Satcon Technology CEO Discusses Q3 2010 Results – Earnings Call Transcript

 |  About: SatCon Technology Corp. (SATCQ)
by: SA Transcripts

Satcon Technology Corp. (SATC) Q3 2010 Earnings Call October 28, 2010 8:30 AM ET


Good day and welcome everyone to SatCon’s third quarter 2010 conference call. Today’s call is being recorded. You may listen to the webcast on SatCon’s website located at

In addition, today’s news release is posted on the site for those of you who did not receive it by email. With us today, are SatCon’s President and Chief Executive Officer, Steve Rhoades, Chief Financial Officer, Don Peck, and Investor Relations Manager, Leah Gibson.

At this time for opening remarks, I’d like to turn the call over to Ms. Gibson. Please go ahead.

Leah Gibson

Thank you, Claudia and welcome to the call everyone. Before we begin, please note that the comments made on this conference call today may include forward-looking statements that involve a number of risks and uncertainties. For this purpose, any statements contained herein, that are not statements of historical facts, may be deemed to be forward-looking statements and may include the words, believe, anticipate, plans, expects, intend and similar expressions, which are intended to identify forward-looking statements.

Important factors that could cause actual results to differ materially from those inferred by such forward-looking statements are set forth under the caption Risk Factors in SatCon’s Annual Report on Form 10-K for the year ended December 31st, 2009, and the company’s quarterly report on Form 10-Q ended September 30th, 2010. These factors are included there for reference. Once filed with the SEC, copies of the 10-Q will be available from SatCon upon request and will be posted to the company’s Investor Relations website at

In addition, today’s call is being recorded and a webcast replay will be available on the Investor Relations website. This conference call and associated recordings belong to SatCon and are prepared for the benefit of our investors.

I will now turn the call over to our President and Chief Executive Officer, Steve Rhoades. Steve?

Steve Rhoades

Thanks Leah and good morning everyone. I’m extremely pleased to report to you on yet another record revenue quarter for SatCon, inline with our preliminary results reported last week. We’re very pleased to have posted revenues ahead of our project of $56 to $58 million with Q3 2010 ending at $58.4 million.

This represents an increase of more than 480% over our reported renewable energy solution revenues for the same quarter a year ago. Gross margins came in within our goal at 27% and we expect this upward trend in gross margin to continue in the fourth quarter and into 2011.

As we introduced last week, we expect revenues for the fourth quarter of 2010 to be between $70 and $75 million and expect to achieve a gross margin percentage for the fourth quarter of between 28% and 32%.

During the quarter, we shipped 220 megawatts to SatCon industry leading solutions. SatCon’s 500 kilowatt PowerGate Plus solution, continue to be our strongest performing product, shipping 147 megawatts representing over 1100% growth over the number of 500 kilowatt units shipped in the third quarter of 2009.

Our 500 kilowatt PowerGate Plus continues to be the most widely deployed utility ready solar PV inverter in the large scale inverter category with over 800 megawatt sold worldwide since its introduction in 2005.

In addition to the continued success of our PowerGate Plus solutions, we have significant demand for our old Solstice 100 kilowatt and 500 kilowatt solutions, which have already generated significant sales since their introduction this year.

As of October 27th, 2010 the company’s backlog, which consists of purchase orders of customers was $132.6 million with total revenue year-to-date surpassing $100 million. Backlog from North America represented approximately 62% of the total while Asia contributed 23% and Europe contributed approximately 15%.

We have sold over 1300 units of our commercial and utility scale inverter solutions year-to-date and our current backlog consists of 560 megawatts of our large scale inverter solutions. This surge in sales has out paid for PV industry and clearly reflects the growth of the large commercial and utility scale PV market, which in 2011 is expected to grow five times faster than the rest of the industry according to recent analysis from IMS Research.

Given the continued strength of the utility scale market coupled with our robust revenue growth current backlog and pipeline we believe that we will acquire well over 20% of the global market for PV inverters at 250 kilowatt and above for 2010. Focusing for a moment on our strong sales performance, we continued to see significant contributions from each of our core growth markets in North America, Europe and Asia-Pacific.

In North America, sales represented 53% of the total revenue for the quarter and bookings reached over 194 megawatts. One of the driving forces behind this is the considerable growth in the utility scale solar market worldwide where SatCon has established itself as the most innovated solution provider and brand.

