Advanced Energy Industries Inc (AEIS) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 Advanced Energy earnings conference call. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Ms. Annie Leschin, Investor Relations. Please proceed, ma'am.

Thank you, Operator, and good morning, everyone. Thank you for joining us this morning for our first-quarter 2011 earnings conference call. With me today are Hans Betz, Chief Executive Officer, and Danny Herron, Executive Vice President and CFO, both of whom will present prepared remarks. By now you should have received a copy of the earnings release that was issued last evening. For a copy of the release, please visit our website at www.advanced-energy.com or contact us at 970-407-4670. Advanced Energy will be participating in a number of conferences this quarter, including the [DMA] Small and Mid Cap conference on the May 11 in Boston; the Credit Suisse Semi-Equipment conference on May 12 in Boston; the Needham CleanTech conference on May 17 in New York, and to Stifel conference on May 24, also in New York. As other events occur, we will make additional announcements.

I'd like to remind everyone that except for historical financial information contained herein, the matters discussed on 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. Statements that include the terms believe, expect, 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, and other factors listed in our press release. These and other risks are described in forms 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 second-quarter guidance provided during this call and in our press release dated today. Guidance will not be updated after today's call until our next scheduled quarterly financial release. I will now turn the call over to Hans Betz, CEO of Advanced Energy.

Thank you, Annie, and welcome everyone. Similar to last quarter, we are going to refer to the set of earnings slides that we have posted on the IR section of our website to help walk through the quarterly results and outlook of our markets. If you turn to slide number 4, I will begin with some of the highlights of the first quarter of 2011. I would like to start with a recap of the quarter. 2011 began with very solid results for Advanced Energy as we met our top and bottom line projections. Operating under our strategic business unit structure for the first full quarter, total revenue was $137.7 million, driven by stronger-than-expected thin film sales to the semiconductor market. We continue to align our strategic business units and streamline our costs and processes to best capitalize on this structure. This led to an improved operating margin of 17.7% and GAAP EPS of $0.43 per share. Overall, we were very pleased with our performance.

At our analyst day in early March, we commented that we were seeing signs of improved sentiment from our semiconductor customers since the beginning of the quarter. This manifested in higher thin film results for the quarter than originally anticipated and once again, demonstrated the advantage of AE's diversified business model. This quarter, our thin film business compensated for the greater-than-normal seasonality in our renewables unit, contributing 73% of total revenue versus renewables 27%, enabling us to achieve our projections for the quarter.

Let me begin with semiconductors on slide number 6. At the beginning of the quarter, our semiconductor market looked as if it would slow down from the fourth quarter. 3 months later, the industry's CapEx investment drove our sales from this market to climb 14% sequentially and approach record levels. Orders were strong across our entire customer base, both Tier 1 and Tier 2 OEMs. The improved traction and design wins of our paramount product continue to increase our penetration and solidify our position with key customers. Once again, we saw strength in Europe, as well as in Korea, which continues to be a very important market for us. Emerging technologies, such as 3-D packaging, performed exceptionally well this quarter.

Perhaps the biggest news this quarter came from a macro perspective. Tragic events in Japan created uncertainty from an economic perspective and sent reverberations through the electronics industry and the semiconductor supply chain. Very quickly, we moved to identify and understand the potential impacts on our products and our ability to supply customers. Midway through the second quarter, the [near-term] for semiconductors has grown more cautious. Samsung's announcement pushing out $1 billion in CapEx ,and more recent anecdotes from customers may be early editors of industry softness, pointing to some near-term weakness. Accordingly, we believe the slowdown in the second quarter may be temporary, and we anticipate a resumption of CapEx investment in the second half of the year. Based on the announcement by [laser place] in the industry, capital spending should continue throughout 2011 at relatively high historical rates.

Moving to flat panel displays. After several quarters of growing revenues, we experienced an anticipated decline this quarter, as customers paused after placing large orders in the third of fourth quarters. A lumpy business by nature, the flat panel market fluctuates with the investment patterns of (inaudible). Our outlook for the flat panel display business is strong as we have seen in quite some time. Driven in part by capacity builds for current generation displays, the large investment cycle underway for (inaudible) and larger panels will drive our shipment levels higher in the next few quarters.

From an industry perspective, we are seeing the accelerated adoption of new technologies, such as OLED flat panel displays. In the race to provide the next generation of tablet computers, the market is transitioning more quickly to these applications where AE is playing a significant role in the dry-etch processes associated with these products. We anticipate continued investment in OLED manufacturing capacities, 5.5, this year has seen some customers designed their Gen-8 tools for use in OLED which is a very exciting development. Flat panels will be an area of growth in the coming quarters. Phone, touch pad screens, Gen-8, the ramp in volume orders for our new product (inaudible) the wins we have achieved at certain customers, particularly in etch, will play a significant role in our success as we are growing sales in [TVT] tools.

