第一太陽能 (FSLR) 2008 Q2 法說會逐字稿

Good day, everyone and welcome to the First Solar second quarter 2008 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 call over to Mr. Larry Polizzotto, Vice President of Investor Relations for First Solar, Incorporated. Mr. Polizzotto, you may begin.

Thank you. Good afternoon, everyone and thank you for joining us for First Solar's fiscal second quarter 2008 conference call. Today after the market closed, the company issued a press release announcing its fiscal second quarter 2008 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. An audio replay of the conference call will also be available approximately two hours after the conclusion of the call.

The audio replay will remain available until Friday, August 1, 2008 at 8:59 p.m. Mountain Standard Time or 11:59 p.m. Eastern daylight time. And can be accessed by dialing 888-266-2081. if you're calling from within the United States or 703-925-2533 if you're calling from outside the United States. And then entering access ID number 1255716. A replay of this Webcast will also be available approximately two hours after the conclusion of the call and will be available for 90 calendar days. If you are a subscriber of FaxSet, you can also obtain a written transcript within two hours. On the phone in Germany are Mike Ahearn, Chief Executive Officer,Jens Meyerhoff, Chief Financial Officer and Bruce Sohn, President of First Solar. Mike will begin the call with an overview of the company's achievements and progress during the quarter. Jens will then provide an update of the second quarter 2008 financial results and update to the financial guidance for 2008. We will then open the call for questions.

I want to remind you that all financial numbers reported and discussed on today's call will be based on Generally Accepted Accounting Principles. The company has 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'd 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. The forward-looking statements in this call are based on current information and expectations and are subject to uncertainties and changes in circumstances and do not constitute guarantees of future performance.

These statements involve a number of factors that can cause actual results to differ materially from those statements including the risks described in the company's most recent annual report, Form 10-K and other filings with the Securities and Exchange Commission. First Solar assumes no obligations to update any forward-looking information contained in this call or with respect to announcements described herein.

Before I turn the call over to Mike Ahearn, I would like to mention that during the third calendar quarter of 2008, the company will be speaking at the following conferences. First, the Pacific Crest Technology Conference in Vail, Colorado on August 5, 2008; second, CitiGroup's Technology Conference in New York City on September 3, 2008; and, finally, Cowen's Clean Energy Conference in New York City on September 10, 2008. It's now my pleasure to introduce Mike Ahearn, CEO of First Solar. Mike?

Thank you, Larry and thank you for participating in First Solar's second quarter 2008 earnings call. Our focus for 2008 remains unchanged as we continue to ramp capacity at our new production facilities, drive operational excellence and cost leadership, and further develop market opportunities within Europe and for large utility scale PV system deployments in the United States. During the second quarter of 2008 we continued to make strong progress toward these goals.

Second quarter production was 114.1 megawatts, representing an annualized line capacity of approximately 48 megawatts per line, which is a 5% increase over the first quarter and a 30% increase year-over-year, resulting from continuous run rate, yield and efficiency improvements. Inversion efficiency increased 10 basis points sequentially to an average of 10.7% for the quarter. Net sales for the second quarter were $267 million, generating GAAP net income of $69.7 million or $0.85 per diluted share. And cost per watt was $1.18 and included $0.06 of KLM ramp cost. In addition, we recently produced our 500th cumulative megawatt.

The construction of our Malaysia manufacturing center is progressing well. Plant one ramped better than expected and contributed $47.4 million to our second quarter net sales. We anticipate plant one to reach full capacity during the third quarter of 2008. Plant two construction and equipment qualification had been completed, and we expect the production ramp to commence during the third quarter. We also expect revenue shipments from plant two following successful completion of our product qualification test in the beginning of the fourth quarter. Plant two is scheduled to achieve full capacity by year end. Plants three and four are progressing well, although as of today we are too early in the process to quantify any potential upside.

Turning to the market, in Germany revisions to the [feed-in] tariff law have brought greater certainty to the market, although steeper digression rates will make project economics more challenging for the industry over the next several years. In response to the lower feed-in tariff for [free-field] projects, we expect our German customers to gradually begin shifting higher proportions of their First Solar deployments in Germany from free field to roof top systems and to pursue opportunities increasingly outside of Germany.

