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Advanced Energy Industries (NASDAQ:AEIS)

Q3 2013 Earnings Call

November 05, 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

Y. Edwin Mok - Needham & Company, LLC, Research Division

Krish Sankar - BofA Merrill Lynch, Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

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

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Advanced Energy Industries Earnings Conference Call. My name is Lacy, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Ms. Annie Leschin, Investor Relations.

Annie Leschin

Thank you, operator. And good morning, everyone. Thank you for joining us today for our Third 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 Unit; and Gordon Tredger, President of the Solar Energy Business Unit.

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. On November 20, Advanced Energy will be hosting an Analyst Day in New York. This will also be a webcasted event, and we hope you would join us.

I would like to remind everyone that except for the historical financial information contained herein, the matters discussed on this call contain certain forward-looking statements that are 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 today, 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 would 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. Nearly 2 years into the strategic plan, we are now in November 2011. I'm pleased to report that we have made great progress towards our objectives of improving margins, accelerating revenue growth, and back to utilizing our cash. We have seen improved non-GAAP operating and EPS performance in line with our guidance, which has led to more value for our shareholders. We expect this to continue in the fourth quarter and beyond.

In the third quarter, we had total revenues of $143 million, non-GAAP EPS with $0.53, and GAAP EPS of $0.02. This was a sound quarter as operating profit less restructuring improved 45% sequentially and 42% versus the prior year. These results demonstrate our advantageous tax structure, but more importantly show the efficiency and the effectiveness of our business model and its ability to return value to our shareholders. Year-to-date in 2013, our operating income excluding restructuring has increased by nearly 140%, from $7.7 million in the first quarter to $12.6 million in the second quarter to $18.3 million in the third quarter. Clearly, a strong bottom line performance, and a trend we are pleased to see.

Now let me highlight several important accomplishments that we had during the third quarter. First, we rapidly accumulated the acquisition of our 3-phase string product line that we announced in April of this year. We've consolidated factors and offices, reduced headcount and lowered our breakeven to the mid-$60 million range. This resulted in the Solar Energy business returning to profitability during the third quarter, which is non-small task in the midst of this integration.

Second, but no less important, is the validation of our manufacturing model. The accelerating revenue growth for [indiscernible] our Thin Film business as we come to translate in the strong margins and contribution to the bottom line. With continued growth from Thin Films, we would expect the same in the fourth quarter.

In Solar, the manufacturing model is no less important. With growing backlog, especially at the 1-megawatt, we should see improved profitability as volumes increase in 2014. Third, over the last 6 months, backlog for the company has grown by at least $48 million. We saw increasing interest for our Solar products in new geographies, specifically the 3-phase string in the U.S. and Canada, and as already mentioned, to the 1-megawatt in the U.S.

At the same time, we are also taking orders from utility products in Eastern Europe. Backlog traction and film applications also grew for a variety of applications, including semiconductors, both in the U.S. and Canada -- sorry, U.S. and Asia, glass coating and industrial hard coating. We expect to gain -- we expect to again see revenue growth for the category in the fourth quarter, translating into higher profits.

In the midst of our extensive integration work, the only negative in the quarter was the buildup of inventory and the subsequent cash generation. The silver lining is that the lion's share of the inventory buildup was in preparation of shipment of our new solar products late in the fourth quarter, and inventory relating to the closure and transition of our solar manufacturing in Oregon. We still expect the situation to improve considerably over the next couple of quarters.

Overall, I'm pleased to report that restructuring is now essentially complete. Our manufacturing model combined with our growing company-wide culture of operational excellence in showing results. Continuous improvement and efficiency are starting to embed themselves throughout the organization. We anticipate that mainly through gross margin improvement, our costs should continue to decrease. Our focus now is on accelerating profitable revenue growth, and taking advantage of our manufacturing model.

Today, you will hear from Gordon and Yuval as they discuss more of the specific actions that each business is taking to accomplish this. With strong backlog, new product introductions and expansion into new applications and geographies, combined with our significant design wins and our favorable tax position, we believe we are in a good position to accelerate our EPS growth. At the same time, we're continuing to look for good usage of our cash to accelerate EPS growth further.

As I mentioned last quarter, we planned to initiate shipments of the 1-megawatt at the end of the fourth quarter. But there is always a risk in knowing the exact timing. Nonetheless, we expect EPS and revenue growth in the fourth quarter demonstrating the strength and effectiveness of our strategy. Yuval?

Yuval Wasserman

Thank you, Garry, and good morning, everyone. On Slide 8, the third quarter was marked by strong execution of our Thin Film strategic plan. Clearly, we're seeing the benefits of our strategy to position AE close to customers, to expand and diversify into new applications, and to continuously drive efficiency gains for stronger contribution to the bottom line. With our cost structure now aligned to industry dynamics and business objectives, Thin Film's operating income less restructuring increased to 24%, or $18.2 million this quarter, as revenues grew 5% to $75.4 million.

Let's turn to our performance in our served markets on Slide 9. Sales to semiconductor application expanded more than anticipated this quarter due to the cyclical recovery of memory spending, investments in 2x nanometer's foundry capacity, and 2 strategic investments that AE has made in the last few years. The first, was our investment in R&D centers worldwide, which is allowing us to become embedded in our customers design processes. This has led to increased design wins across etch, PVD and PECVD applications, and a broader customer base in regions such as Korea and Japan. The second was our investments in advanced RF pulsing technology and products, which has extended our presence in etch applications. Combined with momentum in semiconductors, that is expected to drive growth in 2014, we believe these investments are positioning us to diversify and accelerate our growth.