We have seen significant increased demand in each of our three core markets as demonstrated by the volume of our 500 kilowatt PowerGate Plus and 500 kilowatt Solstice solutions that have been selected for numerous multi megawatt solar power plants worldwide.

In North America, we recently announced that our 500 kilowatt Solstice solution was selected to power a 63 megawatt solar power plant in Puerto Rico. The CIRO One installation, which we utilized 126 of our SatCon Solstice 500 kilowatt solutions, would be situated on 180 acres of land. That will be the largest and most advanced ground mounted solar PV plant in the U.S.

We also continue to extend our leadership position as the solution provider fourth of choice for U.S. utilities. As we mentioned on our last quarter’s call in June, SatCon secured a landmark deal with Southern California Edison to supply our inverters for a minimum of 75% of their 215 megawatt SPVP program.

As part of this program Southern California Edison utilities both the SatCon PowerGate Plus 500 kilowatt and the newly launched Equinox 500 kilowatt platforms for its solar rooftop initiative, which has already produced 24 megawatt in orders that are expected to be delivered by year end.

We’ve also generated a generous pipeline of projects in Ontario, which was highlighted during the quarter by our largest single Canadian order to-date. In the quarter, our present fully integrated 1 megawatt medium voltage package solution was deployed by Q-Cells for a 20 megawatt utility scaled solar PV power plant in Sault Ste. Marie, Ontario.

These projects make among the largest to-date in Ontario and our contract did under the renewable energy standard offer program developed and overseen by the Ontario power port. The key strategic goal to in the success of our business over the past two years has been the growth of the SatCon brand in the global large commercial and utility scale inverter market.

We captured the leading market share position in North America and through the expansion of our worldwide sales and service organizations we’ve extended our global solution delivery model in Europe and Asia as well. By building a team that consist of the world’s best systems, engineers, designers and service technicians we are providing our customers the expertise and technological innovation required successfully developed for next generation of large scale solar projects in power markets worldwide.

In Europe, our revenues for the first nine months of 2010 are up over 1100% from the same period in 2009 and represented 38% of sales during the period. Year-to-date, we have booked over 220 megawatts, expanding over seven countries, with the largest orders coming from Czech Republic, France, Germany, Greece and Italy.

In France for instance, we recently provided 36 of our PowerGate 500 kilowatt inverters to Enfinity one of the recent leading solar PV development companies. This 18 megawatt installation now serves as one of the largest solar farms in the country. We also continued to increase our traction in Germany, where we have received orders from a large Germany PV project developer to power a 19.5 megawatt project, which will utilize 39 of our PowerGate 500 kilowatt inverters.

Despite proceed, impending slowdown in some of the European markets power pipeline remains robust. We see a high volume of residential and light to medium commercial installations transitioning to large scale multi megawatt solar power plants, which leverages our most innovative solutions in markets like Germany, Italy and France.

At this time, we see no decline in our growth rates in any of these major markets in Europe as we continue to grow our leadership position there. We also continue to see strong growth and opportunity in Asian Pacific, where in China; we own approximately 30% of the market for large commercial and utility scale solar PV projects. The strength of our brand in Asia is supported by the key partnerships we developed in late 2009 and early 2010 with industry leading companies such as GCL Solar Limited.

Just last month, we announced that we’ve expanded our partnership with GCL to include a strategic manufacturing agreement that will add an additional 500 megawatts of capacity annually for our PowerGate Plus 500 kilowatt inverters. This facility located in Nanjing, China, will produce our inverters to be sold GCL into the Asian solar market as well as for GCL projects. Under the agreement, GCL will own and operate the plant and procure all raw materials. And SatCon will manage the facility and own the equipment that does the final testing to ensure we maintain protection over our core technology in IP.

This agreement not only reinforces our strategic relationship with one of Asia’s largest utility solar power plant developers, it also strengthens our position in one of the fastest growing solar markets in the world. The partnership also expands our manufacturing capacity from 1.5 gigawatts to 2 gigawatts annually, when the facility comes online in early 2011. But lastly, it provides additional operating leverage to our margin structure as it reduces fixed cost associated with additional expansion.

With our strategic investments in both Europe and Asia delivering tremendous growth, we expect these markets will continue to be key components of our growing global market share in 2010. This growth has also enabled us to diversify the effects of seasonality and macroeconomic forces we used to see in our business resulting in a more balanced growth rate.

