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Advanced Energy Industries (NASDAQ:AEIS)

Q2 2013 Earnings Call

July 30, 2013 8:30 am ET

Executives

Annie Leschin

Garry W. Rogerson - Chief Executive Officer and Director

Yuval Wasserman - President of the thin Films Business Unit

Gordon B. Tredger - President of Solar Energy Business Unit

Danny C. Herron - Chief Financial Officer and Executive Vice President

Analysts

James Covello - Goldman Sachs Group Inc., Research Division

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Tony Grillo

Andrew Hughes - BofA Merrill Lynch, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Advanced Energy Second Quarter 2013 Earnings Conference Call. My name is Stephanie, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to Ms. Annie Leschin, Investor Relations. Please proceed.

Annie Leschin

Thank you, operator. And good morning, everyone. Thank you for joining us today for our Second Quarter 2013 Earnings Conference Call. With me on today's call are: Garry Rogerson, Chief Executive Officer; Danny Herron, Executive Vice President and CFO; Yuval Wasserman, President of the Thin Films business; and Gordon Tredger, President of the Solar Energy business.

By now, you should have received a copy of the earnings release that was issued yesterday evening. For a copy of this release, please visit our website at advanced-energy.com or call us directly at (970) 407-4670. This quarter, Advanced Energy will be presenting at the Jefferies Global Industrial Conference on August 12 and at Needham's Advanced Industrial Technologies Conference on August 13, both of which are in New York. The company will also be presenting at Credit Suisse's Future of Energy Track at the 2013 Small and Mid Cap Conference on September 17 to 18 in New York as well.

I'd like to remind everyone that except for the historical financial information contained herein, the matters discussed on this call contain certain forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Statements that include the terms believes, expects, plans, objectives, estimates, anticipates, intends, targets, goals or the like should be viewed as forward-looking and uncertain. Such risks and uncertainties include, but are not limited to, the volatility and cyclicality of the industries we serve, the timing of orders received from our customers and unanticipated changes in our estimates, reserves or allowances, as well as other factors listed in our press release.

These and other risks are described in Forms 10-Q, 10-K and other forms filed with the SEC. In addition, we assume no obligation to update the information that we provide you during this call, including our guidance provided today and in our press release. Guidance will not be updated after today's call until our next scheduled quarterly financial release.

I'd now like to turn the call over to Garry Rogerson, CEO of Advanced Energy. Garry?

Garry W. Rogerson

Good morning, and thank you for joining us. We performed well in the second quarter with total revenue of $140 million, non-GAAP EPS of $0.35 and a GAAP loss per quarter of $0.24. The implementation of our company-wide strategic plan was taken hold over the last 18 months and is starting to bear fruit in the form of increased profitability.

The growth of our Thin Films business continued this quarter as we further penetrated markets for our traditional products and gained traction in new product areas for application, such as abatement and hard coatings. This led to increased Thin Films sales and improved margins in the quarter, putting us on the path to achieving our Thin Films operating goals.

Our solar business performed better than we expected this quarter, even if we are in the midst of integrating a large acquisition, undertaking restructuring and introducing new products. The integration of our newly acquired product line is proceeding smoothly and more quickly than anticipated, leading to the prompt realization of associated cost reductions and less dilution. The large and complex integration of our new solar products, R&D and sales distribution, along with our restructuring, is roughly 3/4 complete.

Together with the major restructuring underway to accelerate our other planned cost reductions, we believe these efforts should be substantially finished after one more quarter of disruption. Beyond that, the solar business should resume its revenue growth and good profit contribution. Currently, we are very encouraged by our strong backlog in both Thin Films and solar. In particular, we see our planned solar shipments gaining momentum as the year progresses. Recently, we won some very large utility orders and our order pipeline of prospective business is growing in both utility and commercial.

