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SolarCity (NASDAQ:SCTY)

Q4 2013 Operating Metrics Conference Call

February 24, 2014, 5:00 p.m. ET

Executives

Aaron Chew - Vice President of Investor Relations

Lyndon Rive - Chief Executive Officer

Peter Rive - Chief Operations Officer, Chief Technology Officer

Bob Kelly - Chief Financial Officer

Analysts

Phillip Shen - Roth Capital

Brian Lee - Goldman Sachs

Krish Sankar - Bank of America Merrill Lynch

Vishal Shah - Deutsche Bank

Edwin Mok - Needham & Company

Patrick Jobin - Credit Suisse

Paul Coster - JPMorgan

Pavel Molchanov - Raymond James

Tyler Frank - Robert Baird

Operator

Greetings, and welcome to SolarCity's fourth quarter 2013 operating metrics conference call. [Operator instructions.] I would like to turn the conference over to your host, SolarCity Vice President of Investor Relations Aaron Chew. Thank you. Please begin.

Aaron Chew

Thank you, and good afternoon to all of you joining us today for SolarCity's fourth quarter operating metrics conference call. Leading the presentation today will be a discussion from our two founders, Chief Executive Officer Lyndon Rive as well as our Chief Operating Officer Peter Rive, as well as our Chief Financial Officer, Bob Kelly, after which point in time we will open up the call to questions.

As a reminder, today's discussion will contain forward-looking statements that involve risks and uncertainties including forecasts regarding SolarCity's 2014 financial and operational results. Words such as believe, may, estimate, continue, anticipate, intend, expect, predict, potential, and similar expressions as they relate to SolarCity, its business, and its management are intended to identify forward-looking statements.

Forward-looking statements should not be considered a guarantee of future performance or results and will not necessarily be accurate indications of the time at or by which such performance or results will be achieved, if at all.

Forward-looking statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed and/or suggested by the forward looking statements, including risks identified in SolarCity's earnings press release issued today and the slides accompanying this presentation, as well as additional risks and uncertainties identified in the section entitled Risk Factors in our quarterly report on form 10-Q, which will be filed with the Securities and Exchange Commission.

We do not undertake any obligation to publicly update or revise any forward looking statement, whether as a result of new information, future developments, or otherwise. In addition, during the course of this call, we will use a number of specially defined terms relating to our business metrics and financial results. We refer to definitions of these terms included in the slides accompanying this presentation, which are available on our Investor Relations website at investors.solarcity.com.

And with that finally behind us, I will introduce SolarCity's Chief Executive Officer, Mr. Lyndon Rive.

Lyndon Rive

Thanks, Aaron. Before we get into 2013 end of year results, I want to apologize for not having GAAP financials ready for this call. The acquisition of the two companies that we acquired, the accounting of that has taken longer than we expected. We have not completed the overhead allocation. We’ll get this all done this week. We’ve worked really hard the last few weeks trying to get it all ready.

I apologize for that. But we’ll be releasing the numbers on Monday, instead of releasing them today. That may change. Just thought it would be best to give you the final numbers on Monday. We’ll also have another owner’s call on Monday as well.

So let’s get into 2013. 2013 was an amazing year. I’m extremely proud of the SolarCity team. We have built a platform infrastructure that can deploy large-scale distributed solar. We had four major goals.

The first goal was to install 250 megawatts, which we increased to 278. The second goal was to reduce our fully loaded cost of installation. The third goal was to reduce our cost of capital, and then the fourth goal was to be cash flow positive for Q4.

I’m glad to say that we’ve met and exceeded every single one of those goals. For reducing our costs, we actually came close to 30%. This is through operational efficiency, economies of scale, process improvements, and also the acquisition of Zep.

For reducing our cost of capital, we not only reduced our cost of capital through securitization, but also increased our capital resources. I’m looking forward to coming out with our first offering with Common Assets, and that should be out in the next few months.

Now, for the first time in the company’s history, we don’t have a residential operational constraint. We’ve always had a long waiting list of customers, and now today a customer can get site ordered within five to eight days, and our systems will get installed within two to three months.

