Power-One Inc., Q2 2010 Earnings Call Transcript

Jul.30.10 | About: Power - (PWER)

Power-One Inc., (NASDAQ:PWER)

Q2 2010 Earnings Call

July 29, 2010 5:00 p.m. ET

Executives

Richard Thompson – President and Chief Executive Officer

Linda Heller – Senior Vice President, Finance, and Chief Financial Officer

Kevin Trosian – Vice President, Investor Relations

Analysts

Colin Rush – Think Equity

Bill Ong – Merriman & Company

Neil Deaton – Stephens Inc.

Walter Nasdeo – Ardour Capital

Joe Maxa – Dougherty & Company

Karl Richter – AlphaOne Capital

Operator

Good day, everyone, and welcome to Power-One, Inc., Q2 2010 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Power-One’s Vice President of Investor Relations, Mr. Kevin Trosian. Mr. Trosian, please go ahead, sir.

Kevin Trosian

Good afternoon, everyone. Thank you for joining us today to discuss Power-One’s 2010 Q2 results. Joining me today are Richard Thompson, Chief Executive Officer; and Linda Heller, Chief Financial Officer. By now you should have received a copy of today’s press release; if not, it is available on the company’s website at www.power-one.com.

Before we begin I would like to remind you that this conference call may contain forward looking statements regarding Power-One’s views of future events, projections, or expectations. Any such forward looking statements may deal with or include matters which involve risks or uncertainties. Power-One’s actual results may differ materially from those results as discussed or information provided in the forward looking statements. We refer you to the company’s reporting documents as filed with the SEC for a discussion of the risk factors that may have a material impact on results.

Today’s call also contains historical non-GAAP financial measures. The non-GAAP measures exclude restructuring charges and/or costs related tot eh closure of our Dominican Republic facility. Additionally, in adherence with regulation FD, we have opened up this call so that all interested investors are free to listen in. The press release and this conference call will be our only forum to answer questions regarding our estimated performance going forward. Consequently, should you have any questions regarding our estimates of sales and profits, or other financial matters for the upcoming quarter, as well as how they may affect our income statement models and balance sheet, this is the time that we are able to respond to these questions.

I will now turn the call over to Richard Thompson, the company’s Chief Executive Officer. Please go ahead, Rich.

Richard Thompson

Thank you, Kevin. I will begin today’s call with an overview of the company’s Q2 performance, describe the creation of the renewable energy and power SBUs, and discuss our future strategy to continue to take global market share while driving improving margins. After my remarks, Linda Heller, Our Chief Financial Officer, will provide greater detail on the financials, including the results of the quarter and guidance. We will then answer your questions.

Let me begin by highlighting a few of the key accomplishments this quarter. First, we achieved our third consecutive quarter of GAAP profitability. Second, we grew consolidated revenue 41% sequentially, and 135% year-over-year. Renewable Energy, or RE revenue, increased 73% sequentially and 745% year-over-year. In fact, we shipped 529 MW of inverters in the Q2, bringing our total to over 800 MW this year.

Third, from an operational standpoint we expanded capacity and are strengthening our supply chain. And fourth, we created two strategic business units, or SBUs, to provide a more distinct focus on each of our end markets. The SBUs were created within Power-One to open further opportunities for revenue and margin expansion based on both the high growth in the inverter and solar markets and the expansion opportunities available to Power-One and its power conversion products. While each SBU is well-grounded in power conversion technology, they possess different sets of business characteristics including product design, customers, supply chain, manufacturing, and sales. These differences are fundamental and require two distinct management approaches to optimize each business.

Renewable Energy Solutions will design, manufacture, sell inverters and related infrastructure products for the solar and wind markets and will be led by Dr. Alex Levran as President. Alex and his team have been largely responsible for the growth in this SBU, and will continue to focus on attracting new customers and entering into new geographies. Our solution will focus on Power-One’s traditional AC/DC and DC/DC power conversion products – network power systems and digital power technology, selling into the networking, storage, server, and industrial markets among others.

We believe the initiatives we have put in place will create operating margin improvements for Power Solutions. Dave Hogge will head the Power Solutions SBU as President, and recently joined Power-One from Cooper Industries.

