry?

Good morning, and thank you for joining us. Nearly 2 years into the strategic plan, we are now in November 2011. I'm pleased to report that we have made great progress towards our objectives of improving margins, accelerating revenue growth, and back to utilizing our cash. We have seen improved non-GAAP operating and EPS performance in line with our guidance, which has led to more value for our shareholders. We expect this to continue in the fourth quarter and beyond. In the third quarter, we had total revenues of $143 million, non-GAAP EPS with $0.53, and GAAP EPS of $0.02. This was a sound quarter as operating profit less restructuring improved 45% sequentially and 42% versus the prior year. These results demonstrate our advantageous tax structure, but more importantly show the efficiency and the effectiveness of our business model and its ability to return value to our shareholders. Year-to-date in 2013, our operating income excluding restructuring has increased by nearly 140%, from $7.7 million in the first quarter to $12.6 million in the second quarter to $18.3 million in the third quarter. Clearly, a strong bottom line performance, and a trend we are pleased to see. Now let me highlight several important accomplishments that we had during the third quarter. First, we rapidly accumulated the acquisition of our 3-phase string product line that we announced in April of this year. We've consolidated factors and offices, reduced headcount and lowered our breakeven to the mid-$60 million range. This resulted in the Solar Energy business returning to profitability during the third quarter, which is non-small task in the midst of this integration. Second, but no less important, is the validation of our manufacturing model. The accelerating revenue growth for [indiscernible] our Thin Film business as we come to translate in the strong…

Thank you, Garry, and good morning, everyone. On Slide 8, the third quarter was marked by strong execution of our Thin Film strategic plan. Clearly, we're seeing the benefits of our strategy to position AE close to customers, to expand and diversify into new applications, and to continuously drive efficiency gains for stronger contribution to the bottom line. With our cost structure now aligned to industry dynamics and business objectives, Thin Film's operating income less restructuring increased to 24%, or $18.2 million this quarter, as revenues grew 5% to $75.4 million. Let's turn to our performance in our served markets on Slide 9. Sales to semiconductor application expanded more than anticipated this quarter due to the cyclical recovery of memory spending, investments in 2x nanometer's foundry capacity, and 2 strategic investments that AE has made in the last few years. The first, was our investment in R&D centers worldwide, which is allowing us to become embedded in our customers design processes. This has led to increased design wins across etch, PVD and PECVD applications, and a broader customer base in regions such as Korea and Japan. The second was our investments in advanced RF pulsing technology and products, which has extended our presence in etch applications. Combined with momentum in semiconductors, that is expected to drive growth in 2014, we believe these investments are positioning us to diversify and accelerate our growth. In flat panel display, the large layer of investment for GEN 5.5 small/medium AMOLED displays in Korea, and as LCD large area capacity in China, slowed this quarter as manufacturers begin mass production, utilizing the investment capital of the last several quarters. New technology investments made in flexible displays and encapsulation are now in their initial stages of limited production. While touch panel buying in certain territories remained…

Thanks, Yuval. Let me begin with our results on Slide 12. The third quarter was a busy one for the Solar Energy business. We spent much of the quarter continuing to integrate the product line we acquired in April, and restructuring existing portions business in order to streamline manufacturing operations, and focus our portfolio on products to drive profitable sustainable growth. We shipped 347 megawatts this quarter versus 318 last quarter. While revenue remained roughly flat this quarter, I'm pleased to report that we returned to profitability and lowered our break-even point to the mid-$60 million range. We expect further improvement as our various restructuring and integration efforts take hold over the next year. We are also seeing our order backlog build nicely, as we prepare for the initial shipments of the AE 1000NX, known as the 1-megawatt in the fourth quarter. Now turning to Slide 13, I'd like to give you an update on our restructuring activities. The consolidation of our Bend, Oregon factory operations into Shenzhen and Fort Collins is now complete. This was an enormous undertaking, but one that should prove to be very beneficial. We analyzed our entire portfolio to determine which products are best suited to address future market needs. We also continue to adjust our production processes, and find more ways to save cost and drive efficiencies. Our near-term challenge has been in shipments of the 1-megawatt. Next, the integration of the 3-phase string product line is also essentially complete. Pleased to become one of our flagship offerings targeting the sweet spot of our markets, this product is performing solidly in Europe, and beginning to gain acceptance in the U.S. As customers start to see the significant advantages that these products offer, including easy installation, small size, quick service and the proven reliability that…

