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Advanced Energy Industries (NASDAQ:AEIS)

Q1 2011 Earnings Call

May 03, 2011 8:30 am ET

Executives

Company Speaker -

Danny Herron - Chief Financial Officer and Executive Vice President

Hans-Georg Betz - Chief Executive Officer and Director

Analysts

Joseph Maxa - Dougherty & Company LLC

Weston Twigg - Pacific Crest Securities, Inc.

Colin Rusch - ThinkEquity LLC

Marc Bachman - Auriga USA LLC

Krish Sankar - BofA Merrill Lynch

Timothy Arcuri - Citigroup Inc

Edwin Mok - Needham & Company, LLC

Jesse Pichel - Jefferies & Company, Inc.

Mark Delaney - Goldman Sachs Group Inc.

Unknown Analyst -

William Ong - Merriman Curhan Ford & Co.

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Advanced Energy Earnings Conference Call. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Ms. Annie Leschin, Investor Relations. Please proceed, ma'am.

Company Speaker

Thank you, operator, and good morning, everyone. Thank you for joining us this morning for our first quarter 2011 earnings conference call. With me today are Hans Betz, Chief Executive Officer; and Danny Herron, Executive Vice President and CFO, both of whom will present prepared remarks. By now, you should have received a copy of the earnings release that was issued last evening. For a copy of the release, please visit our website at www.advanced-energy.com or contact us at (970) 407-4670.

Advanced Energy will be participating in a number of conferences this quarter, including the BMA Small and Mid-Cap Conference on May 11 in Boston, the Credit Suisse Semi Equipment Conference on May 12 in Boston, the Needham CleanTech Conference on May 17 in New York and the Stifel conference on May 24, also in New York. As other events occur, we will make additional announcements.

I'd like to remind everyone that except for historical financial information contained herein, the matters discussed in this conference call contain certain forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Statements that include the terms believes, expects, plans, objectives, estimates, anticipates, intends, targets or the like should be viewed as forward looking and uncertain. Such risks and uncertainties include, but are not limited to, the volatility and cyclicality of the industries we serve, the timing of orders received from our customers and unanticipated changes in our estimates, reserves or allowances, and other factors listed in our press release. These and other risks are described in Form 10-K and 10-Q and other reports filed with the SEC. In addition, we assume no obligation to update the information that we provide you during this conference call, including the second quarter guidance provided during this call and in our press release dated today. Guidance will not be updated after today's call until our next scheduled quarterly financial release. I'll now turn the call over to Hans Betz, CEO of Advanced Energy.

Hans-Georg Betz

Thank you, Annie, and welcome, everyone. Similar to last quarter, we are going to refer to the set of earning slides that we have posted on the IR section of our website to help walk through the quarterly results and outlook for our markets.

If you'll turn to Slide #4. I'll begin with some of the highlights of the first quarter of 2011.

I would like to start with a recap of the quarter. 2011 began with very solid results for Advanced Energy as we met our top and bottom line projections. Operating under our strategic business unit structure for the first full quarter, total revenue was $137.7 million driven by stronger-than-expected Thin Film sales to the semiconductor market. We continued to align our strategic business units and streamline our costs and processes to best capitalize on this structure. This led to an improved operating margin of 17.7% and GAAP EPS of $0.43 per share. Overall, we were very pleased with our performance.

At our Analyst Day in early March, we commented that we were seeing signs of improved sentiment from our semiconductor customers since the beginning of the quarter. This manifested in higher Thin Film results for the quarter than original anticipated and once again demonstrated the advantage of a diversified business model. This quarter, our Thin Film business compensated for the greater-than-normal seasonality in our Renewables unit, contributing 73% of total revenue, versus Renewables' 27%, enabling us to achieve our projections for the quarter.

Let me begin with semiconductors on Slide #6. At the beginning of the quarter, our sales to semiconductor market looked as if it would slow down from the fourth quarter. Three months later, the industry's CapEx investments drove our sales from this market to climb 14% sequentially and approach record levels. Orders were strong across our entire customer base, both tier 1 and tier 2 OEMs. The improved traction and design wins of our Paramount product continued to increase our penetration and solidify our position with key customers. Once again, we saw strength in Europe as well as in Korea, which continues to be a very important market for us. Emerging technologies, such as 3D packaging, performed exceptionally well this quarter.

But the biggest news this quarter came from a macro perspective. The tragic events in Japan created uncertainty from an economic perspective and sent reverberations to the electronics industry and the semiconductor supply chain. Very quickly, we moved to identify and understand the potential impact on our products and our ability to supply customers. Midway through the second quarter, the near-term market for semiconductors has grown more cautious. Samsung's announcement pushing out $1 billion in CapEx and more recent anecdotes from customers may be early indicators of industry softness, pointing to some near-term weakness. Accordingly, we believe the slowdown in the second quarter may be temporary, and we anticipate a resumption of CapEx investment in the second half of the year. Based on the announcements by major players in the industry, capital spending should continue throughout 2011 at relatively high historical rates.

