MEMC Electronic Materials CEO Discusses Q3 2010 Results - Earnings Call Transcript

Nov. 2.10 | About: SunEdison (SUNEQ)

MEMC Electronic Materials (WFR) Q3 2010 Earnings Call November 1, 2010 5:30 PM ET

Executives

Timothy Oliver - Chief Financial Officer and Senior Vice President

Kurt Bruenning -

Ahmad Chatila - Chief Executive Officer, President and Director

Analysts

Atif Malik - Morgan Stanley

Stephen Chin - UBS Investment Bank

Nimal Vallipuram - Gilford Securities Inc.

Sanjay Shrestha - Lazard Capital Markets LLC

Vishal Shah - Barclays Capital

Krish Sankar - BofA Merrill Lynch

Edwin Mok - Needham & Company, LLC

Gary Hsueh - Oppenheimer & Co. Inc.

Timothy Arcuri - Citigroup Inc

Jesse Pichel - Jefferies & Company, Inc.

Satya Kumar - Crédit Suisse AG

Christopher Blansett - JP Morgan Chase & Co

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MEMC Third Quarter Earnings Conference Call. [Operator Instructions] I'd like to now turn the conference over to our host, Treasurer of MEMC, Mr. Kurt Bruenning. Please go ahead.

Kurt Bruenning

Good afternoon. Thank you for joining the MEMC Third Quarter 2010 Earnings Conference Call. With me today are Ahmad Chatila, President and Chief Executive Officer; and Tim Oliver, Chief Financial Officer;

Before we begin, please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. These risks are described in the earnings release published today and in our 2009 Form 10-K. As a supplement to this call, we have provided slides on our website that will provide more detail regarding the quarter. Please go to the Investors section of memc.com for the slides.

I will now turn the call over to Ahmad for his opening remarks, and then Tim will review the financial results. Ahmad?

Ahmad Chatila

Thanks, Kurt. Good afternoon, everyone. I'm pleased to report another quarter of continued sequential improvement in our performance. All of our divisions are making progress. The strategic and operational actions we have taken to reposition our company, change our risk profile, improve predictability and strengthen our business continue to show results. They are positioning us for improved long-term performance. In addition, the synergies that we expected between our three business units are materializing.

I expect we will see further gains in Q4 and in the first half of 2011, but we still have a long way to go.

Our performance in Q3 provides further evidence that our efforts are on track. First, we are repositioning MEMC for rapid growth and to control our own destiny; second, costs are being taken out of our system to drive better margins and higher earnings; and third, the customer remains our number one focus as we work to fuel their growth.

I'll provide a few comments on each business unit and Tim will provide financial details in his remarks. In our Semiconductor business, demands for our products were solid. We are seeing high selling prices and we're achieving productivity gains. Customer momentum is good, held by strategic actions that we began last year, which we are positioning to show us continued improvement to our results in 2011 and beyond.

But we're not satisfied with our current levels of productivity. In our Materials business, Solar Materials business, I'm pleased to report that supply-chain actions and higher selling prices are providing a catalyst for continued margin improvement. Selling prices are solid in the short to medium term, but we're taking actions to ensure that we are prepared for any sudden changes in end demand.

We are achieving lower costs on wafer tooling partnerships and higher polysilicon volumes. Our new solar wafer facility in Kuching, Malaysia is on track and we're sending samples from our product line.

We expect a meaningful financial impact in 2011 as the facility ramps commercial production. In addition, Solaicx, our business broadens our product offering into fast growing monocrystalline solar markets. We are currently investing in growing this business, which was added to MEMC at the right time.

These investments will result in some short-term headwinds for the numbers in this business, but I've no doubt that this acquisition will provide real value to shareholders in the medium to longterm. The Solaicx technology is truly unique and value-added, and product demand is very strong. The acquisition will be accretive to earnings in 2011.

The SunEdison business cut the second half of the year off to a strong start and is executing on a strong second half ramp. SunEdison added 10 megawatts of new products to its portfolio to energy producing assets. We've been adding about 40 megawatts a month to the pipeline, which now stands at over one gigawatt, but we continue to be disciplined in our approach to growing the business and lowering risks. And our working capital in this business to a large extent is being financed through an efficient supply chain, not the MEMC balance sheet.

During the quarter, SunEdison announced several international and domestic solar projects. And that momentum and good news carried in the beginning of the current quarter. In early October, we announced the sale of 70-megawatt Rovigo solar power plant in Northeast Italy. When completed, later this year, this plant is expected to be the largest operating solar power plant in Europe. And while it is a large project, it's only the beginning of the major expansion to come at SunEdison.

As I mentioned a moment ago, our divisions are working very well together. A few examples of the synergies include research and development in the Semiconductor business, the supporting solar materials with differentiated product offerings, polysilicon can be allocated between the businesses for efficiency and costs are amortized across larger volumes. Solar Materials is utilizing industry relationship to help SunEdison procure margins more cost effectively and they are now working with cell and module companies on novel product ideas for SunEdison's use. And finally, SunEdison is accelerating Solar Materials customer penetration and market position.

In closing, I'm pleased that we have reported another quarter of steady progress. While we have a long way to go before I'll be satisfied with the absolute level of results, our strategic initiatives are beginning to bear fruit and will show results in 2011 and beyond.

With those opening comments, I'll turn the call over to Tim. Tim?

Timothy Oliver

Thanks, Ahmad, and thanks to all of you for joining us this afternoon. My comments today will reference the charts provided on our website, which both summarize the data provided in the press release and its attachments and provide additional analysis. Since Kurt has already reviewed the cautionary Safe Harbor language, I'll move right to Page 3 entitled Q3 Summary GAAP Results for MEMC.

Walking down the income statement, revenue in the quarter was $503 million, an increase of 12% sequentially. Higher revenue is due to higher pricing in both of our Materials business, accompanied by higher solar wafer volumes and partially offset by lower direct sales in SunEdison.

Year-over-year revenue was up 62% or 55% when adjusted to exclude the acquisition of SunEdison last year. Wafer volumes in both of our Materials businesses were up significantly, while pricing was up double digits in Semi and down modestly in Solar.

Gross profit rate decreased by about 30 basis points sequentially, but increased over 10 full points versus last year to 16.9%. We'll discuss the profitability of each of the reported segments in a couple of slides. But in general, profitability in our Semiconductors Materials business is improving in concert with volume-driven productivity and improved pricing.

At Solar Materials, favorable pricing and productivity continued to be partially offset by higher wafer tooling costs at our subcons. And at SunEdison, the margin rate was above its typical run rate due to a higher energy revenue mix.