We expect to see increasing sales in Italy over the balance of 2008 and 2009, as several of our customers with long-term contracts begin to serve this market. In addition, we recently entered into a 17-megawatt contract that establishes a new business relationship with NL, the largest utility in Italy.

We also anticipate sales growth in France. The French government has been considering an increase to its feed and tariff program, and we believe First Solar is well-positioned in the French market with our existing customer relationships. In Spain, we're following discussions within the Spanish government concerning revisions to the Royal Decree. We don't have much to add outside of what's been reported and can't predict the outcome of these discussions. However, our near term exposure to the Spanish market is limited. We continue to believe Spain can be an important market over time due to its abundant sunshine and unmet need for renewable energy.

In the U.S. as previously stated, our 2008 goals are to establish pilot projects that will enable us to validate and demonstrate the cost and performance of utility scale PV systems in the U.S. and to establish business relationships with U.S. utilities that will enable us to expand project volumes in future years. We focused our efforts on California due to investor-owned utilities large unmet demand for solar power in order to comply with that state's renewable portfolio standards.

During the second quarter we made significant progress on our U.S. market goals. We recently announced a 7.5-megawatt AC pilot project in Blythe, California, which First Solar may expand at its option to 21 megawatts AC. First Solar will construct and finance this project and sell the power to Southern California Edison under a long-term power purchase agreement. We recently received approval from the California Public Utilities Commission and anticipate starting construction in the first half of 2009, subject to an extension of the federal ITC.

We also recently announced a 10-megawatt AC project in Nevada with Sempra Generation, a subsidiary of Sempra Energy which First Solar will construct adjacent to an existing combined cycle plant. The project is expected to be completed by the end of 2008. Finally, we announced a 2-megawatt AC roof top project in Southern California which we believe will be the largest roof top PV system in the U.S. First Solar has supplied the design and hardware for the system, which will be owned directly by Southern California Edison. Construction has commenced and Southern California Edison expects to connect the PV power plants to grid in September 2008.

These pilot projects enable First Solar to validate various system designs, product applications, and business models that have the potential to dramatically lower solar electricity prices in the U.S. and develop business relationships with two of the leading utilities in California.

In conclusion, Malaysia plants one and two are progressing better than planned. We continue to see strong execution by our operations team at our existing plants. And our entry into the U.S. utility segment is preceding on plan with three important pilot projects currently under way and significant business relationships established with two leading U.S. utilities.

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

Thank you, Mike, and good evening. Net sales for the second quarter of 2008 were $267 million, an increase of $70.1 million or 35.6% over the first quarter of 2008 and an increase of $189.8 million compared to the same period of 2007. The increase in net sales was driven by the ramp of plant one in Malaysia, contributing $47.4 million, increased line throughput and customer mix of approximately $13.3 million and the further strengthening of the Euro contributing $9.4 million.

ASP per watt rose to $2.57, up from $2.45 in the first quarter of 2008, primarily driven by favorable foreign exchange rates. Gross margin for the second quarter was 54.2%, up from 53% in the first quarter of 2008. Gross margin benefited from favorable foreign exchange rate trends, increased conversion efficiency, higher module run rates and lower material costs. This was partially offset by a ramp penalty of $6.4 million or 2.6% associated with the ramp of our first plant in Malaysia.

We maintained an average 50% hedge of our expected net income over a rolling 12-month period, composed of forward contracts and our ability to naturally hedge. For the remainder of 2008, 54% of our expected 2008 Euro denominated net sales have been hedged at an average exchange rate of $1.50 per Euro. Given the natural hedge at our Frankfurt Oder facility, approximately 73% of our expected 2008 earnings are hedged at this point.

Cost per watt was $1.18, up from $1.14 in the prior quarter, due to $0.06 of Malaysia one ramp costs, $0.02 of foreign exchange impact for expenses at our Frankfurt Oder plant. This was partially offset by increased throughput, raw material costs, and lower labor costs in Malaysia. Manufacturing costs per watt included $0.03 of stock-based compensation in the second quarter. Operating expenses were $56 million in the second quarter, versus $46.2 million in the first quarter of 2008. Excluding plant start-up cost, operating expense was $51.4 million in the second quarter, up from $33.4 million in the first quarter.