I’d like to begin speaking about each SBU, including the first half performance, second half tactical issues and strategic initiatives. In RE Solutions we continue to take market share. The high yields our inverters provide through efficiency, harvesting capabilities and uptime, have influenced customers to purchase our Aurora inverter line. In fact, we have added new customers across all channels, including a number of new EPCs and distributors.

Turning to the broader market, we see positive demand indicators in the second half for solar inverters. Based on our backlog and bookings, demand appears strong well into 2011 as recent feed and tear proposals have been more favorable than previously expected. However, as industry capacity ramps and supply chain loosens, we do not believe the current rates of bookings or revenue growth are sustainable over the long run.

Inverter supply has been tight as the industry has seen component shortages due to high demand. In response to the higher demand we are adding capacity and expanding our supply chain. Overall, though, as solar adoption broadens to geographies outside of Europe we have seen greater stability in the global solar market. In turn, our customers are able to better forecast their product needs providing us with more visibility into future revenue. To meet the growing demand for inverters, we are continuing to add capacity. As of the end of the Q2 our annual RE capacity reached 2.5 GW, although demand still outstrips our production capacities.

In the first half, RE has been running above practical capacity, leading to margins that are unsustainable at current levels. To compensate for growing demand we plan to continue adding capacity to our European facilities which we expect to exceed 3.5 GW by year end. In North America we are nearing site selection in the US, have selected a Canadian high-level assembly partner, and are placing lines for our China-specific central inverters in our facility in Xi'an. We are targeting the completion of these new facilities over the next two to three quarters. This new facility will add over 1 GW of additional capacity.

It is important to note, however, that as utilization rates drop to a more sustainable 85% level over time, margins for the RE SBU will likely decrease modestly due to typical inefficiencies as we open these new facilities including ramp-up costs and absorption.

In order to execute our business strategy we are making significant investments to meet our growth and expansion and plans in RE. As mentioned a moment ago, we are dramatically increasing our footprint, which was less than 1 GW in 2009, to over 4 GW in 2011. Further we have a directed market gain strategy, which includes investments in sales and marketing, R&D, and our service build out. We will continue to invest in these areas to better serve our customers, gain share, and protect our market share. Key areas of spend include updating our marketing communications and messaging; increasing sales personnel; and adding engineering talent to focus on new product introduction.

In addition, we are increasing our service offerings to expand revenue opportunities, to meet our customer needs, and provide differentiated product and service offerings that provides more value to the end user. Looking at new product introductions, we are designing new technologies to expand our available markets and market share. This quarter we expect UL certification for our NEMA 3R US-compliant 200 kW and 300 kW central inverters, as well as launch our isolated string inverters in the US market. In addition, we are on track with the development of our micro inverters and our 700 kW and 1.4 MW liquid-cooled solar inverters.

Turning to Power Solutions SBU operating results are improving, however due to component shortages revenue was essentially flat quarter-over-quarter. To overcome volatility and achieve shipment growth, we are addressing vendor-related issues in the supply chain to correct product delinquencies to customer request dates, and to shorten our lead times.

During the quarter, we closed the Dominican Republic plan on time, which will provide approximately $14 million to $15 million in annual savings. We will continue to see partial savings this year and to fully realize them on an annual basis in the Q4 of 2010. Further, by shifting European production to our Slovakian plant we’re improving absorption while at the same time opening additional RA capacity in Italy. And in China, the consolidation of our plant into a single factory in Xi’an is also improving Power-One’s overall efficiency.

For the Power SBU we continue to develop new and innovative products to provide expanded revenue opportunities. Anticipated product introductions include the formal launch of our platinum technology, hybrid solutions for base station controllers, and further digital power offerings. We anticipate modest revenue improvement in the second half as we focus on customer satisfaction. Further, we are aligning our spending with the market as we reduce costs and drive profit improvements in Power Solutions.

Retuning to Power-One as a whole, we are excited about our opportunities that lay before us. RE continues to be an area of rapid growth and we are managing initiatives to bring the Power Solutions Unit to a sustainable profitability level. We have the cash, the capital structure to support investments in both businesses, and we will continue to grow margins and cash flow for the company over time.

I’d like to turn the call over to Linda for a detailed discussion of Power-One’s financials.

Linda Heller

Thank you, Rich. Before I dive into the results in detail I would like to highlight some of the key milestones we reached in the Q2 of 2010. First, Power-One achieved profitability for the third straight quarter. Second, margins increased 700 basis points to 37%. Third, operating income grew 134% sequentially. And last, we improved our working capital with strong balance sheet management.