Continuing down the P&L, operating expenses were $75 million, down about $11 million sequentially due largely to the absence of divesting of some past large equity grants that occurred in the previous quarter. Year-over-year OpEx was down $12 million driven by the lapping of a large restructuring charge taken in Q3 of last year, offset by the acquisitions of SunEdison and Solaicx, and by incremental expenses to support the rapid growth in both of our Solar businesses.

Other income and expense flipped to an expense of $5.2 million from income last quarter. The change is attributable to the absence of gains in the sale of fixed income investments we recognized in Q2. The net expense in Q3 is more reflective of a typical quarter going forward, where interest income only partially offsets the lease and interest costs incurred on our own Solar Energy assets.

In the Suntech warrants, having caused more than $12 million of non-cash reductions to earnings in the first half of the year, did have a slightly positive valuation adjustment in this quarter. While we don't include the fluctuation of another company stock in our guidance or planning, the value of these warrants now reflect in our books is very low and the valuation risk from here remains limited.

The tax volumes or the tax benefit relative to the modest pretax income we recognized in Q3. Similar to the first half of this year, we continue to benefit from a favorable mix of losses in high tax jurisdictions, partially offset by income and low tax jurisdictions.

Equity and earnings of JV and minority interest was a $900,000 loss and represent the distribution of interest to partners across all three of our segments. The walk completes at the bottom of the page with an EPS of $0.08 a share.

Turning to Page 4, entitled non-GAAP Reporting Rationale. As we've described previously, GAAP accounting and more particularly, real estate accounting within GAAP, can cause a significant dislocation between our reported GAAP results and the actual operational performance at, and the cash flows generated by our SunEdison segment.

In general terms, because we often procure the land for a project and because the equipment is deemed to be integral to the land on which it sits, and because we often have an ongoing relationship with these plants through an operations and maintenance contract, many of our projects, both direct sales and MEMC finance projects, are required to be reflected under real estate accounting.

To better describe the operational performance and cash profile of SunEdison and to provide increased transparency, we're introducing a new non-GAAP adjustment to revenue and profit this quarter. This adjustment essentially treats all direct sales and sale-leaseback transactions as if their current period sales under traditional SAB 104 revenue recognition. This adjustment is entirely contained within the SunEdison segment, and we are not seeking relief for non-cash items like stock option expense or acquisition accounting.

It's also very important to note that we expect the non-GAAP EPS to approximate GAAP EPS over time, meaning that they are likely to be quarters in which non-GAAP results are lower than GAAP results.

Moving to Page 5, titled SunEdison non-GAAP accounting adjustment. We've provided detailed walk to the two different types of adjustments. From the condition that caused the application real estate or lease accounting on the left-hand side of the page to the GAAP treatment in the middle of the page, and then finally, to our non-GAAP treatment in the right-hand side.

The first adjustment is the Solar Energy system direct sales that are deemed to be integral to the land in which they sit, and are therefore, real estate transactions. Under GAAP real estate accounting, all contingent obligations or guarantees, regardless of how remote the probability of occurrence might be, must be reserved a maximum potential impact.

So a typical commercial terms in solar power plant sales, like two-year energy guarantees or long-term operation to maintenance agreements with uptime warranties, will cause a substantial portion of the revenue and nearly all of the profit to be deferred for the life of the guarantees or the contracts, while all of the costs are recognized today. Our adjustment will determine a sale based on SAB 104 terms and we'll pull those deferrals back to the current period.

The second adjustment similarly attempts to reflect the sale of these leaseback transactions, which is a preferred and lucrative structure particularly in the U.S., as a direct sale. The adjustment to revenue reflects the price paid for the system by the financing party and the profit adjustment is a difference between that price and our cost to build the system.

The energy produced by the system is then deemed sold and is reversed out in future years. Any future period excess revenue or profit from extraordinary energy production or energy credit valuation or terminal value benefit, all of which would be over and above the original sales contract, will be recognized in the period that they occur.

Again, in both instances, the adjusted approach better aligns P&L optics with the cash flows and better describes the operational performance of the SunEdison unit.

Page 6 is titled GAAP to non-GAAP Reconciliation and is the last page of the SunEdison accounting tutorial. It provides a walk of our Q3 results for both SunEdison and the total MEMC from GAAP to this new non-GAAP metric. The non-GAAP adjustment adds $47.7 million to revenue, including $7.4 million for three direct sales in Italy and $40.3 million for sale-leaseback transactions. The adjustment also adds $6.8 million of segment margin, including $1.3 million in direct sales and $5.5 million from sale leasebacks. Because we don't allocate taxes between our operating segments, the tax effect is reflected in the total MEMC column.

The next several slides provide a little more color on 2010, both performance to date and our expectations for the fourth quarter. The summary results slides provide a rolling five-quarter look at sales and segment margin, except at SunEdison, where we only include data from the post acquisition periods.

We also refreshed the second half outlook slides that we used last quarter to update you on our progress against those slides. So on Page 7, Q3 summary results for Semiconductor Materials. In Q3, the Semi business continued to deliver steady upward progress. Revenue increased more than 50% year-over-year and 5% sequentially.

The sequential improvement was entirely attributable to higher pricing, while year-over-year, both pricing and volumes were significantly higher. And from a profitability perspective, excluding the $8 million benefit from the insurance recovery in last quarter, the Semi material segment margin increased by $10 million or by about 350 basis points sequentially. The improvement was primarily attributable to the better pricing.

On Page 8, 2010 outlook update for Semiconductor Materials, we republished a chart from last quarter on our second half outlook and added notations to show progress in the third quarter. On the revenue side, while the market environment does feel a little less heated and demand is a little less uniformly strong, our fourth quarter still looks to be on pace for record production volumes and another quarter of modestly higher pricing.

From a profitability standpoint, our outlook on pricing remains favorable, our repositioning efforts continue, but our cost productivity is lagging. We expect margin to continue to improve and to extend the march toward our longer-term average, but they will not achieve those levels this year. We still have a lot of work to do in 2011 to get profits in this business back to where they used to be.

Next. Moving to Solar Materials on Page 9. Q3 summary results Solar Materials. Revenue in this segment increased 31% sequentially and 63% versus the prior year. The sequential improvement was driven by significantly higher wafer volumes and modest pricing improvements.

Year-over-year revenue was up due to dramatic volume increases and partially offset by slightly lower pricing. Segment margin increased sequentially, as higher prices allowed us to maintain the spread with the wafering subcontractors in the quarter.