The increase of $18 million is a result of increased labor and infrastructure investments to support our continued growth, with the main drivers being hiring and compensation expenses of $7.4 million, increased [stockpensation] expenses of $3.4 million increase in R&D related expenses of $1.7, and $5.5 million of various other expenses. Plant start-up costs decreased by $8.1 million sequentially to $4.6 million in the second quarter as plant one in Malaysia commenced production, and we continued to incur start-up expenses of plants two through four. Plant start-up expenses will increase sequentially In the third and fourth quarter of 2008, due to the pending start-up of these plants.

Operating income for the second quarter was 33.2% of net sales or $88.7 million, compared to 29.5% or $58.1 million during the first quarter and $5.8 million during the same period of 2007. And included $15.4 million of stock-based compensation expenses.

Interest income for the quarter was $4.9 million, reflecting an average pretax yield of 2.9% and compared to $6.7 million in the first quarter of 2008. The decline in interest income was driven by lower interest rate and an average portfolio maturity of less than 90 days. Net income for the second quarter of 2008 was $69.7 million, or $0.85 per share on a fully diluted basis, compared to $46.6 million or $0.57 per share on a fully diluted basis in the first quarter. Our tax rate for the second quarter of 2008 was 25.8%.

Cash and all other marketable securities decreased by $47.8 million to $661.2 million in the second quarter. Cash flow from operations during the second quarter of 2008 was $59.2 million and was impacted unfavorably by an increase in working capital of $59.8 million, revenue growth and the actual pending start-up of our various plants in Malaysia. We spent $160 million in capital expenditures during the second quarter, against depreciation of $13.4 million. This brings me to our updated guidance for 2008.

For 2008, we expect to sell 470 to 485 megawatts, based on our demonstrated second quarter run rate and expected production from plant one and two at our Malaysian manufacturing center. We expect net sales of $1.175 billion to $1.225 billion, subject to customer mix, foreign exchange fluctuations and the ramp of our second plant in Malaysia. We expect plant start-up costs of approximately $37 million.

Stock based compensation is estimated at $60 to $62 million with approximately 20% allocated to cost of goods sold. Our GAAP operating margin is expected between 31 and 33%, subject to our net sales. Our tax rate for 2008 is expected to be approximately 27%. Year end 2008 fully diluted share count guidance remains unchanged at an estimated 83 to 84 million shares. Capital expenditure for the year is expected to be approximately $550 million. This concludes our prepared remarks, and we'll open the call for questions. Operator?

(OPERATOR INSTRUCTIONS). Our first question comes from Vishal Shah from Lehman Brothers.

Yes, thank you very much. Congratulations on a great quarter. Can you please talk about some of the potential factors involved in your decision to expand manufacturing beyond your four factories in Malaysia? And I have a follow-up after that.

Yes. Thanks, Vishal. Well, I think basically we're looking at production volumes in relation to market demand, and of course, what we're seeing is that we've been able to increase the throughput on our existing production lines, more significantly and faster than initially conceived. And bring up the new lines at a faster rate.

So we've got a lot more volume flowing through now that's basically alleviated some short-term need to build more factories. At the same time, we've got an ongoing effort to identify sites and work through qualification and planning issues. We don't have a set time frame, but we continue to look at market demand in relation to existing production throughput gains and try to balance all the considerations, so we don't have anything to announce today, but we're constantly evaluating that.

Great. Thank you. And just on the U.S. market, based on your experience so far, how do you see the market developing? What kind of model do you think works best? And how much dependent is it on the ITC?

Well, our focus of course is right now on utilities in the U.S. that are under renewable portfolio standard obligations. I think there's a couple of -- there's several potential models here that could make sense. One is what we're calling the IPP model, build, own and operate a solar generation plant. So the output under a long-term power purchase agreement or some combination of that and a spot market offering to a regulated entity under an obligation. That's one model.

There's another one where you build, own -- build and deliver a turnkey system to a regulated utility that then owns it and puts it in its rate base. There's probably a third channel to market where you're providing a turnkey system or some element of that to an unregulated affiliate of a diversified energy company, and I think any of these models could make sense, depending on given geographic market or utility situation and depending to some extent on how the investment tax credit is structured going forward. So in the pilot projects, we've actually piloted all three of those models, and we think it's important to have a full box and complexability to see how this thing evolves.

