First Solar's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: First Solar, (FSLR)

First Solar, Inc. (NASDAQ:FSLR)

Q3 2013 Earnings Call

October 31, 2013, 4:30 pm ET


David Brady - Vice President of Treasury and Investor Relations

Jim Hughes - Chief Executive Officer, Director

Mark Widmar - Chief Financial Officer, Chief Accounting Officer


Brian Lee - Goldman Sachs

Brandon Heiken - Credit Suisse

Mahavir Sanghavi - UBS

Vishal Shah - Deutsche Bank

Paul Coster - JPMorgan

Ben Kallo - Robert Baird

Krish Sankar - Bank of America Merrill Lynch

Edwin Mok - Needham & Co.

Mahesh Sanganeria - RBC Capital Markets

Jagadish Iyer - Piper Jaffray

Colin Rusch - Northland Capital Markets


Good afternoon, everyone, and welcome to the First Solar's third quarter 2013 earnings call. This call is being webcast live on the Investors' section of First Solar's website at At this time, all participants are in a listen-only mode. As a reminder, today's call is being recorded.

I would now like to turn the call over to Mr. David Brady, Vice President of Treasury and Investor Relationships for First Solar, Inc. Mr. Brady, you may now begin.

David Brady

Thank you, operator. Good afternoon, everyone, and thank you for joining us. Today, the company issued a press release announcing its financial results for the third quarter. A copy of the press release and the presentation are available on the Investors' section of First Solar's website at

With me today are Jim Hughes, Chief Executive Officer and Mark Widmar, Chief Financial Officer. Jim will provide an update on significant business and technology developments and then Mark will discuss the third quarter results and provide updated guidance for 2013. We will then open up the call for questions.

Most of the financial numbers reported and discussed on today's call are based on U.S. Generally Accepted Accounting Principles. In a few cases where we report non-GAAP measures, we have provided a reconciliation to GAAP equivalents at the back of our presentation.

Please note that during the course of this call, the company will make projections and other comments that are forward-looking statements within the meaning of the Federal Securities Laws. The forward-looking statements in this call are based on current information and expectations and are subject to uncertainties and changes in circumstances and do not constitute guarantees of future performance.

Those statements involve a number of factors that could cause actual results to differ materially from those statements, including the risks as described in the company's most recent Annual Reports on Form 10-K and other filings with the Securities and Exchange Commission. First Solar assumes no obligation to update any forward-looking information contained in this call or with respect to the announcements described herein.

It is now my pleasure to introduce Jim Hughes, Chief Executive Officer. Jim?

Jim Hughes

Thanks, David. Good afternoon and thanks for joining us for our third quarter 2013 earnings call. I will begin by taking a moment to recognize some of this quarter's remarkable achievements.

Our business development team booked 860 megawatts DC of new business, compared to shipments of 406 megawatts in the quarter, a ratio of over 2 to 1 and resulting in a year to-date book-to-bill ratio of greater than one.

We had earnings per share of almost $2 on a GAAP basis significantly above expectations and due primarily to the sale of the ABW projects in Canada and commencement of revenue recognition from the Desert Sunlight project.

We are now flash-testing modules at our Perrysburg facility with the conversion efficiency of 14.1%. Just result potential to open up new business segments to us and significantly increase our total addressable market and finally at a time when others are no longer reporting module cost per watt.

We have had the largest quarterly decline in our cost per watt since 2007, falling $0.08 to $0.59 on average in Q3 and in line with our competitor's report cost per watt excluding freight, recycling and warranty charges our core figure is now oil $0.50, $0.49 to be exact, the lowest in the industry. These results are an impressive validation at the in technology and cost roadmaps that we provided during our Analyst Day in April and upon which we will continue to execute.

Slide 5 shows the chart that we presented on Analyst Day, which compares our module efficiency roadmap to that of utilities scale crystalline silicon based on our estimate from a combination of our own and third-party analysis. Both roadmaps are normalized for real world temperatures at 6 degree Celsius and adjusted for their respective temperature provisions.

As you can see the gap between cadmium telluride and CSI is all but for us, virtually eliminating, so called utility scale down for systems penalty. More importantly with our steeper efficiency roadmap, we expect to have surpassed the performance CSI by mid-'14 thereby any significant advantage in the future and at the same time further improving on transit manufacturing cost advantage.

