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SolarCity Corp. (NASDAQ:SCTY)

Q4 2012 Earnings Call

March 6, 2013 5:00 p.m. ET

Executives

Lyndon Rive - CEO

Robert Kelly - CFO

Peter Rive - COO

Jonathan Bass - IR

Analysts

Brian Lee - Goldman Sachs

Satya Kumar – Credit Suisse

Joe Osha - Bank of America Merrill Lynch

Y. Edwin Mok - Needham

Phillip Shen - Roth Capital

Pavel Molchanov - Raymond James

Aaron Chew – Maxim Group

Operator

Good afternoon. And welcome to SolarCity’s fiscal fourth quarter and full year 2012 earnings conference call. Management will be utilizing a slide presentation for this call which is available now for download or can be viewed on the webcast on SolarCity’s investor relations page at http://investors.solarcity.com. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions).

At this time, I would like to turn the conference call over to Mr. Jonathan Bass, Senior Director of Communications. Please go ahead sir.

Jonathan Bass

Thanks everyone for joining the call today. As a reminder, this discussion will contain forward looking statements that involve risks and uncertainties, including forecasts regarding SolarCity’s 2013 financial and operational results. Words such as believe, may, estimate, continue, anticipate, intend, expect, predict, potential and similar expressions as they relate to SolarCity, its business and its management are intended to identify forward looking statements. Forward looking statements should not be considered as a guarantee of future performance or results, and will not necessarily be accurate indications of the time that apply which such performance or results will be achieved if at all. Forward looking statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed and/or suggested by the forward looking statements, including risks identified in SolarCity’s earnings press release issued today and in the slides accompanying this presentation, as well as additional risks and uncertainties identified in the section entitled Risk Factors in our registration statement on Form S-1 which has been filed with the Securities and Exchange Commission. We do not undertake any obligation to publicly update or revise any forward looking statement whether as a result of new information, future development or otherwise.

In addition, during the course of this call we will use a number of especially defined terms relating to our business metrics and financial results, the first definitions of these terms included in the slides accompanying this presentation which are available on our investor relations website at investors.solarcity.com. We’re going to try to keep today’s presentation including questions and answers to 45 minutes.

And with that, I’d like to introduce SolarCity CEO Lyndon Rive.

Lyndon Rive

Thank you everybody for joining our first earnings call. We’re very excited to share our Q4 and 2012 results. We could not have offered better yet. When we review the business metrics you would see that key business metrics had at least 100% growth, some as high as 300%. This is not a small numbers, this is a big number.

We are clearly on our way to building the most compelling energy company in the 21st century. 2013 is off to a great start with our partnership with Honda. The demand for cheaper, cleaner energy is high and the market potential is massive, solar is still less than 1% of our energy needs.

Turn to slide four, in order to achieve our vision, there may be massive investment into deploying solar energy system. With each new customers, we create a predictable recurring SOC. Our financial strategy is to maximize the retained value for our shareholders by covering the investment activities with tax generated from financing and operating activities. In short, as we invest into solar system with operating and financing assets (inaudible) we’re going to have three main activities, operating activity, investing activity and financing activities.

Peter Rive, our COO will cover the operating activities, includes the contractual payments, acquiring customers, operating and maintaining the solar systems, the technology development, additional solar system we offer direct sales, we are starting to see significant uptick in our upsells. This includes energy efficiency, storage, electric vehicle charging stations. He will also cover our investment activities. The investments that we are making to become the next generation clean energy company.

Bob Kelly, our CFO will describe our financing activities. He will describe to you what we are doing to lower our cost of capital and what we are doing to expand our capital sources. With that I would like to move into page five and hand over to Peter Rive, our chief operating officer.

Peter Rive

Thanks. So Q4 deployments came in at 48 megawatts which is the largest quarter on record, so that was a very, very, exciting quarter for us. The 48 megawatts was in part as a result of a handful of commercial projects that were completed in Q4 result. The 48 megawatts as a whole reflects a 129% growth over Q4 2011 and the year end total of 157 megawatts reflect a great growth of 118% over the full year 2011.

