SunPower Corporation (SPWR) 2013 Q3 法說會逐字稿

Good afternoon, and welcome to SunPower Corporation's third-quarter 2013 results conference call.

(Operator Instructions)

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

Sir, you may begin.

Thank you, Sheila.

I would like to welcome everyone to our third-quarter 2013 earnings conference call.

On the call today, we will start off with an operational review from Tom Werner, our CEO, followed by Chuck Boynton, our CFO, who will review our third-quarter 2013 financial results.

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 2012 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 posted a set of PowerPoint slides, which we will reference during the call on the event and presentations page of our investor relations website.

In the same location, we 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.

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

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

SunPower delivered strong Q3 results, exceeding our financial forecast across the board.

Our performance reflects continued robust worldwide demand for our high-efficiency distributed generation solutions, and solid execution on our large power plant projects.

North America once again drove our overall results, although we saw further improvement in our EMEA business, which is benefiting from a strengthening market environment, and we also had another strong shipment quarter into Japan.

Due to the strong and growing worldwide demand for our products and solutions, we have decided to expand our manufacturing capacity by 25%, or around 350 megawatts.

I will provide further detail on our expansion plans later in my remarks.

Please turn to slide 4. Our Solar Star and CVSR projects remain on plan, with revenue and margin from both projects accounting for the majority of our power plant business for the quarter.

Outside of America, we are gaining increasing traction in our power plant business, and recently-announced projects in Japan and Chile.

Our cooperation with Total in new markets is going very well, and we are working together on a pipeline of projects in over 30 countries, where Total has a strong market presence.

In our distributed generation business, demands for dealer -- for our US residential lease remains solid, and we recently added another $155 million in new financing from two partners during Q3.

Total lease capacity now exceeds $850 million.

Chuck will provide a detailed update on lease in his section.

We increased shipments into EMEA during Q3, driven by strong demand for our new X-series 21% efficient panel, and delivered increased margins in Asia Pacific, where our product has captured a significant share of the Japanese rooftop market.

We beat our cost targets for both cell and panel in Q3 and ran our factories at 100% utilization.

By switching to diamond wire saw wafers, we reduced silicon consumption to 4.2 grams per watt, a 15% reduction over the last year.

We are now utilizing wafers at or thinner than 135 microns, an industry leading metric, enabled by our [fought back contract cell] architecture.

Finally, we strengthened our balance sheet during Q3, increasing our cash balance to over $740 million.

I will now present a little more detail on the performance by region and channel, starting with our power plant business.

Please turn to slide 5. In North America, construction on the 579 megawatt Solar Star project for MidAmerican remains on track, and we expect to start energizing phase one by the end of the year.

We continue to see benefits associated with scaling our standardized Oasis power plant block, with costs on Solar Star coming in below target during Q3.

Panel installation in CVSR is complete, and we expect formal commercial start up this quarter.

In Asia Pacific, we are seeing increasing success in the power plant market, and recently signed a 69 megawatt supply agreement in Japan for this segment.

This agreement brings our total grand amount backlog to more than 90 megawatts, and further broadens our market position there.

We are partnering with Total in a number of emerging markets, such as the Middle East, Africa, and South America.

For example, our recently announced 70 megawatt project in Chile.

This groundbreaking project is the world's largest merchant PV power plant, meaning that electricity will be sold on the spot market, rather than through a long-term power purchase agreement.

We believe that this project represents an important milestone, proving that solar power can provide wholesale power at prices competitive with conventional generation technologies.

70% of the $200 million project will be financed through nonrecourse project debt from Overseas Private Investment Corporation, or OPIC, US governments development finance institution, including an equity investment by Total.

Construction is scheduled to begin within a few months, in early 2014.

Now let me transition to our distributed generation business.

Please turn to slide 6. In the North American residential market, demand for our rooftop solutions remains very strong.

We offer an increasingly broad selection of financing options, including cash, loan, or lease, in order to meet the requirements of our diverse customer base.

With another $155 million in lease capacity financing closed during Q3, we have now raised more than $850 million in lease financing over the past two years.

With additional facilities expected to close soon, we will continue to scale our lease customer base.

We also recently announced a partnership with Digital Federal Credit Union for up to $100 million in loan capacity nationwide.

Expect to see increased loan volume as a result.

On the policy front, we were pleased with the passage of AB 327 in California, as well as the decision of the Arizona Corporation Commission staff related to net metering.

