第一太陽能 (FSLR) 2007 Q4 法說會逐字稿

Good day, everyone and welcome to the First Solar fourth-quarter and year-end 2007 earnings conference call. This call is being webcast live on the investor section 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. I would now like to turn the program over to Ms. Erica Mannion, Investor Relations for First Solar, Inc. Erica, you may begin.

Thank you. Good morning, everyone and thank you for joining us for First Solar's fourth-quarter and 2007 year-end conference call. This morning, the Company issued a press release announcing its fourth-quarter and 2007 year-end financial results. If you did not receive a copy of the press release, you can obtain one from the investor 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 if you are within the United States, or 719-457-0820 if you are not calling from within the United States. Please enter reservation number 9023734. The audio replay will remain available until February 16 at 10 o'clock a.m. Eastern time. Also, a webcast will be available in approximately two hours on the investor section of the Company's website. And if you are a subscriber of FactSet, you can obtain a written transcript of the conference call within two hours.

With me today on the call 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 during 2007 and the Company's progress during the fourth quarter. Jens will provide you with fourth-quarter and 2007 year-end financial results, and an update to the financial guidance for 2008. We will then open the call up for questions.

All financial numbers reported and discussed on this call today will be based on generally accepted accounting principles. The Company has allocated approximately 1 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, the availability of or changes in government subsidies, changes in government laws or regulations regarding the sale, use or disposal of solar modules and 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 availability to successfully replicate production at its Malaysian plant, the successful integration of its recent acquisition of Turner Renewable Energy, the availability of certain raw materials and the Company's relationships with its key customers and 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 filings with the Securities and Exchange Commission and in the Safe Harbor language of the earnings release that was sent out this morning. The Company assumes no obligation to update any statement made during today's call or to revise any forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in any forward-looking statements.

Before I turn the call over to Mike Ahearn, I would like to mention that during the first calendar quarter of 2008, the Company will be speaking at the following conferences -- the Piper Jaffray Third Annual Clean Technology and Renewable Conference in New York, New York on Wednesday, February 20, and the Morgan Stanley Technology Conference in Dana Point, California on Monday, March 3. It is now my pleasure to introduce Mike Ahearn, CEO of First Solar. Mike?

Thank you, Erica. Thanks for participating in today's fourth-quarter and 2007 year-end earnings call. 2007 was another strong year for First Solar. We increased -- (technical difficulty) -- by 273% over 2006 to $504 million. We increased module production volumes by 244% over 2006 to over 200 megawatts. We increased salable watts per module by 10% over 2006 to an average of 70.3 watts per module for the full year, while making significant gains in module throughput. We've reduced our cost per watt by 12% over 2006 to an average of $1.23 per watt for the full year and we achieved cash flow from operations of $200 million in 2007.

While delivering these strong near-term results, we also laid the foundation for profitable growth and continued cost reductions over the next several years. More specifically, we entered into additional [fund] take-or-pay contracts under terms extending through 2012, which brought our total contracted sales for the period 2008 to 2012 to over three gigawatts and $5.9 million based on an assumed exchange rate of $1.30 per euro. The revenue provided by these contracts is enabling us to expand our production capacity, which is a key driver to our cost reduction effort.

We expanded our key customer base from six customers in 2006 to 12 customers by the end of 2007 and the addition of these customers has extended our geographic market coverage to all European markets with meaningful feed-in tariffs. We also demonstrated the benefits of our Copy Smart methodology for replicating factories by successfully building and ramping our Frankfurt/Oder factory ahead of schedule and at operating performance comparable to existing plants.

And we acquired Turner Renewable Energy, which has been renamed First Solar Electric Company. The acquisition added balance of plant engineering and project management skills to the Company that enable us to begin deploying cost-effective solar electricity solutions for utilities seeking to meet renewable portfolio standard requirements in the US.

I would like to take this opportunity to thank and recognize the entire First Solar team for accomplishing these results, which marked key milestones on our midterm path to reducing solar electricity prices to levels competitive with retail conventional electricity. We believe we remain on track to reaching the 2010 to 2012 pricing capability goals that we have previously laid out.

So with that, let me address the Company's performance during the most recent quarter. The fourth quarter of 2007 represents a steady-state quarter for the Company, meaning a quarter that reflects the full benefit of full production capacity of all lines of production without the impact of any ramp costs or other nonrecurring events.

Fourth-quarter production was 77.1 megawatts, representing an annualized line capacity of approximately 44 megawatts per line, which is an 11% increase over the third quarter and results from the combined impact of full-capacity operation at Frankfurt/Oder and continuous throughput improvements on our production line.

Conversion efficiency averaged 10.6% for the quarter, up slightly from 10.5% in the third quarter. Cost per watt declined to $1.12, including $0.03 of stock-based compensation expense, which represents a 6% decline over the third quarter. And revenues increased 26% over the third quarter to $200.8 million, providing us with a GAAP net income of $62.9 million or $0.77 per share.