Now I’d like to provide deeper insight into the details that drove our financial performance. During the Q2 of 2010 we recorded revenue of $215 million, an increase of 41% from Q1 2010 revenues of $152 million. Renewable Energy products were the main driver of the sales increase, growing 73% sequentially. Net income attributable to common stockholders for the Q2 was $24 million, or $0.17 per diluted share, compared to $4 million, or $0.04 per share for the Q1 of 2010.

We posted operating profits of $49 million or a 23% operating margin, which included $4.7 million in restructuring and other charges. Excluding these charges, we would have recognized $54 million in operating profit, or a 25% operating margin. Total gross margin for the Q2 improved to 37% compared to 30% last quarter. Better product mix, factory efficiencies, and increased volume all contributed to the improvement, which was somewhat offset by higher labor costs and freight. Excluding a charge of $1.8 million related to our resulting, gross margin reached 38%. We believe we can still improve our consolidated gross margins over time due to the efficiencies from the closure of the Dominican Republic facility, a continued rationalization of our supply chain, and product mix.

Operating expenses of $30 million for the quarter, which included $2.9 million related to our restructuring actions, decreased as a percentage of revenue, totaling 14% of sales as compared to 16% in the Q1 of 2010. We anticipate increased sales and marketing and R&D expenses as we invest to accelerate market share gain, and spending will modestly accelerate in these areas in the second half 2010. Headcount decreased by 525 employees to 2954, from 3479 last quarter, primarily due to the closure of the Dominican Republic facility.

As Rich mentioned, we are now reporting revenue and operating income by SBU. In the Q2 RE Solutions posted $142 million in revenue and $16 million in operating income. Operating margin was strong due to higher utilization and factory absorption. Based on the factors Rich mentioned earlier, including capacity expansion, investments and operating expenses, and the building number of services businesses, we believe current margins are unsustainable over the long term and anticipate operating margin will contract.

Core areas of strength for RE Solutions included Italy and Germany with France, Australia, and The Czech Republic highlighting their regions of growth. Europe accounted for 93% of RE’s revenue, with Asia representing 6% and North America 1%. For the RE SBU distributors accounted for 65% of sales, EPCs 33%, and OEMs 2%.

Turning to Power Solutions, revenue reached $72 million versus $70 million in the Q1. Revenue was relatively flat with last quarter as growth was hindered by component shortages. We are working with other suppliers in designing components that we cannot second source. Power Solutions posted an operating loss of $2.5 million, which included $1.8 million related to eh closure of the Dominican Republic facility, with lower utilization rates affecting margins.

Revenue was split relatively evenly across all three geographies for the Power SBU. OEMs comprised 81% of revenue while distributors contributed 19%. In addition to the operating expenses incurred by the RE and Power SBUs, corporate and unallocated operating expenses were $8.3 million which included restructuring charges of $2.9 million. Interest expense of $2 million included interest and amortization of related costs from convertible debts outstanding. We converted approximately $0.9 million related to the accretion of dividends related to the preferred stock issued to Silver Lake Sumeru.

The Q2 consolidated tax provision was $23 million related primarily to tax on profits generated from certain European locations. Taxes were higher as we generated revenues in jurisdictions where we do not have significant net operating loss carry forward. With our expansion plan in the US as well as a number of our strategic initiatives we anticipate reducing our future cash burden.

Turning to our restructuring, we effectively closed the Dominican Republic facility at the end of this quarter. We anticipate some cost savings in the Q3 while fully recognizing the benefits in the Q4 2010.

EPS this quarter was $0.17 per diluted share versus $0.04 in the Q1 2010. Due to increased net income levels, a two-class method of computing earnings per share was used as Power-One’s capital structure includes preferred shares that participate in dividends equally with common shareholders according to a predetermined formula. The diluted shares used in this diluted EPS computation excludes the preferred shares in the total share count, and also excludes from that income the earnings allocated to the preferred shareholders. Therefore, diluted EPS under the two-class method is comparable to the diluted EPS using the if-converted method.

Moving to the balance sheet, our cash balance grew to $145 million from $101 million in the Q1 of 2010 due to improved working capital management and profitability. During the Q2 cash generated from operating activities reached $50 million as the DSOs decreased to 57 days and inventory turns reached 5.6 times. Given the growth in the business we anticipate modest increases to DSOs and inventory from current levels.