Our investments over the past two years have not just focused on building our business geographically. We have also supported efforts to build a solution portfolio that defines the new standards for performance, quality and value for the solar industry. These market changing innovations include the introduction of our SatCon Solstice system solution and Equinox, our next generation utility ready 500 kilowatt inverter system with 98.5% peak efficiency.

In this launch, in October of last year, Solstice has redefined the large scale solar value operation by increasing the overall system energy yield by 5% to 12%. While at the same time reducing the overall balance of system installed cost by 20% to 25%. By breaking large installations up into smaller more controllable increments of less than 3 kilowatts Solstice enabled tailored design flexibility that generates significant performance improvements through fine grained energy harvest.

With the current pipeline for our Solstice solutions reaching nearly 200 megawatts, the impact of Solstice is clearly marking an inflection point in the standards for performance and quality in large scale solar power production.

Solstice’s advanced feature utility ready solution innovation will be further demonstrated by our recently announced 1.2 megawatt ground mounted project with Sustainable Energy Generation Group where the first side by side installation of SatCon’s PowerGate Plus and Solstice solutions will generate solar power at a water treatment facility in Kent County.

We are excited for this project as it will be the first commercial site to demonstrate the performances difference of the two technologies under the same conditions. While Solstice is our first example of this expanded system solution approach, we continued to secure our place as the world’s best-in-class utility scaled inverter system provider by introducing Equinox our next generation 500 kilowatt power conversion solution.

Equinox’s advanced utility ready features enables simplified grid interconnection and can be easily integrated into SCADA systems through standardized communication interfaces making them a vital element for managing large complex distributed generation PV installations.

Like Solstice, Equinox improves system-wide energy harvest in solar plant yield, which enables the large scale solar industry’s lowest level cost of energy at a 98.5% efficiency rate.

The Equinox and Solstice Solutions joined SatCon’s strong IP portfolio of large scale advanced feature systems for electrical power conversion. This long history of innovation includes our PowerGate Plus 500 kilowatt, the Prism 1 megawatt medium voltage package solution. And the 1 megawatt PowerGate Plus inverter solution providing the industry’s most advanced and complete suite of products specifically designed to address the needs of large multi megawatt utility scaled systems.

By concentrating our efforts on the challenges and opportunities that reside in the total system from the panel through the inverter to the grid, we create a highly differentiated value proposition to our customers through a combination of technology innovation and a world class delivery model on the strength of our market position and our successful strategic operational performance year-to-date we recently raised $37.5 million through a public offering of our common shares. This infusion of capital strengthens our balance sheet and provides the cash required to fund our rapid growth.

As we look to the remainder of 2010, we expect our fourth quarter revenues will increase significantly to between $70 million and $75 million. And our gross margin percentage between 28% and 32%. On the strength of our booking pipeline and diversification of our geographic presence, we do not expect revenue in the first quarter of 2011 to be affected by the seasonality we’ve experience in past years.

With that, I’ll turn it over to Don, who will review our financial results.

Donald Peck

Thanks Steve. Revenue for the third quarter ended September 30th, 2010 was $58.4 million, an increase of approximately 481% or $48.3 million over the same period in 2009. And well above the guidance the company provided during last quarter’s earnings call of third revenue between $43 million and $47 million. Our revenue is at $58.4 million for Q3 is over double our revenue towards the last quarter, $27.6 million. Our year-to-date revenues of $100.7 million is 224% higher than the revenue the same nine month period last year of $31 million.

Bookings for the first nine months of the year were $200.5 million, an increase of 468% over the bookings recorded for the first three quarters of 2009 of $35.3 million. As we continue to expand our market share in North America and China, and increase of sales presence in Europe.

Our backlog, which consists the firm six purchase orders from our renewable energy customers was $92.9 million as of quarter end. A record, $132.6 million as of October 26th, 2010 about 85% of this backlog is currently expected to be shipped in the next two quarters. During the quarter, we’ve sold 689 units with a total megawatt capacity of 220 megawatts. As compared to 176 units, with 34 megawatts of capacity during the same quarter last year.