Moving to flat panel display. After several quarters of growing revenues, we experienced an anticipated decline this quarter as customers paused after placing large orders in the third and fourth quarters. A lumpy business by nature, the flat panel market fluctuates with the investment patterns of big fabs. Our outlook for the Flat Panel Display business is the strongest we have seen in quite some time, driven in part by capacity builds for current generation displays. The large investment cycle underway for Gen 8 and larger panels will drive our shipment levels higher in the next few quarters. From an industry perspective, we are seeing the accelerated adoption of new technologies such as OLED flat panel displays. In the race to provide the next-generation tablet computers, the market is transitioning more quickly to these applications where AE is playing a significant role in the dry etch process associated with these products. We anticipate continued investment in OLED manufacturing capacities for Gen 5.5. This year, we are seeing some customers design their first CMA tools for using OLED, which is a very exciting development.

Flat panels will be an area of growth in the coming quarters. Phones, touch screens, Gen 8, the ramp in volume orders for our new product, Ascent, as well as the wins we have achieved at certain customers, particularly in etch, will play a significant role in our success as we are growing share in PVD tools.

Our performance in the solar panels and glass market held from the record highs achieved at the year end due to weaker sales of products for thin film modules. However, sales of crystalline silicon equipment to the Chinese customers climbed even higher in the first quarter as did sales to architectural glass customers for Low-E coatings. Solar panels and glass remains one of our top areas of focus. Current industry reports show concern over demand keeping pace with the incredible rate of buildout in China. Not unexpectedly, we have begun to see some headwinds in solar cell manufacturing capacity in China. From our vantage point, it appears that investment in manufacturing lines in China has hit its peak. This is leading to a decline in demand for power suppliers going into the crystalline silicon market in China, while the market pauses to consume the high levels of product purchased in the last several quarters as new capacities come online.

Additionally, with the Japanese tragedy and if you're tied to nuclear power, we believe the potential for increased solar panel installation in Europe may grow and limits the possibility of further caps. One potential bright spot, in particular, solar markets for AE could be CIGS. We have been talking with OEMs who are developing systems for CIGS, I believe. There may be some investments in the second half of the year given our content in CIGS is higher than in crystalline silicon, and our new Ascent product is making strong inroads into these applications, we could see improving tractions in these applications going forward.

Turning to Slide # 7, on our renewables revenue. Our primary markets, North America is one that typically had certain degree of seasonality in our experience in the first quarter due to weather-related factors that slows installations. This year, a more extreme winter caused of few projects to be pushed into the second quarter, which caused a larger potentially decline in the first quarter.

Worldwide, the inverter market was severely impacted by the changes in European feed-in-tariffs. The surprising shutdown of the market in Italy this quarter and the Czech Republic last quarter as well as dynamics ranging from France putting projects on hold, to U.K. shutting down grand launch and large-scale projects sent shock waves through the industry. According to IMS, first quarter inverter revenue worldwide fell over 45% quarter-to-quarter with Europe hit harder than the industry expected. While our exposure in Europe is very limited, we too felt some effects on our sales this quarter.

Due to the tumultuous political environment surrounding the future of incentives and potential caps, we are even more confident in our strategic focus on the North American market. With Italy solidifying its plan relative to feed-in tariff rates and caps, we believe that territory will remain viable with growing momentum in the second half of the year. We see other opportunities emerging in Eastern Europe countries as well.

In total, we shipped approximately 150 megawatts this quarter, which was down over 25% from last quarter's high. Commercial and utility scale demand for our products over 250 kW remains the primary driver behind our revenue. We also added to our product offerings in North America and expanded our footprints and potential opportunities in the emerging markets this quarter. The industry will say 35 kW commercial product for the U.S. and Canadian market and began to ramp up shipments of both our residential and commercial products in this market during the quarter. We plan to adapt our strong commercial offerings to the Canadian market in the second quarter given the growing opportunity we see ahead. While still in the early days, the Canadian market looks very promising with our strong bookings. We expect this territory to contribute meaningful in the future. Additionally, we are making progress in Asia where we installed a 1-megawatt project in Taiwan this quarter.

The first quarter ended with record bookings of $65.5 million for Renewables business unit, driven by anticipated strength in commercial sales and extremely strong growth in utility units. Just today, we announced 2 of the most significant wins to date. One, with Cupertino Electric for PT&E for a 35-megawatt spread over 2 sites. The other project is a 150-megawatt information with Zachry Industrial Construction in Arizona, which we believe is the largest solar TV worldwide installation record. These projects are noteworthy wins for AE simply given their size. Having successfully won both against the competition, we are to view these as great indicators for the strength and differentiations of our product and growing presence in the North American utility market.

The outlook for inverter industry should rebound in the second quarter, up virtually the same percentage held according to IMS. With our record bookings and growing pipeline, we do believe our growth prospects for the rest of 2011 remain very strong, ahead of industry's projections. Our growing success in utility market and position among the leaders in the commercial segment in North America leave us better positioned for the year ahead.

Now let me move on to our Service business. Service revenues maintained the levels achieved through the last few quarters, which is particularly impressive given the divestiture of our Flow business and subsequent loss of related service revenue. We worked through some of our backlog and saw growth in our revenue related to some of the product this quarter.

In Renewables, we doubled the footprint of our SiteGuard contracts from 28 megawatts to 56 megawatts. While these are all medium to long-term contracts that may not generate much revenue near term, our building pipeline momentum is a strong indicator for our recurring revenue stream in the future. Currently, our activity levels and backlog appear consistent with the industry, and we expect service to grow as the year progresses, particularly in semiconductors and with the addition of new customers in the Tool Refurbishment segment. We also plan to introduce additional service products to grow revenue and gain market share during the year and just begin to see growth in our renewables services business from annuity revenues as early as the end of 2011.