Construction of our Malaysian manufacturing center is progressing on schedule. Plant one construction has been completed and we are completing equipment installations and starting the initial stages of line qualification on a schedule consistent with our targeted production ramp in the second quarter of 2008. We do, however, anticipate a slightly steeper ramp on plant one, giving upside to our previous production estimates for 2008 and Jens Meyerhoff will address that when he makes his comments regarding guidance.

Plants two, three and four are in different stages of construction and are progressing in line with our previously announced capacity expansion plan. We expect to be at full capacity with all four factories in Malaysia by the fourth quarter of 2009, which will bring our total announced companywide annual production capacity to approximately one gigawatt based on the demonstrated fourth-quarter 2007 production run rates at our existing lines.

Turning to the market, demand for our products remained robust during the fourth quarter and we continued to experience market demand in excess of supply. We sold 75.8 megawatts in modules at an average sales price of $2.60 per watt.

As mentioned on prior calls, First Solar is pursuing revenue growth on two fronts. First, we believe additional growth remains in markets supported by feed-in tariff incentive structures, including countries in Europe, as well as South Korea and Ontario, Canada, which are served largely through our key customers under long-term contracts.

In 2007, the vast majority of our modules were deployed in Germany. Approximately 55% of our modules were deployed in free field applications and 45% of our modules were deployed on rooftop applications. In 2008, we expect continued high volumes of module deployment in Germany and a similar mix between free field and roof-mounted projects. With our expanded customer base in Europe, we also expect to see growing volumes deployed in other EU countries, including Spain, Italy and France.

Second, First Solar is seeking opportunities to open new markets with limited or no dependence on traditional PV subsidies. A core focus in this regard is the US utility market where we believe low-cost PV represents an attractive solution for regulated utilities seeking to meet our PS quotas. Our expanded capabilities in First Solar Electric enhance our ability to reduce balance of plant costs in parallel with our module cost reduction efforts and we believe this will lead to a compelling product offering. In 2008, we expect to begin initial deployment of projects in the US that are designed to validate key costs and performance assumptions in preparation for higher volume deployment.

In conclusion, our factories continue to run well and our 2007 results increased our position as the low-cost leader in the industry and brought us closer to achieving price points that make solar electricity viable without significant PV subsidies. Market demand for our products remain strong and our long-term contracts provide embedded revenue growth over the next several years and our Malaysia expansion projects are proceeding on schedule.

With that, I would now like to turn the discussion over to Jens Meyerhoff, our CFO, who will discuss our fourth-quarter and 2007 year-end financial results and provide an update to our guidance for 2008.

Thank you, Mike and good morning. During the fourth quarter of 2007, we were able to continue to demonstrate the scalability and operating leverage underlying our technology and business model. Net sales for the fourth quarter were $200.8 million, an increase of $41.8 million over the third quarter of 2007 and an increase of $148.1 million compared to the same period of 2006.

For the year 2007, net sales were $504 million and increased by $369 million over 2006. The strengthening euro contributed $43.8 million to our net sales during 2007 when compared to 2006. Gross margin for the fourth quarter was 55.3%, up from 51.6% in the third quarter of 2007 and up from 48.6% in the same period of 2006. Gross margin benefited from the leverage typically experienced in a steady-state quarter as incremental sales contributed their full variable margin in excess of 70% to the gross margin line.

Gross margin in the quarter also benefited by approximately one percentage point due to further euro appreciation over the prior quarter. Gross margin for 2007 reached 49.9% compared to 40.2% in 2006 and benefited by approximately 10 percentage points from year-over-year cost-per-watt reductions driven by increased conversion efficiency, throughput gains and plant scale.

Foreign exchange gains contributed three percentage points to our gross margin, effectively offsetting the majority of our annual contractual price decline for 2007.

In order to further reduce volatility around our euro exposure, we have executed additional forward contracts between now and the first quarter of 2009 that allow us to sell EUR226 million at an average exchange rate of $1.45, hedging approximately 36% of our expected 2008 revenues.

Our cost per watt for the fourth quarter averaged $1.12 per watt, including $0.03 of stock-based compensation, representing a 6% decline over the third quarter as we realized additional economies of scale from our German plant and continued to benefit from higher throughput rates. Please note that our cost per watt was negatively impacted by $0.03 this quarter over the third quarter due to euro-denominated expenses at our Frankfurt/Oder plan.

For the year, we achieved a 12% cost-per-watt reduction when comparing 2007 over 2006, consistent with our long-term plans despite an unfavorable foreign exchange impact and without yet benefiting from our lower production costs in Malaysia.

Operating expenses, excluding plant start-up costs, were $28.6 million in the fourth quarter of 2007, down from $30.9 million in the third quarter, which included $8.7 million of non-recurring, stock-based compensation expense. Net of this charge, operating expense increased by $6.4 million, primarily due to increased compensation expense as a result of further hiring and due to compliance costs. Operating expenses, excluding plant start-up costs, were 14.3% of net sales in the fourth quarter and declined from 19.5% in the third quarter.