These decisions support our belief that residential rooftop solar will continue to be an important element in the long-term growth of the US distributed generation business.

We also had a strong quarter in our North American commercial channel where our pipeline now exceeds $1 billion.

In EMEA, industry conditions continue to improve, and pricing remains stable.

As I mentioned earlier, demand for our new X-series panel is very high, and we now have a two-quarter backlog for this product.

Similar to our approach in the US, we are finalizing plans for third-party financing vehicles in Europe.

While the consumer incentives and tax structures are quite different in Europe, we expect that our third-party finance offers will allows us to address new market segments and customers.

We initiated our first shipments related to the French tenders that we won earlier this year, and expect additional project wins from our currently-submitted bids in the latest tender round.

Finally, Japan remains a very strong distributed generation market for us.

Shipments accounted for approximately 26% of our volume in Q3, up 130% year-over-year.

We are also utilizing our industry-leading technology to customize products specifically for the Japanese rooftop market.

We expect to begin shipping our first product this quarter.

Before turning the call over to chuck to review the financials, I would like to spend a few minutes on our future capacity plans.

Please turn to slide 7.

As we mentioned previously on this call, in our earnings press release earlier today, we have made the strategic decision to expand our cell manufacturing capacity to capitalize on the improving economics of our solar technology, and to enable further penetration of key global markets.

Fab 4, planned for the Philippines, will increase our capacity by 350 megawatts, or more than 25% of current total capacity.

We expect first silicon in the first half of 2015 with full total build out by the end of that year.

We are currently in discussions with the Philippine government related to the facility, and expect a favorable outcome of these talks prior to our first tool orders.

Our preference to expand in the Philippines is driven by a close proximity of our advanced engineering development group in fab 2, and by our ability to leverage those resources to rapidly scale our newest technology.

With continuous improvements to our Maxeon Gen III cell technology, we plan to extend our world record module efficiency.

Our module technology gives us long-term competitive advantage, because it delivers the highest energy production with unmatched reliability, affirmed by four different external testing agencies.

CapEx for the fab will be between $185 million and $230 million, and we will fund this expansion through internal cash generation.

This plan positions us well for strong growth in 2015 and 2016, as we ramp to more than 1.8 gigawatts of annual capacity.

While fab 4 is being built, we plan to increase our existing fab capacity for 2014, by about 10%, to more than 1.3 gigawatts, as can be seen in the slide.

With that, I would like to turn the call over to Chuck to review the financials.

Chuck?

Thanks, Tom.

Good afternoon, and please turn to slide 8.

We posted another strong quarter of results in Q3, as we executed well across all geographies and end segments.

For the quarter, revenue, margin, and EPS all came in better than our plan.

Non-GAAP gross margins improved 500 basis points year-over-year, with net income increasing significantly, compared to last year.

In addition, we prudently managed our operating expenses, strengthened our balance sheet, and drove a quarter of strong cash flow.

Overall, execution on our power plant projects, further expansion of our global distributed generation market footprint, and lower manufacturing costs enabled us to exceed our forecasts.

Moving on to the P&L, our non-GAAP revenue for Q3 was $619 million, compared to $607 million last year, and better that our forecast.

Revenue in the third quarter includes revenue from CVSR and Solar Star of $235 million, on a non-GAAP basis, and $270 million on a GAAP basis.

Cell production in Q3 was 313 megawatts, up more than 5% sequentially, as our fabs are fully utilized during the quarter.

Megawatts recognized for the quarter totaled 252 megawatts, and we deployed more than 265.

Our non-GAAP gross margin by quarter was 19.1%, and ahead of plan.

Now, let's discuss our regional performance in more detail.

In Q3, non-GAAP North American revenue was $404 million, and better than planned.

North American revenue accounted for 65% of total revenue, with a non-GAAP gross margin of 21.2%.

We recognized 112 megawatts in the quarter, with approximately 60% coming from our power plant business.

We are ramping our installation of Solar Star for MidAmerican and expect to announce full commercial operation of CVSR in the near future.

The balance of our North American business performed well, with strong commercial and public sector revenue.

Demand in residential lease was also strong, as our volumes benefited from our recent financings.

Cash sales in residential accounted for approximately 60% of total residential sales.

In EMEA, non-GAAP revenue was $121 million, up 13% sequentially, as we benefited from strong demand trends, ASP increases in Europe, as well as the construction of our two power plant projects in South Africa.