In summary, this has been a very impressive quarter, but it also demonstrates the lumpiness of our business especially in terms of revenue earning tied to our projects. For this reason, we continue to recommend investors focus on the long-term trend and average results of the company, rather than all the individual quarters.

Now turning to the book-to-bill performance. Slides Six and Seven show the total outstanding bookings in gigawatts and revenue and the change in those bookings record year-to-date. This data represents our, business which includes a level of very small percentage of third-party module sales in addition to our advanced systems project pipeline.

Total outstanding bookings rose 2.6 gigawatt DC to 2.7 gigawatt DC year-to-date and our book-to-bill ratio is greater than number one, the ratio for the quarter was closer to one. Letter a number of deals we have been working on in fact.

In September, we announced the acquisition of the Moapa project in Nevada from K Road Power. This 250 AC project is in an advanced stage of development and have the 25-year PPA in place with the Los Angeles Department of Water and Power. Construction of the project could start as soon as the fourth quarter of 2013 and be completed by the end of 2015. The purchase of Moapa in addition to the Element pipeline announced on last quarter's call are examples of the use proceeds for project in pipeline acquisitions which we indicated in connection with the equity offering in June.

We also recently entered into an agreement with NextEra to build the McCoy project, a 250-megawatt AC solar power plant in Riverside County, California. Construction is expected to begin in 2014 with completion in late 2016. In addition, we have sign an agreement to build four solar power plants in California totaling 79 megawatts AC. All of the projects will incorporate First Solar's RayTracker technology, which provides up to 20% more energy and reduces the levelized cost of electricity. Construction on all four projects is expected to be completed by late 2014.

We also added 39 megawatts AC of demand from Electric. Last month we announced the launch of a joint venture with Belectric to develop and build solar energy projects on three continents Europe, North Africa and the U.S. The announcement is the latest milestone in a longstanding partnership between the two companies that spans over a decade. An estimated 80% of the 1.4 gigawatts of solar capacity installed by Belectric is powered by First Solar modules.

Switching to projects sold. In addition to the sale of the ABW project in Canada to General Electric, today we announced the sale of Silver State South, a 250 megawatt AC project to NextEra, subject to certain conditions precedent. Closing is expected in early 2014. Under the agreement, First Solar will continue to develop Silver State South, which is in the permitting stage. We will also provide EPC services and modules for the project. Pending permitting and regulatory approvals, construction is expected to start in late 2014 and be completed in late 2016.

We have also successfully completed the 13 megawatt DC power plant in Dubai. While this is by no means one of our biggest projects, it is our first utility scale project in the Middle East and the largest operating solar photovoltaic plant in the region. This achievement establishes an important benchmark for the development of solar photovoltaic in one of the most promising markets we operate in.

In summary, Joe Kishkill and his business development team have done an outstanding job. Joe joined First Solar as Chief Commercial Officer in August. Joe, a Harvard MBA graduate also holds a Bachelor of Science and Electrical Engineering from Brown University. He was a regional president for Exterran, a global provider of natural gas, petroleum and water treatment production services. He brings unparalleled expertise to this extremely critical role. His primary focus will be on sustainable growth in emerging markets.

Turning to outstanding bookings in revenue turns. Given the lower system ASP environment we showed performance by increasing our bookings in Q3 to $7.8 billion, even while recognizing over $1 billion in revenue in the quarter. In addition, we have 7.7 gigawatts in near-term opportunity which is a decrease of 300 megawatts since the end of the second quarter.

Bruce just discussed in detail on slide eight. The purpose of the metric on slide eight is to provide a useful indicator of the overall level of activity that we are seeing in the marketplace which remains strong. The total opportunity fell slightly during the quarter but we are very comfortable with this performance given the conversion of several potential deals and the firm bookings this quarter, such as Moapa and McCoy which were compensated for by the identification of new opportunities.

We have just over 1.4 gigawatt of mid and late stage deals with moderate to high probability of success. The largest portion of our 6.3 gigawatts is early stage which means that the majority of these projects will have a development cycle of 12 to 24 months and consist primarily of our own captive project assets. We believe that the ratio of mid to late stage deals to early to early stage opportunities is a healthy proportional distribution.