Our performance in the solar panels and glass markets has (inaudible) from the record highs achieved at the year-end due to weaker sales of products for [Samsung] modules. However, sales of crystal and silicon equipment to the Chinese customers climbed even higher in the first quarter, as did sales to architectural glass customers for low-E coatings. Solar panels and glass remains one of our top areas of focus.

Current industry reports show concern over demand keeping pace with the incredible rate of build-outs in China. Not unexpectedly, we have begun to see some headwinds in solar cell manufacturing capacity in China. From our vantage point, it appears the investment in manufacturing lines in China has hit its peak. This is leading to a decline in demand for power supplies going to the crystal and silicon market in China, while the market pauses to consume the high levels of products purchased in the last several quarters as new capacities come online. Additionally, with the Japanese tragedy and (inaudible) nuclear power, we believe the potential for increased solar panel installation in Europe may grow and limit the possibility of further caps.

One potential bright spot in the thin film solar market for AE could be CIGS. We have been talking with OEMs who are developing systems for CIGS and believe there may be some investment in the second half of the year. Given our content in CIGS is higher than in crystal and silicon and our newest film product is making strong inroads into these applications, we could see improving tractions in these applications going forward.

Turning to slide number 7 on our renewables revenue. Our primary markets, North America is one, that typically has certain degree of seasonality in our experience in the first quarter due to weather-related factors that slows installations. This year, the more extreme winter weather caused a few projects to be pushed into the second quarter, which caused a larger sequentially decline in the first quarter.

Worldwide, the inverter market was really impacted by the changes in European feeding tariffs. The surprising shutdown of the market in Italy this quarter, and the Czech Republic last quarter, as well as dynamics ranging from France putting projects on hold, the UK shutting down ground mounds and large-scale projects sent shockwaves through the industry. According to IMS, first-quarter inverter revenue worldwide fell over 45% quarter-to-quarter, with Europe hit harder than the industry expected. While our exposure in Europe is very limited, we too felt some effect on our sales this quarter. Due to the tumultuous political environment surrounding the future of incentives and potential caps, we are even confident in our strategic focus on North America markets.

With Italy solidifying its plan relative to feeding tariff rates and caps, we believe that territory will remain viable, with growing momentum in the second half of the year. We see other opportunities emerging in Eastern Europe countries, as well. In total, we shipped approximately 115 MW this quarter, which was down over 25% from last quarter's high. Commercial- and utility-scale demand for our products over 250 kilowatts remained the primary driver behind our revenue.

We also added to our product offerings in North America and expanded our footprint and potential opportunities in the emerging markets this quarter. We introduced a 35kW commercial products for the US and Canadian market and began to ramp up shipments of both our residential and commercial product in this market during the quarter. We plan to adapt our strong commercial offerings to the Canadian market in the second quarter, given the growing opportunity we see ahead. Though it is still in the early days, the Canadian market looks very promising. With our strong bookings, we expect this territory to constitute meaningful in the future. Additionally, we are making progress in Asia, where we installed a 1 MW project in Taiwan this quarter.

The first quarter ended with record bookings of $65.5 million for renewables business unit, driven by anticipated strength in commercial sales and extremely strong growth in utility units. Just today, we announced two of the most significant wins to date. One, with Cupertino Electric for utility for 35 MW spreads over two sites. The other project is a 150 MW insulation with Zachry Industrial constructed in Arizona, which we believe is the largest solar PV worldwide installation on record. These projects are noteworthy wins for AE simply given their size. Having successfully won both against the competition, we also view these as great indicators for the strength and differentiations of our products and growing presence in the North American utility market.

The outlook for inverter industry should rebound in the second quarter, up virtually the same percentage [sale], according to IMS. With our record bookings and growing pipeline we believe our growth prospects for the rest of 2011 will remain very strong, ahead of industry's projections. Our growing success in the utility market and position among the leaders in the commercial segment in North America leave us well-positioned for the year ahead.

Now let me move on to our service business. Service revenues maintained the levels achieved through the last few quarters, which is particularly impressive given the divestiture of our flow business and subsequent loss-related service revenue. We worked through some of our backlog and so growth in our revenue related to firmer product this quarter. In renewables, we doubled the footprint of side car contracts from 28 MW to 56 MW. While these are all medium- to long-term contracts that may not generate much revenue mid-term, our building pipeline momentum is a strong indicator for our recurring revenue stream in the future.