Great. Thank you very much.

Thank you. Our next question comes from Mark Heller from Merrill Lynch.

Thanks. Great quarter. First a clarification. Did you disclose what the shipments were? I know I think production was 114 megawatts. What was shipments?

Shipments were 103.2 megawatts.

Okay. And I guess on the ITC, if it's not extended, is there sort of like a backup plan for those modules?

I think there's a couple things that could happen here, Mark. What we might get between now and the end of the year, what we might get the eight year or multiyear extension passed, but short of that, it's conceivable to have a one year extension that will buy time post election to think through and consider something which is multiyear in nature. If that doesn't occur, I think there are some projects that would go forward independent of an investment tax credit and allow some of the early, relatively lower volume work to continue. In our case, we would continue to serve the European markets. We don't have massive volumes of solar deployment planned in the near term in the U.S. So I think, basically, we'd continue to focus on Europe and react a little bit to how the U.S. situation unfolds.

And one more question, if I could. The line throughput was 48 megawatts last quarter. What do you think is the long-term target for that?

Well, there's not really a long-term target. I mean, the way -- our culture and our approach is really built on a continuous improvement philosophy that basically says if we're at 48 megawatts now, what constrains us from reaching a higher annual throughput rate? And that really tells us where to focus our efforts and in order to alleviate constraint that will bring us to the next level. So we're continuously improving, trying to refocus and set the bar higher and can continuously improve, and the efforts here in bringing up Malaysia plant one as it was and in driving that line throughput are really a tribute to an incredible team. What these guys have done is nothing short of amazing. It's a relentless sort of continuous focus that they've got and are continuing to raise that number.

Thanks.

Thank you. Our next question comes from Steve O'Rourke from Deutsche Bank.

Thank you. Good afternoon. You announced the 10-megawatt project very recently. How should we think about modeling this type of business with a utility? For example, with respect to your core gross margins.

So, Steve, I think at this point in time we have not disclosed any details around the economics around this project for a simple reason, that we deem these projects pilot projects, and these pilots actually are geared towards validating our capability, our cost estimate, our execution capability around this new part of our business that we historically have not executed under.

So we would like to have the opportunity to actually complete these pilot projects. That's what they're intended to do. And as those complete and we can fine tune our own models, I think at that point in time we probably can give you more clarity. Obviously, the guidance I gave on today's call includes the small impact of any of these projects.

Fair enough. And then one quick follow-up. How many RFQs from utilities are out for bid now and what's the aggregate size of those RFQs if you add them all up?

Well, in California, which has really been our focus, there is an RFQ cycling that has recently been completed, and I can't tell you the total volumes, but I'm certain the total aggregate volumes are in excess of a gigawatt. So those are all -- RFPs have been submitted now in response to those. They're under consideration, and at least thus far in California, it's worked on an annual cycle along those lines. So next year come around May or so, we'd see another set of RFQs rolling out. In the other states, I think it really -- it varies I think quite a bit, state by state but that hasn't been our focus so far.

Thank you. Our next question comes from Stephen Chin with UBS.

Hi. Thank you and congratulations on the great execution there. My question is what would you say the approximate revenue run rate of Malaysia plant one will be when it reaches full capacity, and how much larger can we think of Malaysia plant one, how much larger is Malaysia plant one in terms of revenue compared to, say, the Germany Oder plant?

Well, the run rate of our facility in Malaysia will be running at the same rate as our facilities in Frankfurt Oder and in [Perrysburg], so we ran at a rate of about 48 megawatts this quarter and our expectation is that we would match that run rate sometime in the third quarter and see the full benefit of that throughout Q4. Of course, that would generate the same revenues since the product out of Malaysia is being shipped into the same markets in which the Frankfurt Oder and Perrysburg volume is going.

Thank you. Our next question comes from Michael Molnar from Goldman Sachs.

Good afternoon, everyone.

Michael.

Question on related question before. When you think about owning the power versus manufacturing the module, I realize these are pilot projects, but as you think about it going forward over the next several years, what kind of returns do you envision for the business? Is it going to be a similar hurdle rate on return on capital, or do you think you might adjust that, giving the differing risks between owning the power and manufacturing module? Just trying to get a bigger picture view as to how you think about your hurdle rates as you make investments.