In closing, I'm very pleased with our first quarter performance. Our 2 strategic business units once again balanced out the cyclicality and seasonality experienced by different markets. With record bookings and, we believe, the largest solar PV inverter project in the world currently in our backlog, our pipeline is extremely compelling, especially in Renewables. While the investment cycles in other printer markets, such as semiconductors and solar panels and glass have slowed a bit in the near-term, the successful combination of our 2 power conversion businesses should serve, to balance out the cyclicality of these businesses and joined forces in the second half of the year as our renewables business builds and we anticipate strong CapEx investment in the semiconductor market to return. I would like to thank the entire Advanced Energy team worldwide for their hard work, dedication and strong commitments during the quarter. I'll now hand it over to Danny, our CFO.

Danny Herron

Thank you, Hans, As Hans discussed, we began 2011 with a solid first quarter. The seasonal weakness in Renewables was offset by strength in our Thin Films business, highlighting the advantages of our diversified business units. Where in some quarters our Renewables business has helped to moderate the effects in capital spending cycles, this quarter, we saw the reverse with our Thin Films business compensated for some of the slightly stronger-than-normal seasonality that our Renewables unit experienced. As a result, our Thin Film business unit contributed 73% of total revenues and Renewables 27%, and we achieved our revenue and earnings goals for the quarter.

Turning to Slide #9. As expected, revenues fell 7.4% versus the record fourth quarter to $137.7 million. Year-over-year, total revenues rose 97.5% from $69.7 million in the first quarter of 2010. This robust year-over-year growth was largely driven by our successful acquisition of PV Powered, which was announced early in 2010 and closed in May. Combined with our Solaron inverter offerings, the acquisition has expanded the breadth and depth of our inverter product line and increased our penetration of the emerging North America inverter market. The improvement in the economy has led to increased capital spending in a number of Thin Films markets, providing the company a variety of growth engines throughout its markets. Our Thin Film business unit had sales of $100.1 million, representing 72.7% of total sales, and first quarter operating income was $24.8 million. Thin Films was primarily driven by strength in our core semiconductor market with sales of $46.0 million or 33.4% of total sales. Semiconductor sales increased 14.3% sequentially and 12.2% over the same period last year. Sales to our solar panel and glass markets were $24.5 million or 17.8% of total sales. This was down 5.1% from the fourth quarter but was up more than 3x from the same period last year as we gained substantial traction with our Chinese customers. Service sales were $13.7 million or roughly 10% of sales. This was relatively flat sequentially, though an increase of 25.5% over last year.

Turning to our Renewables business unit. This business unit had sales of $37.6 million or 27.3% of total sales, a 27.4% decline from the fourth quarter's record levels, driven by seasonality in the North American market that we have discussed. Operating income in our Renewables business in the first quarter was $2.5 million. With record bookings of $65.5 million, we are excited by our prospects in the North American market.

Turning to Slide #10. Operating margin grew in the first quarter to 17.7% from 16.1% in the fourth quarter. Operating expenses decreased 7.6% to $37.7 million, primarily due to end of the year bonus and sales compensation payments that were incurred in Q4 2010.

Now let me break out our operating expenses. R&D expenses increased 3.8% sequentially to $15.9 million or 11.5% of sales in the first quarter as we continue to grow our engineering teams in order to continue the development and enhance our inverter technology. SG&A decreased 15% from the fourth quarter to $20.9 million, representing 15.2% of sales due to the lower compensation and commission expenses mentioned above. The total tax rate for the quarter was approximately 25%, in line with our annualized tax rate expectation for 2011 in the 24% to 26% range.

We have successfully leveraged operating model this quarter despite lower sales, achieving strong net income from continuing operations of $18.8 million or $0.43 per diluted share. This compares to net income from continuing operations of $4.8 million or $0.11 per diluted share in the same period a year ago.

Turning to our balance sheet on Slide #12. We ended the first quarter with cash and investments of $140 million, roughly flat with December levels. The major uses of cash for the quarter were $4.4 million in CapEx spending and an increase in trade working capital of $18.1 million as we increased raw material inventory in anticipation of stronger Renewables revenues over the next couple of quarters. In the past, we have shown our willingness to leverage our balance sheet to ensure we can meet customer lead times as installments ramp up in the spring.

Over the last 12 months, we've also grown shareholders' equity about 40%. Stock option expense for the quarter was $2.7 million, fixed asset depreciation was $2.3 million and intangible amortization from the acquisition of PV Powered was $900,000 for the quarter.

Finally, turning to Slide #13. You can see our guidance for the second quarter of 2011. We expect revenues to be between $148 million and $160 million, and EPS should be in the range of $0.36 to $0.44 per diluted share based on an estimated 44.5 million shares. This concludes our prepared remarks for today. Operator, I'd like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Colin Rusch representing ThinkEquity.

Colin Rusch - ThinkEquity LLC

Congratulations on a solid quarter. Can you give us a little bit more color on the geographic distribution for the solar backlog, if all that's in North America, and if you're starting to see any pickup in activity in Asia?