Currently, our activity levels and backlogs appear consistent with the industry and we expect service to grow as the year progresses, particularly in semiconductors and with the addition of new customers in the two refurbishment segments. We also plan to introduce additional service products to grow revenue and gain market share during the year, and should begin to see growth in our renewables service business from annuity revenues as early as the end of 2011.

In closing, I am very pleased with our first-quarter performance. Our two strategic business units once again balanced the cyclicality and seasonality experienced by different markets. With record bookings and with at least the largest solar PV inverter project in the works currently in our backlog, our pipeline is extremely compelling, especially in renewables.

While the investment cycles in other thin film markets, such as semiconductors and solar panels and glass have slowed a bit in the near-term, the successful combination of our two power conversion businesses should serve to balance out the cyclicality of these businesses and join forces in the second half of the year, as our renewables business builds and we anticipate strong CapEx investment in the semiconductor market to return I would like to thank the entire Advanced Energy team worldwide for their hard work, dedication and strong commitment during the quarter. I will now hand it over to Danny, our CFO.

Thank you, Hans. As Has discuss we began 2011 with a solid first quarter. The seasonal weakness in renewables was offset by strength in our thin film's business, highlighting the advantages of our diversified business units. Where in some quarters, our renewables business has helped moderate the effects of capital spending cycles, this quarter we saw the reverse, with our thin film's business compensated for some of the slightly stronger-than-normal seasonality that our renewables unit experience. As a result, our thin film business unit contributed 73% of total revenues, and renewables 27%, and we achieved our revenue and earnings goals for the quarter.

Turning to slide number 9. As expected, revenues fell 7.4% versus the record fourth quarter to $137.7 million. Year-over-year, the total revenues rose 97.5% from $69.7 million in the first quarter of 2010. This robust year-over-year growth was largely driven by our successful acquisition of PV Powered, which was announced early in 2010 and closed in May. Combined with our Solaron inverter offerings, the acquisition has extended the breadth and depth of our inverter product line and increased our penetration of the emerging North America inverter market. The improvement in the economy has led to increased capital spending in a number of thin films markets, providing the Company a variety of growth engines throughout its markets.

Our thin film business unit had sales of $100.1 million, representing 72.7% of total sales, and first-quarter operating income was $24.8 million. Thin films was primarily driven by strength in our core semiconductor market, with sales of $46.0 million, or 33.4% of total sales. Semiconductor sales increased 14.3% sequentially and 12.2% over the same period last year. Sales to our solar panel and glass markets were $24.5 million, or 17.8% of total sales. This was down 5.1% from the fourth quarter, but was up more than 3X from the same period last year as we gain substantial traction with our Chinese customers. Service sales were $13.7 million, or roughly 10% of sales. This was relatively flat sequentially, though an increase of 25.5% over last year.

Turning to our renewables business unit. This business unit had sales of $37.6 million, or 27.3% of total sales, a 27.4% decline from the fourth quarter's record levels, driven by seasonality in the North American market that we have discussed. Operating income in our renewables business in the first quarter was $2.5 million, with record bookings of $65.5 million, we are excited about our prospects in the North American market.

Turning to slide number 10. Operating margin grew in the first quarter to 17.7% from 16.1% in the fourth quarter. Operating expenses decreased 7.6% to $37.7 million, primarily due to end-of-the-year bonus and sales compensation payments that were incurred in Q4 2010. Now, let me break out our operating expenses. R&D expenses increased 3.8% sequentially to $15.9 million, or 11.5% of sales in the first quarter, as we continued to grow our engineering teams in order to continue the development and enhance our inverter technologies. SG&A decreased 15% from the fourth quarter to $20.9 million, representing 15.2% of sales, due to the lower compensation and commission expenses mentioned above.

The total tax rate for the quarter was approximately 25%, in line with our annualized tax rate expectations for 2011 in the 24% to 26% range. We have successfully leveraged our operating model this quarter despite lower sales, achieving strong net income from continued operations of $18.8 million, or $0.43 per diluted share. This compares to net income from continuing operations of $4.8 million, or $0.11 per diluted share, in the same period a year ago.

Turning to our balance sheet on slide number 12. We ended the first quarter with cash and investments of $140 million, roughly flat with December levels. The major uses of cash for the quarter were $4.4 million in CapEx spending, and an increase in trade working capital of $18.1 million as we increased raw material inventory in anticipation of stronger renewables revenues over the next couple of quarters. In the past, we have shown our willingness to leverage our balance sheet to ensure we can meet customer lead times, as installments ramp up in the spring. Over the last 12 months, we have also grown shareholders' equity by 40%. Stock option expense for the quarter was $2.7 million, fixed-asset depreciation was $2.3 million, and intangibles amortization from the acquisition of PV-Powered was $900,000 for the quarter.