It’s important to note though that commercial projects can’t sway some of our megawatts deployed numbers on a quarter on quarter basis, as that volume is little more spiky than our residential business. But the record Q4 deployments brings our accumulative megawatts deployed to 287 megawatts. Now what was also a massive amounts on for us in 2012 is that all of our systems collectively had their first 1 gigawatt hour day of production. So in other words, all of our systems in one day produced 1 gigawatt hour which was a big amount for us.

There is a number of customers added in Q4 2012 was 8557 which is a 192% increase over Q4 2011. This brings a total SolarCity customer count as of the end of 2012 to 50,532. The number of energy contracts, in other words, leases or PPAs that we added in Q4 2012 was 6,810 which represents 190% increase over Q4 2011, to bring the total energy contracts to 40,456. Just you know there is a definition action of this presentation where we in more detail define many of the measurements that we are discussing, including the difference between customers and energy contracts and so on. But briefly the difference between customer and energy contract is customers are those that have bought some of our product as a direct cash bill and energy contracts are the leases or PPAs.

So then transactions from other energy products and services continued to see incredible growth. We had a 350% increase from Q4, 2011 to Q4 2012. So even though energy efficiency, storage and electric vehicle services are still a relative minor component of our overall revenue, it’s really encouraging for us to see the growth rate and the successful execution of our upsell strategy.

Another massive milestone for us in 2012 was that our contracted payments surpassed the $1 billion milestone, so a 124% growth compared to the prior year. The current backlog of our signed contracted customers is 194 megawatts. Now it’s important to note that some of this backlog includes some projects with multiyear deployment schedule, and that part of that 194 megawatts (inaudible) beyond 2013, regardless we are in amazing position to meet our 2013 targets. And just to be in the position we are right now the different portion of our targeted deployments for 2013 already signed up and contracted put us in a perfect position to meet our 2013 targets.

Now I want to go to the next slide which is slide six, our investing activities. So investing activities are essentially the investments we are making in deploying the solar systems and the accompanying infrastructure that is necessary in order for us to realize our vision of a distributed generation energy company.

In 2012 we invested $449 million into building solar energy systems and this brings a cumulative investments we have made to over $1 billion. So it’s also important to note that we expect the investments that we need to make on a per megawatt basis to decrease as our costs decrease. And with that, I am going to hand it over to our CFO Bob Kelly to talk about financing activities.

Robert Kelly

Thanks Pete. Turning to slide seven on the financing activities. There’s a couple of themes I am going to touch on here and you will hear this on this call as well as the future calls regarding financing. It’s lowering the cost of capital, decreasing the cost of capital, increasing the sources of capital.

On lower the cost of capital we recently completed our first recapitalization of three early financing funds that we had on the books. These funds are about three, three and a half years old and the cost of capital was a little over 8%. We refinanced these funds in the marketplace at 3.45%. I think a couple of things you’re seeing here is the maturing of the asset class. What we’re financing with these assets are 20-year contractual cash flows. It’s a very high quality predictable cash recurring and with the low operating cost structure. When you bring that asset to the marketplace it will achieve a very attractive cost of capital and that's what happened with these three funds which we restructured.

We’ve also recently started talking with the rating agencies in our efforts to position the company to drive down the cost of capital. We’ve got probably a two-stage approach with the agencies. First, we want to educate them on the asset class, talking about the FICO scores of our portfolio, the long-term nature of the portfolio, the recurring predictable cash flow and the fact that what we’re financing in the marketplace is an energy payment. An energy payment is an operating cost of the house sold. It is paid before the mortgage and if you need heat air-conditioning you will have to pay your energy bill. We want to bring the agencies up to speed, have them understand the quality of cash and the asset that we have on our books.

The second part of their first stage is related to the production side. We produce kilowatt hours, the customer pays for kilowatt hours. We did a very predictable kilowatt hour production in this business and finally there is no feedstock, this one is free. When you combine the revenue streams with the no feedstock costs you're educating the agencies on a very attractive asset class.

