第一太陽能 (FSLR) 2006 Q4 法說會逐字稿

Welcome to First Solar's 2006 Fourth Quarter and Year-End Conference Call. The date of this call is February 13th, 2007. This call is the property of First Solar, and any recording, reproduction, or transmission of this conference call without the express prior written consent of First Solar is strictly prohibited. This call is being recorded. You may listen to a webcast replay of this call by going to the Investors section at First Solar's website.

I will now turn the call over to Erica Mannion, Investor Relations for First Solar. Please go ahead, ma'am.

Thank you. Good afternoon, and thank you for joining us for First Solar's Fourth Quarter and 2006 Year-End Earnings Conference Call. Shortly after market close today, the company issued a press release, announcing its fourth quarter and 2006 year-end financial results. If you did not receive a copy of the press release, you can obtain one from the Investor's section of First Solar's website, at www.firstsolar.com. You may listen to an audio replay of this conference call by dialing 888-203-1112, and entering reservation number 4420579.

Also a webcast replay will be available in approximately two hours on the Investors section of the company's website. Today with me are Mike Ahearn, president and chief executive officer, and Jens Meyerhoff, chief financial officer. Mike will begin with an overview of the company's achievements and progress during the fourth quarter and fiscal year of 2006. Jens Meyerhoff will provide you with details of the fourth quarter and 2006 year end financial results, and financial guidance for 2007.

All financial numbers reported and discussed on today's call will be based on generally accepted accounting principles, with the exception of the company's EPS presentation, which gives the facts of the company's initial public offering in prior periods.

We will then open the call up for questions. The company has allocated approximately one hour for today's call. During the Q&A period, as a courtesy to those individuals seeking to ask questions, we ask that participants limit themselves to one question and one follow-up question. This information will remain available until February 16 at 10:00 pm, Standard Mountain Time.

During the first quarter of 2007, the company will be presenting at the following conferences: Piper Jaffray's Second Annual Solar and Clean Tech Symposium, on February 21 in New York City. Morgan Stanley's Tech Conference, March 5th through the 8th, in San Francisco. Goldman Sachs Small Cap One on One Conference on March 15, in Boston, and Credit Suisse Alternative Energy Conference on March 16 in New York City.

Now I would like to make a brief statement regarding forward-looking remarks that you may hear on today's call. During the course of this call, the company will make projections and other forward-looking statements within the meaning of the Federal Securities law. These statements are based on current information and expectations that are inherently subject to change and involve a number of risks and uncertainties.

We caution you that actual events or results may differ materially from those in any forward-looking statements due to a variety of factors, including but not limited to the availability of government subsidies, the demand for solar modules, the cost of capital available to our customers and end product users, the field performance and reliability of our products, the company's ability to successfully replicate production at its German plant, and the company's relationships with customers and key suppliers.

Additional information concerning factors that could cause actual events or results to differ materially from those in any forward-looking statement is contained in the company's prospectus filed with the SEC, and in the safe harbor language in the earnings release that was sent out earlier today.

The company assumes no obligation to update any statement during today--today's call, excuse me--to revise any forward-looking statement, or to update the reasons actual results differ materially from those anticipated in forward-looking statements.

It is now my pleasure to introduce Mike Ahearn, president and CEO of First Solar. Mike?

Thank you, Erica. And thank you for participating in our first earnings call, which concludes 2006--a remarkable and rewarding year for the company and its shareholders.

First Solar reached a number of major milestones in 2006 as we developed significant momentum over the course of the year, which I'd like to highlight briefly.

During 2006, we tripled our annual production volume to 60 megawatts, with full quota production totaling 24.7 megawatts, solidifying our position as the largest solar module manufacturer in the U.S., and the largest thin film manufacturer in the world.

We tripled our revenue to $135 million, reflecting the additional production volume and continued strong market demand for our product. We also entered into long-term contracts with selected customers during 2006, which after recent modifications totalled approximately 1.5 gigawatts over the years 2007 through 2012, equating to approximately $2.6 billion at an assumed exchange rate of $1.20 per euro.

These contracts, and the relationships with our core customers, have established First Solar as a market leader in large-scale PV systems, and provide multi-year demand visibility that has enabled us to continue to aggressively expand production capacity.

We reduced manufacturing costs to $1.25 per watt in Q4, and $1.40 per watt for the year 2006--a 12% decline year over year. The fourth quarter results reflect steady paced production at our Ohio facility for the full quarter, and we believe provide further evidence of First Solar's cost leadership in the industry.