If you look at it, we always articulated a goal to earn a 5% EVA spread over our average weighted cost of capital and under the module business, that number was 20%. So 15 plus times. So we thrive to continue to operate targeting this type of EVA spread. One thing you could, however, see as the financing of these projects is quite different and the balance sheet of this business will be structured differently from the module business, that the weighted average cost of capital hopefully will be lower than the 15% in order to succeed and then you add a a 5% targeted EVA spread. So that's what we would strive to structure the economics around.

As you think about this type of business going forward, what do you think you bring here in terms of an advantage over others that are going to try to do similar things on the installation side?

Well, I think, start with the module and the low cost position around the module. And then as we expand vertically into engineering procurement construction, so a fuller build-out of the turnkey system, we make most of our money on our module, as opposed to a system integrator, which needs a larger to be profitable. So I think there's an advantage going in. But then the ability to design the system, optimize it for cost and performance, and then drive continuous improvement and throughput rates on the construction build, much like what we've done with the factories through a copy smart process. We think will result in some pretty significant all-in cost reductions as well.

So there's a variety of things that go into a lower turnkey system cost that we think we can drive. Volume of course relates to yields purchasing discounts. If things materialize the way we envision it. I would say on the project finance piece, right now the way that the tax code's structured, you're really looking at a tax -oriented investor to own the lion's share of the equity in whatever entity holds these projects long-term. We don't see that being First Solar, at least for the foreseeable future. You probably should assume there's a tax-oriented investor taking the bulk of the equity at relatively modest yields, along the line of what you see in wind projects, for example, and First Solar holding some residual interest, usually that's a flow-through interest under a structure or something along those lines and it's got a carried return element to it.

Thank you. Our next question comes from Timothy Arcuri from Citi.

Hi, guys, thanks a lot. Two things. First of all, can you give us some idea of what the incremental cost per watt is out of the new facility?

So, at this point in time, I think we're probably far enough where we can confirm the previously guided $0.20 per watt benefit. We're not fully ramped yet. We're fine tuning. But I would say we're comfortable with the $0.20 benefit.

Okay. Jens, thanks a lot. Can you give us some idea, Jens, when you think about '09, what do you think about relative to the total utility market, and what do you think your share of that market might be? I'm just trying to figure out what the split might be of your revenue of utility versus nonutility.

I would say, honestly, it's probably-- today we're probably not in the position really to start our 2009 guidance. So I think if you give us one more call usually we start to get into '09 guidance with the third quarter earnings call. So a quarter ahead of us, and we'll probably give a little more detail on that call.

Thank you. Our next question comes from Nick Allen from Morgan Stanley.

Yes, thanks for taking my call. Could you talk a little bit about the capacity factor that you're expecting from projects, utility projects in Southern California on the heels of Southern California Edison filing the indicated 27%, which seems to be high compared to even tracking systems that get maybe 22 to 24%.

Yes, I haven't seen that filing, Nick, at least the reference to the 27%. That seems high to me too. I would have said low 20s in California. That's what we typically would see.

Okay. And as a follow-up, was the 10.7% was the efficiency blended, was there a premium efficiency or a higher efficiency coming out of the Malaysia factory versus the rest of the lines as a whole?

The efficiency of 10.7 is just an average. We obviously have a distribution around that range of -- a range of output from the different factories. Malaysia starting up with our copy smart approach is matching the performance of the other facilities from an efficiency perspective. So similar distribution coming out of Malaysia from the other two facilities.

Great. Thank you so much.

Thank you. Our next question comes from Satya Kumar from Credit Suisse.

Yes, hi. Question on German pricing, given the greater than expected decline in the freedom tariff and the shift to roof top, how should we think about pricing for new contracts if you were to enter into some in Germany, and I think you guys have a put option to [sell your x] to your current customers. How would that sort of change if the market shifts to roof top?

I don't imagine we're going to see an abrupt shift. I just think as the -- we don't know this for a fact but as these rates come down for feed in tariffs, it's reasonable to assume that our customers in search of higher profit margins will naturally tend to gravitate towards the higher feed-in tariff rates so that would be commercial roof top in Germany and then projects in some of the other U markets at the higher radiance level.

