第一太陽能 (FSLR) 2013 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to the First Solar's third-quarter 2013 earnings call.

This call is being webcast live on the investor section of First Solar's website at 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. David Brady, Vice President of Treasury and Investor Relationships for First Solar Incorporated.

Mr. Brady, you may now begin.

Thank you, operator.

Good afternoon, everyone, and thank you for joining us.

Today, the Company issued a press release announcing its financial results for the third quarter.

A copy of the press release and the presentation are available on the investor section of First Solar's website at firstsolar.com.

With me, today, are Jim Hughes, Chief Executive Officer, and Mark Widmar, Chief Financial Officer.

Jim will provide an update on significant business and technology developments, and then Mark will discuss our third-quarter results, and provide updated guidance for 2013.

We will then open up the call for questions.

Most of the financial numbers reported and discussed on today's call are based on US Generally Accepted Accounting Principles.

In the few cases where we report non-GAAP measures, we have provided a reconciliation to GAAP equivalents at the back of our presentation.

Please note that 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.

Those statements involve a number of factors that could cause actual results to differ materially from those statements, including the risks, as described, in the Company's most recent annual report on Form 10-K, and other filings with the Securities and Exchange Commission.

First Solar assumes no obligation to update any forward-looking information contained in this call, or with respect to the announcements described herein.

It is now my pleasure to introduce Jim Hughes, Chief Executive Officer.

Jim?

Thanks, David.

Good afternoon, and thanks for joining us for our third-quarter 2013 earnings call.

I will begin by taking a moment to recognize some of this quarter's remarkable achievements.

Our business development team booked 860 million megawatts DC of new business compared to shipments of 406 megawatts in the quarter, a ratio of over 2 to 1, and resulting in a year-to-date book-to-bill ratio of greater than 1. We had earnings per share of almost $2 on a GAAP basis, significantly above expectations, and due primarily to the sale of the ABW project in Canada, and the commencement of revenue recognition for the Desert Sunlight project.

We are now flash testing modules at our Perrysburg facility with a conversion efficiency of 14.1%.

Such results have the potential to open up new business segments to us, and significantly increase our total addressable market.

And, finally, at a time when others are no longer reporting module cost per watt, we have had the largest quarterly decline in our cost per watt since 2007, falling $0.08 to $0.59 on average in Q3.

And in line with how our competitors report cost per watt, excluding freight recycling and warranty charges, our core figure is now below $0.50, $0.49 to be exact, the lowest in the industry.

These results are an impressive validation of the technology and cost road maps that we provided during our analyst day in April, and upon which we will continue to execute.

Slide 5 shows the chart that we presented on analyst day, which compares our module efficiency road map to that of utilities that scale crystal with silicon, based on our estimate from a combination of our own and third-party analysis.

Both road maps are normalized for real-world operating temperatures at 60 degrees Celsius, and adjusted for their respective temperature coefficients.

As you can see, the gap between cadmium telluride and CSI is all but closed, virtually eliminating the so-called utility scale balance of systems penalty.

More importantly, with our steeper efficiency road map, we expect to surpass the performance of CSI by mid-2014, thereby gaining a significant performance advantage in the future, and at the same time, further improving our intrinsic manufacturing cost advantage.

In summary, this has been a very impressive quarter, but it also demonstrates the lumpiness of our business, especially in terms of revenue and earnings tied to large projects.

For this reason, we continue to recommend that investors focus on the long-term trend and average results of the Company, rather than on individual quarters.

Now, turning to the book-to-bill performance.

Slides 6 and 7 show the total outstanding bookings in gigawatts and revenue, and the change in those bookings that occurred year to date.

This data represents our total business, which includes a relatively small percentage of third-party modules sales, in addition to our advanced systems project pipeline.

Total outstanding bookings rose from 2.6 gigawatts DC to 2.7 gigawatts DC, year to date, and our book-to-bill ratio was greater than 1 to 1. The ratio for the quarter was closer to 2 to1, due to the successful closure of a number of deals we have been working on in the past few months.

In September, we announced the acquisition of the Moapa project in Nevada from K Road Power.