Turning to our aspiration goals and strategic plan. Over the last 1.5 years, we laid out the plan to improve operating margins, generate cash and accelerate revenue growth, all leading to our aspirational goals over the 3-year time zone of approximately $200 million in cash generation, $700 million in annualized revenues and $2 of earnings per share in 2014. While these goals still remain aspirational at present, we believe that they are achievable. It is just a matter of timing. But as we have said before, there are many factors that can affect our future performance, and you should view these goals as aspirational, not as guidance.

Since announcing our strategy in the fall of 2011, we put an action plan in place as we're implementing operational excellence in everything we do from distribution to R&D to our centralized outsourcing model for manufacturing. We've improved our distribution channels, expanded our geographic presence, accelerated new product development and outsourced more of our manufacturing. At the same time, we've significantly reduced our cost structure by approximately $55 million to-date and generated $111 million of cash to-date for stock buybacks and acquisitions in order to accelerate earnings growth. We are now starting to see the fruits of our labor through the dramatic shift in the company. The results we're seeing today would not have been possible just 2 years ago.

Now let me take you through the most plausible way I think we can achieve our goals in a reasonable timeframe. First, in Thin Films, we expect revenues at the peak of industry cycles to be approximately $80 million per quarter. Depending on a reasonable mix of business, there's no reason to assume that we could not add another $4 million to the bottom line per quarter as we do not expect our cost to increase.

In solar, improving our recent acquisition of the 3-phase string product line, we expect breakeven in the mid- to high $60 million range exiting the third quarter and to reduce that further in the fourth quarter. With the recent introduction of our 1 megawatt solar inverter, the addition of the 3-phase string product line and our increased geographic presence, we are seeing a growing number of opportunities. The strong market demand for these new products gives us confidence that we could see solar revenues averaging roughly $100 million per quarter, recognizing the lumpiness of this market depending on the size and timing of projects. The improved margin profile of these new products, along with the introduction of a more balance of systems components, should add to our bottom line.

As we have said many times before, in order to improve margins, we must constantly look for ways to reduce cost. With our newly implemented operational model, we believe there are many opportunities to lower our cost structure through better management of our supply chain and the streamlining of new product design. Finally, we expect to generate more cash in the next year, which we plan to utilize for other acquisitions or future stock buybacks to further accelerate earnings growth.

In closing, the parts of the puzzle are very much in place for what we believe could be an excellent 2014. Hopefully, I have demonstrated just a few ways that we can take a significant step forward in accelerating our revenue growth, achieving our profitability, including the introduction of new products and our expansion into new geographies. In the third quarter, we plan to complete the majority of the integration of our recent acquisitions and carry out the rest of our restructuring, leading to improved results for the second quarter just exited. As we look to the fourth quarter and beyond, we see the potential for significant revenue and EPS acceleration.

Gordon and Yuval will now take you through some of our growth initiatives for 2013 and beyond and Danny will tie it all together for you. Yuval?

Yuval Wasserman

Thanks, Garry. Beginning the Slide 9. Thin Films revenues grew 16% sequentially to $71.7 million in the second quarter to levels not seen since 2011. With a streamlined cost structure in place and the recovery of our markets underway, we are now demonstrating just how quickly our profitability can accelerate as revenues grow and costs remain constant. This quarter, Thin Films operating income grew to $14 million or 20% of revenue, up from 12% last quarter.

Turning to our market performance on Slide 10. Once again, semiconductors grow the majority of the improvement in Thin Films this quarter. Through a combination of market share gains from prior design wins, expansion in applications in etch, PECVD and PVD and ongoing demand for gas abatement, we saw quarterly sales that outpaced industry growth. With the first wave of semiconductor investment behind us, the wafer fab equipment industry is expected to pause, leading to a roughly flat to down outlook for the year. The anticipated investment in memory capacity, combined with the investment in sub-28 nanomenter technology and increasing utilization rates should drive additional growth in products and services for semiconductor applications through 2014.

In flat panel display, investments in GEN 5.5 AMOLED display capacity continued to drive revenues this quarter. Demand for smartphones, tablet displays and touch screens should continue. Near term, we expect AMOLED manufacturers to slow investment as they ramp volumes in capacity installed over the past several quarters. This should lead to reduced demand for our power supplies in the second half of the year.