Our efforts in Q2 to diversify our supply base, build flexibility into our supply-demand equation and for mutually beneficial partnerships, all helped to keep the price cost dynamic in check.

Excluding the $4 million insurance recovery in Q2 and a mildly dilutive effect of the Solaicx acquisition in Q3, the Solar Materials segment margin increased about $7 million or 130 basis points. On Page 10 then, 2010 outlook update Solar Materials, you'll see that we remain confident in our second half outlook that we communicated last quarter.

On revenue, we still expect to see increasing wafer volumes along with modestly higher average prices. And our profit, all of our efforts to improve wafer cost to diversification and partnering, coupled with driving lower poly costs are paying off and will pay off.

On Page 11, entitled Q3 summary results for Solar Energy or SunEdison. Turning to SunEdison, there's two important things to note about this page. First, it depicts the impact of our non-GAAP metric. All metrics on this page are non-GAAP. And second, we received no P&L credit in the third quarter for the Rovigo project under either GAAP or non-GAAP treatment.

Despite the fact we reached definitive agreement to sell this project and collected $68 million from the eventual buyer, and completed 65% of the construction, we did not have a good revenue event even under SAB 104, and therefore, we did not include any non-GAAP impact.

SunEdison revenue was up sequentially to $69 million in Q3 on a non-GAAP basis from higher sale-leasebacks and energy revenues partially offset by lower direct project sales. Segment margin increased $1 million to break even versus a loss of $1 million in the quarter before. And operationally, SunEdison completed and recognized 29 megawatts year-to-date and is 155 megawatts currently under construction and not yet recognized, including the 70-megawatt Rovigo project.

Moving to Page 12, titled SunEdison pipeline. Along with the introduction of our new SunEdison-centric non-GAAP measure, we're also adding pipeline this quarter as an important disclosed metric. While the non-GAAP P&L helps describe the operational performance of this business, pipeline will help illustrate the selling, marketing and branding successes of this business.

Our strict qualifications for inclusion may cause this metric to be lower than we could otherwise report, and may disadvantage us in comparison to others with more liberal definitions, but it assures a very high-quality pipeline.

In order to be included in our pipeline, we must have a signed power purchase agreement, or a grid interconnection point with all the permitting in place or a signed development agreement with negotiated terms and conditions. Even though we've announced some large wins recently, we did not include them in this metric, because they don't yet meet that hurdle. Over the course of this year, we've added about 40 megawatts a month to our pipeline, increasing it by 56% and the rate of that improvement is accelerating.

On Page 13, 2010 outlook for SunEdison. All of the green checkmarks are meant to mean, they were well underway to delivering a very strong second half at SunEdison. During Q3, we closed important financing arrangements with both JPMorgan and Bank of America. We built pipeline and developed key international relationships that will generate pipeline in the very near future. And of course, we made tremendous progress in the Rovigo plant.

Last week, we closed a six bank syndication of the Rovigo debt. On Saturday, we achieved interconnection. And today, we began sending energy into the grid. The initial economics of this transaction are now determined and the push to final funding of the debt is on schedule.

So on to Page 14, free cash flow walk 2010 Q3. In order to provide more clarity and to differentiate between the two very different capital models and cash flow characteristics of our Materials businesses versus SunEdison, we've broken out the cash flow walk into these component parts.

In Q3, cash usage was $28 million as cash outflow for capital investments to support future growth outpaced cash inflows. During the third quarter, we generated $52 million of cash from operating activities, the major source of operating cash in this quarter were improved working capital management and the cash received from the Rovigo sale as illustrated by the increase in inventory of $195 million offset by $146 million increase in payables and the $68 million received from the buyer and hung up as deferred revenue on Solar Energy systems.

Moving to investing activities. We invested $96 million in capital expenditures related to planned growth in the Semiconductor and Solar Materials business units during Q3. These investments will expand and debottleneck our polysilicon operations, expand our 300-millimeter Semiconductor capacity and enable our internal solar wafering capability.

Finally, the last major categories in analyzing our cash flow are related to the funding of the construction of Solar Energy systems and the eventual proceeds from financing these systems with non-recourse debt and capital lease obligations. The construction of Solar Energy systems use $66.9 million in the third quarter. These are projects that the company does not currently plan to sell, but rather to finance through either sale-leaseback or some other form of non-recourse debt financing.

During Q3, we were successful in supporting most of our balance sheet projects with project finance capital. We execute offtakes from the financing that generated $85.2 million in cash flow, the net of these two items in the third quarter resulted in a net cash inflow of $18.3 million.

Moving to Page 15, free cash flow walk for the 2010 year-to-date, provides the same information but for the year-to-date. As of Q3, we've generated positive cash flow from operations of $61 million. Improved profitability and a better supply chain management at SunEdison has been sufficient to fund our working capital investments and to support our rapid growth.

On the investing side, its evident that we continue to invest heavily in the future growth of the Semiconductor and Solar Materials businesses with $237 million of CapEx to date. For SunEdison, much like Q3, we've been successfully lining our project finance capital to support these balance sheet projects.

So before I open the call to your questions, I want to comment on our outlook for the remainder of the year. While we intend to provide both GAAP and non-GAAP guidance for 2011 on our next call, and while we do not intend to make a habit of providing specific quarterly guidance, we do know that those of you who build quarterly financial models need some help bridging the next couple of months. With three quarters of the year already in the books and considering the complications caused by both the impact of real estate accounting and the back-end loaded revenue recognition pattern at SunEdison, we think it appropriate to suspend our annual EPS guidance that we've provided in January and provide a new outlook that covers only the remainder of this year. So as I described briefly earlier, in the Semiconductor business, modest increases in both prices and volumes will drive sequential improvement in profitability very similar to the sequential improvements this business has posted in each of the previous quarters this year. That being said, despite improving over 20 full percentage points this year, margins rates will fall short of our previous expectations. Reinvigorated productivity efforts and further global repositioning will be necessary to get margins in this business back to where they used to be.

In solar, substantially higher volumes, higher prices and for the first time all year, lower wafering costs, will, together, likely result in a very strong quarter. And in fact, could result in revenue and segment margins being similar to that generated in the Semiconductor business.

And SunEdison expects to close over 120 megawatts in the fourth quarter and to deliver an exceptionally strong quarter that will include the entire financial benefit of the Rovigo transaction. While we expect to get this project closed and recognized in 2010, and our work will be done, this is a large complicated, multiparty transaction and events outside our control could cause financial close in this project to slip into early next year. Taken together and assuming Rovigo remains a 2010 event, the results we expect to report on a non-GAAP basis will be very strong. But the impact of real estate accounting on the SunEdison business will likely have a significant impact on the GAAP OpEx of that business, and therefore, on MEMC. I hope that helps and we're now ready to take your questions. So Anne, we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Stephen Chin with UBS.