In the short term, we don't see -- if you look at the balance of 2008 and '09, we don't see any evidence of anything happening right now along those lines. But I would imagine gradually that would occur. Don't think that will impact put options or anything of that nature in 2008 or pricing, for that matter, under the long-term contracts.

That's helpful. And quick follow-up. Jens, can you give us some color behind the increase in inventory and receivable days as to what's driving that?

So obviously the receivables have increased as a function of the revenue growth from Q1 into Q2. So that's the primary driver there. Increase in inventory is driven -- we're bringing up four plants in sequence here, so we're building up inventory in order to support that ramp and obviously every plant you bring up, right, will hold a certain amount of [work], so you get a step function just out of that.

Thank you. Our next question comes from Rob Stone from Cowen and Company.

Hi, guys. A point of clarification, Jens, on your comment about the lower cost in Malaysia. I think you said in the past when fully ramped it could be $0.20 cheaper than Ohio. How does Germany compare to Ohio at the moment? Give us a sense.

I think, so, Germany is slightly favorable to Ohio for essentially two reasons. The four line versus three line operations and underlying the financing in Germany, we have lower depreciation due to the government grants we received.

Less than a 20% benefit versus your blended cost per watt on the prior point. So again, what I would say, what we guided was a $0.20 benefit out of the U.S. production costs driven by labor. I think we feel comfortable at this early stage of rate to confirm that, and I think as the plant comes to full production, I think we'll give you an update on the final number and what we see economies of scale wise.

Mainly labor at this point but with 16 lines running sort of side-by-side there, there should be a significant scale benefit as well.

There is a scale benefit. We have not articulated that scale benefit over 16 lines for the simple reason that this is the first 16 line operation we're bringing up, Rob, but you would assume that you get some efficiencies out of your fixed costs. At the same point in time, keep in mind that you've essentially four independent modules so it doesn't scale overall on plant specific fixed costs.

One more quick housekeeping question. It seems like your tax rate guidance is down slightly for the year. Any color on that? And any thoughts?

Actually, the color around, together a little bit with the faster bring-up of the Malaysian plant. Malaysia provides for accelerated depreciation in year one, and we're starting to see some of those benefits which essentially have significantly reduced the taxable income in 2008 which was not yet subject to a tax auditing.

Great.

Thank you. Our next question comes from Sanjay Shrestha from Lazard Capital Markets.

Great. Good afternoon, guys. Congratulations here on a great execution. Quick question. When we think about 2009, you guys have an existing long-term contract with 6.5% annual [ESP] reduction, but you obviously have been getting such a great traction with your ramp-up, and there's a lot of talk about supply-demand imbalance during 2009 in the broader industry. How do you see ESP dynamics play out for you guys given that you're already [on top of the] year-end market , do you actually in fact have a chance to even step it up? Do you see that decline even being faster in '09? How should we think about that?

Good percentage of our sales in -- planned sales in 2009 are subject to those long-term contracts, Sanjay, where the pricing is already locked in. So I don't think we'll see -- I mean, the balance of the modules that aren't under long-term contract will either be added to existing long-term contracts, put into the U.S. in utility projects or put into Europe in some of those markets.

So I don't see a lot of downward pressure in respect to the EEG digression rate on our pricing practices in 2009. I think it's going to be driven more by what will clear some of the new markets we're expanding into, those types of issues.

Thank you. Our next question comes from Sam Dubinsky from Oppenheimer.

Just a couple quick housekeeping questions. Did you guys sell any wafers into the spot market -- any modules into the spot market this quarter or were all of it long-term contracts?

As you know, we're not really a participant in the spot market so all modules were sold through long-term contract in Europe or as Bruce mentioned we're starting this year to sell to some of these utility projects.

Okay. And on the cost per watt, did you guys disclose the cost per watt was on the Malaysia products only this quarter with the start-up costs?

No, what we did mention is the overall cost per watt was impacted unfavorably to the tune of $0.06 due to the start-up, but we really don't break out the cost on a per plant basis.

Thank you. Our next question comes from Jesse Pichel from Piper Jaffray. Sir, your line is open. Please check your mute button.