Now, this is a major achievement, and now we can invest into sales and marketing and grow the sales team and grow the bookings. It will take about three months to get the sales team up and running. It takes about two months to get the sales team fully productive. We started making these investments in Q4, and we really started seeing the results in January. January is our record residential bookings, so definitely starting to see the results.

With that, I’ll hand it over to Peter Rive.

Peter Rive

I’m Peter Rive, chief operations officer and chief technology officer. Deployment volume for Q4 was a record 103 megawatts. This was made up of 70 megawatts, which was residential deployment, which was up 130% year on year compared to the prior quarter. And commercial deployments of 33 megawatts was 116% from the prior quarter.

As always, Q4 is a massive quarter in large part because of really big commercial volumes, and commercial volumes are typically spiky and also typically dip from Q4 to Q1. So that’s just something to bear in mind as we talk a little bit about our Q1 2014 guidance.

But as a result of increased operational capacity, we continue to feel very confident of our 2014 guidance of 475 megawatts to 525 megawatts. What’s really exciting about deploying that number is that it will bring the cumulative megawatts deployed to over a gigawatt, which is a truly amazing and very exciting milestone for SolarCity.

Let me just give an update on the number of energy contracts. We now have over 80,000 energy contracts, $2 billion of cash contracts coming to SolarCity. So to me the amazing part of this is if you look at 2012, we had $1.1 billion, and we’ve added $900 million in one year. It’s almost equal to the entire company’s history up until 2012. So very happy with that performance.

The market share numbers are very impressive. We were at 12% in Q1 of 2012, and we’re now at 32%, so in just under two years, we’ve gained significant market share. The benefit of market share is it gives us more economies of scale. By getting more economies of scale, we can continue to invest in technology and services that will continue to separate us even further from our competitors and our value proposition to our customers.

I was pretty eager to talk about the cost reductions, and we’re finally here, and I’m very excited to walk you guys through it. But what we’ve been seeing over the period this year is we’ve essentially fully allocated costs by 30%. And we’re incredibly happy with this milestone, and this can be attributed in large part to just the economies of scale that we’re seeing.

A lot of the fixed expenses in the business are able to stay completely flat while we dramatically increase the volume, while at the same time, the actual variable costs that we’re seeing in terms of installation costs are continuing to improve as well, as we’ve seen over the period, big benefits coming from [unintelligible] hardware as well as other process improvements.

A couple of other highlights are that in Q4 we opened up 10 new operation centers, bringing the total up to 46, which is 50% higher than it was the year before. We’ve also completed the centralization of all of our account management in Las Vegas, and this has really helped in reducing the costs, [unintelligible] in customer satisfaction, and it’s also given us the ability to extend our service hours.

I’ve been working very closely with the team at Zep and the products that they have coming down the pike, which continue to amaze me. I’m very excited to talk to you guys more about it over the coming quarters. But I expect for us to be able to see further cost reductions resulting from that in hardware, in both commercial and residential.

I want to also now pause to make an organizational announcement. As you may know, since SolarCity’s founding, I’ve been serving the dual roles of both the company’s chief operations officer as well as the chief technology officer. And over the past year, under Tanguy Serra’s leadership - Tanguy is our executive vice president of operations - our costs have dramatically lowered, our cycle times are significantly better, and most importantly to me, our culture and sense of pride in the importance of our mission is as strong as it’s ever been.

So it is with this in mind that we’ve appointed Tanguy Serra as our new COO. As a result of this change, going forward I’ll be focusing all of my efforts on the technology components of our business as our full time CTO. There’s so much that we have to do in this area. We’ve got to continue to delight our customers with fun and interesting software, we’ve got to make our systems scale as the business does, and improving the productivity of our employees are just a couple of areas that I’ll be focusing on.

Additionally, there is grid integration and storage that also require dedicated attention and are essential to the continued adoption of solar as over the long term we begin to approach high degrees of penetration over the coming decades. Technology has always been one of my strengths and my passions, and so I’m really excited to have a partner like Tanguy who will give me the ability to focus on that.

