第一太陽能 (FSLR) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the First Solar second quarter 2007 earnings conference call. This call is being telecast live on the Investor Relations page of First Solar's website at www.firstsolar.com. At this time, all participants are in a listen only mode. As a reminder, today's call is being recorded. A replay of the call will remain available until August 3rd at 12:00 a.m. Eastern daylight savings time. You may listen to the audio replay by dialing 888-203-1112 if you're calling from within the United States, or 719-457-0820 from outside the United States, and entering reservation number 5699645. Also a web cast replay will be available in approximately two hours on the investor section of the Company's website.

I would now like to turn the call over to Ms. Erica Mannion, Investor Relations for First Solar, Inc. Ms. Mannion, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining us for First Solar's second quarter 2007 earnings conference call. Shortly after market close today, the Company issued a press release announcing its second quarter 2007 financial results. If you did not receive a copy of the press release, you can obtain one from the investors section of First Solar's website at www.firstsolar.com.

With me today are Mike Ahearn, Chief Executive Officer, Jens Meyerhoff, Chief Financial Officer, and Bruce Sohn, President. Mike will begin with an overview of the Company's achievements and progress during the second quarter of 2007. Jens will provide you with second quarter financial results and an update to the financial guidance for 2007. We will then open up the call for questions.

All financial numbers reported and discussed on the call today will be based on generally accepted accounting principles. 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.

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 comments that are forward-looking statements within the meaning of the federal securities laws. 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 various factors including, but not limited to, 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 and Malaysian 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 statements is contained in the Company's Form 10-K filed with the SEC and in Safe Harbor language of the earnings release that was sent out today. The Company assumes no obligation to update any statement made during today's call to revise any forward-looking statements or to update the reasons why actual results may differ materially from those anticipated in any forward-looking statements.

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

Thank you, Erica, and thank you for participating in today's earnings call, which concludes the second quarter of 2007. During the second quarter, we increased revenues by 15% sequentially over the first quarter of 2007 to $77.2 million, reflecting continued strong demand for our modules. We increased production output by 7.7 megawatts, or 29%, over the first quarter as a result of starting production at our Frankfurt (Oder) plant and improving module production throughput and conversion efficiency at our Ohio plant.

We posted net income of $5.2 million before giving effect to the release of valuation allowances against certain deferred tax assets, which brought our total net income to $44.4 million for the second quarter.

Underlining these results, we continue to progress toward our midterm goal of reducing solar electricity prices to levels that compete on a non subsidized basis with conventional retail electricity rates. During previous calls, I outlined the key initiatives we're pursuing in 2007 in furtherance of this goal, which consist of first, cost reduction enabled by higher throughput, higher module conversion efficiency and low manufacturing cost locations, rapid capacity expansion through our plant replication process and market expansion, both geographically and by market segment.

I'd like to briefly update you on each of these, starting with our cost reduction and capacity expansion efforts. Total production at our Ohio plant was 27.7 megawatts in the second quarter, an increase of 6.1% over Q1. This increased production resulted from an increase in sellable watts per module driven by higher conversion efficiencies and increases in module production throughput rates. During the second quarter, we also continued to benefit from the additional capacity provided by our R&D coder in Ohio. Based on these second quarter improvements, we are increasing our 2007 production target from a range of 100 to 105 megawatts to a range of 105 to 110 megawatts at our Ohio plant.

At our plant in Germany, we produced 6.1 megawatts and shipped 4.1 megawatts of modules in the second quarter. All four production lines in Germany are now operating with product and process performance metrics comparable to our Ohio plant. These results strengthen our confidence that we will produce 65 to 70 megawatts from our Germany plant in 2007, which brings our total target of 2007 production to a range of 170 to 180 megawatts.

In Malaysia, we remain on schedule to complete construction of our first four-line plant by year end and to reach full capacity by the fourth quarter of 2008, in line with our previous communications.