Stephen Chin - UBS Investment Bank

I'm just a little confused on what you think this possible sales range can be for SunEdison? I know you said 120 megawatts, Tim, but does that suggest SunEdison's revenues in the fourth quarter could range anywhere from $300 million to $400 million?

Timothy Oliver

Yes. So let's do it this way. I think, of the 120 megawatts, about 90 megawatts will be direct sales. So that's Rovigo and some other projects. There are also some sale-leaseback transactions in the quarter that make up most of the remaining megawatts. And our non-GAAP metric then, a great deal of that revenue would be pulled forward. So while the price in the U.S. is lower than it is outside the U.S., I think you're on to something. You take the 120 megawatts, you multiply that by an average selling price and you get to a very large revenue number that, on a non-GAAP basis, we would be able to deliver.

Stephen Chin - UBS Investment Bank

And then back on the question on the lagging Semiconductor for profitability that you called out. How much of that do you think is coming from continued underutilized capacity? Because if you look at the third quarter Semiconductor wafer trends, it looks like wafers starts in the quarter may have been up about 5% sequentially. But it looks like MEMC's third quarter wafer starts were flattish. So is there a possibility of MEMC is losing market share here? And is that what's causing the lower profitability?

Ahmad Chatila

It's Ahmad. The answer is no. It's not about market share loss. What's we're finding is, you go over a year and you improve the profit by 2,000 basis points, I think we're just -- we were expecting more, and I think it was unrealistic for us. So we're going to a point where we need to be a lot more systematic in our plans, like using lean methodology and reducing procurement costs in a very systematic and sophisticated fashion. We have a path. It's just not happening as fast as we'd like it to be. We expect, actually, our market share to continue to have momentum in the foreseeable future. We're limited actually by more capacity than anything.

Timothy Oliver

We asked an awful lot of this business this year, with record output, with moving equipment around the world, all the time when volumes were coming off a very low base, while their performance is very remarkable, our expectations perhaps outstripped to any organization's ability to execute against them.

Ahmad Chatila

I would invite you, Steve, to compare this business to other leaders in the industry. And you'll find out that they have caught up with the top player in terms of EBITDA and numbers like that. So just watch where they are, but we want them to be much higher, frankly, speaking, and we can. Especially with the move to Asia in our plants, and we will get there.

Operator

And next, we'll go to Sanjay Shrestha with Lazard Capital.

Sanjay Shrestha - Lazard Capital Markets LLC

One follow-up question on the SunEdison side, guys. So this 90 megawatt direct sales on a non-GAAP basis, so you will recognize the revenue, then we can basically sort of look at the clearing models, as you said, the ASP, here is the cost, and you will also be able to recognize, on a non-GAAP basis, all the profit in Q4. Correct?

Timothy Oliver

That's right. The most important of those, obviously, is the Rovigo transaction. As I said earlier, while we had success selling the project, we had tremendous success building the project this quarter. We did not have a revenue event. So we anticipate, upon funding the debt, to have a good revenue in that project and all of the profit on that project would be recognized in the fourth quarter. You also write that even in the absence of Rovigo, we will still have the busiest quarter of the year in terms of closing our megawatts.

Sanjay Shrestha - Lazard Capital Markets LLC

So how does it work for you guys now? And have you guys given some points to how to guide the Street about this? But non-GAAP conversions with the GAAP numbers over time, it will actually continue to sort of build the backlog. So how do you sort of plan to kind of help us walk through how exactly does this end up playing out over time?

Timothy Oliver

First, I think we'll continue to provide the GAAP and an GAAP numbers and help you with the walk between the two, because actually, a lot can be learned in the adjustment itself. Secondly, when we provide guidance, providing guidance by our three reporting segments would vary key. They're three very different businesses and certainly, they're different capital models. Then lastly, helping you translate our expectations of non-GAAP performance in SunEdison to GAAP performance, will have a lot to do with the mix of transaction that we expect in the year. So much like when we came into this year, we tried to describe how much would be direct sales versus sale-leasebacks. I think under this non-GAAP metric, we'll be able to get you closer to where we think. And of course, as the year plays out, then we'll have to update you as that mix shifts.

Sanjay Shrestha - Lazard Capital Markets LLC

On your Solar side of the business, with the wafering and the poly side, with bringing some of the JV on the wafering side, one comment I hear here, is everything sort of trended up, volume, price and lower processing costs and the less of the tooling fee. Shouldn't that continue the trend into 2011, especially on the lower tooling side? And could we see some significant progress there more than offsetting even the ASP reduction on the wafer front?

Timothy Oliver

The answer is absolutely, yes. But I'll let, Ahmad give you...

Ahmad Chatila

We're not giving 2011 guidance, but so far so good, at least for the first half between our own internal plan and one JV ramping and a couple of deals that we have not announced, long-range deals with cost-plus models. I think even if the price declines we're going to have expanded margins in the business. In the first half 2010, maybe even the second half.

Operator

Satya Kumar with Credit Suisse.

Satya Kumar - Crédit Suisse AG

Could you give us some clarity on the Semiconductor business, the pricing momentum has decelerated a bit in Q4. I know normally volumes with Semis are higher in Q2 sequentially due to seasonality. What do you will happen to pricing in calendar Q1? Do you see a scenario where pricing is down? And in terms of operating margin for the Semi business, you're now closer to 11%, I think, at the peak at the last cycle, you are probably approaching 30%. Given pricing is flattening out, capacity is fully utilized, cost reduction appear to be a bit behind plan. How much opportunity do you have to increase operating margins for the Semi business?

Ahmad Chatila

This is Ahmad. Let me try to answer your question. I'm going to be broad a little bit, so that you guys get a feel for the Semi business, since we sell in the range of 12 million, 12-inch wafers a year. I mean, you have to think about it this way, so we see everybody. One, I think the foundries and some of the memory companies are taking part a little bit. So the price on polished wafers is a little bit less than strong, but it's not collapsing by any means. Some people are talking about taking some annual maintenance in first quarter as well. MEMC in both segments is gaining share, so we don't expect to go backwards. The other segments are automotive, power electronics, analog companies, diversified companies, IDMs, those companies are doing so far, so good, especially on the IP. The price actually is higher. So in Q4, we expect the price to be up a little bit, and then first half of the year, could be flat to up, to down, one, two points, we're not sure. We have not finalized all the negotiations so far. From an operating margin perspective, the business has a shot at increasing, in percent term, by another 50 points over the horizon. And the way we're going to do it is through redeploying our factories in Asia and improving our product offering. So there's a lot of mix that we're going to play with in 2011 that gets us more profit, as well as, since our service is improving, our customers are seeing us more as a significant there. There used to be a big GAAP between our volume and our pricing. But for the last six quarters, we have not reduced pricing if anything, we've increased them for the last six quarters, and we're going to continue to do by showing a better service. So I don't know if I answered all your question but that's my perspective on the Semi business.

