SunPower Corporation (SPWR) 2012 Q3 法說會逐字稿

Good afternoon, and welcome to the SunPower Corporation's third-quarter 2012 results conference call.

Today's call is being recorded.

If you have any objections, please disconnect at this time.

I would now like to turn the call over to your host, Mr. Bob Okunski, Senior Director of Investor Relations at SunPower Corporation.

Sir, you may begin.

Thank you, Ed.

I would like to welcome everyone to our third-quarter 2012 earnings conference call.

On the call today, we will start off with an operating view from Tom Werner, our CEO.

Followed by Chuck Boynton, our CFO, who will review our third-quarter 2012 financial results.

Tom will then discuss our guidance for the balance of the year, before opening up the call to questions.

As a reminder, a replay of this call will be available later today on the Investor Relations page of our website.

During today's call, we will make forward-looking statements that are subject to various risks and uncertainties, that are described in our 2011 10-K, our quarterly reports on Form 10-Q, as well as in today's press release.

Please see those documents for additional information regarding those factors that may impact these forward-looking statements.

To enhance this call, we have also posted a set of PowerPoint slides, which we will reference during this call, on the Events and Presentations page of our Investor Relations web site.

In the same location, we have posted a supplemental data sheet detailing some of our historical metrics.

On slide 2 of our PowerPoint presentation, you will find our Safe Harbor statement.

Our prepared remarks will run approximately 25 minutes and then we will have a brief question-and-answer session.

With that, I would like to turn the call over to Tom Werner, CEO of SunPower, who will begin on slide 3. Tom?

Thanks, Bob, and thank you for joining us today.

On today's call we will update you on our Q3 operational highlights and strategic position, review our third-quarter financials, and provide our outlook for the balance of the year.

Overall, Q3 was a strong quarter.

Against the backdrop of highly challenging industry conditions, we increased revenue in a number of key markets.

SunPower's ability to add value, both upstream and downstream, enabled us to record our third sequential quarter of mid teens gross margins.

And post another non-GAAP profit for the quarter.

We also strengthened our balance sheet, reducing inventory by more than $40 million.

And exiting Q3 with more than $375 million in cash.

Now, let me provide some specific Q3 operational highlights.

Please turn to slide 4. SunPower's North American power plant business continues to perform very well, driving strong revenue and margin contribution, while providing long-term predictability and visibility.

Execution on our 250-megawatt CVSR project for energy remains on track.

And we achieved an important milestone in September by connecting 22 megawatts to the grid.

To date, we have installed more than 150 megawatts of panels at CVSR.

We are also making significant progress on financing of our first two Southern California Edison Antelope Valley solar projects, totalling 600 megawatts.

We remain confident that we will have financing in place to meet our 2013 construction schedule.

These two projects provide us long-term financial visibility as both CVSR and AVSP together will provide approximately one-third of our revenue each year over the next three years.

We also continue to build our pipeline of new power plant projects.

And recently executed a PPA with PG&E for the 100-megawatt Henrietta project in California.

SunPower continues to win in the utilities scale market, as we bring a unique combination of quality in the field, technology, and balance sheet to the PV power plant business.

In the North American commercial business, we recently dedicated approximately 4 megawatts of systems for the Porterville school district in California, bringing our total megawatts installed in the educational sector to more than 30.

In the North American residential market, we were once again by far the largest lease provider.

For instance, in California, SunPower leases accounted for approximately 40% of all residential PV lease applications in Q3, according to information from CSI.

Over the past year, we have added approximately 13,000 lease customers, bringing our total US customer base to 60,000.

This growth has been driven by a unique combination of attractive customer economics and superior technology.

Both delivered through the industry's largest and most experienced independent dealer network.

Moving on to Europe, Middle East and Africa.

The European market continues to be challenging.

And our performance was impacted by lower volumes in most key markets, as well as declining ASPs.

Our goal is to regain profitability in this region.

And we are implementing a number of strategic initiatives that will enable us to achieve this goal next year.

I want to reiterate that we remain committed to the European market as the long-term fundamentals for solar are strong there.

For example, in France, we were recently awarded 12 projects totalling 33 megawatts.

We expect Germany, Italy and France to remain our core markets in Europe.

In the Middle East and Africa, we are continuing to add resources.

Our efforts are primarily focused on C7 projects that are well-suited for these geographies.