This 250-megawatt AC project is in an advanced stage of development, and has a 25-year PPA in place with the Los Angeles Department of Water and Power.

Construction of the project could start as soon as the fourth quarter of 2013, and be completed by the end of 2015.

The purchase of Moapa, in addition to the Element pipeline announced on last quarter's call are examples of the use of proceeds for project and pipeline acquisitions, which we indicated in connection with the equity offering in June.

We also recently entered into an agreement with NextEra to build the McCoy project, a 250-megawatt AC solar power plant in Riverside County, California.

Construction is expected to begin in 2014, with completion in late 2016.

In addition, we have signed an agreement to build four solar power plants in California totaling 79 megawatts AC.

All of the projects will incorporate First Solar's rate tracker technology, which provides up to 20% more energy, and reduces the levelized cost of electricity.

Construction on all four projects is expected to be completed by late 2014.

We also added 39 megawatts AC of demand from Belectric.

Last month, we announced the launch of a joint venture with Belectric to develop and build solar energy projects on three continents, Europe, North Africa and the US.

The announcement is the latest milestone in a long-standing partnership between the two companies that spans over a decade.

An estimated 80% of the 1.4 gigawatts of solar capacity installed by Belectric is powered by First Solar modules.

Switching to projects sold, in addition to the sale of the ABW project in Canada to General Electric, today we announced the sale of Silver State South, a 250-megawatt AC project to NextEra, subject to certain conditions precedent.

Closing is expected in early 2014.

Under the agreement, First Solar will continue to develop Silver State South, which is in the permitting stage.

We will also provide EPC services and modules for the project.

Pending permitting and regulatory approvals, construction is expected to start in late 2014, and to be completed in late 2016.

We have also successfully completed a 13-megawatt DC power plant in Dubai.

While this is by no means one of our biggest projects, it is our first utility scale project in the Middle East, and the largest operating solar photovoltaic plant in the region.

This achievement establishes an important benchmark for the development of solar photovoltaic in one of the most promising markets we operate in.

In summary, Joe Kisthill and his business development team have done an outstanding job.

Joe joined First Solar as Chief Commercial Officer in August.

Joe, a Harvard MBA graduate, also holds a bachelor of science in electrical engineering from Brown University.

He was a regional president for Exterran, a global provider of natural gas, petroleum and water treatment production services.

He brings unparalleled expertise to this extremely critical role.

His primary focus will be on sustainable growth in emerging markets.

Turning to outstanding bookings in revenue terms, given the lower system ASP environment, we showed strong performance by increasing our bookings in Q3 to $7.8 billion, even while recognizing over $1 billion in revenue in the quarter.

In addition, we have 7.7 gigawatts in near-term opportunities, which is a decrease of 300 megawatts since the end of the second quarter.

This is discussed in detail on slide 8.

The purpose of the metric on slide 8 is to provide a useful indicator of the overall level of activity that we're seeing in the marketplace, which remains strong.

The total opportunity set fell slightly during the quarter, but we are very comfortable with this performance, given the conversion of several potential deals into firm bookings this quarter, such as Moapa and McCoy, which were compensated for by the identification of new opportunities.

We have just over 1.4 gigawatts of mid- and late-stage deals with moderate to high probability of success.

The largest portion, about 6.3 gigawatts, is early stage, which means that the majority of these projects will have a development cycle of 12 months to 24 months, and consist primarily of our uncaptive projects assets.

We believe that the ratio of mid- to late-stage deals to early-stage opportunities is a healthy proportional distribution.

Slide 9 shows the breakdown of demand by geography.

Our opportunity set outside the US is now 4.2 gigawatt, and represents 55% of the total.

This is perhaps the best illustration, to date, of the progress that we are making in creating demand in sustainable markets, and gives us confidence in our ability to replenish our pipeline going out to 2016 and beyond.

Turning to slide 10, notwithstanding our improving prospects in competitive positioning in our traditional module and systems business, we continue to explore new business opportunities that create value for our customers and shareholders.

First Solar has made strategic investments in our O&M business over the past few years in order to create a unique technology-based platform which allows us too rapidly scale are worldwide O&M portfolio.

We are now leveraging that investment by expanding into the third-party operations and maintenance business to offer our O&M services to customers for projects not using First Solar modules.

