Advanced Energy Industries, Inc. (AEIS)
November 15, 2012 9:30 am ET
Garry W. Rogerson - Chief Executive Officer and Director
Gordon B. Tredger - President of Solar Energy Business Unit
Yuval Wasserman - President of The Thin Films Business Unit
Danny C. Herron - Chief Financial Officer and Executive Vice President
Colin W. Rusch - ThinkEquity LLC, Research Division
Good morning, everyone. Thank you very much for coming today at Advanced Energy Analyst Day this year. I really appreciate your being here. My name is Annie Leschin, Investor Relations. Just want to welcome everyone and quickly get to the agenda. So I'll be introducing obviously, the rest of the team. With us today is Garry Rogerson, CEO; and Yuval Wasserman, President of the Thin Film Business Unit; Gordon Tredger, President of the Solar Energy Business Unit; and Danny Heron, CFO. And then we'll open it up for questions at the end.
Just as a reminder, this is being webcast, so we would ask that everybody keep their phones to a minimum if we could. Thank you so much. And with that, let me turn to the Safe Harbor, which you are all quite familiar with and let me introduce Garry Rogerson, President and CFO of Advanced Energy.
Garry W. Rogerson
Okay. Well, thank you for being here today. This is our first presentation of our strategic plan. And so really what we wanted to do is update you a bit on where we are within that strategic plan.
Before we go any further, I was just lying in bed last night, and I think about all the turmoil there is in this industry. In the Solar energy, we've got companies going bankrupt, we got people firing their people doing all this stuff. And in the semiconductor, we got layoffs going on in the big companies. At AE, that's not true. At AE, our solar business is growing and its margins are expanding slowly. I know it will be a bumpy ride, but they are expanding.
At Thin Film business, it is in as tough a position in the marketplace as it could possibly be. It's in flat panel display. It's in semiconductor. It's in solar. All the places you wouldn't like to be. And that's where it is. And guess what, we're making money. We're still making money after all. So, and that is because we have a really stable, good, professional team.
And last year, we've said it and it's true. This team, and I'll pick on Yuval running our Thin Film business, incredible job this year. I mean, we have changed the way this Company has operated. And solar, again, we have changed the way it's operating. Gordon had changed it. We're really hangers-on here.
So great team. Great team and lots to come out of that team in the future. So can we go to the next slide?
Okay. I just want to go backwards to this slide. I like to, at this point, always talk about what we're going to talk about and give you a few hints. And then at the end, find out actually if we said it clearly.
But first, what I want to do is try and go over the points that -- these cost reductions that we did last year that we've taken it up to $30 million of costs out the business, so far. And that $30 million is not coming back. And you've seen it in the business this year. You've seen it in the last 2 quarters. You've seen how we've been able to survive in Thin Film and expand our margins in Solar. That $30 million is not coming back and there's much more to come.
And we have a different model now than we used to have. So our financial -- our business model and our financial models are very different to a year ago. And one of the things I'd like us to get out of today is that. Is that, whether you like it or not, we all understand the business model, the financial model that we are working towards. And it's a great model. It's a model that will spew off cash. And as that volume goes up, the profits will go up. I get I should have said it the other way around. The profits will go up as the volume goes up, and the cash will be -- come out.
We, our model puts us in a great position to grow. So what I want to do today, and Yuval and Gordon are really going to show it, is how we can now grow our revenue to that model. Because that's key to grow our revenues profitably as we go forward.
At the same time, we'll talk about acquisitions, we did one today, I guess, it's announced today to accelerate our growth into the future.
So what I want to do then and what Danny will be talking about is we have a goal. We have an internal goal, an aspirational goal of $2 a share. And I've heard people say I don't know how you're going to get there, blah, blah, blah. That's fine. What I would say is, don't worry about getting to $2 a share. The question really, is when will we get to $2 a share. It's not, I mean, we have a model now that once we get those revenues up, we should get to $2 a share. We should get to it and further. But the question is when. Nowhere in this markets are in a trough. So I want to show you, we want to show you how you can get to that $2 a share. But at the same time, we're not going to sit on our laurels and say we can just get there. We're doing a lot of stuff to try and get there.
So what I'd like us to get out of today is costs are gone, more costs are coming out, the model has changed that we are working to. We are going to accelerate our revenue growth. And through accelerating our revenue growth, the profits will expand, cash will come to the bottom line, earnings per share will go up and we should, at some point, get to $2 a share.
So I've said everything I need to say, right? Done. But I shall carry on. Where do we put the little thing?
Okay. This is basic stuff, yes? It's bread-and-butter. We said it was bread-and-butter last year. It's obviously what we've got to do with the place we're in. We needed to expand our margins and get revenue growing and utilize and generate cash that we can then utilize.
So margin expansion. We've taken $30 million out so far, and I believe we'll get north of $50 million out of the company. North of $50 million will come out. Last quarter, I told you $10 million would come out of cost of goods for next year. So that would take it to $40 million. Some actually saying we only need to get another $10 million out to get to the $50 million.
I think a lot of that, so we want to be careful here, that $30 million won't come back and you're starting to see it in our profitability. I think the costs have now come out that we traded, that we traded against revenue. As pricing comes down, obviously, we'll fight it. We're trying to push it up. But if it comes down, we've now got room to play. And Danny will talk about that later.
The key now is revenue growth for us. And let me talk about this a little bit more, okay? We're repeating a little bit of the same thing here. But I guess this is important. The last year, what we've been trying to is build a foundation. Build a foundation that we can really accelerate growth from. And there was no point accelerating growth if we can't make money. No point at all. And we've seen companies that do that. We've seen and they brag about market shares and the next day they go bankrupt. Then we see it all the time. We see companies that brag about getting market and reducing their margins to get market and their margins go down.
So what we try to do is build the foundation from which we can grow. So I told you about the $30 million that's come out. The breakeven to the company is about $90 million. The breakeven is about $90 million.
Remarkably, this year, we've generated $85 million year-to-date. I suspect we've never done that before. I don't know it because I can't go fast enough back in the history, but I suspect we've never done that before. And at the same time, we said we would buy shares back and we bought them back. I think we bought them back in about 6 months? In about 6 months so we've said we'd buy shares back, we bought shares back. So we're building a really nice company here.
Probably, the 3 major accomplishments of this: Thin Film profitable even in a downturn, Thin Film's generating cash even in a downturn.
Our Solar business, it's expanding margins while other companies go bust. We're expanding our margins. It's slow, bumpy process, but our margins are expanding. I remember people saying, no you can't expand your margins. Of course, you can. You reduce your cost structure and the margins expand. That's what you do. And they are expanding. It will be a bumpy road. There is no question about it, but they'll continue to expand as we grow the business.
This is probably the most important slide here. And it's the reason I believe we're in a kind of sustainable advantage over our competitors. It's our model. And I want to talk about that a little bit. I don't know if this diagram does it justice, but we'll give it a go.
Shenzhen is becoming the hub of our manufacturing worldwide. It's got everything. But everything we do is going to go through one hub, Shenzhen. If we acquire companies, don't think we're going to acquire manufacturing. Or if we do acquire manufacturing, it won't be to close down. We're not going to have a lots of spotty little businesses all over the place that we have to fly to and have reviews and all this kind of stuff. We'll have one central manufacturing point at Shenzhen.
Now that manufacturing point is actually the way I imagine it and it's becoming as an outsourcing center. So the reality is, our factory is really not a factory. We're moving as quickly as we can to fabless. We don't want a factory. So we outsource more and more sub-assembly. We take for instance in Solar, we've taken the pieces there. Now we outsource the sub-assemblies from Shenzhen. So actually, it's a professional center. It's a professional center that will become more professional, and less true manufacturing as we would imagine it. And we'll keep driving more and more volume through that center.
And just to give an example, the company we just bought from Switzerland today. Great technology, lovely little products. They don't get any volume really, and a few people. So we take the products. We put them into our Shenzhen. We manufacture them there. The costs get reduced as they go there and then they go through our distribution channels across the world. That's how we will operate on all the acquisitions that we do. They won't -- we won't have any more manufacturing.
At R&D, it's exactly the opposite. We want our R&D to be as close to the customers as we can possibly get it. Yuval will tell you today why we're winning more business in semiconductor, in markets we've never won in before. And one of the big reasons is we decentralized R&D. R&D is moving much closer to our customers, whether they're in San Jose, California, whether they are in Korea or whether they're in Europe. Wherever they are, we're putting our R&D people much closer to the customers. If there are very clever people anywhere in the world, we'll pick them up. And what we want them to do is design products that go through our factories and then get out through our distribution.
Interestingly, a company, not the one we bought in Switzerland, we don't sell to the potential markets that they are in. We don't. But we get phone calls all the time that people believe we do. So we're ideal to pick the product up, what I'll do is to pick. I would suspect if the markets -- market share survey was done in those markets, we would have a significant market share even though we sell nothing. Because our name is so well known.
So what we're doing, distributed R&D close to the customers, one manufacturing hub is continually outsourcing, trying to do itself out the business all the time and a global distribution. And that is exactly the same for Solar and our Thin Film business.
I believe, as we move forward and push more through this model, we will make a lot of money. So if I just go to the next slide -- have I said everything on that, Yuval, Gordon? Have I taken a bit from your?
Gordon B. Tredger
Garry W. Rogerson
Okay. We have the model. We have a model that I know will work. You look at Q3, the Q3 2011 versus Q3 2012. Q3 2011, we were the old AE, the old AE. Q3 2012, we are the new AE. There's an amazing difference there. Our revenues, because of the cycle, have gone down. Our earnings per share have nearly doubled. Revenues have gone down and earnings per share have nearly doubled with actually a rather poor tax rate. That's what the new model does. It's a great quarter for me to put the comparison up, by the way. I don't want to say that every quarter will look like this. But this is what the new model had done. Pushing stuff into Shenzhen, getting local to our customers is allowing us to change the game. The game has changed. I absolutely believe we're at a competitive advantage compared with our friends in Solar and our friends in Thin Film. We have an advantage with the way we are now playing the game, and actually we're utilizing both groups to be synergistic with one another. Very, very happy with this.
So the model is fine. We've now got to accelerate our revenue growth.
So quickly, turning to the future. Costs will not come back. That quarter you saw now gross margins will fluctuate, of course, with mixed changes. But that's the sort of numbers we are hoping to get from now on.
Cost of goods is where we're going to get the costs out now. And as I've said last quarter, we took out $10 million, which will come out in the next, you will see in the next year and there's plenty more to come. Plenty more to come as we utilize our new model. This will be a never-ending story. Our costs will never stop coming out.
Yuval, Gordon will talk about revenue growth. Yuval will talk about expanding into new markets. We've got to go into new markets. The semiconductor market, we all know it's a stifling market. But it's also a slowly shrinking market as it becomes more efficient. Everyone knows that. So we've got to move into other markets and fortunately for us, there are plenty of markets for us to go into. And we are starting to go into them.