Year-to-date we have sold 1328 units, with total megawatt capacity of 380 megawatts or basing the 84 megawatts capacity sold during the first nine months of last year. Continued acceleration in our gross margin was evident as our gross margin percentage increased to 27% for the third quarter of 2010, compared to negative 4% for the same period in 2009 and 21% for the second quarter of 2010. This gross margin achievement is inline with our goal announced during the last earnings call of margins to the quarter in a mid to high 20% range, and reflect the solid improvement in our manufacturing procurement processes and the impact of higher volumes.

As Steve mentioned in his remarks, we expect our gross margin percentages will continue to improve next quarter as we leverage our Chinese contract manufacturing operations and further rationalize our supply chain to utilize a greater percentage of lower cost for each manufacturing components.

We expect that we will achieve margins of between 28% and 32% for the fourth quarter of 2010, as we continue to drive margin expansion in our business.

Our operating expenses for the quarter are approximately $14 million, compared to operating expenses of $7 million for the same period in 2009. For the nine months ended September 30th, 2010 our operating expenses were approximately $34.1 million, compared to operating expenses for the first nine months of 2009 of $19.9 million.

The main drivers for the increase in our operating expenses as compared to the same three month period in 2009 were higher research and development expenditures as we continue to fund product innovation and higher selling, general and administrative expenses as we continue to expand our sales and services footprint globally and increase our travel requirements and facilities.

In particular, during this past quarter we spent additional research and development resources on our try to qualify additional sources of component supplies, particularly in light of some supply shortages experienced during the third quarter. We also experienced higher sales and marketing expense with higher commissions due to increased revenues and additional hiring to establish our global sales marketing and servicing presence particularly in Europe and China.

While we expect, we will continue to hire and expand in these areas, we do not anticipate that the overall rate of increases in either R&D or sales and marketing over the next few quarters will be at the same rate as experienced over the past few quarter and we expect that we’ll continue to expand our operating leverage.

During the quarter, the company generated positive operating income of $1.7 million compared with operating loss for the same period last year of $7.4 million. This positive operating income signifies an important inflection point for the company as we continue to drive towards greater profitability and cash generating operations.

With respect to non-operating items during the third quarter of 2010 we changed in the fair value of outstanding warrants generated a charge of $1.3 million compared to a charge during the third quarter of last year of $305,000 our foreign exchange gain year-to-date is about $25,000 as we have minimized our exposure to cost of foreign currencies including the Europe.

Net loss attributable to common shareholders for the third quarter of 2010 was $1.6 million and year-to-date was $17.3 compared to a net loss attributable to common shareholders for the same three month period last year of $8.6 million and the nine month period of $27.6 million.

On a weighted average per share basis, both basic and fully diluted we had a net loss of $0.02 per share this past quarter compared to a net loss of $0.12 per share for the same period last year.

Now turning to the balance sheet, we ended the quarter with $11.3 million in cash. Accounts receivable revenue in the third quarter were approximately $55.2 million up from $17.6 million at December 31st, 2009. of the $55.2 million of September 30th, 2010 accounts receivables approximately $7 million represented pre-bills on orders to be delivered and recognized as revenue in future quarters, which is also driving the increase in our current deferred revenues.

Inventory at quarter end was $28.4 million, up from $11.9 million at December 31st, 2009 as we ramp our increased revenue targets for Q4 2010. And of course the latest news from the company was the significant strengthening of our balance sheet with our recent equity offering, which rates $37.5 million in net proceeds for the company.

We have also recently taken a number of steps to streamline our capitalization structure. In early October, all of our Series B Preferred shares were converted to common shares, also as part of the equity offering our Series C Preferred shareholders agreed to convert their preferred shares into common stock, a transaction that was executed just yesterday.

As a result, our capitalization no longer include any preferred stock and now includes only common stock, common stock warrants and outstanding stock options. Our pro forma common shares outstanding as of today on a fully diluted basis using the treasury stock method and yesterday’s closing price is just over 134 million shares. We have of approximately 117 million shares of common stock, 11 million shares of common stock warrant and 6 million stock options.

More so importantly as a result of the conversion of the Series C Preferred stock, the company will not need to record any further non-cash charges after yesterday related to dividend, deemed to dividend and accretion related to these Series C Preferred shares after get to the close on October 27 and the conversion of these shares.

For the fourth quarter of 2010, one month worth towards the non-cash charges related to the Series C Preferred stock along with the consideration of $1.25 million paid to the Series C Preferred shareholders as an inducement for them to convert their shares as part of our offering will result in a charge of approximately $1.9 million on our earnings attributable to common shareholders during the fourth quarter of 2010.