In flat panel display, the large layer of investment for GEN 5.5 small/medium AMOLED displays in Korea, and as LCD large area capacity in China, slowed this quarter as manufacturers begin mass production, utilizing the investment capital of the last several quarters. New technology investments made in flexible displays and encapsulation are now in their initial stages of limited production. While touch panel buying in certain territories remained significant, they're expected to slow in future quarters, as supply and demand balance out.

Looking ahead, we expect some civilization in LCD CapEx, as fab concentrated to build in China, where investment activity remain strong, with capacity growth expected to increase by year-end 2014. In our Renewable business, significant buys for architectural glass applications in China begin to ramp this quarter. This should drive expansion of low-equal to glass business well into 2014, to match Chinese government infrastructure investment.

In Solar, with a few Thin Film shell technology buys from customers looking for higher efficiency, but otherwise, the business remains quite weak for the foreseeable future. In the Thin Film industrial business, our entry into Brazilian power delivery application is making inroads into a potentially important growth driver of our industrial business long term. For example, with the addition of our hard coating products, we're recently engaged with a Korean customer that is developing decorative and EMI coatings for next-generation consumer products that could lead to significant global expansion opportunities.

At recently this quarter, we grew our presence in automotive applications and expanded into Thin Film battery applications that could also provide future growth. Finally, in service, we showed strong performance, led by North America, where we're gaining share at key customers for our fab-wide solutions offering. We have extended our OEM offerings to include upgrade packages, to engage customers in the capital reuse programs. Our preventive maintenance and refurbishment programs in areas such as data business may begin to offset the fourth quarter seasonal decline. With our strength in relationships and offerings, our value proposition is resonating with OEMs and end users, as we enter 2014.

Turning to Slide 10. While our low-cost, high-efficiency model is powerful, our continued investment in new products and technologies is equally so. Thus far in 2013, we had developed and launched more products than in the last 3 years combined. This quarter, we won 82% of the design win contests in which we participated, semiconductors posted a 74% win rate, driven by contingent strength in etch, PVD and PECVD.

As a reminder, semiconductor design wins can take a few minutes to translate it's potential products and revenue. Thin Film industrials won 85% of the design pursued. Though many of these are small relative to the average semiconductor win, we have broadened our wins into applications that we have not participated in previously. For example, we are launching a new family of DC products that will improve the way your materials are structured on large substrates for flight handling displays, low-E glass and Thin Film solid cells.

Overall, we are pleased with our performance this quarter. We are securing on our strategic objectives, and look for continued growth in the fourth quarter. Everything we have put in place, including our investment in key products and technologies, is part of our strategy to achieve operational excellence, accelerating diversified revenues and drive more for the bottom line. I would now like to turn the call over to Gordon to discuss our Solar Energy business.

Gordon B. Tredger

Thanks, Yuval. Let me begin with our results on Slide 12. The third quarter was a busy one for the Solar Energy business. We spent much of the quarter continuing to integrate the product line we acquired in April, and restructuring existing portions business in order to streamline manufacturing operations, and focus our portfolio on products to drive profitable sustainable growth.

We shipped 347 megawatts this quarter versus 318 last quarter. While revenue remained roughly flat this quarter, I'm pleased to report that we returned to profitability and lowered our break-even point to the mid-$60 million range. We expect further improvement as our various restructuring and integration efforts take hold over the next year. We are also seeing our order backlog build nicely, as we prepare for the initial shipments of the AE 1000NX, known as the 1-megawatt in the fourth quarter.

Now turning to Slide 13, I'd like to give you an update on our restructuring activities. The consolidation of our Bend, Oregon factory operations into Shenzhen and Fort Collins is now complete. This was an enormous undertaking, but one that should prove to be very beneficial. We analyzed our entire portfolio to determine which products are best suited to address future market needs. We also continue to adjust our production processes, and find more ways to save cost and drive efficiencies. Our near-term challenge has been in shipments of the 1-megawatt.

Next, the integration of the 3-phase string product line is also essentially complete. Pleased to become one of our flagship offerings targeting the sweet spot of our markets, this product is performing solidly in Europe, and beginning to gain acceptance in the U.S. As customers start to see the significant advantages that these products offer, including easy installation, small size, quick service and the proven reliability that AE's products are long been known for, the 3-phase string products are strengthening our commercial offering in the U.S. As we prepare for the expected growth of this product line, we see an opportunity to lower cost, and potentially drive even stronger margins than we have today. This quarter, in line with our business model, we began to transition management of the supply chain for the 3-phase string product line to our operation in Shenzhen, China. There are plenty of opportunities to lower our cost this quarter.

Reducing cost is very important to us, but we are also focusing on growth initiatives. As part of our global expansion strategy, we see potential opportunities for us over the next few years in promising areas such as India, Japan, Canada, U.K., and South America. We have begun to optimize the 3-phase string products in these countries, and other products in our portfolio can be ideally suited. With our broad range of products for roof top, card port and larger ground mount applications, we believe AE is rapidly becoming the one-stop shop for commercial applications.