Slide nine shows the breakdown of demand by geography. Our opportunities outside the U.S. is now 4.2 gigawatt and represents 55% of the total. This is perhaps the best illustration to date of the progress that we are making in creating demand in sustainable markets and gives us confidence in our ability to replenish our platform going after 2016 and beyond.

Turning to slide 10. Notwithstanding our improving prospects and competitive positioning in our traditional module and systems business, we continue to explore new business opportunities that create value for our customers and shareholders. First Solar has made strategic investments in our O&M business over the past few years in order to create a unique technology based platform which allows us to rapidly scale our worldwide O&M portfolio.

We are now leveraging that investment by expanding in to the third-party operations and maintenance business to offer our O&M services to customers for projects are not using First Solar modules. This service base component of the solar value chain offers a unique opportunity for sustained revenue growth given the 25 plus year life span of solar power plants.

This will also enable us to offer additional products and services to our customers beyond the fixed fee scope throughout the entire power plant life cycle such as re-powerment. In addition, our platform creates high barriers to entry for competitors and provides us with a distinctive differentiator relative to other platforms in the market. Our customers have been receptive to this proposal and we expect to add to our portfolio under management in 2013 and beyond.

In closing, we achieved a solid performance this quarter and the prospects for the industry are definitely improving but they still remain uncertain. Several potential challenges remain. Of particular concern are announcements of new capacity expansions, which showed expectations for demand in certain geography such as China and Japan failed to materialize or the economics associated with those markets declined substantially. This could lead to a renewed oversupply situation in the industry at large and in the markets that we are targeting and then once again put pressure pricing and profit margin for all solar players.

With that I will now turn it over to Mark, who will provide detail on our Q3 financial results and an update to our 2013 full year guidance.

Mark Widmar

Okay. Thanks, Jim, and good afternoon. Turning to Slide 12, I would like to begin by highlighting the third quarter operational performance. Production in the quarter was 426 megawatts DC, up 10% on a sequential basis. This increase is reflective of the re-ramping of production line that has undergone planned equipment upgrades. When completed, these upgrades will facilitate the achievement of near-term targets on our module cost and efficiency improvement roadmaps.

Comparing production cost year-over-year, excluding the German manufacturing volume which is no longer operational, production increased 8%, which was driven by improved module efficiency and higher utilization on a same number of production lines. In the third quarter, we ran our factories at approximately 80% capacity utilization, up five percentage points from the prior quarter.

As Jim highlighted earlier on this call, we continue to make great progress towards achieving the efficiency and manufacturing cost target that we have provided during our Analyst Day in April. We have reduced our module manufacturing cost per watt to $0.59 from $0.67 last quarter, an $0.08 per watt or 12% reduction quarter-on-quarter. This is the best quarter-over-quarter cost improvement in six years on a per watt basis and highest percentage reduction since our IPO.

This step function improvement is directly attributed to the efficiency and manufacturing improvement program and the cost savings initiatives that are being developed and implemented by our world class R&D in manufacturing teams. Excluding the impact of underutilization, our core comp per watt fell to $0.57, a $0.06 improvement on the prior quarter.

During Q3, our best plant manufacturing cost at full utilization was $0.56 per watt. Average conversion efficiency for Q3 increased 30 basis points to 13.3%. While this is a significant quarter-on-quarter improvement, it is noteworthy to highlight that for the first month of Q4 our lead line average efficiency is 13.9%.

As we replicate the lead line manufacturing process across the balance of our production lines, we expect the fleet average efficiency to meet or exceed the lead line 13.9% efficiency over the next few quarters.

Now moving to the P&L portion of the presentation on Slide 13, third quarter net sales reached a record $1.3 billion, compared to $520 million last quarter. This was driven by higher business project revenues partially offset by slightly lower module-only sales.

The higher systems revenue is primarily attributed to the initial revenue recognition for Desert Sunlight and the sale of the ABW projects in Canada. It is important to note that as expected Desert Sunlight contributed materially and disproportionately to results of the quarter.

As initial revenue recognition achieved, include project activity that was completed over the last several periods. As a percentage of total sales, our systems revenue which includes both, our EPC revenue and solar modules used in the systems projects increased from 84% in the prior quarter to 95% in the third quarter, again, driven by the Desert Sunlight and ABW projects.