Thereafter, starting in Q1 2011, there will be no similar drag on our earnings. These charges cost us $0.02 per share this quarter and have cost us $0:07 per share for the first nine months of this year.

With that I’ll turn it back to Steve.

Steve Rhoades

Thanks, Don. And with that I will ask the operator to open the call for questions. Operator?

Question-and-Answer Session


(Operator Instructions) Our first question is coming from the line of Adam Krop with Adour Capital.

Adam Krop – Adour Capital Investment

Hi guys.

Steve Rhoades

Hey Adam.

Adam Krop – Adour Capital Investment

Could you elaborate a little bit more on the seasonality you mentioned in the first half of 2011? So are you expecting shipments to be up in 1Q, versus 4Q? I know, looking back you’d in the last couple of years, shipments were kind of down about in that 20% range, can you just elaborate a little bit more?

Don Peck

Right now, what we see is, no slowdown as we move through year-end. So, we are certainly not looking for any seasonal dip as we go through Q4, Q1. We are actually looking for revenue to be up as well.


Thank you. Our next question is coming from the line Dale Pfue with Cantor Fitzgerald.

Dale Pfue – Cantor Fitzgerald

Yes, congratulations on a great quarter, great outlook, gentlemen.

Don Peck

Thanks Dale.

Dale Pfue – Cantor Fitzgerald

Could you talk a little bit about the competitive dynamics out there? What you are seeing in terms of pricing in the various geographies around the world?

Don Peck

Well, we’ve been providing, high value system solutions in the markets that we served and they are all competitive and large multi-megawatt deals are done at smaller, at higher discounts and the smaller deals, but with all of that, we’ve seen our price per watt has held up pretty flat quarter-over-quarter, because of the value of the solutions that we’ve been able to provide.

So, and I think that, we’re going to see price per watt when you are doing a multi-megawatt deal that’s going to be lower than we were doing say, 200 – more than 250 kilowatt roof. But overall as a company, we’ve been able to hold our revenue per watt, pretty well.


Thank you. Our next question is coming from the line of Joe Maxa with Dougherty & Company.

Joseph Maxa – Dougherty & Company

Thank you. Can you give a little more clarity or color on your gross margin range for Q4? What may happen to be at the low end or what may happen to be at the high end? And then also what are some of your – or what would be your longer term gross margin target? Thank you.

Don Peck

Let me take the last question first. We think we can drive margins in the mid-to-high 30’s that’s been our goal for quite sometime and we are on that. We think we’re continuing to be on that task. If there are issues through the quarter that that can impact the gross margins, there are some tight flats on your supply chain, which had led to a little bit of increased costs in terms of material costs. I mean, logistics and other non-standards that can move our margin around.

So, we are working hard to drive margins higher everyday in the company, but there are some moving pieces that can be changed when we land in that range.


Thank you. Our next question is coming from the line of Ahmar Zaman with Piper Jaffray. Please state your questions.

Sean Wieland – Piper Jaffray

Hi there, this is Sean for Ahmar. Just wanted to come back to the pricing question and just get a sense of how you guys see the pricing trending in 2011, if you can give us any sort of visibility on what you are seeing at this point?

Steve Rhoades

Our goal is to continue to drive our own cost down and to be profitable at competitive levels of price. But it’s also the case that we are trying to expand our solutions into the array where products like the Solstice, in the DC converter and smart sub-combiners that’s associated with that, which increases the amount of the product that we can sell into the same site with products like our Prism solution that allows us to include medium voltage transformers integrated in with switch gear and with our central inventers to integrate the factory.

So, the central inverter market is certainly going to see some pressure, it’s hard to quantify right now. But we will see some pressure as we look into next year, but our overall opportunity into large multi-megawatt plants is increasing. And so we can hold our revenue per watt or even increase it as we look into next year, because the breadth of our solution is wider as we look at these big multi-megawatt plants.


Thank you. Our next question is coming from Pavel Molchanov with Raymond James. Please state your question.

Pavel Molchanov – Raymond James

Thanks for taking my question. Good quarter, I wanted to go to your projection that you will have 20% market share at 250 KW plus in 2011. Can you just go over some of the underlying assumptions behind that forecast?