We increased growth margins to 48.6% for the fourth quarter, and 40.2% for the full year 2006. Our ability to be the industry price leader while maintaining industry leading gross margins demonstrates the strength of our competitive cost advantage.

And we became a profitable company in 2006, posting net income of $4 million, compared to a net loss of $6.5 million in 2005. Our ability to achieve net income at a relatively low production level, and while incurring significant expense to support our growth, become a public company, and start up a new plant in Germany, reflects the operating leverage of our business model, and the discipline and focus of our organization.

In 2007, we're building on these successes, and continuing to execute on a number of initiatives designed to achieve our mid-term goal of reducing module costs to levels that will make solar retail electricity prices competitive with conventional alternatives. The key initiatives include rapid capacity expansion through our plant replication process, market expansion both geographically and by market segment, and cost reduction enabled by higher throughput, higher module conversion efficiency, and low manufacturing cost location.

I'd like to update you briefly on our efforts in each of these areas, starting with production capacity expansion.

In 2006, all of our production came from our Ohio facility, where we operate three production lines with a total nameplate capacity of 75 megawatts. Just to cover the terminology quickly, we describe our production capacity with a nameplate rating, which means to us, minimum expected annual production. Currently, we assign each production line a 25 megawatt nameplate rating--in reality, we expect actual annual production per line to exceed 25 megawatts as a result of continuous improvement in module throughput and watts per module.

But for simplicity in describing our production capacity, we intend to continue to use 25 megawatts as our nameplate capacity, until we consistently achieve 30 megawatts in annual production per line across the company, at which time we'll reassign the nameplate rating to 30 megawatts.

Total production as I mentioned, in Ohio, was 60 megawatts in 2006, as compared to 20 megawatts in 2005. Q4 production was 24.7 megawatts, as compared to 18 megawatts in Q3, with the increased production volume during the fourth quarter due to several factors. The benefit of operating all three lines at full capacity for the full quarter, an increase in sellable watts per module driven by higher conversion efficiencies, increases in module production throughput rates, particularly our throughput rates downstream from semiconductor coating stage, and additional capacity provided by our R&D semiconductor coater, which allowed us to match the increased down put throughput rates, and increase overall production volume.

Aided by the R&D coater, annualized production per line exceeded 30 megawatts in the fourth quarter, establishing an actual run rate of almost 100 megawatts for the Ohio plant. In 2007, we expect to produce approximately 100 megawatts in Ohio, despite a gradual phase down of the R&D coater production, due to continued increases in our inline semiconductor coater throughput rates, increases in throughput rates through the balance of the lines, and increases in watts per module.

In April, 2006, we started construction of a four-line, 100 megawatt nameplate production facility in Germany. This facility is a replication of our two-line configuration that was successfully deployed with the Ohio expansion. Construction of the facility and production lines has been completed on schedule, and we are in the early stages of qualification, with significant production expected to begin in Q3 2007. Production from our German plant is expected to total 35 to 50 megawatts in 2007.

In January, 2007, we announced an agreement with the Malaysian government to build a four-line, 100 megawatt nameplate production facility in Malaysia, which is essentially a copy of our German plant. The project is located in the city of Kulim, near Penang, about a one-hour flight from Kuala Lumpur. The area offers well-trained workers, with infrastructure support and a low manufacturing cost environment, and the Malaysian government is providing a 15-year income tax holiday as part of the project. Major production equipment has been ordered, and we expect to break ground on schedule in April of this year, and to substantially complete construction by year-end.

This will be followed by qualification in Q1 of 2008. We expect to ramp production at the facility in Q2 of 2008, and to be at full capacity by Q4 of 2008 in line with previously communicated timelines.

Trend sales--in 2006, we sold 56 megawatts in modules at an average sales price of $2.39 a watt, resulting in revenue of $135 million. Product demand remained robust during the fourth quarter, with net sales reaching $52.7 million.

I'd like to talk briefly about our market segments--customers and sales in 2006, and the market expansion we're envisioning in 2007 and beyond. We entered the German market in 2003 where we continue to focus, because its incentive program, EEG, enables an efficient marketplace with strong demand growth and multi-year demand visibility. Since entering that market, we've focused on relatively large applications, consisting of ground mounted or free field systems that are typically 1 megawatt and larger, and commercial and industrial rooftop systems that are typically 100 kilowatts and larger. Over 90% of the modules we sold in 2006 were targeted to these large field and rooftop systems in Germany.