In our Solar business, it's the same in some ways. We are in the U.S. We've designed our product for the U.S. We're doing great in the U.S. No problem at all. We are picking up forward. We are not going, by the way, for market share. So when you ask a question, your market share is lower than anyone else's or you're shrinking, I'll tell you, I don't care. I really don't care. All I want to do is grow profitably. We've seen companies who grow unprofitably. I don't want to be one of those. I've never been one, don't want to go there. So we're going to grow profits. We've got to get out of the U.S. We've got to get out to the U.S. Our products are designed for the U.S. and Canada and we need to get out of the U.S.
And with our -- R&D is working more efficiently than it has ever had. Yuval is going to talk about that. Yuval is going to talk about lean R&D. Gordon is going to be talking about new products that are in development and coming along, but we're also going to utilize our cash to acquire. I said that a year ago. I said it's a little bit of a -- you have to be a little bit pragmatic about it, realistic about it. But the list is growing, and we should be acquiring revenues, which is synergistic to the businesses that we want to go into, into the future.
So you will see that. You will see that. You saw one today. I'm not -- I can't say I'm 100% sure, but the probability is going up, that's where you will see more acquisitions in the future from us, in both Thin Film and in Solar. So our cash that we used for buybacks last year, will be used more for acquisitions this year.
Just a quick one on that $25 million buyback. That is not, last year I said here, I announced a buyback, we'll buyback. But this one is not. That's just, we're being realistic. It's there for me to use -- for us to use if we want to use it. It's not that I'm telling you that I'll have bought them back in 3 months. They bought it all back in 12 months. That's not true. They said just in case. Just in case the markets come down. Just in case something happens, we can pick up a little bit more dollar. It's not my #1 goal this year. My #1 goal is to get those revenues to grow. Because if we can get those revenues to grow with the model we've got, we'll get to $2 a share.
So Phase I was the restructuring. Now we're looking at accelerating our revenue growth. But at the same time, continue to reduce that cost. I mean, we're talking about basic stuff here.
So this is what we've set ourselves as an aspirational goal. And I'm just going to say, I don't think there's any issue over time of us getting to $2 a share. I don't think so. I mean, there, you'll see plenty of ways that we can get there. I mean, I think we could do actually nothing and get there actually. I think Thin Film will come back if Solar just gave us the contribution that it was giving us last quarter and Thin Film came back 100% to the old peak, we would whiz past that $2 per share. I don't know that's true. I don't know if we will get to that peak without doing stuff. But take it back it off to 80%, so you will get to 80% of the peak, we will get to $2 a share. We should get to $2 a share. So even if 80% is the peak and Solar not giving me any more contribution at all, we should get to $2 a share.
So the only issue is when. The only issue is when. And I think just sitting here doing nothing we'll get there at some point. Trouble is I don't know when. So now everything we do is to get us there. So we are acquiring to accelerate growth. We are acquiring. We are doing much more R&D. We've got much for coming out into the future, in both Solar and in Thin Film to protect us, to help us get there and we're continuing to reduce our cost structure.
So I think the $2 a share, I won't -- I really would like it that you leave this room believing we can get to the $2 a share and then you can discuss amongst yourselves when. And you can discuss it amongst yourselves. I think it's possible in 2014. I really do.
Cash generation, well we've generated $85 million in 3 quarters. So I think we can get to $180 million, $200 million in 3 years. And we've done, we got nearly half the way there already. So I think that's very possible. It's going to get tougher obviously, as we squeeze a lot of the easy stuff out. But that's -- we've done a great job so far, have no problems getting there. The 11% growth, Solar is growing about 20% a year at the present time. We see it growing roughly at that over the next year or so. So we're not unhappy with that 20%. I'd like to bulk it up and try and find ways to protect it and make sure it happens, but I think we're okay. So these are the financial goals we set last year. We ticked a few boxes, plenty more boxes to tick, but I think we're on our way. These chaps, Yuval and Gordon have got to have prove it to us all that we will now grow our business. The model is fantastic. So Yuval, I think you're the next guy up. By the way, if you want to ask questions as we're going along, no problem with it. Or if there's something I have said that you don't feel comfortable with and you want to chat about it, I'm happy. Yuval?
Good morning. So just a year ago, we shared with you our goals, long term goals for 2014. And we shared with you how we are going to get there. We talked about reducing our break-even point below $50 million a quarter and we talked about increasing the profitability of the BU through the trough. And when we talk about growth, we talked about growing faster than the markets we currently serve while, at the same time, continuously driving efficiency in the operation and the service and reduce our sizes. So where do we stand today? We continue to focus on the 3 pillars of the strategy that Garry talked about. On margin expansion, revenue growth and cash utilization. And I'll give you kind of the story of where we are today, and that will lead us to talk about growth.
Our restructuring went as we expected and we're now at approximately $45 million per quarter break-even point. We optimized the organization. We did it selectively. We made a smart change and relocated resources where they are most effective and we reduced our footprint in the U.S. by 64,000 square feet, and in Asia, by 9,000 square feet. And that does not include space that was free in Shenzhen for additional products to be manufactured and space that we have given to Hitachi Metal when we transition our flow business to them. So we have dramatically reduced our footprint and resized the Company.
Gerry talked about distributed engineering. The idea was, in addition to be close to our customers and be intimately involved with them as they develop their products, it's also to create a flexible business model. 12% of our R&D spend now is outsourced. And it's not only the low-level commodity engineering activities. We have partners that help us also develop products. We have partners in the U.S. We have partners in India. We have partners in Europe. All help us to do quicker engineering, develop some new technologies and it's a variable, flexible cost. We reduced our fixed cost and we have no partnership. 85% of our sustaining engineering that used to be done in Fort Collins, Colorado is now in Shenzhen at a low cost area where we have more done for every dollar we spend in R&D.
Our distribution network had to change as the market we serve is changing. We've seen a lot of footprint change among our key customers, Japanese companies moving to other places in Asia, American companies moving to Asia.
We had to do 2 things. #1, make sure that our footprint is aligned with our customers and also convert as much as we can, fixed cost to variable cost. So we created a hybrid distribution network. We have direct sales and service people in key world regions close to our market and target customers, and we have distribution network relying on the reps and distributors that also allows us to sell and promote and propagate to market the non-semi, the industrial products that are one of those products that really depend on the selling effort.
We finally concluded the transition from a flow business. We exited the Flow Service business and all the activity and the assets are gone. With it, a reduction in footprint.
We continued to drive operational excellence in Shenzhen. And a lot of the cash that we have generated as a company came from operation efficiencies. And we continue and will never stop to drive material cost reduction activities, either through commercial solutions or engineering solutions. So we're doing a great job moving towards the continuing improvement of our margins.
In terms of revenue, Garry talked about the markets we are in today and none of them is a great story. The Semi cap market has been down in 2012. 2013 is murky. We see transition in the market where some of the investments are moving from memory to LSI, the logic devices. At the same time, the Company's talking about capital reuse. There is a significant investment in R&D in the Semi-Cap equipment market as OEMs trying to gain market share, as tools will be in position for next-generation technology. So we are at the trough, yet there is a lot of investment in R&D. And the ability that we have created to be very profitable at the trough allows us to continue to invest in product development with our customers.
The flat panel display market, we see another delay in the market investment and capacity. The expected revenue for large TV, screen TVs was not realized. There's more mobile devices and connectivity that drives the market. Issues that the key suppliers of flat panel displays had with yield and cost and transition to mass production of AMOLED delayed a lot of the investments. So we saw another delay yet again in the FPD market and Solar panel market you guys know. It's a sad story right now as the market goes through major consolidation. And we don't see a lot of activity happening there.
So we have to take additional steps to facilitate growth for the BU line. So we're looking at adjacent markets. And we talked about it last year and I'll show you how much progress we have made. We continue to look at growth outside our core markets and we want to accelerate that growth through acquisitions of products, technology or companies that are generating profit.
Cash utilization. Migration to demand flow technology in our manufacturing really reduced our inventories and freed up cash for the Company. And we have seen significant improvement in our cash conversion cycle as each one of the components was aggressively addressed to make sure that we are reducing our cash conversion cycle, freeing up cash for the Company.
We also went through a restructuring with the way we deploy assets. And we have moved to mixed line methodology in manufacturing and we do a lot of capital reuse. So our investment in capital is much lower than it was before. And we're not a capital-intensive business to begin with.
As Garry said, we're deploying our cash. You heard about the legal acquisition we had today. We are going to use our cash to acquire technology, products and companies that will facilitate the growth.
Some reality check, where we are today. If you look at Q3, the last quarter, the BU revenue was $56.8 million. Our operating income was $6.1 million. Operating margin 11%.
If we have superimposed this revenue on the cost structure we had at the old AE, and here we make some adjustment to make sure that we compare apples-to-apples because we've made some changes in the way we allocate G&A. But if we look at the superimposed, our last quarter revenue on the old AE cost, we will generate or would have generated only 4% operating income.
However, if we go back to 80% of the peak cycle we had in the past while maintaining the current cost structure, our operating margin will be north of 20%. And as Garry said, the costs that we have taken out and the structure that we created, this cost is not coming back. It's a new machine. It's a new structure. It's a new model. And right now, the question is, when are the markets coming back? Because that will drive tremendous profitability to the bottom line.
So let's talk about growth. To grow, we are migrating from our core, Semi, historical markets and products using our historical existing products to adjacent markets in a general Thin Film and Industrial arena, where we can deploy our current products or their derivative or generate incremental products to serve those markets. And this is an example, this is the previous solar glass coating, et cetera.
So we're there already. We're now aiming to expand ourselves beyond the Thin Film Industrial and look at potential new markets, one of them is precision hard coating, a market we have never dealt with before. As Garry said, people called us, thought they have products for the market. We did not have the products.
Industrial power is another area, and gas abatement is a new deployment of a product we had to a new application that, right now, is generating some growth. And I'll share it with you in a minute.
So the markets we serve are very diverse. And the bottom line with all of them, cost is becoming a key underlying driver. Even the semiconductor high-value R&D activity still demands significant reduction in cost, continuous reduction in costs.
So in the Semi, we continue to invest in keeping up in leapfrogging or leading in technology to be able to enable our customers to go and fulfill their development plans. The challenge in this market is to copy exactly, is has a huge impact on product life cycle. The flexibility to change things, the flexibility to refresh products is not very easy or available. And we see a consolidation and localization of the market. We just recently saw the acquisitions between AMAT, Varian, Lam, Novellus, recently ASML vertically integrating the market for little, very unique demand on our R&D resources and long-term investment.
The other markets we serve, the PD Solar and glass go through consolidation and cost, cost, cost, cost, cost, right, as Garry said before. Flat-panel display, now we're talking about a 2 vectors. The size of the substrate that are being used for the flat-panel and the technology on the films and the structure of the panel that are driven by the user experience and the user interface, right? And we've seen these 2 areas when the investment is being made. Bigger size drive more power and advanced technology drives more precision and control.
The industrial world, very fragmented, very cost driven and very distribution network dependent. And to grow in the industrial world, we have to also develop a distribution channel that is very different from the semiconductor-type activities.