In LCD, increases in capacity should continue with investments in China, where demand for televisions remain strong, driving demand for our products in the third quarter. In the Renewables business, while solar panel capacity still far exceeds demand, we are seeing some investment in advanced PVD applications, which favor AE products and solutions. Additionally, architectural glass is poised for significant growth as China's infrastructure investment in its Western provinces grows over the next several quarters.

In our Thin Films industrial business, we are expanding our product line with our Solvix portfolio, introducing new products and implementing a distribution channel strategy to address new applications and geographies. We are diversifying our industrial global market presence in hard coating, optics and automotive applications. In service, we see growing interest in upgrade and refurbishment programs for fab capital reuse and repurposing in conjunction with projected increases in fab utilization in the second half of 2013. Combined with our preventative maintenance offering for gas abatement in flat panel products, we are positioning our service business for future growth.

Finally, let me turn to our design wins. Once again, our commitment to next-generation R&D investment, in collaboration with our customers, enable us to expand our served applications. In total, we secured more than 80% of the contests we pursued, which were up a considerable 30% sequentially. In semiconductors, our win rate was over 90%. And in Thin Films industrial, we won over 80% of the opportunities pursued during the quarter. As we have said in the past, our industrial wins are typically more project-based and can represent near-term revenues. Our semiconductors wins represent potential future revenue, as OEMs move to high-volume manufacturing upon winning a process of record status at end users.

In semiconductors, our investment in advanced RF power delivery solution over the 1.5 years have led to a significant increase in the global presence in etch, PVD and PECVD applications. These wins allow our customers to migrate to newer platforms with value-add technology, efficiency gains and competitive cost structure as demand for deposition in etch processes increase due to the adoption of vertical NAND and multi patterning lithography. We believe we are well positioned to capitalize on these trends, given our recent wins.

In Thin Film industrials, we have wins this quarter ranging from newer Low-E glass lines to flat panel display applications to technology investments in Thin Films solar and the expansion of our served application in cathodic arc deposition and hard coating for aerospace and industrial machine tools. As we become more efficient in the deployment of our core resources, our new product development methodology and customer engagement model enable us to significantly accelerate the launch of new products and technology. This year alone, we expect to introduce more products than we have in any of the last 10 years.

Overall, we're executing on our strategy in Thin Film business to profitably manage through the cyclical troughs and capitalize on investment peaks. While the revenues have rebounded from their cyclical bottom, our costs have remained low, allowing us to generate significantly higher profitability. With a more positive outlook expected for our markets in 2014, we should be able to reach the $80 million revenue range per quarter that we anticipate in the peak of the industry cycle. We are excited about our potential as we enter the fourth quarter in 2014.

I would now like to turn the call over to Gordon to discuss our Solar Energy business.

Gordon B. Tredger

Thanks, Yuval. Beginning with our Solar Energy results on Slide 12. With the contribution from our newly acquired 3-phase string product line, we shipped 318 megawatts in the quarter versus 217 megawatts last quarter. This led to a 36% increase in quarterly revenue to $68 million. Although we had an operating loss of $1.8 million in the quarter, the integration of our recent acquisition and associated restructuring actions are moving along quickly. From the quick identification of redundant costs to the consolidation of our footprint, these activities are bringing a number of benefits to the organization, which we expect will allow us to regain profitability sooner than originally thought.

To give you an update on these efforts, let me turn to Slide 13. Since the close of the acquisition in early April, we have recognized approximately $2.5 million of cost synergies and lowered our operating cost each and every month, a trend we expect to continue in the third quarter. During the quarter, we consolidated our 2 German and 2 U.S. sales offices and streamlined the operations in Mexico and Germany into 1 building. We also began consolidating our Bend, Oregon factory operations into Shenzhen and Fort Collins, and we expect to finish this by the end of August. This represents an important step in the rationalization of our product line, which should allow us to focus on core growth opportunities in the commercial and utility scale markets with our newly expanded, strong margin product portfolio.