On July 6th we announced a call fro redemption on the remaining $34 million outstanding on our 8% senior-secured convertible loan. As of this Tuesday, July 27th, $22.5 million of the face value of the notes, equating to 11.25 million shares, have been converted. Note holders have until 5:00 pm Eastern Time on August 10, 2010 to deliver a conversion notice.

In the Q2 consolidated bookings increased to 757 million from 453 million last quarter. Of these, RE accounted for 657 million and Power for 100 million, versus 355 million for RE and 98 million for Power in the Q1 of 2010. We do not believe the current book to bill ratio of 3.5 is sustainable over the long term and anticipate it will contract in the second half of 2010.

Finally, beginning this quarter Power-One will begin providing revenue guidance on a consolidated basis for eh current fiscal quarter. Revenue for the Q3 2010 is forecast in a range from $250 million to $270 million. We will now be happy to take your questions. Kevin?

Kevin Trosian

Thanks, Linda. Before we begin the Q&A session of today’s call we’d like to ask analysts and investors to limit themselves to one question and one follow-up. If you have more questions we ask that you proceed back into the queue to allow others to ask their questions. Operator, will you please open the queue?

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions.) I would now like to hand the conference back over to Mr. Trosian while we wait for participants to queue.

Kevin Trosian

While the Operator is holding for questions I’d like to update you on a few upcoming events. Power-One will be presenting at the following three conferences this quarter: Needham’s Clean Check Conference on August 9th; Think Equity’s Growth Conference on September 15th and 16th; and Ardour’s Energy Technology Conference on September 16th and 17th.

Operator, we are ready for the first question.

Operator

Our first question comes from Colin Rush from Think Equity.

Colin Rush – Think Equity

Good afternoon, gentlemen, and congratulations on the phenomenal results. Can you talk about the product mix within Renewable Energy? If you’re really still being driven by the string inverters or if you’re starting to see some of the larger inverters pick up share.

Richard Thompson

Thank you, Colin. This is Rich. As we look at our deliveries during the quarter we’re still very, very strong in string inverters, particularly in the 10 kW to 12.5 kW range. The mix in business is similar to in the past, so we’re approximately 75% string, 25% utility. Within the string we’re delivering three-phase and single-phase.

Colin Rush – Think Equity

Excellent. And can you talk about what you’re seeing as potential competitive threats as you look at new product development out in the marketplace? And if you wouldn't mind segmenting between North America and Europe on that.

Richard Thompson

Okay. As we look through our product areas I believe that we’re leaders in product development. We’re not going to share with you too much about our new products unfolding for competitive reasons. But we believe that our MPPT power point, our maximum power point tracking, our efficiency and other features including easier to install and scalable units are still market-leading in features and efficient.

In North America, as you know, we’re just entering North America with our NEMA 3R products. You’ll see next year actually a new product specifically for this arena as well. So I know that’s not a specific answer for what you’re asking but for competitive reasons we need to be a little circumspect. I will say that our micro inverters are coming along well as well and you’ll see those entering the marketing Q4.

Colin Rush – Think Equity

Excellent, and one last question from me. You know, there’s a lot of speculation about a new energy bill or mandates coming out of China alter this summer. Can you talk about the preparedness of your supply chain to service the potential growth in China over the next couple of years?

Richard Thompson

Right. We see China and the Golden Sun initiative really pointing towards a commercial environment. As we’ve disclosed previously we are specifically creating a 250 kW, 500 kW product for central inversion into China, which has a different feature set. We believe these products will be very competitive as it is a lower price market – price per watt there is much, much lower. We are outfitting our factory now. We are doing that in Xi’an in line with the power factory and the supply chain globally is robust. And actually some of our suppliers in Europe have actually followed us to China which is very helpful in that they’re already familiar with our bonds and our product offering and our needs. So we feel quite comfortable that we’ll be able to service this market well, particularly with our new products.

Colin Rush – Think Equity

Thanks so much and congratulations.

Richard Thompson

Thank you, Colin.

Operator

Our next question comes from Bill Ong from Merriman & Company.

Bill Ong – Merriman & Company

Good afternoon, congratulations. Solid quarter, just a great execution over the past year.

Richard Thompson

Thank you, Bill.