Semiconductor sales is like farming. You're managing just a few major accounts. So it's really farming, right?
Going after the industrial world is like hunting. You have to have distributed sales force with rest of the distributors to go there and help you sell.
So to be able to serve those markets and to facilitate growth in the Thin Film industrial, which, we believe, is an unserved market, we restructured the BU into 2 teams. Each is led by a vice president responsible for that market. They copy exactly market a product, which is basically the Semi, where precision long investment, long product life cycle are a must, right, is led by one focus team. And that focus team goes all the way from sales marketing through engineering, through the operation and the distribution network. And similarly, a focus team that right now is going up with the Thin Film industrial market was created where we have much more flexibility to optimize our products. We're not bound with -- by copy exactly demand. So we can drive product derivatives and design changes to reduce cost and to optimize the product to a specific application for a specific world region, right? So it's a shorter design time, very quick turnaround time and we have the flexibility to do whatever we need to do to go with these customers. And that's delineation of these 2 groups, ensure that no one market robs focus and attention from the other, okay?
So our growth initiatives, as we talked about last year, and we'll tell you a little bit where we are, our R&D, distributor and close to our customers for the same reason we mentioned before intimacy, speed, lean engineering, being together with our customers as they develop technology, broadening our product portfolio, our family of products covers a huge array of applications. And we had some light spots within this puzzle of products. And we continue to fill up the blanks and add more products to our portfolio to go up to other markets. So in all the market we serve, we continue to broaden the product portfolio and we will do that in-house or by acquisition.
Lastly, we talked about stepping outside of the current core markets we serve and that's expanding the total available market. And to be able to do that, we need to step out from the comfort zone and we will do that again, organically and inorganically and accelerating the whole process through acquisition.
So as Garry said, we made tremendous progress in our distributed R&D and engagement model. The first pilot, if you may, took place in San Jose, California where we put together a localized engineering and R&D team is fully functional, fully operational. We are now launching products from San Jose directly to Shenzhen, to the hub. And those designs do not go back through the headquarters. They don't go back to Fort Collins. We developed with our customers derivatives of products and we launched them directly to the hub. As a result of the acquisition we announced this morning, we're now having an engineering design center in Europe as a center of excellence for industrial applications.
We are continuing in our transition into China, in Shenzhen, as I mentioned before our sustaining engineering and will be called the Fast Turn On [ph] engineering activities are taking place. Next year we will have an engineering center in Korea with a main focus on the flat-panel display market, the large size substrate market that drives a lot of applications related to flat panel. That will be done in Korea.
So this activity, this investment in localization, this effort to be there with our customers has already showed some really interesting success story.
In the Silicon Valley, we are, right now, in the midst of penetrating to advanced Etch applications. Applications we were not involved in before, right? Our matched product go through a significant innovations as we go and work directly and intimately with our customers. And we are developing next-generation technology for both 450-millimeter wafer size and sub 1x nanometer technology node.
In Europe, we expanded our served market and into the optical ophthalmic lens coating. So if you go to LensCrafters or Walgreens, you get your infrared reflective coating on your glasses, our power supplies are going to do that, right? They will facilitate the process that will allow the local supplier to coat your eyeglasses with anti-reflective coating. We're sharing -- we're getting sharing glass because of our activity in Europe. And because of our efforts to locally distribute our application support and application development, we have now collaborative development program in Europe in an area called Dual Magnetron Sputtering and this is being done locally, and we're excited about the opportunity.
The addition of the team right now that was acquired this morning will accelerate and propagate our local effort in Europe to other areas in Europe as well.
In Korea, as you know, we have a pretty strong presence in Korea. We have local final assembly and test line. We have a strong application engineering team. We are working very closely with our customers, both in SPD and flat-panel display and in Semi.
And during the last 4 quarters, we have increased our engagement locally with end-user and local equipment manufacturers to start working with them on their needs for next-generation technology as Korea, you know, is migrating now from their focus on developing a DRAM of memory focus supply chain to now logic focus supply chain. They need a lot of solutions in the area of power supplies, both DC and RF.
And we talked about China. China is becoming our sustaining engineering hub, the area where our industrial products derivatives will be made and we're pretty excited about the progress so far. 85% of our sustaining engineering is done right now in Shenzhen.
To address the markets we serve, as they go through investment in next-generation technology, and now at the trough, there's a dash to gain market share in advanced applications.
We have 4 new products right now. In the semiconductor area, new product being evaluated for advanced RF pulsing application where we really offer new and exciting technology for both etch and CVD. We have broadened our RF product offering and we anticipate within the next 2 quarters to officially launch some of these products in the market. This is exciting. It's collaborative and it's aimed at next-generation technology node.
In the 450-millimeter arena, as you know, it's real. And the G450 is taking tools next year. Some of our customers running 450-millimeter wafers in their labs now. And we have power supplies made by AE right now running process on blanket wafers 450. So we're pretty excited and that will again, allow us to launch to market high power DC and RF products that will be aimed at that inflection point in the market. Granted real revenue in 450 probably will not come before 2017. We're going to see a slow migration as the industry goes through R&D to the G450 fab and others until the industry basically converts.
We have the staying power. This is the next inflection point. Many companies will not be able to sustain that change, and we believe we are well-positioned.
Sub 1x nanometer technology. Here, we're leapfrogging and go into a totally new technology. We have a fast solid-state match that is aimed at very unique and short deposition processes that are so short that the current technology that is being used for matching is not going to be enough for the industry. So we have a new state of the art destructive solution with fast solid-state match and we have new power supplies that are not -- we cannot even define them in RF or DC. It's a very new technology that is aimed at next-generation sub 1X nanometers too.
In the thin film industrial. Here we go into a different direction, more power for larger substrate. We have 4 units of our new 50kw RF power supplies are now in evaluation at customers in Asia, for etch applications for flat-panel displays and we have advanced DC solution for deposition for metallic films for flat-panel displays right now being sold in the market. So we are offering a new set of products, both in the RF and the DC, to enable those solutions.
Similarly, in a PV Solar and glass, it's a slow market and you know what's happening at PV Solar. However, we have launched a new bipolar DC power supply and it's being used now for glass coating. And with that, through a partnership with a European partner, we have a low-cost matching network that is aimed specifically for this market. Because it's so cost sensitive.
In the industrial area, as I mentioned before, very fragmented. The growth potential is large. We are working on high-value derivatives. We're providing to customers stripped-down products that are competitive, high-value and implemented specifically on their machines. So it's almost like a custom-made derivative for a specific application and a specific customer.
We continue to look for other homes for our products and we've taken our products to new markets. One area that we will talk about a little bit more is the point of use gas abatement. It's a product we've had for years that now is being deployed to get rid of greenhouse gases as they come out of the process.
The industrial hard coating. It's a market, as Garry said, we did not serve before. We're serving it now with the acquisition we made this morning. And we're going also after food and beverage packaging technology and expanding our Sekidenko product line into IR methodology. What you see on the right side is a plasma process inside a plastic bottle in our lab. And semiconductor processes now migrate into other industries because of the ability to create thin films on various substrates. We're there closely with the developers to develop some of the enabling technologies required to take the packaging industry to the next level.
So let's talk about gas abatement. Processed gas go through the chamber, they react with the wafer or on the wafer, they go through the vacuum system, and then they need to leave the vat [ph]. The problem is some of these gases are nasty. Some of them are very hard to treat and especially PFC gases, the greenhouse gases need to be cracked. So the market was using large abatement machines that used to be running all the time to take care of that.
It became clear that because of the size and the cost of operation, cost of ownership, there is a need for another -- different solution, more point solution. So we took our remote plasma source and created a point of use solution for abating the gas coming out of the process.
So if you look at the left-hand side picture, you see an example, the left box is the standard abatement machine used today. And the right-hand side box is our point of use solution. It's very small. It doesn't occupy any space and it's being bolted on the vacuum system. And when it's needed, it's being turned on. And when it's not needed, it's off. So there's no consumption of power. There's no consumptions of chemicals or gases or anything.
We grew this business in 2 quarters from insignificant revenue to $3 million a quarter within 2 quarters, as it propagates, people start adopting it. The market size, we believe, is $100 million or more. And there's more regulation and compliance requirements related to greenhouses sustainability propagate, there will be more need for this solution for gas abatement, not only in the semiconductor industry, but in general, industries where these gases are being used. We're excited about this.
The next area that we looked at and Garry talked about as well, an area that we've not played enough in is the hard precision coating. Hard precision coating uses plasma. Hard precision coating is in everyday's life. And if you look at from consumer product to industrial products to defense products, hard coating is critical. In precision coating requires a very fine tuning and pulsing of the power and reduction of arcs that happens in the process, so that a defect-free film is generated with very strong adhesion to the substrate below it. So precision power is required for hard coating, hard quality coating. Where these coating go to? Everywhere. If you see on the right-hand side, drill bits. Machine tools that are being used to stamp. So you extend the life of them by coating them with hard coating. Jet engine blades are coated with hard coating and consumer and industrial products. So the market is broad. The machines that serve the market are all over the world and the power supplies that's required for this market are the precision power supplies that we talked about.
The market is about -- the market for the power supplies for this application right now is about $50 million a year. That's a TAM. And we have not played in this market at all. So how we did approach the market is by acquisition. We acquired a product and technology made by a company, a little company in Switzerland called Solvix. It's an industrial, very rugged, very reliable and it's a great product. It's being sold in very small area only in Europe and only to selected customers for hard coating application, but also for ophthalmic coating for eyeglasses.
The other unique thing about this product line is their arc management and detection technology is the best. They have unique industry-leading arc detection and suppression technology that is not only enabling them to create much better films, it could be ported back to our product lines and reused in our portfolio to enhance the capability of our portfolio as well.
Their strategic fit is fantastic. Their product is totally complementary and noncompeting with our portfolio. They are fully outsourced, which means we can take it as is and outsource it into our Shenzhen hub. It's currently outsourced already. And the team there becomes our localized engineering center in Europe. Our plan is to immediately move the products to Shenzhen, to expand the product to world markets because it's being sold only in a few countries in Europe. And it has a home in many other world regions and we are going to cross-leverage the industry-leading arc detection and suppression technology to our other products.
So if look at only these added markets that we're looking into that we can add to our historical TAM, we're looking at that TAM that will grow from 2014 to 2015 at a CAGR of 14%. So we're pretty excited about these opportunities. As Garry said, we're looking for others in our pipeline that will add more to our total available market as we continue to migrate beyond semi and beyond thin film.
So we are on track to fulfill our vision to become a precision power solutions company, beyond thin films processing, leveraging our core competency in power conversion and power electronics.
To summarize, we maintain our strong leadership in served markets. We are still to be a leader in the market we serve. Our new cost structure allows us to remain very profitable and the profit to continue to invest in R&D and developing new products. And we are very confident about our ability to fulfill and meet our strat plan. Our long-term trajectory and our strategic plan. Relying on a very strong, very strong operation we have in the hub in Shenzhen, and continue to focus on emerging markets and adjacent markets.
