Annie Leschin - IR Hans Betz - President and CEO Larry Firestone - EVP and CFO

Brian Lee - Citi Joe Feng - JPMorgan Alexander Paris - Barrington Research Olga Levinson - Lehman Brothers Tom Diffely - Merrill Lynch

Thank you, and good afternoon. Thank you for joining us this afternoon for our first quarter 2008 Earnings Call.

With me on today’s call as the operator mentioned are Hans Betz, President and CEO, who is joining us from China today and Larry Firestone, EVP and CFO, both will be presenting prepared remarks today. By now, you should have received a copy of the press release that we issued approximately an hour ago.

If you are in need of a copy, please visit our website at www.advanced-energy.com or feel free to contact us at 970-407-4670. Before we begin, I would like to let everybody know that Advanced Energy will be participating in JPMorgan’s Technology Conference on May 23rd in Boston.

As additional events are scheduled this quarter, we will make additional announcements. I would like to remind everyone that except for historical financial information contained herein, the matters discussed in this conference 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.

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, our ability to benefit from the cost -- continued cost improvement initiatives currently underway and unanticipated changes in our estimates, reserves or allowances. These and other risks are described in Form 10-K and 10-Q and other reports filed with the SEC.

In addition, we assume no obligation to update the information that we provide you during this conference call, including the first -- excuse me, the second quarter guidance provided during this call and in our press release today. 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 Hans Betz.

Good afternoon, everyone, and thank you for joining us. Advanced Energy performed well this quarter.

Our sales grew 6% substantially to 88.9 million exceeding our guidance as we successfully executed on our diversification strategy this quarter by growing revenue outside of semiconductor to 35% of our total business. Stronger non-semiconductor sales also drove a slightly higher gross margin of 40.3%, while our continued effective management of cost improved operating margin by more than 3.0 to 8.3%.

This led to first quarter EPS of $0.13 above our guided range. Finally, we generated $29 million in cash before our stock repurchase to end the quarter with a 137 million in cash and marketable securities.

Semiconductor sales in the first quarter was roughly flat with the last quarter, which is noteworthy as industry conditions deteriorated during the quarter due to continued ASP pressure and reduced demand. We did however ship a number of our semiconductor products to key OEMs for use on their evaluation tools which have shown encouraging preliminary results.

The industry outlook continues to be uncertain as semiconductor companies try to deplete the impact of low memory prices and CapEx with a decidedly negative macroeconomic conditions. As a result, we anticipate our semiconductor revenue in the second quarter will be softer than the first quarter given the key OEM customers weakening outlooks.

We remain encouraged by the penetration of some of our new products for next generation offerings and continue to work to gain market share and position ourselves to take advantage of the market recovery when it occurs. Sales to our non-semiconductor markets were the highlight of this quarter, increasing 18% sequentially, led by solar, flat panel display and architectural glass markets.

Flat panel display was clearly the highlight of the quarter with sales up nearly 90% over the fourth quarter. After two year lower panel prices are now driving increased demand for flat panels and investment in next generation fabs by the flat panel manufacturers.

The demand in the markets and the need for panel maker profitability are causing manufactures to accelerate the investment in new capacity in order to meet the current demand on a timely basis and maximize their profit at these levels. As we have consistently stated in the past few quarters, the result has significantly increased CapEx investment during the quarter, which we expect to continue for the foreseeable future.

We would expect second quarter revenues to the flat panel market to be at the similar level. Advanced Energy should be positioned to grow faster than the flat panel equipment CapEx this year, given our current strong market share in Gen 5, 6, and 7 and the rapid expansion of equipment purchases expected throughout the year.

While we are encouraged by the robust market position in the near term, we are also seeing heightened competition in the next generation flat panel equipment, that means Gen 8 and Gen 10. Data storage sales declined 7% from last quarter as the shift to perpendicular recording is being implemented at lower levels than expected from the search and shipment weaknesses in the second half of ‘07.

We did, however, see a spark of resurgence in the last month with an increase in orders and shipments. We expect another minor pickup driven by hard disk drive.

On the optical, say DVD side, the selection of Blu-ray as the winning high definition format was the big news in the quarter and should provide a positive catalyst in the market over the next few years. However, given the long-term expected adoption rates, we anticipate the HD format Blu-ray will remain a small, but continuously growing portion of the data storage market for the foreseeable future.

The architecture glass business showed strength this quarter with sales increasing 24% sequentially due to orders from a key Chinese customer. We anticipate continued growth in the second quarter with shipments to China and a new customer in Russia.