Satya Kumar - Crédit Suisse AG

Coming back to the topic on Q4, I think part of the reason, I think the reason why your stock is down is the lack of clear guidance in Q4. You've completed the Rovigo project, you have some of the energy, you are saying the economics are determinable. Given that the last couple of quarters, people have struggled with coming up with the right estimate for earnings and given the sensitivity to stop showing around in the hits and misses to consensus earnings. Why not, at least, consider providing at least a non-GAAP revenue guidance and non-GAAP sort of earnings guidance just for this Q4, until we have some better visibility on 2011, when you actually come one and give 2011 guidance. And on that topic of 2011, this 1,000 megawatts that you're talking about for the pipeline, how much of that do you expect will get completed in 2011?

Timothy Oliver

I'll let Ahmad take the pipeline. Let me take the guidance one first. The non-GAAP metric that we rolled out this quarter is a complicated one. It's going to take some time for people to understand and for us to help you learn it. The translation we needed to make this quarter, was from GAAP guidance that we gave in January that had modified twice before and that we had somehow try and translate that modification to a non-GAAP metric. We determined we would lose you in that transition. It was better to start fresh and to tell you what we thought would happen in the next 60 days of this year. I think if you go back, and you do the math on each of the Materials businesses that I just described, higher revenues, higher profits in each of those businesses and you go back and you take the 120 megawatts and you apply a non-GAAP metric to 120 megawatts and average profitability in that business, you're going to get to a revenue number that's in excess of $1 billion. And You're going to have a very good profit quarter for our company, the best one for the year by far, that's on a non-GAAP basis. The difficulty of understanding the fourth quarter is going to be the translation of the Rovigo project to a non-GAAP basis. And let me just make you suffer with me just for a second, the accounting here. The way this works is because we own the land of the Rovigo project, we're required to do a hypothetical deinstallation modeling effort to determine whether or not this project is integral to the land in which it sits, and whether or not it can be deinstalled and reinstalled somewhere else for less than 10% of the total cost for the project itself. Now despite the fact no one would ever do that and no one is willing to bid that, you have to go through that process. Once you -- if in fact you fail that test, which we will on Rovigo, because it's so very large and our costs are coming down, then you're forced to evaluate every guarantee that you make on the project, whether that be a two-year guarantee on power generation, which is for something very typical in our transactions, and in fact, we very infrequently miss those. In fact we intend to achieve about 104% of our energy output in the first couple of years and we like to have, we request to have a 20-year operation maintenance agreements, because we like to keep our hand in the mix in these projects, and it makes for more valuable project. When you do that, that's deemed to be an agreement that needs to be deferred. So you take the total value of each of those contracts I just described, and it causes you to defer at least 75% to 80% of the total profit on the project to periods two and 20 years out. So, having walked you through that, it's meant to say, we knew when we looked at that accounting, we must develop a non-GAAP metric. We must begin using it in 2011 but to translate it back across the previous nine months of the year would've been a long and arduous process. So we simply started clean and talked about the fourth quarter.

Satya Kumar - Crédit Suisse AG

In terms of the 2011 pipeline for SunEdison, did you give a number in terms of how much you expect it will be completed in 2011?

Ahmad Chatila

No, we have not given that number but I expect significant growth year-on-year. We will tell you that in February.

Operator

Now we'll go to Krish Sankar with Merrill Lynch.

Krish Sankar - BofA Merrill Lynch

Number one, Tim, on the real estate accounting of SunEdison, does it even apply to debt finance projects to SunEdison? And secondly, in 2011, do you think your off margin goal of 12% to 14% or 15% for SunEdison is achievable?

Timothy Oliver

Yes, so let me get to the first one. Our non-GAAP metric will only make adjustments for real estate and lease accounting. So transactions that we decide that we want to keep on our balance sheet and finance using our own debt and bring onto the books, we will not adjust for. We will tell you about them with the time. We'll tell you about the economics, we'll talk about the IRR of those projects and we'll talk about the number of kilowatt hours that we add to our portfolio of PPAs and add them to the ongoing and repeating revenue stream associated with energy revenues. Your second question was on expected margin rates that SunEdison going forward, is that right?

Krish Sankar - BofA Merrill Lynch

Yes, can you hit your goal of 12% to 15% of margin in SunEdison?

Timothy Oliver

Yes, I think we should be able. That has two pieces to that assumption. One is that the project margin rates remain in the mid to low 20s, and while it gets tougher to do so on large U.S. utility scale projects, which will have a few up and we've announced a few wins as of late, it's easier to do on direct sales in Europe and taken in total, I think it's a very fair expectation for 2011 as we sit here today. And then, of course, the only other part of the equation is the cost structure associated with running the SunEdison business, the SG&A piece. Over time, we will absolutely be able to keep the SG&A number below 10% or at 10% of the cost of that business. That being said, when you're growing at the rate that we're growing currently, you may, at any one period, be somewhat out of phase on that cost structure. But over time, that's absolutely the model that should come through.

Krish Sankar - BofA Merrill Lynch

And then finally, what do you think is the solar demand in Q4 from your point of you for the overall industry?

Ahmad Chatila

I don't know the number, Krish, but it's still very solid. There's a lot of shortage in polysilicon. We don't sell polysilicon, as you know, but definitely there's a lot of shortage there and we have no view about next year.

Timothy Oliver

Poly is tight. Wafering is tight and if we had more wafers or more poly, we could sell it.

Ahmad Chatila

I mean the bottleneck is really poly, it's not the wafer at this moment.

Krish Sankar - BofA Merrill Lynch

On the Semi side of the business, you said demand was cooling down. What kind of indications do you actually get from your customers or what do you look at to gauge the demand? Is it consignment inventory? Is it like pricing slowing down? What are the metrics that you think...

Ahmad Chatila

We didn't say it's cooling down. We said it's less overheated. So the demand on us continues to rise. And what I said is, there's a pause in complex segments, foundry and in memories. But a pause does not mean it's going to continue. We expect 2011 to be a good year for silicon wafers at this moment as we see the world.