What we want to do with the agencies is have them to rate the asset class of what we’re bringing to the table. And then that will allow us to go out into multiple capital markets, the securitization market, there is a lot of talk about that in the solar industry, pension fund market, the project finance, bond market, the bank market. If we can get and we will get all these capital markets competing for the rated asset that will allow us to drive down the cost of capital and also increase the sources of capital.

Moving on to the sources of capital, in 2012 we financed $323 million of our investments. That’s on a historical basis looking to the future, we have 115 megawatts of finance available, financing funds, tax equity funds available as of February 28. This represents about six months of target deployment. You’d like to keep the tax equity funds in the three to nine-month range. The tax equity market is a one year market, people understand their tax bills, it’s a constant business of raising capital for our company.

When you look at the commitments that we have on the books the 115 and the term sheets that are in progress, we do not anticipate financing to constrain that growth in 2013. In fact, our financing fund pipeline has never been stronger and when I look at the cost of capital and the direction it's headed, we feel pretty good about the financing activities for the business.

Turning to the GAAP income statement on slide number eight, there is three basic concepts I want to walk you through relating to the GAAP statements. The first one is the operating lease revenue. This is perhaps one of the most important metrics or financial indicators to look at for the health of the SolarCity business. In 2012 roughly $48 million, that’s a doubling from 2011. This represents the recurring contractual cash flow, that contracts that we have on the books which are generally recognized over 20 years. When you look at the business and the health of the business this is the number you should see increasing every single quarter as we add more and more contracts to the portfolio and install systems. So that’s the first and perhaps the most important GAAP metric to take a look at for our business.

The second one to take a look is the cost of revenues and the operating leases, the number in 2012 of $13 million. This represents the installed cost of the systems. We amortize that number over 30 years, that’s what the cost of revenues for operating leases represent. The company is focused, obviously what you want to do is lower the cost of installation. When you drive down the cost of installation you have a lower depreciation over 30 years, so your gross profit between the operating leases and the cost of revenues will expand. Take a look at the gross profit of $51 million, you will always see a pretty good gross profit in the business based on the concepts of the 20-year cash flow minus the depreciation of the asset over 30 years.

The third and final area to look for the GAAP statement and analyze is related to the operating expenses, the sales and marketing and the G&A. The sales and marketing are parts which are related primarily associated with acquiring new customers. This is your gross capital. This is the money you invest to bring in new assets and new customers in the future.

When the operating lease revenues build up over time and exceed your gross capital, you will achieve GAAP profitability as the volume increases on our books. In fact, the profitability if we slow down our growth, the GAAP profitability would incur much faster quicker.

Let’s turn to slide nine on the statement of cash flows. This is a cash related business given how the GAAP numbers on the income statements represents themselves and it’s -- when you look at the health of the business this is probably the most important chart to take a look at. This brings together the financial strategy, which Lyndon talked about in the opening where we want the net cash provided by operating activities and our financing activities to exceed the investment activities.

I’d point you to the fourth quarter here, three months ended December 31, 2012. Operating activities generated almost $65 million of net cash and financing activities was $104.5 million, some of those too exceeded the investment activities of $151 million and generated net cash provided was $18 million.

When you take a look at the financial strategy and the evolution of SolarCity it’s important to look in probably three stages. Historically what we did on the financial side was monetize or sold most of our contracts off to raise cash which allows us over the last six years or so to develop the infrastructure of the business. When we went public in December of last year it’s probably the second stage where we utilized the operating cash flow and the financing cash flow to cover our investments. This will go on for a considerable period of time as we build out and grow the business, and the final stage when you look out into the future is when you build up significant operating lease revenues, your volume of business allows you to click coupons and that you won't need financing to invest in the business.