This is a segue to also update everybody on our progress with storage. What’s really exciting is we’re beginning to see great promise in battery cost reductions coming from economies of scale and manufacturing. And those promise to lower our storage costs and give us confidence in our long term goal of basically providing firm solar generation that’s available at night.

Our short term [unintelligible] of storage is going fairly well. We have residential storage deployments that are very successful and we are expanding our pilot program for our residential storage customers. The biggest benefit is essentially standby power.

On the commercial side, we’ve announced our product, DemandLogic, and this is an example of us kind of combining intelligent software with solar output and the batteries in order to be able to reduce the demand charges that a customer may experience. And so this is one of those instances where solar plus storage further reduces the customer’s energy bills.

And with that update, I’ll hand it over to Bob.

Bob Kelly

Thanks, Pete. For those of you following along, I’ll start on slide 10. While it’s sometimes difficult keeping up with Lyndon on the sales and bookings, and Pete on the cost side, we really had a great quarter relating to the completion of the building blocks for our financial strategy.

We now have all the pieces in place to finance the increased volume of sales and installs anticipated over the next two years. It starts at the beginning when the sale is made. We have to build the facility. In the quarter, we finalized a $200 million three-year credit revolver. We used this to build or construct the job.

The real key here is how quickly you can turn the jobs and the revolver. It allows you to have more money over time to increase the flow and increase the jobs under construction. As you start approaching a 60- to 70-day cycle time, the revolver can be used five or six times in the business a year.

When the jobs are completed, we monetize the tax benefits through our tax equity funds. As of Friday, we had capacity of 171 megawatts. This compares to 149 megawatts during our third quarter call. And just consider those numbers when you think of a 103-megawatt installation quarter in the fourth quarter.

We’ve now completed 32 tax equity funds. The deals are getting bigger, reflecting our increased volume. We aim to have around a three- to nine-month supply of tax equity. Tax equity is essentially an annual business for the investor as they know their ability to take the tax credit over the year.

This number will fluctuate over time depending on the quarterly installations, i.e. the usage of the tax equity, and also the timing of the fund’s closings. We had a good quarter. We continue to build up our base investors, which become repeat investors, and we’ve added new participants, which hopefully will become repeat investors also.

As we build up the portfolio of jobs, we then move the jobs from the tax equity into our aggregation financing facilities, which we raise capital against our recurring, contractual cash flow over 20 years. We closed our third and largest such facility, at $225 million of capacity. We closed $220 million of commitments in this transaction.

This transaction was very well received in the marketplace, led by Bank of America Merrill Lynch, and we had three additional syndicate banks. The product to finance our business has really started to take hold in the marketplace.

The aggregation facilities are refinanced in the longer term capital markets. Lyndon mentioned it, but I’ll mention it again. The major milestone for the business on the term markets was the first solar securitization, which was rated BBB+. We will be an active participant in this market. We’ll flow the jobs through the aggregation, and then into the securitization market.

Currently, we are at the rating agencies for our second deal. I think it will be around $90 million to $100 million depending on the aggregation, and that’s expected to hit the market probably early in Q2.

The financial strategy was designed to increase the sources of capital and drive down the cost of capital in this asset-intensive distributed generation business, and the model is set up very, very well right now.

Turning to the next slide, slide 11, retained value past the $1 billion mark at year end, and now stands at $1.51 a watt. The securitization contributed around a $55 million or $60 million change in the retained value, so the incremental retained value came in at around $1.90 a watt.

When you look at the insulation volume of 475 megawatts to 525 megawatts this year and the incremental dollar per watt, those two numbers will drive the retained value significantly higher in 2014.

Usually at this time I jump into a discussion of the financials. However, as Lyndon mentioned, we’ll have a follow up call next Monday, when the GAAP financials are released.

Lyndon Rive

Before we get into the megawatt forecast for Q1, I wanted to give you a historic performance of the company since 2007. What you see here in this chart is of the 400 megawatts we installed for that year, what percentage has been installed in Q1, Q2, Q3, and Q4? In Q1, the average for our company, since 2007, is 16%. Q2 is 20%, Q3 is 24%, and then Q4, 40%.