We've been fortunate to develop strong working relationships with six of the leading project developers and system integrators for large-scale projects in Germany, and in 2006, we entered into the previously mentioned long-term supply agreements with these customers. The contracts include firm annual volume commitments and fixed prices that decline by 6.5% per year. Module prices, which are denominated in euros, are set at levels that enable our customers to install and sell projects with attractive economics under the EEG feed-in tariff, applicable to large free scale projects, which is the lowest feed-in tariff provided under the EEG.

The German free field tariff in 2006 was 40 euro-cents per kilowatt hour, and declines by 6.5% per year. This 2006 tariff rate, combined with the lower radiance levels in Germany, required that German free field projects be installed a total cost of 4.10 to 4.5 euros per watt in order to be economically viable. Our customers were able to achieve these cost levels based on the pricing provided under our supply contracts, and the reductions they achieved in balanced system components and installation costs.

In addition, the pricing under our long-term contracts enabled our customers to expand profitably in the commercial rooftop segment, where the EEG feed-in tariff was 48 euro-cents per kilowatt hour, 8 euro-cents per kilowatt hour higher than the feed-in free field tariff.

Over 2006, our customers developed project pipelines in excess of the module volumes committed under our long-term contracts. To meet part of this demand, we shipped additional modules to our customers in November and December beyond the initial contract amounts, as our rapid production ramp in Ohio enabled us to exceed our initial production forecast.

In 2007, total installed system costs are continuing to decline in line with EEG rate reductions, which we believe will translate into strong demand pipelines for both free field and rooftop applications in Germany. As an example, we recently teamed with one of our customers, juwi solar, to develop a 40 megawatt project in Brandis. This is a [inaudible] located in eastern Germany, and will be installed between 2007 and 2009. The Brandis project will start construction in Q2, and upon completion, will rank as one of the largest PV projects ever developed in the world.

We anticipate that additional multi-year, multi-megawatt projects will be realized in Germany over the course of 2007.

Our experience with large-scale projects and system costs optimization in Germany is directly transferable to other markets, and in the second half of 2006, we saw Spain emerge as a robust market for large-scale PV systems. Our existing customers are actively developing project pipelines in Spain, and in Q4, one of our customers deployed the first phase of a multi-megawatt project using our modules--a 2 megawatt installation located in Granada.

We're also exploring new relationships with Spanish companies that would position us to serve the market efficiently and capture share in the free field segment, which we believe will be the dominant portion of the Spanish market. We're targeting 10 to 20 megawatts of projects for deployment in Spain in 2007.

We intend to expand sales into geographic markets beyond Germany and Spain that have incentive programs in place that are functioning robustly, and offer multi-year demand visibility. We currently monitor a number of markets closely, including Italy, Greece, France, Canada, South Korea, and several U.S. states. Right now, we believe attractive market opportunities exist in the U.S. for both utility scale projects and distributed generation. We're engaged in discussions to establish customer relationships to address these opportunities.

We've reserved modules to speed relationships in one or more of these new markets in 2007, that we believe will serve as a basis for expanded sales volume in 2008.

Finally, I'd like to make a few comments about our cost reduction efforts. As we enter 2007, prices under our long-term contracts adjusted downward by 6.5%. In addition, we're committed to continuing to reduce prices to levels that will support large, non-subsidized markets for solar electricity over the next few years, provided we earn superior financial returns as prices decline.

In order to maintain both our financial performance and price leadership, we remain focused on a number of cost reduction efforts. The major focus has been on increasing conversion efficiencies, thereby increasing saleable watts per module. Average annual module conversion efficiencies have increased from less than 6.5% when we started commercial production in 2001, to over 9.5% at the end of 2006.

We remain on track to achieve average module efficiencies of 11% to 12% over the 2010 to 2012 time period, and we believe conversion efficiencies in this range will be consistent with meeting cost targets that will open large non-subsidized markets.

We're also focusing on increasing module production throughput to each line. This includes improving yields, increased from the equivalent operating time, and continuously de-bottlenecking the lines. We expect minimum 3% year over year increases in production line throughput over the next several years as a result of these efforts.