Operator

And next, we're going to Tim Arcuri with Citigroup.

Timothy Arcuri - Citigroup Inc

Ahmad, on the roughly 260 megawatts, it looks like you did in the Solar Wafer business, what was your coverage on that out of your own polysilicon?

Ahmad Chatila

I would say close to, I don't have the number, but I'll give you just a quick one, it's like 85%, 90%.

Timothy Oliver

About 90%.

Ahmad Chatila

90%

Timothy Arcuri - Citigroup Inc

Secondly, Ahmad, was I to interpret your answer to a prior question that you think that Semiconductor revenue in March is not down, that it's up?

Ahmad Chatila

In the view that I see so far right now, Tim, is that 2011 would be larger for us in revenue than 2010 at this moment in time. I think Q4 clearly as a larger revenue number, higher pricing. In Q1 and Q2, we have not finalized our pricing yet. I expect the pricing to be flattish, up, down one or two points but volume is up.

Timothy Arcuri - Citigroup Inc

So then you would expect Semiconductor revenue to actually grow in Q1 versus Q4?

Ahmad Chatila

Yes.

Timothy Arcuri - Citigroup Inc

Can you give us some update, are you still planning 12,500 tons of poly by the end of this year? And maybe, can you give us some goals for next year?

Ahmad Chatila

The answer is yes, and next year is 15,000. And we're progressing very nicely on these targets, Tim.

Timothy Arcuri - Citigroup Inc

And Ahmad, is that more next year front-half loaded or is that back-half loaded?

Ahmad Chatila

It will be back-half loaded for getting to 15,000. Because we have this factory in Italy, we're ramping Phase 2 right now. We ramped a little bit in Q3 and a lot of it in Q4 and it's progressing very nicely. Pasadena also is ramping through productivity improvements. We're actually up around 50% year-on-year just from productivity without capital investments. Next year, Pasadena will increase as well a little bit, but we're going to do Phase 3 in Merano, which we already launched and it will show up as a result in Q3 and Q4.

Operator

And we'll now go to Chris Blansett with JPMorgan.

Christopher Blansett - JP Morgan Chase & Co

I wanted to ask you, you had a pretty big volume increase on your solar side, and yet there wasn't a lot of leverage on the margin side. Can you maybe talk about pricing trends versus your ability to improve your margins further from here?

Timothy Oliver

Pricing was better, and it will be better again to the same magnitude, may be a little bit better than that even price increases higher in Q4. The important part of it, margin equation for us is the cost side. We continue to work on strategic alternatives to our own wafering facility, while we work on that wafering facility diligently to get that cost down. And I think you'll see in Q4 that those efforts are beginning to bear some fruits. So while we were able to take volume up, which is a good thing we were able to meet the higher demand, find wafers at good decent pricing in the quarter and meet that demand. And also, we think we'll see even more of it in Q4. The other thing to remember is, I had an insurance gain in that business in the previous quarter and I did an acquisition of Solaicx, which had some startup costs or ramp costs as well as purchase accounting that make the profitability there not look quite as good as it otherwise would. In the absence of those two things, they had a terrific improvement in margin.

Christopher Blansett - JP Morgan Chase & Co

Just as related to your year-long guidance, Rovigo is going to be a direct sale. Is it simply a timing issue that is kind of making you pull back your guidance, or is it a change in the way you have to account for it? Just simply put.

Timothy Oliver

It's the second. It's the latter. It's the change to a non-GAAP metric would be exceptionally confusing to try and convert a full year guided number that we already revised twice into a non-GAAP metric for the remaining three months of the year. So it was just for simplicity's sake to say, you now know what three quarters are, let us help you understand the fourth, give you as much help as we can to model it and then get on to 2011.

Christopher Blansett - JP Morgan Chase & Co

And then, I wanted to ask about the taxes going forward, because I believe the expectations was you wouldn't have any tax benefits in the third quarter but you did have a pretty big one.

Timothy Oliver

I would say that we expected to have tax benefits to be a net taxpayer in the latter half of the year. But on the increments that spread between the two quarters, because Rovigo moved into the fourth quarter, all of my profit will occur in the fourth quarter, all of my tax would occur in the fourth quarter. See what I'm saying? So the benefit got pulled forward to Q3, the tax expense will be in Q4.

Christopher Blansett - JP Morgan Chase & Co

And then next year, just in general for tax guidance, I don't know, should we expect you to be a net taxpayer next year?

Timothy Oliver

Yes. I'm going to start my model with 15-ish percent and go from there. It depends on where obviously, where the profit occurs and where the eventual backlog converts, what parts of the world for SunEdison, but I think 15% is a good place to start.

Christopher Blansett - JP Morgan Chase & Co

Is R&D kind of jumped up a bit from here, is this part of the Solaicx acquisition? Should we expect this is a run rate going forward? Is it tied to solar wafer production?

Timothy Oliver

It's both of the things you described, and you should expect it as we go forward.

Operator

And next, we have Vishal Shah with Barclays Capital.

Vishal Shah - Barclays Capital

Tim, I understand you're putting off your guidance because of the accounting issue, but if you look at what you just said on Semis and Solar, I'm assuming you said, fuller revenues and profitability will be as high as Semiconductor segment. And just those two segments plus the three quarters should get you above your $1.85 billion-plus revenue guidance that you provided previously, is that right?

Timothy Oliver

I agree, well above. I agree.

Vishal Shah - Barclays Capital

Why did you pull it off? Why did you take this guidance off?

Timothy Oliver

I only suspended my EPS guidance. I had two other guided metrics that I gave out in January. The one was that we do $1.8 billion in revenue and the other was that we have the positive free cash flow for the year. I would say it should be evident. Last time we said we would exceed that revenue range, and so Matthew just did, it should be evident to anyone that certainly on a non-GAAP basis, we will well exceed that hurdle. From a free cash flow perspective, I would say that Rovigo closing is important, you can see in my working capital, the impact of Rovigo. When I get funded on Rovigo, then I should be fine on the guidance on free cash flow, the prior guidance of free cash flow. Does that help?

Vishal Shah - Barclays Capital

On Solar, you said that your margins in the Solar Wafer segment will be up sequentially?

Timothy Oliver

Yes, for the first time all year long, we're going to have a quarter in which we get higher prices and lower costs. We've been working very hard to achieve this to widen the spread and we're going to achieve that in the fourth quarter. It's an important moment for us.

Vishal Shah - Barclays Capital

So is it mostly because you're not going to use more third-party poly or is it you use less tooling...