Earlier this month, we announced plans to construct an additional four-line 120 megawatt nameplate production facility in Malaysia. The new plant will be located adjacent to the initial four-line plant currently under construction. The Malaysian government has agreed to provide a 15-year income tax holiday for the second four-line plant, which is identical to the arrangement in place for the initial plant. We expect to begin construction of the second four-line plant in the fourth quarter of 2007, complete plant construction in the third quarter of 2008, and reach full production by the second quarter of 2009.

Turning to the market, our product demand remained robust during the second quarter of 2007 and we continue to experience market demand in excess of supply. In the second quarter, we sold 32.6 megawatts of modules at an average sales price of $2.37 per watt, resulting in revenue of $77.2 million. Based on current customer projections, we expect 2007 installations in Germany to comprise approximately 80% of total sellable watts, installations in Spain to comprise approximately 10% of total sellable watts, installations in Italy comprise approximately 5% total sellable watts, and installations in North America to comprise approximately 3% total sellable watts. This leaves an additional 2% of total sellable watts, which is being allocated strategically over the balance of 2007.

Earlier this month, we announced several long-term module purchase agreements that provide further geographic diversification into markets that include Spain, Italy, France, Greece and Canada. I'd like to briefly summarize these contracts.

We entered into a purchase and sale agreement with EDF-EN that runs from 2007 through 2012. This is a firm take-or-pay agreement with pricing, payment and other material terms similar to our existing long-term agreements. EDF-EN is a public company that is 50% owned by EDF, which is the largest utility in Europe, and develops, owns and operates renewable energy projects throughout Europe and the U.S. EDF-EN is targeting our modules for deployment in EU countries outside of Germany, as well as in the U.S.

We entered into a purchase and sale agreement with Sechilienne-Sidec that runs from 2007 through 2012. This is also a firm take-or-pay agreement with pricing payment and other material terms similar to our existing long-term agreements. Sechilienne-Sidec is a publicly traded company based in France that also develops, owns and operates renewable energy projects primarily in France and French territories in the Caribbean and Indian Ocean. Sechilienne-Sidec is targeting our modules for deployment in EU countries outside Germany, as well as certain markets outside the EU.

We increased volumes under an existing agreement with Juwi Solar that runs from 2007 through 2012. Juwi Solar is a leading solar project developer based in Germany and is actively involved in developing solar projects throughout the EU. They're targeting the additional modules for deployment primarily in Spain, Italy and France.

We entered into a firm take-or-pay multi-year agreement with Sun Edison, a U.S.-based solar project developer and service provider. These modules are targeted for ground-based projects in Ontario, Canada, which has a feed-in tariff structure similar to the EU countries where we currently operate.

In addition to these agreements, we entered into a module supply agreement to serve a German utility through its affiliate, Rio Energie. Rio Energie is a joint venture between Juwi Solar and Stadtwerke Mainz, which is the municipal utility for the city of Mainz, Germany. The joint venture will build solar generation systems through 2012 to help serve the municipality's renewable energy objectives. This contract is also a firm take-or-pay agreement with pricing, payment and other material terms substantially similar to our existing long-term agreements.

These new contracts total 685 megawatts and bring our total module sales under contract through 2012 to approximately 2.2 gigawatts, or US$4.1 billion at an assumed exchange rate of $1.30 per Euro.

In summary, we're progressing well on our underlying cost drivers, conversion efficiencies, throughput increases and capacity expansion, while expanding our presence in the marketplace. We continue to make good progress in our key initiatives and believe we're on track toward our midterm goal of reducing solar retail electricity prices to levels that will complete on a nonsubsidized basis with conventional electricity over the next few years.

I would now like to turn the discussion over to Jens Meyerhoff, our chief financial officer, who will discuss our second quarter financial results and an update to our guidance for 2007.

Thank you, Mike, and good afternoon. In the second quarter of 2007, First Solar continued to benefit from strong growth and operational performance as we started operating our Frankfurt (Oder) plant. Revenues for the second quarter were $77.2 million, an increase of $10.3 million, or 15%, over the first quarter of 2007 and an increase of $49.4 million compared to the same period of last year.