So going on to our forecast, on slide 13, we are forecasting 78 megawatts to 82 megawatts for the quarter. This is in line with our performance, roughly around 16%, similar to what our company average has been since 2007. A big reason for that, of course, is the reduction in commercial volume.

We still feel very confident for 2014, for our 475 megawatts and 525 megawatts. On cash flow positive, I know that I’ve stated that we’ll be cash flow positive in Q4. We were cash flow positive in Q4.

Being cash flow positive every quarter afterwards is timed to the financing timing. So the timing may not come in at the same time as the quarter end, so it may go in and out. But for the year, we will be cash flow positive.

Looking for 2014, the foundation is ready for scale. We’ve already seen an increase in revenue, or at least our bookings, with January being our largest residential bookings in the company’s history. We’ve reduced our installation time, and reduced our installation cost, so the infrastructure is there, and we reduced our cost of capital and increased sources of capital. So we are ready to scale this business and look forward to an exciting 2014.

With that, we’ll open up to Q&A.

Question-and-Answer Session

Operator

[Operator instructions.] Our first question comes from the line of Phillip Shen with Roth Capital.

Phillip Shen - Roth Capital

I’d like to start off with confirmation of the retained value per watt. Did you guys pay $1.90? I think I came up with a $2.15 per watt calculation. Can you talk to us about what happened there in terms of mix? And also what do you guys expect going forward in 2014? How do you expect retained value per watt to trend?

Bob Kelly

On the first part of your question, I’ll answer and probably throw it over to Lyndon on the mix and where the trends are in the business. When you take the retained value of 1052, you have to subtract out what was allocated to the securitization. Because underneath the securitization, essentially you take away the tax equity, or you remove the tax equity, so that contributes to the cash flow available from those assets in the retained value. So when you take away 60, you get left with that number, and divide it by the bookings, you’ll come up with something around $1.90 a watt.

The second one, I’ll turn it over to Lyndon.

Lyndon Rive

Remember, we have a fairly large installed base, where we [sell] most of the cash flows to our tax equity investors. As we sign up new tax equity investors, we sell as little as possible of the cash flows. So I do think the incremental retained value will increase, but I don’t want to set the expectation that it’s going to continue at the rate that it has so far. There will be gradual increases, but not what you’ve seen in the past.

Phillip Shen - Roth Capital

And in terms of your Q1 guidance, it’s potentially a little bit weaker than it possibly could have been, but given your slide that talks about historical averages, it makes sense there. To what degree was Q1 impacted by bad weather? Or was it all due to seasonality? What are your thoughts on that one?

Peter Rive

The bad news is it didn’t help. But primarily it’s just as a result of a drop in commercial volume.

Lyndon Rive

There always tends to be a Q4 commercial push, where the customer wants to get the project done, and if there isn’t, there’s a little breather in Q1, in the commercial business.

Operator

Our next question comes from the line of Brian Lee with Goldman Sachs.

Brian Lee - Goldman Sachs

I had a couple of follow ups on Phillips question. First, the retained value, how should we be thinking about the securitization impact on the retained value, on a go forward basis? I guess is the 260 per watt the new base off of which retained value should fluctuate?

Bob Kelly

No, the incremental retained value is the one. You’ve got to remember, the retained value is a financial concept, as Lyndon said, of what’s left over after money to the tax equity. When you securitize an asset and you collapse the tax equity, there’s more cash available, so that’s an improvement in the retained value. Yes, if you did more securitizations like that, yes you would see higher numbers come in retained value, but the number to focus on is what’s the incremental retained value as you bring new jobs on. So securitization is fundamentally just lowering the cost of capital to the business and having more money for the shareholder.

Brian Lee - Goldman Sachs

That’s actually a good segue into my next question. I was, on ABS specifically, wondering if you have any sense of how you would expect the pricing to look versus the 4.8 you did in the first issue. And then also, to your point, how quickly do you think future ABS issues can come together as you move through the year?