In addition, we're focused on reducing manufacturing costs as we expand the geographic scope of our production facilities. For example, our German plant has received very favorable financing terms with the support of the German government. Investment grants totaling $55 million reduce the plant's depreciation expense by $8 million per year.

In Malaysia, in addition from benefiting from lower operating costs, we're planning for a larger production facility that will provide added economies of scale at the plant level. We've purchased enough land for up to eight production lines, or 200 megawatt nameplate production capacity. Although we're only building four lines at this time, we are also building some of the infrastructure for the next four-line plant, in order to save money and time on the next expansion.

In addition, we've obtained, without cost, an option on adjacent land that will accommodate eight additional lines. At full build out, this site will therefore accommodate 16 lines, or 400 megawatt nameplate capacity. We have not committed to any of these additional build outs at this time, or to building all of our capacities sequentially in Malaysia.

In summary, First Solar is the industry cost leader, and we're focused on further reducing costs to levels that will make solar electricity prices competitive at retail with conventional alternatives over the next several years. We are growing rapidly while demonstrating increased profitability and solid progress toward our mid-term goal.

And now, I'd like to turn the discussion over to Jens Meyerhoff, our CFO, and we'll discuss our fourth quarter and 2006 financial results and 2007.

Jens?

Thank you, Mike, and good afternoon.

We are pleased to report a financially strong fourth quarter that solidifies our long-term financial model. With the conclusion of the fourth quarter, we are ending the first profitable fiscal year in First Solar's company history.

Revenues for the fourth quarter were $52.7 million, an increase of $11.9 million, or 29% over the third quarter of 2006, and an increase of $39.1 million compared to the same period last year.

Revenues for fiscal 2006 were $135 million, up $86.9 million from fiscal 2005. Germany accounted for 95% of 2006 revenues, with no single customer accounting for more than 20% of our revenues during the year.

Gross margins for the fourth quarter were 48.6%, up from 39.9% in the third quarter, and up from 27.8% in the fourth quarter of 2005.

Gross margins benefited sequentially from higher throughput and slightly higher ASPs, due to favorable customer mix and a stronger euro. Our incremental gross margin during the fourth quarter exceeded 70%, as our manufacturing fixed costs stayed essentially flat quarter over quarter, creating strong leverage in our financial performance.

While we are pleased with this quarter's gross margins, we do not believe that they are indicative of our 2007 performance, as our ASPs contractually declined by 6.5% in January, and we expect to incur significant ramp costs at our German plant by mid of 2007.

Operating expenses, excluding plant startup costs, were $12.6 million in the fourth quarter of 2006, up from $10 million in the third quarter of 2006. The increase is primarily a result of increased personnel expenses due to further hiring and infrastructure build out. Operating expenses for 2006 increased by $21.5 million over fiscal 2005, due to higher personnel expenses, as our headcount increased by 65 employees, and we incurred significant costs to ready us for the life of a public company.

Operating expenses as a percentage of sales were 24% in the fourth quarter, slightly down from 25% in the third quarter of 2006. Operating expenses included $2.8 million of stock based compensation during the fourth quarter, up from $1.6 million in the third quarter, due to additional stock option grants made in the fourth quarter in conjunction with our IPO, and all 2006 hires.

These options were granted at the IPO date and price. Excluding stock-based compensation, our operating expenses declined to 18.5% of sales through the fourth quarter, compared to 21% in the prior quarter.

Plant startup costs increased by $2.9 million during the fourth quarter to $4 million, due to progress made at our German plant. Operating income for the fourth quarter was 17%, or $9 million, an increase of $3.9 million over the third quarter of 2006 and an increase of $15.4 million over the fourth quarter of 2005.

Operating income for the fourth quarter included $3.7 million of stock based compensation expense, and $4 million in plant startup costs, and reached 31.5% of sales, excluding such expenses.

Interest income for the quarter was $1.8 million, reflecting an average yield of 5.1%. In the fourth quarter, we booked $2.8 million of foreign exchange gains as we continue to benefit from a strong euro.

The tax rate for the fourth quarter was 38.5%, up from 0% in the third quarter of 2006, as we started to recognize tax expenses due to the increased profitability in our U.S. entities, which have no loss carry-forwards due to the fairly recent shift into a C corp. We did not realize any tax benefit from the losses in our German entities, or from stock based compensation expense, as we continue to fully reserve all deferred tax assets in our balance sheet.