Gross margin was 28.8%, up from 27% in the prior quarter. This is due to the favorable systems revenue mix and the lower manufacturing cost. Additionally, gross margin benefited from a change in estimated reduction in our end-of-life recycling obligation which resulted from the completion of our annual study of the estimated future collection or recycling cost.

We now have high volume operational cost data from cycling technology that provides a longer term representation of the asset cost to compare against our estimates. Based on this actual operational run data and recycling operational improvements made throughout the year, we have reduced our estimated future collection recycling cost per month.

The lower cost when applied against our 7 gigawatts of module to solar field result in a lower obligation. This change is also expected to positively contribute to our go forward module cost reduction.

Continuing third quarter operating expenses including asset impairment charges increased $57 million quarter-over-quarter to $156 million. This increase is fully attributed to the pre-tax asset impairment charge of $57 million related to the recently announced agreement to sell the company's facility in Mesa, Arizona. The sale of the facility is expected to provide additional liquidity to the company of approximately $115 million, and is expected to result in a net reduction in annual operating expenses, including both depreciation expense and cash expenditures of approximately $10 million.

The Mesa sale proceeds are expected to be received in the fourth quarter of this year. Excluding the asset impairment, total operating expenses were slightly down compared to the prior quarter. As we proceed through the fourth quarter and exit 2013, we expect the quarterly output total to decrease by approximately 5% to 6% over the next four quarters. As we focus on stated strategy to lower general and administrative expenses in order to prioritize and internally fund R&D and sales and marketing activities which are expected to facilitate market enabling growth.

On a reported basis, third quarter operating income was $208 million compared to operating income of $39 million in the prior quarter. The increase was primarily reflected as higher revenue recognition and margin mix for our systems business, partially offset by higher operating expenses including the asset impairment charge. Excluding restructuring and asset impairment, third quarter profit from income tax was $266 million compared to $43 million in the prior quarter.

Third quarter GAAP net income was $195 million or $1.94 per fully diluted share. Including the asset impairment charge of $0.34. Compared to $0.37 per full diluted share of the second quarter and $1.00 in the third quarter of 2012. Including the asset impairment charge of $0.34, our Q3 non-GAAP earnings per full diluted share was $2.28.

Turning to slide 14. I will review the balance sheet and cash flow summary. Cash and marketable securities increased by approximately $247 million reaching $1.5 billion in the quarter. This increase was driven primarily by cash received from customers who have continued to bill out of our captive systems project and module sales.

Our net cash position continues to be a competitive advantage in the industry increased by $274 million to approximately $1.3 billion. To provide some perspective on how our net cash position has continue to improve even amidst a strong industry downturn that has led to other competitors' demise. First Solar has strengthened its balance sheet, going from a net cash position of approximately $187 million in Q3 of last year to $1.3 billion in Q3 of this year, an increase of just over %1.1 billion.

On the working capital front, we have reduced key working capital accounts based on our focused management on inventory, receivable and project related assets. In aggregate, the reduction in quarter-over-quarter to the networking capital account is slightly more than $100 million.

The following the highlights the key drivers in the reductions. Accounts receivables trade balance decreased by $45 million quarter-over-quarter to $248 million and the collections related to several of our systems projects and continued collections from module only sales. Unbilled accounts receivable retainage decreased by $23 million mainly due to decreases in unbilled balances for our Imperial Valley and Agua Caliente projects.

Inventory, including balance of systems parts decreased $10 million sequentially due to greater installation of modules in the systems business. Project assets increased $27 million primarily due to Moapa project acquisition as well as an increase in construction activity on our portfolio of unfilled projects, partially offset by the sale of the ABW project. Deferred project cost decreased by $248 million, principally due to the initial revenue recognition on Desert Sunlight, partially offset by the increase associated with Campo as the project has not yet achieved substantial completion and revenue recognition.

Other assets, including non-current retainage, increased by $120 million versus the prior quarter. Of that increase, approximately $40 million was driven by increases in Desert Sunlight and Topaz projects. Such retainage amounts relate to construction work already performed but which are held for payment by our customer as a form of security until we have reached certain construction milestone.