Timothy Oliver

No. The fact that the demand we're going to see, we're going to have to use more external poly. No, it has everything to do with the fact that, that subcon squeeze that we suffered through in Q1, have been working diligently to remedy for the last, the better part of the last four, five months. We're finally starting to see the partnerships we put in place, the diversification of our supply base. We won't have any of our own wafers out yet, but that will be early next year. All of those efforts are paying dividends, and will get that righted in Q4.

Vishal Shah - Barclays Capital

Non-GAAP operating margin guidance for SunEdison, 12% to 15% range. Is that still possible?

Timothy Oliver

Yes, I think someone asked me that question a little earlier, and I went to the model that said you have to presume a low- to mid-20s gross margin rate, project margin rate, if you will, on that business going forward. And while it won't be that in every project, it will be higher in some and lower in others. In aggregate, I think that's a fair place to expect this business to be. And our cost structure ought to eventually normalize at about 10% of revenue, therefore, your model works. I did warn before that as this business is growing and as we add cost to support that growth, we may at point be out of phase at our SG&A spending relative to the size of the business, but the model still works.

Operator

We will now go to the line of Atif Malik with Morgan Stanley.

Atif Malik - Morgan Stanley

Could you update us on the Korea semi wafer expansion? Is completed? And what is your capacity right now? And any plans for further expand it?

Ahmad Chatila

We will ship start shipping in Q4, this quarter the 10 millimeter wafers out of Korea. We will expand it to around 50,000 wafers a month by Q2, but right now, we have more demand than supply and we're trying to look at our capital expenditures for 2011. Frankly speaking, all our businesses are growing. We want to balance what we want to do in each segment. So that's the update on that factory.

Atif Malik - Morgan Stanley

We've been hearing equipment lead times on the wafers, as far as in furnaces, extending to 12 months to 14 months, and I was wondering how does it impact your schedule for the tooling JV or the Kuching expansion?

Ahmad Chatila

We have no issues there, not really. I mean, our critical path for our own factory has been building a building in a place, where we wanted to be environmentally friendly, and well said, the electricity is low, but the infrastructure is not there. The JV, no shows whatsoever, is about hiring people, ramping all that and we're starting to see good results from it in Q4.

Atif Malik - Morgan Stanley

And then the facility, has that been qualified for Semi referring?

Ahmad Chatila

Yes.

Atif Malik - Morgan Stanley

Is it fully qualified?

Ahmad Chatila

It is qualified. I mean, fully qualified means is every customer qualified? So the answer is no, many customers are. We're ramping.

Atif Malik - Morgan Stanley

And what's your view by the end of next year, will it be fully qualified?

Ahmad Chatila

All customers, I really don't know. I mean, look, in the Semi business, there's 4,000 products. That's how much we ship. It's close to impossible to qualify everybody. Since I came to this company, we're trying to cross-qualify factories now for seven quarters, and still were not done. It just takes forever. That's why the Semi business is a good business. The qualification cycles are very long, it takes a while.

Operator

And next we have Gary Hsueh with Oppenheimer & Co.

Gary Hsueh - Oppenheimer & Co. Inc.

Just trying to understand what your megawatt under construction metric here, 111 megawatts when you reported the June quarter and you're saying 155 megawatts. How much of that is Rovigo, both in Q2 and Q3? And what are your expectations in terms of megawatts that you could close in Q1 on a non-GAAP basis?

Timothy Oliver

So 70 megawatts in each quarter. We put it in construction when the plant is launched to 70 megawatts of the 111 and 155 are Rovigo. And we've not given guidance for 2011. So I think you can imagine it by, let's say, I'm going to close about 120 megawatts in the quarter, I have 155 megawatts under construction, that obviously some of those are going to carry over into next year.

Gary Hsueh - Oppenheimer & Co. Inc.

But it's the same 70 megawatts both in Q2 and Q3, Rovigo, that hasn't changed, the progress?

Timothy Oliver

That's correct.

Gary Hsueh - Oppenheimer & Co. Inc.

Just a second question here, one thing I didn't understand, I'm having trouble understanding is just why is cost productivity lagging in Semis, where Semi is probably the more stable predictable part of your business out of SunEdison and Solar Materials? Why would cost productivity be lagging in Semis of all places? I would've thought that might have happened on Solar.

Timothy Oliver

It's lagging only our internal expectations for the business, and our original expectations for the year when we talk to you. So that business as executing exceptionally well and it's taken margins from something that rounded to nothing at the beginning of the year, to nearly around 20% on gross margin in that business. So they have improved remarkably and they're getting closer to their more historic averages in that high 20s to near 30% range in gross margins. So they've climb back. We had anticipated much more rapid ramping in our restructuring efforts and we plan to get more return, more quickly from the globalization efforts we've got underway. Those are not here yet, we're working very hard on them. It's going to take us a little longer than we originally had modeled.

Nimal Vallipuram - Gilford Securities Inc.

Just on direct sales on Rovigo, is it true or is it approximately 80% and 90% of that on a GAAP basis recognized revenue profitability over two years? Or how much of that tail extends out in two to 20 years?

Timothy Oliver

So the energy deferral is a two-year deferral. We guarantee energy for a couple of years. That makes up about 2/3 of the total deferred amount we have to defer. So as I said, we'll end up deferring 75% to 80% of the total profit on the project. 2/3 of that you get back and after two years, the remaining third would be out in 20 years. It depends. Every project is a little different, and every contract is structured a little bit differently, but for Rovigo, that's a fair guess. When we get it done, we'll give you all the details.

Operator

And we now will go to Jesse Pichel with Jefferies.

Jesse Pichel - Jefferies & Company, Inc.

On Page 11, the $47.5 million non-GAAP sales adjustment to SunEdison. How much of that is direct sales versus the lease structure?

Timothy Oliver

Yes, I gave that in my script. It's out there. Let me have Kurt call you with it. It's predominantly sale-leaseback. There are 3 megawatts of direct sales in there.

Jesse Pichel - Jefferies & Company, Inc.

What kind of prices are you getting on direct sales these days? And what's the outlook there for next year?

Timothy Oliver

The direct sales are in Europe--we saw the Rovigo project, right? We've announced that project. That was a little bit less lucrative than some of the smaller projects in the region, because of the scale and because of where it resides, it's not quite as sunny. So those are the best prices we're getting, and in the U.S., they're not quite as good, but we are disclosing exactly our pricing.

Jesse Pichel - Jefferies & Company, Inc.