Our Frankfurt (Oder) plant contributed $9.7 million to our revenue growth while revenues from our Ohio plant stayed nearly flat due to inventory shipments that occurred during the first quarter of 2007. Geographically, Germany accounted for all of our revenues this quarter with no single customer accounting for more than 21%.

Gross margin for the second quarter was 36.7%, down from 44.9% in the first quarter of 2007, and up from 32.7% in the same period last year. Gross margin was negatively impacted by 9.8 percentage points due to the ramp of our Frankfurt (Oder) plant and the related limited ability to absorb overhead during the ramp phase. Gross margin benefited from favorable pricing due to a continued strong Euro, higher module throughput, and increased sellable watts per module, driven by conversion efficiencies, which was in part offset by a sequential increase in stock-based compensation.

Gross margin at our Ohio plant reached 45.8%, driven by incremental contribution margins from further throughput increases. As a result, our Ohio manufacturing cost per watt declined from $1.29 in the first quarter to $1.28 in the second quarter and included $0.08 of stock-based compensation.

On a consolidated basis, our cost per watt increased to $1.45 due to a $0.20 ramp impact at our Frankfurt (Oder) plant and included $0.06 of stock-based compensation expense. Both gross margin and cost per watt will remain impacted during the third quarter due to the continued ramp at our German plant, but should improve sequentially over the second quarter on a consolidated basis as the ramp of our German plant completes.

Operating expenses, excluding plant startup costs, were $21 million in the second quarter of 2007, up from $16.7 million in the first quarter of 2007. The increase is primarily a result of increased compensation expense and compliance costs as we prepare for our first year of Sarbanes-Oxley 404 compliance. Operating expense, excluding plant startup costs, were 27% of sales in the second quarter, an increase from 25% in the first quarter as we continue to drive infrastructure build-out ahead of the significant revenue ramp in the second half of 2007.

Operating expenses included $4.4 million of stock-based compensation during the second quarter, up from $4 million in the first quarter, due to additional stock [option] grants made in the first quarter, [and vesting] changes discussed in our last earnings call.

Plant startup costs were $1.5 million during the second quarter and related solely to the construction of our Malaysian plants. Plant startup costs decreased by $7 million sequentially due to the commencement of production at our German plant, which drove the reclassification of such costs into cost of goods sold in the beginning of the second quarter.

Operating income for the second quarter was 7.5%, or $5.8 million, compared to 7.2%, or $4.8 million, during the first quarter of 2007, and an operating loss of $4.6 million during the same period of 2006.

Interest income for the quarter was $3.8 million, reflecting an average yield of 4.5%, compared with $4.1 million in the first quarter of 2007. The decline in interest income is due to the transition from taxable to tax-exempt investment vehicles providing a benefit to our net income.

During the second quarter, we recognized the tax benefit of $39.2 million, or $0.51 per share, due to the release of valuation allowances against certain U.S. deferred tax assets. While this release has no cash impact in the current quarter, it reflects the likelihood of our ability to realize the cash value of such assets over future periods. The tax rate for the second quarter, excluding this extraordinary event, was 33.9%.

Net income for the second quarter of 2007 was $44.4 million, or $0.58 per share on a fully diluted basis, or $5.2 million, or $0.07 per share on a fully diluted basis, excluding one-time events, and compared to $5 million, or $0.07 per share, on a fully diluted basis for the first quarter of 2007, and a net loss of $2.5 million for the second quarter of 2006.

Cash and short-term investments decreased to $315 million during the second quarter. Cash flow from operations during the second quarter of 2007 was negative, driving cash usage of $13.6 million, primarily due to an increase in working capital related to the ramp of our German plant and estimated tax payments made in the second quarter.

We spent $31.1 million in capital expenditures during the second quarter against depreciation of $6 million. Cash flow from financing activities was $42.6 million due to loan and grant proceeds of $26.4 million from our German financing and proceeds of $16.2 million from the exercise of (inaudible) stock options during the second quarter.

This brings me to our guidance for the fiscal year 2007. We explained to you over our last earnings calls that our financial performance for 2007 would significantly depend on the successful and timely ramp of our German plant. With the continued progress we have seen to date, we're increasing our guidance for 2007 and expect approximately 170 to 180 megawatts of production volume, which translates into expected revenues of approximately $400 million to $415 million for 2007.