The last number on this slide to take a look at is the on the right-hand side December 31, 2012 $175 million of equity capital that we raised last year. When you look at that number and forecast out the business we should be in pretty good shape to grow the business with the capital that we have on our plate today. As the point being is it's unlikely it will be necessary you go back to the equity markets given what we see here for the next couple of years.

With that, I will turn it back to Lyndon.

Lyndon Rive

So we are deploying hundreds of megawatts in building out a distributing energy company. Bob talked about the financing new raising to cover that infrastructure costs. And then we look at, one is left, what’s the retained value of the financing funds? The retained is a minus effect that comes to SolarCity, also to pay the financing partners, cover the operating and maintenance costs, discounted at 6%. We feel strongly this is one of the most important metrics when valuing a solar energy contract.

Today our retained value is over $500 million, this includes our backlog. To make the math easy, it’s roughly a $1.18 per watt. The $500 million includes our legacy systems that we sold off to the financing partners, and we gave up most of the cash flows as Bob mentioned. We did that to add additional cash to operating activities to build out the business.

As we improve our cost of capital and we reduce our cost of installation, the retained value will increase. Now via open funds we’re only expecting things to move aggressively quarter on quarter but over a year you will definitely see movement on retained value increasing.

If you go to slide 11, discuss these 2013 forecasts. Looking at 2013 we think this is another great year for SolarCity. Every quarter we’re going to give you the next quarter’s forecasts. So for Q1 our forecast is 41 MW. This is lower than our Q4 2012 mainly due to the commercial sequential swings. Peter describe that the commercial can swing quarter on quarter.

With the IPO proceeds, we are investing heavily into growth. These investments will yield gradual increases in Q2 that most of our volume is going to come in, in Q3 and Q4. With our 195 MW in backlog the growth rate that we are seeing, the investments we are making we feel extremely confident in meeting our 250 MW target for 2013.

As Bob described, we were net cash flow positive in Q4, 2012. We’re now making big investments into our growth and we expect to see that again and maintain net cash flow in Q4, 2013 and onwards at the same time increasing our retained value. That’s the end of the presentation.

With that, we will now open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question is from Brian Lee of Goldman Sachs.

Brian Lee - Goldman Sachs

First off, how should we think about the growth in OpEx here through year end since you’re going from a positive net cash position and just the recently completed quarter but do you think that will reverse for the next couple of quarters until you get to year end again?

Lyndon Rive

So we are making the investments today and those investments will only yield results once the systems are financed and installed. You have some backlog constraints and job flow that you have to get through the system. We think those results will yield – will come on in Q3 and Q4 primarily, and that has to do with timing associated with financing these assets. So the timing will have an effect there, and we expect the timing to catch up and stay consistent in Q4 and onwards.

Peter Rive

So we’d expect that OpEx sales and marketing and general operating expenses in Q4, the category sales and marketing, there we are seeing good declines in acquisition expenses, we do expect to get leverage over that. And the same is true even more so for general operating expenses. So there will be an increase in sales and marketing expenses as we invest in our growth for 2013 and there will be some increase in general operating expenses. So we do expect to get a very good leverage over those general operating expenses.

Brian Lee - Goldman Sachs

Fair enough. I guess anyway even if it’s a ballpark range you guys can help to quantify what that growth might be year on year?

Peter Rive

No at this stage. At this stage we are not ballparking operating expenses. The primary focus for us is on ballparking megawatts deployed and then aggregate cash flows.

Brian Lee - Goldman Sachs

Maybe one quick one on financing capacity and then I will jump back in the queue. I think you guys had said coming into this call you were at around $600 million of remaining financing capacity. I know you're talking about it in megawatt terms now. Is there a way that so we can kind of get a sense for what the trend is here that you can equate that to a dollar amount taken?

Lyndon Rive

Yeah, we’re looking equating to a dollar amount as our financing strategy varies from fund to fund. Some funds we sell more cash flow off to the financing cost and other funds will sell less. So the way we look at it is how much capacity do we have on our megawatt capacity we have. We think that’s the best measurement.

Operator

Thank you. The next question is from Satya Kumar of Credit Suisse.