Additionally, we are also starting to monetize our project pipeline in Israel.

In South Africa, we've been notified by the government that financing for two ground mount projects totalling 30 megawatts will be completed in the fourth quarter.

Moving on to Asia-Pacific.

As we mentioned last quarter, SunPower is very well-positioned in Japan by virtue of our superior rooftop product value proposition, and our distribution partnership with Toshiba.

In Q3, our shipment volume into Japan increased 30% sequentially and accounted for more than 10% of our total revenue.

In China and India, we are in discussions to leverage our C7 technology, and expect to close at least one of these opportunities during the next few quarters.

We also made significant progress in expanding our footprint in Australia, as evidenced by our recent strategic investment in Diamond Energy, a privately-owned local renewable electricity provider.

Now let's move to technology.

Please turn to slide 5. SunPower's success stems from our unique technology position.

And we continue to invest in research and development to extend our competitive advantage.

We are ramping production on our next-generation Gen 3 technology mean cell efficiency of up to 24%, the highest in the industry.

Tool installation is occurring, as we speak.

And we expect to produce close to 100 megawatts of Gen 3 cells next year.

We will utilize our Gen 3 cells in SunPower's 21% and 22% efficient panels, as well as in our C7 concentrator product, where cell efficiency is critically important.

We believe that our customers will be very impressed with not only the higher efficiency of Gen 3 products, but also by their exceptional energy delivery.

We recently installed a 1.5-megawatt Gen 3 Oasis power block at our 25-megawatt MID project.

The side-by-side performance data coming from this site confirms that the Gen 3 power block is delivering significantly higher energy than our Gen 2 technology.

This is particularly notable, considering that Gen 2 technology is already the industry gold standard in terms of energy delivery.

The final area of technology is our step reduction program.

The manufacturing team has executed well, as all of our lines at Fab 2 have now been retrofitted to run the new process.

The rollout of this program, which reduces our line process steps by 15%, was accomplished a full quarter ahead of schedule, with yields in equipment efficiency above plan.

We will start converting Fab 3 over to the new process next year.

Now, let me turn toward the topic of cost.

You may have noticed that during Q3, we announced the industry's first 25-year comprehensive product and performance warranty.

SunPower's ability to offer a full 25-year warranty, 15 to 20 years longer than our competitors, is directly related to our superior cell and panel technology that is extremely resistant to cracking, corrosion, and resultant output degradation.

As we mentioned on our last earnings call, we have been thoroughly reviewing over 3 million panel years of field operating data to corroborate this remarkable long-term panel reliability characteristics that we first identified in our reliability labs.

The importance of this new performance warranty is that it provides our customer with another source of tangible, measurable lifecycle value.

Please turn to slide 6, which illustrates three key sources of customer value, enabled by our panel technology platform for a representative residential system.

Let's start at the upper left-hand side of the chart.

This is the panel ASP our customers pay on a total systems basis.

Moving one step to the right, we see the efficiency benefit our customers capture due to reduced balancing system and installation costs.

This benefit varies for different segments, but can easily range between $0.20 and $0.30 per watt for a typical residential or light commercial system.

Moving another step to the right, we see the benefit of increased daily energy production.

On average, SunPower panels deliver about 7% more energy than conventional silicon technology.

This benefit leverages the entire installed system cost.

This example uses $4.50 per watt for the total system cost, so the energy benefit is a little over $0.25 per watt.

Finally, the next step to the right-hand side of the chart shows the value of lower degradation, which is a result of our unique copper-based back-contact architecture.

Over a 25-year system life, this reduced degradation will account for around 6% higher total delivered energy.

On a discounted basis, this is worth another $0.15 per watt for the case in question, and backed by our improved panel warranty.

This example shows clearly why our customers are willing to pay a significant premium for SunPower panels compared to conventional panels on a total system basis.

In this case, a total of between $0.60 and $0.70 per watt.

To put it another way, while our customers pay a premium on a watt-to-peak basis, the advantages I just mentioned lead to our customers actually paying less for energy over the life of the system.

As we speak about our leasing business later in the call, keep in mind that SunPower fully monetizes these energy and reliability benefits by virtue of the lease structure.

Now, let me briefly cover some specifics on cost.

For the quarter, we met our blended cost per watt targets.