We expect our gross margin to recover during the third quarter and target steady (inaudible) gross margin for the fourth quarter of 2007 as we benefit from full production volumes in Germany.

Stock-based compensation for the fiscal year 2007 is expected to increase from our previous guidance of $26 million, to $36 million to $37 million as a result of continued strong stock price appreciation and the acceleration of new hires to support our capacity expansion and annual stock refresh grants with the adoption of the stock-based long-term incentive program.

On July 30th, our board of directors approved various equity grants totaling approximately 300,000 restricted stock units and options, of which approximately 72,000 will vest upon grant. As a result, we expect to incur approximately two-thirds of the remaining 2007 stock-based compensation expenses during the third quarter. While our 2007 guidance for stock-based compensation expenses assume a continued increase, are expected dilution from equity-based compensation programs has and continues to remain well below 2%, in line with previous communications.

Production startup costs are reduced from our previous guidance of $18 million to $23 million to approximately $18 million to $20 million due to compensation related startup costs. The revised revenue, stock-based compensation and startup expenses would imply an operating margin between 14% and 16% for 2007. Our 2007 tax rate outlook post Q2 reduces from our previous guidance to 36% to 37% and our estimated fully diluted share count increases to 83 million shares of 84 million shares at the end of 2007, [giving effect] to our planned stock offering.

We increase our capital expenditure outlook to $240 million to $260 million for 2007 due to the accelerated build-out of our second four-line plant in Malaysia.

This concludes our prepared remarks and we open the call for questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS) And will go first to Steve O'Rourke from Deutsche Bank.

Hi, good afternoon. Thank you. I just want to make sure I understand the cost per watt -- your manufacturing cost per watt, should we expect that to be $1.45 in 3Q, a declining profile after that, and then back up with the Malaysia ramp?

No, Steve. The way you should be looking at it, the majority of the ramp impact happened actually in the second quarter, so the ramp impact will decline as we're seeing -- looking at a significant sizable increase in production output coming out of the Frankfurt (Oder) plant

Okay, so we should see that decline meaningfully next quarter?

Yes. The cost per watt should decline on a fully consolidated GAAP basis over the second quarter significantly.

Okay. And I just also want to make sure I understand how we should be looking at ramp-up costs. They were pretty low in this past quarter -- I think about a million and a half if I remember the number correctly. How should we be looking at that going forward?

Yes, so I think you're referring to the plant startup costs, so they were 1.5 million, which related to -- strictly to the Malaysia build-out, so as we're moving through the year, either we're completing the construction of our phase one in Malaysia, you're going to start to see these costs continuously increase as we're bringing on equipment, as we're hiring employees, and the start up expenses are comprised of depreciation of the building cost that are noncapital, but also largely compensation expense related to the employees we're hiring for the factory.

Okay, fair enough. And if I could ask one last one. How much of the 6% capacity increase in Ohio was conversion efficiency versus throughput?

It was approximately 50/50.

Okay, thank you. I'll jump back in queue.

We'll now move on to Rob Stone with Cowen and Company.

Hi. First question a follow-up on the last one -- what is the average watts per panel at the moment?

Rob, it's ranging from let's say 67 watts to 72.

Okay. And then could I ask you, Mike, to just repeat what you said about the timing of ramping up Malaysia 1 and two? It sounded like things are accelerating and I wanted to get, in particular, the timing of the production ramp for each of the phases.

Sure. We haven't really changed the timing on the first four-line plant that's been under construction, so we're still on schedule to complete construction by the year end and to reach full capacity fourth quarter 2008. The acceleration was really the second phase -- the second four-line plant -- which would commence construction in Q4, complete plant construction Q3 of 2008, and then we're targeting reaching full production by second quarter 2009.

So the part that I'm still trying to parse out is how -- if Malaysia 1 is finished in Q4 -- it takes a full year to ramp from Q1 through Q4. It seems like your capacity is coming up quicker than that in Germany, with a little bit of production in Q2, halfway there in Q3 or something, and then fully ramped by Q4, and yet it sounds like you're describing Malaysia 1 as taking four quarters to ramp. Am I understanding that correctly?