This service base component in the Solar value chain offers a unique opportunity for sustained revenue growth, given the 25-plus year lifespan of a solar power plant.

This will also enable us to offer additional products and services to our customers, beyond the fixed-fee scope, throughout the entire power plant lifecycle, such as [repiling].

In addition, our platform creates high barriers to entry for competitors, and provides us with a distinctive differentiator relative to other platforms in the market.

Our customers have been receptive to this proposal, and we expect to add to our portfolio under management in 2013 and beyond.

In closing, we achieved a solid performance this quarter, and the prospects for the industry are definitely improving, but they still remain uncertain.

Several potential challenges remain.

Of particular concern are announcements of new capacity expansions, which, should expectations for demand in certain geographies such as China and Japan fail to materialize, or the economics associated with those markets decline substantially, this could lead to a renewed oversupply situation in the industry at large, and in the markets that we are targeting, and would once again put pressure on pricing and profit margins for all solar players.

With that, I'll now turn it over to Mark, who will provide detail on our [fiduciary] financial results, and an update to our 2013 full-year guidance.

Okay, thanks Jim, and good afternoon.

Turning to slide 12, I would like to begin by highlighting the third-quarter operational performance.

Production in the quarter was 426-megawatt DC, up 10% on a sequential basis.

This increase is reflective of the re-ramping of production lines that have undergone planned equipment upgrades.

When completed, these upgrades will facilitate the achievement of near-term targets on our module costs and efficiency improvement roadmaps.

Comparing production costs year over year, excluding the German manufacturing volume, which is no longer operational, production increased 8%, which is driven by improved module efficiency and higher utilization on the same number of production lines.

In the third quarter, we ran our factories at approximately 80% capacity utilization, up 5 percentage points from the prior quarter.

As Jim highlighted, earlier on this call, we continue to make great progress towards achieving efficiency and manufacturing cost targets that we provided during our analyst day in April.

We reduced our module manufacturing cost per watt to $0.59 from $0.67 last quarter, an $0.08 per watt, or 12%, reduction quarter on quarter.

This is the best quarter-over-quarter cost improvement in six years, on a per watt basis, and the highest percentage reduction since our IPO.

This [step] function improvement is directly attributed to the efficiency in manufacturing improvement programs, and the cost-savings initiatives that are being developed, and implemented, by our world-class R&D and manufacturing teams.

Excluding the impact of underutilization, our core cost per watt fell to $0.57, a $0.06 improvement on the prior quarter.

During Q3, our best plant manufacturing cost, [ethyl] utilization was $0.56 per watt.

Average conversion efficiency for Q3 increased 30 basis points to 13.3%.

While this is a significant quarter-on-quarter improvement, it is noteworthy to highlight that the first month of Q4, our lead-line average efficiency is 13.9%.

As we replicate the lead-line manufacturing process across the balance of our production line, we expect the fleet average efficiency to meet or exceed the lead-line 13.9% efficiency over the next few quarters.

Now moving to the P&L portion of the representation on slide 13.

Third-quarter net sales reached a record $1.3 billion, compared to $520 million last quarter.

This is driven by higher-system business project revenues, partially offset by slightly lower module-only sales.

The higher-systems revenue is primarily attributed to the initial revenue recognition for Desert Sunlight, and the sale of the ABW project in Canada.

It is important to note that, as expected, Desert Sunlight contributed materially, and disproportionately, to the results for the quarter, as initial revenue recognition achieved includes project activity that was completed over the last several periods.

As a percentage of total net sales, our systems revenue, which includes both are EPC revenue and solar modules used in the systems project, increased from 84% in the prior quarter to 95% in the third quarter.

Again, driven by the Desert Sunlight and ABW projects.

Gross margin was 28.8%, up from 27% in the prior quarter.

This is due to the favorable systems revenue mix, and the lower manufacturing cost.

Additionally, gross margin benefited from a change in estimated reduction in our end-of-life recycling obligation, which resulted from the completion of our annual study of the estimated future collection and recycling costs.

We now have high-volume operational cost data, from our [laser] recycling technology, that provides a longer-term representation of the actual cost to compare against our estimates.