For 2007, operating expenses, excluding start-up costs, were 19.3% of net sales, down from 29.4% in 2006, demonstrating the scalability of our focused business model. Plant start-up costs increased by $1.3 million sequentially to $4.1 million in the fourth quarter and are expected to peak in the first quarter of 2008 as multiple plants at our Malaysia plant site are being constructed and we are nearing the ramp of plant one.

Operating income for the fourth quarter was 39% of net sales or $78.3 million compared to 30.4% or $48.3 million during the third quarter and $9 million during the same period of 2006. Operating income for 2007 was $137.2 million or 27.2% of net sales compared to $2.8 million in 2006.

We continue to believe that First Solar's financial performance will be best judged by our ability to achieve the minimum 20% RONA threshold underlying our long-term financial model. During the fourth quarter, we achieved this goal for the first time with an annualized RONA of 21.9%. Our business model remains focused on opening new markets that represent attractive trade-offs between lower prices and higher, long-term volumes and cash throughput coupled with less subsidy dependents. These opportunities will, over time, provide further RONA scale and higher asset returns while possibly diluting gross margin percentages achieved in the second half of 2007.

Interest income for the quarter was $7.2 million, reflecting an average pretax yield of 5.8% compared to $5.3 million in the third quarter of 2007. The increase in interest income was driven by higher average cash and marketable security balances in the fourth quarter due to the proceeds from our secondary offering in August and positive free cash flows.

Net income for the fourth quarter of 2007 was $62.9 million or $0.77 per fully diluted share compared to $38.5 million or $0.49 per fully diluted share in the third quarter, which excludes certain one-time tax benefits of $7.5 million or $0.09 per share recorded in the third quarter. Net income grew sequentially by $24.4 million or $0.28 per fully diluted share, excluding the impact of the one-time tax benefit realized during the third quarter. Net income for the year 2007 was $158.4 million or $2.03 per fully diluted share compared with $4 million in 2006.

Our tax rate for the fourth quarter of 2007 was 27%.

Cash and all other marketable securities increased to $698.3 million during the fourth quarter. Cash flow from operations during the fourth quarter of 2007 was $102.9 million due to higher cash-based earnings and improved working capital performance. We spent $118.4 million in capital expenditures during the fourth quarter against depreciation of $6.8 million. Cash flow from financing activities was $11.4 million due to proceeds of $15 million from the exercise of employee stock options, partially offset by debt repayments.

This brings me to our guidance for 2008. For 2008, we expect to sell 400 megawatts to 430 megawatts driven by our demonstrated fourth-quarter run rate and the steeper ramp of our Malaysian factories providing upside in the second half of 2008.

We expect revenues of $900 million to $950 million subject to customer mix and foreign exchange fluctuations. Revenues in the first quarter of 2008 are expected to decline sequentially over the fourth quarter of 2007 due to our contractual price decline, which took effect January 1 of 2008.

We expect plant start-up costs of $28 million to $31 million, up from $17 million in 2007. Please be mindful that in addition to the margin impact of our price decline, the start-up of each plant has significant impact on both operating and gross margin before we reach full capacity as seen during the first and second quarter of 2007.

We have increased our estimate for stock-based compensation to $35 million to $40 million due to stock price volatility and further expansion in workforce with approximately 20% of those costs allocated to cost of goods sold.

GAAP operating margin is expected to be between 25% and 27% of net sales and is subject to the timing of our plants starting up and ramping on time. Our tax rate for 2008 remains unchanged at approximately 30% and will not yet benefit from the tax holidays in Malaysia, which will take effect in 2009.

Year-end 2008 fully diluted share count is estimated to be 83 million to 84 million shares. We expect to spend approximately $500 million in capital expenditures, which is based on currently announced capacity expansion through plant four of our Malaysian manufacturing center and infrastructure-related investments. This concludes our prepared remarks and we will open the call for questions. Operator?

(OPERATOR INSTRUCTIONS). David Edwards, Morgan Stanley.

Good morning. One quick question for you. If you can talk a little bit about First Solar Electric Company, can you give us an idea of sort of milestones that you are looking for in that business?

Yes, David. This is Mike. Yes, I think, for 2008, the milestones are really around deploying several pilot projects to begin to form some key relationships and validate our cost consistent performance assumptions. And we expect that to provide a basis to roll into 2009 and beyond and start to building higher volumes. So think of 2008 really as a year to lay the groundwork.

All right, great. Thanks a lot.

Steve O'Rourke, Deutsche Bank.

Thank you, good morning. Can you help us understand how we should think about ongoing efficiency improvements and can you speak a little bit to the repeatability of efficiency during an extended production run? Is it tightly distributed around the average that you give?

Yes, let's see, the way we think about efficiency in general -- to achieve the targets we set for 2010 to 2012 in terms of pricing capability, our average conversion efficiencies need to be in the range of 12% and if you start from 2007 through 2012, that implies a half a point a year of conversion efficiency improvement and we are obviously tracking to that. These efficiency improvements are largely event-driven, so it is difficult to pin them down into timeframes, certainly quarterly timeframes and even annual. So there is some lumpiness to how they get integrated, if you will, but we are tracking to that and we still feel confident around hitting the longer-term objectives.