Bill Ong – Merriman & Company

Yep. So my question is just to qualify, it looks like you have a gross margin opportunity to turn upwards from current levels and then added infrastructure will likely moderate operating margins down a little bit. Is that correct?

Richard Thompson

Yeah, let’s talk through that a bit. Historically in the power business as you know, we’ve closed the Dominica Republic. We’ll start seeing some of that back into Q3, largely most of that benefiting Q4. That adds about $14 million, $15 million to our gross margin annually. And in Renewable Energy we continue to operate well. What we’re trying to caution investors in that we are adding capacity and as one bring sin capacity online there’s always ramp up costs as you put new production into place. And secondly, there tends to be absorption costs at least in the first few months and perhaps quarter. We think that impact will be minimal but we want to make people aware of it.

Secondly, as we look at our operating expenses and the key to our operating expense is our sales and go to market, basically – so it’s marketing and sales footprint. And secondly and actually more important is our engineering footprint – we have a large number of engineers, we have aggressive plans to expand that dramatically. We have a very ambitious product roadmap so we expect our engineering expense to go up pretty significantly over time as our sales and marketing will.

But as you’ve seen with the bookings we gave to you today that we are experiencing really good growth and we expect to grow into these expenses over time. So we believe that again, as we’ve always shared, that we will not be outdistanced in the marketplace versus competition on our operating income.

Bill Ong – Merriman & Company

That’s great. And then some tax rate insight, just given your diversified presence. And you talked about shortages on your core power supply business. Was any of your customers impacted adversely? And so a little bit of insight on there.

Richard Thompson

Okay, let me talk about the power business and Linda will talk to you a little bit about taxes. On the power business and even in Renewable Energy business the supply chains are quite tight on certain supply, certain components that go into our products. We were much more successful in Renewable Energy in acquiring the components we need, and we actually have gone forward with our purchasing and are taking inventory risks throughout our supply chain in Renewable and in parts of Power. So you will see raw material on our balance sheet over time expand, slowing down just a tad on inventory turns. But as our solid balance sheet with $145 million in cash and very strong capital structure we’re able to support that investment.

On the Power side we’re seeing some high voltage MOS fits continue to be giving us a fit. Some semiconductors as well. Overall these don’t appear to abate from the forecast we’ve gotten from our customers until late into Q3 and Q4. Having said that, it has caused delinquencies for us. It’s a situation that we’re certainly not happy about. We’re working with our customers in some instances who have larger purchasing power than we are to secure those components. But in all honesty it is a very difficult situation today. We do see it abating as I mentioned and we hope to get back more towards industry lead times again toward the end of the Q4.

Linda Heller

And Bill, on the taxes as I indicated we are generating an income in countries where we do not have NOLs, primarily in Europe for the majority of that. And for the past several quarters we’ve been taking restructuring charges in countries where we do have NOLs and have not received a tax benefit, which has been impacting our effective tax rate. Now that we have completed the Dominican Republic closure we won’t have that impact from the restructuring changes, but as we expand into North America, further expand with the Renewable Energy business that will also help the effective tax rate.

Bill Ong – Merriman & Company

Great. Great job, everyone.

Richard Thompson

Thank you.

Operator

Our next question comes from Neil Deaton from Stephens.

Neil Deaton – Stephens Inc.

Hey guys, this is Neil. Thanks for taking my questions. Rich, could you just give us a little more color on the development of the new services and support business? Will that be a global service offering? What kind of profitability levels do you expect that business to generate?

Richard Thompson

Okay, great. The service business is a requirement for continued success in Renewable Energy. We have hired a very senior service manager to help us develop this, Maury Rogers. He comes to us with years of experience in the industry. And we’re developing a hybrid solution which we practiced today. We set the delivery standards, the service delivery standards throughout the globe and we largely have the service delivered through third-party prodders. So we’ll continue to expand that footprint.

As with most service offerings, particularity when you are expanding those service offerings and establishing your depots and your workforce, and developing a network of products, it is not a profitable effort – it’s one required to support your revenue stream. So we would expect that to have losses, modest losses I’ll say in the near future, over the next say two to six quarters, and then come to profitability. But I don’t think you’ll see any damage on the P&L through that activity. It will actually expand our ability to bring new customers onto our customer list.

Neil Deaton – Stephens Inc.

That makes sense. And then could you just help us think about the quarterly inverter capacity levels as we progress throughout the remainder of the year as well?