Our other new product offering, the 1-megawatt, is seeing strong demand in anticipation of initial shipments for the back end of the fourth quarter. Customers for utility scale applications are eager for delivery, so they can begin to realize unique benefits in the associate and the economies of scale from this product. We look forward to giving you access to a large number of potential projects in 2014. Interestingly, some customers for commercial ground mount applications are also gravitating toward the 1-megawatt offering, as the economics are compelling for installations in the 5- to 20-megawatt plus range as well.

Responding to this growing demand, we're actively expanding our distribution channels, primarily in the U.S., European and Asian markets. This quarter, we continue to add experienced sales professionals to withstand our worldwide sales efforts. As we unveil our new products and begin to enter new regions, AE's unbending commitment to the highest level of reliability, performance and customer support will continue to be an important differentiator for us. In closing, having largely completed the integration of the 3-phase string product line, and the restructuring of our existing commercial product offering, we have improved our breakeven. With our global expansion strategy underway, our broadened product portfolio that addresses market demands for both utility and commercial applications and a growing backlog, we're optimistic about our prospects for growth in 2014. I would now like to turn the call over to Danny to discuss our financial performance. Dan?

Danny C. Herron

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

Now before I talk about results, I would just like to take a minute to walk through the favorable impact that various tax items had on our results this quarter. As Garry mentioned, the most important thing is that we still met our targets, and had a strong quarter of profitability. In fact, operating profits have improved throughout the year. To begin with, while there are always discrete items included in tax rates, this quarter, we saw a large tax item released that related to our 2009 restructuring, which resulted in actual tax rate of a negative 25% for the third quarter. Leading to GAAP EPS with one-time restructuring charges of $0.57 per share. If we excluded the discrete tax item for the quarter and use our currently effective tax rate of 12.5% based on the profitability contribution of each business unit this quarter, we achieved $0.40 of GAAP EPS plus restructuring charges. Because we're already excluded in large part of the tax impact in our non-GAAP EPS of $0.53, the impact of utilizing the current effective tax rate of 12.5% is less, leading to non-GAAP EPS of $0.50.

More importantly, as we look into 2014, we now expect our ongoing effective tax rate with both figures contributing profits to be less than 20%. Let me begin with the highlights of the third quarter on Slide 16. Total revenues were $143 million, representing a 22% increase versus the same sales quarter last year, our operating income excluding restructuring increased 45% versus last quarter to $18.3 million or 13%, and our cash grew by $6 million to end the quarter of $105 million.

Turning to our revenue performance on Slide 17. Revenues from the Thin Film's business grew 5% sequentially to $75 million. The increase was driven by solid sales across most of our markets. Semiconductor applications rose 5% to $43 million versus $41 million last quarter. Data Storage and Industrial rose 13% to $9 million compared to $8 million last quarter, and Thin Film renewables also increased over 100% to $5 million from $2 million last quarter. Service also performed well, increasing 6% to $13 million. As expected, flat panel display applications fell 32% sequentially to $6 million, [indiscernible] adjusted diluted capital investment. Sales in our Solar Energy business were flat sequentially at $68 million in the third quarter, as we allocated additional resources towards our aggressive restructuring plan and utility projects for later shipments of the 1-megawatt product offering scheduled for the fourth quarter.

Turning to Slide 18, non-GAAP operating expenses decreased to $33.1 million from $35.5 million the last quarter. The results of our efforts to quickly integrate the acquisition of the 3-phase string product and restructure it using product lines. We also incurred pretax charges of $19.9 million for restructuring, $4.1 million of stock-based compensation and $626,000 in amortization of intangible assets. Total non-GAAP operating margin improved significantly to 16.1%, and 14.6% in the same period last year from 12.7% recorded in the second quarter of 2013.

Operating margin on our Thin Film business on a GAAP basis grew to 24% from 20% in the second quarter. In the Solar Energy business, we reported operating income of $192,000 compared to an operating loss of $1.8 million last quarter. Our aggressive cost reduction initiatives continue to reduce our breakeven point in the Solar Business to the mid-$60 million a quarter range. Once our aggressive restructuring and integration actions are fully realized, we believe there is room for further improvement.

Despite almost $20 million in restructuring charges, we were able to achieve GAAP income from continuing operations of $687,000 or $0.02 per diluted share. This compares to a loss in continuing operations of $9.8 million or $0.24 per diluted share in the second quarter, and income from continuing operations of $5.7 million or $0.15 per diluted share in the same period last year. Non-GAAP income from continuing operations, which excludes the after-tax impact to $22.4 million of restructuring, $3.6 million of stock-based compensation, $549,000 of intangible amortization and a $5.6 million benefit from a nonrecurring tax release item was $21.7 million or $0.53 per diluted share.

The nonrecurring tax release item reflects the restructuring items from 2009. This compares to non-GAAP income from continuing operations of $13.9 million or $0.35 in the second quarter and non-GAAP income from continuing operations of $10.3 million or $0.27 per diluted share in the third quarter of 2012. Taxes were accredited $2.1 million in the quarter, as we receive the benefit of the tax release item.

Turning to our balance sheet on Slide 19. We ended the quarter with $104.7 million in cash and cash equivalents, having generated $5.6 million in the quarter. Our inventory grew by $21 million during the quarter, as we anticipate beginning shipments of the new 1-megawatt product in the fourth quarter. In the third quarter, as shown on Slide 20 and 21, we recognized $19.9 million of restructuring charges, bringing the total charges to related to these activities to roughly $44 million, $36 million of which was non-cash.