Quarter-over-quarter, total debt decreased to $229 million, a sequential decline of approximately $27 million. Operating cash flow for the third quarter was $375 million, compared to $222 million in the second quarter. Free cash flow was $284 million compared to a $168 million in the prior quarter. Capital expenditures totaled approximately $69 million for the quarter were primarily related to production upgrades which are expected to increase module efficiency and throughput. Depreciation for the quarter was $60 million compared to $58 million in the prior quarter.

Turning to Slide 15, I will now provide the update on the full year 2013 guidance outlook.

Starting with the key underlying assumptions, with the exception of a slight change in the mix between shipping volumes, on module only versus systems project volume, the only material change in our updated guidance is assumption around Desert Sunlight.

Having met the GAAP requirements to a revenue recognition and having added clarity on the remaining product schedule for the year, we now expect approximately 50% of Desert Sunlight's revenue to be you recognized for the year.

All other key assumptions for the production plan including expected improvement in module efficiency and cost targets and the total shipment volume assumptions, all remain unchanged.

Turning to Slide 16, we are updating our 2013 guidance as follows. Beginning with net sales, we are lowering the range mid-point of $3.7 million to a new mid-point of $3.5 million to account for probable revenue recognition risk that could cost the economic associated with one of more of our project to slip in to next year.

However, due to the expected increased revenue recognition for Desert Sunlight and the associated favorable margin, we get a partial offset than on the top line and materially higher margin dollars and earnings.

Consequentially, we are raising our gross margin range to 24% to 26%. Our operating income range to $470 million to $490 million and our earnings per share range to $4.25 to $4.50 per share, an increase of approximately $0.40 to the mid-point compared to prior.

Regarding the sources of the increase in our earnings guidance, approximately $0.25 is due to the operational and project cost line improvements in the plan. About our prior forecast and other $0.15 contributing to favorable timing in the systems business, primarily related to the higher recognition for Desert Sunlight.

Please note that the nature of the incremental pull in on Desert Sunlight of 2013 is not a result of the accelerated project build plan but rather simply a result of higher amount of recognition that our prior risk adjusted forecasted so.

Our range in operating expenses remain unchanged. The range on the tax assumption is now 14% to 16% versus our prior range of 15% to 17%, the reduction being attributed primarily to a change in the expected jurisdictional income mix for the year.

Our lower expected operating cash flow range of $700 million to $900 million, again reflect a potential impact of scheduled risk that could cause cash receipts of one or more projects to move into early next year.

Capital expenditures are now forecast to be between $300 million and $350 million. The expected range on decrease in working capital from beginning of the year is now $50 million to $159 million.

[Fourth quarter], there are couple of scenarios, which could result in additional upside to our 2013 guidance ranges, but would however result in corresponding reduction our pull-in of project economics currently assumed to occur in 2014. This is due to the nature of our system project business which as you know tends to be lumpy due to project schedule, site conditions and revenue recognition criteria just to name of few.

Given our outlook assumes the level of resiliency, we could see more project economics recognized in the year versus our rate case plan assumed that the ranges we just provided. Additionally to help provide some guidance on how to think about the standalone Q4 forecast for income and earnings, please note that the share count will be slightly higher than the third quarter total, but materially higher than the weighted average share count for the year.

As a result, the quarterly fiscal period having materially different amounts of shares outstanding. The expected annual earnings per share range will not equal to sum of each standalone quarterly earnings per share amount. Also, the tax rate for Q4 will be slightly higher than the year-to-date rate, which is due to jurisdictional income expected in Q4. The net effect is that the year-to-date rate is slightly below and the Q4 rate is slightly above our full year tax rate guidance.

As we look ahead to next year, we are on the path of developing our 2014 corporate calendar and expect to hold another Analyst Day event scheduled for early March, during which we will provide an update on our strategy, key markets to financial outlooks. Similar to the past spring, we plan to provide our initial full year 2014 guidance at that event. More details will be announced as they become available.

Now moving to Slide 17, I would like to summarize the quarter. Q3 was an exceptional quarter, the strong results that were achieved through team work and a constant focus on executing our strategy. As Jim and I have highlighted, we continue to show progress on the many fronts including the growth opportunity set and the advancement of our technology competitiveness and the execution of our operating plan.

We continue to strengthen our balance sheet and resulting bankability with the intent to developing a well balanced foundation that ensures our customers will have a reliable long-term solar PV solution partner. We remain on track for the year, maintaining our focus on expecting and executing our roadmaps and strategic imperatives outlined during the April Analyst Day event.