Danny Herron

As you know, we are focused almost entirely on the U.S. market there. In fact, in our outward guidance, we're not really incorporating anything for Europe in there. We did have 1 megawatt in Asia this quarter, but most of our focus is on the U.S. market, in the North American market.

Colin Rusch - ThinkEquity LLC

And then on the cost side with PV Powered, can you talk a little bit about what you're expecting in terms of margin improvement from improved sourcing and improved component design this year and what you might expect to see looking into 2012?

Hans-Georg Betz

I think what we see is some kind of very different gross margin ranging from a pretty low gross margins in the low-power systems up to a more than 30% gross margin on the high-power things. What we try to achieve by having PV Powered integrated in AE is a broader and higher purchasing power, in particular on those standards components like PCB boards, which we see some impact already. And, of course, in the situation in which PV Powered is, I think we have always some kind of design improvement in order to lower down the material costs, which, of course, turns into a higher gross margin. So we are working on that and I think we have some experience how to do that.

Colin Rusch - ThinkEquity LLC

And just in terms of the actual improvement, you're seeing a little bit of benefit from the PC boards. And anything else here over the next couple of quarters?

Danny Herron

Colin, you'd always have your purchasing power from putting the 2 companies together. We can get better rates on commodities like steel for the cabinets and things like that. So those continue to be in place, as well as taking the best of the best between both AE Solaron and the PV Powered product and making sure we implement the manufacturing processes that are the best.

Colin Rusch - ThinkEquity LLC

Okay, great. And then on the solar capital equipment side, can you just break down, well, which part -- or out of the roughly $23 million, $24 million that you have for the quarter, how much was on the Thin Film side and how much of it was really crystal and solar? And what that backlog looks like going into 2Q.

Hans-Georg Betz

Colin, I mean, not breaking out exactly what the percentage is, but I think we can say that the crystalline part of our business is the majority. And looking forward, I think as we spoke about earlier, I think China, which is our main customer, has reached its peak in the manufacturing of solar panels, and there will be a pause independent whether it's crystalline or Thin Film.

Colin Rusch - ThinkEquity LLC

And do you have a sense of timing on that front? And that's my final question.

Hans-Georg Betz

It's hard to say, but we have 2 hats on our head, which is -- one is the Thin Film part of our business. The other one is the inverter part. And if you have an oversupply on panels, we may benefit on the inverter side because the prices are dropping, and if the price are dropping, it's more attractive for building new installations. So at this point in time, I have no really clear view of what's the timeline for the pause is at this point in time.

Operator

And your next question comes from the line of Bill Ong representing Merriman Capital.

William Ong - Merriman Curhan Ford & Co.

Can you talk about how many megawatts were booked in the quarter? And also the percentage mix between large projects? Let's say 100 megawatts and above, versus smaller projects? And also, how long does it take to complete a typical small project versus a larger project?

Hans-Georg Betz

I mean, the smaller projects have a much shorter timeline. And if you could see from our large win on the Zachry and PG&E, I think these are stretching over sometimes 2 years. The biggest project is stretching over 2 years. In the smaller, like commercial installation, I think it's just a matter of quarters.

Danny Herron

Yes, we typically don't break out the details of the backlog and the bookings, but I will say that majority of our business is 250 kW and above. I mean, at the end of the day, our entire commercial product line is well received and very popular in North America, but our focus is on the larger products.

William Ong - Merriman Curhan Ford & Co.

That's helpful. So as you sought to get larger and larger megawatt projects, does that impact your inventory turns, if any?

Danny Herron

Not really. The lead times stay consistent. It stretches out the length of the project. As Hans said, a large project, like the one we just announced in Arizona, is going to take a couple of years from beginning to end. But it doesn't really impact our inventory because we ship in progress during the project.

William Ong - Merriman Curhan Ford & Co.

That's helpful. And nice job, everyone.

Operator

And your next question comes from the line of Zach Larkin representing Stephens, Inc.

Unknown Analyst -

I wondered if you can give us a little bit of an update and some color on the competitive landscape in North America, if you're seeing any impact from some of the new competitors who are trying to enter this market. And also, talk a bit about the pricing in the region.

Hans-Georg Betz

Well, let me answer the last question of your questions. I think, of course, we see some kind of price pressure, but it's not out of the norm, and I think we are used in our Semiconductor business that there is a continued growth -- pressure in prices. And we have some experience in how to do that. On the other side, with our service offering, I think, to a certain degree, we can send off too much price erosion anyhow. And part of the agreement in Zachary, I think, was the performance of the inverter. But at the same time, I think this kind of superior service offering was part of that, too. So therefore, it's not out of the norm. As far as the competitive landscape is concerned, we see one strong competitor, which is from the European side, which is SMA, but SMAs claim in an area which we do not pinpoint that much, which is string inverters, which is residential part. And we haven't seen too much on Power-One yet. But we do see, of course, on a regular base Satcon and Siemens

Unknown Analyst -

Also along that same line, could you give us a bit of an update on your capacity expansion plans and how things are moving and what we should expect to see on that front?

Hans-Georg Betz

Yes, as we've mentioned, I think all the time because the question comes up every time, because the question comes up every time, we have an actual capacity between Bend and Fort Collins, which satisfies, I think, all what we expect as a revenue this year. But in addition to that, we do have Celestica in Canada, and we have SGG in China. And to keep in mind, the expansion of capacity is it pretty simple, straightforward and not very expensive situation? What you have to have is space. What you need in addition to that is test space for your inverters. But that's it. So it's a very quick expansion, always possible, as we have shown in the past.