To move us closer to a more streamlined and functional organization, our sales and customer support organization in the U.S. took ownership of the 3-phase string products this quarter, proactively introducing them to existing customers. At the recent Intersolar conference in San Francisco, we exhibited the 3-phase string inverter products, which received a great deal of attention. We believe we are entering the U.S. market with this product at an opportune time and are encouraged by the U.S. shipments we have already seen in our first quarter of operation.

Also at the Intersolar conference, we introduced AE's much-anticipated 1 megawatt product, the AE 1000NX. This product has the potential to be a game changer for utility scale and larger commercial projects, providing PV plant owners with increased energy harvest and less downtime, a reduced balance of systems cost. This should allow them to realize a lower levelized cost of energy, or LCOE, and improve margins for us. The initial reception to this product has been very positive and we expect to recognize our first revenue in the fourth quarter. Already, this product line has been selected for a large installation in the U.S., which we expect to begin shipping at the back end of the year.

Turning to Slide 14. With one of the broadest and most compelling product portfolios in the industry and our growing pipeline, we are participating in and winning more upcoming projects in North America. To support our growing opportunities, we continue to invest in our field sales and support coverage. This quarter, we added more sales and support resources in the U.S. to extend our geographic presence in North America as we bring our new products to market. With our expanded worldwide distribution channel, we are also seeing more potential business in territories such as India, Eastern Europe, Korea and Latin America, and have the opportunity to expand into new areas, such as Japan, where AE has not participated in the past. We're already seeing a steady stream of business in India with the 3-phase string products. And we are exploring ways to strengthen our presence in that market.

We are very excited of the prospects for the business as we position ourselves for 2014. We plan to complete the majority of our restructuring activities by the end of the third quarter, setting us up to achieve a breakeven in mid- to high $60 million. With a lower breakeven, new products well-suited to the utility and commercial markets and an expanding presence in large, new geographic markets, we have the potential for a record year in 2014, a year of strong revenue and earnings growth.

I would like to now turn the call over to Danny to discuss our financial performance. Danny?

Danny C. Herron

Thank you, Gordon. In today's call, I will refer to both GAAP and non-GAAP results. As a reminder, non-GAAP measures exclude the impact of restructuring charges, acquisition-related costs, stock-based compensation and the amortization of intangibles. The reconciliation of non-GAAP income from operations and per share earnings is provided in the press release table.

Let me begin with the highlights of the second quarter on Slide 16. Total revenues were $140 million, representing a 25% increase sequentially and a 21% increase annually.

Turning to our revenue performance on Slide 17. Revenues for the Thin Films business increased 16% sequentially to $72 million. Most of the increase was driven by sales to semiconductor applications, which grew 26% to $41 million from $33 million last quarter. While sales of our flat panel display applications decreased by 5% sequentially, sales remained relatively high at $8 million. This is over 3x the levels of a year ago, as we saw another strong quarter of investment. Sales in data storage and industrial applications rose 9% to $8 million, compared to $7 million last quarter, since we executed on our strategy of diversifying into adjacent markets. Finally, service revenues were relatively flat at $12 million as customers continued cost-containment measures. Sales in our Solar Energy business reached $68 million in the second quarter, representing a 36% sequential increase, reflecting the addition of our newly acquired 3-phase string inverter for commercial market applications.

Turning to Slide 18. Non-GAAP operating expenses increased to $35.5 million due entirely to our recent acquisition. We also incurred pretax charges of $24.2 million for restructuring, $3.2 million of stock-based compensation and $2 million in amortization of intangible assets. Total non-GAAP operating margin was 12.8%, similar to the same period last year and an increase from 11.7% in the first quarter of 2013. As a reminder, we allocate all of our expenses to each of our 2 businesses, resulting in operating margins that are roughly 3% to 4% lower than others in the industry. Operating margin in our Thin Film business on a GAAP basis improved to 20% from 12% in the first quarter. In our Solar Energy business, not unexpectedly, we reported an operating loss of $1.8 million versus breakeven last quarter as we worked through the integration of our recent acquisition and undertook restructuring actions.