Net income for the fourth quarter of 2006 was $8 million, or 11 cents per share on a fully diluted pro forma basis, compared to $4.3 million or 6 cents per share on a fully diluted pro forma basis for the third quarter of fiscal 2006, and a net loss of $7.2 million for the fourth quarter of fiscal 2005.

Net income for fiscal 2006 was $4 million, or 5 cents per share on a fully diluted pro forma basis, compared to a net loss of $6.5 million for fiscal 2005. Pro forma earnings per share have been adjusted for the relevant periods, assuming the company's initial public offering had occurred at the beginning of fiscal 2005.

On a GAAP fully diluted basis, net income for the fourth quarter of fiscal 2006 was 12 cents per share, compared to 7 cents per share for the third quarter of fiscal 2006. Also on a GAAP fully diluted basis, net income for fiscal 2006 was 7 cents per share.

Cash and marketable securities increased to $308.4 million during the fourth quarter. Cash flow from operations during the fourth quarter of 2006 was $12.9 million, compared to cash usage of $12.8 million during the third quarter of 2006, and cash flow of $7.1 million during the fourth quarter of 2005.

Our [BSO] slightly increased to 47 days during the fourth quarter of 2006, compared to 44 days in the third quarter of 2006.

Net inventory increased by $6 million during the first quarter as a result of continued ramp of production.

We spent $41.8 million in capital expenditures during the fourth quarter of 2006, against depreciation and amortization of $3.5 million. Cash flow from financing activities was $323.1 million, due to $306.4 million of IPO proceeds, $34.1 million of loan proceeds from our German financing, offset in part by the repayment of $26 million in related party debt.

This brings me to our guidance for our fiscal year of 2007. Our financial performance during fiscal 2007 will significantly depend on the successful and timely ramp of our German plant, and less on the [inaudible] variability. As Mike mentioned, we expect approximately 100 megawatt of production volume from our Ohio plant, and between 35 and 50 megawatt from our German plant, reflecting the inherent uncertainties surrounding the ramp of our first overseas production facility.

This ramp and production volume translates into expected revenues of $310 million to $340 million for 2007. As previously communicated, we expect to ramp the German plant in the second half of 2007, which indicates that approximately 60% to 65% of our revenues will be generated during the second half of 2007.

We expect to be profitable on a GAAP basis in 2007, but also expect profitability to be burdened by production startup costs during the first half of 2007, which could potentially cause a loss in the second quarter as such costs peak.

Gross margin will decline during the first quarter of 2007, due to our contractual price decline, and will be further burdened by the cost of ramping production in late Q2 and Q3 at our German plant, before they ramp back through the remainder of the year.

Our operating margin will largely depend on the production levels in Frankfurt/Oder, and the resulting operating leverage from incremental revenues. The revenue range described earlier would derive an operating margin of 6% to 12% for 2007.

Operating income for 2007 is expected to include stock based compensation of $18 million to $20 million, and production startup costs of approximately $25 million to $30 million.

Our 2007 tax rate is expected to be slightly above 40%, and our estimated share count to be 76 million to 77 million shares by the end of 2007.

We expect capital expenditures of $210 million to $240 million during 2007, primarily for the remaining equipment in Germany as well as the build out of our Malaysian plant, and for some sustaining in infrastructure needs.

This concludes our prepared remarks, and with that, we will now open the call for questions.

Operator?

Operator?

Thank you, sir. If you would like to ask a question at this time, please signal by pressing the * key, following by the digit 1 on your touchtone telephone. If you are using a speakerphone, please make sure that your mute function is disengaged, to allow our equipment to reach your signal.

If you find that your question has already been asked and answered, you may remove yourself from the queue by pressing *2 on your touchtone telephone. So again, that is *1 to signal for a question, and *2 to remove yourself.

We will pause now, to assemble our roster.

And we'll take our first question, from Jesse Pichel with Piper Jaffray.

Hi, good afternoon. Congratulations, Mike and Jens--very well done. How many megawatts did you sell in Q4? And what is your targeted inventory build in 2007?

OK, so the megawatts sold in Q4 of 2006 were 21.2.

OK. And how do you think inventories will build for 2007?

I think we're probably going to have similar relationships like we have seen in 2006 with respect to the weeks of inventory we're holding, so I think it can model around 12 therms per year.

Twelve therms. And you mentioned higher efficiencies that are expected over the next few years. Do you expect higher efficiencies to come along with higher costs? Or will the higher efficiencies all drop to the bottom line?