Unknown Analyst -

Right, okay.

Operator

And your next question comes from the line of Edwin Mok representing Needham & Company.

Edwin Mok - Needham & Company, LLC

So first question is on your guidance. Can I ask what is baked into the Renewable versus the Thin Film part of your business? Are you assuming that Renewable will be growing while Thin Film parts is declining? And then a follow-up question regarding that is, what is baked into your gross margin guidance?

Danny Herron

Yes. Generally, for our guidance this quarter of 148 to 160, we have about a 50% growth factor in there for our Renewables business, and we have a 4% or 5% decline in for our Thin Film business. And that's our current view. Obviously, these markets are extremely dynamic. They change all the time. That is one of the nice advantages of having a diversified revenue stream. But at this point, that's what we would have in there. And obviously, that drives to a different EPS. We would expect in Q2 that our op expenses as a percent of revenue will come down. But because the margin is lower in the Renewable business than it is in the Thin Film business, we'll have a slightly lower EPS.

Edwin Mok - Needham & Company, LLC

I see. Very helpful. And then on the operating margin side on the Renewable, have you thought a little bit that longer term? Well, what do you think you can achieve in terms of operating margin for your Renewable business?

Danny Herron

Yes. For 2011, we still anticipate something in the 15% range. Remember, this is business that in Q4 shipped $51 million worth of products. So it has an infrastructure that's been set up for that level of revenue. This quarter, the revenue was down to $38 million. So if you just did the simple math, you can see the significant impact that lower revenue would have. If you take this quarter and use our 50% factor, you can also see the leverage that, that could have in Q2. So we think long term we still have a very good 15%, 16% business.

Hans-Georg Betz

Now maybe I'll give you a bit more color on that, too. Because on the Thin Film side, we always have a very diversified product portfolio, which, of course, calls for a pretty high R&D in order to stay on top of the pack. That means we have a high mix, low volume. On the inverter side, we do have a high volume, low mix because the platform is pretty much the same through the different power levels. That means in turn, on the long-term side, even though we do have a lower gross margin, but the expenses in order to have R&D engineering at the Fort is lower as well, and the manufacturing side is simple as well because you have many high volume, low mix, so therefore, we expect on the long term that the uptake is the same as we see in the Thin Film area.

Edwin Mok - Needham & Company, LLC

Great. It's very helpful there. A follow-up question on the renewable side. So, congrats on winning the Cypress project there. I was wondering, I mean, just some color you can provide on that win in terms of what potentially that project could become since in Zachary the detail was provided there. Did you try actually to work with Cypress? And as they decide to build out the rest of that whole pipeline, that you expect to potentially win the rest of that business?

Danny Herron

Well, certainly, that would be our goal. I mean, we're there on the first 150 megawatts. We expect to perform very well. We think that was a very competitive situation. We won based on our product reliability and on our service offering. And we think being there, improving that every day should give us certainly the opportunity to continue on that project as it builds out. Much like Southwest Airlines only uses 737s, we hope that, that project only uses Solaron inverters.

Edwin Mok - Needham & Company, LLC

That's a good comparison to Southwest. One question on inverter pricing, right? If I take the 150-megawatt shipment that you guys have and just plucked that into the revenue that you guys represent, reported, I thought it was a little over $0.30 ASP, right, versus typically, you guys talk about below $0.25 ASP for your product. I was wondering, well, what is the disconnect there? Is that more on just other pieces that you guys are selling? Can you help us out with that?

Danny Herron

Yes. Certainly, when you look at the total project, there are some accessories that we had on there, remote-sensing, various things. There's probably some spares in there that are part of the total also. So it's a number of items there. So it's real hard to do the math you did to get the pricing on a per unit basis.

Hans-Georg Betz

And that's -- if you look at the factors of success going forward, in particular the large utility projects, it's more important to have the availability, the uptime. And there's a very clear trend into some kind of performance guarantee, which in turn is exactly where we have been playing into as a mission critical element in the service side. And just think about the fact if we wouldn't have a top-notch service environment, we would have been kicked out of the Semiconductor business right away. So we are in a situation, luckily, that we have some heritage in our business, in the Service business, which helps us a lot in order to secure businesses as a salesforce. And if people think they can easily build up a salesforce which is matching our experience, I can just warn you, it's not that easy.

Edwin Mok - Needham & Company, LLC

Great, yes, that's very good color.

It sounds like that you've got the -- that it did help you guys win the Zachry project. But actually, one quick follow-up with that. How much -- the increase in ASP or ISP, is that haunted by the increased sell of PowerStation solutions? Did you guys actually recognize the revenue of the component that is used in the PowerStation?

Danny Herron

Only one. It's been part of the total sale as we put this together. In creating the PowerStation, that is our revenue.

Edwin Mok - Needham & Company, LLC

Great, that's all I have.

Operator

Your next question comes from the line of Krish Sankar representing Bank of America-Merrill Lynch.

Krish Sankar - BofA Merrill Lynch

Yes, I had a couple of question. Hans, some of your customers, like LAM and Novellus have spoken of more pushouts. Have they actually communicated that to you yet?