Thank you, Gordon. In today's call, I'll refer to both GAAP and non-GAAP results. As a reminder, non-GAAP measures excluding impact of restructuring charges, acquisition-related costs, stock-based compensation, amortization of intangibles and nonrecurring tax refinance, reconciliation of non-GAAP income from operations and per-share earnings is provided in the press release table. Now before I talk about results, I would just like to take a minute to walk through the favorable impact that various tax items had on our results this quarter. As Garry mentioned, the most important thing is that we still met our targets, and had a strong quarter of profitability. In fact, operating profits have improved throughout the year. To begin with, while there are always discrete items included in tax rates, this quarter, we saw a large tax item released that related to our 2009 restructuring, which resulted in actual tax rate of a negative 25% for the third quarter. Leading to GAAP EPS with one-time restructuring charges of $0.57 per share. If we excluded the discrete tax item for the quarter and use our currently effective tax rate of 12.5% based on the profitability contribution of each business unit this quarter, we achieved $0.40 of GAAP EPS plus restructuring charges. Because we're already excluded in large part of the tax impact in our non-GAAP EPS of $0.53, the impact of utilizing the current effective tax rate of 12.5% is less, leading to non-GAAP EPS of $0.50. More importantly, as we look into 2014, we now expect our ongoing effective tax rate with both figures contributing profits to be less than 20%. Let me begin with the highlights of the third quarter on Slide 16. Total revenues were $143 million, representing a 22% increase versus the same sales quarter last year, our operating income excluding restructuring increased…

[Operator Instructions] And our first question will come from the line of Jim Covello with Goldman Sachs.

Couple of questions. I guess, first the recovery in the memory, spending within the semiconductor division, how broad-based is that recovery? Is that 1 or 2 players, or is it 3 or 4 players? And then now sustainable do you think that recovery is?

Jim, this is Yuval. We saw the recovery coming from 2 areas. The Phase I of the investment in VNAND, and the expansion of the DRAM in Line 16 in Korea. That will impact the current and future quarter. And what we hear from analysts and forecasters and the customers that there is an expectation to see Phase II in the second half of 2014.

Very helpful. I guess, next question, you mentioned 82% -- that you're winning 82% of your design win contests. What percent of your revenue, say, in 2013, is from products designed in the last 12 months, let's say. And then you mentioned that it takes a couple of years obviously to turn those design wins into revenue. So what percentage of your revenue in the semiconductor business in particular would come from new design wins, say, in 2015?

So, Jim, we'll look at the whole BU, and we measure that through our vitality index. And right now, currently, the revenue that comes from products we've developed during the last 3 years is about 35%.

And then what would you expect that to be a couple of years out when the design wins you've won now have become revenue?

We can’t say that.

Okay. Okay, great.

I think the beauty is that we're winning. We're winning within semi, but actually we're winning outside of semi, which is a key strategic objective of ours. So, I think in 3 or 4 year's time, if you're looking forward, we will have -- we'll be in many more applications worldwide, which is of course what we're wanting to do. As you know, we're having significant design wins within semi in the U.S., in Japan and in Korea. So, we're in quite good shape, actually.

Terrific. And then if I could just sneak one more in. There's been a fair amount of consolidation from the semi equipment OEMs, both completed in the case of Lam and Novellus, and an announcement in case of AMAT and TEL. What do you think the impact of that is going to be for your business?

I mean, it's good for us, really. We play with all of the players as you know. And we see nothing, but good things coming from this joining up of the 2 companies.

And our next question will come from the line of Edwin Mok with Needham & Company. Y. Edwin Mok - Needham & Company, LLC, Research Division: So first of all, the question on the Thin Film side. I think you mentioned that you guys made some progress in the hard coating side? Are those something that you expect to drive growth in 2014? Or is it something that is -- or it probably benefited you in this quarter and next quarter..?

I'll let you Yuval speak -- I'll let Yuval answer it, but remember what our strategy is. Our strategy is to go into new applications. This is one of those new applications. We're getting multiple design wins. We're shipping products into countries such as Korea, Germany. So we're in the good shape in this area. We believe we can command very high market shares in this area, actually, with our product. And we're doing a good job. Yuval, some detail.