The increase in the total anticipated amount is due to larger intangible amortization write-offs as we aggressively rationalized the Solar Product line. We expect these costs to reach the total savings for the current restructuring of $20 million to $22 million annually, roughly $14 million of which will be cash savings. The current actions, coupled with the previous cost-reduction activities to bring our total cost savings to approximately $72 million to $77 million by 2014.

Overall, we're pleased with the progress we've made on our strategic objectives to run a more effective, profitable and streamlined Company that continues to return value to our shareholders. Even in the midst of restructuring and acquisition integration, we will see more and more of incremental revenue flow to the bottom line. As we begin the fourth quarter, we are encouraged by our increasing backlog, particularly in the Solar Energy business, as customers await shipments of our 1-megawatt offering. Our balance sheet remains strong and we are excited at the prospects ahead as we build the momentum for 2014.

Now turning to our guidance for the fourth quarter on Slide 23. We expect revenues to be between $145 million and $155 million. This guidance assumes that the current semiconductor capital investment in memory, in foundry to drive an increase in our Thin Film business.

In our Solar Energy business, we will continue to invest in preparing for the anticipated shipments of our newly released 1-megawatt inverter, for utility applications late in the quarter, as well as our 3-phase string inverter with the commercial market. We are expecting an actual tax rate of 0 in the fourth quarter, which we will have discrete items due to the annual truing up of our tax position.

On Slide 22, we have restated what the third quarter would have been with 0% tax rate so that you can see an apples-to-apples conversion on a sequential basis. Based on this, we expect GAAP EPS to be between $0.47 and $0.52 per share before restructuring charges.

Non-GAAP earnings per share are expected to be between $0.59 and $0.63 per share. Non-GAAP guidance excludes restructuring charges of approximately $500,000. Other non-GAAP charges include stock-based compensation of $4 million and amortization of intangibles of $1.3 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] And our first question will come from the line of Jim Covello with Goldman Sachs.

James Covello - Goldman Sachs Group Inc., Research Division

Couple of questions. I guess, first the recovery in the memory, spending within the semiconductor division, how broad-based is that recovery? Is that 1 or 2 players, or is it 3 or 4 players? And then now sustainable do you think that recovery is?

Yuval Wasserman

Jim, this is Yuval. We saw the recovery coming from 2 areas. The Phase I of the investment in VNAND, and the expansion of the DRAM in Line 16 in Korea. That will impact the current and future quarter. And what we hear from analysts and forecasters and the customers that there is an expectation to see Phase II in the second half of 2014.

James Covello - Goldman Sachs Group Inc., Research Division

Very helpful. I guess, next question, you mentioned 82% -- that you're winning 82% of your design win contests. What percent of your revenue, say, in 2013, is from products designed in the last 12 months, let's say. And then you mentioned that it takes a couple of years obviously to turn those design wins into revenue. So what percentage of your revenue in the semiconductor business in particular would come from new design wins, say, in 2015?

Yuval Wasserman

So, Jim, we'll look at the whole BU, and we measure that through our vitality index. And right now, currently, the revenue that comes from products we've developed during the last 3 years is about 35%.

James Covello - Goldman Sachs Group Inc., Research Division

And then what would you expect that to be a couple of years out when the design wins you've won now have become revenue?

Yuval Wasserman

We can’t say that.

James Covello - Goldman Sachs Group Inc., Research Division

Okay. Okay, great.

Garry W. Rogerson

I think the beauty is that we're winning. We're winning within semi, but actually we're winning outside of semi, which is a key strategic objective of ours. So, I think in 3 or 4 year's time, if you're looking forward, we will have -- we'll be in many more applications worldwide, which is of course what we're wanting to do. As you know, we're having significant design wins within semi in the U.S., in Japan and in Korea. So, we're in quite good shape, actually.

James Covello - Goldman Sachs Group Inc., Research Division

Terrific. And then if I could just sneak one more in. There's been a fair amount of consolidation from the semi equipment OEMs, both completed in the case of Lam and Novellus, and an announcement in case of AMAT and TEL. What do you think the impact of that is going to be for your business?

Garry W. Rogerson

I mean, it's good for us, really. We play with all of the players as you know. And we see nothing, but good things coming from this joining up of the 2 companies.

Operator

And our next question will come from the line of Edwin Mok with Needham & Company.

Y. Edwin Mok - Needham & Company, LLC, Research Division

So first of all, the question on the Thin Film side. I think you mentioned that you guys made some progress in the hard coating side? Are those something that you expect to drive growth in 2014? Or is it something that is -- or it probably benefited you in this quarter and next quarter..?

Garry W. Rogerson

I'll let you Yuval speak -- I'll let Yuval answer it, but remember what our strategy is. Our strategy is to go into new applications. This is one of those new applications. We're getting multiple design wins. We're shipping products into countries such as Korea, Germany. So we're in the good shape in this area. We believe we can command very high market shares in this area, actually, with our product. And we're doing a good job. Yuval, some detail.

Yuval Wasserman

So, Edwin, as we presented in last November, our strategy with hard coating was to expand geographically using the new product line that we acquired last November and go after advanced application for precision power distribution solutions. That takes us into the high quality films coating applications that right now we are seeing adoption in Korea with consumer products. And at the same time, optical coatings that goes to -- from eyeglasses to other more advanced optical coatings that we take to both in Europe and Asia.