The efficiency roadmap we have now, Jesse, would have those improvements dropping to the bottom line, essentially.

And based on your market assessment there, do you think thin film ultimately takes the entire ground-based market in Europe? And what is going to be the competitive response there from the poly-based solar module companies that have dominated this market for some time?

Well, I wouldn't say--I'm not sure that I would agree that any particular technology has dominated the ground-based market. I mean, that market was really created in Germany, for all practical purposes, in 2004, so it's a relatively new market that's expanding now into Spain and I think even in the U.S.

And I think we'll see, as costs come down, photovoltaics actually competing with other, non-photovoltaics technologies to supply cost effective central generations, so solar thermal being a pretty good example.

So right now, I think our focus--we're not constrained in taking share or generating sales by competitive pressure. Our issues are internal constraints, and our focus is on increasing throughput efficiency, and I think that will continue for the foreseeable future.

And my final question is, I was pretty shocked to learn that your customers are selling your modules, really for the same installed price as poly-silicone based modules, but they're selling it on the higher kilowatts produced per rated watt. Does your roadmap for higher efficiencies and other improvements there yield better kilowatt hours per rated watt going forward?

Well, let me clarify that, because the installed system costs on these projects that are being deployed in Germany--the all-in cost there is approximating crystal and silicone module prices. So you've got a whole system here being built and sold, essentially, at a price point that's equivalent--it's roughly in the zone of crystal and silicone module price.

And you have to hit those system cost points to have an economically viable offering at these low feed-in tariff rates, the low radiance conditions in Germany. So that's--we're enabling a market here that wouldn't otherwise exist in today's market price levels.

I do agree, though, that--at least, our data has demonstrated on a lower radiance condition, low light conditions, we get more actual electricity generation per installed DC watt. In the conditions we're operating in now, let's say.

Great, thank you very much. See you on the 21st, and congratulations.

Thanks.

And we'll take our next question, from Robert Stone with Cowen & Company.

Can you say what the average sellable watt per module were--in other words, I'm trying to parse throughput gains versus conversion efficiency gains in the fourth quarter, please.

I think--Rob, I think fourth quarter, a good fourth quarter average is 65 watts per module.

Versus what number in Q3?

Fifty three.

Fifty three?

Fifty three, yes.

OK. Thank you.

And we'll take our next question from Sanjay Shrestha from First Albany.

Great job. Good afternoon, guys--again, congratulations here on a great performance. A couple of quick questions.

Number one, when you guys talk about the land and the option that you guys have as it relates to expansion in Malaysia for additional lines, and then eventually taking it to 16 line--what are some of the internal, sort of the discussion that you guys are having in terms of--how do you plan to sort of go about that? Is it dictated by getting to that 11% to 12% efficiency first, or--because, I mean, you can pretty much sell what you can make, because you're giving a fantastic value proposition for the end users, so why not aggressively expand right away?

OK, I'll give you my answer as opposed to our internal discussion. The way we're looking at expansion, yes, we'd like to expand as rapidly as we can. It drives cost reduction in a number of ways.

But we also want to make sure that we're going to repay plant investment in the expansion, and that involves looking at demand, not just in the current market, or over the next 12 months--

Sure.

--but over a three to four year, sort of a window. Which is really where the long-term contracts come into play.

So the idea is to establish our internal capability to expand rapidly and flexibly, and opportunistically, as we build demand in the marketplace, and I think at this point, we're looking ahead to the next decision point, and we'll decide as we get a little bit closer.

OK, fair enough. Fair enough. A quick follow-up question then.

Now when we're looking at your margin performance here in the quarter, it's up--it's obviously up. But it certainly did benefit from the ASPs of debt as well, as you mentioned.

But as we look forward, excluding other ramp up related costs and the--obviously, the costs associated with the expansion of Germany plant, now--is like mid 40s all of a sudden a new territory, even without a meaningful efficiency gain? Is it kind of like the new benchmark for you guys on the gross margin level?

Well, I'm saying I would like [inaudible], to take this opportunity to remind everybody about our long-term model rate--

Absolutely.

--the target gross margins--

Yes.

--in the 35% to 40% arena, while achieving a 20% return on net assets. And the resulting business leverage we get out of that is pushed towards growth as we want to meet--right? And want to reach unsubsidized markets by 2010 or 2012 at a pricing level of $1.00 to $1.25.

