Good morning, everyone. Thanks for joining us. I think we still have a few people coming in the back, but we're going to get started. Welcome. My name is Annie Leschin, Investor Relations. Thanks so much again for joining us for AE's Analyst Day.
Just a quick review of the safe harbor. I would be remiss if I didn't mention. Obviously, there's a number of forward-looking statements that we're going to mention today with regards to our restructuring plans and internal goals, specifically for 2012 to 2014. Obviously, these are estimates only, not guidance. We do not plan to update them in the future, and they are based on as we see things today.
So with that, I just wanted to give you a quick review of our schedule for the next hour or 2. We plan to end with Q&A and some lunch for everyone. And speaking today, again, will be Garry Wasserman (sic) [Rogerson], our CEO; Danny Herron, our CFO; Yuval Wasserman, President of the Thin Films business unit.
And let me just begin, by introducing Garry Rogerson, who obviously has just joined us several months ago, currently Chairman of the Board at Coherence. Garry was with Varian for quite some time, and he is CEO and Chairman. And we're excited to have him with us. So with that, let me turn it quickly over to Garry to begin. Thanks so much
Garry W. Rogerson
Thank you. Thank you, everyone. Just a little [indiscernible]. Just on the side on the introduction for me. I have to be very clear. I was with Varian, Inc. There were 3 Varians Semiconductor, Varian Medical and Varian Inc, and I was with Varian Inc. I was also part of the spin of those 3 companies in the 1990s, which is probably a rather successful spin. Just to clarify that because there are other Varians around at the present time.
Well, before we get started, what I'd like is go to that forward-looking statements thing at the beginning, because I think it's extremely important this time around. This is the first time, I believe, in this company's history that we are going to tell you something about our 3-year strategic plan, as much as we can. We've been developing this over the last 3 months, and we're now going to tell you as much as we can about it. And we're going to have some granularity there to that plan.
Obviously, as time goes on, we will adjust the sales, and we're going to tell you that as well. But we want you to be able to measure us. And when things are going wrong or going good, we'll tell you, and we'll tell you how we're adjusting into the future.
We are trying to change the company. So just on the forward-looking statements. We are trying to change the company. The company is a high technology company, and it has been focused on technology a little bit too much. And we're trying to bring that, so we focus on our technologies, we grow our business, but we also, right at the top of the list, focus on shareholder value.
And I know everyone says this as they're creating shareholder value. This is what we're here for. We're here to create shareholder value, and we're here for you to see how we're trying to create shareholder value. And let's make sure that this is what we're all about. You can talk to us about a lot -- and you can't hear me? Slides? Oh, you want me to move the slides as well? It's the bottom one.
So just -- I think she wants me to move to the slides because you think I'm going to take too long. Okay, the first slide is just a definition of Advanced Energy today. I think as you're all here, you know it. What I'd like to do is tell you a few of the strengths I've seen in Advanced Energy.
Great products, good positions in the marketplace, #1 position in the marketplace, in the applications that we're in very often. Very often a good position in the marketplace we're in. For instance, our solar business does not have the baggage of Europe. We are focused on the U.S. and northern [ph] Canada, and our products are designed for the U.S. and Canada. So we don't have the sort of baggage that one might have if one developed a different way.
Our Thin Film business, we have very good strength with all our partners and we're probably #1 in a variety of different applications that you know. So great product, great technology. Yuval will be talking to you about that later on how we grow and utilize those technologies for other applications.
Number 2 is excellent service. Global service, global support structure is very, very good within the company. And number 3, and perhaps it should be number 1, is the quality of our products. We have an outstanding name out of there. I've visited customers, spoken internally, the quality of our products is fantastic. Absolutely fantastic. And I get that feedback time and time again.
We have one other strength in the company, and that is our facility in Shenzhen, China. It’s our manufacturing plant at the present time for our Thin Film business. And that is a world-class facility, and it's a facility that you'll hear time and time again. We're going to use it more and more in the future.
So just a few points of the good things about Advanced Energy. There are plenty more. There are plenty more that I could talk about. The area that I want to focus on more and more -- is this a pointer as well. Yes, the area I want to focus on more and more is how do we get the value of this company up? That is the key. Getting the value. You know and I know we are totally undervalued. Totally undervalued to what we've got. I know we're in a downturn, but really, the price we're at is crazy. So our focus is on moving that price up, and our focus is on improving our earnings per share over time.
So let's chitchat about that a little bit. If there's anything that I'd say that's not clear, you can please ask questions as we go along. If there's something that's of interest, let's wait 'til the end, yes? Okay. First 90 days. I think I've probably talked about a lot here. Let's just go through it a little bit more. So say it one more time, just the positive. Absolute technology leader. Great technologies and we're not going to lose that. In fact, Yuval will talk to you soon about how we're going to get closer to our customers, how we're going to get a closer understanding of what our customers want and need.
Diversified markets? Yes, we've got diversified markets, you know that. World-class manufacturing in China. I think Yuval will be mentioning awards that we have won, to date. Very recently, our quality is great, and that zooms on to quality and customer satisfaction.
And as you know, we have a strong balance sheet. A great balance sheet. I think we had $155 million of cash, something like that, after that last announcement.
So it's a wonderful company. What we now need to do -- but here are the challenge for the company, it is cyclical. We have a big semiconductor part of the company, so we go up and down. And what seems to have happened in the past, when we go down, we reduce our costs. And when we go up, we increase our costs. So we really don't get the bang for the buck out of the company. We actually haven't been getting the bang for the buck out of the company.
So what we're trying to do is -- we're not trying to do it, we are doing it, is to reduce the breakeven of the company so that when we go down, we don't have to shuffle the cards, we don't have to get people to disappear. We don't have to do all the drastic actions with stocks to invest in the future. We're bringing down our breakeven so we can take the cycles. And then when we come up, we don't increase our costs. And that is key to a cyclical business, that we don't increase our costs, so more profit comes to the bottom line and we generate more cash. That's what we're trying to do. That is our challenge, and you'll hear about that time and time again.
Margins? They're okay in our Thin Film business, that's terrible in our Solar business. And we need to do something about that. And we are doing something about that. You'll hear about that today.
And jumping back to Solar. Great position, focused on the U.S. and Canada. That's where it is. That's where the game is. And we are growing steadily our revenues, we just have to get more aggressive on making money out of those revenues. It's not a massive challenge. It doesn't need rocket science. It needs control of our costs and reduction in our manufacturing costs, or EPS leverage goes with the whole thing.
So an effective utilization of cash, and we're sitting on $150 million of cash, which is doing nothing. It's doing nothing to anyone. So we need to utilize that cash and get it back either to our shareholders, or get it invested in the company in other ways. And we're doing that.
Today, we announced our first buyback of $75 million, and it's something I've done before with many other companies and has always been -- has always, in the end, given us the reward that we want. And it's given us that reward, but not only is it a buyback, it's that we accelerate our earnings per share potential at the same time.
So if you have a poor company and you do a buyback, it's sort of rubbish in, rubbish out, yes? If you have a company that can improve its earnings per share and you buy back at the same time, that's when I believe you get the bang for the buck. That's when our management team believes you're getting the bang for the buck. And that's our Board is supporting that approach.
So effective utilization of cash. So I'm just going to go through a few slides. Some of them you probably know, and I'll go through them quickly. So the first thing we did, and it was done before I was around, was separate the company into 2, into a solar business and a Thin Film business. Obvious. It's an obvious thing to have done. I'm pleased we did it. One is more cyclical. One is a rapid growth business, revenue growth. One has OEMs. We're designing in that product. One you're going to end users or you might be going through third parties to end users, but you're going to end users at the end of the day.
So they're very different models, so we've separated them so the 2 presidents can make different types of decisions for their businesses. Now, I want to be a little bit careful here because the sales is separate, the marketing is separate, the R&D is separate, most of the administrative things are separate. But the accounting, the legal is not separate, and the one thing that we're going to leverage more and more in the future is our manufacturing power in Shenzhen in China.
So Thin Film has manufacturers in China, and it's brought us a world-class facility, we have to utilize that for our Solar group. So again, so we've separated ourselves into 2, and we've been developing, as I mentioned right at the beginning, a 3-year strategic plan. It's basic stuff. It's the stuff you do at any company, and if not, they've got a problem. So what we're doing, we're looking at ways to expand our margins. And you have seen that we've started to take actions relating to that.
Danny will give you more details later, but we will probably get to about $20 million of costs that will come out in the company that will never -- well, I shouldn't say never. I mean, they might come back as we grow, but we're taking out strategic costs. Costs that is not necessary to the company. So empty buildings, R&D that's not efficient. We're putting our R&D as close to the customers. We're doing a lot of different things to reduce our costs, which expand our margin.
Cost is not coming back. Revenue growth. We need to grow our revenues and expand where we're going. We're a little bit narrow at the moment in both thin film and solar. We need to expand, but we'll play in the sandbox that we're in. So don't expect us to go and buy, I don't know, a bread company or whatever. We're going to stay where we are. In my previous life, I've loved bolt-on acquisitions, technologies that allow us to grow, technologies where we can plug holes in our business, utilizing our distribution systems to grow.
So listen to the revenue growth story today. I think that would develop more as we go forward. You will hear less today, but in the future, you're going to hear more about the revenue growth.
And finally, cash utilization. Cash will be used, number one, to make our company more efficient. So make what we've got better. And we're doing that. You're seeing us to do that now. And number 2, it would be to get revenues to grow faster, whether that's clever R&D, where it's technology, where it's bolt-on acquisitions, where it's a major acquisition, we have to find a way to grow our revenues faster.
And finally, that cash utilization, which I've said before. Number one, it is for investing in ourselves; number 2, it's for acquisition; and number 3 is we give it back to you in some shape or form.
Okay. Well, I guess everyone said, "You're going to repeat yourself a few times." And I do that. So I apologize there. I've said we've got a factory in Shenzhen, China. It does all our Thin Film business. We'll move most of our manufacturing there. If you think about it, I have 4 choices for manufacturing. I have Shenzhen, I have Colorado and I have Bend or another. Well, of the 3, Shenzhen you’d choose for most of your manufacturing, and that's where we will do it. Obviously, we will do assembly and test locally as required.