Finally, turning to slide number 13, you can see our guidance for the second quarter of 2011. We expect revenues to be between $148 million and $160 million, and EPS should be in the range of $0.36 to $0.44 per diluted share, based on an estimated 44.5 million shares. This concludes our prepared remarks for today. Operator, I'd like to open up the call for questions.

(Operator Instructions). Colin Rusch, ThinkEquity.

Hi, gentlemen, and congratulations on a solid quarter. Can you give us a little bit more color on the geographic distribution for the solar backlog? If all of that is North America, or and if you're starting to see any pick-up in activity in Asia?

Yes, Colin, good morning. We, as you know, we are focused almost entirely on the US market. In fact, in our outward guidance, we're not really incorporating anything for Europe in there. We did have 1 megawatt in Asia this quarter, but most of our focus is on the US market and the North American market.

And then on the cost side with PV Powered, can you talk a little bit about what you are expecting in terms of margin improvement from improved sourcing and improve component design this year, and what you might expect to see looking into 2012?

I think what we see is some kind of very different gross margin ranging from a pretty low gross margin in the low power systems up to a more-than-30% gross margin on the high-power things. What we tried to achieve by having PV Powered integrated in AE is a broader and higher purchasing power. In particular, on those standard components like PCP boards, which we see some impact already. And, of course in the situation in which PV Powered is, I think we have always some kind of design improvement in order to lower down the material costs, which of course, turns into a higher gross margin. So we are working on that and I think we have some experience how to do that.

Just in terms of the actual improvement, you're seeing a little bit of benefit from the PC boards and anything else here over the next couple of quarters?

Colin, you always have your purchasing power from putting the two companies together. We can get better rates on commodities like steel for the cabinets and things like that. So those continue to be in place, as well as taking the best of the best between both AE Solaron and the PV Powered product and making sure we implement the manufacturing products that are the best.

Okay, great. Then, on the solar capsule equipment side, can you just break down which part out of the roughly $23 million, $24 million that you had for the quarter, how much was on the thin film side and how much of it was really crystal and solar and what that backlog looks like going into 2Q?

So Colin, not breaking out exactly what the percentage is, but I think we can say that the crystalline part of our business is the majority. Looking forward, I think as we spoke about earlier, I think China, which is our main customer, has reached its peak in the manufacturing of solar panels, and there will be a pause, independent whether it is crystalline or thin film.

Do you have a sense of timing on that pause just yet? And that's my final question. Thanks a lot, guys.

It is hard to say, but we all have two hats on our head which is one is the thin film part of our business, the other one is the inverter part. If you have an oversupply on panels, we may benefit on the inverter side because the prices are dropping and if the prices are dropping, it is more attractive for building new installations. So, at this point in time I have no really clear view of what the timeline for the pause is at this point in time.

Perfect. Thanks a lot guys. Take care.

Thanks.

Bill Ong, Merriman Capital.

God morning, everyone. Congratulations on a nice quarter. Can you talk about how many megawatts were booked in the quarter? And also the percentage mix between large projects, let's say 100 megawatts and above, versus smaller projects? And also how long does it take to complete a typical small project versus a larger project?

The smaller projects have a much shorter timeline. And if you could see from our large win on the Zachry and PG&E, I think these are sometimes stretching over two years, the biggest project is stretching over two years. In the smaller, like commercial installation, I think it is a matter of quarters.

We typically don't break out the details of the backlog and the bookings, but I will say the majority of our business is 250 kW and above. At the end of the day, our entire commercial product line is well-received and very popular in North America, but our focus is on the larger products.

That's helpful. So as you start to get larger and larger megawatt projects, does that impact your inventory turns, if any?

Not really. The lead times stay consistent. It stretches out the length of the project, as Hans said. A large project like the one we just announced in Arizona is going to take a couple of years from beginning to end. But it doesn't really impact our inventory, because we are ship in progress during the project.

That's helpful. Thank you very much and nice job, everyone.

Thanks.

Zach Larkin, Stephens Inc.

Good morning, gentlemen , congratulations on a

Thank you.

Quick question, wondered if you could give us a little bit of an update and some color on the competitive landscape in North America? If you are seeing any impact from some of the new competitors who are trying to enter this market? And also talk a bit about pricing in the region?

Let me answer the last portion of your question. I think, of course, we see some kind of price pressure, but it is not out of the norm, and I think we are used to in our semiconductor business that there is a continuous pressure in prices, and we have some experience in how to do that. On the other side, with our service offering, I think to a certain degree, we can send off too much price erosion anyhow. Part of the win in Zachry I think was performance of the inverter, but at the same time I think this kind of superior service offering was part of that, too. So, therefore, it's not out of the norm. As far as the competitive landscape is concerned, we see one strong competitor, from the European plan, which is SMA. But SMA is playing in an area which we do not pinpoint in that much, which are string inverters, which are residential parts, and we haven't seen too much on Power-One yet, but we do see of course on a regular basis, Stacon and Siemens.