Some industry experts believe that the channel is all of a sudden chock-full of extra modules out there. Are you seeing any weakness there, since you have to buy modules as well. As there any extra panels available for Q1 or for Q2 of next year?

Timothy Oliver

None. If you can find them, we'd like them.

Jesse Pichel - Jefferies & Company, Inc.

Would you believe these suppliers when they all say that they're effectively sold out and know and pricing for Q1? Is that what you're seeing as well?

Ahmad Chatila

I believe them, Jesse because the way they're pulling wafers from us.

Jesse Pichel - Jefferies & Company, Inc.

Just to the poly business, which is near and dear to my heart. Wouldn't you make more profits selling poly into this market? And what trigger do you need to fund another poly expansion?

Ahmad Chatila

We already actually are funding Phase 3 of Merano. We're just doing it in a controlled fashion. So what we did in 2010 and throughout 2009 is improve the productivity of our factories and fund Merano at expansion. So in Pasadena, the team has increased the production by 50%. And in Merano, they doubled the size of that plant. In 2011, we'll add another phase in Merano, and take it from 12,500 to 15,000.

Jesse Pichel - Jefferies & Company, Inc.

So that's just Merano?

Ahmad Chatila

Yes, just Merano.

Jesse Pichel - Jefferies & Company, Inc.

What would total poly then go from in '10 to '11 production?

Ahmad Chatila

It goes from 12,500 of installed capacity to 15,000.

Timothy Oliver

What you know is only Merano is expanding in that number from 12,500 to 15,000.

Jesse Pichel - Jefferies & Company, Inc.

And then Pasadena is how much again?

Ahmad Chatila

Pasadena is really 2/3 of the number, and next year it will be maybe at 60%.

Jesse Pichel - Jefferies & Company, Inc.

I guess I'm just pushing to see why don't you just put on another 10,000 ton plant like [indiscernible].

Ahmad Chatila

Well, we're thinking about these things. All this cost money and we have Semi business that is growing vary fast and we're gaining share, and then we have our wafering business that has very good cost, and it requires CapEx. So we're trying to balance all these things. Poly is very important, it's the nucleus of the business. We'll invest in it, that's why we're not ready to announce anything at this moment. We're still contemplating, really, what's our next big move. But hopefully, within three to six months, you'll hear something from us.

Jesse Pichel - Jefferies & Company, Inc.

Are you looking for partner? Are you looking for an innovative way to expand with someone else's CapEx basically, or something strategic?

Ahmad Chatila

All of the above, Jesse, including also trying to install advanced technology. As you know, MEMC has very specific reactor technology, and we think if that technology is put in the right place with the right feedstock, it can be much lower than other people. So we're thinking about that as well. So technology, partnership, country, all that, we're thinking about it.

Jesse Pichel - Jefferies & Company, Inc.

I've heard in the market that MEMC is buying projects from other developers and then putting it into your financing ability, says that is a bottleneck. Can you talk about what are the profits -- is that a big part of your business? And what is the profitability look like on that when you do that model, which I don't know what you would even call it.

Ahmad Chatila

Yes, Jesse, we do that. We have, in a way of funnel, it includes our own development, other people who are unable to build projects, all that. But the main metric there, is how many cents do you pay per watt for development, right? And you've seen some of the acquisitions, the numbers in the $0.25 range and if you do time cost of money, it's making the $0.40 to $0.45 range, if you're going to really measure how many of them will be built and how much you pay the front. We pay a lot less than that. We will never get to that point, and a lot of people come to us.

Operator

And our last question is going to be coming from Edwin Mok with Needham & Company.

Edwin Mok - Needham & Company, LLC

Just on the Semis, on your comment that you're not hitting your target for the year. I'm just curious. does that come from ASP not increasing as fast as you would like? Or is that coming from just operating your stretch and you can't do more than what you've done?

Ahmad Chatila

Yes, I think we're little bit -- let's say that we demand from our people a lot more than we are able to increase year-on-year. We increase by 2000 basis points. We wanted to be 3,000 actually, a little bit more than 3,000 basis points, they didn't do it. The pricing is pretty solid. Cost improved a lot, but it's not good enough. It's as simple as that. The costs improved through absorption and improved through some procurement and some productivity on in the plant by elimination of waste, but we have not done a perfect job. We should do better. So our views we're off. We told you that we'll probably get to the historical run rate. That run rate actually ranges between 25% to 30%. We wanted to be around 30% and we didn't get there. But you know what, we're very proud of that thing. I mean look, it's very hard to get eight factories with a few thousand employees to improve 2,000 basis points year-on-year. This also matches the profitability of the leading company. We attained that, but we're not satisfied.

Edwin Mok - Needham & Company, LLC

Was the ramp on the Korean wafer factory, I'm just curious what is your mix? Can you remind us what's your mix of the smaller wafer sales right now? And do you expect that mix to shift as your ramp more in Korea?

Ahmad Chatila

Let me tell you, I know a little bit of the numbers, but I'll ask Kurt to help me. Kurt?

Kurt Bruenning

Our mix of the 300 versus 200 slightly, our 300 is slightly below 50%, and we would expect, as we increase capacity for that the number, that number to likely increase.

Ahmad Chatila

Around 50%, perhaps which is six inch and eight inch wafer, or 150 and 200 -- it's around 150.

Edwin Mok - Needham & Company, LLC

One question on SunEdison. I look at your non-GAAP numbers for the second versus third quarter. Your non-GAAP revenue has increased sequentially from $47 million to $69 million, right? Yet your non-GAAP margins remained flattish. How do I reconcile that? Is it something specific to the project that you've done? Because I imagine your operating costs wouldn't have increased sequentially so.

Timothy Oliver

It actually had to do with the mix of projects within the non-GAAP metric. So in periods in which we have higher sales in Europe, in the non-GAAP metric, you're going to see higher profitability and in periods in which we have a higher mix of sale-leaseback transactions in the U.S., you'll see slightly lower margin rates. And what we would do as we go forward is disclose to you inside of that non-GAAP metric, how much is sale-leaseback and how much is direct sales. So we'll help you do that math. In effect, we've put in the remarks here and Kurt can get for you the split in this quarter.

Edwin Mok - Needham & Company, LLC

On your pipeline of one gigawatt, any way you can kind of give us your graphic location of those projects? How much is U.S. versus Europe?

Ahmad Chatila

We're diversified worldwide, but we're not ready to give a breakout at this moment.

Timothy Oliver

And thank you for your help today, and thanks to all who joined us.

Operator

That does conclude your conference for today. Thank you for your participation, and for using AT&T Executive TeleConference Service. You may now disconnect.

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