And remain confident in our cost-down road map that calls for us to exist 2012 with a minimum 25% year-on-year cost reduction.

We will accomplish this through higher yields, improved overall equipment effectiveness, and lower raw material costs.

For example, our Q3 silicon utilization was 4.8 grams per watt, the first time we've achieved poly utilization below 5 grams per watt on a quarterly basis.

Finally, as we announced, we are further restructuring our manufacturing operations in the Philippines to reduce costs and improve operational efficiency.

This will result in the temporary idling of six of our 12 lines in Fab 2 and reduce Q4 utilization to approximately 60%.

We took the painful step of reducing our head count by 900 employees as a result of this restructuring, with a significant majority of these reductions in the Philippines.

Through this reorganization, we believe we will reduce inventory, improve efficiency, and further improve our competitive position during the industry's transition to a long-term sustainable market.

Lastly, we prudently managed our balance sheet and liquidity needs during the quarter.

Please turn to slide 7. For the quarter, cash and cash equivalents increased to $377 million.

On the working capital side, we successfully reduced inventory by approximately 10% while meeting all of our project milestones.

With the manufacturing and restructuring in the Philippines, we expect further inventory reductions as we go through 2012.

We are also focused on managing our operating expenses, given current industry conditions, and are allocating our CapEx dollars to those projects offering the greatest returns.

With that, I would like to turn the call over to Chuck for a more detailed review of our financial performance.

Chuck?

Thank you, Tom.

Good afternoon.

And please turn to slide 8. Today, I will discuss two key themes.

First, I will talk about our operational performance for the quarter.

And then provide some color on what is driving the success of our leasing business.

As Tom mentioned, our financial performance in the quarter was solid, as we leveraged our diversified downstream model and cost reduction strategies to achieve better-than-forecasted results.

Our non-GAAP revenue for Q3 was $607 million compared to $651 million in Q2 2012.

We saw outperformance in North America and Japanese markets.

But this strength was more than offset by the continued weakness in Europe.

Non-GAAP revenue in the third quarter includes approximately $231 million from the continued construction of CVSR.

And $11 million from our 25-megawatt McHenry solar farm for the Modesto irrigation district.

The difference between GAAP and non-GAAP revenue is due to GAAP-based real estate accounting requirements.

Whereas non-GAAP revenue follows the IFRS convention for revenue recognition.

For the third quarter, GAAP revenue exceeded non-GAAP revenue by approximately $42 million.

Global ASP declines in the quarter were in line with our expectations at less than 10%.

And we maintained our meaningful pricing premium across all geographies.

Cell production in Q3 was 227 megawatts, down approximately 10% versus Q2 '12, as we managed our manufacturing output to match current industry conditions and focused on reducing inventory levels.

Megawatts recognized for the quarter totaled 210 megawatts, also down 10% sequentially, as we were impacted by further weakness in our European rooftop business, primarily Germany and Italy.

Due to our flexible downstream model, we were able to reallocate a number of megawatts to stronger markets, such as the US and Japan.

But could not offset the current weak conditions in this region.

As we mentioned on prior calls, we are focused on our cost reduction initiatives and have a three-point plan covering our full product, which includes BOS, operating expenses, and capital expenditures.

Our efforts are starting to bear fruit and show in our results this quarter.

Our non-GAAP global gross margin for the quarter was 14.1% and above our plan.

Our strong gross margin performance for the quarter was attributable to the continued execution in our North American projects business, as well as further share gains in the Japanese market.

Now, let me spend some time on our regional performance.

In Q3, non-GAAP North America revenue was up slightly to $460 million sequentially.

Accounting for 76% of total revenue with a non-GAAP gross margin of 20.2%.

Our CVSR project remains on plan.

And in US residential, our leasing product continues to see strong demand.

We remain the leader in residential in California in both cash and lease sales.

In EMEA, non-GAAP revenue was $89 million, down significantly from last quarter, as overall volumes declined due to reduced demand and ASP pressure.

Our two largest markets in Europe, Germany and Italy, declined to 6% of total revenue versus 11% last quarter.

Non-GAAP gross margin in Europe was a negative 23%.

This margin includes inventory and production charges of $21 million.

Without those charges, margins for the quarter would have been slightly positive.

We are committed to the EU market and firmly believe that our technology advantages offer us a strong economic value proposition in Germany, Italy and France.