Our focus on improving our OEM relationships in this sector continues as we position our sales more strategically to capture a larger share of the market. Sales to the industrial coating market was flat sequentially.

This market continues to provide consistent revenues, good margins and the opportunity to drive business into new market areas. Looking ahead, we see this part of our business growing slightly from new customer acquisition.

Our solar business consisting of both photovoltaic thin-film deposition tools that we supplied to OEM equipment makers and our commercial inverter was yet again in bright spot for Advanced Energy in this quarter. Sales for the thin-film deposition tool market increased 12% sequentially demonstrating the continued strength in demand for our product.

As key OEMs continued to invest in this segment, we anticipate another strong quarter, and we are on track to double our solar revenue in ‘08. Our Solaron commercial inverter product continued to gain traction.

Having acquired two new customers during the quarter, we now have several inverters installed on the bridge. Solaron’s performance results at our customer sites to date have been very positive with a minimum of 97 conversion efficiency.

Solaron is also receiving very high marks for uptime as demonstrated in a recent installation, where Solaron replaced a competitive product with a history of very low uptime and performance. Since the installation of our product at this site a few months ago, the customer has reported a 100% uptime and much improved conversion efficiency.

We continue to focus on our strategy of penetrating the U.S. commercial inverter market first.

We are also making strategic investments to expand our inverter product portfolio and plan to introduce an extended line of Solaron products addressing higher power capacities for a larger segment of the market over the next few years. Overall, we are pleased with our first quarter performance.

We continue to focus our effort more intensively on the non-semi markets, but we are investing in key growth areas to develop new products, understand our customer needs, and increase our market penetration as evidenced by our growing non-semi revenue. We implemented the first phase of our cost reduction, decreasing P&A costs by over $5 million.

This among other cost initiatives will allow us to achieve our target growth rate over the next few years. I would like to thank the entire Advanced Energy team around the world for their hard work.

I will now turn over to -- the call to Larry Firestone, our CFO to elaborate on our operating results.

Thank you, Hans, and good afternoon, everyone. I will review the results for the first quarter of 2008 and discuss our guidance for the second quarter.

Strength in our non-semi markets drove the growth in our sales for the first quarter of 2008 to $88.9 million, which was above our guidance. This represented a sequential increase of 6% compared to the $83.8 million for the fourth quarter of 2007 and a decrease of 17.2% compared with the $107.3 million for the first quarter of 2007.

Sales for the semiconductor capital equipment market were $57.7 million representing approximately 65% of total sales in the quarter. Sales for the non-semiconductor markets were $31.2 million or 35% of total sales compared to 32% in the fourth quarter 2007.

Non-semiconductor markets include solar, both inverter and thin-film deposition tools, flat panel display, data storage, architectural glass and industrial coating. The much anticipated return of the capital investment drove the flat panel sales to reach 9% of total sales this quarter versus 5% in the fourth quarter as panel makers forged ahead with their expansion plans.

Data storage fell slightly to 3% of total sales compared to 4% last quarter. The hard disk industry continues to make incremental investments at lower levels as the industry works to utilize the existing capacity that was installed over the last year and a half.

We expect to see similar revenue levels next quarter. Sales to the architectural glass market represented 3% of total sales versus 1% in the fourth quarter.

We’ve secured orders from China and continue to be encouraged by the activity in the glass market related to Low-E glass expansions and initial investments and maintenance-free glass as well as the solar market. Our industrial coating in emerging market sales represented approximately 11% of first quarter sales, down slightly from the 12% in the prior quarter.

This category represents sales to a collection of customers not specific to major markets. Sales to the solar market in the first quarter, which are comprised mostly of sales to our OEM customers that manufacture thin-film deposition tools, represented approximately 9% of total sales consistent with last quarter.

We continue to ship and install inverters to the solar market and expand our installed footprint and our customer list. This should continue to drive the expansion and the growth of inverters in our revenue stream.

Global service revenue which is included in the sales that I mentioned for each market was 17% of first quarter sales. Upgrade sales in out-of-warranty repairs continue to drive recurring revenues to our growing installed base.

Our ending backlog for the first quarter rose 11.6% to $51.3 million compared to $46 million last quarter. And our book to bill was 1.06 during the quarter.

Gross profit was $35.8 million or 40.3% for the first quarter, which is a 120 basis point increase over the last quarter’s $32.8 million or 39.1%. This sequential increase was driven by a stronger revenue performance in our non-semi markets.

Year-over-year gross profit declined however from $48.3 million or 45% in the first quarter of 2007. R&D was $13.1 million or 14.7% of first quarter sales, slightly above in absolute dollars but below as a percent of sales compared to the $12.5 million or 14.9% of fourth quarter sales, and above the $12 million or 11.2% of sales a year ago.