Based on this actual operational run data, and recycling operational improvements made throughout the year, we have reduced our estimated future collection recycling costs per [module].

The lower cost, when applied against our 7 gigawatts of modules to sell to the field, results in lower obligation.

This change is also expected to positively contribute to our go-forward module cost reduction.

Continuing to third-quarter operating expenses, including asset impairment charges, increased $57 million, quarter over quarter, to $156 million.

This increase is totally attributed to the pre-tax asset impairment charge of $57 million related to the recently announced agreement to sell the Company's facility in Mesa, Arizona.

The sale of this facility is expected to provide additional liquidity to the Company of approximately $115 million, and is expected to result in a net reduction in annual operating expenses, including both depreciation expense, and cash expenditures, of approximately $10 million.

The Mesa sale and proceeds are expected to be received in the fourth quarter of this year.

Excluding the asset impairment, total operating expenses were slightly down compared to the prior quarter.

As we proceed through the fourth quarter and exit 2013, we expect the quarterly OpEx total to decrease by approximately 5% to 6% over the next four quarters, as we focus on our stated strategy to lower general and administrative expenses in order to prioritize and internally fund R&D and sales and marketing activities, which are expected to facilitate market-enabling growth.

On a reported basis, third-quarter operating income was $208 million, compared to operating income of $39 million in the prior quarter.

The increase was primarily reflective of higher revenue recognition, and margin mix, for our systems business, partially offset by higher operating expenses, including the asset impairment charge.

Including restructuring and asset impairment, third-quarter profit from income tax was $266 million, compared to $43 million from the prior quarter.

Third-quarter GAAP net income was $195 million, or $1.94 per fully diluted share, including the after-tax impairment charges of $0.34, compared to $0.37 for fully diluted share, in the second quarter, and $1 in the third quarter of 2012.

Including the asset impairment charge of $0.34, our Q3 non-GAAP earnings per fully diluted share was $2.28.

Turning to slide 14, I'll review the balance sheet and cash flow summary.

Cash and marketable securities increased by approximately $247 million, reaching $1.5 billion in the quarter.

This increase was driven primarily by cash received from customers with the continued buildout of our captive systems projects and module sales.

Our net cast position, which continues to be a competitive advantage in the industry, increased by $274 million to approximately $1.3 billion.

To provide some perspective on how our net cast position has continued to improve, even amidst a strong industry downturn that has led to other competitors demise, First Solar has strengthened its balance sheet, going from a net cast position of approximately $187 million in Q3 of last year to $1.3 billion in Q3 of this year, an increase of just over $1.1 billion.

On a working capital front, we reduced key working capital counts, based on our focus management on inventory, receivables and project related assets.

In aggregate, the reduction quarter over quarter to the network and capital accounts is slightly more than $100 million.

To finally highlight the key drivers in the reduction.

Accounts receivable trade balance has decreased by $45 million, quarter over quarter, to $148 million, and it's due to the collections related to several of our systems projects, and continued collections from module-only sales.

Our billed accounts receivable and retainage decreased by $23 million, mainly due to decreases in [unbilled] balances for our Imperial Valley and Agua Caliente projects.

Inventory, including balanced systems parts, decreased $10 million sequentially, due to greater installation of modules in the systems business.

Project add was increased $27 million, primarily due the Moapa project acquisition, as well as an increase in construction activity on our portfolio of unsold projects, partially offset by the sale of the ABW projects.

Deferred project costs decreases by $248 million, principally due to the initial revenue recognition on Desert Sunlight, partially offset by the increase associated with Campo, as the project has not yet achieved substantial completion and revenue recognition.

Other assets, including non-current retainage, increased by $128 million versus the prior quarter.

Of that increase, approximately $40 million was driven by increases in Desert Sunlight and Topaz projects.

Such retainage amounts relate to construction work already performed, but which are held for payment by our customers, as a foreign security, until we reach certain construction milestones.

Quarter over quarter, total debt decreased to $229 million, a sequential decline of approximately $27 million.

Operating cash flow for the third quarter was $375 million, compared to $222 million in the second quarter.

Free cash flow was $284 million, compared to $168 million in the prior quarter.