Hans-Georg Betz

What we see from both, they have been guiding downwards in Q2. And in the communication with these key customers, we have the sentiment that the second half of the year, it's still rebounding and we will see what we hear from our customer, what we anticipate, a still very high spending on CapEx over the year.

Krish Sankar - BofA Merrill Lynch

Got it, got it. Okay. And then another question I had was, what did you say your service revenue was in Q1?

Danny Herron

Well, $14.5 million, I believe, was the number.

Krish Sankar - BofA Merrill Lynch

$14.5 million? Okay. And then final question. The op margin on the inverters in Q1, like 6.5%, is pretty low. Is that a onetime aberration or do you think the operating margin is getting to, like, the mid-teens is a longer term goal and it's going to take us a while to get there?

Danny Herron

Yes. Now we would anticipate 2011 to have op income in the 15% range for our Renewables business. Q1 was simply a function of lower volume. As I mentioned, in Q4, we shipped $51 million worth of product. So we have an infrastructure that's set up to ship that level and higher. And we anticipate that business to continue to grow. As we mentioned, Q2 should be up about 50%. Long term, our company goal is to get to an op income of 20%, and we think that's very reachable in the next several years through leveraging our infrastructure and growing our top line. We have every intention to try to do that this year.

Hans-Georg Betz

So the more we get these kind of big projects in which we can apply our Solaron, and as you know, historically, the Solaron has a much better gross margin, which is just the fact in the high-power realm, generally speaking.

Operator

Your next question comes from the line of Timothy Arcuri representing Citi.

Timothy Arcuri - Citigroup Inc

Hans, a couple of things. First of all, can you give the backlog number? Is the $145 million the right backlog number?

Hans-Georg Betz

You'll have to refer to Danny.

Danny Herron

Yes, our current backlog is about $140 million.

Timothy Arcuri - Citigroup Inc

Okay. So there were a couple of backlog adjustments in the quarter?

Danny Herron

Yes. And you know, roughly, we've -- of our backlog, about 50% or 60% of it is shippable in Q2. I'm going to preempt that with you, Tim.

Timothy Arcuri - Citigroup Inc

Okay, yes. And how much of that is inverter? Of the $140 million?

Danny Herron

We're not breaking it down between the 2 business units.

Timothy Arcuri - Citigroup Inc

Okay. And relative to the guidance, I don't know, I jumped on late, but what is the assumed inverter business for Q2 in terms of megawatts or in terms of revenue? Did you give us any sense on that? How much will it grow?

Danny Herron

Yes. What we did, Tim, is gave some color around about a 50% growth is what we are anticipating for the Renewables business in Q2. And we expect our Thin Film business to be down 4%, 5% for the quarter. Obviously, that drives total revenue up, which will reduce our op expense as a percent of income. But because of the different margin profiles of those, we'll see EPS drop slightly at the midpoint of our guidance versus Q1. But it's all mix related. Actually, we're doing a better job leveraging our op expense as we move forward.

Timothy Arcuri - Citigroup Inc

Okay. And then just so I'm clear on the megawatt. So should the megawatts also grow by about 50% so that the dollar per megawatt should be about the same?

Hans-Georg Betz

Yes, It's not correlated 1:1 because they have different power levels, which we play into. But I think at the first approximation, it's probably correct to assume that.

Timothy Arcuri - Citigroup Inc

Okay, great. And then just last thing. Hans, do you, -- you guys have pretty big -- obviously, you're very leveraged to the U.S. market. So you have a pretty good sense of how big it is. So what do you think the size of the U.S. market is, the U.S. solar market PV for 2011? And what do you think your share is of the market?

Hans-Georg Betz

I think I can give you a pretty good picture of what the supposed overall market is, which is somewhere between 2.5 and 3 gigawatts. I mean, as far as our share is concerned, I think we have -- at least we had in Q1 a share of 25% and we, of course, are pretty confident to grow the share. To which degree, Tim, I don't know, but we will break the 30% barrier for sure.

Timothy Arcuri - Citigroup Inc

Great.

Operator

And your next question comes from the line of Jim Covello, representing Goldman Sachs.

Mark Delaney - Goldman Sachs Group Inc.

This is Mark Delaney calling in for Jim Covello. Hans, I was hoping you might be able to provide a little bit more detail. You spoke at the Analyst Day about being open to the possibility of splitting the Renewables and Thin Film business units, but the market didn't ascribe a certain level of value that you guys see in those businesses. I was wondering if that's still something that the company is considering, and if there's any ramifications either in your materials sourcing or R&D leverage that would impact that decision.

Hans-Georg Betz

I think that the key point is, we would like to have a better transparency on the market and, therefore, we went into the segment reporting. And, of course, we operate both businesses as independent business units. But we use any kind of synergetic effect either on the supply chain side or the manufacturing side or, of course, in the G&A to keep the cost down as much as we can. But this is for the time being exactly what we do, not more.

Mark Delaney - Goldman Sachs Group Inc.

Danny, I was wondering if you could help us understand the bookings a little bit more. The $184 million that you reported, does that already recognize all of the large solar projects that you said are going to ship over a couple of year periods or should some of that still come as you get closer to the shipment targets?

Danny Herron

It would include the one major project because there's a contract with that project. So that is included. But the rest of it is just normal course bookings.

Mark Delaney - Goldman Sachs Group Inc.

Okay, great. I appreciate the help, guys.