Steve Rhoades

We are taking research, primarily from one of the research crews we work with. IMS Research on their expectation for the global market in 250 and above they also have some projections from other analysts that follow-up on the side with that market and we stack that up against our shipments to-date in our bookings but we expect to ship for the rest of the year and we get a number north of 20%. So it’s really based on the analyst research out there. But we are following in our own internal shipments and the bookings we have for Q4.


Thank you. Our next question is coming from Colin Rush with ThinkEquity Partners.

Colin Rush – ThinkEquity Partners

Thanks so much and congratulations guys on the phenomenal growth. Can you talk about the response time of your MPPT products? Efforts are making on improvements there as well as your expectation for expanding functionality, the substring control and the beginning of interaction with larger control equipment on the grid such as substations and transformers?

Don Peck

Sure. So with respect to MPPT, one of the really interesting advantages of the Solstice architecture by pushing the optimization out to the, out to the string levels. We’re seeing much faster response times with respect to changes in radiant that’s the string level package. If you look at in a radiant’s monitor mounted up to the level of the string and then track the performance of the power output out of the string, they track almost exactly. Its’ a big advantage for us and it’s an additional pick up we see from the distributed MPPT architecture that we have with Solstice.

So that is a really interesting change in fact, actually a little bit beyond what we thought we were going to get when we introduced the Solstice architecture.

With respect to the medium voltage interconnection, we’re introducing the features that our utility clients are looking forward for utility solar connection then we just introduced automatic voltage regulation per the standards that came out of PG&E for the CalRENEW site we did out at Mendota, California.

We introduced the site controller for that particular site that manages the overall plant. The Equinox product and the Solstice product has been a quick kind of standard with power vacuum control and with the ability to do harmonic injection that we’ve had in all of our products and we’ll continue to have state to interface, we can interface it with many utilities, communication schemes. So we’re trying to provide the products and the solutions that are clearly going to be necessary to meet the demands of our utility scale clients.


Thank you. Our next question is coming from Jesse Pichel with Jefferies & Company. Please state your questions.

Jesse Pichel - Jefferies & Company

Good morning, Mr. Rhoades, Mr. Peck. Congratulations on the progress. I have two questions. First, can you give us some color around the lead times of IGBTs and capacitors? And when do you think the shortage can ease to allow higher gross margins? My second question is, we recently visited the 20 megawatt Xunzhou plant in China using your inverters and we were told that GCL’s quoting on a gigawatt in China. So my questions there are, is GCL obligated to use Satcon on this potential gigawatt pipeline? And in general, what are your expectations around the GCL pipeline in China and abroad? Thank you.

Don Peck

Thanks, Jesse. With respect to the supply chain and in particular power chip components, we’re seeing the manufacturers parts of components add capacity and try to meet the demand that surprised then in particular with the solar industry this year. We’re working closely with several manufacturers who are working add capacity both for IT manufacturing and for packaging instead using their complicated packages.

So I expect the supply chain to free up a bit at the hiring for the higher power module keys that we employ for our large inverters as we move into Q1 and in Q1 we are still working hard against some shortages here in Q4. But, I think by the end of Q1 we’ll see supplies ease up. With respect to other components like AT film caps and fuses some of the contactors and breakers we are qualifying for exchanging resources, at the moment we’ll have second sources for all of our patterns by the end of the second quarter and that’s greatly eased our supply chain issues in those particular areas.

We have secured the supply. We believe we are going to require to deliver on the revenue that we’ve guided for Q4 of $70 million to $75 million. So we are in good shape to deliver on what we’ve provided for guidance.

Turning to the question on GCL and they are large pipeline. GCL was the largest integrator in China. They’ve got a really solid background for pipeline of projects that they are working on. They are standardized on the Satcon PowerGate 500 kilowatt inverter for their projects, they are not obligated to use it for all of their projects, but the contract that we have with them for the managing factory there is a minimum take of 25 megawatts a month once that factory is up and running.

And the factory will be sized at 500 megawatt annual initially, but the building the stake that we are working with them on for the factory can be double that capacity after a gigawatt annual capacity. So if we need to take capacity up to meet the demand for their pipeline in China, we can do that relatively, rapidly.

We are also working with GCL outside of China and they have a strong pipeline of projects here in the U.S., in Southern Europe and in other locations here on the world. So, it’s a solid partnership for one, one we have high electrifications for as we look in the next year.