Megawatts for the quarter were in line with Q2, though, as Tom mentioned earlier.

The limited supply of our X-series panel impacted our total megawatt shipments in this region.

Gross margin was similar to last quarter at 10%, and we are proud of the team and the significant turnaround in this region.

We expect the favorable results to continue in the fourth quarter.

Turning to APAC, revenue was $94 million, and also ahead of plan.

Gross margin for all of APAC was 22%, up almost 600 basis points sequentially, as we benefited from running our factories at full speed, product sales in Asia, and our differentiated premium offering in the Japanese market.

Company-wide non-GAAP operating expenses for the third quarter were $69 million, in line with Q2.

For Q3, EBITDA was $92 million, up 56% year-over-year.

Q3 EBITDA includes $21 million from NCI from our residential lease program.

Non-GAAP diluted earnings per share for the quarter was $0.44, and GAAP earnings per share was $0.73.

GAAP earnings per share for the quarter reflects a one time non-cash $52 million gain, related to a contract termination.

This gain is excluded from our non-GAAP results.

Non-GAAP weighted average diluted shares outstanding for the quarter were $133 million, and reflects the impact of the increase in our share price, as we calculated our outstanding warrants and unvested stock awards.

The GAAP share count reflects the potential conversion of our two stock settled converts under the if-converted method.

We expect our non-GAAP weighted average shares for Q4 to be in the range of 147 million to 157 million.

For GAAP shares, we expect Q4 to be 121 million to 149 million.

With variability in our share count ranges as a function of our increased profitability, as well as our share price, in essence, the economic volume of our outstanding warrants and converts has increased significantly over the past, due to our performance.

For 2014, we expect our share count to be in line with our Q4 ranges.

In Q3, we recognized $21 million of NCI on the P&L, and as I discussed in detail during our previous earnings calls, our residential lease ITC financings provide a P&L benefit as shown in our NCI line.

This is effectively the gain we recognized by transferring the tax attributes to our tax equity partners.

In other types of sale transactions, this benefit shows up as revenue or a reduction of COGS.

In Q4, we expect our NCI income to be approximately $9 million.

Please turn to slide 9. We exited Q3 with a strong balance sheet, as we increased our cash position by more than $160 million, and generated $160 million in free cash flow.

Of the $160 million, $100 million was a sale of a short-term investment, making the effective free cash flow $60 million.

We explained in prior calls that we expected to generate $100 million to $200 million in free cash flow for the year.

We are happy to announce that we have achieved this goal one quarter ahead of plan.

Including our undrawn, $250 million revolver, we have $1 billion in liquidity to fund the growth of our business.

As you can see, we prudently managed our working capital.

During the quarter, we built modest inventory for the ramp at Solar Star, we were pleased to see DSOs decline to 56 days, with a cash conversion cycle of 14 days.

Please turn to slide 10.

Q3 was another great quarter for our DG business.

Globally, SunPower deployed 134 megawatts of residential products, including 56 from APAC, 33 from Europe, and 45 from North America.

In North America, we are balancing our lease and cash business based on customer economics and available lease financing capacity, which remains constrained.

As of the end of Q3, we reached 134 megawatts of cumulative North America leases deployed, serving approximately 20,000 customers, with net aggregate contracted payments exceeding $585 million.

We are also pleased to announce $155 million in financing capacity, with two financial partners.

And similar to last quarter, one new investor, and one repeat investor.

In addition, we closed $100 million of residential loan financing capacity.

These financings position us well for Q4, and we expect to close additional capacity soon.

I would now like to spend a few minutes providing additional detail related to our leasing business.

Please turn to slide 11.

As I mentioned, our leasing results continue to be strong.

The chart on the left shows our revenue over the last five quarters.

You will note that there can be variability related to revenue recognition, due when the leases are placed in service, as well as the lease type.

The individual factors of each lease determine if it's a capital or operating lease.

A capital lease provides up front revenue recognition, whereas an operating lease is recognized over 20 years.

In Q3, approximately one-third were capital leases, with the balance being operating leases.

Revenue growth in this channel has been very robust.

For example, year-over-year, our residential revenue has more than doubled, while bookings have increased by 60%.

For the third quarter, revenue for our residential and commercial ESP businesses was $35 million.