Okay, thanks very much. Also along that same line, could you give us a bit of an update on your capacity expansion plans and how things are moving, what we should expect to see on that front?

Yes, as we mention I think all the time, because the question comes up every time, we have an actual capacity between Bent and Fort Collins which satisfies I think all that we expect as a revenue this year. But in addition to that, we do have Celestica in Canada and we have SGD in China. To keep in mind, the expansion of capacity is a pretty simple straightforward and not very expensive situation. What you have to have is space. What you need in addition to that is test space for your inverters, but that's it. So, it is a very quick expansion, always possible, as we have shown in the past.

All right. Okay, thanks very much.

Edwin Mok, Needham & Company.

Thanks for taking my question. So first question is on your guidance. Can I ask what is baked into your renewable versus the thin film part of your business? Are you assuming that renewable will be growing while thin film is declining? And the follow-up question regarding that is what is baked into your gross margin in your guidance?

Yes. Generally for our guidance this quarter of $148 million to $160 million, we have about a 50% growth factor in there for our renewables business. And we have a 4% or 5% decline in for our thin film business. And that is our current view. Obviously these markets are extremely dynamic, they change all the time. That is one of the nice advantages of having a diversified revenue stream. But at this point, that is what we would have in there, and obviously that drives to a different EPS. We would expect in Q2 that are op expenses as a percentage of revenue will come down, but because the margin is lower in the renewable business than it is in the thin film business, we will have a slightly lower EPS.

I see, very helpful. And then on the operating margin side on the renewable, how do you talk a little bit about that longer term? What do you think you can achieve in terms of operating margin with your renewable business?

For 2011, we still anticipate something in the 15% range. Remember, this is a business that in Q4, shipped $51 million worth of product. So, it has an infrastructure that has been set up for that level of revenue. This quarter the level of revenue was down to $38 million, so if you just did the simple math, you can see the significant impact that lower revenue would have. If you take this quarter and use our 50% factor, you can also see the leverage that could have in Q2. So, we think long-term, we still have a very good 15% 16% business.

So, maybe give you a bit more color that too, because on the thin film side, we always have a very diversified product portfolio, which of course calls for a pretty high R&D in order to stay on the top of the pack. That means we have a high mix/low volume. On the inverter side, we do have a high-volume/low mix because the platform is pretty much the same through the different power levels. That means in turn on the long-term side, even though we do have a lower gross margin, but the expenses in order to have R&D engineering [as default] is lower as well. The manufacturing side is simple, as well, because you have a high-volume/ low mix. So therefore, we expect on the long-term, that the OpEx is the same as we see in the thin film area.

Great, very helpful there. A follow-up question on the renewables side. Congrats for winning the [December's] project there. I was wondering any additional color you can provide on that win in terms of what potential that project could become and if is it Zachry was the piece that was provided there. Does that actually have to work with Sempris? And as they decide to build out the rest of that whole pipeline there, do you expect to potentially win the rest of that business?

Well certainly that would be our goal. We are there on the first 150 megawatt. We expect to perform very well. We think that was a very competitive situation. We won based on our product reliability and on our service offerings and we think being there and proving that every day should give us certainly the opportunity to continue on that project as it builds out. Much like Southwest Airlines only uses 737s, we hope that project only uses Solaron inverters.

That is a good comparison of Southwest there. One question on inverter pricing. If I take the 150 megawatt shipment that you guys have and just plug that into the revenue that you guys reported, I got to over $0.50 ASP, right? Versus typically you guys talk about below $0.25 ASP for your product. I was just wondering what is the disconnect there? Is that more on just on all the pieces that you guys are selling? Can you help us out with that?

Yes, it certainly, when you look at the total project, there is some accessories that we had on their, remote-sensing, various things, there's probably some spares in there that are part of the total also. It's a number of items there, so it's real hard to do the math you did to get the pricing on a per-unit basis.

I think, if you look at the factors of success going forward, in particular the large utility projects, it's more important to have the availability, the up-time. There is a very clear trend into some kind of performance guarantee, which in turn is exactly what we have been playing into as a mission-critical element in the service side. Just think about the fact if we wouldn't have a top-notch service environment, we would have been kicked out of the semiconductor business right away. So, we are in a situation, luckily, that we have some heritage in our business, in the service business, which helps us a lot in order to secure businesses as a safety portion. And if people think they can easily build up a sales force which is matching our experience, I can just warn you, it is not that easy.