No, I think, Rob -- I think the way you should look at, I think it's essentially in line with what we said before, so you have -- you're completing the construction. You have one quarter of qualification, right? And then two quarters of ramp. So right now, if you look at Germany, we're still ramping in the second quarter -- in the third quarter, and the fourth quarter is essentially the quarter that benefits from full capacity throughout all three months.

So a similar pattern for Malaysia 1 and then Malaysia 2 just kicking in a little sooner than originally expected.

That's basically correct. Yes.

Okay. Thank you.

We'll now move on to Satya Kumar with Credit Suisse.

Yes, thanks for taking my question. In terms of your production capacity expansion, you noted the Malaysia 1 plant, maybe a year after the German plant, Malaysia 2 plant's probably six months after the Malaysia 1 plant. Can you talk a little bit about what you are doing to shorten this [interfab] start-up time. Where can you take that eventually? A year from now, could we be looking at, say, a three-month [interfab] start-up time or is there something inherent in the fab construction that prevents multifab startups simultaneously?

Well, we don't have an explicit target that we've talked about, but part of our continuous improvement is obviously to shorten both the build and the ramp times, and that involves work throughout the supply chain as well as internally. So you're right; we have moved the intervals in from 12 months originally to more like six months today. It's something we continuously work on and we would expect to see improvement as time passes.

Okay, but is there fundamentally something that prevents (inaudible) start ups or is (inaudible)?

Well, I wouldn't -- I would say it's not something we've entertained at this point and probably couldn't give you an accurate answer.

Okay, understood. And what should we model in for capex per watt for the Malaysia 2 facility?

I think at this point in time, we're kind of still looking at the $1.25 per watt. I mean, obviously that is declining as we continue to improve the throughput and conversion efficiency.

Okay. And last question for me, there is some increased talk of (inaudible) feeding time productions in Germany above the 6.5% going into '09 and beyond. How should we think about your existing contracts and future contracts in terms of the [ASP] progressions as we move out (inaudible) years?

Well, the contracts are firm take-or-pay contracts that have a 6.5% price reduction built in year over year. It all occurs in January 1st. And so those are fixed. There's no change to the contracts involved. As far as the change in the [ceiling] program itself, it's still obviously in the discussion stage. We're involved and closely monitoring it, but it's a little early to predict how that's going to turn out.

But the contracts you announced recently earlier in this (inaudible) have a similar [degradation] rate as the previous contracts?

Yes. Yes, it does.

Okay. Thank you.

And from Banc of America, we go to Eric Brown.

Hi. The tax rate guidance you gave of 36% to 37%, I assume that's for the full year. And then what are the factors that will influence your tax rate for next year and what do you expect the blended tax rate will be?

Yes, I think the answer to your first question is yes, we are looking at 36.5% essentially for 2007. So the reason for the normalization of the tax rate obviously has been the release of the valuation allowance, which capped the rate in prior quarters artificially high, so now as we move forward, as we bring up Malaysia, obviously we're starting to benefit from the 15-year tax holiday. In addition, also, the German tax rate has been reduced effectively next year, I found, from essentially almost 40% down to 30%. So these effects combined, I think, will start a favorable impact on our tax rate.

For next year, I think we'll start to look at [towards] 30%, which I think we've been communicating in the past. Then as Malaysia comes father up and both Malaysian plants are all operational, we essentially will be at a stage where over 50% of our capacity will come out of a tax-exempt geographic location, which will bring our tax rate sub 30% levels.

Okay. And then there's been a lot of discussion recently on the competitive environment in thin film. Can you give us a view on the competitive landscape of the next 12 and 24 months?

Yes. We are seeing some thin film come into the market. Mostly the discussion and interest is around amorphous silicon, or what we call micromorph. And it will continue to be some product coming out of the market. It hasn't impacted us and I don't think it will over a 12-month period because we're largely contracted at this point.

Okay. Thanks.