Garry W. Rogerson

Just a reminder about strategy, we have little research and development groups across the world who design products. And then we send it to Shenzhen, and then we distribute it. One of those design groups is in Switzerland. They had products when we bought their company a year or so ago, but now they're starting to develop new products that we can distribute worldwide into the hard coating area. So this is part of the strategy of the Company and it's a part of the strategy that is working.

Y. Edwin Mok - Needham & Company, LLC, Research Division

I see, okay. That's great. And then on your guidance, I just want to make sure that I understand, if I take the midpoint of your guidance, $150 million, is that growth almost all coming from the Thin Film area? Is that the...

Garry W. Rogerson

We're not sure. At the size of the company, we're sort of betting on stats for which part of the company grows. We've said to you that a new flagship product in Solar, the megawatt, is releasing at the end of this quarter. We said last quarter. We said that this quarter. Our backlog in that product has gone up incredibly. And in fact, I think we said the number. Danny, what is the number we said?

Danny C. Herron

The backlog in total has grown about $45 million.

Garry W. Rogerson

Which most of was of the 1-megawatt. So the backlog has increased considerably. As that starts to ship, we'll obviously start to grow. The Utility area is an area that we haven't grown in recently, and now we've got that chance to grow. The product is a really good product. So there's a potential for growth there. There's potential for growth in Thin Film, in semiconductor and outside of semiconductor. So we've got plenty of areas that we can grow into this quarter, and there is a statistical chart of what it might be.

Y. Edwin Mok - Needham & Company, LLC, Research Division

Okay, that's helpful. If I look at your 1-megawatt product, right, you've launched that product even last quarter, right, I was wondering why it takes long for you to actually have that product get...

Garry W. Rogerson

Yes, it's a very good question. As we've said to you all along, that it would ship at the end of this quarter, that's right, and that's when we believe it will ship out. In the Utility marketplace, people are not wanting to buy and ship immediately. So we talked about the product that stock about 6 months ago, I guess, we started to talk about the product. And now we've built up a backlog, and we're about to ship it. In fact, customers who have seen this product are responding very well to it. That's a really highly efficient product for the marketplace. So we're looking forward to great success from this product as we start to ship, as we start to get more orders.

Y. Edwin Mok - Needham & Company, LLC, Research Division

So is there a reason why you can't ship earlier in the quarter? Because you have supply constraints? Or is it just customers don't want to...

Garry W. Rogerson

No, it's not supply constraint. It's called planning. We're planning to ship at the end of Q4. And that relates to ordering the parts. So we can ship at the end of Q4. It's timing for our customers as best we can. There are also the things that go into when we ship the product out.

Danny C. Herron

All certification testing and things like that, Edwin. It's a complex part, obviously.

Y. Edwin Mok - Needham & Company, LLC, Research Division

I see. Okay, great.

Garry W. Rogerson

It's just -- it's planning. Six months ago, we put a plan together of when we want or whenever we did, we put a plan together of when we want to ship it. And obviously, the earlier, the better or when customers want it. But our plan says that we will be shipping by the end of this quarter. Now just to give you a warning, by the way, when you ship out products, new products, there's always a cost related to those new products. And I can assure you, if we don't ship, we'll get the cost. That is just normal business. We still think we can ship. We still think we're in good shape. So at the moment, we're okay. And we'll give you an update on that product line in November, November 20, at our Analyst Day, which I hope you'll all be at.

Y. Edwin Mok - Needham & Company, LLC, Research Division

Great. One last question on the Solar, and I'll let the other guys ask. But if I look at kind of blended pricing or dollar per watt, it has trended down to just $1 from $0.194, I just used the number you guys provided, right, with the 1-megawatt going to be shipped, which I understand has a lower dollar per watt relative to that number, is that how we should kind of think about your blended dollar per watt as we go into 2014?

Gordon B. Tredger

We've always said, Edwin -- this is Gordon. We've always said that you have to be careful using broad averages in terms of cents per watt when you're looking at our revenues. They vary according to segments. As you pointed out, the Utility segment, in general, is going to have lower ASPs per watt. But at the same time, the products have inherent cost advantages that allows you to push the cost down. We expect to have strong margins on the megawatt in Q1 and beyond, expanding over the course of time as we ramp up that product in terms of its volume and also dropping its cost. On the other hand, our 3-phase string products are commanding reasonable prices in their markets that they're designed for, and we have similar cost reduction initiatives in place to drive the margins -- drive the margins up going forward. So in broad terms, what I'd encourage you to do is monitor our volumes, but at the same time, understand that these metrics that you're using are going to vary from quarter to quarter based on which side of the business, utility, commercial, which region, Europe, India, U.S., would -- it depends. It's going to bounce around a little.

Garry W. Rogerson

That measure that you use is a measure that I've never ever understood because, it depends on geography, it depends on application, it depends on products. So to take that broad term and generalize, is a really tough thing to do. And I encourage you not to do that but to look at the success of our organization going forward. We think we're in a very good spot at the present time. We've got product range we've just developed to do very well in 2014. You can see, let's say that backlog is $45 million. The majority is the megawatt. Just imagine, and that's being developed over the last 2 quarters. So you can actually see what we could ship, what we could be getting to if we can ship what we get in. It's not a difficult calculation to do. So we believe there is good growth prospect for our company in Solar next year. That, with the Thin Film business, I think, puts us in a pretty good position for 2014.

Operator

And our next question will come from the line of Krish Sankar with Bank of America Merrill Lynch.