Great. Yes, thanks. That's a very good call, so it sounds like safeguard did help you guys on the Zachry project. Actually one quick follow-up with that. How much --the increase in ASP or the high ASP, was that (inaudible) by the increased sale of power station solution? Do you guys actually recognize the revenue of the component that is used in the power station?

We would, it would be part of the total sales as we put this together and create the power station, it is our revenue.

Great , that is all I have.

Okay, thanks.

Krish Sankar, Bank of America/Merrill Lynch.

Yes, I had a couple of questions. Hans, some of your customers like Lam and Novelis have spoken about [Bushrod]. Have they actually communicated that to you yet?

Well we see it from both, they have been guiding downwards in Q2. And in the communication with these key customers, we have the sentiment that the second half of the year is still rebounding, and we will see-- what we hear from our customers, we anticipate, a still very high spending on CapEx over the year.

Got it. Okay. And then another question I had was what did you say your service revenue was in Q1?

It's $14.5 million I believe was the number.

$14.5 million. Okay. And then final question, the op margin on the inverters in Q1 like 6.5% is pretty low. Is that a one-time aberration or do you think the operating margin getting to like the mid-teens is a longer-term goal and it's going to take us awhile to get there? Thank you.

We would anticipate 2011 have op income in the 15% range for our renewables business. Q1 was simply a function of lower volume. As I mentioned, In Q4 we shipped $51 million worth of product, so we have an infrastructure that is set up to ship that level and higher, and we anticipate that business to continue to grow. As we mentioned Q2 should be up about 50%. Long-term, our Company goal is to get to an op income of 20%. And we think that is very reachable in the next several years through leveraging our infrastructure and growing our top line. We have every intention to try to do that this year.

So, the more we get this kind of big projects in which we can apply our Solaron. And as you know historically, the Solaron has a much better gross margin, which is just a fact in the high-power ground, generally speaking.

Thank you.

Timothy Arcuri, representing Citi.

Hi, Hans. Couple things. First of all, can you give the backlog number? Is $145 million the right backlog number?

I'll have to refer to Danny.

Yes, our current backlog is about $140 million.

Okay, so there were a couple of backlog adjustments in the quarter?

Yes. And roughly, of our backlog, about 50% to 60% is shippable in Q2. So, go ahead and preempt that with you, Tim.

Okay, yes, thanks. And how much of that is inverter? The $140 million?

We're not breaking it down between the two business units.

Okay. And relative to the guidance, I don't know -- I jumped on late, but what is the assumed inverter business for Q2 in terms of megawatts, or in terms of revenue? Did you give us any sense on that, how much it will grow?

Yes, what we did, Tim, is gave some color around about a 50% growth, is what we are anticipating for the renewables business in Q2. And we expect our thin film business to be down 4% or 5% for the quarter. Obviously, that drives total revenue up, which will reduce our op expense as a percent of income, but because of the different margin profiles of those, we'll see EPS drop slightly at the midpoint of our guidance versus Q1, but it is all mix-related. Actually, we're doing a better job leveraging our op expense as we move forward.

Okay, and then just on I'm clear on the megawatts, so should the megawatts also grow by about 50%, so that the dollar-per-megawatt should be about the same?

Yes, it's not correlated one-to-one because we have different power levels in which we play into. But I think at the first approximation, it's probably correct to assume that.

Okay. Great. Then, just last thing, Hans, you guys have pretty big -- obviously you are very leveraged to the US markets so you have a pretty good sense of how big it is. So what do you think the size of the US market is, the US solar market PV for into 2011? And what do you think your share is of the market? Thanks.

I think I can give you a pretty good picture of what the supposed overall market is which is somewhere between 2.5 and 3 gigawatts. As far as our share is concerned, I think we have-- at least we had in Q1-- a share of 25%, and we, of course, are pretty confident to grow the share. To which degree, Tim, I don't know, but we will break the 30% barrier for sure.

Great. Thanks, Hans.

Jim Covello, Goldman Sachs.

Hi, guys thanks for taking the question. This is Mark Delaney calling for Jim Covello. Hans, I was hoping you might be able to provide a little bit more detail. You spoke at the analyst day about being open to the possibility of splitting the renewables and thin film business units up, the market didn't ascribe. There's a certain level of value that you guys see in those businesses. Wondering if that is still something that the Company is considering, and if there are any ramifications, either in your material sourcing or R&D leverage that would impact that decision?

I think the key point is we would like to have a better transparency on the market and therefore we went into the second reporting. Of course we operate both businesses as independent business units, but we use any kind of synergetic effect, either on the supply chain side or the manufacturing side or of course in the G&A, in order to keep the cost down as much as we can. But this is for the time being, exactly what we do, not more.