As we saw today, and I'm sure we'll see in the future, we will continue to tuck in acquisitions to accelerate that process. Thank you.
Gordon B. Tredger
I'm Gordon Tredger, in case you haven't met me yet. Joined Advanced Energy as the President of the Solar Energy business in December of last year. I joined, really, because I saw a company that had, in the solar energy space, some great relationships with its customers, a strong product position that came from knowing those customers extremely well and an underperforming profitability picture. So it was a great opportunity.
Last year, at Analyst Day, as Garry outlined, the three-year strategic plan was presented to you, all of you, and my job was to come in and really take that plan and run with it. So some of the objectives that we've set for ourselves, 20% to 22% annual revenue growth and you'll see that isn't something that has been a problem for Advanced Energy in this space in the past. But our other objective is to drop 10% to 15% of that revenue to the bottom line as operating profit, which was something that the company has been challenged to do.
So to go about this, one of the first things I did was hire a new VP of Marketing for the division industry -- the strong industry experience and he's really helped instill the disciplines in our product development and commercialization processes. So that as we grow, we feel we can not only have sustainable growth, but we can achieve profitable sustainable growth.
Early December last year, you'll recall, we executed a reduction in force in order to reduce our breakeven point. So that was executed successfully. The goal was to be able to breakeven in a seasonally weak Q1 environment for us. You'll recall, we generated about $0.5 million on our $45 million in revenue in that first quarter. And our goal now is to maintain that break-even point. As Garry said, costs won't be coming back in.
Another key thing for our success was going to be our ability to drive cost reductions through our supply chain. So again, we went outside the company, we brought in a new VP. Initially, as our Director of Supply Chain Management, but now as our VP of Operations and he's really done a great job of driving reductions in cost through the supply chain. We'll talk some more about that as we go along. We've consolidated our operations footprint, closed a couple offsite warehouses that were generating additional cost in the business, not just from the space they occupied, but from the multiple times that we were handling components.
And finally, operating income improvement. So if we generate growth, if we can reduce the breakeven point, if we can drive cost reductions through the supply chain, obviously the operating income improvement is going to come along.
So the 3 pillars of the strategic plan, margin expansion. That's something we're really focused on through the course of this year. I'll outline some of the progress that we've made.
I'll also talk about the fact that we're going to now turn to generating revenue growth and really trying to accelerate that and I'll give you some thoughts on cash utilization.
So in terms of margin expansion, that reduction in force that I talked about. That brought us $6 million to $7 million in fixed cost reduction on an annual basis. And really helps set the stage for us to achieve our operating income target in the third quarter of this year well ahead of our -- well ahead of what we would have expected at the start of the year. The sub-assembly transfer, one of you asked about that earlier this morning. We've started talking about that late last year. There was a lot of skepticism on the part of some people. And I think what we should have done a better job of explaining right from the get go is we weren't transitioning subassemblies to China. Some ephemeral spot over there. We have the world-class facility in Shenzhen. And all of [indiscernible] production has been coming out of that plant since about 2009. So this is something that we know we're comfortable with. We've got hundreds of people in that plant that Solar could stand on the shoulders of, and that's really what we're doing. We've got a capable supply chain, professional driving the strategy and we've got people in Shenzhen that know how to execute on this. So it was really a winning formula for us.
Phase 1 of that transition is complete. Now we just need to -- as we bring new products to market, we'll continue to fill that factory in Shenzhen and create space for the new things coming in by outsourcing the activities that are already there. So hopefully, you'll see a continual reduction in cost. It's just going to be relentless.
I mentioned the footprint consolidation. And then finally, we're looking at the designs of our products. If you have a lot of outsourcing that you want to do, obviously, you need to get supply chain management involved in that process of developing those products as early as you can. And they bring some great ideas to the engineers.
So how's all this been working for us? Well, I mentioned the breakeven goal in Q1. And then our goal from then on was to achieve sequential growth as we went through the year. By the end of the third quarter, our revenues were up to $60 million. Our operating income was $7.4 million. So we hit that 10% to 15% with a 12% operating margin in Q3. As Garry said, Q3 was a great quarter for us. But if we have a little look back to where we would have been at the cost structure from last year, that 12% would quickly have become 2%. Huge difference. And if we extrapolate it forward to 2014, again, assuming the 20% year-on-year growth, we end up at 14% operating margin, which is exactly what we said we were going to try and accomplish.
So let's talk a little bit about revenue growth. So assuming, as I said, that we keep our cost under control, we keep driving our supply chain, the secret really is to accelerate our growth. Three ways we can do it. One is the global expansion that Garry talked about. And I guess, to put the translator on this, when Garry says we need to get out of the U.S., what he really means is we need to maintain our strong position and look to emerging markets outside of the U.S. for growth. But we're not getting out of the U.S.
Adding new technologies that we can bring to existing customers. AE is looked at as a strong partner by some of our EPC partners and they look to us to bring the latest to them so that they can continue to enable their success. We'll talk more about that.
And finally, we are exploring opportunities for inorganic growth. Acquisitions is a great way for us to utilize one of the strengths we have, which is our cash position, in order that we can really lever that growth.
We're also looking to broaden our product portfolio. You would have heard about the 500 kilowatt monopolar product at Analyst Day last year. That product's now been released, it's gaining traction in the market.
We have also been taking orders for our 1-megawatt product. Another one that you would have heard about. We'll explore that in more detail in a minute. And we're also working to develop low-cost products for some of these new emerging markets.
We disclosed our relationship with -- broadening of our relationship with SGEG earlier this year. We're excited about the progress that they're making on a low-cost inverter that we can have the rights to market outside of the Chinese market.
And then finally, we can also look to expand our offering outside of just inverters, things like data monitoring, broadening our O&M support offerings. These are things that we can use to really take our success in terms of supporting inverters and broaden out our revenue stream.
So I mentioned the fact that AE has been successful in generating revenue growth. So from the time AE really got involved starting in 2007, the CAGR has been over 100% on an average basis. And the business has also been largely focused on the North American market. That's a great position for Solar. If you think about it, we're selling in North America, which has been a strongly growing market. You can see that strength is anticipated to continue over the next few years. We're in the inverter space, which is essentially the brains of the Solar field, so we're in a strong position there. And we also have really focused in on the needs of North American customers. So our market position is strong. We feel confident in the relationships that we have and we can continue to build from that strong base.
Looking within the market, we're also fortunate with the strategic decision that was made to really focus in on the needs of customers in the larger commercial and utility space. Micro-inverters have eaten away at the low end of the string market for residential customers and we're very well-positioned within the strongest growing areas of the North American market.
Obviously, the strength there is the product offering that we can provide. We have a broad range of commercial inverters. On the monopolar product side, 35 kilowatts on up to 500 kilowatts. There's also situations where a customer might want bipolar design. We have the ability to offer both.
The key thing is that developers are very closely aligned with our value proposition. We sell a very reliable product. We have a product that has a reputation for maximizing energy harvest with its 99% inverter availability. And then something that is synonymous with AE is our legendary customer support. As you go around and talk to our customers, you'll hear time and time again, the thing that really differentiates us are the field applications engineers that come in at the front end and help customers understand how to maximize energy harvest through their design we're there, when inverters get commissioned and where there -- anytime something goes wrong, 24/7 telephone support, we have people on site quicker than anyone else in the industry.
So the leading product is this 500 TX, AE 500 TX that I mentioned a moment ago. Last year, at Analyst Day, you might have heard it referenced as the PVP 500. So this is the product that really completes the range in the commercial space for us. And it's important to mention that it is the AE 500 TX.
At SBI this year, we unveiled our new branding strategy. We're not using the NASCAR marketing approach anymore, where you have Solarons and PVP products and SiteGuard and SafeGuard and all these different brands that people have to remember. Everyone knows us as AE. They can understand we have our transformer-based products, the monopolar products and our transformer-less products, former Solarons that are bipolar. It's been very well-received by customers. The AE branding is very simple, it's clean. And most important, people in the U.S. understood these brands that have been developed over time. But as we move to new markets outside of the U.S., we didn't want to have to educate everyone on several different brands. We just wanted to focus on Advanced Energy, which is a brand that is known in parts of the world. We have established presence in some of these countries. We wanted to be able to capitalize on that.
It's also a strong product in its own right. This 1.75 DC AC loading ratio is an industry-leading ratio. What it does is it allows our customers to stream more panels off of the single inverter. Again, maximizes their energy harvest.
It's also now approved for production in Canada. It will be compliant with the FIT Program up there. And our growing presence will be complemented with this product. And we're also -- sorry, let me just back up. It's a perfect fit in the commercial market between 1 to 5 megawatts. That's an ideal commercial installation for us. But we also recently sold a 20-megawatt utility scale project using this product and we'll be deploying that this quarter. So we're pretty excited about the prospects going forward.
One of the first customers for this product was the Toms River Regional School district. And you can see from the little testimonial, what comes through here is the fact that this product is a nice fit with the needs of these developers focused on the product's performance, but also the people that stand behind that product. It's something that really resonates with people. And again, you'll see 13 projects, 4.5 megawatt, something that we can build on for the future.
Now I'll turn for a minute to our utility scale offering. So you see in the upper corner of the screen there, a depiction of our power station. AE was the first to market with a 2-megawatt power station. It was something that the industry saw as an innovation and really helped us build out our presence in the utility scale projects around the U.S.
We're now at the point where value that this brings to the market is dependable electricity generation, it's the high-efficiency. But more importantly, the unsurpassed uptime that this skid brings really resonates with customers.
We're FIT compliant in Ontario. We talked last quarter about how we're starting to see some of the deals coming through there. So we're very excited about the possibilities for the future.
And again, we have a customer. The key thing here being that what this customer recognizes is the strength of the technology. She'd talk about the price, but what she's really talking about there is the fact that with our product line, you get a lower cost solution because you get tremendous savings from the balance of the system. So inverters are what they are. But with our design, you need fewer step-up transformers that also enables reduced cost for wiring. Copper is very expensive. So overall, the customer can see about a 40% reduction looking on a like-to-like basis. So that's something that comes through here. And also, the fact that we've got the folks in the field that can stand behind these products.
So talked a lot about this customer support is a tremendous advantage for us. We're proven performers. Can't emphasize enough the fact that we can sell these 99% uptime guarantees and achieve them.
We've got proven performance in some very demanding environments, be it desert climates or colder climates in the northern regions. We cover it all.
World-class support. As I said 24/7. You can get an AE representative on the phone. Our nominal response time is within 72 hours. But in a lot of cases, we can commit to 24-hour turnaround. And that comes to our lifecycle offering for services.
SiteGuard, we can essentially step in and make sure that we maintain the operation of the entire solar field, not just the AE inverter. In other situations, we just offer the support through SafeGuard where we come in and maintain the inverters, make sure that they're up, anytime there's an issue, we're there to address it. And we can also, because of the reliability of the product, we can also offer a customer up to a 20-year warranty, provided they're willing to pay for it.
So what underpins our value proposition is really this lowest LCOE, levelized cost of energy, for those of you that may not be familiar with the term.