In terms of the variance, the dispersion, there is some. It is relatively tight. We sell -- that is reflected in several power SKUs in our productline. I think that is a basically ordinary course type situation for us.

Okay, and one follow-up. With the gross margin performance you have on fully ramped factories now, even if we start to assume you have some utility scale business building in over the next couple few years at lower gross margin ramping other plants, is the long-term guidance that you have for your model, should that be revised upward do you think?

No, I think, Steve, at this point in time, still believe that the long-term model is in tact. As you know, I think if you look at the cost reduction, the cost-per-watt reduction is probably the key matter in here, which was year-over-year 12%, which is slightly ahead of just a linear rise 10% underlying our long-term grid parity goal. I think we believe those relationships are still in tact. Also be mindful that we have also a pretty sizable contribution from a very strong euro built into that gross margin performance.

Fair enough. And one last question, the question was asked about First Solar Electric. What should we expect on a utility scale this year as far as pilot programs building in? Will there be any revenue derived from that do you think and is First Solar Electric focused only on utility scale projects right now?

There will be some revenue, Steve. I wouldn't call it significant from an overall perspective given the fact that what we're trying to do is execute on a few relatively small pilot projects to get through that validation process. I forgot the second half of that question.

Focus on utilities.

Oh, yes. We are focused on utility scale, that is correct. There are a few projects that were carried over from Turner Renewable Energy that are of a distributed nature, but the focus right now is just on utilities.

Fair enough. Thank you.

Michael Molnar, Goldman Sachs.

Good morning, guys. A question for you on your manufacturing inputs, specifically tellurium, how do you manage your inputs and specifically how much do you have under contract already and what is the risk that some of your inputs becomes scarce if other Cad-Tel players come to market?

Michael, we have multiple, multiple suppliers, right, qualified for both the raw material salt, as well as for the subsequent compounding into Cad-Tel, so we are managing this closely. When we make investment decisions like right now, as Mike mentioned in the script, right, we are building out roughly a gigawatt of capacity, right, we assess the capability of our supply chain against those capacity expansions. So we will make a decision on those capacity expansions without checking the box and so we feel comfortable with our supply chain situation on Cad-Tel and tellurium in particular and something we continue to manage obviously and we have got a team working it like all other supply chain matters.

Okay. And just one other question. It seems like every other day, there is a new thin-film entrant being funded and two related questions. Do you fear a potential massive oversupply for thin film and number two, is it possible or even something you are looking at to use your technology on a flexible substrate?

Let me take the first question. I think that -- well, first of all, how do we think about a competitive threat? Primarily, it is around whether some company or set of companies could come into the market while we are all dependent on PV subsidy pools and take the share of the market that we are counting on to be able to scale and achieve the cost reductions that lead to our targets over 2010 to 2012. We think if we get to the pricing capability targets that we have set for 2010 to 2012, very large markets open for everybody in the PV industry. Our competition really becomes cost of fuel-based solutions.

So the question we look at is what is the threat that somebody takes share in the next several years that we are counting on to be able to scale and in that regard, we don't currently see a strong probability of that occurring. We feel pretty good about our position.

To the extent that other thin-film technologies do scale though and reach price points that can achieve the same kind of grid parity type pricing, we think that is good for the industry and it eventually will occur. So that is sort of a thought on competition.

In terms of oversupply, we also think there is a distinct possibility that that could occur sometime in the next year or two, that the timing is difficult to handicap, but that would be driven in our view more by crystalline silicon supplies rather than thin film, at least in the short term.

On flex substrate, yes, Cad-Tel -- it is capable of being deposited on flex substrates. It is not something that is in our product roadmap currently, but there is no technical barrier to doing that, so we have looked at it from time to time.

Great. Thank you.

Satya Kumar, Credit Suisse.

Hi, thanks. What was the actual ASP in the fourth quarter?

Can you ask that again?

What was the actual ASP of your products in the fourth quarter?

260.

2.6?

Yes.

What are you assuming in your '08 guidance for the unhedged portion of the euro in terms of exchange rates?

On average $1.33.

$1.33. And you now have seven lines up and running between Germany and Ohio, you said you produced 77 megawatts. I know one of the lines has a little bit higher capacity, but what is the rated capacity per line; how should we think about that? What is the mechanical throughput potential and how can you -- how do we model it?

I think mathematically you'll see right now, we are having a run rate, right, annualized run rate per line of about 44 megawatts.

It is still only at 11 megawatts, okay. And just last question, Jens, it was a great quarter, but the second time in a row the numbers have come in significantly above guidance. Why wouldn't you have preannounced, and just wondering what your thought process was around that?

Okay. So I don't think we have a practice of preannouncing the upside (inaudible).

Maybe just to reiterate what our practice has been on the guidance, we base the guidance on the production volumes that we are committing to the marketplace that we are out trying to sell. And in a market environment where demand exceeds supply, and there are uncertainties as we bring up new factories, it is prudent in our view to be somewhat conservative with respect to the expectations in the marketplace.