So, Edwin, as we presented in last November, our strategy with hard coating was to expand geographically using the new product line that we acquired last November and go after advanced application for precision power distribution solutions. That takes us into the high quality films coating applications that right now we are seeing adoption in Korea with consumer products. And at the same time, optical coatings that goes to -- from eyeglasses to other more advanced optical coatings that we take to both in Europe and Asia.

Just a reminder about strategy, we have little research and development groups across the world who design products. And then we send it to Shenzhen, and then we distribute it. One of those design groups is in Switzerland. They had products when we bought their company a year or so ago, but now they're starting to develop new products that we can distribute worldwide into the hard coating area. So this is part of the strategy of the Company and it's a part of the strategy that is working. Y. Edwin Mok - Needham & Company, LLC, Research Division: I see, okay. That's great. And then on your guidance, I just want to make sure that I understand, if I take the midpoint of your guidance, $150 million, is that growth almost all coming from the Thin Film area? Is that the...

We're not sure. At the size of the company, we're sort of betting on stats for which part of the company grows. We've said to you that a new flagship product in Solar, the megawatt, is releasing at the end of this quarter. We said last quarter. We said that this quarter. Our backlog in that product has gone up incredibly. And in fact, I think we said the number. Danny, what is the number we said?

The backlog in total has grown about $45 million.

Which most of was of the 1-megawatt. So the backlog has increased considerably. As that starts to ship, we'll obviously start to grow. The Utility area is an area that we haven't grown in recently, and now we've got that chance to grow. The product is a really good product. So there's a potential for growth there. There's potential for growth in Thin Film, in semiconductor and outside of semiconductor. So we've got plenty of areas that we can grow into this quarter, and there is a statistical chart of what it might be. Y. Edwin Mok - Needham & Company, LLC, Research Division: Okay, that's helpful. If I look at your 1-megawatt product, right, you've launched that product even last quarter, right, I was wondering why it takes long for you to actually have that product get...

Yes, it's a very good question. As we've said to you all along, that it would ship at the end of this quarter, that's right, and that's when we believe it will ship out. In the Utility marketplace, people are not wanting to buy and ship immediately. So we talked about the product that stock about 6 months ago, I guess, we started to talk about the product. And now we've built up a backlog, and we're about to ship it. In fact, customers who have seen this product are responding very well to it. That's a really highly efficient product for the marketplace. So we're looking forward to great success from this product as we start to ship, as we start to get more orders. Y. Edwin Mok - Needham & Company, LLC, Research Division: So is there a reason why you can't ship earlier in the quarter? Because you have supply constraints? Or is it just customers don't want to...

No, it's not supply constraint. It's called planning. We're planning to ship at the end of Q4. And that relates to ordering the parts. So we can ship at the end of Q4. It's timing for our customers as best we can. There are also the things that go into when we ship the product out.

All certification testing and things like that, Edwin. It's a complex part, obviously. Y. Edwin Mok - Needham & Company, LLC, Research Division: I see. Okay, great.

It's just -- it's planning. Six months ago, we put a plan together of when we want or whenever we did, we put a plan together of when we want to ship it. And obviously, the earlier, the better or when customers want it. But our plan says that we will be shipping by the end of this quarter. Now just to give you a warning, by the way, when you ship out products, new products, there's always a cost related to those new products. And I can assure you, if we don't ship, we'll get the cost. That is just normal business. We still think we can ship. We still think we're in good shape. So at the moment, we're okay. And we'll give you an update on that product line in November, November 20, at our Analyst Day, which I hope you'll all be at. Y. Edwin Mok - Needham & Company, LLC, Research Division: Great. One last question on the Solar, and I'll let the other guys ask. But if I look at kind of blended pricing or dollar per watt, it has trended down to just $1 from $0.194, I just used the number you guys provided, right, with the 1-megawatt going to be shipped, which I understand has a lower dollar per watt relative to that number, is that how we should kind of think about your blended dollar per watt as we go into 2014?