Furthermore, this business generated approximately $23 million of pretax net income, including interest, OpEx absorption, and the NCI benefit of $21 million.

Consistent with the growth in megawatts booked, we are also seeing a corresponding rise in contracted payments.

Not only do we see this as a solid rapidly growing revenue channel, it's also driving meaningful cash flow and net income.

In closing, our year to date performance reflects the unique advantage of our industry leading technology and flexible downstream model.

With our fab expansion and vertically integrated model, we are well positioned for long-term profitable growth.

With that, I will turn the call back to Tom.

Thanks, Chuck.

I would now like to discuss some of the highlights of our guidance for the fourth quarter, as well as our improved 2013 earnings outlook.

Please turn to slide 12.

For Q4 2013, we expect to recognize revenue on approximately 300 to 330 megawatts, with full-year megawatt recognized in the range of 1 to 1.03 gigawatts.

On a non-GAAP basis, we expect Q4 revenue of $675 million to $725 million, with full-year revenue between $2.52 billion and $2.57 billion.

For Q4, we see non-GAAP EPS in the range of $0.15 to $0.35, and for 2013, we are raising our earnings guidance from a range of $1 to $1.30, to $1.30 to $1.50.

On a GAAP basis, we expect Q4 revenue of $575 million to $625 million, with annual revenue, of $2.45 billion to $2.5 billion.

In relation to earnings per share, we see Q4 2013 in the range of a loss of $0.10 to a profit of $0.10, and 2013 earnings of $0.45 to $0.65 per share.

Capital expenditures in the fourth quarter are expected to be in the range of $20 million to $30 million.

We also remain committed to reducing operational expenses year-over-year, and have already reached our goal of $200 million in free cash flow for the year.

Before turning the call over to questions, I would like to spend a few minutes explaining our plans for the next few years.

2013 has been a very strong year for SunPower, as we capitalize on long-term investments in technology and downstream channels.

As a reminder, back in May, at our analyst day, we expected our full year 2013 non-GAAP earnings to be in the range of $0.60 to $0.80, and now we are expecting earnings between $1.30 and $1.50 per share, which reflects the solid execution of our model.

We plan to build on this momentum into next year, investing for the future through upstanding capacity expansion and further technology development, as well as by continuing to create value downstream in our power plant and DG channels.

For 2014, we will lay the groundwork that will allow us to rapidly expand our infrastructure and manufacturing scale in 2015, while delivering strong bottom line performance next year.

For 2014, we see non-GAAP earnings per share per quarter in the range of $0.15 to $0.35, with full year earnings of at least $1 per share.

As a reminder, this guidance takes in to account pre-op expenses for fab 4, as well as a higher share count.

As we look towards 2015, we expect our financial results to increase meaningfully versus 2014, as we benefit from additional fab capacity, execution on our domestic and international project pipeline, and further expand our DG volumes, including lease.

We will open the call to questions.

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

First question, please.

(Operator Instructions)

Our first question comes from Shar Pourreza.

Your line is open, please announce your company name.

This is Shar Pourreza at Citigroup.

Congrats on another very strong quarter.

Let me ask you one quick housekeeping question.

The fabrication, or the capacity expansion that we saw, is that the 3B plant?

So the facility that we're -- the fab that we are going to build is not 3B, it's a new fab in the Philippines that will actually use the infrastructure from a previous fab we had in the Philippines.

But no, it's a fab in the Philippines, and we retain the capability in Malaysia to expand and to build on 3B.

Got it.

Okay.

Can you up the megawatts as far as the expansion from 350, on the current site?

Or would you have to go to Malaysia?

I would say it's probable we would have to go to Malaysia.

There is the possibility that the team is looking at, of up to a 25% expansion.

In all probability, it would make more sense to go to Malaysia.

And Malaysia is not our only option, by the way, it's the most likely, but it's not our only option.

Got it.

Let me ask you, earlier this year, the first time, first instance we saw Total infuse equity capital into a project, when you think about moving forward, and you are chasing after pipelines in South Africa, and the Middle East, Saudi Arabia, what not.

The relationships with Total, can we assume that any project wins will come about with infusion from Total, very similar to the Chilean project?

Or is it going to be Total more leveraging the relationships, with them being hands off?

I'm wondering what kind of exposure Total will have in Middle Eastern projects.

So the short answer would be that a big percentage of the time, we will see some equity participation by Total.

That is certainly not the rule.