Pay for performance. Well, in the past, I would say the company's had more like profit sharing schemes. That's a word that's not used in the company, but we had. We had more like a profit sharing scheme within the company. We're not doing that anymore. That is gone. We're paying for performance. So if you have a -- that may be specifics objectives or the high end, where the management level, which leads on share price. But as you go through that organization, we're paying for performance and that's what we're going to do. So a lot of changes in that area within the company.
By the way, just as a side, I don't think we own that whole building. I think we've got 2 floors or something. I remember once I was a sales guy and we opened a new office and we just had one window. And the competitive point to the outer [ph].
Okay. Revenue growth. I've talked about this a little bit. It's an area I'm going to talk about more in the future. Today, and really and we are focusing more on getting our cost structure in line with our revenues and getting ourselves more performance orientated as a company. But there are plenty of opportunities for us to grow. For instance, in the Solar area, we are only in the U.S. and Canada. We're lucky. It's a growing area, but we are only there at the present time. So there's opportunity for us as we start manufacturing more in China to start penetrating China. China and India are the obvious areas one might consider.
So cash utilization. I've gone through this with you, and I think we know that story, all of us very well. Maybe a few comments on the efficiency improvement. It is amazing how quickly we are reducing our cost structure. It's amazing how quickly we're exiting buildings. And clearly, we're going to tell you more as we go forward. It's amazing how we're sharpening our R&D focus as we go forward. It's amazing how we're starting to get the facility in Shenzhen in China to create space for us to manufacture. We're actually not investing much in new square footage.
So on the efficiency improvements, we're coming along very nicely. Stock buyback, you know about. And we are exploring other ways to grow. We do have plenty of cash. We have a very strong balance sheet, so we are looking at other ways to grow.
All right. So this is where -- so our strategic plan. We have a strategic plan, which we've developed over the last 3 months. I think it's roughly what we think might happen if we execute well. This excludes any buybacks. So this excludes buybacks. This slide was created before we had got approval for a buyback, and so it does not take into account -- Danny will tell you what you might expect from such a buyback in the future. You can all do that simple math, I hope.
So we're expecting not aggressive growth over this period. Now we know there are cycles so they're going to be down, they're going to be up. But what we're really saying here, if we get $700 million plus of revenue, we should be able to generate over that 3-year between $180 million and $200 million. And the earnings per share should be roughly at the $2 levels before a buyback. That's what we're aiming for. We're about $1 today, so it's doubling it. That's what we're trying to achieve at the moment.
I hope you're going to see the way clear for us to do that. I hope you will see how we can do that. And then I hope, as we go through every 3 months, we can tick the boxes off with you and say, "Yes, we've done that." Or "Yes, we haven't done that." Or "Oh, dear, we've made a mistake, and we're going to adjust the sales and we're going to try a different way to get there." So you will get much more clarity from me as we go forward. And please, always ask questions.
So that's enough for me now. Now, you're going to hear really the meat and potatoes of how we're going to do it. And at the end, please ask as many questions as you'd like, and thank you for being here. Thank you. Okay, Yuval?
Thank you, Garry. For those of you who don't know me, my name is Yuval Wasserman. I'm the President of the Thin Film business unit. Bear with me, I have a cold today. So if I start coughing too hard, give me -- please bear with me.
What I'd like to do is start with a little bit of background to give you historical trajectory or perspective of the Thin Film business unit. And for those who are listening, we are on Page 15 of the presentation.
The last 10 years of the evolution of the Thin Film business unit were extremely important for our future. As we reshape and migrated the business from a single focus, almost, on the semiconductor industry into a much more diversified business.
In 2000 we had served the semiconductor industry with a broad portfolio of products ranging from power solutions, power supplies, temperature measurement, pressure control, pressure measurement, mass flow controllers, et cetera, software, sensors, we were extremely wrought with a lot of product lines, some of them homegrown, some of them by acquisitions, with a very high structure of costs and R&D. And the semi business contributed 70% of our revenue.
So we were very semi-centric and, in a way, not very efficient in the way we ran the business. In 2003, we made a great decision to move our manufacturing from the U.S. to China and we build a world-class manufacturing in Shenzhen, as Garry described before, where more than 90% of our manufacturing currently is being performed.
In 2005, it became clear to us that we need to change our strategy. And instead of being focused on a semiconductor industry with a slew of products and technologies, we decided to focus on what we're really good at and take it to many industries and end markets. We have started to shed and divest a lot of the non-power product lines and took our power conversions, core products and technology, to non-semi industries, focusing on thin films. Thin film processing were the center of application space, and power conversion and power control was the focus.
We have divested our flow business and other business. But at the same time, using our core competency, we took our business to an adjacent market, the solar inverter. In 2005 we took the technology that we have developed for our D.C. power supplies and we created the Solaron inverter and took it to market.
2007, we introduced the inverter to the market, and we started to see growth. And very quickly, as Garry explained, we came to the point that in order to maintain our focus on the businesses we run, we created 2 distinct business units: Thin Films and the Solar Energy business unit. We acquired PV Powered, and now we are in a position that we're ready to take the Thin Film business unit to the next level. And my presentation today will describe to you in more details that you haven't heard [ph] from us before what we plan to do.
We are focusing and have been aiming at preserving our position in the market as a leading and trusted technology partner. The way we do business with our customers is critical for our growth and market position. To be able to maintain that position, there are 3 core capabilities or key success factors that we have to maintain and continue to invest: Leadership in technology, operational excellence and global footprint. When we have made the decision to focus on what we're good at, we voted to continue to invest in power conversion. DC, RF. And this is the core innovation and the key technology thrust of this company. IP, trade secrets and designs, all the way from the physics of the individual transistor through the circuit design and into the packaging and the solution that we combined together with really creative and advanced measurement and control. Because a combination of power conversion and power measurement and control allow us to provide solutions that go into our customers' thin film processing equipment. And in order to be able to provide them the solution that they need, we continue to invest in our company in the basic process technology of Thin Film, deposition of metal films, deposition of the electric films and etch applications. We have in our labs the ability to run the same processes that our customers run in their labs, which allow us to stay very close to their technology, nodes and development.
As Garry said before, a critical component of our business is our operational excellence and a center of manufacturing in Shenzhen in China. Our factory in China is indeed world class, as measured by our customers, not by us. We go every year through a process that is described years ago by SEMATECH Strategic (sic) [Standardized] Supplier Quality Assessment process. It's basically a yard stick. It's a benchmark of qualifying a company in term of its quality.
Our factory in Shenzhen scores greater than 7 in the SSQA process. For those of you who understand the process, this is really a benchmark. It's a very high score.
Our customer satisfaction and quality, as Garry mentioned before, have been recognized. Recently, last quarter, we have received an award from Applied Materials, our biggest semi customer, for a quality supplier award. And 2 weeks ago, we received from our customer in Europe, Oerlikon, a supplier award for continuous, consistent 100% on-time delivery through the cycles.
The ability to manage through the cycles, to go through the downturn and then immediately, through the steep ramps, this agility and flexibility is one of the capabilities that we have in the company. We continue to invest in and maintain because it will allow us to run through the cycles, as Garry mentioned before.
Lastly is our global footprint. The industries we serve are changing. We see a lot of migration from the U.S. to Asia, and within Asia, from one country to another. And at the same time, we see an emergence of semiconductor wafer processing equipment growing, industry growing in Korea, for example. So the industry is changing. The center of technology development, the center of manufacturing moves to Asia. And as our customers go through the next technology nodes or the next wafer size, it is extremely critical that we will be close to them, because in order to be able to fulfill those plans of accelerated development in both wafer size and technology nodes, we need to be engaged from an early stage. The cost of the next node is extremely expensive.
Additionally, the emerging industries in Asia for the semiconductor and non-semiconductor processing equipment is expecting to generate local content. So if we, as a critical component supplier to this industry, are not present in these markets, we may be at risk of competing with local suppliers. So global footprint doesn't only mean salespeople and service people. Global footprint means that we are there with our customers at the location and the place and time when they develop their technology nodes.
Moving to Page 17. If you look at the trend of the revenue -- these are the last 7 quarters. I'd like to point out a few important behaviors or trends. First of all, you can see that we're still dependent strongly on the semiconductor industry, and it cycles quarter to quarter. And we are now operating in a very efficient market. The number of companies that build fabs is just a handful. They buy equipment and tool set based on the technology, device technology that they go after. And the tool set mix changes from DRAM to flash to logic. That will drive a different profile of wafer fab equipment that is being manufactured by just a handful of suppliers. And we, as a critical component supplier to the semi equipment industry, we have unique content within these tools.
So we had an industry that is driven by just a few end-users that buy equipment from just a few suppliers that buy critical components from just a few suppliers. And that dynamic, and a combination of timing of building fabs, the technology of this fab, the signature of the wafer fab equipment that this fab is buying will determine our revenue profile.
The other interesting point about this chart, you can see what happens in China with the PV solar market. During a period of 6 quarters, we have seen a huge increase in business, driven by the investment in China for crystalline silicon manufacturing capacity for solar sales. That was a creation of a local industry. And in a very short period of time, as you all know, China went from providing 5% of the world's solar panels to 90% of the world's solar panels. And in the process of creating and building this infrastructure and capacity for manufacturing, we have seen a surge in our business for power supplies that go to China for those specific fabrications.
Similarly, although our content in the high brightness LED market, in the LED market, is much smaller than the content in the solar PV market, we saw a similar wave of investment in China and Korea in high brightness LED equipment that right now just practically stopped.
Lastly, the flat panel display market has been lumpy and will continue to be lumpy, as investment in factories that make either large TVs or flat panels for handheld devices usually go through a big investment in capital equipment and then a period of digestion. So this market will continue to be lumpy.
Moving forward, where are we year-to-date? What you see here is the percent of revenue, our revenue, that goes to each end market, excluding service. Service is 15% of our revenue. You can see very clearly that we're still not at 70% level of semiconductors, but we're at the 40% level followed by PV solar and glass, 20%, and then display and industrial, which industrial is a lot of consumer product that require coating.
Our technology application space is divided between thin film processes on small substrates such as silicon wafers that are used for the semiconductor industry or for the crystallin silicone solar film, or thin film processes that go to very large substrates, like glass, that is being used for flat panel displays or even low e [ph] glass that is being used for buildings.