Krish Sankar - BofA Merrill Lynch, Research Division

A couple of them. Can you tell us the geographic breakdown of the inverter revenues?

Garry W. Rogerson

We don't break down the geography. But as you know, the majority of it was coming from the U.S. before we built the 3-phase string product line. So you can break it out for yourself.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it. And then on the 3-phase string inverter, are you seeing any traction in the residential market with that yet or...?

Gordon B. Tredger

As we've always said, as a company, our focus, particularly in the U.S., is on the Utility segment and on the commercial segment. We don't have products that fit the residential segment.

Garry W. Rogerson

Yes. In fact, actually, something that may -- should be coming out is how well we've done in the commercial segment this year. Remember, we haven't really had a utility product through the last couple of quarters. That's the product we've been gaining the backlog in. In fact, our commercial product lines have been doing very well, and the 3-phase string is accelerating that. When we got the 3-phase string from Germany, it actually wasn't designed exactly for the U.S. market, and we were getting orders for it. We've now redesigned it with the expertise from our R&D groups to fit the U.S. marketplace, and that product only released in November, I believe, or started shipping in November. So this product has got a lot of legs to it. We're then going to release into Canada. We're going to release it into Japan. You will hear more and more about 3-phase string for commercial customers. You won't hear us with this product line going into the residential marketplace.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it, all right. And then one final question. In the past, you guys have supplied the inverters to First Solar. And I think 3 months ago, First Solar signed a deal with GE, and part of it was they're going to use GE inverters. I was wondering if you have seen any change in your business with First Solar.

Garry W. Rogerson

No, we haven't. That agreement -- no, we haven't.

Krish Sankar - BofA Merrill Lynch, Research Division

So you're still shipping them inverters for their projects?

Garry W. Rogerson

No, we don't ship in there. We don't ship there.

Gordon B. Tredger

We haven't -- yes. We never said we ship inverters to First Solar.

Garry W. Rogerson

Yes.

Operator

And our next question will come from the line of Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Following up on the prior question on not so much the geographic mix but the end-user mix between the Utility end market, the commercial end market and the residential market, where are you guys currently in rough terms? And what are you targeting in the longer term?

Garry W. Rogerson

I'll just repeat what I said a few seconds ago because I obviously didn't make it clear. The last few quarters, actually, most of that business has been commercial. Very little Utility because we were switching over to a new product and people started to order that new product and we're beginning to gain a backlog in that new product. In fact, there were some of our smaller customers who are buying the smaller products prefer to wait for the bigger product. So you can get to that yourself. Most of our business in the last few quarters is commercial. Gordon, am I...

Gordon B. Tredger

Yes. The megawatt is going to be a very crucial product for us in 2014. It's the flagship of the Utility offering. It's been extremely well received in the Utility segment. We've got a number of EPCs and many of them -- EPCs that we have not done business with in the past that are very interested in the products. So we're very excited about prospects in Utility. On the commercial side, as Garry expressed, we've got the 3-phase string products that are gaining acceptance in the U.S. market, we've been fortunate to acquire the pioneer in 3-phase string technology based out of Europe where these products are the de facto standards for commercial applications. We've cut -- as Garry said, we've gone ahead and reengineered the product for 1,000-volt applications, for the requirements of the U.S. market, gained all the CSA and UL approvals required to ship into the U.S. and into Canada starting in Q1. So we feel very good about our prospects in the Utility and commercial segments going forward.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. And then a quick question for Danny, if I may. Danny, you talked about the fact that restructuring had substantially wrapped up. Based on that, should we anticipate a steeper downtick in OpEx in Q4 relative to Q3?

Danny C. Herron

I think it will be relatively the same, Pavel. We got most of the things that were implemented in Q3 done early. The major restructuring in Q3 was the completion of the intangible write-offs. And then we moved our blend operation into Fort Collins and then to Shenzhen. So we consolidated manufacturing. So that will show up a little bit, but that's generally a cost of goods sold item because its factory cost. But no, we're about where we will be. As Gordon mentioned in his remarks, he's got his breakeven down into the mid-60s, and you can see the accelerated profit in our Thin Film business. And then if you just look at the amount of money they return to the bottom line, for a dollar of incremental sales, Q3 versus Q1, it's close to 65% of the incremental revenue. It came down as we completed a very aggressive restructuring program.

Garry W. Rogerson

Just to reemphasize there, the costs we've taken out won't come back. We continue to find ways to improve the efficiency of that organization. But at the same time, what surprised us greatly is the fact of the cost reductions we can do on the products, which were manufactured in Germany and outsourced in Germany. Our Shenzhen facility can take a huge amount of cost down. It's in the margin, but we can take a lower cost out, using our machines. The way we decide to manufacture, we can really drop costs out of the products. Really, I want us all to reflect on that because the way we're manufacturing is so different to anyone else. We're outsourcing. We have very little fixed cost. So we are really in a very powerful position, and we manufacture in low-cost areas. So we are in a very powerful position, one, to reduce that cost, and secondly to grow with the great product line that Gordon has just tried to tell you about.

Operator

And our next question will come from the line of Joe Maxa with Dougherty & Company.

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

I have a follow-up on the Solar side. The backlog you talked about in the Utility, is that -- if it doesn't ship in Q4, I mean, how long will you see this over what timeframe ship? Would it be Q4 and Q1? Or what you would be thinking about?