So I think that as much as anything explains why we have been able to beat guidance that drives up those production numbers, at least.

Vishal Shah, Lehman Brothers.

Thanks for taking my question. Can you talk about what some of the considerations would be for you to start thinking about your next set of capacity expansion, now that you have executed ahead of schedule on your Malaysia ramp?

Yes, there are a few things. We start with the notion that we are currently building four factories at once and that is fully occupying our organization and our external partners, so we have got our hands full right now.

In addition, our production line rates, as we have been discussing, have increased, so we have got more supply to work with from existing factories, which is obviously a good thing. The expansion of additional production capacity would really be driven by the need to meet existing demand or new demand with traditional production and that is something we are assessing constantly. We don't have a set timeline or a rhythm to these expansion projects, so we will continue to assess that and it will largely be driven by market demand conditions.

Great. And one follow-up. On the year 2009 capacity assumptions, assuming a similar run rate and capacity expectations, what percentage of your total production do you think would be under long-term contracts?

Well, I think we haven't really given any guidance, right, on 2009. It is kind of a hard question for us to answer. Typically, we always talk about roughly a two-thirds capacity utilization we are striving for on our long-term contracts, so that is more with respect to the build-out, but I don't think we can give you a specific percentage here for 2009.

Okay, great. Thank you.

Rob Stone, Cowen & Co.

Hi, guys. Another nice job as usual.

Thanks, Rob.

Looking forward to late this year and in 2009, feed-in rates are coming down in some of the significant markets -- Germany, Spain -- and potentially, market prices may go down in high single digits, maybe as much as 10% in 2009. What are your customers telling you about that forward view? Is your 6.5% annual schedule adequate or what?

We think the current pricing is adequate to deal with the range of outcomes around these digression rates and as you can imagine, when we negotiated these long-term contracts, the uncertainties around feed-in rates in the out years was a key topic of discussion and we had comments the last couple of years about why we set our prices so low, but the answer was to make these customers -- partially answer -- was to make these customers comfortable against a range of outcomes on feed-in rates and frankly, interest rates and we are still operating within the range that is priced into the contracts, so we feel pretty confident about their ability to execute.

So is it fair to say that you are essentially operating now at a level below what you could do if you weren't on a long-term schedule in terms of ASPs?

I guess yes. If the question is today could we sell in a spot market at higher ASPs, it is probably true. It has probably been the case for the last couple of years. I think the issue is though, over the period through 2012, we are going to see -- we may well see supply/demand imbalance shifting and we have always thought it was a good trade-off to get the visibility and go ahead and lock the prices down.

So with respect to delivery schedules, I know you haven't given specific guidance for 2009 full year, never mind quarters, but do you see signs of continued steady deliveries or is there a potential of any disconnect as we get to the end of this year?

I mean it is hard to say what happens in 2009. I think, in general, by contracting a significant part of our production, we are attempting to become robust against market dislocations and we'll just have to get deeper into the year and see how things progress in terms of '09.

And finally, with respect to the feed-in rate, the new numbers haven't been finalized yet for Spain and Germany. Are you hearing anything different than the last proposed set of rates that have been discussed?

No, no, it's pretty much the same discussions as several months ago.

Okay. Thanks very much.

Eric Brown, Banc of America Securities.

Hi. There have been some rumors floating around. Maybe you could address the issue of whether you are having any yield problems in the field.

To our knowledge, we are not. We have checked with a number of our customers and we have, as you know, pretty extensive internal quality controls and external field testing data, so we are not aware of anything, Eric. I think based on the note you published late yesterday, I think you know more about it than we do frankly at this point as to where that rumor may have come from, but we don't have any information, no.

Okay. Jens, on the exchange rate question before, the $1.33, that was associated with the hedged or is that the average for the entire portion?

No, that's the unhedged portion. The hedged is valued at about $1.45.

Okay. The comments on the ramp of Malaysia -- so is the Malaysian facility now going to ramp, the first one at least, similar to how the German facility ramped?

Eric, this is Bruce. The ramp is on the same schedule that we had mentioned previously. Malaysia one basically mimics Frankfurt/Oder 12 months later, so it is on a similar start-up schedule with ramping in Q2 and Q3 and we will be at full production in Q4. Both Mike and Jens made reference to the fact that we anticipate the ability to have a slightly steeper ramp than we had communicated previously and that is reflected in the updated guidance.

Okay. And should we expect that Malaysia two through four should have the similar ramp pace as well?

We are still looking at those. The current schedule is per the original plan, so they maintain the current schedule and we watch as the equipment comes in and gets qualified and we will communicate any changes as we see them.

Okay. And then one more. On the DT Solar or Turner Renewable legacy projects, what kind of influence is that in the '08 revenue guidance and what kind of margins, gross margins, will you expect from that business?

Yes, I think if you look at the impact, the impact out of First Solar Electric on 2008, it can be deemed immaterial, so you are talking sub 5% levels.

Okay, thanks.

Jesse Pichel, Piper Jaffray.