So that broad base of applications, deposition of thin films, metal dielectric, extra thin films, metal dielectric and various sizes of substrate requires a broad portfolio of product solutions, a combination of power and frequency.
And we have been investing, as we go with one industry to another, and industries go from one material or substrate side to another, we continue to evolve and develop our product portfolio.
Just to give you some color, the products logos at the bottom, represent which products go to which end market. And an important thing to note here is that in 2011 year-to-date, 25% of our revenue was generated from products, platforms and derivatives that we launched since 2009. So we have a pretty nice wave of new products that go-to-market as we continue to innovate.
Going to Page 19 and looking into the future. When we look at our markets and we analyze our total available markets, we use third-party information, top-down analysis. We talk to our customers and generate the bottom-up analysis and we go through a process of assessment to look at how the future is going to look like. Based on our analysis, the information we have, we expect to see a down cycle in all the markets we serve in 2012; semi, PV solar, flat panels, et cetera.
The markets we serve, we expect to see a decline of about 20% year-over-year in 2012. And we expect to see, based on information we have, a recovery through 2013 and 2014. So all in all, if you look at between 2011 to 2014, we anticipate that our total available market will remain flat. And our main focus right now and vision is how do we manage through the cycle while increasing our profitability, continuing to develop new products and technologies for the next future and expanding our product offering beyond thin films, so that we can grow the business slightly faster than our TAM. And that leaves me to talk about the future and our vision.
We wish to build an enterprise that is growing faster than our served market. Leveraging our success in thin film in the thin films world, we'd like to build a portfolio of products and technologies, either organically or inorganically, and take those power conversion solutions, which is as Garry said, our sandbox is power conversion and control, and take these power conversion and control capabilities and solutions to other markets that are not thin films.
If we want to go faster than our TAM, our thin film TAMs, we need to grow our TAM. The 3 pillars of our strategy is the same that we have in our corporate strategy: Margin expansion, revenue growth and cash utilization. Let's peel the onion. Let's look at more details, and I'm going to Page 22 right now.
In the margin expansion, we have already implemented significant cost reduction measures in the Thin Film BU. Our restructuring measures took a breakeven point below $50 million a quarter. We implemented these measures through the first half of the year, our op inc, operating income margins would've been improved by 2% to 3%. These changes were made, the restructuring were made to fix cost out, and we hope never to see this cost back again as we go through the cycle and as we increase our revenue going forward.
Our R&D and sales marketing, as we already talked about in our earning call, were restructured. And we took a lot of costs out and increased efficiency. It's not just by cutting resources, it's more about how we do things, what we do and what we're not going to do. This focus on future revenue-bearing development, this focus on how we develop things, do we have to develop everything in-house or can we develop with partners, like our customers, will increase our efficiencies and increase our speed of taking our products to market.
Some of our engineering, simple functions. We accelerate the outsourcing. And some of what we call commodity engineering, and commodity engineering can be drafting or drafting approval, things that you do not have to retain in your core technology center will move to China, to our engineering team in China. And at the same time, as I talked before about the fact that our customers migrate to new world regions, we will optimize our distribution network to make sure that it's fully aligned with the future location and presence of our customers, as we drive efficiency in the process.
We announced the consolidation of space. In the process of divesting a lot of old businesses, as I mentioned before. We created a lot of space. We shed off activities, we shed off businesses, we did not shed off space. The first bold move that we made was a decision to shrink our size in Fort Collins by 56,000 square-foot.
Practically, what it means, we're moving from 4 buildings in a campus to 2 large buildings on a campus. We had additional consolidation of space expected in the U.S. which we hope to complete in 2012.
And lastly, as Garry talked about pay for performance, we have restructured our performance payment for our sales force. We have morphed our sales force compensation package to be more in line with what our sales people really do, which in many cases is design win and account management. A lot of our business is design win business, and a lot of the activity is technology migration from one node to another and technical account management. That will make sure that our sales people are fully aligned with the corporate strategy.
Going to Page 23. Let's talk about revenue growth. We talked about optimizing a distribution network, and that's only one step. We're co-locating our service organization together with our customers. So that in fact, our distance is going to go to 0, and our responsiveness is going to be almost instantaneous. That's what we hope to do.
But more than that, because of the changes in the engagement model in our industry, where customers are expected to engage with suppliers at an early stage of R&D simply because of the cost of R&D and time-to-market. We need to co-locate our R&D centers close to our customers' R&D centers. And the intent is not cost only. The intent is early engagement from an early stage as the industry goes to the next-generation wafer size, substrate size, manufacturing technology or process technology.
The next area that we address for growth is our product portfolio. And I'll share with you later a little bit more details about which products we're going to take market. In the product area, there are 3 thrusts that are really important. The first one is the film gaps we have in the product portfolio.
As we mentioned before, to serve the markets we need to serve, we have to have a broad portfolio of par and frequency combinations, DC, AC, MF, magnetic frequency, high frequency, et cetera. In the broad matrix of products that the market use, we have some areas where we need to add new products. And we can do that organically or we can do that inorganically using our cash.
The second thrush in product development is to create market-specific and application-specific derivatives in markets we serve start to specialize. The same RF power supplies that are being used in semi is not needed for the same power and RF combination that are needed for non-semi, simply because of the requirements in terms of process and sensitivity process control and mainly costs. Derivatizing successful products and making it special for a specific market and application will continue to ensure that we are absolutely aligned with our customer needs.
Lastly, the industries we serve are going to go through significant technology inflection points. Semiconductor, just an example. The migration to next-generation technology nodes, and the move through 450-millimeter wafer size, these require new generation of power supply solutions. The earlier we engage with our customers, the better we'll be positioned to make sure that we win these design wins.
Lastly, we talked about expanding the TAM. We will grow into new applications in our core market, and we wish to enter to new markets, non-thin films markets with power solutions. We call it Precision Power Solutions. These are power supplies and control system with very high capability and position to serve other than thin film markets. And the way we'll approach this is both organic and inorganic plans.
Going to Page 24. This is our globalization or localization plan. We are at the final stage of building our R&D center in San Jose, very close to our customers. And we are working on the next phase of establishing an R&D capability in Korea.
Naturally, the San Jose group will be heavily focused on semi, the R&D group in Korea will be heavily focused on both semi and large area thin film processes, for example, flat panel displays. where we already have a manufacturing site and we already have a significant market presence. In the future, we hope to open centers in China and in Europe. And each one of these centers will become the center of excellence for a specific technology node or technology and application.
The growth into adjacent new markets will be driven across all the pieces of our business. Our service business has been fairly stable through the cycles as you would expect, but at the same time, the growth in the service business could be really accelerated if we branched out and started using our assets capabilities and knowledge to service other people products. Currently, we serve our own products only.
Our infrastructure and our capability could absolutely be used to serve other people products, and that's a growth opportunity that we hope to pursue. The new markets we talked about, the non-thin film applications, we're looking at generating incremental revenue in 2014 that will come from non-thin films market. The markets we're looking into right now are markets with huge TAM compared to the semiconductor industry or compared to the TAM we have today. Medical equipment, more specifically, Precision Power Solution for medical equipment both for treatment, but also for imaging. Automotive through electric vehicle charging technology and other industrial, non-thin film industrial markets and applications, where precision power control is required.
Lastly, just a comment about a small business we still have, a thermal instrument business. We plan and hope to have a significant revenue growth in this area as we translate our #1 position in the markets we serve into activities and growth in other markets. And we're already in the process of developing non-semi solutions and non-thin films solution for our thermal instrument business.
Going quickly to the next slide, 26, cash utilization. We continue to evolve, invest and develop our manufacturing and operation in China. We are in the process of converting this great production place to a mixed line technology and demand flow technology. Demand flow technology for a very high mix, low volume manufacturing that we have, will enable an improvement in our inventory churns and will improve our cash conversion cycle. At the same time, as we go through shrinking our spaces and more effectively utilizing our assets, we will implement capital reuse strategy and a mixed line methodology in only one of them where multiple products are being built on one production line instead of a dedicated line.
Using a similar line for a family of products will free up space, reduce cycle time and eventually improve our costs. We will not have to continue to buy additional capital equipment to grow the business and to grow capacity.
Similarly, we will reuse, test and develop our equipment through our R&D and service centers. And by that, we reduce a profile of required capital investments. We hope that, that strategy will work so that it'll help us to reduce our investment in capital. Lastly, we will use our cash for acquisitions, both in our core markets and the non-thin film markets.
I'd like to summarize with a very brief description of our product strategy for the 2 major market segments that we serve, semi and the non-semi large substrate or large surface area. Semi industry, we know where we are today, and we are in the trough right now. We believe, based on information we have and based on the analysis we have done independently and with our customers, that the semi industry in the short-term will not see a significant recovery before the second half of 2012.
We see a transition to investment in logic and then we hear the DRAM will not come back maybe at all next year. Our anticipation is to see the recovery in the second half of next year. Long term, with the improvement in the macroeconomy and the markets, especially consumer markets, there is the expectation there will be a surge and continuous growth in mobile devices and tablet PCs. But at the same time, the industries we serve will become more efficient. We're going to see larger and fewer end-use customers and wafer fab equipment companies as the industry will eventually go through consolidation. And we have discussions in the industry right now about new supplier engagement model where the end user as well as equipment maker realize that in order to be able to develop the technology they need for the next-generation wafer size or next generation technology node, they need an early stage engagement and they need to choose who they work with from the get-go.
Specifically, what we would like to do is to grow faster than the market while securing our next generation wins. And the inflection points in semi that we'll look at very carefully are the 3D devices, both transistor devices, but also 3D packaging, as well as a dual and triple patenting technology.
We will plan to launch new product solution in 2012, which will allow us to expand our advanced edge application position as the industry goes to the next level of technology. So in 2012, we will share with you news about new product.
In the area of 450 millimeter wafers, during the strategic horizon of our plan, we wish to become an early supplier of choice with both RF, DC high power solutions for the industry when the industry is ready to adopt the new wafer size. Activities and development programs are underway in the industry now, as the industry is getting ready for this new, significant inflection point in the business. Lastly, as we stop thinking about long term the 1x nanometer technology node, AE is going to launch a new breakthrough in enabling technology that will reshape the way deposition and edge applications are being used. The technology was introduced 2 weeks ago at a conference, we have secured our IP and we are working on something that is going to be amazing in terms of the capability, simplicity, innovation and cost.