It is important to note that without our aggressive cost-reduction activities this quarter, which I will review shortly, the loss would have been significantly higher. Had the first quarter of our Solar Energy business included the acquisition of REFUsol, we would have had a loss of approximately $3.8 million in the first quarter. With our aggressive restructuring, we improved the profitability of our newly acquired product line by more than $2 million. Had our restructuring initiatives been in place for the entire quarter, we would have reached breakeven for the quarter. Going forward, we believe our breakeven in our Solar Energy business will be in the low to mid-$60 million range by the end of the fourth quarter. While revenues can be lumpy depending on the size and timing of projects, we believe we are positioning our solar business to achieve operating margins in the range of 10% at revenue run rates averaging $100 million per quarter.

GAAP loss from continuing operations was $9.8 million or $0.24 per diluted share. This compares to income from continuing operations of $6.8 million or $0.17 per diluted share in the first quarter and income from continuing operations of $8.9 million or $0.22 per diluted share in the same period last year. Non-GAAP income from continuing operations, which excludes the after-tax impact of $19.6 million of restructuring, $2.5 million of stock-based compensation and $1.6 million of intangible amortization was $13.9 million or $0.35 per diluted share. This compares to non-GAAP income from continuing operations of $11.7 million or $0.29 in the first quarter and income from continuing operations of $9.5 million or $0.24 per diluted share in the second quarter of 2012. Taxes were $2.5 million or 20.3% in the quarter as our effective tax rate incorporated improved profits for 2013 in our Thin Films business.

Turning to our balance sheet on Slide 19. We ended the quarter with $99.1 million in cash and cash equivalents, down from $182.3 million due to the $77 million acquisition of REFUsol and our investment in working capital is the velocity of our business return.

Before I discuss guidance to the third quarter, I want to remind everyone that we are in a transition period as a company as we integrate our recent acquisition and complete a significant restructuring. We are pleased with the progress we have made. And as Garry mentioned, our restructuring is currently ahead of schedule. In the second quarter, as shown on Slide 20, we recognized $24.2 million of the $35 million to $37 million in total charges projected, $6.5 million of which was cash. Over the next 3 months, we plan to finish the transfer of the remaining supply chain activities to Shenzhen and complete the product rationalization of our inverter portfolio.

On Slide 21, this should lead to total savings for the entire restructuring of $18 million to $20 million annually, roughly $14 million of which will be cash savings. The current actions, coupled with previous cost-reduction activities, should bring our total cost savings to approximately $70 million to $75 million by 2014. As we enter the third quarter, we are encouraged by the increasing backlogs in both of our businesses. Our balance sheet remains strong as we pursue additional acquisitions and build momentum for 2014.

Finally, turning to our guidance for the third quarter on Slide 22. We expect revenues to be between $140 million and $150 million. Our guidance assumes flattish performance of our Thin Films semiconductor and industrial applications and growth in our Solar Energy business, driven by our newly released 1 megawatt product for utility applications and our 3-phase string inverter for the commercial market. With respect to third quarter tax rate, approximately 23% to 25% and GAAP EPS to be between $0.28 and $0.32 per share before restructuring charges. Non-GAAP earnings per share is expected to be between $0.36 and $0.40 per share. Non-GAAP guidance excludes restructuring charges of approximately $12 million, $10 million of which will be noncash charges. Other non-GAAP charges include stock-based compensation of $2.8 million and amortization of intangibles of $1.6 million.

This concludes our prepared remarks for today. Operator, I'd like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of James Covello with Goldman Sachs.