Our next question is coming from Scott Reynolds with Stifel Nicolaus.

Scott Reynolds – Stifel Nicolaus

Good morning everyone. First, I wanted to get some a little bit of clarity on the quarter being up following the first quarter sequentially, typically there is a 20% to 30% drop. I just want to clarify, do you think the quarter is going to be up or flat or not as down as much as normal? And then the second question, could you go over the implications for GCL to revenue or margins just a bit? Thank you.

Don Peck

Sure, so we are not expecting a dip at all in Q1. We are not providing revenue guidance right now for Q1. But we expect Q1 to be up relative to Q4. With respect to the detailed margins, the nature of the deal is that, they are providing, they are purchasing from us products and services that are lower in cost than, for inverter if they purchase them from us, but the margin dollars we receive for the inverter is roughly the same.

So the gross margin for the products that we are producing in the Nanjing factory are at considerably above the target margins for the overall corporation. So it’s a good deal for us to take some reduction on the top line associated with that deal. But it’s a very high margin deal for us and it’s good for us to see what their gross margin performance is looking out into next year once that’s up and running at full speed. But the factory is going to start producing product in March.

I wouldn’t expect it to be fully at 25 megawatts in the first month, but GCL – if you’ve seen the plant in China and see that factory can put them in grid that serves and I expect that factory to come up quickly and get to the 25 megawatt per month minimum take that we’ve contracted with them.


Thank you. Our next question is coming from Edwin Mok with Needham & Company.

Edwin Mok – Needham & Company

Thank you, for taking my question and congratulations for the good quarter. Just a question on this pricing. I think one of the answer you mentioned that you think central inverter market will be seeing some pricing pressure in the New Year. I was wondering that comment, where did that come from? Do you think that comes from just general market trend? Or is that a supply chain easing or that increased competition give a little more color about that, tell us about you? And then just quickly on the Solstice and also Prism product although they are adding more value to the customer anybody can quantify how much incremental dollar per watt or in terms of percentage let’s say it, that you can generate form those products versus PowerGate?

Don Peck

Sure, thanks for the question Edwin. What I mean primarily on the prices that projects are getting bigger. If you actually look at the larger projects, they are done in tens of megawatts. And so we have done those, slightly higher discounts that we see larger and larger projects

Large projects are making up an increasing traction of our overall business and so that where I feel some pressure. But as a counter to that and as a serious counter to that, as we look at the fact on the overall business, if I look at the opportunity say at a 10 megawatt plant…

If I look at the opportunity saying at 10 megawatt plant, if I just look at the central inverter opportunity, if we can pair that to the opportunity we would have with Solstice, with our distributed AC to DC converter string level and the Smart Subcombiners that those are build into. If I look at the essential inverter integrated in with the Prism platform with switchgear medium voltage transformer pre-integrated at the factory.

If I look at site controllers for a 10 megawatt plant, for the monitoring well station the suite of products that we are offering, our revenue opportunity in that 10 megawatt plant is roughly double what it was that we’re just offering the central inverters.

So, we are the solution provider, we provide project design services, we provide commissioning services that we are beginning a plant ongoing O&M and so extended warranties up to 20 years or even for up to a 99% uptime guarantee. Our total suite of solutions from panel to grid and still widely a plant can thus double our opportunities inside the 25 megawatt plant.


Thank you. Our next question is coming from Carter Driscoll with Capstone Investments.

Carter Driscoll – Capstone Investments

Good morning John and I had a quick question, one of the tickets got back and gets you take the regulatory environment, maybe you could give me your perspective on comparing the United States versus Europe there is a huge changed environment versus maybe the potential that prop 23 passes on the California Power’s initiatives and how that may or may not affect the demand growth in those respective markets?

Steve Rhoades

It’s a great question. So, I think that we’ll continue to see that the European markets will be in total the largest markets in the world that compete in tariff with fiercely powerful incentives we see strong markets in Italy, France, and even continuing in Germany next year for the infill for ground mounted and for the largest commercial in a very robust pipeline of projects in Germany.

So, despite the changes that we see in tariff in Germany, despite some drops in other countries, our pipeline of projects in Europe has grown significantly and we’re expecting growth next year for our business in multiple countries in Europe. With respect to the U.S., what I’m saying in the business in terms of large multi-gigawatt project is, people has figured out how to view these projects. If we look at the combination of the ITC, sophisticated project developers coming in and some using large solar power plants.