And there's really 3 components here. We've talked about maximizing the energy harvest for our customer. Very important. A lot of companies go out and tout their CEC efficiency, which is something that's important with an inverter. But it isn't just CEC efficiency. The inverter has to be up and running anytime the sun's available and that's what we can provide.
Lower balance of system cost. I talked about the fact that with our skid integration, we can keep the cost low. And with bipolar products, there is the cost advantages that I mentioned. And finally, lower O&M support costs.
So if you have an inverter that's designed for a 20-year life, it doesn't have to be visited for repair on a routine basis. You can really drive those O&M costs lower.
So the combination of the energy production, the balance of system savings and the LCOE -- sorry, and the lower O&M cost allow us to keep that LCOE very low. And what we end up selling to a customer is really confidence. If you buy an AE inverter, you can be confident in your energy production. Very important when developers are putting together their financial model.
So let's talk about how we can take that value proposition and expand on it. So you can see in the left-hand corner there, the U.S. market growing strongly. But in absolute terms, it's actually small relative to some other markets in the world.
China, on the other hand, on the right-hand side, it came from nowhere and has grown very strongly. It's anticipated to continue to grow strongly. But what I'll tell you is what we've said before, and that is the Chinese market is going to be a market for the Chinese. There's inverter manufacturers over there that are meeting the needs in China extremely well. There's foreign companies that have gone over there and gotten bloody noses trying to compete directly with the Chinese. So what we've done is we've established a development partnership with SGEG, which expanded our relationship. They're focused on a low-cost inverter that meets the needs of the Chinese market. We've given them access to some critical know-how. Some of our utility interactive controls, for example, some of our firmware so that we could get them to market quickly. And then in return, we have the rights that we can pick that low-cost inverter design and we can provide that to other markets.
So India is another market where we think that low-cost technology will have a nice fit. It's a market, again, that's come from nowhere. It's at 1 gigawatt now, it will at 4 by 2015. There are some very interesting projections going out to 2020, to see how that market is going to unfold. But again, that's going to be a market worth having a product that fits the expectation of an Indian customer is critical.
Japan. Again, another market after the tsunami. Their nuclear power production was suddenly in question. So they've come up with a very aggressive plan to introduce solar into that country and the market will expand there rapidly and we plan to be part of that equation.
And then the last one I'll mention is EMEA itself, Europe. There's a lot of press out there talking about some of the travails of the current situation where there's uncertainty with the German FIT program. Italy, with the economic uncertainty. So 2 large markets for solar are actually seeing some declines.
But the expectation is that those declines will start to reverse themselves. And overall, there are areas of Europe that are going to grow strongly over the next 2, 3 years. So that overall by, 2015, we'll see a return to growth in Europe. And if you look at the absolute size of that opportunity, it's got some exciting prospects.
So again, just to look at that in a little more detail, you can see the base of the graph is the European market. You can see it having a dip in 2013. We can all have our own numbers. If the European demand fell from the 15 that is shown here to 13, the main thing is it's expected to be short-term and correct itself. And as early as 2014, the market will start to recover and grow nicely from there.
North America, again, you can see the growth. But again, overall, it's a smaller opportunity than what is looked to be contributed either from Asia or from Europe. And the Asian markets are all going to grow very strongly. So there's plenty of opportunity out there. The key thing for us is to have the products that fit the bill.
So within that North American market, there still are opportunities for growth we feel. We're continuing to invest in our field-facing customer -- or field-based customer-facing folks. These field applications engineers that I mentioned that are critical, we're putting additional bag-carrying capacity in place so that we have more people calling on customers unearthing more opportunities. And then finally, we're continuing to build our service network to make sure that as we grow the business, that we don't fall short, in terms of the customer support that we provide.
So having more folks in the field what does that allow us to do? Well, it allows us to deepen the relationship with these important EPC partners. So we have field people that have existing relationship with customers. They can focus on maintaining and deepening those relationships. And then we have folks that can go out and make sure that we're getting our share of the new opportunities that are out there.
One thing about these EPCs, as we develop a stronger and stronger relationship with them, they're introducing us to opportunities to sell into some of these other markets. So that as we have products available that will fit the bill in Japan or fit the bill in South Africa or fit the bill elsewhere. We'll be there with EPC partners that know us, rely on us and are prepared to introduce us to some of these new markets.
And finally, what we're doing is we've invested in a software tool called [indiscernible], which is basically a software backbone that allows us to manage our Service business much more efficiently, dispatch people when a customer calls. The dispatch person can get on the software, dispatch someone immediately. When the service person finishes their call, they have an iPad with them. They have a few clicks that they make to fill out the service report that immediately goes back to headquarters.
A tremendous improvement over the days when we had to book a service person home on a Friday or on a Monday so that they could fill out all the paperwork from the previous few days. So again, that's going to give us more capacity because we're going to be more efficient. So we can maintain ourselves with fewer people going forward, or at least having to hire fewer going forward and still maintain that tremendous support that we offer to people. So that's North America.
In terms of these emerging markets, we want to capitalize or continue to capitalize on the strength that we're seeing in the Canadian market. We will be releasing our 1,000 volts 500TX product with the UL listing in the middle of December, and that's in response to a direct request from a Canadian customer who came in from his vacation to meet with me one day late in June and implored me to please proceed with this UL approval. The quote would be "Please don't make me buy from" -- and I'll spare you the name of the company, but he wanted to buy from AE. And that just -- I mean, it sounds self serving but it's real. There are customers out there that are very pleased with what we've been able to do and continue to provide them in terms of support. And as I've mentioned, the 500TX product is now released up there, we'll begin shipments on that very shortly.
Penetrating emerging markets with country-specific products. Well, what that means is the recipe that's been very successful for us in the U.S., we're now going to apply in other places.
So it's very clear when you go to India, for example, if you have a partner like we do in Bergen, they introduce you to all of the right people. And very quickly what you find is they're looking for a solution to their problems, not a solution to the problems of somebody in New Jersey or in Germany. They want a product that meets their objectives, in terms of the price they're willing to pay and provides the features that are important to them, not the features that we tell them should be important to them.
And leveraging this SGEG collaboration, again, is going to give us the cost position on these products to start from in order to be very successful with that over time. Again, it's not going to be something that comes on in a month or 2, we're in this for the long term and we'll continue to build this out in a way that we can be profitable doing it.
The other thing we can do is build on our presence in Taiwan. It's not a big market. It's not one that we've talked about a lot externally, but our 60-hertz products do fit in Taiwan. We've got installations there. And more importantly, we've got very capable people there that we can now use to lever our presence in places like Japan and Korea.
So again, you have EPCs over in that part of the world that operate in some of these different countries. And so from our Taiwan base, we've been introduced to people in Japan. We've got people in Korea that are interested in Japan that are also present in Taiwan. So we can start to build that out as soon as we have the 50-Hz products available that I'll talk about in a minute.
And then last but not the least, there's this expanding awareness of solar in some of these island countries. Puerto Rico is an example of one and the rest of the Caribbean. You have islands in the South Pacific. You've got Hawaii, but then places like Guam where they're using diesel to generate power today, very expensive, not environmentally friendly.
And then in the mine locations. So if you look in Costa Rica, up in some of the mines, they're trucking diesel all the way up to these mine locations in order to generate power. Because otherwise, there isn't any electricity available. Find the same things in some remote parts of Australia and elsewhere in the world. So the opportunity is there, we need to expand our product line.
So I talked about the need for a 50 Hz product. So we do have one under development. We call it the 630TX. It's an offshoot of the 500TX that we launched last year and have been shipping this year. And it will, again, meet the needs of people in these 50 Hz countries. We talked about a native 1,000 volts solution. So it's 1,000 volt, which is something that's coming across as important in those countries as opposed to 600 volts that commercial applications use here in the U.S. for example. And the other thing is with the transformer out, you can bring multiple units together and lower the overall cost of the system.
The SGEG partnership that's going to give us the low cost solution that we need to capitalize on some of these situations. We talked already about the need to really target in on what the specific requirements are for each country. The approvals in Japan are going to be different than what the expectations are in India, for example.
And then we also have the flexibility to meet the requirements for local manufacturing wherever we go. You see the FiT program in Ontario. There's specific requirements for content. In India perhaps with some of their tariff structures that hit all products there would be an advantage to assembling the products locally there. So the product, the platform, that will be very well positioned for us to be able to do that. We have the recipe from the Canadian operation that we can now apply wherever we go in the world.
And then finally, talked about moving to products outside of the inverter. So the integrated monitoring platform that we've developed is a good start. Again, we're not going to be the folks that provide this data system. There's people that do that quite well for power plants all over the world. But we will have the ability to step in between there, control the inverters, monitor their performance, make sure that they're available. And when they're not, we can use alarms to get out there and make sure that they're back up and online quickly.
And this will also integrate very nicely with our next-generation of utility interactive controls for things like low voltage ride through, high voltage ride through or power factor control.
And then the product that we're excited about now is this -- it's been called the Megawatt previously, it's now known as the 1000NX and it is the next generation of our utility offering, a perfect fit for customers in the North American market. We understand their needs quite well. The product's been very well received and we are already receiving purchase orders for it for shipment later next year.
It's a smart inverter. It will support the broad range of utility interactive controls that I mentioned, maintain the advantage in terms of wiring costs being minimized and also support the 2-megawatt configuration with a skid at a lower cost. Two inverters on a skid, it is a lot less expensive than putting 4 inverters on a skid, you have a lot of redundant things, displays and breakers and things of that nature that get minimized as you move up to the Megawatt.
Unlikely, we'll see a 4-megawatt skid, just from the issue of the logistics, a 2-megawatt skid can get towed pretty nicely by a semitrailer and follow a conventional road. You start building up to 4, it's very heavy. It's very awkward, very cumbersome.
And then lastly, a little going to look at the cash utilization. So obviously, if you're going to utilize cash, you need to generate some. Something that we're focused on, we're working to -- on everything from accounts payable terms, we're now focused on how we can begin to drive our inventories lower while maintaining our ability to have flexible lead times for customers on the commercial side of the business and also to make sure that we're able to capitalize on the growing business that we'll see from the utilities sector.
We expect to generate cash strongly for the next couple of years. So we're looking now at ways that we can utilize cash organically and inorganically.
We have a very active development program. Products like the 1000NX, the 630TX, they require investment and we're working on those aggressively right now. We are expanding our sales channels, not just in North America, but we're going to establish them in places outside of the U.S.
And then last but not least, there's acquisitions. If you're in a position today of being a successful inverter manufacturer with available cash, there's folks out there that would be happy to talk to you about how you could combine your businesses. So as Garry mentioned, we have a list of folks. There's not just inverter manufacturers, but other things beyond the inverter, O&M services, that we can look at acquiring in order to broaden out our presence in this market.
So just a quick summary. We're very confident in our 3-year strategic plan. We can maintain our strong leadership in North America and in fact we can grow from that base -- continue to grow from that base in North America. We've got our cost structure in line. Those costs will be coming back. So we can reach our profitability targets, especially given the focus that we have on managing cost out through our supply chain.