Bob Kelly

Let me answer the second one first. As we move into our second transaction, the speed of getting it done is so much faster. I was even thinking about shortening the aggregating facilities, because in fact you could flow the megawatts much faster. So just in the second one, I feel pretty good that the speeds is going to be better than in the first one.

On the price, it really depends on the market price and the premium you’re paying, or the spread. A lot depends upon the average life of the facility that you’re left with, if you stay away from the high end of the yield curve and move in the seven to nine year range. It’s a lot more attractive.

We were at a securitization conference and I thought the demand for our product at that conference, and talking after the first one got done, was so much better than the demand for our product before the first one.

Brian Lee - Goldman Sachs

Just on the guidance for Q1, can you speak specifically to what the mix will look like, resi versus commercial? I guess the reason I ask is given your comments that seasonality will impact commercial more so than resi, is resi is going to be relatively more flat on a sequential basis, if I look at the year over year trends and seasonality impact in commercial?

Lyndon Rive

I appreciate the question, but sorry, at this time, we’re not guiding on the mix between residential and commercial for Q1.

Operator

Our next question comes from the line of Krish Sankar of Bank of America Merrill Lynch.

Krish Sankar - Bank of America Merrill Lynch

Number one, Bob, the cost of [unintelligible] have focused on installation, customer acquisition, and capital. Are the future reductions on these three levels, or is there anything else that has the potential to see the cost down further?

Peter Rive

The cost reductions that we’ve focused on is essentially the all-in cost. It is all of the capital costs of getting the systems deployed. And separately, the cost of capital. And those two have always been two of the three critical levers in the success and continued prosperity of solar.

Krish Sankar - Bank of America Merrill Lynch

And the [unintelligible] revenue has been up sequentially for almost four to five quarters now. Do you see customer demand for direct sales increasing? And is this [unintelligible] revenue [unintelligible] you expect to keep growing? Or is this an area that could be emphasized in terms of more releases down the road?

Lyndon Rive

I’m sorry, I just didn’t hear that question.

Peter Rive

Just to clarify, you’re asking what our outlook is for [cash systems sales] revenue?

Krish Sankar - Bank of America Merrill Lynch

Yeah, it seems like you direct sales have been growing. Is this a trend we should expect in the future also, or would you like to focus more on leases?

Lyndon Rive

Our primary focus is installing systems that we’d own. Every now and again, we do get commercial customers, especially government agencies, that want to buy the system. But the company’s focus is on growing systems that we own, and the other is opportunistic. So it’s hard to forecast what opportunities will come our way, but the focus is deploying systems that we own and retain for 30 years.

Krish Sankar - Bank of America Merrill Lynch

And then one last quick question on storage. The mutual partnership with Tesla seems to be more focused on the commission [unintelligible]. Is that what we should expect on solar for the next few years? Or do you see a pathway to residential pretty quickly?

Peter Rive

The collaboration with Tesla dates back many years, and it’s been a research and development collaboration. The products that we’re currently offering are both residential and commercial. So we expect that as well as perhaps even very large scale systems to be the way that we deploy the product.

Operator

Our next question comes from the line of Vishal Shah with Deutsche Bank.

Vishal Shah - Deutsche Bank

Just wanted to follow up on incremental retained values and specifically if you guys have had around the same level, $1.90 for the past two quarters. Is there going to be seasonality to that going forward? Or should we expect it to remain around those levels when you back out securitization?

Lyndon Rive

I don’t think the seasonality is going to have much effect. Because remember, [unintelligible] cash flow over the next 30 years.

Peter Rive

I would expect, though, there’s a mix between residential and commercial that may affect the number as well. So it’s more a function of mix than it is seasonality.

Vishal Shah - Deutsche Bank

And along those lines, for your mix going forward, are you focusing more on certain geographic regions, west coast versus east coast? And how do you expect that would affect retained value.