In APAC, revenue was $58 million, up 20% sequentially, as we continue to see strong demand dynamics in Japan with the new subsidy adoption.

We are well-positioned to continue our growth in this market through our extended relationship with Toshiba, as our high-efficiency technology is perfectly suited for the Japanese rooftop market.

Non-GAAP gross margin for the quarter in APAC was 21.4%.

Non-GAAP operating expenses for the third quarter was $75 million, which was an increase from Q2, primarily driven by an $8 million bad debt reversal in the second quarter.

We ended the quarter with a non-GAAP loss before tax of $1 million.

And recorded a non-GAAP tax benefit of $3.9 million.

Overall, our non-GAAP earnings per share for the quarter of $0.03 was better than plan.

On a GAAP basis, loss per share was $0.41, though a GAAP loss per share includes approximately $60 million in one-time charges related to goodwill and intangibles.

Excluding these charges, GAAP loss per share was also better than our plan.

Our non-GAAP weighted average diluted shares outstanding were 119.2 million.

As Tom already discussed, we prudently managed our balance sheet and working capital during the quarter, as we increased our cash position and reduced inventory levels by more than $40 million sequentially.

Our cash conversion cycle remained low, at 43 days.

Looking forward, our focus remains on cash management, reducing our expenses, and appropriately managing our inventory, given current industry dynamics.

I would now like to spend my remaining time discussing our value proposition related to our leasing product.

Please turn to slide 9. For context, North American residential is slightly more than 10% of our revenue, and leasing is a subset of that business.

We are providing this additional information on this call, as it is relatively new to our investors and is fairly complex.

As you know, SunPower has been serving the residential market segment since 2005.

And remains the US residential market leader with more than 330 megawatts installed to date.

With approximately 60,000 US customers served by 500 authorized dealers across 45 states, and a more than 30% market share in California, we have the largest and most established market footprint in the industry.

Executing on our long-term strategy of end-market diversification, we have a low-cost, flexible delivery model that enables us to rapidly roll out new products and services to our dealer partners and end customers.

Additionally, the combination of our upstream manufacturing and standardized racking, inverters and monitoring provides a closed-loop innovation cycle that provides our residential customers with the best-in-class solar solution that is competitive with current electricity rates.

This strong US residential infrastructure is why we are the leader in US residential leasing.

Let me touch on what we see are four key attributes for success in the residential leasing business.

And why SunPower has a distinct competitive advantage in this segment.

They are system performance and reliability, scale, access to capital, and brand.

System performance and reliability is a key factor in a solar lease.

Leasing is really an LCOE, or cents per kilowatt hour-based decision.

Put another way, the consumer is not leasing a solar system, but buying energy over a period of time for a set price.

Therefore, reliability and degradation rates directly impact the customers' economics.

We offer the industry's highest efficiency solar systems, backed with the longest and most comprehensive warranty.

Second, to be successful in the residential leasing business, you need scale.

Scale drives operating efficiencies.

The capability to rapidly adjust to changing market conditions and the ability to spread costs across a larger footprint.

As I mentioned earlier, we have the largest solar footprint in the US.

And that scale provided the leverage to go from launch of leasing to number one market share in the course of one year.

Third, financing and access to capital are also key components in residential lease, as they have a direct impact on margins.

A strong balance sheet, established technology, and bankability all play a key role in financing, as these attributes reduce risk to financiers.

A lower financial risk level translates to a lower cost of capital and a higher margin to SunPower.

We are starting to see larger pools of capital being allocated to the leasing business.

And expect to secure additional financing capacity in the coming quarters to support our growth.

We also expect some of the early entrants in the solar leasing market to start securitizing their residential assets over the next few quarters.

Remember, in Q4 2010, we were the first company to securitize solar projects.

We expect to securitize solar leases when our pool is large enough to support this capability in mid to late next year.

Finally, brand.

As you know, our success in the residential business is based on our ability to offer a superior customer experience compared to our competitors.

And a company that is at heart a technology company.

This advantage is easily seen in the pricing premium we receive for our systems on both cash and lease.

We work very closely with our dealers to instill best practices.

And with lease, we have a more direct engagement opportunity to drive SunPower loyalty, launch future products, and activate referrals.

Before turning the call back over to Tom for guidance, we have also posted a slide on a number of important metrics related to our residential business.