Moving to the other markets we serve, PV solar glass market development. In the near term, we are living in an increasingly changing environment for incentives and political changes affect the market. Overall capacity and eroding ASPs of solar sales and modules created practically almost a paralysis in the market when it comes to building additional capacity. And we look at the first signs of a consolidating market. The industry still looks for high-efficiency and low-cost PV sales, as more and more pressure is being put on the balance of the system. Energy-efficient buildings will drive continuous growth in urban areas with low e [ph] glass, and in some areas, buildings within a PV-integrated system into the building are an interesting target.
In the long run, we believe that we will continue to see growth in North America, China and India, as well as growth in urban areas, mainly in Asia. The economic viability of solar, we believe, will become a reality, and that will drive future investment in the market. China's dominance in the crystalline silicon solar will continue, but at the same time, we expect to see continuing price pressures, while new cell technologies and solutions are being launched to market.
And in flat panel display, we see a decline in the world in the consumption of large screen TVs and an increase in handheld devices and mobile phones. The industry drivers right now are mobility and connectivity. And technology investment in the long term will focus on the user's experience. That will drive solutions like multi-touchscreens, high definition, 3D displays, which require technologies like active matrix, OLED, for our purpose, the deposition of edge of new material.
Our product plans for these markets: To address the future migration in China where the industry will consolidate and the need for cost-effective products will be critical, we are going to launch a new AC power solution, specifically derivatized and designed for the China PV solar market. This product will be launched in 2012. We will continue to develop our AC/DC power solutions for large area sputtering which will go to glass, but also for flat panel displays, PVD and AMOLED active layered display deposition. And lastly, our very successful, high-power RF power supply that is being used in Korea for the edge processes for flat panel displays, will be launched to the rest of the world. We have invested and we have served the Korean market first. This product will mature and will take you to rest of the world.
To summarize, our focus on restructuring and operating expenses to reduce the breakeven point, our plan to increase profitability through the thin film cycle, which will allow us to grow faster in the future and in the markets we serve, driving operational excellence and efficiency altogether, we aimed at an anticipated operating income of 23% to 25% at cycle peak. We define cycle peak at around $100 million a quarter. Thank you.
Danny C. Herron
Well, good morning, everyone. I think it's still morning. I want to talk to you about our solar energy business. It's a business that has grown extremely quickly, but it's a business that needed some change of direction, I would say, needed to get focused on profitability. And I think you'll see, as we go through this, that we're taking the necessary steps, to improve the profitability in that business.
So let me take you where we've been. It's a great growth story. This business, back in 2002, 2007, is when PV Powered and NA both started playing in the solar business. For AE, we introduced a 333 product in the 2007 timeframe. It wasn't exactly the right product for the market. Our theory at the time was 3 products would give you a megawatt. It didn't quite work out that way. We reintroduced it in 2009. You can see the significant increase in revenue. That was a 500 KW product. And so that time that we also started looking out to expand and broaden our product portfolio, so we acquired PV Powered in May of 2010.
And the combination of the 2, we've seen very accelerated growth. Our growth over this period of time was about 134% on a compounded basis. If you look at from 2009 through 2011, we've grown at about 151%, and the industry's only grown at 120%. So we're doing very well on the growth, now it's about getting ourselves focused on profitability. If you look at our milestones over time -- and one thing we've always done extremely well is build really good inverters that have very high efficiencies. Most of you are aware, there's a CEC website that talks about the average efficiency of inverters. And it really is taking the measurements throughout the day. It's not about peak efficiency, it's about how much energy harvest you have. If you look, we introduced the Solaron or the PV Powered back in the early days, and they had 96%, 97% efficiencies at that point in time. And we've just improved upon that as we've introduced more products.
If you look in 2009, our installed base had grown over 11,000 units, and we started introducing our SafeGuard and service offerings at that point in time. In 2009, another milestone for us was landing a contract with SEGIS to do some research and development, partnering with the government. And you'll see a product later on that is really an outgrowth of that, where we have a controller that can control up to 40 inverters at a time. And that's really an outgrowth of partnering with the government, Department of Energy on the SEGIS project.
And then if you notice in 2009, the 260 KW PV Powered product came out. It was best in its class, it served the commercial market. The large rooftop is what that product served. It was a mono-polar product. And then we also introduced the 500 KW Solaron product. It was a bi-polar design. And it has been extremely well accepted in the utility market.
And then as you've all pointed out earlier, in 2010, we chose to split the company into 2 strategic business units. The Solar business is entirely different than the Thin Film business, although we share a common heritage on power conversion.
In the solar business, our go-to-market is different. We're going to the end customer. The person is actually buying the product, putting it in the field and owning that product.
In the Thin Film business, obviously, we're selling power supplies to the tool manufacturers. So it's a whole different go-to-market strategy. We split the company into the 2 business units. It's been there for about a year.
And then this year, we just introduced a PV Powered 500 mono-polar product I'll talk about it a little bit later. And you may have heard last year, we were awarded the largest PV solar installation in the U.S. It's a project in Southwestern Arizona. It's 150 megawatts of AC power. It's part of a 800-megawatt potential project. So obviously, we're doing all we can to be a supplier of choice for them so they will continue to use our products in the future. In fact, I'll show you a picture of these, of installation in that project.
And I will say this: Our customer thinks enough of us. At the SPI show in Dallas about 4 weeks ago, they actually brought one of their products on the way to Arizona. They actually assemble 4 of our products on a skid in Lubbock, Texas, and then they ship them to Arizona. They actually stopped by the show and participated in the show for 3 days. So that tells you something about the customer experience, when a customer is willing to do that for you.
So let's take a look at our products. This will show you the 3 major segments in the North American market. The residential, it's really from 10 kW down. It's a small market. It's going to have about $370 million worth of TAM by the year 2014. And more importantly, it's not growing very quickly. It's about a 14% CAGR, and it has got tremendous competitors out there. I would almost call it like the TV market: There are plenty of ways you can buy TVs, there's only a couple of jumbotrons. Well, this is the TV market in inverters, very commoditized.
If you look at the commercial, though, the commercial segment is growing at about 36%. It's expected to have a TAM of about $500 million by 2014. It is an area that we are very strong in with our 260 PV Powered product as well as the new introduction of the 500 PV Powered product. Yes, that's very well in the large rooftop installations.
And then in the utility area, we really have the, one of the best products out there, the Solaron 500. That's a very strong growing market. The TAM is expected to be about 34% over the next 3 years. And it's expected to be, and I'll show you a graph later on, about $800 million of the TAM in the U.S. So the North American market is really dominated by the commercial and utility projects, and that's where we play and where our strengths are.
So the vision for the Solar Energy business unit is really to capitalize on our market-leading position in 3 phase inverters. It's what we've done well over the years: expanding our products, services and other offerings while maximizing our profitability and also increasing the IRR for our customers. It's about a customer experience where we're partners with them. We think this industry will go through consolidation over the years. And there'll be several large players that play in the utility and commercial space, we intend to be one of those players.
So as Garry talked about earlier and Yuval talked about, we are laying out our strategic plan for you today. It's based on 3 pillars: It's about margin expansion, it's about revenue growth and it's about cash utilization. We can do all those things better than we have in the past, and our intention here is to lay out the things we're going to do in the next 3 years so that you can hold us accountable for delivering against those targets. So we're sharing with you, as Garry said, our internal targets, something that AE has not done in the past. And we're doing that today, and I'll share those with you for the solar unit.
If I look at margin expansion in our solar business unit, one thing is we can restructure our operating expenses to reduce our cost. That is something we should have accomplished by the end of the year. And we're focused heavily on that. We can be more efficient in the things that we do. We're going to target operating income by 2014 in the 10% to 15% range. Now that's a little bit different than what you'd thought about this year. Obviously, ASPs have come down more drastically in the marketplace. But this also includes the full allocation of our G&A expenses, which if you look at our segment reporting, it's currently in a corporate bucket so this would -- and that's about a 3% impact. So if you add about a 3% number to that, you will get a relative range to what we've been talking about in the past.
We're going to transfer our sub-assemblies for our manufacturing to our facility in Shenzhen. We make these products now. We'll have people in our plants at the end of November starting to transition, we'll have the sub-assemblies transitioned in the early part of 2012. The process has already begun as we speak.
And we think we'll have the completion of our Solaron and our PV Powered production in the early 2013 timeframe. It's what we're targeting now and to have our production processes done in Shenzhen. Obviously, we'll still have final assembly and test in the places where it's required.
And we'll be moving to one consolidated North American location. We have a number of different products being produced today. Those can all be produced in 1 footprint. Obviously, that would be more efficient than trying to do it in 2.
We are doing a lot now to consolidate our footprint. By the end of the year, we'll be out of some excess warehouses in the solar unit, and that will allow us to not have to double-handle products. We have outside warehouses, so think about this: I've been in manufacturing for 35 years. There's nothing good about handling these raw materials or finished goods. You just create damage, you create losses. When we take inventory now, we take it off a truck, we put it into a warehouse, we store it for a while, then we take it and put it back on a truck and take it to our facility. That's what we mean by space consolidation and eliminating these warehouse spaces so that we're more efficient. We only have to handle it one time. That reduces damage, it reduces the amount of inventory you have to have and it reduces labor because you're not handling it several times.
We think most of our consolidation will really be done by 2013, that's what we're targeting now.
And then, the other thing we've really got to do and work on is, we need to redesign our products for low-cost manufacturing. Some of our early products were technological marvels, I would say, but they required specialized materials that maybe only 1 or 2 vendors made. Whenever you have that type of situation, guess what, you have a higher cost of sales than you really need. If you can design products that use common parts, you can apply leverage in your supply chain to have a lower cost of production. And that's what we need to do. As we roll out new products, we are designing them first and foremost for low-cost manufacturing.
As with Yuval, we're focused on revenue growth and expanding our TAMs. We need to expand our business globally. Now I'm going to show you our strategy in the short term, it's really focused on North America and there's some very good reasons for that. It's the fastest-growing market in the world. Europe is actually consolidating and will decline. And as Garry said at the beginning, fortunately, we're not in this Europe hangover that's out there with all the political and financial unrest over there. It's not impacting us as it is some others.