Richard Thompson

Okay. We ended the quarter, Q2 shipping 529 MW. We’re up to 2.5 MW at the end of half 2. So we’re expected to hit 3.5 annual capacity at the end of the year. So we’re almost at a GW a quarter. As we add on North America capacity and China capacity we’ll solidly be at 1 GW into next year. So we’re adding capacity very rationally. Again, our gain share strategy is to run at 85% of practical, to have inventory on the shelves, to have short lead times, shorter than the industry as was our practice before the up tick in the first half of the year. So we believe our plan’s very solid, very easy for us to execute. We’ll spend our capital rationally and bring on new management to man those organizations.

Neil Deaton – Stephens Inc.

Great. Thanks, guys.

Operator

Our next question comes from Walter Nasdeo with Ardour Capital.

Walter Nasdeo – Ardour Capital

Thank you. Good afternoon.

Richard Thompson

Hey, Walter.

Walter Nasdeo – Ardour Capital

Hey. You know, I’m trying to get my mind around this great growth that you guys have been showing quarter over quarter and then trying to look out into the future as you’re giving some guidance – that’s a great help, obviously. As far as how this growth is translating to capturing market share, what is your expectation over say the next four to six quarters on what you can kind of capture in the solar inverter market?

Richard Thompson

Well, today we ended up last year as #4 in the industry; that was up from #9 just two years ago. So we’ve made tremendous gains in the solar inverter market. Obviously we have aspirations to be much bigger than #4, that’s why we’re in business and why we’re expanding. I think, you know, and hats off to SMA – a very large market leader, 40% share according to some reports, and obviously the person we should have our sights on.

So we’re going to continue to grow and take market share, and see how we can do. I won’t give you a prediction. I think that’s being a little bit too bold, but we’re certainly active. We believe that our product offerings are the best in the industry. We also believe that our operations team, which has performed fanatically over the last couple quarters as we’ve tackled a large, large increase and kept very, very low defective parts per million in the field - some of the best in the industry - will continue to be able to manage this growth successfully.

So not what you wanted to hear but I just don’t want to give predictions on where we might be in market share.

Walter Nasdeo – Ardour Capital

That’s okay, I didn’t think you would. And can you just give me a backlog number for the end of the quarter please?

Richard Thompson

Well we stopped giving backlog by giving you the bookings. We think that that’s more valuable to you. As you know, backlog, particularly as we start knocking back lead times will be harder to read. It’ll become again more of a turns business. We think the bookings number should be more helpful to you.

Walter Nasdeo – Ardour Capital

Alright. Thank you so much.

Operator

Our next question comes from Joe Maxa from Dougherty & Company.

Joe Maxa – Dougherty & Company

Thank you, and another congratulations. My question is, can you give us an idea… I’m just thinking about the book rate, and obviously as you’ve talked that the book to bill ratio is not sustainable. But in the near term what can you tell us about July as it compared to Q2? And what are you looking for for let’s say the rest of the year?

Richard Thompson

Well, I don’t think we want to give that kid of prediction. We've shared with you the revenue guidance. I misspoke and said “bookings” earlier, but the revenue guidance was $250 million to $270 million for Q3. We do have from the bookings and the information we gave you last quarter you should be able to see how that compares or calculates to our book to bill if you have that information. But we would expect with the change in feed and tariffs we would see orders moderating a little bit as well as with the change in lead times. As we get to more of a turns industry, let’s say for string inverters four to six weeks in the months and quarters to come, and get back to about a six to eight week for central inverters, you’ll see a more normal industry bookings rate.

As you might recall, before the run up in the tail end of last year the bookings were more like 1:1, at max 2:1. So we think it’ll get better very quickly. We’ll start seeing an abatement in Q3 just because of the European summer vacations, and then we expect to have a strong end of the quarter and into the Q4 as people rush to beat the bad or inclement weather of the winter.

So that’s about all we can say about the current outlook if you like. But this last two quarters I think any inverter company would tell you was just phenomenal growth. When you’re hitting book to bills of 4x and 5x it’s something that’s not likely to repeat itself.

Joe Maxa – Dougherty & Company

Okay. And my second question would be, if you could give us an update into the wind inverters and what are you seeing in that market right now?