We've always said, Edwin -- this is Gordon. We've always said that you have to be careful using broad averages in terms of cents per watt when you're looking at our revenues. They vary according to segments. As you pointed out, the Utility segment, in general, is going to have lower ASPs per watt. But at the same time, the products have inherent cost advantages that allows you to push the cost down. We expect to have strong margins on the megawatt in Q1 and beyond, expanding over the course of time as we ramp up that product in terms of its volume and also dropping its cost. On the other hand, our 3-phase string products are commanding reasonable prices in their markets that they're designed for, and we have similar cost reduction initiatives in place to drive the margins -- drive the margins up going forward. So in broad terms, what I'd encourage you to do is monitor our volumes, but at the same time, understand that these metrics that you're using are going to vary from quarter to quarter based on which side of the business, utility, commercial, which region, Europe, India, U.S., would -- it depends. It's going to bounce around a little.

That measure that you use is a measure that I've never ever understood because, it depends on geography, it depends on application, it depends on products. So to take that broad term and generalize, is a really tough thing to do. And I encourage you not to do that but to look at the success of our organization going forward. We think we're in a very good spot at the present time. We've got product range we've just developed to do very well in 2014. You can see, let's say that backlog is $45 million. The majority is the megawatt. Just imagine, and that's being developed over the last 2 quarters. So you can actually see what we could ship, what we could be getting to if we can ship what we get in. It's not a difficult calculation to do. So we believe there is good growth prospect for our company in Solar next year. That, with the Thin Film business, I think, puts us in a pretty good position for 2014.

And our next question will come from the line of Krish Sankar with Bank of America Merrill Lynch.

A couple of them. Can you tell us the geographic breakdown of the inverter revenues?

We don't break down the geography. But as you know, the majority of it was coming from the U.S. before we built the 3-phase string product line. So you can break it out for yourself.

Got it. And then on the 3-phase string inverter, are you seeing any traction in the residential market with that yet or...?

As we've always said, as a company, our focus, particularly in the U.S., is on the Utility segment and on the commercial segment. We don't have products that fit the residential segment.

Yes. In fact, actually, something that may -- should be coming out is how well we've done in the commercial segment this year. Remember, we haven't really had a utility product through the last couple of quarters. That's the product we've been gaining the backlog in. In fact, our commercial product lines have been doing very well, and the 3-phase string is accelerating that. When we got the 3-phase string from Germany, it actually wasn't designed exactly for the U.S. market, and we were getting orders for it. We've now redesigned it with the expertise from our R&D groups to fit the U.S. marketplace, and that product only released in November, I believe, or started shipping in November. So this product has got a lot of legs to it. We're then going to release into Canada. We're going to release it into Japan. You will hear more and more about 3-phase string for commercial customers. You won't hear us with this product line going into the residential marketplace.

Got it, all right. And then one final question. In the past, you guys have supplied the inverters to First Solar. And I think 3 months ago, First Solar signed a deal with GE, and part of it was they're going to use GE inverters. I was wondering if you have seen any change in your business with First Solar.

No, we haven't. That agreement -- no, we haven't.

So you're still shipping them inverters for their projects?

No, we don't ship in there. We don't ship there.

We haven't -- yes. We never said we ship inverters to First Solar.

Yes.

And our next question will come from the line of Pavel Molchanov with Raymond James. Pavel Molchanov - Raymond James & Associates, Inc., Research Division: Following up on the prior question on not so much the geographic mix but the end-user mix between the Utility end market, the commercial end market and the residential market, where are you guys currently in rough terms? And what are you targeting in the longer term?

I'll just repeat what I said a few seconds ago because I obviously didn't make it clear. The last few quarters, actually, most of that business has been commercial. Very little Utility because we were switching over to a new product and people started to order that new product and we're beginning to gain a backlog in that new product. In fact, there were some of our smaller customers who are buying the smaller products prefer to wait for the bigger product. So you can get to that yourself. Most of our business in the last few quarters is commercial. Gordon, am I...