And we need to explore some organic and inorganic growth patterns. We're certainly developing products to be able to grow quickly. China is going to be a very low-cost market and so we're doing some design work to develop a product for that, but there may be inorganic opportunities to accelerate that process.
So some of the things we've done recently. Our -- one of our best-selling products is the 260 PV Powered, it's 260 kW product. And our customers like it so much they were buying 2 of them for 500 kW applications. We just rolled out at SPI our PV Powered 500, our kW product, the monopolar design. It's been very well received. We'll start making shipments in April in a substantial way. And that product is very well received: It's lower cost for our customer and it has a better margin for us so it's a win-win all the way around.
We have a 1-megawatt product that is currently scheduled to be completed by July, it's when we're targeting the rollout of that. And what's important about that is, as these utility projects get bigger and bigger and bigger, and they are -- I mentioned the 150-megawatt site, that's really going to be an 800-megawatt site. There are many, many large-scale developments out there today. Having a 1-megawatt product would allow us to put 4 of them on a skid and deliver 4 megawatts of inverters to the site. And I'll show you in a few slides from now the ease of installation of putting these things on skids to where we need it arrive at the site. You can basically have it installed in 4 or 5 hours and hooked up. So it's a very good product for us as we get the 1-megawatt out there.
And then there's other things beyond the inverters that -- we're working with SEGIS on our contract there to do data collection and analyzation of that. We've got the controller that we put out there that controls a number of inverters. So we're looking at expanding into adjacent markets so that we can also increase our TAM that way.
And then at the end of the day, we're about profitable growth. The industry is going to -- some third parties have tremendous industry growth out there. And we'll participate in it and we'll take our share, but there's always somebody out there willing to take a deal based on price only. Well, we're in business to make money and we're not ashamed of that. And we're going to be challenging ourselves to take profitable deals -- take deals with the partners that allow you to make some money. They make some money, it's a good partnership. So we're not going to chase some of the deals that other people make. So you might see our growth slightly less than the market growth, but we're focused on profitable growth.
So let's take a minute and look at the worldwide markets. So you can see on the left, and this shows 2011 and 2014, and this is third-party research of what they think the installations will be in these 2 years. So in the U.S., IMS is suggesting a 7.9 gigawatt market in 2014 versus this year. They're estimating about 2.9, so more than 100% growth over the 3 years. In fact, it is the largest market that is growing of all of these on the page. You can notice Europe and the Middle East and Africa is actually declining, it's looking at about a 5% negative CAGR over these 3 years. And then India, China and Australia won't be large markets. But if you notice, none of those markets are as large as North America's going to be in 2014.
So we're already in North America. We do very well here. We're going to continue to focus on North America because we can make some money here, but we're not losing sight of those other markets and the growth potential that they offer.
So let me take a few minutes and talk about our products. This is our commercial inverter product offering. We have the PV Powered product. We have the Solaron product. One of them is a monopolar design, one is a bipolar design. It allows us to play in both segments of the marketplace.
On the utility side, actually, the bipolar is very well accepted. It's a little bit more of a challenge on the commercial side so we have the PV Powered product that helps us. Our products have very, very good dependability. We have a 99% uptime in the field, and that's really important when you put in these products in the harsh conditions. One thing that's really different about the North American market and the European market, in Europe, they build a facility and they put the products in there. The facility is air-conditioned. It allows you to build a cheaper inverter because you don't have to have as rugged a case. You don't have to have internal cooling. So you've got some things that naturally cause your product cost be higher in the North American market, but ours are designed for very good reliability. And because of our design, in some cases, we reduce the balance of systems cost, which plays in the levelized cost of energy that I'll talk about in a few minutes.
And why are we playing here? Once again, this is a very strong market growth in North America, a 36% CAGR over the next 3 years.
So our utility-scale power stations. Basically, putting several inverters on a skid makes ease of installation. It's a very high-efficient and a high-quality product. And really, if you look, we have on the right, you can see one of the solar fields where we installed in multi-site remote monitoring. We have interactive controls for the utility. These are all things that our customers demand out of the product and that we've been able to deliver over the years.
So I've talked about it. This is the product, actually, this is one that came through the SPI show. So this is the 500 Solaron product that Zachry is putting 4 on a skid. They're building these in Lubbock, Texas. They actually can put it on a flatbed, no special permits, drive it to Arizona and then install it. And once the truck comes on site, the pad's already been poured. It's roughly a 4- to 5-hour installation so it's a really nice application of taking our product, doing some more work to it and then making the ease of installation in the field that much easier.
Zachry, historically, we've been able to build 8 to 10 megawatts a month and sort of in the industry average on sites. Zachry seems to be accelerating their demand so it's happening. Originally, this was a 18-month contract but they seem to be wanting to move faster, so that's a good thing. It'll work well with our 1-megawatt product when it comes out also because, with the footprint of it, you will also be able to do 4 of those on a skid and build it remotely and take it to the site.
This is the 500 kW monopolar that we introduced at SPI. Very well received. And remember, the solution here is this product is replacing what our customers were buying as 2 260 kW products. So we replaced that with 1 product, it's cheaper for our customer. It's a good margin for us, and it really has very good efficiency, as you can see. And this is, once again, this isn't our efficiency numbers, it's the California Energy Commission. So you can go to the website, and the beauty about our products is, when you go to that website and look around and compare them to others, you'll see our average efficiency is generally 1 or 2 points better. Everybody has some peak efficiencies that'll get similar but the average efficiency is what matters.
And then I talked about our solar plant controller, clearly an outgrowth of our partnership with the Department of Energy and the SEGIS contract. The design we came up with, it controls up to 40 inverters. In fact, let me show you a case study here: This is the PG&E site in California, it's a 35-megawatt site. It's actually planned to be 150 megawatts, so this is the first phase. And they're using 2 of these solar controllers to control the 70 Solarons that we have on that site, the Solaron being a 500 kW product. And this is 35 megawatts so it's about 70 inverters there and they're all being controlled with just 2 controllers. Very well received by our customers.
And then something that's really an outgrowth of our 30 years in the power supply business, we have a very strong service offering. We have a proven performance there that's really based on what we've been doing for 30 years in semiconductors. But if you look at it, we offer 99% uptime guarantee. We have some 20-year warranties that are out there. You can only do these if you have a really good service team.
And then we're also offering SiteGuard. You've heard me talk about this before. It is our life cycle maintenance program. We offer a menu of services that we would do for a solar field, from cleaning the panels to repairing the inverters to taking polarity checks and efficiency checks on the field every week, so our customers look at a menu of options.
So we currently have about 320 megawatts under contract. We've talked about this in the past as being somewhat of a future revenue stream and annuity for us. If you look at the market for the installations that'll be out there by 2014, and I'm excluding all the markets that really aren't open for a third party, so like, First Solar does their own maintenance on their sites, but if you exclude all those, we're looking at a market in 2014 of a potential 8 gigawatts. So 1 gigawatt for us is about a $10 million revenue stream at a $10,000-per-megawatt price. And the price runs anywhere from $10,000 to $20,000 per megawatt, so I'm using the low end of that scale. So if the market is 8 gigawatts by 2014 and we only captured 1 gigawatt of that, it's about a $10 million revenue stream. So we're very excited about the offering here, and it's, more and more, the projects get concentrated in areas. It allows you to lower your cost of service, and yet the price of service can remain the same, so a very good option for us going forward.
So now, I want to talk about LCOE. And this is where we've done a really nice job as a company on winning business. True, this is where we won the PG&E business, the Zachry business. LCOE stands for levelized cost of energy. And it's really about reducing the system cost, providing a lower-cost solution for the total system. So for instance, in our Solaron product, we can reduce the balance-of-system components that you have to purchase, so we can lower your upfront costs with that. As I mentioned, the energy harvest is extremely important.
If you're in a desert Southwest for 20 years, it's the lifecycle of these fields, and I'm collecting 97.5% of the energy being developed and somebody else is only at 96%, that 1.5% a year for 20 years when you have the sun shining for 12 to 14 hours a day, it's a lot of money. It really does improve your IRR on the project. So the energy harvest is really a real key for us, and that's why we continue, as we develop new products, to focus on that average efficiency.
And then our lower O&M costs over time. We have the best service offering, we believe, out there. We have a 20-year design life. We've partnered with Boeing on the PV Powered products to design reliability into theirs. In the AE products, it's really just an outgrowth of 30 years when you're building power supplies for a fab plant that goes down, it costs several billion dollars to build. You've got to have reliability, and we've had that. So we're really focused on the meantime to recovery on our product offering here, and it really plays well in the LCOE equation.
And then one of the other pillars is cash utilization. We mentioned that today when Garry announced our share buyback, that's a method of cash utilization that use our cash to do something that helps the shareholders long term. Well, we need to utilize our working capital more effectively. We have opportunities to reduce our inventory by increasing our inventory turns. And also, remember, I said about designing new products and designing them with common parts versus specialized parts. Common parts don't have as long a lead time, you don't have to build as much buffer stock. So there's lots of reasons we've got to design these future products for low-cost manufacturing.
We need to restructure our supplier agreement to let them participate in the solar industry. Most of you know, most of the terms are moving towards 90 days. We're in the construction business, it's really what inverters are sold to, and the marketplace terms are moving more and more to 90 days. Our suppliers need to get on board. We're in this together as partnership so we need to restructure agreements with suppliers to match our payment [ph] customers.
And we think, looking at our business, our strat plan, that we have an opportunity to deliver in the solar business over $50 million of cash flow in the next 3 years.
So we deliver all the money, what are we going to do with it? One of the things is to look at more development and some inorganic acquisitions. So we're fortunate to have a business that has a very healthy balance sheet. We're delivering more cash over the next several years, and we hope to deploy that effectively to continue to grow the business in a profitable way.
So I want to spend a couple of minutes and just sort of give you our view of the current market in inverters. Everybody has a view, I read all of your research when you write it so I know everybody's got opinions on this. So this is the current view we have.
Certainly, there's plenty of pessimism out there. We read everyday about panel prices continuing to drop. It's certainly impacted our business. We've seen the pause button hit especially on the commercial side. Utility doesn't seem to be as affected as the commercial side, but certainly with the panel price drops that we've had, there's been a slowdown in the marketplace. If you look at Europe and all of the financial unrest over there, I think it'll probably be a tough winter in the European markets for PV. And certainly, we will see some fallout in the U.S. on that.