Moving on to Sanjay Shrestha with Lazard Capital Markets.

Good afternoon, guys. Again, congratulations on a continued great execution here. Just a quick point of clarification. The shipment out of the German plant, we're talking about 65 to 70 megawatt now. Can you give us sort of the breakdown on how much of that you expect in Q3 and Q4? Is it going to be more skewed towards Q4 or is it going to be half and half?

Yes, I think we probably usually don't like to go into the quarterly granularity here, Sanjay, but I think the way you can look at it in the fourth quarter, we would expect full capacity, so if you kind of look at our nameplate rating and then you can essentially kind of start backing in what it means to the third quarter.

Got it. Got it. Okay. Just wanted to clarify that. And also another thing, guys, looking a little longer term here and, you know, sort of looking at your Malaysia plant and the way you guys sort of did the Malaysia 2 after the pretty big long-term contract announcement, so is that sort of what's the next thing we should here before you guys go into Malaysia 3, or is there a potential new announcement that you sort of want to have in the U.S. market or you're looking at maybe the continued improvement in the efficiency of the next-generation technology to sort of go into the third and fourth phase of the expansion?

As you know, Sanjay, our strategy has been to secure visible pipelines of demand that will support the retainment of investment to build our production capacity. You could expect that before we expand beyond this eight lines that's already been announced in Malaysia, we would have visibility into multi-year demand that would be sufficient to repay investment on the incremental production. And traditionally, that's come from long-term contracts, as that's the preferred approach. It wouldn't have to be that way, but we would want -- we're looking for a level of certainty and visibility and to demand before we commit the [money].

Got it. And one last question then, guys -- maybe more of a point of clarification. Would the anticipated increase in your module efficiency here and the progress that you guys are making, even if, let's say, that the proposed feed-in program goes into effect in Germany, it probably means more that your shipment is going to go toward the commercial rooftop application instead of ground-mounted system and net-net is probably not going to be really any different with both your existing, maybe forward-looking long-term contracts in that market. Is that the right way to think about it?

Well, yes. I think there's a range of outcomes under these feed-in tariffs that could affect rooftop as well as free-field. I think if you take an extreme case of degradation in the year-year feed-in rates, I would expect it would prompt customers to shift geographically, which we're seeing already outside of Germany, and from free-field toward rooftop and smaller applications. And that seems logical to us.

Okay. That does it for me. Thanks a lot, guys.

Thanks.

And from Piper Jaffray, we'll move on to Jesse Pichel.

Yes. Hi, guys. Your inventory went up 12 million sequentially and you mentioned that you shipped to inventory. My question is is that about 9 megawatts of finished goods inventory and why could you not sell it in the quarter? And then do you sell it all in Q2? And then I have a follow-up question.

Okay, so number one, obviously there were two trends here in inventory, so inventories slightly declined in Ohio. We had Q1 shipments out of inventory in Ohio, so that's what drove balance revenues for Ohio. If you look at Frankfurt (Oder) -- Frankfurt (Oder), naturally inventory increased because we're bringing up the factory and the factory bring-up deals with an increase in inventory. We produced more than we shipped in Frankfurt (Oder) as we completed and finalized long-term product qualifications in one of the lines.

So you sell it all here in Q2?

In Q3.

Q3. I'm sorry, yes.

So we would expect that inventory to turn in Q3, yes.

Okay. And then about your long-term contracts, to follow up on the earlier question. Are those backed up by any kind of prepayment or letter of credit? Because I'm wondering what happens in the event of a polybased panel oversupply, where traditional panels would go for about $2.25. What would keep your customers having to buy it at that certain rate?

Well, Jesse, they're firm contractual commitments, so the answer would be a contractual obligation would presumably keep them in line and performing, but these new contracts are not backed by a letter of contract or bank guarantee, unlike the previous ones, and to a large extent, that's because of the credit worthiness, strong financial condition of the customers in this case.

You had a long-term target of selling your modules for $1.25 with a $0.70 cost. I'm wondering if you are still on track for that target and what the time line for that might be.