And then finally, we can use potential acquisitions to accelerate our efforts to build a presence outside of the U.S. market.
So thanks. I'll turn it over to Dan.
Danny C. Herron
Good morning. Thank you. I guess my job is really to summarize what you've heard here for the last couple of hours. I'll try to pull together what we've been working on for the last year. You heard Garry start this morning talking about building our foundation as we started to focus on margin expansion. You've heard Yuval and Gordon talk about our revenue growth. And certainly, we've already utilized some of our cash this year with the share repurchase and acquisition announced today.
So how are we doing? We stood up here a year ago and we talked about a restructuring plan. We talked about the cost objective. I think we said $16 million to $20 million. We're well above $30 million. We're on our way to $50-plus million. And if you look at the things we've done, a lot of these, they're completed. We said we were going to do them. We went out and did them. We quantified them. For 3 quarters now, our costs have remained flat. The costs aren't coming back.
There's still some things in progress. We will never stop realigning our engineering services. This is the business that's going to change forever and we're going to be flexible enough to change with it. We'll always keep the focus on cost reduction. If you look here, I've got in progress. Sub-assemblies will always continue to transition, sub-assemblies to outsource more from our plants so that by doing that, we're able to reduce our inventories, have other people build sub-assemblies for us and our cost of goods reduction that will be a relentless focus.
The really great companies, if you look at history, are the ones who continue to focus on cost every day. It's not a restructuring program. We mentioned that we shouldn't have a lot more restructuring charges after this quarter. But don't misunderstand, that doesn't mean that we won't keep focusing on cost reduction. We just, at this point, don't see anything really large enough that we're going to bother you with a restructuring charge on a quarterly basis. But we're going to continue to always focus on cost reductions.
So how does it add up? If you look at where we are in the 2012 column, we're already at 30 million plus. Garry talked about, on the last earnings call, we've identified cost reductions of about $10 million that are from this day forward, from material reductions. All of those summarize up, and if you look at the out years, by 2014, we expect to have about $55 million out of this business. The tax affects that at our normal tax rate of about 28%, given the blend of the businesses, it's $1 a share of cost reductions versus where we were when we started this process last year. It's about $130 million over the cumulative 3.5 years for a $16 million investment. I will go spend $16 million all the time to get that kind of return.
What I hope to be able to do, in what you heard from Yuval, you heard from Gordon, you heard from Garry, is this is all about showing you a pathway to our target of $2 a share. I'm going to show you multiple ways, multiple things that can happen that can get us well above the $2 a share. Will they all happen in the same year? Garry mentioned, he's very confident we'll get there. The issue is when.
There's lots of things we can do. We've already done some of these things on the left. The restructuring basically is behind us on Phase I. We talked about things we're doing from growth. We acquired a small company today to give us an expansion into another market. Gordon talked about all the R&D stuff that he's got going. Those are things you're going to see in 2013.
On cash generation, we announced a buyback, that's a defensive measure, who knows what's going to happen with the fiscal cliff that's in the press every day. You could see real opportunities to acquire some shares back and even give us more insurance to get to our $2 a share.
And then in the future, it is all about gaining the momentum on our revenue growth, whether it's in Thin Film with adjacent markets, with design wins that we've had this year or it's in Gordon's business with new products and expansion on a worldwide basis. So there's lots of ways we can achieve our target that we're trying to get to.
So let me recap. It's where we've been, what we're doing and where we're trying to go. On a margin expansion, I mean, we brought our break-even down to about $90 million. You roll back to this company 2 or 3 years ago at current revenue levels, it would have probably been losing money. We would been having reductions in pay. We would have been laying people off. We did all that last year. We got our business set to the right size. So our business can remain profitable in these trough levels.
We have competitors out there worried about not making money next quarter. We gave guidance. We're going to be profitable next quarter, this quarter. We believe that we've got the right size business now to survive these troughs to make reasonable money. But when the markets return, and I say when, because I think we all know that's going to, we just don't know exactly when. Everybody tries to forecast. Is it next quarter? Is it 3 quarters from now? But when it does, we're positioned as well as anyone to have extreme profitability when that occurs.
Our focus now is really on cost of goods sold. We took the low hanging fruit. We took care of the OpEx. We got the business structured correctly. And now, it's about cost of goods sold. It's about doing things like we installed the software called REVAS [ph], reverse auction software. In certain instances, we went out in resource products and we found reduction in excess of 25% on certain costs. That's pretty significant. That's a big opportunity for us.
If you look at outsourcing the sub-assemblies, we were in our Shenzhen plant 2 or 3 months ago, they showed me a presentation where we're currently building a sub-assembly. It's got 73 raw material parts in it. We're outsourcing that to someone to build that for us, so we're going from 73 inventory items to 1. It's a way of reducing our balance sheet investment and inventory by pushing it back to our suppliers, maintaining good quality and being more flexible in the process.
So how are we doing on the revenue growth? We expect to grow our Thin Film revenue, they've all went through that with you today, at better margins in the future, with more focus on Thin Film industrial. There's a better margin opportunity in that. And just think about it, Thin Film industrial has lots of customers. The semiconductor side only has a few customers. They're pretty big. They have more pricing power than the little customers we deal with on the Thin Film industrial side. So it gives us an opportunity to grow that business and grow it at increased margins.
We're talking about acquisitions. We've completed one. There are several more and Garry, Yuval and Gordon, all talked about the list is growing. We will continue to utilize our cash. And I'll show you what if we do that in a minute.
You look at [indiscernible]. We say they will grow their revenue at current margin. Now they're finding cost-reduction items in cost of goods sold. We all hear about margin pressure out there, pricing pressure. But we think we can probably take cost out at an accelerated rate and maintain or improve our margins in our Solar Energy unit. If you look at, the proof is probably in execution. Over the last year, we've grown our margins in solar. I don't think others have, but we did. We grew margins year-over-year in Solar and we grew at about 20%.
And then in cash. Last quarter, we had $174 million. We generated about $25 million last quarter. Year-to-date, we've done $85 million through 3 quarters. So we're in a very strong position to continue to generate cash. We have a focused team that's looking at DSOs. They've come down significantly this year. Our payables are up, in terms of days and our inventory is down. All those things are now in place. And the expectation, the bar has been raised internally that those things aren't coming back when volume comes back. We're going to continue to manage metrics.
If you look at what could we do in the next 2 years? So we think it's pretty reasonable to think that we'll generate between another $100 million and $125 million in the next couple of years. So just go with me here. We had $175 million to begin with. We've generated $125 million. We're up to $300 million. Just take 2/3 of that. Assume we're going to invest $200 million in acquisitions. And I'll take that a little further. You can use a 4 multiples of EBITDA. You can use an 8. You'll come out between $25 million and $50 million of EBITDA that we can acquire. Your tax affect that at 28% and you're talking another $0.46 a share at the low end, up to $0.92 at the high end. So once again, it's just another tool that we have in our toolbox to try to achieve the target of $2 a share.
So let me show you now in a graphic just how we think we can get there. Now this describes a perfect storm. Everything is working perfectly. We've got the tailwind at our back. But just think about this. We're going to end this year, if you take the midpoint of our guidance, somewhere around $0.60 a share. So let's just roll forward from that through 2014.
On the cost of goods, the $0.22 there. All I've taken is the cost of goods savings that we see in the next couple of years that was on that previous chart and I said we get half of that to the bottom.
So what that says is we have pricing pressure for half of that. The other half comes to the bottom. You tax affect it, it's $0.22 a share. Not unreasonable.
We've always shown you that we will get a reduction in our stock-based compensation expense because we have this tail that's been issued in the past that's unwinding. You go back to a couple of quarters ago. We have a nice chart that showed you what that was. It's $0.13 a share. It's real. It's already in place. There's nothing that we have to go do to make that happen.
And then if you just roll forward, you've all talked about getting back to 80% of the peak. So all I've done is taken $80 million here, that's $20 million a quarter, and added Thin Film. You take about a 50% margin because we'll going to be able to leverage the Shenzhen factory as we put more volume through there. You tax affect it. It comes out to $0.73.
You take Gordon's business. We've delivered this year about a 20% growth rate. We expect to deliver 20% to 22% over the next couple of years. All I've done is taken 20% growth, that from where it is, that's worth about $100 million.
Now I've been conservative on the margin. I've used the 25% income margin. You've heard Gordon talk about deploying sales people in other countries. So we'll invest in that. But you do that, you tax effect it, you still get $0.46 a share.
And then I've layered on the 2 acquisition potentials. The low end of the range. So we spend $200 million. We pay an 8 multiple. We only get $25 million of EBITDA, that's $0.46 a share. If we're able to buy something at 4 multiple of EBITDA, we can get $50 million. The reality is, we'll be somewhere in between.
But I wanted to show you the potential here. So the potential is you can see it adds up to over $3 a share. Once again, this is the perfect storm. Now maybe the perfect storm's happening this year in reverse because we got the trough in Thin Film. We've got a lot of overhang out there with what's going on in the economy. But if everything clicked, that's a pretty nice result. Once again, if it doesn't click, we still feel very comfortable that we have a pathway to get to our $2 goal that we've put out here a year ago.
So let me close with, so how are we doing against the goal? A year ago, we laid out 11% CAGR on revenue. We laid out $180 million to $200 million in cash. We laid out $1.80 to $2.10 on the EPS. So how are we doing? Well on the revenue, we are certainly growing our Solar business, about where we said we would. I don't think anybody really predicted the trough in Thin Film. And it's not that we don't think that revenue will come back. It's just a matter of when. But we're well positioned when it does. If you look at our cash generation, through 3 quarters we're at $85 million. So I think we're well on track to get to the $200 million that we've talked about.
And then if you look at EPS, this year is about $0.60 in a trough market. As we've talked about, if you just came back to the peak in Thin Film, it already be at the $2. We don't think that will happen next month or the next quarter, but we have a pathway to get well above the $2 as you saw on the previous chart.
So that's our prepared presentation. I think we're all available for questions. We can do some Q&A now then we've also got lunch. We can do Q&A during lunch. So we'll open it up at this point.
[indiscernible] The one thought is, it takes sort of a certain kind of mindset or mentality to drive a lot of cost controls in the company, and you guys have done an unbelievably good job at that. It takes a different kind of mentality, in some cases, to drive revenue growth and market expansion. We've seen some other semiconductor companies over time that have done a similarly good job of what you've done on the cost structure side, but it's been a little more challenging to drive the revenue growth. Do you think it's a -- is there a cultural element to that or is it a mindset or what is it that maybe some other companies have kind of tripped up on that transition from cost savings to revenue growth that you guys think you can do better?