If you look at the industry, there will be some consolidation. We've unfortunately had some very high-profile, we had one very high-profile bankruptcy. Every other day, we read about it. The government is supporting the loan they made. But we're going to have consolidation in the panel side of the house, and we'll probably have some consolidation on the inverters side of the house. So that's going to happen.
But then, if you look at it, if you're the guys that are providing a solution to your customers, in the long run, you'll win. And that's what we're trying to be: as a solution provider to our customers, providing them good product at the right price with the right amount of uptime.
Let me just show you on a graph here sort of the state. And the real intent here is not to point out this is the industry because I think the industry is different depending on what country or region of the world you're playing in. If you look at '08 through 2010, we had very lucrative feed-in tariffs in Europe. We all know that. I mean, you can get paid EUR 37 then per kilowatt in Italy, and yet in the U.S., we're selling power into the grid at $0.09 or $0.10 a watt, so large difference the feed-in tariffs have made certainly in Europe. Those are coming down. We're seeing the feed-in tariffs reduced. You saw where we showed that Europe, the Middle East and Africa are going to decline about 5% annually for the next several years, but that will transition to other parts of the world.
And if you look at the U.S., we're getting closer on the right-hand side to grid parity. Then if we can sell power into the grid at $0.10 a watt, natural gas is probably dependent on the price of natural gas somewhere in the $0.07 to $0.09 range, so we are certainly getting closer to grid parity, which is something the industry needs with the lower-cost panels out there that will improve as panel prices decline and with new technologies. We'll get more efficient on inverters. There will be new technologies on the panels that'll collect more electricity, so we'll get closer and closer to grid parity.
At the end of the day, though, it's all about these big financial sponsors and the owners. It's about their IRR. And that's really what we're trying to deliver to them with our products, with our levelized cost of energy focused. We're delivering a better return to the people that are building solar fields. And we're there to be their partner through our service offerings for the next 20 years.
In our sort of view of what's sort of happening in the industry. If you look on the left, that, for sure, to me is a residential inverter market. I've been to the last, I don't know, 4 or 5 solar shows. I've seen a lot of you at several of those. Everyone we go to, we see a lot of new inverter manufacturers. They all seem to be in the residential side. It's almost like the only differentiation on the residential inverters anymore is the color of the box and the emblem on the outside. But in the high-powered stuff, the commercial, the utility scale, there's not new people coming in. There are people out there. We have our competitors that we're fighting with, but we continue to grow.
We had a 27% revenue growth in Q3 versus Q2. And once again, we're playing in North America, which right now certainly appears to be the right place to play. We think, long-term, you're going to see a consolidation. You'll see 3 or 4 or 5 major players out there on the utility and large commercial scale. There'll always be a lot on the lower end of the commercial scale, but when you start talking to the 500 kW products, we think that'll get near down to where there's 4 or 5 key players long term. And once again, we intend to be 1 of those.
If you look at the worldwide inverter demand, it's still growing, it's still a great industry. I mean, 17% growth? There's not many industries out there that have that kind of growth on a worldwide basis. You can see where it's coming, though, and really, Europe has plateaued. It's going to come down. We're going to see growth really in Asia, and the Americas is where it's going to be. And once again, why are we so focused on North America? Because it plays to our strengths. Our strengths: utility and commercial scale.
If you look at this, GTM doesn't break out segments so they have a little bit different number than IMS. The interesting thing, though, is that CAGR is about the same. It's in that 30% area whether it's GTM or IMS. IMS is a little bit higher on what their expectations are, and they do break it out by segments. And I think the interesting thing to note is, in 2014, if you look at this, the utility section will be over 50% of the market. And that plays well to our Solaron 500, plays well to our currently under-development Solaron one-megawatt product.
So where are we going, our goals? Clearly, position for growth, profitable growth. It's not about growing for growth's sake. Reducing our breakeven point to where we can be profitable at current levels of sales. And we can grow our profitability by not adding cost as revenue continues to go up.
We're moving our sub-assemblies to China where we have production. We'll consolidate our footprint. And at the end of today, it's all about getting our operating income up.
Now we anticipate somewhere between 20% and 22% CAGR over our 3-year plan here, and we're looking at 10% to 15% on the operating income line for our solar business unit. And once again, I'll remind you, that is with an additional 3 percentage points or so of G&A cost versus what we have today.
So now, I'm going to take my solar hat off and put on my CFO hat for just a second here.
The restructuring plans that we've talked about, lay it out for you. This is what we are looking at right now. Our organizational restructuring, we expect by 2012 to have about $9 million implemented. We announced just last quarter our space consolidation, and these are the impacts on 2012. So we'll be exiting all the space we've talked about in 2011, it just won't hit the bottom line until next year.
Our consolidation and relocation to China, delivering good results. In fact, I want to take you to the right-hand total column. So our restructuring plan, right now, the cost initiatives just from our restructuring, about $54 million over this 3-year timeframe and it's going to cost us about $16 million in charges. I think that's a really good return. I wish I could find another $20 million in charges if I could get another $60 million in reduction.
So we're really focused on this. As Garry mentioned, the organization is truly focused on profit and growing the bottom line. We want to have great technology, but we're here to return a return to our shareholders. And that's a new focus and I think it's a healthy one.
And then I want to take the restructuring plan and I don't want to add to it. Garry talked about compensation plan changes; talked about, in the past, we have been very dilutive on our equity plans. We're reducing that dilution, we mentioned that on the last earnings call, from about 4% annually to somewhere in the 1.5% range. So we're really focused on providing more to the shareholders.
You add all these up, you tax-effect it at our current rate of 25% or so, and you're looking in 2013 just the things that we've talked about here today, being more $0.43 a share. And I would add that, that is certainly without any share buyback. In fact, if I look at our summary for the company and the things we want to leave you with today, we're looking at a CAGR of about 11% over this 3-year period of time.
As Yuval showed, there are some cycles in our 2 businesses. The Thin Film business, we expect 2012 to be down versus 2011. We should be up in our renewable business. But over time, over the 3 years, we're looking at 11%.
If you look at our cash generation, we expect to generate between $180 million and $200 million worth of cash flow. And certainly, these are internal goals, but we're sharing those with you because we're, we feel that we can hit these or we wouldn't sit up here and share it with you if we didn't have a good probability of hitting them. But they're our internal goals that we're trying to focus on.
And if you look at our EPS, somewhere in the $2 range, somewhere between $1.90 and $2.10 in 2014. And I would add, that is without the share buyback that was announced today. So just, you can do this math yourself, but for some rough math, if you took Friday's closing price, seeing it was $8.94 a share, you divide it out, it's probably worth between $0.40 and $0.45 a share to us on current share count. So the share buyback could take that number from $2 up to the mid-$2.40-ish range based on how much we're able to get, bought back at what price but based on Friday's price. That's what it would deliver.
So I think our program is to break for Q&A, let you grab some lunch, if you want to. Garry and Yuval and I are available for Q&A session now. If you want to grab some lunch, and we'll work through it. Vanessa's circling in the back with a microphone so [indiscernible].
I have one right here.
Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division
Mehdi Hosseini, from Susquehanna. Back to this earning, when I -- if I just do the rough math, solar is going to account for about 40% of that $2 earning by 2014. And you you're making an assumption that revenues are going to grow 20-some-percent at compound annual growth rate and your margins are going to expand. Can you try to help convince me that those assumptions are kind of conservative assumptions, or the 20% growth per year? It seems to me, pretty aggressive, given all the policies that we don't know how they're going to impact them and all the foreign companies that are coming to the U.S. and trying to penetrate the U.S. market.
Danny C. Herron
Great question. Look, our 20% to 22% growth is conservative versus what third-party research is out there saying. They're calling for a CAGR in the 35% range. We think we'll be below that because we're not going to chase all the deals that are out there. We're going to focus on the deals that we can make money on and provide good service to our customers. If you look at what we've grown this year, we were $107 million last year, and I think, if you do the midpoint of our guidance, you're somewhere in the mid-190s for this year, so about 75% or 80% growth. If you look at last quarter, and you talk about foreign competition, I'll just say, last quarter, on everybody's reported their earnings now. We reported 27% growth in revenue for the third quarter. The others that reported their revenues for the third quarter didn't have growth. So I think our products are pretty well accepted, our customers are continuing to ask for our products. And so we feel confident that the numbers we're giving you are in the relative range of our internal goals that we can hit.
Garry W. Rogerson
Just on that 20% revenue growth. We also said we had a book-to-bill that was positive. So we had a book-to-bill that was positive, and we grew our revenues pretty well. By the way, I would rather be a company that's in the U.S. in a growing market than in a company that's in Europe in a shrinking market, trying to get into the U.S. with products that actually might not or might fit that marketplace. Our products are designed for the U.S. and Canadian marketplace. That's what they're designed for. That's been our whole focus for the last few years. So we're in great shape. I mean, I've taken products that are not quite right for the U.S. -- for Europe from this company to Europe. It doesn't work, it doesn't work. You're force-fitting them. So we're actually in a good position product-wise for U.S. and Canada, very good position. And we have decent market share already. Now on top of that, we don't intend to grow into Europe. I mean, everyone knows where we've got to focus our attention, it's on China or in India. We don't have to worry about Europe. It's U.S., Canada, China, India, perhaps Latin America. That's it. [indiscernible] finished. And everything else is a bonus. I mean, Italy is a basket case, yes? It's a basket a case. I mean, do you think anyone is spending money in Italy at all at this moment? Of course, they're not. They're petrified. You think you can get money? You can't. I mean, we're in a great position in the U.S., we've got great products, we can grow in the U.S. It's not going to be easy. It can be really tough because, as you say, other companies are coming in. Hey, I like my hand of cards. I think it's quite a good hand I've got here. I've got a couple of aces. Thank you very much.
Danny, 2 questions. Number one, the model you represented, like, $700 million revenue run rate to the $2 EPS, it looks more like a mid-to-peak cycle number. I'm just trying to figure out, after this restructuring is done, how do you envision your EPS at the bottom of the cycle? Are you going to be better than breakeven, or is it going to be around these levels?