Richard Thompson

The wind market is strong. We’re trying to asses our position in it. As you know, we’ve shared with you that our 2.5 MW was designed for a specific company. We’re looking though at how do we take that technology through the rest of wind? How do we partner better with other people? Do w have to add more offerings? So our wind is on track. We have more ambitious goals, though, than just serving one provider and we’re looking at other product offerings to bundle with it.

Our products, the technology that we created or that was created through the 2.5 MW wind inverter is also being used in our solar offerings. We’ve mentioned before, we expect to have a 700 kW 1.4 MW liquid-cooled actually scalable inverter out middle of next year. So we’re using the technology, we still expect revenue from wind. We ant to find out how we can get more aggressive with it. The wind market is great in China. It’s great in the US, and there’s pockets of expansion throughout Europe. So we certainly want to participate in it.

Joe Maxa – Dougherty & Company

And your current customer, are they on track with your thoughts to start wrapping up revenues in 2011?

Richard Thompson

We believe so but obviously that’s up to their success. We have a product that they’re welcome to use. We’re looking at other types of inverters for some of their older products and we hope to have a good relationship.

Joe Maxa – Dougherty & Company

Alright. Thanks a lot.

Richard Thompson

Okay.

Operator

Our next question comes from Karl Richter from AlphaOne Capital.

Karl Richter – AlphaOne Capital

Hi, thank you. Great, great operational performance. This is an even better quarter than I expected. First question, could you speak to what your lead times are currently or recently as well as sort of how pricing is trending currently versus recent periods on similar products?

Richard Thompson

Okay. I assume you’re asking about renewables?

Karl Richter – AlphaOne Capital

Correct.

Richard Thompson

Okay, great. The pricing that we expect in renewables, it’s been flat throughout this first half of the year. We’re expecting a modest decline over the next two to three years as we’ve seen in publications, 4% to 6% decline per year in pricing. Obviously that’s different in each marketplace. So we believe that we can create efficiencies and cogs to offset those as we tackle those pricing declines. So we think the pricing will certainly be stable in this market. What was the second part of your question?

Karl Richter – AlphaOne Capital

Lead times – where are you guys currently?

Richard Thompson

Yeah. Lead times now for both string, string is probably in the 10 to 12 week range; commercial inverters are in the 20 week range. We expect over time as I mentioned to see those abate back to four to six for string and eight to ten for commercial. That’ll probably take place over the next three quarters.

Karl Richter – AlphaOne Capital

Okay. The second question is really around gross margins. Probably to me the biggest upside surprise in the quarter was to see the 37% number, even with the drag you were still having from the Dominican factory charges. It seems like most expectations were probably for margins closer to 30% to 31%. And I appreciated the comments that you made earlier about not expecting bookings to continue, or run at a 3:1 book to bill and so forth, but what are the specific reasons why margins should come… Or how would you forecast margins in Q3 relative to the revenue ranges you’ve given? What are the factors related to that forecast?

Richard Thompson

Okay. We, you know, as we look to Q3 as I mentioned we’ve cleared out the Dominican cost. The Renewable Energy business, we’re expanding it dramatically so you will see ramp up costs and absorption costs. We’re also, as I said earlier, trying to get back to 85% of practical. That gain share allows us to build finished inventory and to ship when customers have emergencies or as quickly as 24 hours. So we’ll continue to do that practice. But our opportunities are obviously management as well as those ramp up costs, continue to watch our supply costs. During the quarter, even though we had a great gross margin we paid some PPV to get components in and to avoid line downs both in the Power business and the Renewable Energy business. So lots of opportunities to continue to polish our costs.

We keep our eye on S&A, if they’re 40% plus gross margin. And you can probably surmise that we’re already achieving that number. We want to match it across all of our business.

Karl Richter – AlphaOne Capital

Okay. Understood. Very good, thank you.

Operator

This concludes our Q&A session for today. I would now like to hand the conference back over to Mr. Richard Thompson for closing remarks.

Richard Thompson

Okay. Well thank you for your interest. I want to tank the men and women of Power-One for their great efforts this quarter. While you saw the comment at the top of the line of $215 million, every person in the organization was working hard to service our customers and to achieve positive results for our investors. So I really thank them. We look forward to having another good quarter. We have a lot of momentum, we plan to manage it well and to capitalize on it. So I look forward to talking to you next quarter and perhaps seeing you at some of the investor events over this quarter. Thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program for today. You may all disconnect and have a wonderful day.

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