Garry W. Rogerson
First, it's a good question, because if you go back in the past, people used to talk -- they used to talk about are you a cost company or are you an innovative company. And my belief is you have to be both. We have to be both. You can't be one or the other anymore because it continue to drive that cost down and now we're going to find ways to grow. And I would say if you go back a year, probably 80% of my time was worrying about cost. Now probably 80% of my time is worrying about growth. So we can see the engine of cost going along quite nicely. I think it's a bit bold to say we get even $0.50 on the dollar back on the cost we get out now. But okay, it's fine. We'll continue to drive that cost down. But my job now -- our job now -- I mean, I think all of us now are switching from cost to growth. Because that culture is in the company now. It wasn't there a year ago. And I'm not surprised. Who cares what history is. It wasn't there. It's now there. It's now there from your dinners in the evening to real significant stuff. It's there. I mean, it's exciting to me. It's really exciting. I mean, the cost or the $10 million we took out in 3 months. Well, you can either say it's amazing or disgusting, whichever way you want to. It's one or the other. But it's great that we've found that. But now we've got to find ways to grow. And we are, in this technology that Yuval found in Switzerland. It's exciting. This technology, one, is a product in itself that we can distribute across the world. Two, it's a technology that we can actually put in products of our own, which gives them a competitive advantage. And three, it gives us an R&D group in Europe where we've been deficient before. So it's a wonderful acquisition for us. There are many of them around and they're damn hard to convert from being theirs to being ours. But they are there to be had and we're all working on it. I'm actually excited also about the lean R&D. And I don't think you've all talked about that. Probably shut my eyes for a few minutes. But I've heard it before. The lean R&D, which probably all of you know is doing things in parallel. We are doing more in parallel which I don't a year ago we were really doing. And you've all might want to comment on that more. But now we're doing parallel R&D. And it's incredible how fast products are being developed. I mean, some of this -- is it the edge of the products. I mean, the speed of development that I've seen on those products over the last year had been pretty incredible from nothing to something to the customer saying, "yes, we want it," to the other company being taken out, all in a year. Now that comes -- becomes product, as you know, in 2 years. It, before it starts shipping and accelerating, but probably is a $100 million opportunity there over time. I mean, $100 million of -- gift that keeps on giving [ph] as we go there. So no, I think it has to have both. If we don't have that both, we'll be a loser. So if you think we can't do both, then I believe we'll be a loser. And I don't believe that. I believe that we have to do both, and we will do both. And we're all switching now from cost to growth. And that's one of the messages we wanted to put out over today, it's that switch. Clean has to have [ph] -- we have a lovely engine now. It's a really nice engine there, that lovely Shenzhen facility just churning away. I mean, just got -- I imagine I was covered in dollars shooting out all over the place. I love imagining that. I actually wanted to have a little movie, but I was not allowed to.
Garry, I have 3 questions. So first question is, if I went back a year ago when you guys talk about your growth potential way, a lot of the focus went on -- was on Solar Energy. And I think, at that time, I think you've actually said that the goal was just to get kind of a stable Shenzhen business out of [indiscernible] market player. But it sounds like this time, you put a lot more focus on your growth in Shenzhen. Do you think that you can actually grow that business a lot more than what you previously thought? What has changed that? Number one, right?
Garry W. Rogerson
Okay, yes. Okay, so we're doing that one. We're going to stick with that one. Number one, on the solar side, what we said, we'll grow roughly 20% per year. We feel pretty comfortable with that at the moment. Our lives changes. But at the moment, we feel comfortable with that. On the Thin Film side, as the year -- well, I -- we knew already that we -- and again, I haven't got the tone [ph] -- got to get out in semiconductor. We don't want to get out of it. We love it. But we got to get into more things, as well. And we realize that. And -- but we haven't put the thought into it, to be out to speak to you as much about it. And since then, we've started to find markets. We started to find products a little bit last year. The abatement products came upon us in some ways to be [indiscernible], and then we develop them. So there's a little bit of luck there. But then on the Solvix SA, the Swiss company, on some of the sterilization technologies we're getting involved in, I mean, they are us forcing our way out. And we have to force our way out. Semiconductor is getting more and more efficient. So even though we're actually quite lucky in the product we are putting in, it becoming a greater percentage of the product that's being shipped out, so we -- that's great. With no luck, it's what we're good at. But still it's a shrinking market over time as -- and less and less fabs, more efficient fabs. You know the story better than I do.
So the second question is on the Solvix. What exactly market are they shipping to right now or selling product into right now? And are they selling product, or are they just a technology company you guys are buying to productize? Just can you give us some background?
Garry W. Rogerson
So, Yuval can answer. Firstly, there's a little bit of revenue there that covers a little bit of costs that they have. But Yuval, do you want to...
Yes, they do. They -- first of all, this acquisition does not dilute us. It does not. So there's revenue there. And the engineering team, the R&D center that they have there, is fully covered independently, right? And by design, the way they run the business, it was very focused on precision hard coating, ophthalmic lens coating and only in Europe, to selected countries. What we like about this technology is their arc management, which is really leading, as it was detect -- I mean, evaluated by third parties, right, and the product design that really fits the global market requirements for hard coating, an area that was really a white space in our portfolio. So we're excited. The revenue contribution next year will be small, but beyond that, it's going to be an accelerated business for us as we take it to world regions and also as we implement some of the arc detection and control technology in other products in our portfolio.
Garry W. Rogerson
Yes, I -- just to add a little bit more color. I think this -- firstly, the product line, there is a few people in Switzerland, which is great. So there's a nice little R&D center for us. And those costs are covered by a little bit of revenue they get. It's lumpy revenue. They've got 3 or 4 customers, something like that, so it's lumpy revenue that they've got. But the exciting thing for us is 2014. We keep talking about 2014. We should have got this product into China by then, into Korea by then, and we should be growing it nicely into a reasonable sized market. It always what we say, it's a $100 million market.
Right. There's a market for that specific application. It's $50 million.
Garry W. Rogerson
$50 million. So it's a...
That would take you to other opportunities abroad.
Garry W. Rogerson
Okay. Do you have one more question? [indiscernible]? Are you done? Could you come here?
Garry, a couple of questions. The first one is, I understand that the solar market is going through a deep cyclical downturn. Now if you look at the entire Solar supply chain from poly all the way to modules and balance of system, everyone is losing money but the motor guys. Right? So I'm just kind of curious, what is it in the inverters that makes you guys or SMA (sic) [SAM] or Power-One maintain 10%-plus op margin went everybody else is losing money? And subsequently, what kind of pricing reductions or pressure are you baking in for your 2013 outlook?
Garry W. Rogerson
Firstly, that's a wonderful question. We don't see any downturn in the U.S. at all. So you're saying there's this big downturn, there is no downturn in U.S., none at all. So maybe the other guys -- I don't know anything about them. I do know they seem to be changing management and doing all sorts of stuff, but that's their job, not my job. I've seen their public filings, like you do. So what we see is growth in the U.S. We see expansion of margin in the U.S. It can be lumpy. Don't think it's going to go -- always going to up and down, up and down. But I think the trend is good. So we are pretty confident in the U.S. We see the global market growing, so we need to get into the global marketplace. Pricing goes down like any other products in this world. I think I said earlier today, I used to sell a product for $1 million a throw, and there you buy for $35,000. I mean, this is no big deal. I think we've got in our heads, this is something that -- these are rapidly growing, expanding market. Of course, the costs are going to come down. They aren't going to come down. If we don't think that, then you lose. We've seen others lose. I don't know why they lost, but they decided to grow their business and not make any money. Well, you got -- it's a recipe for tooling or [indiscernible] you shut the door, that's what happened. Our job is to not let that happen. Our job is to reduce our costs and our pricing will go down, but we will fight it. We will fight it and make it try and get it to go up. I don't like the idea of CEOs standing up and saying that pricing is going to go down and margin is going to get less because, do you know what happens? Pricing goes down and then margins get worse. You've seen it. You've seen companies -- and I don't like mentioning other companies. They've stood up, the CEOs who's -- to that -- who said that. Do yourself a favor. If you say that the price will go down, then your margins will go down, and in the end, you call it a day. We are fighting to keep our prices up. I've been said before -- I said our price -- our products are Rolls Royce products. I've been, "Oh my god, you mustn't say they're Rolls Royce," but I want our products to be Rolls Royce products. I want our service to be the best. I want our products to be the most efficient, because then maybe I'll get 1% or 2% more than anyone else for the products. And I believe we're starting to get 1% or 2% more for the product because it is more efficient, because our service guys do get there the next day. Our service guys get there the next day. Find out who else's service guys get there the next day. You will find it's not as easy as that. And people will pay just -- not huge a amount, it's impossible, but a little bit more. I'll course 1% more price if you got 10% profit, and that will increase your profit 10%. I mean, you -- this is no-brainer, yes? So I am very comfortable of our approach. Now if there are silly people out there, silly companies who are silly indiscernible] and bring the pricing down. I mean, we have to be careful. We have to be careful, but we are trying very, very hard to be careful.
All right. And then one other question, and I understand that you guys have done a great job with cost reduction and are focusing on organic and inorganic growth, which is the right thing to do. I'm kind of curious on your thoughts, from a capital allocation priority, on dividend, given that [indiscernible] gives a dividend and we have an open buyback too. So I want to know, like what your thoughts are in dividend longer term?
Garry W. Rogerson
Our #1 priority at the moment is acquisitions. Our #2 priority -- well, sorry, our #1 priority is to make ourselves more efficient, so that's #1. #2 will be acquisitions. #3 will be buybacks. And we'll always consider dividends, but we don't look at companies like that to consider whether when we're going to give a dividend or not.
When you talked about the sort of 20% to 22% growth targets for the inverter business over the next 3 years, and there is a lot of focus in today's presentation on expanding into other markets beyond North America, how much of that growth in the next coming years do you anticipate coming from other markets outside of North America? And within that -- of those regions, where have you already received certification necessary to penetrate those markets? And how do you see that linearity?
Garry W. Rogerson
I think that -- I can chat about that for a little bit. I mean, what you've seen is products get -- what I have seen is products going into different countries, the wrong products. And you see bloody noses when that happens, including us. We've have bloody noses as we have sold the wrong product into countries. There's no question at all. What you've also seen from us is, for instance, Canada. When we mentioned 2, 3 years ago we were going into Canada, well, we worked, we've listed, we designed products for the Canadian market, and now we're reaping the benefits of that, which is fantastic. And as Gordon said, our customers just want us in Canada. And that's how we're going to approach it. So it's going to be a very, very slow process. And I've said it before. India is a very good market for us. I don't expect to be saying wonderful things about India for 2, 3 years. I really think it's going to be that sort of time out because we've got to understand the marketplace. And India is -- I've been there many, many times with many, many products. It is a tough marketplace. You just don't say, "I'm going to India," which is what appears to be what people say. It doesn't work. You don't get paid and the product doesn't work, anyway, when you get there. So we've got to be very, very careful. We get the products right. Work with Indian people, Indian professionals in India to get the products right in the Indian market. So I think you'll see a slow progression of us getting into other geographies, unless we can acquire products and acquire distribution to get into those countries. Then, maybe -- maybe that's different. But that's a little opportunistic. We need to look. We need to be careful as we go forward, but that's a possibility. As Gordon quite clearly said, there are a lot of companies out there who are a little bit stressed at the present time and who might want to join up with us in some shape or form.