Yes, hi, Mike, Jens, Bruce. Can you give us some additional color on the utility sales channel in terms of how many utilities, Mike, do you think will deploy trials in '08? And are you seeing greater interest from the European utilities thanks to the new EU directives for 20% renewable targets by 2020?

Well, on the European side, First Solar Electric is just focusing on US utility right now. We do have, through our module sales efforts in Europe, we have exposure to the utilities in Europe there. We are not seeing any greater interest from that. Now, I think the discussions are proceeding along the same lines they have in the last -- over the last six to 12 months.

In terms of First Solar Electric, we are at such an early stage of fleshing out the business strategy and plan that we don't really talk about those kind of details and if we did, it wouldn't be very good information because it is still in flux, it is still dynamic at this point. But there are a number of states that have RPS quotas. Our focus right now is on load-serving entities that have a legal or regulatory requirement to secure renewable energy that is driving off these RPS programs. There are obviously a number of potential utilities in that space.

Would you potentially sell your panels through an electrical utility components company as kind of an OEM solution? Or would you -- (technical difficulty) -- the utility -- (technical difficulty)?

(technical difficulty) -- and as tariff structures come down across the globe, how that might play into your hands competitively?

Yes. Well, we have focused -- from the time we went to market in 2003 through today, we have focused on larger sized systems, both ground-mounted and roof-mounted and the roof-mounted applications I was speaking of are primarily commercial industrial roof systems, so larger systems.

These are the most efficient channels for us in terms of optimizing the system-level performance and economics and scaling the Company, getting large volumes into the market in concentrated ways where we can observe and understand system performance and scale our Company effectively.

So strategically, we like the larger system size and the modules look well whether they are mounted on the ground or on rooftops. Now that we are achieving efficiencies north of 10%, we don't see any reason why we couldn't, if we chose to, bring those systems site down, all the way down to a three kilowatt type size for residential markets, but we haven't done that to date, but part of it is we are having a hard enough time supplying the demand in the segments we are operating in and serving our customers and strategically, we think we are on the right path here to start large and scale down over time.

And so maybe just a bit of a follow-up there, as customers, over time, look at the cost efficiency matrix and tariffs do come down, you will be in a better position, I suppose, to compete even with your lower efficiency. Maybe put it another way, if there is an oversupply situation in the traditional PV arena, you could take advantage of that and the market clearing at a lower price may play into your hands.

Well, it's possible. I mean the way we're thinking about that is we do have some pricing capability here and we would like to use that to find ways to broaden the market, broaden the entire pie for the solar industry by finding markets that aren't relying on traditional PV subsidies and using the pricing capability to build in those markets and I think the US utility RPS market is an example, but there could be, as you say, smaller system-driven markets as well. It doesn't mean we wouldn't continue to participate in the PV subsidized markets at the same time. In fact, those long-term contracts and that revenue stream is pretty important to our ability to scale and hit these spot targets, but I think it is helpful for us and the industry to work to expand the overall market in ways that demonstrate decreased reliance on the traditional subsidies rather than piling on and taking share from the highly subsidized markets. That is the direction we are likely to move in.

Kelly Dougherty, Calyon Securities.

Good morning and congratulations again. It is obvious that costs need to come down all along the value chain to get to grid parity and we saw the Turner acquisition last year as evidence that you have begun to move downstream. Just wondering if this was a one-off effort to break into the US market or if we could possibly see something similar as you try to get into other markets as well?

It's hard to -- it's hard to predict what the future will bring in that regard. I think we are in a stage right now where these markets are evolving and the learning is pretty iterative. I think the US is the first real opportunity to try to expand outside these traditional PV subsidized markets. I think we are going to learn a lot through the US utility effort about what will need to occur elsewhere and I also think as channels mature, your need to do many things obviously diminishes. I would imagine that our roles will be dynamic in these channels over time as the markets mature.

So there is not any kind of concerted effort at the top to vertically integrate further? This was just kind of an opportunity that you took advantage of in the US?

That's true. I mean I think in Europe -- let me state it another way. In Europe, we have very good relationships with highly capable partners, if you will, that are allowing us to serve that market very well. So there would be no need to consider anything of a more vertical nature at this time.

Thank you very much.

Sanjay Shrestha, Lazard Capital Markets.

Great, terrific. First of all, congratulations on a great quarter here, guys. Most of my questions have been answered, but just a couple of quick ones. In terms of the manufacturing output, it has been phenomenal going from 25, 39, 44, but, guys, are we now kind of running at the point where we are going to continue to make gradual progress? With a step change like that, it is probably not going to happen in the near future and probably more likely a longer-term type of an event if that were to play out?

This is Bruce. The real strategy has been to progress towards our long-range plan and to achieve our goals in that 2010 to 2012 timeframe. We really needed to continue to scale at a rate of about 0.5% per year from '07 to 2012 from an efficiency perspective and an amount of 3% perspective from line capacity and capability. But the factories and engineers are working very hard to maintain the improvement rate. The Company has a core value around continuous improvement, as well as driving for results and so they continue to look for all sorts of opportunities to improve the yield, to debottleneck the line, improve cycle time and generally improve the technology and the efficiency. So the work is ongoing.