OK, that's great. Thanks a lot, guys, and once again, congratulations.

Thank you.

And we'll take our next question from Shannon Mikus with Credit Suisse.

Good afternoon. You talked a bit about the Spanish market, but can you also talk about any inroads you've made into the U.S. market?

I can talk about that a little bit, Shannon. We've been spending a fair amount of time assessing the U.S. market and working several potential strategies to enter the market. We think there are good opportunities here in two segments.

One is utility scale projects, these megawatt plus ground monitor projects, addressed to invest your own utilities--upgrading RPS jurisdictions in municipal utilities. And then also, commercial industrial consumers on the distributed generation side.

So we've--I guess what I can say is, we've been in discussions and working now for a number of weeks to try to bring some relationships to closure that we think will get us into this market, and we set aside some modules this year--I'd say between five and ten megawatts to feed not only the U.S., but potentially another geographic market that might emerge.

OK. And also, what was the total stock based comp expense for the quarter, and how should we think about that going forward?

Well, the total stock based compensation expense for the quarter was $3.7 million. And as part of the year-end, we revisited some of the parameters for calculating the stock based compensation--some of them, with respect to volatility, created slightly favorable trends.

But it was $3.7 million, and as I mentioned for fiscal '07, we're looking at the lower end at $18 million--at $18 million, higher into $20 million, and I think you're going to see that with respect to how we recognize in these expenses, it's going to be fairly evenly loaded around the same profile, with respect to the different P&L line items that you have seen in 2006.

Great, thank you.

As a reminder, if you would like to ask a question on today's conference, please press *1 on your touchtone telephone. And we'll go next to David Edwards, with Think Equity.

Morning--well, afternoon, I guess it is. Wanted to quickly ask you a question.

In terms of your sales outside of the pre-sold capacity, as you're looking forward, can you talk a little bit about--you talked a little bit about geographic expansion, but can you also give us any ideas which you think in terms of pricing for that, that falls outside of the predefined German market?

Yeah, I can give you a little bit there, David. I think in Spain, where you have higher radiance conditions, if you use a methodology that sets a price at a level that will drive investor returns on the project financing side, you can back into higher modules, ASPs, than you can in Germany. And that's generally a strategy we will follow in thinking about pricing.

I think the same is potentially true in the U.S., where the--both the radiance levels and the subsidies are more attractive, at least in the segments we're in in Germany now. I think offsetting that, if we found an opportunity to drive big multi-year volume by hitting lower price points, we would be willing to trade off some of that, as it--along the lines that we've done with these other long-term contracts.

Great, and one more question. You obviously showed some very significant progress in reducing the manufacturing cost per watt. You talked a little bit about looking forward in terms of increasing module throughput and watts per module to help drive upset on the revenue side.

Can you talk in turn about what that means in terms of manufacturing costs per watt?

I think if you look at what happened in the fourth quarter, by far the largest contributor was leveraged through higher production volume and total watt throughput. That really gave a strong, strong advance in the cost per watt, long after she is $1.25. That included, by the way, four cents of stock based compensation.

I think as we look forward, Mike described, I think, our key efforts on the cost production side, so I think what we will see, next to the continuous improvement, a further increasing unit throughput and conversion efficiency, will be the bring up of the German plant, which will benefit from lower depreciation, which only gets slightly offset by some of the higher labor costs in Germany, though the German plant will provide a lower cost per watt going forward.

Also for the reason that it really does in-house a lot of the corporate functions that we have placed in Ohio. And then obviously, with Malaysia coming up, the labor costs being significantly lower there, providing for probably 15% to 20% lower manufacturing costs compared to Ohio.

That's great. Thanks a lot.

And we'll take a follow up question from Jesse Pichel with Piper Jaffray.

Three follow up questions. First is--could you let us know, are you competing for the Wal-Mart RFP? And are your panels suitable there for a big box retailer roof?

We're not competing for that, Jesse. That RFP was really addressed to system integrators, and we don't have that capability at the present time. It's not to say our modules couldn't be installed or spec'd into a solution, in response to that RFP. I don't have any knowledge that they would be, but it's possible.

I don't know about suitability to Wal-Mart specifically, because I didn't--we didn't spend much time looking at that specific RFP. But in general, the modules are suitable, and they're well suited to big box retail-type situations. We think ideally so.