Particularly our leasing business on slide 11.

As many of you will use this data to model our leasing business going forward, I would like to provide some additional details that we hope you'll find useful.

This information provided is solely related to our residential cash and residential leasing business.

We exclude any impact from our commercial business in this data set.

As you can see, we book both operating and capital leases.

Over time, this mix will change slightly.

Residential lease customers include all customers who have signed a lease, are in the process of getting a system installed, or already have a system connected.

Each installation is counted as a unique system from a customer count perspective.

Including lease, our total US customer base is 60,000 customers, with more than 100,000 globally.

Leasing remains a small part of our overall business at present, but with the 100 megawatts booked to date, it's growing rapidly and will account for approximately 10% of our megawatts shipped this year.

In summary, our strong Q3 performance reflects the execution of our strategic approach to the market and ability to leverage our technology advantage.

We are focused on our cost control programs and prudent balance sheet management.

With the support from Total, we are confident in our ability to drive profitable long-term growth at SunPower.

With that, I'll turn the call back to Tom.

Thanks, Chuck.

I would now like to turn to our guidance for the fourth-quarter and fiscal year 2012.

For Q4 2012, we expect to recognize approximately 200 to 250 megawatts in revenue, which reflects the temporary idling of six lines in the Philippines for the quarter.

We see non-GAAP Q4 revenues in the range of $700 million to $900 million.

With non-GAAP gross margins projected to be in the range of 14% to 16%.

On a GAAP basis, we expect revenue of $650 million to $850 million.

And a gross margin of 2% to 4%.

Non-GAAP earnings per share is projected to be in the range of $0.00 to $0.25.

With GAAP loss per share of $0.75 to $1.

The large revenue in EPS ranges for the fourth quarter reflect the impact of a number of large-scale projects that may close in the quarter.

Capital expenditures in the fourth quarter are expected to be in the range of $30 million to $40 million.

For fiscal year 2012, we expect non-GAAP total revenue of $2.6 billion to $2.8 billion.

Volume recognized to be in the range of 840 megawatts to 890 megawatts, again reflecting the restructuring in our Philippines operations.

And capital expenditures of $115 million to $125 million.

In summary, SunPower is delivering positive financial results, despite the challenging industry conditions.

We are well-positioned to benefit from our long-term strategy of technology leadership, demonstrated downstream value add, solid balance sheet management, and continued support from Total.

We'll now open the call to questions.

In addition to Chuck, we also have Howard Wenger, President of Regions, and Bob Okunski, our Senior Director of Investor Relations.

(Operator Instructions)

Satya Kumar.

This is Brandon Heiken with Credit Suisse speaking on behalf of Satya Kumar.

I was wondering if you could talk about the economics of the residential leases.

I really thank you for sharing the megawatt info there.

I was wondering if you could talk about the value created for SunPower and your own plans to own versus monetize those residential leases?

Thanks, Brandon.

The economics to SunPower are compelling on lease.

As we mentioned in last quarter's call, though actual gross margin percent is lower than average, but effectively, the margin per watt is higher.

Capital leases, as we mentioned, are booked up front and operating leases are over time, but the cash flows are relatively similar for both.

Chris Kovaks.

Can you maybe go into a bit more detail?

Obviously margins in Europe are a tough spot right now.

You're doing a lot of efficiency improvements across the Company as a whole, particularly in the Philippines and such with the capacity rationalization.

But what are some of the more specific things that are particular to Europe and lets you get back to a breakeven or above gross margin there?

This is Tom.

In Europe, as you've noticed, volumes have decreased.

The actions we're taking to improve things are to focus on three specific countries -- Germany, Italy, and France, as our core countries.

And in those countries, we are customizing our offering to those particular markets.

We're being more aggressive on price than we were in the first half of the year, which we can afford to do because our costs are coming down faster.

And as the policies change in those three markets that are unique to each of those markets, we can customize the offering and work more closely, which is predominantly through our dealer channel in those three markets.

So I would say in Europe proper, focus is more aggressive pricing and customizing our offering to those markets.

Okay.

Can I ask one quick follow-up?

I just wanted any commentary on performance of the C7 deployments you already have in the field.

We've built a couple demo systems and we're just now deploying our first production system.

Actually, we've built three demo systems so far.

A demo system is about 100 kilowatts.