Capital expenditures totaled approximately $69 million for the quarter, and were primarily related to production upgrades, which are expected to increase module efficiency and throughput.

Depreciation for the quarter was $60 million, compared to $58 million in the prior quarter.

Turning to slide 15, I will now provide the update on the full-year 2013 guidance outlook.

Starting with the key underlying assumptions.

With the exception of a slight change in the mix between shipment volumes on a module only versus system project volume, the only material change in our updated guidance is assumption around Desert Sunlight.

Having met the GAAP requirements for revenue recognition, and having added clarity on the remaining projects scheduled for the year, we now expect approximately 50% of Desert Sunlight revenue to be recognized in the year.

Although the key assumptions for the production plan, including expected improvement in module efficiency and cost targets, and the total shipment volume assumptions, all remain unchanged.

Turning to slide 16, we are updating our 2013 guidance as follows.

Beginning with net sales, we are lowering the range from a midpoint of $3.7 billion to a new midpoint of $3.5 million, to account for probable revenue recognition risk that could cause the economics associated with one or more of our projects to slip into next year.

Or due to the expected increased revenue recognition for Desert Sunlight, and the associated favorable margin, we get a partial offset, then on the topline, and materially higher margin dollars and earnings.

Consequently, we are raising our gross margin range to 24% to 26%, our operating range to $470 million to $490 million, and our earnings per share range to $4.25 to $4.50 per share, an increase of approximately $0.40 to the midpoint compared to prior.

Regarding the sources of increase in our earnings guidance, approximately $0.25 is due to the operational and project cost line improvements in the plan, above our prior forecast.

And the other $0.15 should be attributed to favorable timing in the systems business, primarily related to the higher recognition for Desert Sunlight.

Please note that the nature of the incremental [pull in] on Desert Sunlight in 2013 is not a result of accelerated project build plan, but rather simply a result of higher amounts of recognition than our prior risk-adjusted forecast assumed.

Our range in operating expenses remained unchanged.

The range on the tax assumption is now 14% to 16% versus our prior range of 15% to 17%, the reduction being attributed primarily to a change in the expected jurisdictional income mix for the year.

Our lower expected operating cash flow range of $700 million to $900 million, again reflects the potential impact of scheduled risks that could cause cash receipts of one or more projects to move into early next year.

Capital expenditures are now forecast to be between $300 million and $350 million.

Expected range decrease in working capital from beginning of the year is now $50 million to $150 million.

Moving into the fourth quarter, there are a couple of scenarios which could result in additional upside to our 2013 guidance ranges, but would, however, result in corresponding reduction, or pull in, of project economics currently assumed to occur in 2014.

This is due to the nature of our systems project business, which, as you know, tends to be lumpy due to the project schedule, site conditions, and revenue recognition criteria, just to name a few.

So, given our outlook assumes a level of resiliency, we could see more project economics recognized in the year versus our base case plant assumed in the ranges we just provided.

Additionally, to help provide some guidance on how to think about the standalone Q4 forecast for income and earnings, please note that the share count will be slightly higher than the third quarter total, but materially higher than the weighted-average share count for the year.

As a result, the quarterly fiscal periods having materially different amounts of shares outstanding, the expected annual earnings per share range will not equal the sum of each standalone quarterly earnings per share amount.

Also the tax rate for Q4 will be slightly higher than the year-to-date rate, which is due to the mix of jurisdictional income expected in Q4.

The net effect is that the year-to-date rate is slightly below, and the Q4 rate is slightly above our full-year tax rate guidance.

As we look ahead to next year, we are in the process of developing our 2014 corporate calendar, and expect to hold another analyst day event, tentatively scheduled for early March, during which we will provide an update on our strategy, key markets, and financial outlook.

So, similar to the past Spring, we plan to provide our initial full-year 2014 guidance at that event.

More details will be announced as they become available.

Moving to slide 17, I'd like to summarize the quarter.

Q3 was an exceptional quarter with strong results that were achieved through teamwork and a constant focus on executing our strategy.

As Jim and I have highlighted, we continue to show progress on the many fronts, including a growing opportunity set, and advancement of our technology competitiveness, and the execution of our operating plan.