The increase was driven by investments in both new and existing products. And we continue to invest in R&D to create new and industry-leading product as we position ourselves to take advantage of the opportunities in each of our markets.

SG&A was $14.5 million or 16.3% of first quarter sales compared to $16.1 million or 19.2% of fourth quarter sales, and $15.2 million or 14.2% of fourth quarter 2007 sales. During the quarter, we increased our reserve for doubtful accounts by approximately 700,000 as we had a new customer-deferred payment on our products.

This charge will not recur going forward. We also implemented the first phase of our cost reduction program whereby we reduced head count and SG&A, and lowered our spending rate by over $5 million.

This resulted in roughly $674,000 in restructuring charges during the first quarter. We continue to focus on driving efficiencies, as we will analyze our business for further potential cost reductions going forward.

We will communicate more details on our plans as they become (inaudible). Our first quarter net income from continuing operations was $6 million or $0.13 per diluted share, compared to $4.2 million or $0.09 per diluted share in the fourth quarter of 2007.

This compares to $12.7 million or $0.28 per diluted share in the first quarter a year ago. Our stronger than projected net income was driven largely by higher revenues and gross profits, as well as the implementation of our cost reduction program during the quarter.

Additionally, the tax rate decreased to 28% due to the reduction of income taxes in Germany from 38% to 30%. Our head count at the end of the first quarter was 1,700 employees compared to 1,707 employees at the end of the fourth quarter of 2007.

Cash and marketable securities decreased $68.4 million for the first quarter to $136.9 million from $205.3 million at the end of the fourth quarter. Our cash balance declined in the quarter as we initiated our share repurchase program and reclassified some auction rate securities.

To date we have repurchased approximately 3.4 million shares or roughly $44.5 million of the $75 million in the authorized program. Given the auction rate security situation, we plan to minimize the repurchase program over the next few quarters.

We reclassified approximately 40 million in auction rate securities for long-term assets, as this market has closed and the ability for the company to liquidate those securities was currently limited. We’ve also taken a temporary impairment charge of $1.6 million during the quarter as a temporary impairment.

This charge has been recorded in the balance sheet, and if it is determined that the impairment is permanent, this charge will actually be recorded on the income statement. DSOs were 66 days, and trade accounts receivable were $70.5 million at the end of the first quarter of 2008, compared to 64 days and $64.2 million at the end of the fourth quarter of 2007.

Inventory turns were 4.1 versus 3.9 times last quarter. Inventory experienced a slight increase to $51.6 million from $50.5 million in the fourth quarter of 2007, as we increased inventory to support a transition to a new supplier in China for a key set of components.

Capital expenditures declined during the quarter to $1.5 million, due mainly to cutbacks, and fixed asset depreciation was $2.6 million. Our guidance for the second quarter will be down slightly from the first quarter due to the anticipated weakness in the semiconductor industry, but we continue to expect strength from the flat panel and solar markets.

We expect sales will be between 81 and 87 million. Gross margins will be in the 39% range and earnings per share, we expect will be in the $0.07 to $0.12 per fully diluted share range using a 28% tax rate.

This concludes our prepared remarks for today. Operator, I would like to open up the call for questions.

Hi, guys. This is actually Brian Lee calling in for Tim.

I had a few quick things. First thing, is the 5.5 million in annual cost reductions is that all out of Q1 or is there, can we expect a residual impact coming in, in coming quarters?

Larry?

We took -- yeah, we took the 5.5 million as the annual rate of the cost reductions that we took. And as I mentioned, we are currently analyzing the business looking for further but those reductions have been taken, and you will see those laying in on a quarterly rate going forward.

Okay. What percent would you say was actually picking out of Q1 of that 5.5?

Oh. We took the -- I see what you are saying, I am sorry.

We took the cost reduction action in March. So it was a pretty -- I mean, it was a certainly a one-third action against that, but then you also have the restructuring charge.

Okay, okay. That’s helpful.

I guess shifting gears here a little bit. On the margin side, though it sounds like the non-semi business actually is helping on the margin front.

Can you give us a sense for what the sort of margin delta is between your blended margins on the non-semi side versus the semi side?

Yeah we don’t really break that out. What we have said is that the semi margins, are a little lower than the corporate average, and the non-semi are a little higher.

Okay. So I mean, is it fair to assume several 100 basis points or is it somewhere in or could it be as high as 500?

Gosh, we really haven’t guided that. It’s probably in the -- yeah, I would say, because there is so many different markets, I would have to -- then all of a sudden we are talking about mix.