And in the prepared remarks, you mentioned a nominal megawatt there to be sold into Spain. Since you're selling into companies like Conergy and Phoenix that sell into Spain, does this imply that you're selling direct as well?

And as a follow up to that, since you're not contracted for 100% of your output, where do you sell the rest? Is that a higher ASP going direct, or would you find more customers?

Our effort right now in Spain is to find more customers, basically. I mean, we--as these new markets open, like Spain, we've taken assessment of whether there's a top tier of customers emerging that's participating in the segments we're interested in, which is basically these larger scale systems. And if we can make some local relationships, some quality relationships, we're interested in doing that.

So we are, I would say, in the early stages of that--no, I wouldn't say early. We don't have firmed up, long-term contracts with Spanish customers like we do in Germany, but we're in discussions and we're doing some level of business there.

And my final question, for Jens--Jens, could you repeat again the op ex guidance for '07, including the production startup costs and on a quarterly rate, how should we think of op ex ramping? Because you're going to do all the R&D in Ohio, so that shouldn't really go up too, too much, and do you really need much SG&A above and beyond what you have now in Germany?

You're giving actually more credit than I deserve, because I don't think I gave too much specific guidance on the op ex, Jesse, but I think with respect to trends-wise, I think you're going to see still quite a bit of hiring in the first half here, especially Q1 of '07, to further build out infrastructure. That actually is true for R&D as well as SG&A.

There is also the baseline impact of a lot of hiring that happens late in the end, that now from a personnel expense becomes fully effective. So if you take those things into account, you're actually going to see the sum of the step function here in both line items as we move into Q1, and then to your point, a fairly gradual slope. So there's not a lot of adding on top of it, as we indicated earlier--we're fairly far along with building the infrastructure out.

And that's also true for the SG&A line.

Did you give your op ex of sales targets?

No.

You did not? OK. So really, no change from your road show targets, then.

That is correct. I think the financial model that we described during the road show would be as intact.

Fair enough. Thanks very much.

And we'll take our final question from Rob Stone with Cowen & Company.

I'm going to try and make that a multi-part question, since I only asked one before, Jens.

All right--go ahead.

Could you put a little more color on the gross margin impact as you ramp up Germany? I think you said that that would be a Q2, late Q2, early Q3 effect. Can you say for what range of percentage points that might influence gross margin?

And as Germany ramps up, can you say what the sensitivity of your overall operating expenses may be to the euro? And related to that, can you comment on the ForEx gains and your hedging going forward?

OK, good. Well, that's a lot of bombs here. So let me--I'll take the first one, on the gross margin.

So as I mentioned in the prepared remarks, I think I know once we start production, the plant startup costs move up into the cost of goods sold, and we're dealing then with underutilization of capacity until we have achieved full ramp up, which impacts our gross margin unfavorably.

If you look right now at that ramp pattern, we will see that impact late Q2, early Q3, and it could have in the given quarter as high of an impact as the full 10 to 12 percentage points on the margin.

Obviously, the impact is guided and driven by the timeliness of the ramp. If the ramp takes longer, the gross margin impact is bigger. If the ramp is faster, we obviously absorb a fixed cost aspect with the increased production.

And then--so then, if you look through the remainder of the year, you go then into Q4, as we start to see strongest capacity and utilization. You see that impact being absorbed through the higher production volume.

With respect to, I think his next question was on the euro, on the overall euro exposure--if you look at 2007, I think the combined euro exposure that we see right now is approximately $135 million to $140 million of net exposure. That net exposure takes into account revenues, it takes into account our operating expenses that we will incur at the German plant. It takes also into account that some of our capital equipment is euro denominated.

So what we're doing right now is, we have finalized our hedging strategy, and that has been reviewed and approved, and we are in the active execution stage. Given that the euro sits right now at $1.30, we have a high sense of urgency to complete it before this quarter ends.

So in terms of the ForEx benefit that you realized in this quarter, that was largely from what? Timing differences on contracts, or--

Well, if you really look at the $2.8 million that I referred to, that is--that sits in our foreign exchange gains and losses, below the operating income line. That is a result of translating receivables and cash balances, as well as euro denominated debt between our U.S. entity and German entity.

So these are assets that turn fairly quickly. It involves also certain cash balances, cash balances actually got converted to date.

OK. Thank you.

That does conclude our question and answer session, and now I'd like to end today's conference. We do thank you for your participation--you may disconnect at this time.