Okay. Great. Danny, I was wondering if you could help us understand the bookings a little bit more? The $184 million that you reported, did that already recognize all of the large solar projects that you said are going to ship over a couple-of-year periods, or should some of that still calm as you get closer to the shipment targets?

It would include the one major project, because there is a contract with that project. So, that is included, but the rest of it is just normal course bookings.

Okay. Great. Appreciate the help, guys, thank you.

Thank you.

Jesse Pichel, Jefferies.

Hello, good morning. Hans, congratulations on the market share gains for high power in the US.

Thank you.

Can you help us understand the sales cycle for central inverters? How long was the evaluation period on, say, the Arizona project? And who made the final decision? Was it Sempris or Zachry?

I think-- not to go to much into details, I think Zachry was the EPC and we have been part of a competitive selection process. And, in my view, Zachry was the final decision makers, and probably based, as Danny said earlier, based upon the performance of our Solaron inverter, as well as, and I think that's an important point, on the service offering. Which of course, has to do something with performance guarantee, guarantee on availability and therefore on long-term LCOE, harvesting of the energy.

Are there any specific requirements that the off taker, PG&E, has on these projects? And could it very from utility to utility?

I think it certainly could vary from utility to utility, but the one thing that is happening as these projects get larger, what we are seeing is a move towards the total cost of energy over the lifetime of the project. So it is no more focused on just the box cost initially. As these projects grow in scale and they are looking at a 20-year returned, so many factors come into play that we play well in. Our efficiency, our service offering, our reliability, all those things are key component in making a decision in today's marketplace.

And I think from a general viewpoint, I think owners of the installation have always the same kind of drivers behind them. First, they would like to have the maximum harvest on energy over the lifetime of the installation. Secondly, they would like to have a kind of guarantee that the return of investment, which they put a lot of money up front in, is, from a risk standpoint, calculable. And therefore the service part -- and I can just point on that point more and more, the service portion is very important for risk mitigation on their side, in their view.

And dovetailing with that, what are these utilities, or what are the requirements going forward for reactive power? What are your thoughts around that, Hans?

I think it is not rocket science to anticipate somewhere in time if we go over a certain percentage of renewables fed in the grid, the reactive power becomes an important point. I think at this point in time yet, we don't see that as a requirement, but I think in the foreseeable future, it will come. In particular if you look at the feeder on the substations, I guess that's the right word for it, which is a pretty fragile situation as far as the grid is concerned, and therefore, it may come maybe in one or two years, the requirement to have reactive power fed into the grid.

Well, that's very helpful. If I could just ask a housekeeping thing, if I look at your quarter on the 115 shipped, $37.5 million, ASP is around $0.33, which is pretty high, I think I'm assuming that these are mostly smaller strength systems which carry the higher ASP. Where are you seeing these systems in Q1? Is it going to into distribution channels or where in the geography? Because it seems like Q1 was seasonally quiet weak combined with some other effects there. So it seems like you shipped an awful lot even in the quarter.

Clearly our focus is on the commercial and utility scale, and most of our shipments are. Most of them are above 250 kW, so the price map that you are doing is really a result of all the accessories that go with it, and certainly some of the residential inverters will drive that up, but the majority of our shipments are 250 kW and above.

Great. Thank you very much.

Mark Bachman, Auriga.

Hi, Hans and Danny, congratulations on your results.

Thank you.

Can you just clear up a couple of things? On your market share, if I heard you correctly, you think you're about 25% moving to 30%. So, if I think about terms in the way that is your competitor, Stacon, was talking, it sounds like that you expect to even take more share in the North American market, would that be a fair assumption?

It is.

Okay. Also on the operating margin side, Danny, you had made mention of a 15% target here for this year on your renewables business. Can we think of that in terms of 15% for the whole year? Or do we think of that more of a 15% number that you might be able to achieve by Q4?

We are looking at that as a full-year number. Obviously, there is a lot of growth in the inverter business that is projected by AMS and others. I mean, we're looking at 200% to 300% growth in the industry year-over-year, and we're certainly projecting that for back part of the year. So, we think that 15% is a doable number for the full year.

Okay. And then longer term, you thought that might get to 20%, is that correct? Or, how did you -- put the 20% then in context for us.

Our 20% is our total Company overall target. And that 20% really, if you sit back and do the math and we continue to leverage our operating expense, at the 50% that we challenge ourselves internally to do, you can get to that 20% in the next couple of years with some growth in the top line that is expected in the industry.

Okay. If I think about your thin film segment, also on the operating progress there -- or the operating margin progress, how do I think about the mix of the segments that are there, semi, solar, FBD, things like that? And how do I think about progress then and improving the operating margin coming from that part of the business?