Satya Kumar – Credit Suisse

The question for Bob I guess on the slide seven that talks about the lower cost of financing funds from 8% to 3.5%, it sounds like a fairly dramatic decline. Is that 3.5% comparable to the discount rate that you're using for calculating retained value? Could you explain what the cost of funds is for?

Robert Kelly

Sure. Let me take the second half of that first. When you look at SolarCity and a customer enters into a twenty-year contract you have a predictable cash flow of over 20 years. So to determine the value you have to take a discount rate and bring that back to the present. We took a look at the assets, comparable asset classes that the consumer would use from auto loans to prime mortgages and compare to default rates and the payment history, and this asset class is traded between 4% and 6% and we break the upper end of 6% as what we would utilize even though the default rates and predictability of cash was higher in both of those asset classes. So that’s how we came up with quote marking our portfolio to mark at 6%.

When you look at the 3.45% that essentially you took those same cash flows and finance them at 3.45% compared to the 6%, now there is a little difference in maturity, one is 20 years and this is what we call here an aggregation facility where we are trying to take it out in the long-term markets later so with the shorter maturities. But you are comparing the same asset class at 6% to 3.45%.

Satya Kumar – Credit Suisse

Just on the operating metrics could you comment a bit about what you're seeing in the market in terms of pricing trends and the megawatts that you're planning to deploy this year, what’s your outlook for geographical concentration by state?

Peter Rive

So the pricing trends that we are seeing is that we are seeing motor prices, not seeing nearly as kind of the ballparks that were last year that we are seeing kind of minor changes down to flat for motor prices. In terms of geographic concentration, it’s still -- that there is definitely a lot of that’s happening in California, then East Coast is growing for us. Arizona is also growing. So it’s the same geographic concentration as we’re seeing, we are just going deeper into our existing markets.

Satya Kumar – Credit Suisse

Peter, I am sorry, I meant pricing for you, not for modules.

Peter Rive

What do you mean by pricing for us, in our retail price, what we haven’t finished yet (ph)?

Satya Kumar – Credit Suisse

Exactly, PPAs and market pricing for leases.

Peter Rive

We increased our PPA and leasing pricing in September of last year and we haven’t modified the pricing since then.

Operator

Thank you. The next question is from Joseph Osha of Bank of America.

Joe Osha - Bank of America Merrill Lynch

I’ve got two questions, first for Peter the 194 megawatts of backlog, other than getting the financing in place, are there any particular logistical challenges associated with getting that all done?

Peter Rive

The first kind of milestone in any solar project is essentially going through the engineering phase and completing – and getting the permanent applications, that’s where we mentioned that that investment that we are making in engineering capacity in Q1 will result in Q2. It’s just a natural progression of increasing capacity at every single part of the workflow. So starting with engineering then installation, so it’s nothing that we haven’t done before, it’s just that takes a little bit of time to build up that capacity. But it’s something that we are comfortable at doing.

Joe Osha - Bank of America Merrill Lynch

I remember covering other businesses, some backlog is good, at some point it gets a lot of control, are you happy with this level of backlog, would you rather be higher or lower?

Peter Rive

I would rather that was lower to be honest, that, I think that reducing cycle time is important for us and so what we are going to do is get our deployments at these way up and then (inaudible) which will have the effect of lowering the backlog.

Joe Osha - Bank of America Merrill Lynch

What would the typical cycle time be if I am in typical California resident at this point?

Peter Rive

If you are a typical homeowner the time – the cycle time varies quite a bit depending on the complexities introduced by your building department and the customer responsiveness. But the particular typical cycle time is around three months but if you run into more challenging situations with engineering or perhaps with building department approval that could extend to a later date.

Joe Osha - Bank of America Merrill Lynch

And then one quick one for Bob, I saw yesterday that sequester math does appear to impact 1603 disbursements a bit. Is there anything we should know about how that affects your plan this year?