There will be both complete self development with a complete third party, and then in some cases Total with equity positions.

And the model is working great.

You used the word chase.

I think it's going well.

It doesn't feel like we are chasing, it feels like it's going well.

Howard, do you want to add anything?

I would agree, Tom.

Things are going very well.

We have got a 6 gigawatt global pipeline.

Of that, approximately a third is in cooperation with Total.

They are a big lever for us.

Tom mentioned, it's a combination of self development and co-development, where we are working with local developers and Total, selectively, will have a equity participation.

Got it.

And can you remind us what the status of the Saudi reverse auctions are now?

I think they were looking to auction 2 gigawatts to 3 gigawatts this year.

I haven't heard any updates on that.

I think it's unlikely we will see that happen this year.

It's apparent, since we only got two months left in the year.

The intention is still there, and that's going to be a very big market.

I think the structure of the market is still evolving.

Meaning who will build what, at what location scale, how will the oil revenue be modified.

So without speaking on behalf of the Kingdom of Saudi Arabia, I think that they're still evolving the structure, but every signal we have is that they intend on that being a very big solar market.

Got it.

Very last question.

Can you remind us when the agreement with Total will end, where they can up their ownership in SunPower above 66%?

They have certain rights now to take it above 66%, but the standstill expires in, I believe, June of next year.

Great.

Thanks so much, and congrats on the results.

Our next question comes from Ben Kallo, your line is open.

Please announce your company name.

Robert W. Baird, thanks guys.

Tom, you threw out some guidance.

Could you just go over that again, and then maybe if you could go up to the EBITDA line, just how we look at that.

I imagine that's pretty loose guidance, and you'll give formal guidance on the Q1 call?

So I think you're talking about both Q4 and 2014, or 2014 only?

2014 only.

Okay, so I'll comment a little bit, and I'll turn it to Chuck.

What we wanted to do was give a profile, actually of 2014 and 2015, because the fab changes that profile.

We wanted people to know, broadly, where we were at, with -- between the capacity expansion that we indicated, you can get a sense of revenue from that.

But we wanted to give a good sense of the impact of building the fab, and additional share count, that we still expect 2014 to be a very good year.

That was the intention of what we are doing.

And as you point out, of course, we are going to hone in on that guidance in the next earnings call, when we get into Q1.

Chuck, did you want to add anything more precise?

I think that's good.

We did $91 million of EBITDA in Q3, including the NCI benefit.

You could back into expectations for Q4 at a similar level.

That's as far as the color we've provided for EBITDA.

You expanded your tax monetization capacity during the quarter, and I'm wondering, as you are sold out at this time, how do you think about allocating products between your different end markets, geographies, and different products?

Could you just go into that, and then I'll hop back in?

Ben, as you know, we take cash flow and the P&L very seriously and want to deliver solid results across the financial statements, not optimizing for one.

We do allocate product to all key markets.

Howard you want to comment on market opportunity?

Sure.

Hi, Ben, this is Howard.

We have a balanced portfolio approach to our business as you know, where we're balancing across geographies and channels, across the world.

We are always going through an internal allocation exercise to optimize, as Chuck mentioned, profit, cash flow, balance sheet impacts, and strategic markets, where we want to be positioned for the future.

Our core markets -- our key markets right now are US, Japan, we certainly want to win in those places, certain countries in Europe, for sure.

And then, we're positioning in some new emerging markets like Chile, as evidenced by our 70 megawatt win that we announced.

You can expect to hear more about where we are expanding outside of those core key markets.

Certainly, one more comment is that, one of the emerging models for the Company is ESP, Energy Service Provider, we call that, where we're selling solar, coupled with financing, and then layering on additional products that are adjacent to solar.

And that's certainly something that we are facilitating through our lease and financing business in the US, and we're going to continue to invest in that, both in allocation, and in OpEx investment.

Did we lose Ben?

Ben, are you there?

Thanks.

I'm jumping back in queue.

Our next question comes from Vishal Shah.

Your line is open, please announce your company name.

Tom, can you talk about the assumptions you are making in 2014 for the earnings and revenue guidance you gave?

And how many megawatts, or what percentage of capacity will be allocated to Solar Star, and some of Tunisian targets in the US, and what your thoughts are on leasing business for next year?

Thank you.

Sure.

So, the precision that you asked, we will do more of that on the next call, but I will refine it some for you.