Garry W. Rogerson
Well, we, I think we mentioned, roughly the $100 million level per quarter, we would be breakeven, a little bit below that on average. Am I right?
Danny C. Herron
Yes, I think we've got both of our business units under $50 million for breakeven now.
All right. And then another question for Garry. Given your background in Varian, I know we've covered it, but from my understanding, it is more of, coming out of the financial crisis, the company was relatively weak, smaller competitive comps, so you did the right thing by shopping it around and selling it to Agilent. I'm kind of looking at, when you look at Advanced Energy...
Garry W. Rogerson
We didn't shop it around. Someone approached us. And I think our shareholders are very happy with what we did, extremely happy with what we did.
And so you did the right thing for Varian. And when you look at Advanced...
Garry W. Rogerson
No, I did the right thing for our shareholders.
For your shareholders. And when you look at Advanced Energy, do you feel like you have the right products at this time and you -- it's just a matter of scale? Or do you feel like you need the bulk up more on the product line before you get to be a much of a bigger company?
Garry W. Rogerson
First thing, whatever happens, I do the right thing for the shareholders, yes? I make decisions for our shareholders. There are lots of gaps in that product line. So I mean, we touched them and we're already in the solar. We're U.S.-centric. I'd say that it's a positive. Hey, you can turn around and say it's a negative. So we have to fill the holes there. In the thin film, we've got some gaps. We're focused on too few marketplaces at the present time so we need to broaden that. So there are clearly some gaps in our product line, but that's opportunity for the future as well. So I'm happy with our position. Does that answer that question?
Olga Levinzon - Barclays Capital, Research Division
Two questions. I guess, Danny, you mentioned -- or Yuvali, you mentioned that, by 2014, you expect a $400 million run rate annually for the thin film business. How much of that do you expect to come from some of the potential bolt-on acquisitions and how much from the adjacent markets that are -- you're not currently targeting?
Olga, I think I'd like to correct. What I've said is, at 2014, we expect to have an operating income or anticipate an operating income of 23% to 25% based on a peak cycle. And for us, the peak cycle is $100 million a quarter, right? So I didn't project weather for 2014. In our plan, right now, nothing that we have in the plan right now includes any acquisition. And any bolt-on acquisition, we basically think about or could be a driver for acceleration of technology adoption or additional revenue stream combined with that. And the other comment I made maybe was misleading or confusing, is that we anticipate an upside of revenue that will be generated from non-thin film markets, and that's also is not included in the strat plan. So the total numbers Danny showed up by the company in general does not include thin film acquisitions and does not include thin film upside or RBU upside from revenue generated in non-thin film applications. For example, medical, automotive and industrial. Did I answer your question, Olga?
Garry W. Rogerson
Just I think, if we get the revenues, we hit the number. The question is, can we get the revenues? And I think, even though we've shown you an organic plan, I think some protection might come from bolt-on acquisitions, as I see it into the system, as we put new technologies in or new products that can be distributed for us through our distribution system. I've done multiple bolt-on acquisitions even little ones, technologies come in, just a few of the 5-multiples [ph], about, probably done 15 or 20 of them in the last few years. And they really do help get some technology in quickly. So it is an organic plan. But if I said where the risk is, which is what I would ask if I was you, it's the revenues. And the way we can mitigate that risk is through bolt-on acquisitions, a little bit of acceleration here or there. I think we're getting our cost structure really under control. And I think our margins, our gross margin, the focus there now is enormous and it's really good to see. I mean, really, people taking the baton and they're off to the races.
Olga Levinzon - Barclays Capital, Research Division
And just a follow-on question on the inverter side. In your 20-plus-percent CAGR through 2014, how much ASP pressure on a per-product basis are you baking in?
Danny C. Herron
We haven't disclosed that. I would say that we have focused on that. We have cost reductions that are helping us maintain margins, the move to China for sub-assemblies, but we haven't disclosed what our assumption is on the ASPs. Obviously, they're going to continue to erode, and we think we've got that covered in our structure.
Garry W. Rogerson
I've a really patient person waiting here, and I'm going to...
Thank you. After the restructuring is completed, I'm anxious to know what -- or curious, what resources will you have left in Fort Collins? And from a longer-term standpoint, does it make sense to maintain your headquarters in Fort Collins?
Garry W. Rogerson
Firstly, we have a great R&D group in Fort Collins and we will always have a great R&D -- always, that's not the -- we assume we're going to have an excellent R&D group in Fort Collins. We are, as Yuval have said, moving some out to be more close to the customers. So then the question is, where should the headquarters be? I don't think it matters where the headquarters is, quite frankly. I mean, we are -- and you could argue it could be in Shenzhen. I mean, I wouldn't, but you could argue that. I mean, it doesn't matter where the headquarters is.
[indiscernible] from a standpoint, the travel sort of standpoint of the labor pool, things that...
Garry W. Rogerson
From the labor -- well, again, arguing again, as more and more engineering being done in Shenzhen, the types of people you can get is going up so more and more of our resources might go there. So from that point of view, yes. There's few [indiscernible]. Where we are, I think, is a little bit irrelevant, a little bit irrelevant.
Okay. And I also [indiscernible] to know more about [indiscernible].
When the company went for expansion of its product lines servicing the semi industry, one of the acquisition was a parameter company called Sekidenko, and we acquired this company and became one of our product line, if you may. We have retained this product line simply because of that fact that it's the #1 leader in technology and in capability in the markets we serve. It's an extremely well-run and self-contained product line located in Vancouver, and it allowed us to have a unique access to other places that our prior suppliers were not present and work with customers, opened doors faster, if you may. It's a great little product line. And we continue to support the product line and both in terms of market share. As was published by VLSI Research in 2010, this product was, by far, the market leader in this space.
Danny, got a question here maybe on the outsourcing of the -- sorry, offshoring of the sub-assembly manufacturing. You talked a little bit about improving the inventory structure, both on the amount of raw materials and finished goods. But with the offshore manufacturing of the sub-assembly, I'm assuming we're going to have to have a little bit of an increase in the lead times as we're getting those products back to the U.S. marketplace. Do you think this will need [indiscernible] force you guys to incur a little bit larger finished goods inventory just in order to mitigate any potential shipping issues as you're you bringing those sub-assemblies back to the U.S. and North American markets?
Danny C. Herron
Yes, I guess I would answer that, if our inventories were where they probably should be, that might be the case, but they're not where they should be. So by getting them under control, we're going to see a net reduction in our inventories even after we've outsourced. You're right, there's more time on the boat, it will take 2 or 3 weeks on the boat for products to get here. But once again, you've seen our inventory balances grow. We have some opportunities there and we address them. But I don't think it'll going to be a net add.
Garry W. Rogerson
By the way, just to say, we are, we will move some, we will move sub-assembly to Shenzhen, but the real bonus will be, of course, outsourcing within China or the surrounding countries. So you were correct in the first, we are outsourcing more and more.
Yuval, I wanted to ask you a little bit about the restructuring program. If some of your thin film customers, like Lam Research, are growing their R&D dollars by 10% to 15% annually in order to support 3D and 1x nanometer development, so the first question is how did you factor in the expanded R&D programs of your customers into the cost saving plan?
It's a great question. What we see, as I mentioned in my presentation, is a change in the engagement model. And in order to speed development to market and reduce developing costs, if you -- the classical semiconductor process of developing a next-generation tool involved going out of the supply chain and working with 3 or 4 suppliers of a component or a tool to have them develop a solution for your next-generation node, be it etch, deposition, larger wafer site. This model is not sustainable anymore. And the reason it's not sustainable anymore is the fact that the cost of evaluating, let's say, RF power supply, the cost of evaluating 3 different RF supplies from 3 different suppliers, and then choose one of them as a supplier of choice, is extremely expensive. So what we hear in the industry is a model that was working in the past in Korea, for example, you choose who you work with from the early stage, the point that you work with your choice of supplier to create the spec together and not go out with the spec and send it to 4 suppliers. What we see now is happening in our industries and is exactly that. And it's not only semi. So our engagement from an early stage will allow us also to pick and choose and decide what not to do. Our engagement in the early stage will create more collaborative relationship with our customers so it will be more transparent, more open and will go through more quick iteration instead of developing a product and, 18 months later, give it our customers. By that time, they have a new spec. So the, we believe that the efficiency, developing efficiency and the cycle time reduction will dramatically reduce the cost of engineering. The other thing that we believe will improve is shortening the distance, right? And we went through 2 years of really good experimentation when we decided to locate one of our high-power RF production lines in Korea. The intent was not just to put a line in Korea because that's cheaper than China, it's not. The intent was, can you localize where your key customer has their key development centers and when they need local content and, at the end of the day, reduce your operating expenses, right, be closer so you can gain access when you need it and capture market presence, exactly what we did with a high-power RF power supplies that we sell in Korea for flat-panel display etch. And this was the important learning cycle for us, preparing us for next bold move. We said, "You know what, we can do that. We can co-locate engineering resources." And again, I'm not talking about moving a whole department. We're talking about a core engineering team localized, locally hired, right, with the right capabilities and training to work intimately with the local customers, right? If you look at what's happening at semiconductor wafer fab equipment industry in the U.S., they're all moving: Singapore, China, Korea, localizing. We have to morph and increase our flexibility and be with them, as well as with our Korean and Chinese and Japanese customers localized. So in a way, it's counterintuitive. You guys let so many people go, how do you catch up? We believe that the way we go about this, it's not only shrinking the size, as I've said, but together with that, do things differently. Different model. And that will, I think, will increase our efficiencies.
And Danny, can you give us some detail on how you want to implement a buyback program and then what you think the minimum cash use are?
Danny C. Herron
We, our press release today just announced that we'll be doing open-market purchases and other type of contracts, if you will, so it's a little early to detail that out. But we'll talk about it on our earnings call, what we've accomplished, when we have earnings call in late January, early February.
Edwin Mok - Needham & Company, LLC, Research Division
Danny, Edwin Mok with Needham. So a quick question on the solar side. You talk about operating expense reduction on $6 to $7 million, right? It's probably for implementation. And you said that you're targeting this operating income of 10% to 15%. That's including the quarter you have previously stripped all those corporate expense, so that's a pretty big operating margin improvement. And I was wondering, how much of that is product cost reduction versus just reallocational, you talk about, for example, assemblies, changes in plan [ph] and outflow?