Peter Rive

The sequestration will have an effect, our systems are really sound, there will be roughly a $3.8 million effect. Of the 115 MW of financing funds 25 MW of that is 1603 capacity. We may choose to deploy, we may not choose to deploy it. If we do it will have roughly $0.10 to $0.15 of watt effect on SolarCity.

Operator

Thank you. Our next question is from Edwin Mok of Needham & Company.

Y. Edwin Mok - Needham

One question, go back to I guess when BMA comment about the residential versus commercial, just wondering how much of the deployment in fourth quarter is commercial? And then of the 250 MW target for the year what do you expect the mix to be for that 250 MW?

Peter Rive

We want to focus on the aggregate megawatts and then it’s 250 for the year. But in Q4 the residential commercial I think was around 30 and 17.5 in 2012 Q4. And for 2013 we think it should come in around the 190 and 60 but really the focus in the key number that we are guiding towards is 250.

Y. Edwin Mok - Needham

And then I guess the second question if you don’t mind entertaining me, the context of the GAAP number in the fourth quarter, I noticed that your operating lease revenue was actually flat sequentially. Was it just because you have less repeat for the quarter or what, why would that be flat given that you are growing deployment over the last three quarters?

Peter Rive

A lot of revenue is generated in proportion to the number of kilowatt hours that are generated. So if you’ve got – it’s the time of the year right, it’s not sunny in the fourth quarter as it is in the third quarter.

Y. Edwin Mok - Needham

I see, so that’s a function of the generation.

Peter Rive

So if you look at the way that we recognize revenue on a PPA, I guess if you just familiarize yourself with the solar production driven annual basis, then you will understand how PPA revenue is maintained quarter on quarter based on how any of this is in that given season.

Y. Edwin Mok - Needham

And one last question I have is on your system costs. As you said recently you’re seeing module prices somewhat stabilized, right, but module’s pricing remain, so that’s a change for rest of your – how much do you expect the system cost to decline sequentially from 2012 to 2013?

Peter Rive

We are focusing on reducing our aggregate costs by in excess of 5% year on year between now and 2017. What we are going to be disclosing is essentially the retained value and the retained value to develop to what basis should increase as the cost declines. But at the stage we are not going to be talking about our investments costs are our variable costs on a dollar per watt basis just for competitive reasons.

Lyndon Rive

It’s two primary costs, the cost of capital and then the cost of us operating the business. So as we – if you look at retained value it captures both.

Operator

Our next question is from Phillip Shen of Roth Capital Partners.

Phillip Shen - Roth Capital

My first one is a follow up to Satya’s question, what was the aggregate dollar value of the funds that you refinanced?

Robert Kelly

Those funds, those three funds were little over 19 megawatts of funds and probably 20 plus in value.

Phillip Shen - Roth Capital

And then in the past you talked about customer acquisition costs being about $2500 per customer. Can you give us a sense for what your customer acquisition costs were in Q4, but perhaps on a customer basis as well as on a per watt basis and then where you might see them at the end of 2013?

Lyndon Rive

So we – roughly the cost of acquisitions on 2500 per customer, we’re not going to be forecasting our acquisition costs. We have an overall target of reducing our costs of about 5.5% per year. But we’re not going to be forecasting our acquisition costs. We do expect that – we are going to be focused on reducing it and the partnerships like Honda, Home Depot and our current direct strategy we do see it decreasing.

Phillip Shen - Roth Capital

As you push for the decrease in upside of scale what do you see as the key areas of opportunity to reduce those costs?

Lyndon Rive

So partnership is a big area of reducing that costs. Focusing on other different direct strategies focusing on the ones with a lower cost we have a plan now, re-emphasizing those would lower the numbers.

Operator

Thank you. Our next question is from Pavel Molchanov of Raymond James.

Pavel Molchanov - Raymond James

On Q4 revenue you mentioned leasing was down just given the weather patterns but cash sales were also down, was that just a question of mix?

Peter Rive

Yeah, exactly it’s a question of mix.