Hi. Can you give us a little more color on the gigawatt RFP in California? This is --

No, I think the question was what are the -- give us a feel for the volumes of RFQs that you're seeing in the utility markets in the U.S., and I was just commenting that in California those RFQs tend to be put out sometime around the May, June time frame on an annual basis by all of the utilities that are under RPS obligation. And I didn't have the exact number, but I was estimating that the aggregate volumes bid in under those this year exceeded a gigawatt in the aggregate.

Thanks for that. Also, regarding the sourcing of glass in your Malaysian facility, is that on track, and are you seeing any difficulties sourcing the glass for the Malaysian facilities?

No, we haven't. As Mike mentioned earlier, when we look at sighting a facility, one of the criteria that we have is to make sure we have the supply chain lined up and ready to go to supply the facility so that we can generate the modules and get them out to our customers and that was exactly the case with Malaysia.

Our next question comes from Mark Bachman from Pacific Crest.

Great execution, guys. Mike, can you go through your guidance for the second Malaysian factory. Specifically, do you expect any revenue units to come from Malaysia two in Q3? I know you've said you're going to enter production, but do you expect to sell anything out of there? Did I hear you correctly that Malaysia two will be in full production at least 48 megawatts in Q4.

So what we said, Mark, is that there will be -- we do not expect any revenue out of plant two during the second quarter, even though it's starting production, due to the long-term reliability tests we're conducting for the product. And what we said is that essentially would complete the ramp by the end of the year, so I would really rather -- I want you to look at Q1 for the first quarter for our run rate of KLM two.

Okay, and then, Jens, question for you. Superior outperformance on margins but it was nothing like that you guided the Street. In fact, if you take a look at the way that Frankfurt ramped, you took about a 700 basis point hit on ramping that factory. I think a lot of people were led to believe that maybe you could do a little better than that but the margins would be significantly down, yet you outperformed here by 120 basis points on the gross margin line. I know some of that is coming from revenue, but can you reconcile your results versus the guidance you gave us?

Yes, I think, so to clarify I think on our guidance, we stated that the dollar, the absolute dollar impact of Malaysia will be slightly below that of Frankfurt Oder. On a percentage basis, given the much higher revenue that were running at already given the output of both Perrysburg and Frankfurt Oder that impact would have been always lower.

The benefit that we've seen here is that the ramp and the production volumes increased more rapidly due to an absolute flawless execution and that allowed us to absorb more overhead at that factory and essentially provided you with a better gross margin. Obviously, also foreign exchange drove a pretty significant benefit to the gross margin line, driven by better pricing.

Thank you. Our next question comes from Jed Dorsheimer from Canaccord Adams.

Hi, thanks and great quarter. First question, as we look at the utility market, Mike, I was wondering if you could -- if we look at the correlation between peak of radiance and peak load, there's a very high correlation. I'm curious as you're starting to do these pilot projects with the utilities, what the trigger point is in terms of the cost per kilowatt hour that utilities are trying to achieve using -- adding solar to their portfolio.

I think it's in flux. I think it's a moving target but if we just think -- talk about California for a second, the California program has a market price reference which is a benchmark that is calculated by the California Public Utility Commission. And it's calculated with reference to the marginal cost of gas generation on the theory that solar is primarily displacing peak which is primarily gas generated.

And so there's a calculation that's made periodically on this market price reference based on gas-generated cost, and then there are time of use factors applied to that to estimate the marginal cost at replacing various pieces of the load. So peak, shoulder peak, off-peak, so forth. And late last year that MPR stood at slightly under $0.12 a kilowatt hour. It's undergoing revision now, and we think that electricity prices, conventional prices including gas are moving up, and those higher costs, driven by commodity costs and fuel costs, inflation, those higher costs aren't yet reflected fully in electricity rates or in this market price reference.

So that's why I say, I think it's in flux right now. As we bid on these things, I think we're in an environment where we're essentially competing against what other technologies and companies are bidding, including concentrated solar thermal, and in most of those cases nothing's actually been delivered. This is all on a forward basis, so we're seeing bids in the $0.12 to $0.15 a kilowatt hour range and I think that's -- you need to be in that range, I think, to do high volume utility projects in California. But I guess I would add that this is very market and location specific, and I think it's moving and we're really trying to figure it out ourselves. But our going assumption for purposes of these projects I think has been that $0.12 to $0.15.