Danny C. Herron
Yes, there's a -- certainly, the operating expense is a big piece of that, but also the product cost, as well as doing a better job of selling for profit versus selling for revenue, okay? We're in this to make money so there will be deals that we won't chase. We've had tremendous growth. There's been a lot of pressure out there. While I don't think it's been that bad on some of the deals we've taken, we are clearly focused on taking deals that we can make money on and be a partner. They want us there for 20 years, we want to be there for 20 years, but we're not going to chase every deal out there. If you look, I mean, our margins in the East, I mean, you see us all report every quarter. You see what people's margins are doing. You see what our growth rates are, and you see others with growth rates that are non-existent, and their margins are coming down. We're focusing on the right customers, it's the best way I can say it.
Edwin Mok - Needham & Company, LLC, Research Division
Great. And then, Yuval, just a follow-up question for you...
Garry W. Rogerson
Just on that one. We just released one product, which is starting to ship in April, which will have much better margins, and it addresses a very large part of the U.S. marketplace. Danny, [indiscernible] how much it address the 500 product?
Danny C. Herron
Oh, it's a $500 million market.
Garry W. Rogerson
So obviously, we just released the new product, which will be shipping in April, which has better margins than the previous one. So -- and then we've got another [indiscernible] coming one next year. So there are new products coming along all the time for us in the U.S.
Edwin Mok - Needham & Company, LLC, Research Division
Maybe a follow-up to that, then. So what is a much better margin, the 5% point, 10% point increase improvement?
Garry W. Rogerson
We don't disclose that. I've dealt with products in the past that have 80% margins so the margins here absolutely shock me. So we have to improve that. Well, I'm talking about gross margins here. We have to increase the -- improve the gross margins very sensibly.
Edwin Mok - Needham & Company, LLC, Research Division
And now I have a question for, Yuval. You talked about some of the new markets such as TVs as well as metal equipment, right? I know one of your competitors is already in the medical equipment space, and actually, they talk a lot of business there. When do you think you -- when do you expect to actually start having product and maybe generating revenue from those initiative?
Edwin, we are engaged right now, and I cannot disclose with whom, we're engaged right now in the RF field of medical applications. Our products, one of our products, it's an RF product, is in human trials right now. It'll take time for us to go from that space and with the customer we're working with to go mass-produce. But at the same time, it allows us the learning cycle and intimacy with the FDA process and with the market -- with the applications, that will allow us to engage with the market either organically or inorganically. As I mentioned before, our internal goal is, by 2014, to have an incremental 10% of additional revenue coming from non-thin films, all right? Now if you look at, for example, at the RF market, RF ablation market in the medical equipment industry, it's a $1.7 billion market today, expect it to grow to $7 billion in 6 years. It's a hugely growing market. And if you look at what we do, we provide precision, power conversion and control solutions so new and emerging markets where precision power control is essential are markets that we aim at looking into and to penetrate. Now I know that other companies in the field also serve life science or other markets, we understand that. We believe that, with our technology and capability, there is room for us to grow in these markets. The markets we're looking into, each one of them individually is bigger than the wafer fab equipment market.
Colin W. Rusch - ThinkEquity LLC, Research Division
Great. Colin Rusch from ThinkEquity. Can you walk us through which components you're trying to work on in terms of extending the supply agreements in the supply chain and where you think you're going to get the most traction there?
Danny C. Herron
Not any specific suppliers, okay? But at the end of the day, our customers are looking at 90-day terms. Our suppliers aren't used to giving 90-day terms. So across the board, we've got to refocus the partnership here to where we're buying products from them, and we need them to accept terms similar to what we're getting paid.
Colin W. Rusch - ThinkEquity LLC, Research Division
And when your issue POs, how often are you issuing POs? Are they giving them weekly forecast, quarterly forecast, what are you giving?
Danny C. Herron
We have weekly forecast for it. Depending, it's like any manufacturing environment, depending on the product you have, ABC designations on the inventory. So some items have a higher frequency of orders than others.
Colin W. Rusch - ThinkEquity LLC, Research Division
Great. And Dan, I appreciate the commentary on the accountability in setting some targets for us. That is, it's good for us to build at, hang our analysis on a few key points. As you look at the cost reduction, you're talking about new products in April, July on the solar side. Can talk about what the margin trajectory looks like over the next couple of quarters? Is this going to be a little bit rougher before it gets better? How should we think about looking at some of the trends over the next couple of quarters before you start to see some of the benefits start to roll through the P&L?
Danny C. Herron
Certainly, we're not talking about the, we're not giving new guidance or talking about 2012 at this point. We've laid out our 3-year plan. There will be cycles in there. But we're certainly focused on getting our sub-assemblies transferred the end of this year, first part of next year so that will start having some positive impact in 2012. And as we consolidate our footprint, that's certainly going to have some positive impact, as we showed you in our cost reduction plan. But we haven't laid out the percentages by product.
Garry W. Rogerson
What we have said is Q1 and Q2 are going to very tough. We expect to get -- and we're now into more about thin film, which is of course the driver at the present time. In the second quarter, we'll start to get orders, which will start to ship in the third quarter of the year. That's what we said.
You talked about expansion. And would you still try to be #1, #2 in the market? Or as I think you mentioned, Garry, about more of a protective standpoint, would it be more of a supportive role? In other words, would you, if you choose to expand either organically or through acquisition, would you just want to maintain similar market presence, or would you allow profitability or a similar profitability but a lesser market presence and you could be happy with that?
Garry W. Rogerson
'I'm very much more biased towards making money than market share, that's number one. Number two, very often you have to have the high market share to make money so I'm not -- so but actually, our focus is on making money at the present time. If we go into new markets, so when we go into new markets, actually that will be niche markets. I mean, these are high-performance markets, and I would expect us to have very strong market positions in those areas, I mean, because they can be small markets. The parts we're in will be small, we'll be niching it to death as we get to our high-performance niche. And Yuval said before, we're not into charges or whatever it is, it's going to be a high-performance niche or we won't get the price of the product that we want to get.
And would you be working with similar customers, same customers? Or would this would open up new doors for new customers but similar products for you?
Garry W. Rogerson
That's why we -- when you listen to Yuval, you, that is correct. It's different customers, similar technology.
A follow-up with Danny. Yuval mentioned about using thin film opportunity for the electric vehicle market. Have you guys considered the inverters for electric vehicles, is it something you can use the technology to get into? Or is that more a captive business, like what Tesla does today?
Danny C. Herron
Yes, certainly, the technology would work there, but that hasn't been our focus. We don't see that as a huge market. So we're trying to stay where we can make some money, which is the utility and commercial scale.
Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division
I also have 2 follow-ups, starting with solar. Can you remind me what your strategies with penetrating the Chinese and Indian market and strategy in terms of channel strategy? Are you going to partner with distributors, are you going to go after developers? Or whatever, however you want to elaborate on it. And then I also have a follow-up with Yuval on the thin film.
Danny C. Herron
Okay. In the solar market in China, we have a very strong partner now in a company called SGEG that we've been working with. They're doing our production for us there. They also are one of our distribution companies there. We certainly need to partner with someone in China, that's how you play in that market, and that's our focus. We have to develop a lower-cost product to address the Chinese market needs. It is going to be a more price-sensitive market than the U.S. has been. India, we currently have someone down there this week, talking to various ways of going to market in India. We haven't penetrated that market yet, we're just in the infancy of it, and we'll give you more news as that develops.
Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division
Sure. And then another one in thin film, and I apologize if I'm asking the question if it's already been addressed. On the PV part of the thin film, how do you see the growth on the margin profile? Is that one segment that you could see it disappearing? And if so, is that baked into your cost-cutting efforts? Anything you can elaborate on it?
I cannot talk about the gross margins we have for a specific products we sell for the PV solar market. I can tell you that it's absolutely in line with our targets. What we saw is a very aggressive investment in capital equipment in China both Tier 1 and Tier 2 and I would call some of them even Tier 3 companies in China that were racing to build manufacturing plants for solar sales and either buying, manufacturing equipment to Tier 1 from outside of China. And a year ago, we announced a big win that we had in Europe. We're one of the first-tier suppliers for the crystalline silicon PV market. And some of them either it was local suppliers or hope build their home [ph], they were basically homemade equipment. What we see right now, maybe, is simply a decline in investment. And I do not believe it's a matter of ASP or it's just a decline. If you look right now in China, you're going to see a lot of finished good products sitting in the parking lot.
On the page Semiconductor Product Strategy, I wonder if you could read to me again the timeline in going from the next technology node to the 400-millimeter wafers to the I guess that's the nanometer technology node and that disruptive breakthrough that you're talking about, could you offer a timeline there?
Are you talking about the industry timeline or our timeline?
Well, it's your timeline [indiscernible].
Well, these are development programs that are happening as we speak, all right, with our customers. Especially when you talk about 450 millimeter, there are efforts right now in the industry to build the first tools expected to be shipped in Q2 next year where some of the leading will start running them for automation, wafer handling, et cetera, granted mass production for 450 is expected in '16, '17. But we're talking about a fairly lengthy development and evaluation period where the industry goes through developing these technology and tools. Automation, how do you move those wafers is number one, and then what happens to the processing deformity across such a huge wafer. We're involved right now with our customers, some of them, those who basically have the wherewithal and the muscle to develop these tools, in providing them with a power solution needed for 450-millimeter wafers. When it comes to 1x nanometer technology node, this is way out there, we're talking about fundamentally changing the technology and going from a simple, historical power supply and matching the effort that goes to a chamber to a new technology where we basically redefine how power is being used in thin film processes.
Okay, so that's, we're talking about [indiscernible].
We're talking about years, but the penetration of this technology and the securing of IP needs to take place in earlier stages.
Garry W. Rogerson
We're about to -- oh, we're not about -- yes, we are about finished. We are finishing. That means finished, is it? Okay. So we are finishing.
Thank you so much for coming today. I hope this has been useful for you. We are certainly changing our approach. We are trying to be more granular as we go forward so we will give you updates every quarter as best we can. Obviously, there are some things we can't do. And if things are going astray, we will tell you they're going astray and we'll tell you what we're doing to adjust our direction. So again, thank you so much for being here. And we're around now. So thank you. Goodbye.
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