And then we're building our first megawatt soon, to build six more megawatts in Arizona.

All of the systems are meeting or beating expectations and as we scale up for the six megawatts that we're building during the first half of next year, our cost targets are being met, as well.

So, our view on C7 is a really strong competitive weapon, as has been proved given the experience we've had in the last six months.

Okay.

Thank you, guys.

Ahmar Zaman.

Piper Jaffray.

Tom and team, great execution on the quarter.

Congratulations on that.

A question around the US market and also Europe, given the challenges you're facing in the European market.

I wanted to hear from you, given all these anti-dumping tariff discussions and investigations going on in these markets, how is this effecting your business?

Are you taking more share because of this in the European market?

Or potentially see yourself taking more share or benefiting in some way from this?

How should we think about this?

Okay, let me say a few words about tariffs in the markets.

And then Howard, maybe you can expand a little bit on your views on Europe and just where we expect to be strong.

What I would say to you is the impact of tariffs in the US has been what I would consider to be fairly minimal, or at least not noticeable in terms of pricing.

The European situation, I think that there's clearly a movement made in Europe or positioning to be able to produce in Europe.

Fortunately, we're positioned really well, having significant production already in Europe.

So we think we're future-proofed in terms of where Europe is going, in terms of tariffs.

And we see competitors moving relatively quickly to establish production in Europe, as well.

So it would be a little hard to predict.

And we're certainly not counting on the feed-in tariffs giving us a significant advantage.

Just a couple more comments on America and then, Howard, maybe you can say a few words.

The American market is a relatively complex and it varies by channel.

It's different for residential, commercial and utility.

Since this is our home market, this is where we're most deeply penetrated in the downstream.

And as we've mentioned in our remarks, we're number one in residential leasing.

We're usually in the top one or two in commercial, which is a PPA-driven business.

And then we're a self developer in the UPP business.

So I think those, the downstream integration, is really the factor that makes the big difference in terms of our competitive position.

Howard, do you want to say a few words about Europe?

Sure, Tom.

So, as Tom mentioned, we're in very good position to rationalize and grow our European business.

A, because it's shifted from ground systems to roof systems, predominantly.

So it's become a predominantly distributed market generation.

And, as you know, our product plays extremely well for roof tops.

And then one of the things that we've demonstrated that we can do well is leverage our dealer channel.

And we've shown that in the United States.

We have a very robust dealer network in Europe, with about four times the number of dealers that we have in the US.

But one thing that we're not doing in Europe right at the moment is delivering a solution to the end customer, like we're doing in the US with the leasing product.

So you can anticipate that we're going to be looking at financial products and delivering more of a solution to the end customer through our dealer network there that we can leverage.

And that, of course, will improve economics to the Company and to the end customer.

So, that's a big focus for us in Europe.

Great, thanks.

And if I may have a follow-up on the Australian market.

Could you give us an update on your exposure and what you're seeing in the Australian market?

It seems to be growing pretty rapidly.

Yes, thanks for the question about Australia, because we made an investment in Australia in Diamond Energy, which is a gentailer.

This is a move in Australia that, as you know, is a competitive retail market.

This is, I consider it the next step in terms of downstream integration and it allows us to offer our customers essentially on-bill financing.

It allows us to sell energy directly to the customer, much like lease does in America.

So as we've said over and over, our customers buy energy very much overtly now.

In the case of Australia, though, we're now what is known as a gentailer.

So, while the level of investment isn't necessarily material, the strategy is material.

We think the upside potential in Australia is rather significant and the concepts that we develop in Europe, we think we can develop elsewhere.

So, competitive retail market that is growing well, but it has a structure unique and not common in other parts of the world.

Great.

Thank you.

[James Medoff].

Cowen and Company.

Great quarter.

Thanks.

Good job.

A couple here.

Can you discuss your expense targets?

You mentioned on the call that's one of the strategic drives.

Could you give a little more color to what that might look like next year?

Sure.

I'll comment briefly and give it to Chuck.

As Chuck mentioned, we're focused on reduction of module costs, balancing systems costs, and operating and capital expenditures.

So, all three of those we have targets for '12 and '13.

Your question is specifically on the operating expense side.

Yes, thanks, James.

Operating expenses, we think will decline 5%-ish over the next few quarters.