Yes. The megawatt is going to be a very crucial product for us in 2014. It's the flagship of the Utility offering. It's been extremely well received in the Utility segment. We've got a number of EPCs and many of them -- EPCs that we have not done business with in the past that are very interested in the products. So we're very excited about prospects in Utility. On the commercial side, as Garry expressed, we've got the 3-phase string products that are gaining acceptance in the U.S. market, we've been fortunate to acquire the pioneer in 3-phase string technology based out of Europe where these products are the de facto standards for commercial applications. We've cut -- as Garry said, we've gone ahead and reengineered the product for 1,000-volt applications, for the requirements of the U.S. market, gained all the CSA and UL approvals required to ship into the U.S. and into Canada starting in Q1. So we feel very good about our prospects in the Utility and commercial segments going forward. Pavel Molchanov - Raymond James & Associates, Inc., Research Division: Okay. And then a quick question for Danny, if I may. Danny, you talked about the fact that restructuring had substantially wrapped up. Based on that, should we anticipate a steeper downtick in OpEx in Q4 relative to Q3?

I think it will be relatively the same, Pavel. We got most of the things that were implemented in Q3 done early. The major restructuring in Q3 was the completion of the intangible write-offs. And then we moved our blend operation into Fort Collins and then to Shenzhen. So we consolidated manufacturing. So that will show up a little bit, but that's generally a cost of goods sold item because its factory cost. But no, we're about where we will be. As Gordon mentioned in his remarks, he's got his breakeven down into the mid-60s, and you can see the accelerated profit in our Thin Film business. And then if you just look at the amount of money they return to the bottom line, for a dollar of incremental sales, Q3 versus Q1, it's close to 65% of the incremental revenue. It came down as we completed a very aggressive restructuring program.

Just to reemphasize there, the costs we've taken out won't come back. We continue to find ways to improve the efficiency of that organization. But at the same time, what surprised us greatly is the fact of the cost reductions we can do on the products, which were manufactured in Germany and outsourced in Germany. Our Shenzhen facility can take a huge amount of cost down. It's in the margin, but we can take a lower cost out, using our machines. The way we decide to manufacture, we can really drop costs out of the products. Really, I want us all to reflect on that because the way we're manufacturing is so different to anyone else. We're outsourcing. We have very little fixed cost. So we are really in a very powerful position, and we manufacture in low-cost areas. So we are in a very powerful position, one, to reduce that cost, and secondly to grow with the great product line that Gordon has just tried to tell you about.

And our next question will come from the line of Joe Maxa with Dougherty & Company. Joseph A. Maxa - Dougherty & Company LLC, Research Division: I have a follow-up on the Solar side. The backlog you talked about in the Utility, is that -- if it doesn't ship in Q4, I mean, how long will you see this over what timeframe ship? Would it be Q4 and Q1? Or what you would be thinking about?

So first of all, Joe, I just want to clarify, we're referring to an increase in backlog, not a specific backlog number. And the beauty of the Utility segment is, as Garry explained, that the timeframes for these projects extend out over time. So we've got a very healthy backlog that will give us a nice underpinning right into the second half of next year. And with the interest that we're seeing in the ground now of commercial segment that I referred to and some of those of the smaller Utility deals, we're also expecting that we'll be able to see strong growth in the first half of next year as well.

I think, Gordon, we've been a little surprised at how -- the really strong feedback on this product and the efficiency that we get from the product.

Yes. It started really when we did a private showing of the product at the Intersolar Conference in San Francisco. We saw very significant interest that continued to develop. We had follow-up meetings with a number of these new customers at the SPI Conference in October, and we're now seeing a lot of opportunities for the product as we move into 2014. So we've got a backlog we can ship. As we said, it will start shipping in the back end of Q4. And as we move into Q1, we'll be ramping.

And remember, again, at the Analyst Day, we will update you again. And we will certainly won't update our guidance, but we will update you on where we think this product is. By the way, we're there or thereabouts. Don't think we are wide off. We're there or thereabouts. Joseph A. Maxa - Dougherty & Company LLC, Research Division: I wanted to just ask you about -- I think previously, you indicated getting up to perhaps $100 million per quarter on average next year with all your success you're having in your commercial plus the Utility. Do you think you can get there?