We have said previously, the large scale projects are up to a third of our business.

If you think of that, it's actually up to a third of our business for the next three years, which is a huge advantage for us, because we have a great foundation across all three years, that we can capitalize on.

It means we can grow a lease in a way that we think is prudent, given the diversification that we prefer worldwide.

The lease business is going to grow rather aggressively next year, for sure, but offset by the diversification that we desire.

And then, we are seeding new markets.

As I mentioned, in my prepared remarks, Chile will be built next year.

That's where the long-term sustainable demand is, it's in markets that don't require policy support.

So we think it's really important to seed those markets, where you can build a merchant power plant.

So what you see us doing is a mix next year, of business, to be sure, that will allow us to be solidly profitable, but at the same time, profitable over many years, and growing rather aggressively.

So, it gives you a rough idea of mix.

We will give you more about that on the next call.

I think my question is, are you going to -- are you in a position to slow down Solar Star in order to take advantage of say, Japan and some of the other markets?

Think of it this way, I will be precise in my answer.

We will build Solar Star through next year, it will be materially complete next year, going a little bit into the following year.

And then we have two more large projects that will be built roughly over the next 18 months to two years.

The three projects being Solar Star, [Kingthrow], and Henrietta, will be built over 2.5 years, maybe 3 years, and that's our intention.

It allows us to balance the new pipeline that we are filling against the lease revenue.

To be sure, we could do a lot more lease volume, but it's the way we have chosen to allocate.

Just, your thoughts on how you think pricing environment shapes up from next year?

Do you think we see stable pricing, or maybe some pricing pressure as you go through the next year?

This is Howard, I will take that.

We see pricing being stable this quarter, and going into next year.

Demand is quite strong, and we are in somewhat of allocation mode, but as Tom mentioned, we are able to preferentially put our megawatts where it makes the most sense for the Company.

So I think the short answer, Vishal, would be stable.

Stable.

Thank you.

Our next question comes from Patrick Jobin, your line is open.

Please announce your company name.

This is Brandon Heiken, on behalf of Patrick Jobin from Credit Suisse.

Could you clarify to what extent the last two increases in your annual EPS guidance have been, due to pull-in of projects versus other improvements in fundamentals?

And if you are planning projects, how does that reduce the total cost per watt, if you have a reduced construction time?

So we are not pulling in projects, it's improvement in cost structure of the Company.

And a stable to marginally improving pricing environment.

Those are the two levers.

And a little more precision, Japan has been a great market for everybody this year, particularly us, and the way we structure our lease business, it's profitable in the near term.

So the combination of things allows us to be profitable, without pulling things in.

The second part of your question is a very good question.

And that is, of course, costs come down in time, so if you pull in a project, you actually have a higher cost structure, and that's one of the reasons we haven't pulled in projects, is we want to capitalize.

So we're able to scale our business without pulling in projects, continue to cost down curve, and not penalize any of our projects.

Great, thanks.

Could you clarify, you mentioned that shipments to Japan were 26% of shipments in the last quarter.

How do you expect that to progress here, in the coming quarter of next year?

This is Howard.

We expect it to be roughly the same, plus or minus several hundred basis points.

But expect it to be a significant portion of the business going forward.

Great, thank you, I will hop back in the queue.

Our next question comes from Rob Stone.

Your line is open.

Please announce your company name.

Cowen and Company.

Tom, obviously you are giving general guidance for 2014 and 2015.

I wonder if you could say what the factors are you see, that account for the fairly wide range.

You have had a wide range of earnings guidance in particular the last few quarters, and you've done quite well, coming in at the high end or above that.

What are the main levers that account for the spread?

The mix of business that we end up doing is a lever.

The pricing environment, we expect stable pricing.

This year, pricing was better than we planned, so that influenced things.

And then, there's a degree of timing of how fast we feel the project, even, as I answered the previous question, we don't expect to pull in projects, but the timing of how they are completed.

So there is really -- and Rob, we are really guiding 2014 pretty early.

What we want to do is get the big picture out, and as I said before, we want to give the picture of the next couple years, because building the fab is a big endeavor.

And we want to make sure everybody thinks about it in the 24 month horizon.

How big a factor then on just the average EPS you are looking for, cash EPS, of at least $1 is the increased share count in 2014 relative to 2013?

It's between $0.10 and $0.15.

Okay.

Follow-up question if I may, related to Europe.