Got it, terrific, and one quick follow-up then. Given that you guys are focusing a lot in the utility market here in the US and somewhat of an uncertainty here on the ITC front, but since the majority of your focus is here on the pilot and sort of the demonstration project right now, what has been the overall interaction up to this point? Can you guys talk a little bit about that as to some of the positives, some of the negatives and how big of a role does somewhat of an uncertainty here in the near term related to ITCs playing in terms of the negotiation process?

Well, I think most utilities load-serving entities in the US under these RPS obligations are negotiating. They are out in the market negotiating to procure renewable energy without -- in the event that the DTCs or ITCs aren't extended. So I think the discussions are proceeding generally across the board. It's not like there is a freeze on discussions because of the uncertainty concerning those tax benefits.

As far as the tax incentives themselves, it is hard -- it is obviously hard to predict what will happen there. We don't have any knowledge that you don't have. We are monitoring it pretty closely and we will just have to wait and see how it plays out.

Okay, that's great. Once again, congratulations on a great quarter and execution, guys.

Steven Chin, UBS.

Hi, this is [Jack Dish] on behalf of Steven. Congratulations once again. I just wanted to find out -- you culled out Spain, Italy and France and US (inaudible) near-term goals. What kind of geographical split would you expect in 2008, please?

Yes, we don't really break it out geographically. We have found it is pretty hard to predict that because we just don't have the granularity and I think those project pipelines are somewhat influx to break it out precisely, but we do see a general -- there is a lot of projects, as you may know, being deployed in Spain ahead of the extension -- potential extension of the feed-in tariff. So Spain is pretty robust right now. Italy seems to be a functioning viable market at this point. France is at earlier stage, but we do have two France-based companies and we do see project pipeline beginning to build there. So I think it is tough to give you a lot of specificity on what those numbers will actually be.

Okay. Then -- just a quick follow-up on that. You said on the cost-per-watt goals, since you lowered your cost per watt by about 12% in 2007, should we think that to be a reasonable goal for 2008?

No, I think if you look at our roadmap in order to achieve the $1.25 to $1.00 pricing capability, right, in the outer years, which is in line with our grid parity goal of $0.08 to $0.10 per kilowatt power, that requires us to achieve cost per watt of about $0.65 to $0.70 and that is our long-term goal, so we believe we are on track for the roadmap.

Adam Hinckley, Oppenheimer Capital.

Hi, good morning. Just a quick question, Jens, on -- have there been any positive revisions with your existing customers to the amount contracted for 2008?

I am not sure whether I get your question, Adam. Can you maybe rephrase that?

I believe at the Analyst Day you said that there was about 319 megawatts for 2008, which is under the take-or-pay agreements. Have there been any amendments to make that any higher?

So we generally -- as you know, we have the ability, right, to exercise certain put options and if so based on how our product pipelines evolve, right, and how global demand evolves if we do exercise those options in our discussion with those customers.

Okay. Well, then I guess -- with the expectation of what is not under contract for fixed price take-or-pay agreements, on the euro basis, what is the underlying assumptions through 2008 for ASPs?

So as you know, I don't think we have ever really guided around those ASPs, right. Some of the unallocated volume I think as we stated in prior calls is not used opportunistically; it is used strategically to seed new markets. And as Mike mentioned in his comments, the focus here is the US utility market, right, which may have more and does have more challenging economics, right, and could possibly happen, right, at a lower pricing point to the contract.

So then for existing DT agreements, how many megawatts of commitments do they have from other module suppliers and how much would you be internally supplying them? Could you provide any color on that?

As I mentioned, if you look at right now the impact of First Solar Electric on 2008, right, is immaterial and the remaining pipeline that we took over is small and module supply has been secured for those projects.

Colin Rusch, Broadpoint Capital.

Good morning, gentlemen and congratulations on the continued phenomenal execution. My question is about price elasticity in the US utility market. It may be a little bit too early for you guys to have real hard data on this, but how are you thinking about elasticity in the market? Are you looking at RPS requirements plus the market price referent and if you could give me a little bit more -- a little bit of guidance on how to frame that?

Well, in general, in this market segment, our offering is competing against all other renewable energy alternatives, so runs the gamut. So you are going to have to be at a price that is competitive with non-PV technologies. And in general, these things are evaluated for least cost and best fit, so that is a broad enough criteria to allow some consideration for time-of-day generation, of peak offsets and that sort of thing. So it wouldn't be a straight comparison to wind generation for example because we are more of a peaking solution. But that is the competitive universe and I don't think we really know the answer until sort of large projects are under firm contract and have been approved by the relevant regulatory commissions. So we are a little ways away from having the kind of data I think that we all would like to have.

And then going over the French market, if the EU decides to define nuclear energy as not clean energy for its 2020 targets, have you guys done a preliminary assessment on what the market opportunity would be in France for PV if they weren't able to consider all those nuclear assets as clean energy?