We continue to strengthen our balance sheet and resulting bankability with the intent of developing a well-balanced foundation that ensures our customers will have a reliable long-term solar TV solution partner.

We remain on track for the year, maintaining our focus on expecting and -- executing our roadmaps and strategic imperatives, outlined during the April analyst day event.

With that, we conclude our prepared marks, and the open the call for questions.

Operator?

(Operator Instructions)

Brian Lee of Goldman Sachs.

Just from an accounting perspective there's a couple of things moving around here, so just want to clarify on those topics.

On Desert Sunlight, specifically, should we expect the other half of the revrec to all happen in 2014 or is there some to also be done in 2015?

And then, what percent of Silver State South, now that, that is sold, should we expect to see recognized next year?

Yes, Desert Sunlight currently has the COD, we anticipate to complete a portion of the project by the end of 2014.

The other portion may fall in early 2015, based on the COD's.

But largely assuming the balance of the revenue will happen in 2014.

Silver State South, while we will start to begin construction in 2014, it's the latter part of 2014, and it's not clear that, at this point in time, that we will have achieved all of the revenue recognition criteria to start recognizing revenue for Silver State South in 2014.

However, we will see some production volume, and there will be some construction activity, but probably very little, if any, revenue earnings for Silver State South next year.

Brian Jobin of Credit Suisse.

Hi, this is Brandon Heiken on behalf the Patrick Jobin, thanks for taking the question.

I was wondering if you could explain the economics on the recent bookings?

How to those compare with the targets that you laid out for 2014 and 2015?

And, did the other acquisitions that you've made, and the cost reductions affect those targets?

Thank you.

We have not given specific economics on any of the recently announced projects.

But, as we look forward in the economics on the opportunities that we're currently bidding, are consistent with the range of what we previously guided to which would be in the 15% to 20%.

So, without getting into details, each transaction could vary from those specific targets, but, in general, the average still's within that range.

The cost opportunities that we now have highlighted are largely in line with our cost production roadmaps that we had previously communicated.

We may see a little bit of acceleration on the cost per watt profile, but I don't anticipate it will a material impact in the short term.

Stephen Chin of UBS.

Thanks you for taking my questions, this is [Aman Singh] and congrats on the cost stance.

Question on the cost, two parts there.

So, you talked about 14.1%, which you are piloting, what should we expect in terms of what that would lead to as far as cost per watt?

Also, in terms of the benefit on the balance of system, how much reduction can you get on the balance of system, and overall for system cost?

The 14.1%, if you refer back to Analyst Day materials, basically that is on cost roadmap that laid out.

It is merely executing right to the schedule of what we presented.

So, there's not anything new or changed in terms of the cost roadmap.

This is merely validation that we are executing to that cost road map as it was disclosed in the Analyst Day.

In terms of balance of system, we continue to make progress on the balance of system cost, both as a result of increasing efficiency, and as a result of reducing costs in the balance of system itself.

And, again, that remains on the trajectory that we outlined at the Analyst Day.

We are executing basically to the projections that we set out earlier in the year.

I think the other thing to add around that is that if you take that 14.1%, and try to triangulate that to what on the road map, the 14.1%, it would point you to a low $0.50 type number, all right?

If you take that, and you apply that to our best line, in particular, we're going to be in the low $0.50s.

If you take the additional impact of excluding freight, warranty and recycling costs, we would be in the low $0.40s.

So, I think that's the competitive benchmark that we should all keep in front of us.

We have the capability today, 14.1%, which would equate to, on an apples-to-apples comparison, a cost profile of the low $0.40s, call it $0.42, $0.43.

Vishal Shah of Deutsche Bank.

How long does it take to rollout your high-efficiency lines to all of the different factories?

And, you said that 13.9% efficiency.

Should it be assumed that by the time you rolled it out, your cost will be in the low $0.50s?

Thank you.

Our best line right now is 13.9%.

I think our guidance on the exit rate of our best line is 14%.

And my comment in that I made is that over the next two quarters we'll get everything up to 13.9 or north of that.

So, you can start to see us, on a fleet average in the 14%, maybe a little bit above 14% in the first half of next year.