Operator

And your next question comes from the line of Jesse Pichel representing Jefferies.

Jesse Pichel - Jefferies & Company, Inc.

Hans, congratulations on the market share gains for high power in the U.S. And can you help us understand the sales cycle for central inverters? How long was the evaluation period on, say, the Arizona project? And who made the final decision? Was it Semper [ph] or Zachry?

Hans-Georg Betz

I think let's not go too much into details. I think Zachry was the EPC, and we have been part of a competitive selection process. And in my view, Zachry was the final decision maker. And probably based -- as Danny said earlier, based upon the performance of our Solaron inverter as well as, and I think that's an important point, on the service offering, which, of course, has to do something with kind of performance guarantee or guarantee on availability and, therefore, on long-term LCOE harvesting of the energy.

Jesse Pichel - Jefferies & Company, Inc.

Are there any specific requirements that the offtaker, PG&E, has on these projects? And could it vary from utility to utility?

Danny Herron

Well, I think it could certainly could vary from utility to utility. But the one thing that's happening as these projects get larger, what we're seeing is a move towards the total cost of energy over the lifetime of the project. So it's no more focused on just the box cost initially. As these projects grow in scale and they're looking at a 20-year return, so many factors come into play that we play well in: our efficiency, our service offering, our reliability. All those things are key components in making a decision in today's marketplace.

Hans-Georg Betz

And I think from a general viewpoint, I think owners of the installation have always the same kind of drivers behind. First, they would like to have the maximum harvest on energy over the lifetime of the installation. And secondly, they would like to have a kind of guarantee that the return of investment, which they put a lot of money upfront in, is, from a risk standpoint, calculable. And therefore, the service part -- and you can just point on that point more and more. The service portion is very important for risk mitigation on their side, in their view.

Jesse Pichel - Jefferies & Company, Inc.

And dovetailing with that, what are these utilities or what are the requirements going forward for reactive power? Your thoughts around that, Hans?

Hans-Georg Betz

Yes, right. I mean, I think it's not a rocket science to anticipate. Somewhere in time, if we go over a certain percentage of renewables fed in the grid, the reactive power becomes an important point. But I think at this point in time yet, we don't see that as a requirement. But I think in the foreseeable future, it will come. And particularly, if you look at the feeder on the substation, I guess that's the right word for it, which is a pretty fragile situation as far as the greatest concern. And therefore, it may come maybe in one or 2 years, the requirement of reactive power fed into the grid.

Jesse Pichel - Jefferies & Company, Inc.

Well, that's very helpful. And if I could just ask a housekeeping thing. If I look at your quarter on the 115 million shipped, $37.5 million, ASP is around $0.33, which is pretty high, so I think I'm assuming that these are mostly smaller strength systems, which carry the higher ASP. Where are you selling these systems in Q1? Is it going into distribution channels or where on the geography? Because it seems like Q1 was seasonally quite weak combined with some weather effects there. So it seems like you're shipped an awful lot even in the quarter.

Danny Herron

Yes, clearly, our focus is on the commercial and the utility scale. And most of our shipments are. Most of them are above 250 kW. So the price -- math that you do, it's really a result of all of the accessories that go with it. And certainly, some of the residential inverters would drive that up, but the majority of our shipments are 250 and above.

Jesse Pichel - Jefferies & Company, Inc.

Great.

Operator

And your next question comes from the line of Marc Bachman representing Auriga.

Marc Bachman - Auriga USA LLC

Can you just clear up a couple of things? On your market share, if I heard you correctly, you think you're about 25% moving to 30%. So if I think about terms in the way that your competitor, Satcon, was talking, it sounds like that you expect to even take more share in the North American market. Would that be a fair assumption?

Danny Herron

It is.

Marc Bachman - Auriga USA LLC

Okay. Also, on the operating margin side, Danny, you had made mention of a 15% target here for this year on your Renewables business. Can we think of that in terms of 15% for the whole year or do we think of that more of a 15% number that you might be able to achieve by Q4?

Danny Herron

We're looking at that as a full year number. Obviously, there's a lot of growth in the Inverter business as projected by AMS and others. I mean, we're looking at 200% to 300% growth in the industry year-over-year, and we're certainly projecting that for the back part of the year. So we think that 15% is a doable number for the full year.

Marc Bachman - Auriga USA LLC

Okay. And then longer term, you thought that, that might get to 20%, is that correct? Or how did you -- put the 20% then in context for us?

Danny Herron

Yes, our 20% is our total company overall target. And that 20% really, if you sit back and do the math and we continue to leverage our operating expense at the 50% we challenge ourselves internally to do, you can get to that 20% in the next couple of years with some growth in the top line that's expected in the industry.

Marc Bachman - Auriga USA LLC

Okay. If I think about your Thin Film segment also on the operating progress there or the operating progress, how do I think about the mix of the segments that are there, semi solar, FPD, things like that? And how do I think about progress and then improving the operating margin coming from that part of the business?

Hans-Georg Betz

That it's a very high operating income on the Thin Film side is a pure mix of the product. And this is dependent on which kind of segments, without breaking it down at this point, which kind of segments are driving the business mostly, either the solar equipment, the glass equipment or the semi side of the business. But one thing is, I think as a bottom line, we have products which have very, very high gross margin, and there's really no, let's say, additional R&D required going forward. We have products which are very new which have still a lot of R&D and which, in some cases, have not this high of a gross margin. And therefore, it's a mix and it could change from one quarter to the other quarter without any kind of major problems occurring out of this.