Thank you. Our next question comes from [Pierre Simmons] from Simmons & Company.

Thank you for taking my call. Just a quick question. What market opportunities do you see in Japan for First Solar?

I don't know. You know, we haven't really -- we haven't engaged deeply in Japan. I think at a macro level, I mean, it's -- Japan has high electricity costs, fairly good at radiance and you might rank it in the top tier of sort of crossover markets where non-subsidized solar electricity could be economically sensible sooner than other areas. But there are of course a lot of other issues in Japan relating to real market penetration. So we have not looked at that deeply in the last year and-a-half, and we spent a little bit of time prior to that and I think it's an interesting opportunity we can look at in the future.

Thank you.

Thank you. Our next question comes from Al Kaschalk from Wedbush Morgan.

Good afternoon, guys, or evening. Strong execution again. Jens, I was just trying to on -- most of my questions have been answered but the follow-up on the stronger execution on the revenue guidance, you're now up a couple hundred million from your initial guidance for '08 which is fantastic. But I was wondering if you could comment on where that demand is coming from more so than just the US and Germany and in particular customers or -- I know it would be utilities, but any additional color around that.

Well, I mean, I would say generally these volumes through our key partners under these long-term contracts throughout 2008 and as that have in the past. As you know, these key customers, right, are active. We still have a very high concentration of revenues in Germany, as Mike mentioned in his remarks. We start to see the broadening out with growth coming out of Italy, in addition to that. So that's essentially at this point in time -- France obviously we've got strong relationships with respect to both the EDF and [Sechelle An]. Essentially, we're leveraging that very strong customer base, right, to penetrate and that's where we see the strong demand. Obviously, the strong demand is aided by pricing that's very competitively and significantly below market price.

We have time for one more question.

Thank you. Our next question comes from [Daniel Ries] from Collins Stewart.

Hi, glad I got in under the wire. When you mentioned the U.S. projects, you mentioned rate based regulated utilities. Can you say what portion of the market you think that will prove to be in the long run? And since you -- you mentioned that the reference price is often based on gas generation. Do you have any estimate for the peaker capacity currently in California?

Okay. Well, on the first question, I think it's hard to know how much of the solar market would eventually be owned by utilities and rate based. I think it depends, first, on a change to the federal investment tax credit that will permit regulated utilities to take the investment tax credit. Currently, they're not permitted to do that. In the proposed legislation, they would be. There's been a change made with respect to the production tax credit. It would allow utilities to take that. We assume that will happen one way or the other. That will clear one road block.

Then I think the next issue would be whether regulators will permit utilities to put these assets in rate base or ask that they procure the power instead, and there are a number of issues that have to be worked through there. And I think that's going to vary state by state.

And then the third consideration would be what's the utility or the diversified energy company's model for making money. They might prefer to do this through rate basing assets. They could take a different path and use an unregulated affiliate to be in the development business and essentially own and operate and make money on the return on project equity. Or some combination.

So I think we're just in such an early stage right now that we're going to have to wait and see how the tax code gets clarified and how regulators given begin to look at this and how utilities view their business models around solar and so that I think is why it's very important to be flexible. If we had a business model that required PPA structure or pretended to create a lot of value around financial engineering, I think that would be a fairly high risk proposition when it comes to the utility business.

Is the rate base, is putting the assets into the rate base, is that common in southern Europe where you have relations with an L or an EDF?

No, no, not at all. In all the markets we're operating in in Europe they're using a feed-in tariff structure. There's a surcharge on a rate payer's bill. That money is essentially put into a pool, and the pooled money is used to reimburse utilities for purchasing the power directly from private generators at a premium price relative to their wholesale generation cost. It's really the utilities in Europe, the regulated entities are sort of administering these feed-in tariff programs, but they're not making any money on them at all. If they want to make money, then what they'll do is they'll form a subsidiary and so with NL it's the NL subsidiary, and in EDF's case it's EDFEN which stands for Energy [Nouvelle], that's their renewable subsidiary. They own a piece of that. That's pretty much the market to date in Europe. It's not rate based at all. And nor has wind in the U.S. or elsewhere been rate based. So I think this would be a relatively new approach.

Okay. Thank you for joining us today. Operator, do you want to complete the call?

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference, and you may now disconnect.