Which all supports, again, a low $0.50 type cost per watt.

And, that's all consistent with what we showed in the Analyst Day.

Paul Coster of JPMorgan.

Well, it's a two-part question.

I was just wondering if you could give us a bit of an update on TetraSun in passing But, my main question is, if I understand you correctly, Mark, the gross margin improvement is really a function of making new assumptions around revenue recognition on specific programs around the year end, and not a function of efficiency utilization rates, and all of the other operating metrics that we've described.

Is that correct?

Yes, and on the gross margin, I'll take that one and I'll let Jim talk about TetraSun.

Yes, so the improvement in the gross margin, there's a favorable mix shift, Desert Sunlight being a portion of that.

There is also a favorable benefit on the cost profile, especially on some of our project cost plans that are striding a portion of that benefit.

So, one of the things we tried to highlight was that the EPS changed, the midpoint increase of $0.40, $0.25 of that was operational.

So, I want make sure people clearly understand that.

The other 15% is mix benefit, but 25% is operational, which is a combination of a better cost profile on the module, and a better overall cost profile on our key projects.

And then, in terms of TetraSun, we continue to validate and produce pilot product.

And continue to develop our plans for that product, but we don't have any material announcements at this time.

And we'll talk more about it as we get into the early part of next year.

Ben Kallo of Robert Baird.

Hi, gentlemen.

Hey Jim, first of all, on your backlog here, I just wanted to understand what was included through your acquisitions.

And then, as you pull forward some of the, if that's the right term, Desert Sunlight, does that change our assumptions next year,- so you have some of the efficiency gains we are expecting next year happening this year?

And then I'm going to add on YieldCo thoughts as you guys look ahead.

How do you balance current revenue, near-term revenue with the opportunity of selling some of the projects to the market?

Thanks, guys, good quarter.

Sure.

I'll cover the first, and Mark can layer in some detail.

In terms of the acquisitions, once we make a portfolio acquisition, how we characterize those projects in terms of being in the opportunity set, or being a booking.

We use the same standards and rules that we have always applied.

So, there will be a mixture of impacts as we bring those portfolios in.

And in terms of the YieldCo thoughts, we continue to monitor the market performance of the entities that have gone public, most notably NRG Yield and Pattern Energy.

We continue to analyze the benefits, the potential benefit, and the potential issues associated with doing something similar ourselves.

And, I think at this point, we don't have any firm conclusions.

We think it is very interesting and healthy for the industry, how and if we participate is something we're still looking at, and don't have any firm conclusions that have been reached at this point.

And then on the Desert Sunlight, yes, I mean there will be some impact of additional revenue this year on Desert Sunlight that will impact 2014.

However, there's also, in our guidance, a project that we will be moving out of 2013 into 2014.

So, If you look at it, on balance, between the two years, there is a slight downward pressure with Desert, but not a material change, given the movement of revenue out of 2013 into 2014.

Krish Sankar of Bank of America Merrill Lynch.

Hey, so, a change in strategy related to holding onto your projects so longer?

And, also, if you look at the sort of projects that you guys are developing right now.

What are you plans as respect to holding them through completion?

I missed the first part of your statement, you were cut off on the very beginning.

Sorry.

Is the selling of the Silver State South a change in strategy related to holding onto your projects for a longer duration?

No.

What we have said is that we will retain the flexibility to hold projects until we believe we have reached a point in time where we can sell them for an optimal mix of value creation and risk reduction.

Silver State South was a negotiation that had been going on for a very long period of time with an established customer.

And, we felt like that the opportunity to extract further didn't really present itself without taking incremental risk.

It was the appropriate decision.

At the same time that we were making the decision to sell that asset, there are other assets that we have decided to hold, til closer to the commercial operation date.

So, we merely added, we have not drawn an absolute line in the sand as to when we're going to monetize assets.

We've merely said that we're going to have the flexibility to look at different options, which we believe enhances our ability to create value with each individual asset.

Edwin Mok of Needham & Company.

Hi, thanks for taking my question.

I just wanted to want to drill down quickly on the gross margin again?

How much was the improvement that you got in the third quarter came from that adjustment of those warranty?