So I would just answer it the same way we have, which is the non-semi run a little ahead of the corporate average and the semi runs a little bit south. On the other side, we get OpEx leverage on the semi business because we get a lot less sales energy that has to go through to sell the semi business, maybe energy is the wrong term, but certainly less bodies focused on that part of the market.

Okay, okay. Fair enough.

On the FPD business, how sustainable do you guys see business there because it sounds like some of your OEM customers have actually been talking about a pretty big first-half loaded order pattern there, followed by a fairly sharp decline in the back half. So is that sort of the trajectory that you guys would be expecting as well?

I think what we see is what our customers guide. And I think they have a bit of a better visibility than we have.

It’s hard to get a -- let’s say, more crisp outlook from our side than our customers do.

Okay. Last thing, last quick thing from me and then I will go away.

On the solar side of the business there is obviously a large pipeline of thin film projects here, most of that in contract status. Have you guys booked any revenues on any of these projects outside of what you would consider pilot phases?

Is there anything in production, which you’ve actually seen hit the P&L?

I think...

Go ahead, Hans.

What we see is, we are serving practically all the major customers on the solar side, because we have a suite of products which is slow, DC and RF. And we are in some way involved in any of those order.

I guess, what I am asking is it are you guys seeing mostly just pilot projects right now that are impacting the P&L? Or is there actually production phase projects which you are booking revenues on?

I think it’s mainly on the pilot side. I would say the production things or what you are seeing building up in the backlog of a contract volumes that are sitting behind, at least on the thin film side, I think that’s where your question was oriented.

Sure. What sort of timing would you expect, would you expect any of that production stuff to fall into ‘08?

That’s a tough one. I mean, that’s going to end up being one of our customers answers.

That’s going to depend on how they -- what they get through on the pilot side and how fast they move to production.

And the thing at this point in time, it’s hard to discern between production and pilot lines.

But I guess maybe I’m misunderstanding, but at the point that some of your OEM customers are actually installed, is that the point at which your revenue recognition trigger hits or...?

No, when they take possession of our product is when our revenue hits.

Okay.

So as they are moving product off of their lines -- and Hans is right; it’s very difficult to tell which ones are pilot and which ones are production, unless they’re really small versus really large supplies. But -

Right.

But it’s really difficult to tell what’s what as it moves off of our floor, and also when the timing of our customer’s revenue is going to be.

Okay. Thanks, guys.

Sure.

Hi. This is Joe for Jay Deahna.

Thanks a lot for taking my call. Congrats on the quarter.

Thanks.

Quick question on the semiconductor outlook for second quarter. You mentioned it’s a little bit softer.

And the OEMs have guided a pretty big range from like minus-5 to minus-25 on shipments. Can you give us a little bit more color on what you’re seeing?

I think what we see from our line of sight to our customers, I think what they announced publicly in terms of weakening their business, of course, it does reflect in our business as well.

So would you say it’s closer to the minus-5 side or the minus-25?

No, it’s closer to the minus-15 side.

Okay. That’s helpful.

And then shifting gears on this, if flat panel is going to be flat, semi is going to be down, then that suggests that solar should be up. Is that how I should look at it?

That’s true.

Then from the ‘07 your revenues I believe is about 26 million for solar. And if ‘08 is going to be doubled, then that’ll be about 52 million.

In Q1, you got 8 million in for solar. So that leaves about 44 million left for the next three quarters.

Is there a linear trajectory upward, or is it going to be hockey stick effect?

No, we haven’t really guided that, but I would say it’s safe to say that solar just continues to build quarter-over-quarter.

And I think there is no formula, which neither is hockey stick or a linear. It’s quite sometimes lumpy and the orders are pretty big sometimes.

Therefore it’s hard, but we don’t see any downfall from our doubling revenue in ‘08. But it doesn’t necessarily mean that we are accurate on 1 million or 2 million, but just roughly double.

Sure, so roughly double. So then that means that you feel fairly secure that these thin film lines are going to happen for the OEMs to take the components from you.

Yes, I mean, there is not only these thin film lines, which have made a lot of noise publicly, but there are a lot of panel manufacturers. And this is much wider than just these very big orders announced by AMED and Erlycom.

Okay. Do you give out breakout on the exposure to the equipment suppliers versus the solar fabs?

No, we don’t. We don’t.

Okay. All right, thank you.

Could you tell me the dollar amount in the first quarter in the flat panel business?

Oh, let me just look here. Flat panel would be in the 5.7 million range.

And that was up from how much a year ago?