With that, we conclude our prepared remarks and open up the call for questions. Operator?

Question-and-Answer Session


Thank you. (Operator Instructions). Please limit yourself to one question. Our first question comes from Brian Lee of Goldman Sachs.

Brian Lee - Goldman Sachs

I guess just from a timing perspective, there is a couple of things moving around here. So just want to clarify on those topics. On Desert Sunlight specifically, should we expect the other half of the rev rec to all happen in 2014 or is there some that will also be done in '15? Then what percent of Silver State South, now that that project has sold, should we expect this year and next year?

Jim Hughes

So, yes. Desert Sunlight currently has, the COD we anticipate to complete a portion of project by the end of the '14, the other portion may fall in early 2015 based on the COD. But it largely assumes the balance of the revenue will happen that in 2014. Silver State South, while we will start to begin construction in 2014, at the latter part of 2014, and it's not clear that at this point in time that we will have achieved all of the revenue recognition criteria to start recognizing revenue for Silver State South in '14. However we will see some initial production volume and there will be some construction activity but probably very little, if any, revenue or earnings for Silver State South next year.


Our next question comes from Brian Jobin of Credit Suisse.

Brandon Heiken - Credit Suisse

Hi. This is Brandon Heiken on behalf of Patrick Jobin. Thanks for taking the question. I was wondering if you could explain the economics on the recent bookings? How do those compare with the targets that you laid out for 2014 and 2015? And would the other acquisitions that you made in the cost reductions affect those target? Thank you.

Mark Widmar

So we have not given specific economics on any of the recently announced projects but we look forward in the economics on the opportunity that we are currently bidding are consistent with the range of what we previously guided to which would be in the 15% to 20%. So without getting into details, each transaction could vary from those specific targets, but in general the average is still within that range. The cost opportunities that we now have highlighted are largely in line with our cost reduction roadmaps that we have previously communicated. We may see a little bit of an acceleration on the cost per watt profile that I don't anticipate will have a material impact in the short-term.


Thank you. Our next question comes from Stephen Chin of UBS.

Mahavir Sanghavi - UBS

Yes. Hi. Thanks for taking my question. This is Mahavir Sanghavi. Congrats on the cost downs. Just a question on the cost. Two parts there. So you talked that 14.1% which you are piloting. What should we expect that, in terms of what would that lead to cost per watt? Then also in terms of benefit on the balance of the system, how much reduction can you get on the balance of system and overall system cost? Thank you.

Mark Widmar

The 14.1%, if you refer back to our Analyst Day material, basically that is all in the cost roadmap that we laid out and it's merely executing right to schedule what we presented. So there is not anything new or changed in terms of the cost roadmap. This is merely a validation that we are executing to that cost roadmap as it was disclosed in the Analyst Day. In terms of the balance of system, we continue to make progress on the balance of system cost, both as a result of increasing efficiency and as a result of reducing cost in the balance of system itself. And again, that remains on the trajectory that we outlined at the Analyst Day. Everything, we are executing basically to the projections that we set out earlier in the year.

Jim Hughes

I think the other thing to add around that is that as you take that 14.1% and you try to hit and triangulate that to what was on the roadmap, the 14.1% would point you to a low $0.50 type number. If you take that and you apply that our best line, in particular we are going to be in low 50s.

If we take the additional impact of excluding freight warranty and recycling cost, we would be in the low 40s, so I think that's kind of the competitive benchmark that we should all keep in front of us. We have the capability today, 14 one which we sort of equate to on an apples to apples comparison across profile the low $0.42 to $0.43.


Thank you. Our next question comes from Vishal Shah from Deutsche Bank.

Vishal Shah - Deutsche Bank

How long does it take to rollout your high efficiency lines to across all the different factories and you said, 13.9% or should we assume that by the time you roll it out, your cost will be in low 50s? Thank you.

Jim Hughes

The best plan right now is 39. I think our guidance from the exit rate are of our best line is 14%. In my comment that I made is that over the next few quarters we will get everything up to 39 or north of that, so you can start to see us on a fleet average in the 14% maybe a little bit above 14% in the first half of next year which all supports again a low $0.50-type cost per watt and that's all consistent with what we showed in the Analyst Day.