Margins there remain quite a bit below your other regions.

You have talked about getting that to a breakeven by year end, and hopefully better performance next year.

Any update you can provide on that?

Thanks, good question.

We will hit profitability this year, next year we will continue on a positive path.

Importantly, Rob, Europe is our first markets, where we will be looking more and more like an energy service provider.

And we think it's markets where it won't be as dependant on policy, and it will be more independent of policy.

So it's a great place for us to exercise our product offering, understand the solution set, and then expand that to other markets.

Improving economics, and also what we think is the best market to start our energy solution provider offering.

Okay.

My final question is on potential for continued capacity expansion.

I think you alluded to some room to make fab 4 bigger, but most likely going back to Malaysia.

Was a factor -- I think you said proximity to the engineering center, so would it be reasonable to conclude that if the new technology you are deploying for early 2015 is relatively stable, then adding on in Malaysia the following year or something would be more of a copy exact and something with a shorter planning horizon?

Yes.

Great.

Thank you.

Our next question comes from Brian Lee.

Your line is open.

Please announce you company name.

Goldman Sachs.

First off, I guess, can you talk to how linear the fab throughput improvements will be in 2014?

And if you are anticipating being capacity constrained throughout the year, until you get new capacity online in 2015?

It's reasonably linear on the yield and equipment utilization.

Of course, we get the benefit of running the fabs 100% all year, and this year we didn't run at 100% in the first quarter.

If you compare year-on-year, it looks flattish, there's a step function going into the year.

The answer to your question is, for sure, we need a new fab.

We will ramp that fab aggressively.

To get meaningful capacity we need a new fab.

Great.

On your residential leasing segment, I guess, if I look at the 12 megawatts of bookings in Q3, it does seem to imply you are growing a bit slower than some of your peers.

Can you talk to that a bit, and what constraints, if any, you are experiencing, or if there might even be some market share issues at play?

I will make a few comments, and Howard, you can add on if you would like.

Our residential, our distributed generation American business is going to grow great this year, and Howard will give you statistics, and it will grow really strong next year.

To your point, it could grow a lot faster if we chose to.

We are making a decision that we think balances.

And this is the profile of our company for many years now, which is to have a diversified geographic foot print and geographic -- diversified segment footprint, because we think in the previous years, to diversify our policy risk.

As we look forward, it's diversify our policy risk, but also to manage cash effectively, and to capitalize on markets that don't need any subsidies, and that are policy-free or closer to policy-free.

So we are planting seeds for years 2015, 2016, 2017, at the same time as harvesting what is a really strong market.

There is no question, at least, the North American lease market is quite strong, and we can grow it quite a bit faster.

This is Howard, just to add on.

We have held share actually the last couple of quarters, and we're positioned really well for 2014.

As Chuck mentioned in his remarks, we secured some additional finance capacity, which is really important to growing the business.

And we have a very robust network, and channel through our dealer partners in North America.

So we are in great shape for 2014, and we will be growing year-over-year very substantially, 2014 over 2013.

Last one from me on the same topic.

Since you mentioned the funding capacity, can you quantify how much of the $850 million in total lease capacity you raised to date has not yet been deployed?

And whether you can quantify that in terms of a ballpark range of potential megawatt volumes?

Thanks.

Most of it has been deployed.

We raise the funds, and then deploy them over a quarter or so.

So last quarter, we did two funds for $150 million, this quarter two more funds for $155 million, and we expect to close more soon.

We don't break out the details, but if you do the math, you can back solve likely and get pretty close to the megawatts.

Okay, thanks.

Our next question comes from [Christian Carne].

Your line is open, please announce your company name.

It's Bank of America, Merrill Lynch.

I have a couple of them.

Number one, either Chuck or Tom, you clearly had a strong quarter in Americas.

Is most of it being driven by Solar Star leasing business or are there other meaningful projects out there, beyond the known ones, that you think are helping you guys?

Couple of other things, we still had a great large commercial business.

That's contributing, and will grow over the next few years.

We also are wrapping up CVSR, and so that had an impact on the results in the current quarter, in Q3.

Got it.

Can you talk about the different plans you are seeing on the state level demand through your leasing business?

Sure, this is Howard.

I can talk to that.

California still leads the way.

There is demand in other states, we are in Hawaii, we are in a number of states in the east coast.

That's where most of the US demand is playing out for lease.

Got it.