What we said was we think we can get to a range of about $90 million to $100 million a quarter. With the backlog we have, with the new products that have come out, we've got a good shot at it. We've got a good shot at it. Remember, though, we talk about revenue, remember what of our focus is. Our focus is profit and earnings per share. I know others talk about market share and all these type of stuff. We rarely talk about that. We are focused on earnings per share. So if we can’t get the margin at the end of the day that we think we want, we probably won't take the order. So just make sure that the you all realize we're not driving revenues. We're putting our foot on the accelerator slightly. I said a tad last quarter. It's still a tad. We're not slamming that accelerator down. We are wanting to grow sensibly and grow our earnings per share. If you look at our model for Thin Film and look at the profitability we're getting for just a little bit more volume, just imagine, when we start pushing a little bit more volume through our Solar business through Shenzhen, that will drop more profit to the bottom line for both of them. So we're really in a very, very nice position going forward. New products, great model to work with, many places to grow. We're in good shape. Joseph A. Maxa - Dougherty & Company LLC, Research Division: And one question for Danny on the tax rate. Less than 20% next year, but you also indicated -- threw out a number of 12.5% at current mix. And now we're going to be -- you think we'll to be closer to the 12.5%?

Well, in Q4, we got into a 0 tax rate because we will finish up the truing up of the tax return to the provision. So we did the state and federal and we always do that in Q4. So I think taxes this quarter will be 0. When I said going forward, given a normal mix of profitability, with Thin Film at the level of profitability they are. Their sales mostly be in international, we enjoy a very advantageous tax rate there. Solar is -- most of their profits come in countries that have a 30% to 33% tax rate. When you blend the 2 together, you easily get to something south of 20% for next year.

Really, the tax rate is just a function of which one makes the most money. That's all it is. At the moment, Thin Film is doing a great job, and Solar is in a position of doing a good job. So we think next quarter or next year, we'll have blend below 20%.

Yes. And Joe, last year, there's been a lot of blocking and tackling on changing how we do things, putting cost in the right places, taking advantage of the international nature of our company. And the team has done a nice job of structurally changing our tax position so that we can enjoy a tax rate less than 20% on a normal basis.

Now remember, the real focus of the company now is on operational performance, improving the profitability as much as we can, and also, if there is a cyclical downturn, being able to deal with it, make money through that downturn and grow forward. That's one of the things we'll be talking to you about on Analyst Day because we think we've sorted out the cycles. And we will be speaking to you about that on Analyst Day as well as ways to grow our business further.

[Operator Instructions] And our next question will come from the line of Mehdi Hosseini with SIG.

Two questions for Garry, and I have a couple for Danny. How should I think about the flat panel display in this digestion period that you were referring to? Is that going to be a like a couple of quarters? Because this was the second consecutive quarter that revenues were down. I'm just trying to better understand the duration of this digestion period.

Yes, that's a great question. I'm not quite sure -- it's quite true. And I'm going to pass it over to Yuval.

Q2 was an uptick in the flat panel display. And so Q2 was a sharp increase, and it was the typical behavior of the market. Usually, we see the orders coming in lumps. Q3 was a decline. And what we expect to see is the transition period where these capital investments have been digested. We also see the dynamic of -- in the large flat panel displays, there is an investment in China as some of the Korean manufacturers go to -- move capacity to China to take care of the tariff that -- try to reduce the tariff of selling TVs in China. At the same time, there is an increase in investment in touch panels in China across the board in PVD. So what we see right now is a decline in the -- there are some -- the thought basically in the market is that we will see a recovery in the -- towards the second half of 2014. And we've -- in the past, we've seen that behavior of lumpy business for the last few years. And it's not surprising.

Sure. And then one more for Garry. You discussed the $48 million increase in backlog. How should I think about book-to-bill in the third quarter given this increase in backlog?

Nothing. You should be excited about our book-to-bill.

But to what extent is it above 1?

Well, we've gained -- in the last 6 months, we've gained $40-odd million of backlog. So I think it's possible to work that out, yes?

We'll be above 1, for sure, Mehdi. I mean, the company from where it was announced with the $48 million gain. It's there. It will be in our Q, but I can -- when we have our call but I can work on the...

Sure, okay, no worries, no worries. Actually, a follow-up question for you, Danny. If I just were to plug in the midpoint of revenue guide and 0 taxes, to get to the high end of your EPS guide, I would need to keep my margin flat compared to Q3? Am I missing something here?

Well, remember what we said about -- remember that there's a mix issue here. And remember, what we said is we've got the 1-megawatt shipping out in the quarter, in the last week or 2. And that will presumably have -- always when you ship to begin with a product has a lower margin in the first month or 2. I mean, what would worry me is if it doesn't ship and we get those costs in the quarter and not the revenue. That will be a worry. And that's why you've got that broad range and that flattish margin in the quarter. Is that understood? Hang on. I just want to make sure I made it clear.