Yes. And just to clarify, we had a target internally that we talked about externally to have the capability to sell modules at $1.25 a watt as of 2010, moving down from there, and still earn a strong return on the total capital invested in the business. We're tracking to it. I mean, when we say -- or when I was saying earlier in the script that we believe we're on track toward our midterm goals, I'm really referencing that pricing capability target. I do believe we're tracking to it, yes.

But if I take 6.5% off your annual contract, it doesn't come down to that $1.25. It's substantially above that. Is that correct?

That's right.

Or is there some kind of step-down function in 2010 under those contracts?

No, you're right, but let me explain. So again, the target is to be able to price the modules at that rate and earn a superior return on the total capital invested in the business if we chose to do that. That doesn't mean we would automatically go to that pricing. In fact, we'd have to have a pretty good reason. But we do believe that demand is elastic as you start moving down toward those price points, and particularly, demand in nonsubsidized markets.

So if we have a reason that makes sound business sense to move to that kind of price level and if we're capable of doing that and generating strong financial return, then yes, we would certainly look at it, but the key for us is to have the capability to do it. And it's really an internal metric that we think is a more meaningful reflection of the strength of the business than necessarily the P&L as you look at these interim years.

Thanks very much.

We will now move on to Michael Carboy with Signal Hill.

Good afternoon, ladies and gentlemen. Mike, I'd like you to elaborate a little bit more on your remark about achieving grid parity. Is that still in the 2010/2012 time period?

Yes. And here's the way we're thinking about it. We had to put a line in the sand -- or a pole in the hill, if you will -- internally to develop some targets to drive for. And so we took the average U.S. retail of electricity rates of $0.08 to $0.10 a kilowatt hour and said that, to us, is approximately for grid parity. I don't think in reality we would have to be that low in all cases for solar electricity to be competitive, but use $0.08 to $0.10 a kilowatt hour. That implies turnkey system costs of $2.50 to $2 a watt, in that range, depending on irradiance, temperature conditions, financing assumptions. But if you use $2.50 a watt, let's say, as a starting point and you assume the module contributes 50% of that, then you get to $1.25 a watt on the module. We think that 50% relationship is reasonable and will require some work, which we're in fact engaged in outside the module, but from a module pricing point of view, $1.25 gets you into that zone. A dollar a watt on the module price moves you, we think, down to the $2.00 a watt system cost level.

So those are the targets. We've got a cascaded plan that drives to that. It's certainly not without risk. It's got uncertainty around it. It's not straightforward, but it is a detailed bottoms-up plan that we've been executing to.

All right, with regard to the new contracts that have you've struck, contracts are always complicated things and I'm wondering whether there are any explicit force majeure clauses in those contracts that would give your customers outs or any material adverse change clauses with regard to external competitive pricing.

No material -- no pricing type provisions of that nature. There are general force majeure clauses. Typical -- there's nothing specific about them.

Nothing pricing related or competitive related?

No, the only issue I would say around termination would have to do with minimum efficiencies, and there are baseline power skews called out in these agreements. If we drop below that, we'd be in breach of the agreements, and while it's not explicit, I think if we were in material breach, there would be a remedy with the customer that could range from terminating the contract to suing us for damages. Now, those conversion efficiency levels are set fairly conservative from our point of view, so we don't perceive a great deal of risk --

They're well below today's (inaudible).

Thank you.

And moving on from Monness, Dan Ries.

Hi, couple of questions. For the year 2007, do you have some split of what your installation or your customers' installation of ground-based versus commercial rooftop might be for the year? And did you -- I may have missed it, did you say what the module efficiency was this quarter on average?

The module efficiencies on average our ranging between 9.5% and 10%, and that's at the module level. We don't have a specific breakout on the full year. I think what I gave last quarter was updating current as of that time, was roughly 60% free-field, 40% commercial rooftop and we haven't updated it. I don't believe that information prospectively would be available to us right now, but that's where we were last quarter.

Thank you.

And from Natexis, we'll go to Paul Clegg.

Yes, thanks. Are we likely to see additional expansion announcements in Malaysia first or in Germany first? And when will you be in a position to make a decision about further expansion? What needs to happen to take you there?