Gordon B. Tredger

So first of all, Joe, I just want to clarify, we're referring to an increase in backlog, not a specific backlog number. And the beauty of the Utility segment is, as Garry explained, that the timeframes for these projects extend out over time. So we've got a very healthy backlog that will give us a nice underpinning right into the second half of next year. And with the interest that we're seeing in the ground now of commercial segment that I referred to and some of those of the smaller Utility deals, we're also expecting that we'll be able to see strong growth in the first half of next year as well.

Garry W. Rogerson

I think, Gordon, we've been a little surprised at how -- the really strong feedback on this product and the efficiency that we get from the product.

Gordon B. Tredger

Yes. It started really when we did a private showing of the product at the Intersolar Conference in San Francisco. We saw very significant interest that continued to develop. We had follow-up meetings with a number of these new customers at the SPI Conference in October, and we're now seeing a lot of opportunities for the product as we move into 2014. So we've got a backlog we can ship. As we said, it will start shipping in the back end of Q4. And as we move into Q1, we'll be ramping.

Garry W. Rogerson

And remember, again, at the Analyst Day, we will update you again. And we will certainly won't update our guidance, but we will update you on where we think this product is. By the way, we're there or thereabouts. Don't think we are wide off. We're there or thereabouts.

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

I wanted to just ask you about -- I think previously, you indicated getting up to perhaps $100 million per quarter on average next year with all your success you're having in your commercial plus the Utility. Do you think you can get there?

Garry W. Rogerson

What we said was we think we can get to a range of about $90 million to $100 million a quarter. With the backlog we have, with the new products that have come out, we've got a good shot at it. We've got a good shot at it. Remember, though, we talk about revenue, remember what of our focus is. Our focus is profit and earnings per share. I know others talk about market share and all these type of stuff. We rarely talk about that. We are focused on earnings per share. So if we can’t get the margin at the end of the day that we think we want, we probably won't take the order. So just make sure that the you all realize we're not driving revenues. We're putting our foot on the accelerator slightly. I said a tad last quarter. It's still a tad. We're not slamming that accelerator down. We are wanting to grow sensibly and grow our earnings per share. If you look at our model for Thin Film and look at the profitability we're getting for just a little bit more volume, just imagine, when we start pushing a little bit more volume through our Solar business through Shenzhen, that will drop more profit to the bottom line for both of them. So we're really in a very, very nice position going forward. New products, great model to work with, many places to grow. We're in good shape.

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

And one question for Danny on the tax rate. Less than 20% next year, but you also indicated -- threw out a number of 12.5% at current mix. And now we're going to be -- you think we'll to be closer to the 12.5%?

Danny C. Herron

Well, in Q4, we got into a 0 tax rate because we will finish up the truing up of the tax return to the provision. So we did the state and federal and we always do that in Q4. So I think taxes this quarter will be 0. When I said going forward, given a normal mix of profitability, with Thin Film at the level of profitability they are. Their sales mostly be in international, we enjoy a very advantageous tax rate there. Solar is -- most of their profits come in countries that have a 30% to 33% tax rate. When you blend the 2 together, you easily get to something south of 20% for next year.

Garry W. Rogerson

Really, the tax rate is just a function of which one makes the most money. That's all it is. At the moment, Thin Film is doing a great job, and Solar is in a position of doing a good job. So we think next quarter or next year, we'll have blend below 20%.

Danny C. Herron

Yes. And Joe, last year, there's been a lot of blocking and tackling on changing how we do things, putting cost in the right places, taking advantage of the international nature of our company. And the team has done a nice job of structurally changing our tax position so that we can enjoy a tax rate less than 20% on a normal basis.

Garry W. Rogerson

Now remember, the real focus of the company now is on operational performance, improving the profitability as much as we can, and also, if there is a cyclical downturn, being able to deal with it, make money through that downturn and grow forward. That's one of the things we'll be talking to you about on Analyst Day because we think we've sorted out the cycles. And we will be speaking to you about that on Analyst Day as well as ways to grow our business further.

Operator

[Operator Instructions] And our next question will come from the line of Mehdi Hosseini with SIG.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Two questions for Garry, and I have a couple for Danny. How should I think about the flat panel display in this digestion period that you were referring to? Is that going to be a like a couple of quarters? Because this was the second consecutive quarter that revenues were down. I'm just trying to better understand the duration of this digestion period.

Garry W. Rogerson

Yes, that's a great question. I'm not quite sure -- it's quite true. And I'm going to pass it over to Yuval.

Yuval Wasserman

Q2 was an uptick in the flat panel display. And so Q2 was a sharp increase, and it was the typical behavior of the market. Usually, we see the orders coming in lumps. Q3 was a decline. And what we expect to see is the transition period where these capital investments have been digested. We also see the dynamic of -- in the large flat panel displays, there is an investment in China as some of the Korean manufacturers go to -- move capacity to China to take care of the tariff that -- try to reduce the tariff of selling TVs in China. At the same time, there is an increase in investment in touch panels in China across the board in PVD. So what we see right now is a decline in the -- there are some -- the thought basically in the market is that we will see a recovery in the -- towards the second half of 2014. And we've -- in the past, we've seen that behavior of lumpy business for the last few years. And it's not surprising.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Sure. And then one more for Garry. You discussed the $48 million increase in backlog. How should I think about book-to-bill in the third quarter given this increase in backlog?

Garry W. Rogerson

Nothing. You should be excited about our book-to-bill.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

But to what extent is it above 1?