Our next question comes from Paul Coster of JPMorgan.

Paul Coster - JPMorgan

It's a two-part question. I just wondered if you can give us a bit of an update on TetraSun in passing, but the main question is if I understand you correctly Mark, the gross margin improvement is really a function of making new assumptions around revenue recognition on specific programs around year end, and not a function of efficiency utilization rates and all of the other operating metrics that we described. Is that correct?

Mark Widmar

Yes. I will take that one and I will let Jim talk to about TetraSun. Yes. The improvement in the gross margin and there is a favorable mix shift Desert Sunlight being a portion of that, but there is also a favorable benefit on the cost profile, especially on some of our project cost plans that is driving a portion of that benefit.

One of the things that we tried to highlight was that if the EPS changed, the mid-point increased to $0.40, $0.45 of that was operational, and so make sure people clearly understand that the other $0.15 is a mix benefit, but 25% is operational which is a combination of a better cost profile on the module and a better overall cost profile on our key projects.

Jim Hughes

In terms of TetraSun we continue to validate and produce pilot product and continue to develop our plans for that product or we don't have any material announcements at this time and we will talk about more about it as we get into the early part of next year.


Our next question comes from Ben Kallo of Robert Baird.

Ben Kallo - Robert Baird

Hi, gentlemen. Jim, first of all on your backlog here, I just want to understand what was included through your acquisitions? Then as you pull forward some of, if that's the right term, Desert Sunlight, does that make change our assumptions next year, so you have some of the efficiency gains we are expecting next year happening in this year.

Then I am going to add on yield curve thoughts. As you guys look ahead, how do you balance current revenue, near-term revenue with the opportunity of selling some of the projects through the market? Thanks guys. Good quarter.

Jim Hughes

Sure. I will cover the first. Then Mark can layer in some detail. In terms of the acquisition, once we make a portfolio acquisition how we characterize those projects in terms of being in the opportunity set or being a booking. We used the same standards and rules that we have always applied, so there will be a mixture of impacts as we bring those portfolios in.

In terms of the yield curve thought, where we continue to monitor the market performance of the entities that have gone public, most notably NRG Yield and Pattern Energy. We continue to analyze the benefit, the potential benefit and the potential issues associated with doing something similar or so and I will make at this point, we don't have any firm conclusions.

We think it's very interesting and healthy for the industry. How and if we participate at something we are still looking at and don't have any firm conclusions that have been reached at this point.

Mark Widmar

Then on the Desert Sunlight, yes, there will be some impact of additional revenue this year on Desert Sunlight that will impact 2014, well that is also in our guidance project that we will be moving out of 2013 into 2014. So if you look at it on balance between the two years there is slight downward pressure with Desert but not a material change, given the little bit of revenue out in '13 into '14.


Our next question comes from Krish Shankar of Bank of America Merrill Lynch.

Krish Sankar - Bank of America Merrill Lynch

Thanks. A change in strategy or is it holding onto your projects for longer? And also as you look at the unsold projects that you guys have been developing right now, what are your plan to restrict the holding in through completion?

Jim Hughes

I missed the first part of your statement. Could you just - you were cut off from the very beginning.

Krish Sankar - Bank of America Merrill Lynch

Oh, sorry. Is the selling of the Silver State South a change in strategy, related to holding on to your project for a longer duration?

Jim Hughes

No. What we have said is that we will retain the flexibility to hold project until we believe we have reached a point in time where we can sell them for an optimal mix of value creation and risk reduction. Silver State South was a negotiation that has been going on for a great long period of time with an established customer and we felt like that the opportunity to extract further value didn't really present itself without taking incremental risk and it was the appropriate decision. At the same time that we were making the decision to sell that asset, there are other assets that we have decided to hold little closer to the commercial operation day. So we merely added. We have not drawn an absolute line in the sand as to when we are going to monetize the asset. We have merely said that we are going to be flexible. We are going to have the flexibility to look at different options which, we believe, enhances our ability to create value with each individual asset.


Our next question comes from Edwin Mok of Needham & Co.

Edwin Mok - Needham & Co.

Hi. Thanks for taking my questions. Just want to drill down quickly on the gross margin again. How much was the improvement that you got in the third quarter came from that adjustment of those warranty? And as we look beyond this quarter or last quarter, as you look in 2014, where do you think your gross margin is entering?