Pavel Molchanov - Raymond James

Given your guidance for 2013 deployment what allocation do you anticipate between leases PPAs and traditional cash sales?

Peter Rive

So at this stage we're not guiding on the mix between cash and energy contract sales.

Lyndon Rive

Our primary business is to sell energy contracts, in the case where the customer doesn’t want energy contract and they want to buy the system, we will sell it to them but it’s an emphasis for us.

Peter Rive

And the way to think about it is the benefit of cash sales provides the business is that it increases the cash flow from operating activities in such a way that we need to finance less of our investments. So it is interesting in the strategy in that it decreases the amount of the contracted cash flows that we have to sell in order to be able to cover our investments.

Pavel Molchanov - Raymond James

I think you’re not giving guidance on OpEx but I think I heard you say that you're expecting positive operating leverage, so should we take that to mean that OpEx as a percentage increase, so you spend less in deployments in 2013?

Peter Rive

That’s correct.

Operator

Thank you. The next question is from Aaron Chew of Maxim Group.

Aaron Chew – Maxim Group

One, if I can clarify a little bit on the operating stats, in prior disclosures ahead of IPO, you had broken down megawatt bookings. Just wondering if you can break out what the megawatt bookings were in 4Q. I know you offered the backlog as of February 28, so I am not sure if I am calculating it right, but was it notably down from the third quarter rate?

Lyndon Rive

We’re not going to be disclosing bookings, so bookings can swing based on commercial time coming off but we think the most relevant metric is the backlog. So what is our package of install and what’s our throughput.

Aaron Chew – Maxim Group

Then if I can just ask, I know it’s going to be pretty difficult to similarly forecast cash flow but just if you can maybe just offer some guidance to us sort of how to think about looking or modeling out cash flow going forward, is it safe to assume that’s going to be fairly lumpy, are you guys working with a certain hurdle rate or target quarter to quarter, are you just targeting positive and it really depends on the deployment rates and how things are picking in that regard?

Peter Rive

I think that once we have achieve our 2013 goal of becoming cash flow positive in Q4 we will provide more concrete guidance on cash flow targets in the out years.

Aaron Chew – Maxim Group

And then final question I guess to squeeze it in, I know we touched a little bit on the install cost but is there any update to the mid $3 per watt all-in number you have highlighted before in the past and I am sure that didn’t change much over just a couple of months but, a) wondering if you can maybe sort of where you think that could make in 2013 on a per watt basis and then secondly, more intangibly just drilling down deeper into what you guys were mentioning in the presentation about the need to obviously ramp up OpEx on the sales and marketing side to just handle higher deployment rates, is there a way we can think of like how OpEx, I should say system, not OpEx, the system install costs go up if you are originally ramping up to additional 20, 25 megawatts deployments per quarter before an inflection point kicks in and is there an annual megawatt deployment number you can guide us to where you see that real inflection point and when you’d start to pick up and cover your fixed corporate expenses?

Peter Rive

What we have talked in the past as we know will produce inflection point is 250 MW at this stage. But on to the question it’s really not just a function of deployment rate, those are function of growth rates. So it’s slightly more complicated than we can get into at this point right because it’s not just what it’s steady state, it’s not just steady state of deployment, it’s what is steady state of growth. Unfortunately it’s not important for us to get into this in this call.

Aaron Chew – Maxim Group

It’s fair to say that, that potentially could be flat throughout the year because just you are going to be ramping up some OpEx on the per watt basis again and then maybe operating leverage kicks in by next year or – do you think that’s a regular –

Peter Rive

I think you’re going to see better operating leverage and general operating expenses, and some leverage in sales and marketing.

Operator

Thank you. We have no further questions in queue at this time. I’d like to turn the conference back over to Mr. Lyndon Rive for additional remarks.

Lyndon Rive

Well thank you everybody for joining us for this earnings call. We’re looking forward to our next one in 2013 based on our current position we feel very strongly that we are going to meet our 250 MW target. Thank you. Have a good day.

Operator

Thank you ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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