I think the very high operating income on the thin film side is a pure mix of the product. And this is dependent on which kind of segments, without breaking it down at this point, which kind of segments are driving the business mostly. Either the solar equipment, the glass equipment, or the semi side of the business. One thing is, I think as a bottom line, we have products which have very, very high gross margin and there is nearly no, let's say, additional R&D requirement going forward, because we have product which are very new, which have still a lot of R&D and which, in some cases, have not as high of a gross margin, and therefore it is a mix. It could change from one quarter to the other quarter without any kind of major problems are occurring out of this.

Okay. Let's see, just two more quick ones here. On the shipments of the business for your solar business, can you give us an idea of the split between your Solaron products and the PV Powered products?

I think generally speaking, both our are pretty balanced and, of course, with the occurrence of these big projects which we just announced, it is titling a bit to the Solaron side. But, I think generally speaking, it is pretty well-balanced.

Okay. Last question here, then, between those two product lines in your solar business, Solaron and the PV Powered products, how is pricing holding up? Are you seeing price declines on either side of that business greater than the other one?

I don't think so.

No. I think both of them, once again, to the audience we are playing go, which is the commercial and utility scale, were talking to them about the levelized cost of energy over the life of the project. So, we're not trying to play in the price game of just selling a cheap box. We're selling a levelized cost of energy over 20 years, and those customers are willing to pay for the right quality and the right service offering.

Then, on your smaller inverters there, you're not starting to see massive price erosion, given the oversupply situation?

Not yet. Because we are not playing in the very small inverter, like string inverters or even lower, in the residential side of the business. I think the most vulnerable in that respect is the residential part, because there is really no technological differentiation possible. And even the service offering, which is a very valuable asset in our side, is not that important on the residential side.

Thank you so much for your time.

Thanks, Mark.

Weston Twigg, Pacific Crest Securities.

Sure, just real quickly since we're at the end of the call. Just wondering if you can explain why the big jump in inventories and should we expect that to continue to increase?

Yes, Wes, that was simply preparing for the ramp that we see in Q2 and Q3 in our inverter business. So, we wanted to make sure we didn't impact any customer deliveries of-- there were certain strategic parts that we ordered early.

Okay, so that should flatten or maybe even decline?

That's right. We certainly see a big ramp in Q2 and Q3 for the inverter business.

Okay, good. And then just real quickly on the semiconductor revenue. Hans, I Know you've hit on this already, but do you still think revenue is going to be flat to slightly up this year, or are you just kind of holding off on any longer-term guidance?

I think I'm still believing it is flat to slightly up.

Okay, great. Thank you.

Thanks.

Joe Maxa, Dougherty & Company.

Thank you, I'll just ask a quick question on the market. You indicated the 2.5 to 3 gigawatts for the North American market this year. Howe much of that do you expect to come from the commercial and utility side?

I think it's -- off the top of my head I would say the residential is still one-third, I would assume. But the commercial and the utility side is growing much, much faster.

Can you give a rough breakout on commercial versus utility? Are you thinking -- ?

No, it's pretty equal. But it may change going forward to the utility side of the business, because you have seen, what we haven't seen before. This number of megawatts on projects are just recently-- and I think this is a trend which will persist the more we have the very big ones, the higher the growth rate of utilities is in comparison to the commercial ones.

So how many of maybe these larger, let's say, 50-megawatt-plus projects are out there that may come to market this year?

Joe, I really don't have a good number for that, but we are certainly seeing a trend towards larger and larger projects. Because solar, quite honestly, is getting very cost-effective. As panel prices continue to come down, that helps the overall cost of solar energy, so it is growing.

David Kessler, Robotti & Company.

Hi, good morning, guys.

Good morning, David.

Most of my questions were answered, but I just have a couple things I want to get a little more in depth on. When you talk about the growth in the renewables side, on the inverter side, how much of that is market share growth that you are anticipating getting and how much is the market growing, let's say over the next year or two?

I think because we concentrate on the North American market, and what I mentioned before was we would grow our market share probably from 25% to let's 30%-plus. So, most of that growth which we see comes out of the growth of the market at this point.

Okay. And just to follow-up on the commercial and utility breakdown, can you give some color on how much of the RPI businesses is commercial and how much is utility for you now?

David, we don't really break that out. Those are the areas that we focus in, and as Hans said, that is currently about two-thirds of the overall market, but it's the rapidly growing market as more and more utilities get in the game.

At this time I would like to turn the call over to Management for closing remarks.

Well, thanks everyone for being on the call. We will follow up with a lot of people with individual calls in the next couple of hours. We really appreciate you listening in this morning. Thank you.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.