Mark Widmar

I think you are referring to, your question is referring to the end of life adjustment and the impact discreetly to the quarter. I won't get into to the details of what impact it has to the quarter. There is a lot of moving pieces in any given quarter, things that are positive, things that are negative. I think the right way here to look at it is though, is what impact does it have to our full year guidance and if you look at it and comprehensively with all of the other moving pieces that are impacting gross margin, it has a nominal impact to our full year guidance, relative to what we last talked about from that perspective. So no significant change from that perspective

Jim Hughes

And as for 2014, we will communicate that at the Analyst Day


Our next question comes from Mahesh Sanganeria from RBC Capital Markets.

Mahesh Sanganeria - RBC Capital Markets

Thank you very much. Just need a clarification on the contribution to the EPS upside which you just provided. There is lot of moving parts on this little confusion. I am not good at Excel to doing it fast enough. So you have a benefit of gross margin and then you pointed out that there is tax rate and you said that there are operational benefits. So can you just break it out by that EPS upside on gross margin tax and operating efficiency.

Jim Hughes

So the way we have broken it out is it is about $0.40 delta to the midpoint of the guidance. $0.25 of that is operational. $0.15 is Desert Sunlight. If you look at the tax rate impact to the and which is included in the operational, it is less than $0.05 in the range of $0.04 to $0.05. So if you want to break it out, 20% operational excluding tax, tax is about $0.04 to $0.05 and then the balance of it $0.15 would be the favorable revenue mix primarily driven by Desert Sunlight.

Mahesh Sanganeria - RBC Capital Market

And operational, are we talking about in the operating expenses line or gross margin line?

Jim Hughes

Both of it is gross margin, so again it's somewhat the favorable benefit on our cost per watt, so it is also significant savings and benefits on our project costs plans so we have a number of material projects we have been successful in increasing or improving overall savings and productivity through our supply chain through labor productivity through other initiatives that are driving down the cost and delivering those projects.


Our next question comes from Jagadish Iyer with Piper Jaffray.

Jagadish Iyer - Piper Jaffray

Yes. Thanks for taking my question. Just a question on you guys have said about long-term gross margins to be 15% to 20% at your Analyst Day for potentially for next year, so given that you have had all these efficiency improvements and how you have your projects, I just wanted to find out the puts and takes that 15% to 20% longer term. Thank you.

Jim Hughes

Yes. We will give, that's the reason why we want to get to a point where we can have another Analyst Day again do that in early March. We will go a lot more detail in that regard. I would like to say that, we are very pleased with progress that we have made so far on all fronts and we will give you additional insight to some of those opportunities and progress that we made as we talk to you in early March.


Our next question comes from Colin Rusch from Northland Capital Markets.

Colin Rusch - Northland Capital Markets

Great. Thanks so much. Can you give us a sense of why revenue will be coming down with the incremental recognition of Desert Sunlight, it looks like that's a higher margin business for you and a higher SE business. Can you give us a sense of what magnitude of projects that are for recognition either in '13 or '14?

Jim Hughes

Yes. There are in the range of hundreds of millions of dollars, let's just put it that way that are kind of the projects that have revenue recognition that is linked to commercial operation for us other condition and so we are uncertain it will be able to achieve all of those elements over the next 60 days basically.

What we wanted to do is to be balanced the best way to say with what we provide the guidance, we also did give you an indication if things break the right way that we potentially see the revenue recognized in 2013, but we did want to be seeking our head out of window a little bit with 60 days left into the year. Didn't feel like it was worth doing. We wanted to come with a view that was balanced and one that we feel comfortable with delivering again.


Our final question comes from James (Inaudible) of Cowen and Company.

Unidentified Analyst

Hi. I just wanted to ask a little bit more about the pipeline development. The numbers that you gave McCoy, Moapa and a couple of others added up to a little over 600 and you are saying that you book 860. Can you tell us what the other big project or group of smaller projects might have been?

Jim Hughes

There is no one individual project. That's a large number of individual transactions, including some module along with sales, so there is not one or a series that we could point to. That's a large number of much smaller transactions that contributes to that number.


Ladies and gentlemen, that does conclude today's First Solar Q3 2013 financial results conference call. We do appreciate your participation today.

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