Peter Rive

This is the crazy thing about the business, that every market is a big market for us, and we are [unintelligible] every market as fast as we can, with exceptions. There are some markets that we aren’t investing into much. Oregon, we’re not investing too much in Oregon. There you have lower sun production and low cost of electricity. But for the most part, in most of our service territories, we are growing as fast as we can. And we are, of course, investing heavily into the markets with high-cost energy costs.

Vishal Shah - Deutsche Bank

Is there any more granularity on specifically where that might trend, east versus west coast?

Peter Rive

I think the big markets for us in growth is going to be California, New York, Massachusetts, New Jersey, and Arizona. Those will be the big markets for us. And Maryland.

Operator

Our next question comes from the line of Edwin Mok with Needham & Company.

Edwin Mok - Needham & Company

First one is on the mix of commercial versus residential. What was that mix in 2013? And also, roughly 5 megawatt [unintelligible] that you guys have for this year, how do you think that mix will play out?

Lyndon Rive

I don’t think we have that. If you give us one second, we’ll give you the commercial/residential mix for the full year. And in anticipation of that answer, I’ll say that the mix in 2014 will probably be in the same range as the mix we saw in 2013.

Lyndon Rive

We’d probably suggest residential would come in the 400 to 420, and then commercial will be in the 80 to 100.

Peter Rive

What we saw for 2013 was 73% residential and 27% commercial. So directionally, probably similar.

Edwin Mok - Needham & Company

And then I have a question regarding the cost of a few of these facilities that you guys talk about. Specifically, the acquisition facility, and also for the revolver, what kind of rate are you guys getting for those facilities? And do you expect those rates to come down or go up as you progress? Maybe because of scale, you can get a better rate?

Bob Kelly

Both are priced at 3.25 over LIBOR, so they probably come in between 3.25 and 3.5 when you draw on them. If you ask any banker in the marketplace, I expect the cost to come down on all of them. As the business matures, we can see it in the aggregation facility we just completed, demand exceeded supply. So when demand exceeds supply, the price should come down, and probably the next one we’ll see the fruits of our labor there.

But the various pieces of paper are becoming the norms in the business, and you’re getting increased participation from the financial community, which should yield to lower costs over time.

Edwin Mok - Needham & Company

And then Bob, just a follow-on question on that, as the solar project goes through from the revolver, before construction, to affect equity, financing, and then [unintelligible] facility and eventually securitization, how much overlap do you have to deal with? Meaning that you might have a scenario where the party [unintelligible] one facility, and you have to finance it, and then another one, and then you might have to pay double interest during that period. Do you see a lot of overlap, or not much?

Bob Kelly

The flow works very, very well. We don’t see any overlap. If anything on the structure, I sort of hate waiting for the jobs to move through, so eventually the marketplace will squeeze that out into the marketplace and be a little more efficient. It’s really set up to scale the business on a rapid basis, at a low cost of capital, and we have achieved that this quarter.

Operator

Our next question comes from the line of Patrick Jobin with Credit Suisse.

Patrick Jobin - Credit Suisse

I want to go back to Q1 guidance. Just want to make sure I understand your comments as far as seasonal weakness for commercial. Is commercial really falling off? Do you still have growth in residential? Or would there be conceivably some sequential decline in residential as well?

Peter Rive

The biggest reduction is the reduction in the commercial volume, and there’s nothing unusual about this Q4 on Q1 decline at all. I will say, when it comes to the residential, that operations kind of accelerated through a backlog, and there’s massive amounts of deployments in Q4, we simultaneously started investing in sales, and we started seeing the results of those sales, as Lyndon mentioned, in this quarter. So we see, like Lyndon said, record bookings in January, and those will translate to increases in residential deployments in Q2.

Lyndon Rive

Just to understand timeline, it takes [unintelligible] round of sales, which we’ve done in Q4. Now we’re starting to see the bookings results in Q1. But then it takes two to three months to go through all the permitting and everything that’s necessary to actually get installed. So there is a slight delay from when you make the investments to when you actually get the installations.

Patrick Jobin - Credit Suisse

And then a quick housekeeping item before my last question, just on the accounting delay. This is all overhead allocation work? There’s no restatement or anything like that that’s being contemplated?