James Covello - Goldman Sachs Group Inc., Research Division

If I look at the Thin Film business, as you commented, you're getting back to the 2011 level. It seems like you're getting there faster than peers in the Thin Film business. If you could give us some color -- and obviously, I know you have the breakdown on page -- Slide 17 in the presentation. In terms of how you're getting there faster than peers, do you think that's because of the nonsemi markets? Is it share, mix, customer exposure? If you could give us some perspective on that, that would be helpful.

Garry W. Rogerson

That's a great question, James. Let me pass that straight over to Yuval.

Yuval Wasserman

We see the benefit of historical design wins that we managed to close last year. And we see additional products and applications that we penetrated across the board practically with expansion also to new geographical regions. And we see growth coming also from technology buys as some of our customers are sending products for demonstration and evaluations to end users using our components. The continuing demand for the abatement products that we have also helped us to grow faster than the market we serve. So overall, you're right. We did better than the market.

Garry W. Rogerson

I mean, and another thing there, by the way, James, should be commented on is the profit that's come down to the bottom line with these incremental -- with the incremental growth. I think the machine that we put in place, that Yuval's put in place, is incredible. We only need to get a little bit of growth and we can put a lot to the bottom line. As I said in the comments, I think just another $8 million of revenues or $8 million to $9 million of revenues, we could put another $4 million to the bottom line now. So the machine is really geared to getting that volume.

James Covello - Goldman Sachs Group Inc., Research Division

That's great. If I could ask a follow-up, again sticking within the Thin Films business. If I look at semiconductors as a percentage of the total Thin Films business, it's been running anywhere between 1/2 to a little bit more or less than 1/2 in a given quarter. If you project out a couple of years with the efforts and initiatives within Thin Film that you have, what would you expect semiconductor to represent, say, 3 years from now, on average as a percentage of the total Thin Films business?

Garry W. Rogerson

Well, the first thing to remember is we're continuing to win and gain market share in semi. So we're being very, very successful. We've had some big wins in the U.S. that Yuval might want to explain more on and in Japan. So we expect to move forward quite nicely within semiconductor, gaining market share. I hope that the industrial side beats the growth of the semiconductor side. We're already seeing that in hard coating. And I think of abatement at environmental, not semiconductor, even though it is within the semiconductor marketplace. So Yuval?

Yuval Wasserman

That's very correct, Garry. Jim, the abatement business that we started up, basically selling to the semi industry, will be extended beyond semi and beyond the current customer base that we serve. It's a significant potential for growth and it takes us outside of semi, outside of Thin Films with the new approach for point-of-use abatement. And that's a totally new business for us. Additionally, I expect to see the Thin Film industrial part of the business continuing to grow organically and inorganically as we continue to look for power conversion solutions for other industries and other applications, while at the same time continuing to invest significantly in new applications and solutions for next-generation inflection point in semi.

Operator

Your next question comes from the line of Joe Maxa with Dougherty & Company.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Question on the solar side. $100 million per quarter, you're talking about potential for next year. That's a long way from where you are today. Just maybe -- sorry, but I missed the first part of the call. But I'm just curious, how do you get there from current levels? I know you've had some acquisitions. How much of that is going to be part of the $100 million?

Garry W. Rogerson

Well, we said when we made the acquisition that we'll get to $100 million a quarter. And we still believe that. We are getting some large orders in the utility marketplace now, which will add. So if you add it all together, we can get to that $100 million mark. But Gordon, if you'd like to...

Gordon B. Tredger

I think the 2 key things are the new product lines that we're going to be ramping up in the second half of the year. We made the acquisition recently, which has given us a really nice range of 3-phase string products that are going to be very -- that U.S. customers are already demonstrating considerable interest in. It will also take us into some new geographic markets that we haven't been in previously, places like Romania and Eastern Europe or Korea and parts of Latin America, Canada as well, later this year. The second product introduction at the Intersolar San Francisco conference was the megawatt product, which was extremely well received by utility customers. In the prepared remarks, we discussed a major project win. We have other very significant opportunities that we expect to close in the second half of the year. So we think we're pretty well set-up for 2014.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Okay. And then a follow-up, how are -- describe the pricing environment in North America, your utility and others? And then another one is as you move to different geographies, what is the profitability profile in these new markets you haven't been in?