And, as we look beyond this quarter, last quarter, as you look into 2014, what do you think your gross margin in trend?

I think your question is referring to the end-of-life adjustment, and the impact, discretely, to the quarter.

I won't get into the detail of what impact it had to the quarter.

There is a lot of moving pieces in any given quarter, things that are positive, things that are negative.

I think the right way to look at it, though, is what impact does it have to our full-year guidance.

And, if you look at it comprehensively with all the other moving pieces that are impacting gross margin, it has a nominal impact to our full-year guidance, relative to what we last rolled out from that perspective.

So, no significant change from that perspective.

And as for 2014, we'll communicate that at the Analyst Day.

Mahesh Sanganeria of RBC Capital Markets.

Thank you very much.

I just need a clarification on the contribution to the EPS upside which you just provided.

There is a lot of moving parts on this, a little confusion, and not good at [excel] to doing it fast enough.

So, you have the benefit of gross margin, and then you pointed out then there is tax rate.

And, you said there are operational benefits.

So, can you just break it out by that EPS upside on gross margin, tax and operating efficiencies?

So, the way we broke it out is that it's about $0.40 delta to the midpoint of the guidance.

$0.25 of that is operational, $0.15 is Desert Sunlight.

If you look at the tax rate impact, which is included in the operational, it's less than $0.05, it's in the range of $0.04 to $0.05.

So, if you want to break it out, 20% operational, excluding tax, tax if about $0.04 to $0.05, and then the balance of the $0.15 would be is a favorable revenue mix, primarily driven by Desert Sunlight.

And operational, are we talking about in the operating expenses line or the gross margin line?

Both the same gross margin.

So, again, it's somewhat the favorable benefit on our cost per watt, but it's also a significant savings and benefits on our project cost plan.

So, we have a number of material projects.

We've been successful in improving overall savings productivity through our supply chain, through labor productivity, through other initiatives that are driving down the cost of delivering those projects.

Jagadish Iyer of Piper Jaffray.

Thanks for taking my question.

Just a question on, you guys have said about long-term gross margins to be 15% to 20% at your Analyst Day potentially for next year.

So, given that you've had all these efficiency improvements, and how you have your projects, I just wanted to find out the puts and takes of that 15% to 20% longer term?

Thank you.

Yes, I mean, that's one of the reasons why we want to get to a point where we can have another Analyst Day.

We'll, again, do that in early March.

We'll go into a lot more detail in that regard.

Let's just say this, we're very pleased with progress that we've made so far, on all fronts.

And we'll give you additional insight to some of those opportunities and progress that we've made as we talk to you in early March.

Colin Rusch of Northland Capital Markets.

Great, thanks so much.

So, can you give us a sense of why revenue would be coming down with incremental recognition of Desert Sunlight?

It looks likes that's a higher margin business for you, and a higher [SG] business.

And, can give us a sense of the magnitude of projects that are on the fence for recognition either in 2013 or 2014?

Yes, so there's in the range of hundreds of millions of dollars, we'll just put it that way, that are tied up with projects that have revenue recognition that is linked to commercial operation.

There's lots of other conditions.

And so, we are uncertain that we'll be able to achieve all of those elements over the next 60 days, basically.

So, what we wanted to do is to be balanced, is the best way to say it, with what we provide in guidance.

We also did give you indication, though, if things break the right way that we potentially see the revenue recognized in 2013.

But, we didn't want to be sticking our head out the window a little bit with 60 days left into the year.

We just didn't feel like it was worth doing that.

We wanted to come with a view that was balanced, and one that we feel comfortable with delivering against.

James Medvedeff of Cowen & Company.

I just wanted to ask a little bit more about the pipeline development.

The numbers that you gave, McCoy, Moapa and a couple of others, added up to a little over 600 million megawatt's, and you're saying that you booked 860 million megawatt's.

Can you tell us what the other big project or group of smaller projects might have been?

There is no one individual project.

That's a large number of individual transactions, including some module-only sales.

But, it's not one or a series that we could point to.

That's a large number of much smaller transactions that contributes to that number.

Ladies and gentlemen, that does conclude today's First Solar Q3 2013 financial results conference call.

We do appreciate your participation today.