Gordon B. Tredger
If I could just elaborate a little bit for you. coming back to a question that was asked earlier. One of the reasons that we're confident in the inverter side of the business is that the inverter is unique in the sense that it really controls the solar field. And if you look at the investment that is made in inverters when you're putting in the overall system, it's actually a small overall portion of the investment. So the fact that we have these interactive -- utility-interactive controls that bring confidence to the financial model, it means that these aren't commodities that we're selling. They're intelligent systems that bring substantial value to those customers. And we aren't the only inverter manufacturer out there, but we think that, that gives us some protection from what you're seeing, for example, with panel prices crashing. Where that is essentially a commodity these days, it's all a price game. So we can differentiate ourselves a bit. And the reason we're confident in our ability to grow in the U.S. or continue that 20% to 22% growth, you saw from the IMS data, the CAGR being forecasted going forward is 30%. So in some respects, we can continue from the base we're at and achieve the 20% to 22% and not necessarily harvest all the opportunities that, that market CAGR would offer us. And that gives us the opportunity, as Garry said, to be selective and get 1 point or 2 more on price than what perhaps some other competitors will be looking for.
Great. I'll stick with the solar theme since that's where we're at now. Two questions, I guess, right? One is, I think, previously, and maybe this was before you guys' time, you guys talk about Europe. You have developed some European product. And I think, in one of the presentations, you highlight the 50 hertz product that you guys are working on right now. Where are you in that asset right now, in 50 hertz? Are you guys there? Are guys cross-selling now? So that's the first question. And the second question is kind -- in terms -- kind of tie back to one of earlier question regarding pricing and competition, right? So some of your competitors, like you said, Garry, it takes 3 years to enter a new market, so some European competitor, how, you mentioned, it took them the same thing, 3 years, to come into the new U.S. market. Some of them has spent 3 years to get in and in trying to target their market already and it seems like, for example, Poland [ph] starting to make some traction here. How do you guys feel in terms of your competition? Do you start to see increased competition from these European guys? Or are they still nowhere to be seen?
Gordon B. Tredger
Well, I guess, addressing the competition question first, I mean, we've always had competitors in the U.S. market. I mean, we've never been alone in the market. And yes, there's European manufacturers that are coming. But again, if you look at our product line, if you look at the customer relationships that we have, we understand this market. It's our home market. Our products fit the need of these customers, so I don't think that we're at a tremendous risk in our home market.
Garry W. Rogerson
But [indiscernible] the funny thing is we don't ever hear just one competitor. Or -- and I don't like mentioning other people but one competitor that, "Oh, it's this one," all the times coming up. You get a little bit -- it's very spotty how we hear about it. Clearly, some of these guys are doing very well, very well indeed. But it's all over the place. And we feel fortunate enough, I think, Gordon, if -- to be able to pick our customers. We can't pick our pricing all the time, but we can pick our customers. And that, of course, helps you while you're in that sort of mode. And the products we've got, again, are really high-quality products. I mean, our customers come back all the time and tell us what a good supplier we are. And we have problems, but we fix them very, very quickly. Or we try to fix them very, very quickly, and we have. So we can beat the Europeans. It's possible. We can do it.
Gordon B. Tredger
And then I think, to address the other portion of the question, as I mentioned earlier, we feel comfortable with our growth prospects in the U.S. So a product like the 630 TX is something that will build our confidence going forward. You could expect to see that product in the second half of next year. Our clear priority right now is to execute on the megawatt product. We've taken orders from customers. It's being very well received on the part of those customers, and we have commitments to deliver that product. So that's the absolute priority for the first half of next year. And then, as I say, the 630, yes, there's lots of different places that we can go. Japan is a clear possibility. There's also markets in Eastern Europe that are growing strongly. We have a base in Germany with our office in Filderstadt. We have knowledgeable people there. All we need is a product that these people can go out and start touting. So we will be keeping you posted in terms of our progress as we move forward.
Garry W. Rogerson
I think one of the interesting things, you said it, Gordon, and I'll say it again, is this partnership with SGEG that we have. I mean, these are -- they're good people. They've designed a really nice product for the Chinese marketplace. Very low cost. And we could not touch it. There's no way we can get to that sort of cost at this moment. This is with less features than we've got. So we are helping them, and they are helping us. We will be able to take those designs and bring them into India. I think that's a big advantage we have over the Europeans. We have actually got a design house, in effect, in China designing us a low-cost product for the Indian market. Now we will have to do some things first, blah, blah, blah, but we have a very good way of getting into that Indian market, which is very lacking in features, are lacking in features product, lowest-priced products. Still a good margin if you got the right product. It just got no value at that margin if you got the wrong product. And so I think we've got a really leg-up on that marketplace into the future, and other lowest-cost marketplaces.
Colin W. Rusch - ThinkEquity LLC, Research Division
All right, just a quick clarification [indiscernible]. This acquisition is not dilutive, correct?
Colin W. Rusch - ThinkEquity LLC, Research Division
Okay, great. And then for Yuval, can you talk a little bit about the expected margin structure as you move into the industrial coatings market? Obviously, you're going to invest in infrastructure to service these products. Can you talk a little bit about it? Margins have been a little bit higher on these products, and with the cycle time that you said to took off these products with these customers. And what should we expect in terms of return on capital and OpEx spending to penetrate these markets?
So we expect in the industrial markets, and we've done -- we've seen that in the past as well. And I cannot give you numbers, but our margins are higher. Our margins are higher because we're dealing with, in many cases, application-specific solution, relatively smaller quantities per customer compared to the other markets we serve traditionally. So on average, we expect the margins of the products to be higher. Now the cost of doing the business, we're going to leverage our existing infrastructure and what we'll be gaining in going to these markets is the flexibility to deviate from the copy exactly, shackles kind of way we had in the past. And instead of taking products we designed for semi and shoving them into non-semi or the industrial applications, we allow ourself now, with this delineation of the teams, to modify the products for cost reduction effort. Derivatives that will go for application-specific solutions will make them cost effective, but also perform better because they're being designed for an application-specific application. So in fact, we do not believe that the growth and expanding to new markets will negatively impact our margins.
Colin W. Rusch - ThinkEquity LLC, Research Division
And maybe begin to just talk about return on capital for expanding into those markets, what your targets are? And one for Gordon.
I -- Danny, what?
Danny C. Herron
Well, I [indiscernible]. Colin, we're a very low-capital-intensity business. There's very little capital required to go into these markets. As Yuval said, we already have that infrastructure in place. Generally speaking, in thin film, industrial markets, the margins are better because of the reasons Yuval stated. So this is a positive to our return on capital.
Garry W. Rogerson
One of the interesting -- I mean, it's just anecdotally: When I'm in our Shenzhen facility, we actually pull out a box that we're shipping to the semiconductor business. And what I very much enjoy walking around the product and telling everyone why it costs too much to make. I so enjoy doing that. And there's just loads of stuff that we do in this product that makes it too expensive, but we can't change it, but we can change it for the industrial marketplace. So we can actually reduce that cost of manufacture of the products for the industrial marketplace quite significantly. And so -- and actually, I believe what's going to -- my belief, so we're not going to -- we're going to have 2 product lines, in effect, there, so a semi product line and a non-semi kind of -- I would bet $0.10 that the semi guys at some point are going to say, "My goodness. You're selling the same product for less. Why can't I have that one?" And we'll say, "Well, you can't because you've got -- it's got different components in it." I bet they are going to come back to us and say get those components in there. So the products will converge again, so this copy-exact will start to be a little bit less strong because they are hurting themselves. They're really hurting themselves by not allowing the vendors to reduce the cost in effect and because product costs go down over time if you allow us to work it. In effect, they don't allow us to work it. You're tied into your vendors very early on, which probably all of you know, and you're stuck, and everyone knows you're stuck. So it's very hard to reduce the prices when they know you're stuck. I believe that is a very poor concept in today's world, and I believe that will change over time. And this is one of the little nails in that coffin over time...
We use the same factory in Shenzhen. We drove so much efficiency so we have more capacity to drive more products through Shenzhen. So in that sense, the capital investment required to absorb such a new product line or 2, grow outside of the semi area to other areas, is 0 to minimal, very small.
Garry W. Rogerson
I'll give you an example. And you tell me if I'm wrong, Yuval. It is -- there's an example of box [ph] that we test for 30 hours. It goes on test for about 30 hours for semi. It only really needs to be tested for 5 hours, that's all it really needs. But because of copy-exact, we have to set it for 30 hours. Well, immediately, now we're selling it in for the more industrial markets. We bring the test time down to 5 hours. I mean, they don't break after 5 hours, so you've got all the testing you need to do. But because of copy-exact, you still got to do your 30 hours even though it's irrelevant. It's a little bit -- I can see the reason for it, but I can also argue against it -- $0.10 set, by the way, no more than $0.10.
And for Gordon. There's some interesting things happening with subsegments in the North American solar market. Can you talk a little bit about what you're seeing in terms of share shift amongst the subsegments and how you're preparing for that with the product development roadmap going forward?
Gordon B. Tredger
Well, I mean, if you look at the segments of the market where we participate, there's the utility scale portion of the market. We have our new product introduction lined up for that. As we've said, we're taking orders. And I think there is a sense from some customers that somebody has to go first, so we've gotten beyond that. So we feel that we're very well positioned on the utility side for the foreseeable future and in the U.S. market. On the commercial side, there's definitely some movement there. From our standpoint, we launched the 500 TX last year. That really completed our broad offering, in that regard. And there is some interest in preface [ph] string technology out there. It's something we're aware of. Customers right now at the lower end of the commercial market, in particular, are starting to experiment with that a little bit. And we definitely have our eye in the ball there and have some ideas in terms of competitive response if that's one -- if that's a technology that arc -- that starts to resonate with our customers.
Garry W. Rogerson
And I think, to be fair, Gordon, when we go -- when we're on review, we're really looking at customer needs, not what competitors say. I mean, we watch the competitors, obviously, but the real -- the people who jerk us and get us to do things are our customers. We're not so worried about the competitors. I'm worried about our customers buying from us. And that is reduce your costs, improve the efficiency of the product. That's what we've got to do. And I think we're doing it well. And I think we're in good shape. What was that, Annie?
You could wrap it up.
We'll wrap it up.
Garry W. Rogerson
We got one [indiscernible]. Any more questions, first of all? Any more questions?
Okay, well, perfect. Again, thank you for coming. I think, in the last year, we've really put ourselves in a position where, if the revenues come back, we'll do well; if they don't come back, we'll do well because we're going to find ways to get revenues. I do believe that $2 a share is absolutely attainable, it's just a matter of when. And we're doing everything in our power to get there as quickly as we can. And I'd love to tell you it's next week.
I think we can get there. I think there's a lot of different ways we can get there, and we're going to try more than one to get there. I do know that, at some point, we should be able to get there. But it's a pretty exciting time. It's a great time for us. We are really enjoying ourselves, and we think we've got a formula that's different and an advantage from our customer's point of view.
So thank you so much for being here. And I look forward to talking to you whenever you want to. Thank you.
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