Yes. I mean, you're applying the same margin as last quarter when you get to the midpoint, you could take revenue growth I believe is what you said.

Yes, yes.

The margin to the bottom line. And no that would be -- as we've said, our cost -- as a general rule, our costs are not going up as our revenue increases.

Okay. And just specific...

[indiscernible] margin to the bottom line. And as we -- I understand what you're saying for this quarter. And that's sort of neutralized by what ships. As we go forward and we push through more and more from Shenzhen, where square footage, by the way, huge square footage, is going down, huge square footage, is going down, head per -- headcount revenue per head of the company is going up dramatically over this period. So we've got good things going from this model. So we would expect good things to happen next year.

Okay. And then speaking of revenue per headcount, moving -- actually, thinking about the U.S. and new product, should I assume that the SG&A would remain around $18 million, $19 million for the quarter next year? Or should I assume SG&A change would keep the ratio of percentage of revenue constant?

We don't like ratios here. We like to talk about the absolute numbers we're going to spend. And I think that's an issue that companies have, where they creep up there, and G&A and R&D, as revenues come up. And of course, they may have a problem when the revenues go down. We don't do that here. That's not our way of thinking. Our way of thinking is bringing the cost to a level that we can afford going forward and stick to those costs. We don't expect that cost to go up next year. My assumption is that we will find ways, always, to be a little bit more efficient. But we'll keep our costs flat to down.

Our next question will come from the line of Alex Greer [ph] with JMP Securities.

I was wondering if I could return for the question that Jim started with, Garry. Can you give a little bit more color around what's driving the increased win percentage in semiconductors? And maybe if we assume a steady-state environment, what kind of increased dollar opportunity does this bump in win rate represent for you?

Well, we've set the vitality index of the company at the present time. I think -- and a lot of the things here that you're asking we don't disclose. But I think Yuval should talk about the way we now do R&D, the lean R&D that we're doing, which is absolutely phenomenal. The power of that in winning new business has been incredible in both the semi- and the hard coating there. We're doing a lot of good stuff at the present time. Yuval?

Following Garry's comment, we continue to -- as you look at the last 2 quarters, we did really well compared to the market. And the main reason for that is the expansion in semi, I'm talking about the semi right now, the expansion in semi into new world regions that we have never shipped before to new customers that we did not serve before and expanded our presence in applications beyond those that we serve before. And the way we do that is implementing a different engagement model with our customers worldwide through a distributed engineering groups that are close to our customers. These groups are engaged with the customers from an early stage of development, and the result of that is a very short development cycle time. Obviously, more efficient and less costly, there's a much less waste associated with developing these new products, and the intimacy with the customers allow us to develop the products very close to it due to very specific design as the industry continued to become efficient and consolidate many of the products that we sell to our OEMs, become more OEM-specific and application-specific, obviously, to be able to move fast, the early-stage engagement to our localized engineering teams, allow us to move fast and to gain more presence in various applications. We continue to invest in advanced application. The recent investment we've made and launched recently was advanced RF pulsing technology. That allowed us to increase our presence in the etch applications worldwide.

Just as a general rule here, we are in a very exciting position. Our Thin Film business is growing in semi to winning in semi in different countries and different companies. It's expanding into new markets and new countries. And our Solar business is just ready to go. Two great new product lines for both commercial and Utility going into a variety of different geographies. So from the customer point of view, we're in a very good position at the moment. We're seeing more customers all the time. At the same time, we have a machine that will allow us to really drop more and more profit to the bottom line, as we've now demonstrated in Thin Film. So we're in a good position. We want to talk to you more about that at Analyst Day. It's such an exciting time for us, and we're looking forward to seeing you on November 20. I don't know if that's the end, but there you go. Any more questions?

This concludes the question-and-answer portion of today's call. I will now turn the call back over to Garry Rogerson for closing comments.

Again, thank you. And I sort of said -- I apologize for saying them early. Very excited at the present time. The group is in great shape, and we're looking forward to seeing you on Analyst Day to talk in more detail, give you some updates. Good times are ahead. Thank you very much. Bye-bye.

Thank you for your participation in today's conference. This concludes the presentation. You may all disconnect. Good day, everyone.