Garry W. Rogerson

Well, I think the first thing to say is that the machine that we put in place, I believe, gives us a competitive advantage. Our Shenzhen facility, outsourcing from Shenzhen, assembly locally as necessary is a competitive advantage to the company. I'm very pleased with that. There's lots we can do to reduce our costs further in the supply chain and by design. But we're also picking and choosing the type of orders we go for. We're not going for everything at all. Market share is not our driver. Our driver is to get this thing to be sustainably profitable. Gordon?

Gordon B. Tredger

Yes. The market in North America, I mean, nothing's really changed overall at the macro level. There's still people out there that are going to lead on price. It's a competitive market, but we think that the new product offerings will bring forth -- position us extremely well to continue to succeed in North America, particularly the megawatt in the utility market, where our bipolar design gives us some unique advantages in terms of balance of system cost for energy production. And then outside of North America, the 3-phase string product line is the horse that we're going to ride hard in the second half of the year. And I mean, the pricing varies very significantly as you move from markets like India to Latin America over to Japan. The good news is that we're coming up with products that are well suited to the needs of these local customers. And we feel that we've got the right combination of distribution, products and strategy to succeed in those places.

Garry W. Rogerson

Maybe to just say in another way, the 1 megawatt has hit the sweet spot of the utility. The utility is picking up in the U.S. The 3-phase string is picking up in the U.S., I believe, in our first 3 months -- and Gordon, correct if I'm wrong, we had more sales of 3-phase string than record had in all its time in the U.S. So the 3-phase string just in the U.S. is picking up for us. In Canada, it should pick up for us, in Latin America, in India and later in Japan. You'll see a series of releases from us for 3-phase string, which will really help the growth. So the products fit well. We are greatly positioned to get into new geographies and we got the utility picking up. At the same time, I want to keep on saying it, we have an engine to produce low-cost product. We believe our costs can be lower than anyone else that we see in the marketplace at the present time. So we have the efficiency and the cost.

Operator

[Operator Instructions] Your next question comes from the line of Edwin Mok with Needham & Company.

Tony Grillo

This is Tony Grillo calling in for Edwin Mok. I just had a couple of questions for you. And to start off, looking at your guidance and looking at Thin Film versus solar, we see about 4% Q-over-Q guide. I was wondering if you could talk specifically about the drivers and where you expect to see growth here on either side.

Garry W. Rogerson

Well, yes, okay. Within the Thin Film business unit, we are saying we're going to be flat to a tad up -- probably a tad up in the third quarter in revenues. Now costs keep coming down so that's good. Within our solar, we'll see growth in the U.S. with the 3-phase string. We'll see growth with our megawatt product in the U.S. in the second half of the year. Then we'll see growth in new geographies. We're in good shape for revenue growth.

Danny C. Herron

The other thing I'd just add on our profitability, if you recall in my remarks, if we had, had the full quarter benefit of all the changes we made in our solar business, that would have been worth a couple of more million in profit for the quarter. So that's where the EPS growth is coming from also.

Garry W. Rogerson

That's a very good point. So maybe I'll say that in a different way. If we just quarter-ize the last month of expenses with the revenue we got within solar, the business will be at the breakeven point and the cost will continue to come down this quarter.

Tony Grillo

Okay. That's very helpful. And then you talked -- there was a brief question about ASPs. And looking specifically at pricing trends, given the information that you gave, it looks like ASPs decreased Q-over-Q. I was wondering if you could maybe talk about that a little bit.

Garry W. Rogerson

I'll pass it over to Gordon. But I do believe that's because of the new 3-phase string products bringing average pricing down.