Peter Rive

Right now we release the financials on Monday. The primary issue is just workload. We just had so much going on in a short period. And of course the allocation. So we’ll release that on Monday.

Patrick Jobin - Credit Suisse

And then last question, on the cost roadmap. You’ve exceeded your targets 30% this year. How should we think about that 5.5% reduction per year on a go forward basis? And related to that, what are your thoughts around the trade disputes and how that could impact your business if a tariff is imposed on Taiwanese sales, and how would you mitigate that?

Peter Rive

The answer to those two questions, they’re actually interrelated, the trade case, needless to say, is not going to be helpful at all, but is very much a short term factor. So we don’t expect that it will dramatically affect our costs in the long term. And then there also strategies that we’re contemplating that would give us the ability to protect us from the [unintelligible] trade case. But with the uncertainty surrounding the trade case, it is exactly for that reason that it is difficult for us at this time to provide a cost forecast that we’re confident in. So sorry for that, but we will be providing a revised cost forecast to you all during the next earnings call.

Lyndon Rive

And overall, our expectation for the year is we don’t know exactly the impact of the trade case, but in either case, we are confident our costs will reduce, we just don’t want to forecast how much just yet, until we know the impact.

Operator

Our next question comes from the line of Paul Coster of JPMorgan.

Paul Coster - JPMorgan

As we look out to 2014 and your guidance, are there any strategic changes or initiatives that we should be factoring into our thinking. For instance, acquisitions and international expansion?

Lyndon Rive

We are interested in both. We always look at opportunities for potential acquisitions, anything that can reduce our costs, create a competitive product. And then we’re very interested in expanding internationally. It’s just a question of when.

Operator

Our next question comes from the line of Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James

One of the markets where I know you guys have a footprint is Hawaii, and there’s been a fair amount of concern in the media about some saturation on the grid. How are you handling that state of affairs?

Peter Rive

We’re working very closely with the engineers at the utility. It is a very interesting market, as you are reaching high levels of saturation there. We know that the problems that they’re currently experiencing can be overcome through the combination of the deployment of smart inverters as well as storage technologies.

Pavel Molchanov - Raymond James

And then let me ask something on a related point. You guys have historically been avoiding the use of microinverters in your systems. Any change in your stance on that?

Peter Rive

No, we are fans of local DC optimizers, but have not changed our position in regard to providing an inverter that is coupled directly to the module on the roof.

Operator

Our next question comes from the line of Tyler Frank with Robert Baird.

Tyler Frank - Robert Baird

I was wondering, with the Zep acquisition, how you guys are looking at in terms of international locations? Are you going to try to use where Zep’s currently operating to A) grow that business internationally and B) could those be potential launching points for international expansion for [unintelligible] development business?

Lyndon Rive

Absolutely. We’re going to invest into growing Zep’s international business. It is a great platform to work with other partners, get to understand the culture of the other partners, and potential acquisitions from those partners. So as we look at expanding into other parts of the world, it’s much better to have a beachhead with a known company that we’ve worked with for a few months or a few years. So we will look at that as an opportunity.

Tyler Frank - Robert Baird

And in terms of looking at the international expansion, is this something we should look for in the near term, or is this a long term goal?

Lyndon Rive

That’s a good one. It’s something we wrestle with all the time. It’s a debate of do we do it this year or next year. So that’s where we are right now. It’s such a phenomenal opportunity to expand internationally this year, and expand in a big way. But then again, there’s so much opportunity here in the U.S. So it’s just, can we do it all at once? We’ve thought about it, but we’re talking a difference of 12 months.

Operator

We have no further questions in queue at this time. I’d like to turn the floor back over to management for closing comments.

Lyndon Rive

Thanks again for your time today. As I mentioned, the platform is built, it’s ready to scale, it’s taken us a very long time. The fact that we don’t have a long customer waiting list, we’ve been waiting for this for seven years. So everything’s ready for scale, and I’m looking forward to 2014. Thanks again, and have a good day.

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