Final question from my end, what do you think you market share in Japan and the US is today, on the residential side?

Market share in the US residential is between 15-20%.

We believe that the most recent figures are closer to 20%.

In Japan, for residential, we're approximately 10% to 15% of that market.

Thanks a lot.

Our next question comes from Colin Rusch, your line is open.

Please announce your company name.

Northland Capital Markets.

Tom, can you talk a little bit about the potential additional financing vehicles that you might be able to tap into as you go through 2014, and what that impact might be on those EPS numbers?

Certainly, you haven't seen what energy has done with the YieldCo and potential for Total to do a similar vehicle that could lower your cost of capital and support profitability on your platform.

It seems like you may have additional leverage there.

If you walk us through how that might work?

This is Chuck.

I will take the question.

There are emerging a number of financing vehicles, that a lot of companies have talked about.

We participated in one of the YieldCos with our CVSR project.

These are really important in the industry, because they provide additional liquidity and are very strong.

There is some misnomers on -- and requirements to change in policy for MLPs and REITs that you probably know about, so we don't see that a near term boost.

What we are very excited about, though, is the emergency of the ABS markets, the asset-backed securitization markets for our residential leasing program.

Those structures will provide great liquidity at low cost of capital as we scale and grow our residential business.

Can you talk about the impact to earnings power for you, as you see those securities roll out?

Very significant, because effectively, you are going to be able to access much cheaper leverage or debt for our programs, and so you can do the math.

Energy published the results of their YieldCo, it was very favorable, obviously.

Looking at your APAC numbers, you've got gross margins up about 3 points, quarter-over-quarter.

Was all of that on cost reduction from the core manufacturing margins, or was there something on the price side that is helping you drive those margins higher?

There are three key factors.

Certainly, cost reduction helped, also running our fabs at full utilization helped, as well as pricing and sales outside of Japan.

Great, and the sales outside of Japan, what was the impact on the margin from that?

Significant.

Okay.

Perfect.

I will follow up offline.

Thanks.

Last question comes from Mahesh Sanganeria.

Go ahead, your line is open.

Please announce your company name.

Thank you, RBC Capital Markets.

First question, on you capacity plan.

It looks like your growth will be limited by how fast you can bring the capacity.

I'm wondering if there is a way for you to use the lower-efficiency panels?

Does that work with your product?

Is that an option, you would consider or you will stick with your high efficiency panels.

So we will grow our capacity next year.

We will grow over 100 megawatts next year.

That's rather substantial, and there's potential for a little bit more there.

We are also going to be deploying our concentrated products, that is currently a 7-times concentration product.

We have some projects we'll be building next year that utilize capacity more efficiently.

2014, we aren't totally dependant on building a fab, and the fab comes on line in the first part of 2015, and ramps from there.

So 2015 continues to capitalize on the concentration product, and has the fab add on to it.

2015 is a year of real acceleration for us, for sure.

And the answer to your question is, no, we don't plan on using lower efficiency product.

We will grow without product, because of the comments I made in my prepared remarks, there are advantages to our product go beyond efficiency.

They are long-term reliability, and higher energy production, both of which are a big deal in energy service provider-like relationships which today are PPAs and leases, in the future will be different.

That makes sense.

One question -- one question on the guidance for 2014, or the indication of guidance.

You give us an idea of the effect of the share count, and that's probably, that's almost half the effect.

But if the fab doesn't start, where does that expense, I would think that you're talking about higher expenses last year.

Where does that expense come from?

Let me answer that then we are going to wrap up the call.

I really appreciate your questions.

As Chuck said, you said half, it gives me some sense of what your target EPS is for next year, the share count does have a big impact.

Ramping the fab, though, we will be buying equipment next year and installing equipment, and in some cases, running wafers through that equipment.

Because first silicon happens if the first quarter of 2015.

That means, we've got to start getting equipment running in the back half of next year.

And that expense of doing that will run through our P&L, and as a meaningful amount, it will also run through 2015.

It will do be diluted in 2015, because of what I said in my prepared remarks, the higher volume and the other projects and lease that we are doing in 2015.

Think of those two factors.

By the way, we are still not in 2014.

That is our first shot at color for the year.

Obviously expect more in Q1.

Let me end with that, and thank everybody for joining us on the call.

We had a very strong quarter, we raised the year, we're poised for long-term growth.

We look forward to our Q1 call.

Thank you.

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