Oh, I’m sorry; wait a second. Flat panel is in -- I had the wrong line.

Flat panel is in the $7.5 million range, and that’s up from about 4 million a year ago.

And you said that’s going to be relatively flat in the second quarter sequentially? And I think you just mentioned that solar was 8 million or 8.1 million?

Yes, it was in that range.

Right. Okay, and the tax rate, it sounds like you’re using 28% for the year.

Yes.

And just one other thing, I think you discussed it. The 5.5 million cost savings, I guess, you implied that’s going to be spread fairly evenly over the rest of the year.

Mm-hmm.

And then are there more restructuring charges beyond the first quarter?

There will be as we analyze and follow further cost reductions. But we haven’t really defined that yet.

Then that would take shape very similar to what happened in the first quarter.

But if you had more restructuring charges though, then you would expect more cost savings.

Further cost reductions, yes.

Right. Okay, thanks a lot.

Hi, Olga calling in for CJ. Just had a couple of questions.

On the semi side, you had pretty much flattish revenues in March, whereas most of your customers guided to sequential declines and expect similar in June. Is that in anyway indication of incremental market share gains?

How should we think about that and how your semi revenues for ‘08 should fare relative to overall wafer fab equipment?

I think as we mentioned in our script, it’s not an actual market share gain, but it may turn out in the market share gain going forward because some of those additional revenue came from evaluation tool, which are normally used in order to qualify for the next generation. So this is part of it.

Okay, so just overall for right now just to assume that you would generally trend with the market, and not to factor in any incremental upside for that?

No.

That’s a safe assumption, yes.

Okay. And then I guess outside of the SG&A cut that you instituted in March -- and it sounds like you would basically be exiting the year at around this range.

How should we think about ‘09? Would you start to ramp that as your underlying businesses grow or would you try to keep it at this level?

No, I think we’d try and keep it at those levels as best we can.

Okay. And then I guess given the new products that you are introducing on the inverter side or the Solaron, are you factoring in for the potential for exceeding your initial guidance for solar revenues to be up over more than double?

Or are you just sticking that to be more conservative, or I guess any changes in your outlook overall?

Yes, for 2008, yes, I think the market situation that we’re in is one where we’re securing new customers, and we’re installing for the first time in that customer base and really building our credibility. So I think even as we introduce new products later this year, it’s again on a customer and market acceptance kind of trajectory.

So I would say that we would stick with the guidance outline that we gave.

Okay.

Yes, I think in order to confirm that, I mean, there is an inherent timeline. If you have a product which isn’t superior, you need a time of evaluation on the customer side, and this time cannot be shortened or cut.

Therefore in ‘08, it won’t change dramatically.

Okay. And then I guess one final question from me.

In your prepared remarks, you talked about increasing competition at the OEMs for Gen 8 and Gen 10 display tools. How does that impact to you?

Is that more of a ASP pressure for you guys, or more of who you have exposure to versus other equipment providers? How should we read that real competition and how it translates to your top line?

Yes, it’s not necessary an ASP pressure, even though ASP pressure is permanent there. But there is the possibility that part of this business may be lost to competition.

Oh, okay. So you’re talking about competition for you rather than competition for your customers?

Yes, from the component suppliers.

Got you. Okay, that’s it.

Thank you very much.

Yeah, good afternoon. I was hoping to get a little bit more on the auction rate securities.

What were the exposures of those instruments?

You mean the underlying exposure?

Yes student loans or real estate or -

Yes, we had student loans and some municipals. Everything is of really high credit caliber, but again the trading in that whole market has closed up, as you know.

Okay, and you mentioned you took some kind of a charge. Could you explain that again?

Yes, we took an impairment charge. As our money managers have looked at it and they started to grade their whole portfolios, they’ve come out with an impairment methodology that we looked at.

Now AE is not in a position where it needs to liquidate those. We could hold those bonds to maturity.

So that’s where it sits in a temporary impairment situation. But where we are in the world of cash management and FASB accounting is the market value of those securities really needs to be what resides on our balance sheet.

So even though we’re in a position where we can wait it out and hold the maturity or hold the refinancing, whatever is going to happen, we need to follow the current accounting guidance on that.

Okay. And what was the actual impairment charge taken?

I think it was 1.8 million.

1.8, okay. And then at some point if that -- if you do need to liquidate for some reason, then that will hit the income statement?

Yeah. That would hit the P&L in liquidation.

Okay, all right. Thank you.

Sure.

Okay, great. Well, thank you all for joining this call and hopefully we will see you at the JPMorgan Conference in May.

Thank you.

Bye-bye.