We have banks interested in these deals, the returns are such that there are equity players that want to come in. But people have figured out how to view these deals, certainly prop country wont be, it’s not a good thing. But I don’t think it’s going to in anyway show the business here for solar in the U.S. There are many, many, multi-megawatt plans that will continue to be built both in California and especially outside of California, it looks like changes there in their regulatory structure. So, we see next year as a low year, as we look into all three of the major markets that we serve.


Thank you. (Operator Instructions).Our next question is coming from Aaron Martin with AIGH Investment Partners. Please state your question.

Aaron Martin – AIGH Investment Partners

Hi guys, congratulations on the progress here. I just want to see you guys give a little more clarity when you talk about Europe and I knew seeing the growth rate not declining, is this way that the backlog numbers in the last few quarters and as a percentage of the backlog Europe is down. In dollar number is down slightly. So, what are we talking about when you say, the growth rate not declining, what’s the basis what’s not declining off of what type of rate are we are talking about?

Don Peck

Well, this is Don Peck, well the growth is going down they are certainly on a much higher backlog number.

Aaron Martin – AIGH Investment Partners

Growth is, I mean just, we are going to relative to – we don’t know relative to last year are we talking about some relative to the last few quarters?

Don Peck

Relative to the last few quarters; North America has grown even more quickly.

Aaron Martin – AIGH Investment Partners

Yeah, that I understand; I am saying, but even you’re saying, just using the quarter-end backlog numbers of 15 of 93 and 13 of 82, was the number it was, you are still slightly even, slightly lower even dollar number, such as what am I missing?

Don Peck

We may have to just go and dig here, but on a dollar basis and a megawatt basis, our European shipments and our European backlog have grown quarter-over-quarter and we just have to get offline with you and go through the numbers with you. But we – more carefully – I thought it was. If you can, the exact numbers that are you looking for, but we have seen both dollars and megawatts increased, percentages maybe different because…

Aaron Martin – AIGH Investment Partners

Yes, all the three I mean North America…

Don Peck

Exactly, so if North America grows faster it becomes the bigger part of the backlog. But so the shifting in the mix is the effect between quarters, but the dollar amount, certainly have gone up dramatically quarter-over-quarter in each geography.

Aaron Martin – AIGH Investment Partners

Got it. And just quickly I was still working for an overall first, second half of 2010 gross margin over 30%.

Don Peck

We are working to increase gross margins going into next year. We were guiding 28% to 32% here in the fourth quarter and we think long term our margins are in the mid-to-high 30s and we reached almost 30 on the product lines and it’s certainly going to be a hard drive for us to be above 30% over the first half of next year. That’s the only guidance we are providing right now, as for 28% to 32% for the fourth quarter.


Thank you. Our next question is coming from the line of Dale Pfue with Cantor Fitzgerald.

Dale Pfue – Cantor Fitzgerald

Just kind of a housekeeping question Don, earlier on could you give us the prices for those warrants and options outstanding?

Donald Peck

Sure, the warrants, it’s a range of, exact prices on the notes are between $0 and $2.43 and the average expected price of stock options is $2.09.

Dale Pfue – Cantor Fitzgerald

Great, thank you.

Donald Peck

It’s my pleasure.


And our last question is coming from the line of Robert Littlehale with JPMorgan. Please state your question.

Robert Littlehale - JPMorgan

Good morning. I think your headcount was 291 at the end of the second quarter. What is it now?

Steve Rhoades

At the end of September, we were 358.

Robert Littlehale - JPMorgan Securities

358, and as you continue to expand globally, is it trend toward direct sales or joint ventures or how are you sort of building that out?

Steve Rhoades

We have a multilevel selling model for most of our large customers. We use direct selling model on a very high touch. But we are moving a significant fraction of our customers into our strict distribution partners and we have very strong distribution partners like EG Power and Sunlight here the U.S. developing those distribution partners and Europe and China. So most of our sales will continue to more with the direct selling model.


Thank you. As this does brings us to the end of the Q&A session, I would like to turn the floor back over to management for any closing remarks.

Steve Rhoades

Thank you, operator, and thanks for everyone for joining us today. We look forward to speaking to you on our year-end 2010 conference call and this will end today’s call.


Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.

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