Garry W. Rogerson

Well, we've gained -- in the last 6 months, we've gained $40-odd million of backlog. So I think it's possible to work that out, yes?

Yuval Wasserman

We'll be above 1, for sure, Mehdi. I mean, the company from where it was announced with the $48 million gain. It's there. It will be in our Q, but I can -- when we have our call but I can work on the...

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Sure, okay, no worries, no worries. Actually, a follow-up question for you, Danny. If I just were to plug in the midpoint of revenue guide and 0 taxes, to get to the high end of your EPS guide, I would need to keep my margin flat compared to Q3? Am I missing something here?

Garry W. Rogerson

Well, remember what we said about -- remember that there's a mix issue here. And remember, what we said is we've got the 1-megawatt shipping out in the quarter, in the last week or 2. And that will presumably have -- always when you ship to begin with a product has a lower margin in the first month or 2. I mean, what would worry me is if it doesn't ship and we get those costs in the quarter and not the revenue. That will be a worry. And that's why you've got that broad range and that flattish margin in the quarter. Is that understood? Hang on. I just want to make sure I made it clear.

Danny C. Herron

Yes. I mean, you're applying the same margin as last quarter when you get to the midpoint, you could take revenue growth I believe is what you said.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Yes, yes.

Danny C. Herron

The margin to the bottom line. And no that would be -- as we've said, our cost -- as a general rule, our costs are not going up as our revenue increases.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Okay. And just specific...

Garry W. Rogerson

[indiscernible] margin to the bottom line. And as we -- I understand what you're saying for this quarter. And that's sort of neutralized by what ships. As we go forward and we push through more and more from Shenzhen, where square footage, by the way, huge square footage, is going down, huge square footage, is going down, head per -- headcount revenue per head of the company is going up dramatically over this period. So we've got good things going from this model. So we would expect good things to happen next year.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Okay. And then speaking of revenue per headcount, moving -- actually, thinking about the U.S. and new product, should I assume that the SG&A would remain around $18 million, $19 million for the quarter next year? Or should I assume SG&A change would keep the ratio of percentage of revenue constant?

Garry W. Rogerson

We don't like ratios here. We like to talk about the absolute numbers we're going to spend. And I think that's an issue that companies have, where they creep up there, and G&A and R&D, as revenues come up. And of course, they may have a problem when the revenues go down. We don't do that here. That's not our way of thinking. Our way of thinking is bringing the cost to a level that we can afford going forward and stick to those costs. We don't expect that cost to go up next year. My assumption is that we will find ways, always, to be a little bit more efficient. But we'll keep our costs flat to down.

Operator

Our next question will come from the line of Alex Greer [ph] with JMP Securities.

Unknown Analyst

I was wondering if I could return for the question that Jim started with, Garry. Can you give a little bit more color around what's driving the increased win percentage in semiconductors? And maybe if we assume a steady-state environment, what kind of increased dollar opportunity does this bump in win rate represent for you?

Garry W. Rogerson

Well, we've set the vitality index of the company at the present time. I think -- and a lot of the things here that you're asking we don't disclose. But I think Yuval should talk about the way we now do R&D, the lean R&D that we're doing, which is absolutely phenomenal. The power of that in winning new business has been incredible in both the semi- and the hard coating there. We're doing a lot of good stuff at the present time. Yuval?

Yuval Wasserman

Following Garry's comment, we continue to -- as you look at the last 2 quarters, we did really well compared to the market. And the main reason for that is the expansion in semi, I'm talking about the semi right now, the expansion in semi into new world regions that we have never shipped before to new customers that we did not serve before and expanded our presence in applications beyond those that we serve before. And the way we do that is implementing a different engagement model with our customers worldwide through a distributed engineering groups that are close to our customers. These groups are engaged with the customers from an early stage of development, and the result of that is a very short development cycle time. Obviously, more efficient and less costly, there's a much less waste associated with developing these new products, and the intimacy with the customers allow us to develop the products very close to it due to very specific design as the industry continued to become efficient and consolidate many of the products that we sell to our OEMs, become more OEM-specific and application-specific, obviously, to be able to move fast, the early-stage engagement to our localized engineering teams, allow us to move fast and to gain more presence in various applications. We continue to invest in advanced application. The recent investment we've made and launched recently was advanced RF pulsing technology. That allowed us to increase our presence in the etch applications worldwide.

Garry W. Rogerson

Just as a general rule here, we are in a very exciting position. Our Thin Film business is growing in semi to winning in semi in different countries and different companies. It's expanding into new markets and new countries. And our Solar business is just ready to go. Two great new product lines for both commercial and Utility going into a variety of different geographies. So from the customer point of view, we're in a very good position at the moment. We're seeing more customers all the time. At the same time, we have a machine that will allow us to really drop more and more profit to the bottom line, as we've now demonstrated in Thin Film. So we're in a good position. We want to talk to you more about that at Analyst Day. It's such an exciting time for us, and we're looking forward to seeing you on November 20. I don't know if that's the end, but there you go. Any more questions?

Operator

This concludes the question-and-answer portion of today's call. I will now turn the call back over to Garry Rogerson for closing comments.

Garry W. Rogerson

Again, thank you. And I sort of said -- I apologize for saying them early. Very excited at the present time. The group is in great shape, and we're looking forward to seeing you on Analyst Day to talk in more detail, give you some updates. Good times are ahead. Thank you very much. Bye-bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may all disconnect. Good day, everyone.

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