Well, on further expansion, we've got, in essence, a checklist. We consider that a fundamental investment decision so we've got a checklist that revolves around the soundness of our internal operations, our replication capability, capability of the supply chain, and then fundamentally, the demand outlook -- do we have visibility on a multi-year basis into additional demands that would secure the repayment of the incremental plan investment? That's how we've always looked at it. We're capable now of looking at this set of questions on a six-month interval and we'll see what happens.

In terms of where would we build additional plants, we're capable of expanding both in Malaysia and Frankfurt (Oder). We're also continuously looking at potential new locations of sites, qualifying them so that we keep a fair amount of flexibility. The argument for continuing to expand in Malaysia is speed, efficiency and some additional economies of scale. The argument to go elsewhere is basically diversify concentration risks. At a top level, that's the framework.

And a follow-up on the [EEG] and feed-in tariff questions you keep getting. Are you seeing existing customers hold off a little bit now on contracting for future periods until they see what happens with EEG?

No. I think what we're seeing -- and I think it's consistent with some of the reports -- is almost an opposite effect that as people are rushing to get projects in the ground -- try generate revenue of while there is some certainty here. The proposed changes -- the range of discussions that have been kicked around would, I think, all take effect 2009 forward. And I think those remain in the discussion stage through the end of the year. We could probably see some political action in 2008 on those, but at least for the time being, I think the demand is staying very strong in Germany.

(OPERATOR INSTRUCTIONS) Moving on to Steve O'Rourke with Deutsche Bank.

Hi, thank you. Just a couple of follow-ups here. The plant announcements that you make, are those based upon today's conversion efficiency when you talk about rated power?

Yes. I think it's based on the nameplate rating that we've been given, which currently is set at 30 megawatts per line.

Fair enough. And when you think longer term, does it make sense to have more technologies in your complement of products as opposed to just cadmium telluride?

Yes. I think it does, Steve. I mean, we've always had the view that if we could find other technologies that could reach mainstream markets potentially -- without the need for subsidies or at least large subsidies -- we would be interested. What we balanced in the early years was a need to focus and execute strongly to get one technology to market, but even in the last couple of years, we continue to monitor other technologies and we're actively looking today. I think we have a lot of technology and capability we can leverage across different material sets,

So that would include the usual suspect -- amorphous silicon or [sigs] for example?

Yes. I mean, I wouldn't say we've ruled -- we've probably looked at everything that's out there as a technology -- not at specific companies, but we've looked at everything.

Okay. And one last question. What can you do, or are you doing, to bring balance of system costs down? Because if you can get to $1.25 per watt [ASP] for the module in a few years, will DOS costs be there to be able to support these kind of numbers you're talking about at the system level and the cost per kilowatt hour level?

I know, I think that's a big question. There's a lot of activity around that at this point. Well, we're doing a lot of things. I mean, we monitor and collect data on about 20% of the total installed systems across our customer network and understand the system level performance, I think, very well. And have engaged with a select number of inverter manufactures and hardware suppliers around designs -- [NRE] in the case of the inverter guys -- and think we understand pretty well the roadmap to reduce the major cost components, which would be the inverter and really the installation costs.

So we're actively working with our customers -- the long-term customers -- on roadmaps. We've got a dedicated team here in the U.S. We've designed some of our own systems at this point and I think we'll continue to spend more time and resources driving -- doing the system (inaudible).

And that actually brings me to one other follow-up, if I might. Do you remotely monitor all the installed systems or do your integrator installers do that for all of them in a real-time basis?

Well, in Europe, if you're under a feed-in tariff, then there's obviously real-time monitoring going on by the owner -- by the O&M operator on behalf of the owner. We take, in the case of 20% of those -- roughly 20% -- we take a direct feed of that data and we've got our own analytical capability that rolls that out, but it's essentially real-time data.

Fair enough. Thank you.

You bet.

Ladies and gentlemen, that does conclude our question and answer portion and does conclude the conference for today. We thank you for your participation. Have a great rest of your day.