And we would expect longer-term to be modeled at approximately 10% of total revenue.

Okay, thanks.

What about, on the last call, you gave a $0.70 to $0.72 cost per watt for what would have been second half of 2012.

What trajectory do you see for that into next year?

The number you're referring to is efficiency adjusted.

Yes.

We have not guided -- and I appreciate your using that number because it's the competitive number.

We have not guided a new number, but I'll tell you that we think it's that number or heading further south.

So, we'll comment on that further on the next call, but think of that number as the high end of where we think we're going to be next year.

Okay.

And one more, if I could.

The gross margin looks like it holds up pretty well in Q4, maybe even expands a little, from Q3 despite the six shut down lines or idled lines.

Is that happening early in the quarter or late in the quarter?

Or does the gross margin guidance exclude any under-utilization charge?

We include the inventory and line utilization in our numbers.

We have traditionally, and we continue to do so.

I think that separates us from quite a few of the others probably.

So, the answer to your question is it those six lines?

Up to six lines will be out of production for all of Q4 and absorption of that overhead or that under-absorption is built into the numbers that we've guided to.

Okay, great.

Thank you.

[Aditya Stagdahari]

Two questions, please.

First one on Japan.

Tom, could you talk a bit more about the competitive landscape in Japan?

And how should we think about your Japanese business over the next couple of quarters?

Howard, I'll say a few things, and if you'd like to jump in, just do so after I'm done.

The Japanese market is largely a residential market.

After Fukushima, there was development of a ground-mount market there that we don't think will be a long-term part of the business.

It might be, but we're not counting on it.

We think there's largely a rooftop business guide.

The market has accelerated rather dramatically with the introduction of their feed-in tariff and competition is fierce, but it's a market that really values high technology and high quality.

And, of course, it's space constrained, so it's ideally suited for us.

Our partnership with Toshiba is working great, because it's a combination of two quality brands that are positioned very well in the market.

So, rooftop, accelerating rapidly because of the feed-in tariff structure and really well-suited to the strength of our Company.

Howard, do you want to add anything?

Just a couple of words, Tom.

Thanks.

The partnerships are really important in Japan with well-known brands.

The consumers are extremely brand conscious.

We think that -- we started over six years ago in developing relationships in Japan and the one we have with Toshiba is very well known.

The access to the market is extremely diffused.

Meaning there are many points of delivery through a lot of installers and dealers, very small ones.

So, there is a very structured distribution chain there in Japan that maps back to these well-known brands.

We think we have a very unique product in the marketplace, extremely differentiated.

It's highly valued by the consumers in Japan for its efficiency, its look, its reliability, its quality.

Those are the things that resonate.

So, we're very pleased on how things are going so far.

Great.

My second question was on the US market.

Could you give us an update on the landscape of the financing market in the US for large-scale projects?

And then, should we expect to see better terms and conditions as you look to close financing on the Antelope Valley project?

Unfortunately, you were breaking up a little.

I think I got it and I'll answer it and feel free to clarify your question, if I don't get it 100%.

The financing market for large-scale systems varies considerably by the quality of the project.

It's maturing, I would say.

So, a project that's perfected or close to perfected, like Antelope Valley, is in hot demand.

Then you can have projects that only have a land position and then the quality of that land position can vary considerably, in which case I think there's still a line of interest, but far less competitive.

The scale of Antelope Valley, I think, is unique.

I think as we go forward, we'll see less of those very large-scale projects and we're going to see more projects like Henrietta, which fits much better into the financing environment.

It enlarges the number of investors who can own the project themselves.

I would say it's a --.

The other factor that I want to mention is the maturity of solar technology at a large-scale is improving dramatically because of the projects we're building.

There's another solar company that's building some large-scale projects, as well.

Investors are getting experience with large-scale projects and a great deal of comfort with the speed and execution of those projects.

So, very competitive and increasingly so, would be my summary.

Thank you.

Thanks for the update.

You bet.

Thank you all for joining us today.

We had a strong quarter.

Our strategy of having a diverse go-to-market, vertically integrated go-to-market approach with differentiated technology, both module and balance of system, while lowering costs very aggressively.

And the strength of our balance sheet, including Total, positions us excellently in Q3 and for the future.

We really appreciate your time.

At this time, that will conclude today's conference.

You may disconnect.

And thank you for your attendance.