No, we really haven't done that, Colin. Our market analysis right now in Europe is more around the feed-in tariffs and what market opportunity and market structures would drive off of those and what is a reasonable baseline to plan on in terms of availability of the feed-in tariff structures. I think that next chapter that you are referring to is -- that is probably the more interesting question, but we just haven't reached that yet.

Great. Thanks so much. And again, congratulations.

Paul Leming, Soleil Securities.

Good morning and congratulations on a great quarter. I have got a question for Mike. You have raised the specter of overcapacity a couple of times on the call and I am wondering if you could just walk me through how you see that playing out over the next 12 to 18 months given the uncapped nature of the German market. Are you worried about a shortage of capital to buy and install systems? As long as installed costs hit the levels needed to generate the desired project returns, what really is going to be the limiting factor upon installation of modules of projects in Germany to absorb all the capacity that is coming?

That's a good question. I mean I guess -- one question is will we see additional supplies coming into the market as a result of, for example, silicone feedstock constraints being alleviated and possibly removed? That is a scenario we have looked at definitely as a probability. The timing of that is kind of hard to, at least for us, to pin down because it is fairly empirical and you are getting new announcements it seems like every week that bear on that question. So whether that is 12 months or 18 months or post 18 months, I think, at least at First Solar, we are a little softer, a little fuzzier on that, but we think it is a distinct possibility that there will be a lot more volumes, crystalline silicon-based, coming into the market.

In terms of -- yes, where would the constraint be downstream from the module to absorb it? We have been looking at the adequacy of projects financed to continue to support projects in Europe given the issues in the credit market in general. So far, we haven't seen any issues there and we haven't learned anything that would suggest that there is likely to be a constraint, but obviously that is a dynamic situation in and of itself, so we're going to keep an eye on that.

There could be other constraints with respect to inverter supply or just personnel to install these things. There are a number of pieces of the value chain downstream from the module when you get to a turnkey installed project that any number of which could be constrained depending on how rapidly and how significantly volumes come into the market. So we haven't looked at that more generally.

We look at that in terms of our own network of customers, their project pipeline, what it is going to take to deploy the volumes that we plan to put into the market. We have a pretty good feel around that, so it didn't exactly answer your question, but it is hard to pin that down because of the dynamics and the uncertainty around that.

Adam Krop, Ardour Capital.

Good morning. Forgive me if the question has been answered already, but my question is on gross margin. How should we be looking at it? Can you give us a little bit more color on a quarter-by-quarter basis for 2008 given the dynamic of declining ASPs and the ramp of Malaysia one?

I think if you look at it from a (inaudible), I can profile it probably for you and I think 2007 actuals are actually a pretty good proxy here with respect to the profile. So in Q1, you get the hard impact obviously of the contractual price decline hitting your gross margins. Then since the first Malaysia plant essentially is coming up a year offset to what we have seen in Frankfurt/Oder, you should expect, as we move into Q2 and we are starting to ramp, right, where the start-up costs are being reclassified into cost of goods sold that that would reduce gross margins in that quarter due to underabsorption of overhead. And then as you start to benefit from the capacity, obviously as you go into Q3, you start to see a recovery and then in Q4, we are talking about the same phenomenon again for the second Malaysia plant, right, where you start to get the impact of the ramp of the margin.

Okay, that's helpful. Thanks very much. And just switching gears, how should we be looking at CapEx in 2009 and 2010? Do you have any guidance there?

No, we really haven't -- we really haven't guided that far out, right and that obviously is subject to capacity decisions and so on.

Michael Carboy, Signal Hill.

Good morning, ladies and gentlemen. You had mentioned earlier in the call that you felt it was easier to optimize around C&I installs rather than IOU installs and I was wondering if you could elaborate a little bit on when you think you would be able to achieve your RONA targets on IOU installs rather than on commercial, industrial plants?

Let me see if I can maybe recast that a little bit. The long-term target model we have for 2010 to 2012 is really looking at the question of where could we price if we chose to and still be able to drive a minimum 20% return on net assets and this is really a metric we use internally to drive continuous improvement and so the target is to be able to price at $1.25 a watt. That is the blended ASP in 2010 and still drives this 20% RONA threshold and then move that down to $1.00 a watt by 2012.

If we have the capability to do that, then the question would be would we actually do that across the board and that would really depend on the segments, the market segments and the pricing strategy, which we would do on a segment-by-segment basis, but if we had the capability to do that, we think in the utility, the IOU market for example, there is likely to be pretty good demand elasticity around those price levels. We don't know if we have to be that low or maybe you have to be a little bit lower. I think that is going to have to play out, but it seemed like reasonable places to put a stake in the ground and drive toward, so that is really, when we speak about this pricing capability target, that is really how we are thinking about it.

Brian Gamble, Simmons & Co.

All my questions have been answered. Thank you very much.

So operator, I think we are running a little bit over on the call here, so I don't know how many questions you have got left queued here, but we probably should be thinking about wrapping the call up.

There are no further questions at this time.

Okay, very good. Thank you, everybody.

Thank you.

This concludes today's teleconference. You may disconnect at any time. Thank you and have a great day.