Marc Bachman - Auriga USA LLC

Okay. Let's see, just two more quick ones here. On the shipment side of the business for your Solar business, can you give us an idea of the split between your Solaron products and the PV Powered products?

Danny Herron

I think generally speaking, both are pretty balanced. And, of course, with the occurrence of these big projects, which we just announced, it's tilting a bit to the Solaron side. But I think generally speaking, it's pretty well balanced.

Marc Bachman - Auriga USA LLC

Okay. Last question here then. Between those 2 products lines in your Solar business, the Solaron and the PV Powered products, how is pricing holding up? Are you seeing price declines on either side of that business greater than the other one?

Hans-Georg Betz

I don't think so.

Danny Herron

Yes. I think both of them -- once again, to the audience we're playing to, which is commercial and utility scale, we're talking to them about the levelized cost of energy over the life of the project. So it's not a -- we're not trying to play in the price game of just selling a cheap box. We're selling a levelized cost of energy over 20 years, and those customers are willing to pay for the right quality and the right service offering.

Marc Bachman - Auriga USA LLC

And then -- but on your smaller inverters there, you're not starting to see a massive price erosion given the oversupply situation?

Danny Herron

We're not...

Hans-Georg Betz

Yes, Because we are not playing in the very small inverters, like string inverters or even lower in the residential side of the business. And I think the most vulnerable in that respect is the residential part because there is really no technological differentiation possible. And even the service offering, which is a very valuable asset in our side, is not that important on the residential side.

Operator

And your next question comes from the line of Weston Twigg representing Pacific Crest securities.

Weston Twigg - Pacific Crest Securities, Inc.

Sure. Just real quickly since we're at the end of the call. Just wondering if you can explain why the big jump in inventories? And should we expect that to continue to increase?

Danny Herron

Yes. Wes, that was simply preparing for the ramp that we see in Q2 and Q3 in our Inverter business. So we wanted to make sure we didn't impact any customer deliveries. And there were certain strategic parts that we ordered early. That's all.

Weston Twigg - Pacific Crest Securities, Inc.

Okay. So that should flatten out or maybe even decline?

Danny Herron

That's right. I mean, we certainly see a big ramp in Q2 and Q3 for the Inverter business.

Weston Twigg - Pacific Crest Securities, Inc.

Okay, good. And then just real quickly on the semiconductor revenue. Hans, I know you kind of hit on this already, but do you still think revenue is going to be flat to slightly up this year or are you just kind of holding off on any longer term guidance?

Hans-Georg Betz

I think I'm still believing it's flat to slightly up.

Operator

And your next question comes from the line of Joe Maxa representing Dougherty & Company.

Joseph Maxa - Dougherty & Company LLC

I'll just a quick question on the market. You indicated the 2.5 to 3 gigawatts for the North American market this year. How much of that do you expect will come from the commercial and the utility side?

Hans-Georg Betz

I think that -- at the top of my head, I would say the residential is still 1/3, I would assume.

Danny Herron

Yes.

Hans-Georg Betz

But the commercial and the utility side is growing much, much faster.

Joseph Maxa - Dougherty & Company LLC

Is there -- can you give a rough breakout on commercial versus utility? What you think are...

Hans-Georg Betz

Well, it's pretty equal. But it may change going forward to the utility side of the business because you have seen what we haven't seen before. This number of megawatts on projects are just recently -- and I think this is a trend which will persist then. The more we have the very big ones, the higher the growth rate of the utility is in comparison to the commercial ones.

Joseph Maxa - Dougherty & Company LLC

So how many of maybe these larger, let's say, 50-megawatt-plus projects are out there that may come to market this year?

Hans-Georg Betz

I don't know.

Danny Herron

Joe, I really don't have a good number for that. But we are certainly seeing a trend towards larger and larger projects because solar, quite honestly, is getting very cost-effective. As panel prices continue to come down, that helps the overall cost of solar energy. So it is growing.

Operator

And your next question comes from the line of David Cassner [ph] Representing Lamond & Company [ph].

Unknown Analyst -

Most of my questions were answered, but I'll just have a couple of things I want to get a little more in-depth on. When you talk about the growth in the Renewables side, on the inverter side, how much of that is market share growth that you're anticipating getting and how much is the market growing, let's say, over the next year or 2?

Hans-Georg Betz

I think because we concentrate on the North American market and what I mentioned before was we would grow our market share probably from 25% to, let's say, 30-plus, so most of the growth which we see comes out of the growth of the market at this point.

Unknown Analyst -

Okay. And then just to follow up on the commercial utility breakdown, do you -- can you give some color on how much of the RPI business is commercial and how much is utility for you now?

Hans-Georg Betz

David, we don't really break that out. I mean,, those are the areas that we focus in. And as Hans said, that's currently about 2/3 of the overall market, but it's the rapidly growing market as more and more utilities get into the game.

Operator

At this time, I would like to turn the call over to management for closing remarks.

Danny Herron

Well, thanks, everyone, for being on the call. We will follow up with a lot of people with individual calls in the next couple of hours. We really appreciate you listening in this morning. Thank you.

Hans-Georg Betz

Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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