Gordon B. Tredger

Yes. I mean, it's a little difficult to look at ASP comparisons anyway, given the fact that we do have our services and balance of system offerings that revenues fluctuate quarter-by-quarter. But more importantly, this quarter was the addition of the 3-phase string product line. And we're now exposed to some different geographies, where pricing isn't the same as it's been in traditionally in North America, where we've focused in the past.

Tony Grillo

Okay. And if you guys don't mind, one more question on margins. What are kind of the drivers for upside? And why does guidance kind of imply lower margins for the coming quarter?

Danny C. Herron

I think the guidance probably implies better margins for the coming quarter. I guess it depends on your definition of margin. I look at op income margin because, at the end of the day, we're driving the EPS growth. And so as we get more revenues, we get more gross margin dollars and we don't see our op expenses go up, that's going to drive to improve EPS, and that's what our focus is on.

Garry W. Rogerson

With the same mix of products, with the same revenue this quarter coming along, we'll do better than -- we should do better than last quarter.

Operator

[Operator Instructions] Your next question comes from the line of Krish Sankar with Bank of America Merrill Lynch.

Andrew Hughes - BofA Merrill Lynch, Research Division

This is Andrew Hughes on for Krish. In the solar segment, just curious if you can quantify the contribution that the 3-phase string inverter made to revenues in this past quarter and how you see it kind of breaking down among the newer products, 3-phase, as well as megawatt in the guidance that you're giving out for Q3.

Garry W. Rogerson

Really hard to get that granular because there is some taking away, 3-phase string from other product lines, so you can't quite see that. What we said for the combination going into 2014, we should be able to get to about $100 million a quarter or $400 million a year. And that is because of the 3-phase string, that is because of the growth we are seeing in the utility segment with the megawatt that's just coming onboard and the new geographies. So that's about it that we can say there. The 3-phase string is helping us in a lot of different ways.

Danny C. Herron

In our 8-K that we filed after the acquisition, suggest an $80 million to $100 million a year revenue stream out of that product when it's fully incorporated.

Andrew Hughes - BofA Merrill Lynch, Research Division

Got you. And I'm just curious if you could just discuss in the U.S., in particular, I'm seeing a number of 3-phase inverters introduced recently, I think, in particular in the residential sector. So I'm wondering if you can comment on competition for that in that product SKU, in particular, and what segments you're seeing -- sort of what projects, I guess, within commercial you're seeing greatest adoption.

Garry W. Rogerson

Firstly, we're not in the residential. So let's move that one to one side. The 3-phase string that we have is a very high-performance 3-phase string for the commercial marketplace. It was, I believe, the first 3-phase string released in Europe and is still the most efficient that they sell in Europe. Gordon?

Yuval Wasserman

Yes. And so obviously, there's 3-phase string competitors out there. What we're seeing is that AE's had a very strong customer franchise in the U.S. historically. And that customer franchise is very interested in looking at 3-phase string because of its technology advantages and they're very interested in having the support of an established company in the U.S. like AE to stand behind the product. And thirdly, I'd say since we also have our monopolar range of central inverters, we don't have to force-fit the 3-phase string in every situation. We can offer the customer the unique advantages of either technology, and so there's really no pressure there.

Garry W. Rogerson

We love having customers choose AE or AE. And we're happy for that and we will move forward with that one. The 3-phase string -- remember again what we said, we had a record quarter of 3-phase string in the U.S. It's not saying a whole deal, but our salespeople picked it up immediately and started selling it in the U.S. We have traction there. I believe again, Gordon, if I'm right in saying this, this is the only 3-phase string that you can just have 1 installer pick up and put on a wall.

Gordon B. Tredger

Yes, it's the latest product out there.

Garry W. Rogerson

Which is huge, it's a huge cost differentiator.

Operator

With no further question in queue, I will turn the call over to Mr. Garry Rogerson for final comments. Please proceed.

Garry W. Rogerson

Well, thank you very much. We're really excited with the results we've got. We're looking forward to a great 2014. And I am looking forward to seeing you in New York in a couple of weeks time at Needham and Jefferies. Thank you for listening in today. Goodbye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.

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