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Executives

Erica Mannion - IR

Michael J. Ahearn - Chairman and CEO

Jens Meyerhoff - CFO

Bruce Sohn - President

Analysts

David Edwards - Morgan Stanley

Steve O'Rourke - Deutsche Bank

Michael Molner - Goldman Sachs

Satya Kumar - Credit Suisse

Vishal Shah - Lehman Brothers

Robert W. Stone - Cowen & Company

Eric Brown - Banc of America Securities

Jesse Pichel - Piper Jaffray

Kelly Dougherty - Calyon Securities

Sanjay Shrestha - Lazard Capital Markets

Adam Hinckley - Oppenheimer Capital

Colin Rusch - Broadpoint Capital

Paul Leming - Soleil Securities

Adam Krop - Ardour Capital

Michael Carboy - Signal Hill

Brian Gamble - Simmons And Company

First Solar, Inc. (FSLR) Q4 FY07 Earnings Call February 13, 2008 8:00 AM ET

Operator

Good day everyone and welcome to the First Solar Fourth Quarter and Year End 2007 Earnings Conference Call. This call is being webcast live on the Investor Section of First Solar's website at www.firstsolar.com. At this time all participants are in the listen-only mode. As a reminder, today's call is being recorded.

I would now like to turn the program over to Ms. Erica Mannion, Investor Relations for First Solar Incorporated. Erica, you may begin.

Erica Mannion - Investor Relations

Thank you. Good morning everyone and thank you for joining us for First Solar's fourth quarter 2007 year end conference call. This morning, the company issued a press release announcing its fourth quarter and 2007 year end financial result. If you did not receive a copy of the press release, you can obtain one from the Investor Section of First Solar's website at www.firstsolar.com. You may listen to an audio replay of this conference call by dialing 888-203-1112 if you are within the United States or 719-457-0820 if you are not calling from within the United States. Please enter reservation number 9023734. The audio replay will remain available until February 16th at 10:00 AM Eastern Time. Also a webcast will be available in approximately 2 hours on the Investor Section of the Company's website and if you're a subscriber of FactSet, you can obtain a written transcript of the conference call within 2 hours.

With me today on the call are Mike Ahearn, Chief Executive Officer; Jens Meyerhoff, Chief Financial Officer; and Bruce Sohn, President. Mike will begin with an overview of the company's achievements during 2007, and the company's progress during the fourth quarter. Jens will provide you with fourth quarter and 2007 year end financial results and an update to the financial guidance for 2008. We will then open the call up for questions.

All financial numbers that are reported and discussed on this call today will be based on Generally Accepted Accounting Principles. The company has allocated approximately 1 hour for today's call. During the Q&A period, as a courtesy to those individuals seeking to ask questions, we ask that participants limit themselves to one question and one follow-up question.

Now, I would like to make a brief statement regarding forward-looking remarks that you may hear on today's call. During the course of this call, the company will make projections and other comments that are forward-looking statements within the meaning of the Federal Securities Laws. These statements are based on current information and expectations that are inherently subject to change and involve a number of risks and uncertainties. We caution you that actual events or results may differ materially, from those in any forward-looking statements due to various factors including but not limited to the availability of or changes in government subsidies, changes in government laws or regulations regarding the sale, use or dispose of solar module and the demand for solar modules, the cost of capital available to our customers and end product users, the steel performance and reliability of our products, the company's availability to successfully replicate production at its Malaysian plants, the successful integration of its recent acquisition of Turner Renewable Energy, the availability of certain raw materials and the company's relationships with its key customers and suppliers.

Additional information concerning factors that could cause actual events or results to differ materially from those in any forward-looking statement is contained in the company's filings with the Securities and Exchange Commission and in the Safe Harbor language of the earnings release that was sent out this morning. The company assumes no obligation to update any statements made during today's call or to revise any forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in any forward-looking statements.

Before I turn the call over Mike Ahearn, I would like to mention that during the first calendar quarter of 2008, the company will be speaking at the following conferences, the Piper Jaffray Third Annual Claim Technology and Renewable Conference in New York, New York on Wednesday, February 20 and the Morgan Stanley Technology Conference in Dana Point, California on Monday, March 3rd.

It is now my pleasure to introduce Mike Ahearn, CEO of First Solar. Mike?

Michael J. Ahearn - Chairman and Chief Executive Officer

Thank you, Erica. Thanks for participating in today's fourth quarter and 2007 year end earnings call. 2007 was another strong year for First Solar. We increased net sales by 273% over 2006 to $504 million and increased module production volumes by 244% over 2006 to over 200 megawatts. We increased salable watts per module by 10% over 2006 to an average of 70.3 watts per module for the full year while, making significant gains in module throughput. We reduced our cost per watt by 12% over 2006 to an average $1.23 per watt for the full year and we achieved cash flow from operations of $200 million in 2007.

While, delivering these strong near-term results, we also laid the foundation for profitable growth and continued costs reductions over the next several years. More specifically, we entered into additional front take-or-pay contracts under terms extending to 2012 which brought our total contracted sales for the period 2008 to 2012 to over 3 gigawatts and $5.9 million based on an assumed exchange rate of $1.30 per euro. The revenue provided by these contracts is enabling us to expand our production capacity, which is the key driver to our cost reduction efforts. We expanded our key customer base from six customers in 2006 to 12 customers by the end of 2007. And the addition of these customers had extended our geographic market coverage to all European markets with meaningful feed-in tariffs.

We also demonstrated the benefits of our Copy-Smart methodology for replicating factories by successfully building and ramping our Frankfurt/Oder factory ahead of schedule and at operating performance comparable to existing plants.

In the acquired Turner Renewable Energy which has been renamed First Solar Electric Company, the acquisition added balance of plant engineering and project management skills to the company that enable us to begin deploying cost effective solar electricity solutions for utilities seeking to meet renewable portfolio standard requirements in the U.S.

I would like to take this opportunity to thank and recognize the entire First Solar team for accomplishing these results, which marked key milestones on our mid-term path to reducing solar electricity prices to levels competitive with retail conventional electricity. We believe we remain on track to reaching the 2010 to 2012 pricing capability goals that we have previously laid out.

So with that let me address the company's performance during the most recent quarter. The fourth quarter 2007 represents a steady state quarter for the company, meaning in the quarter that reflect the full benefits, full production capacity of all lines of production without the impact of any ramp cost or other non-recurring events.

Fourth quarter production was 77.1 megawatts, representing an annualized line capacity of approximately 44 megawatts per line which is an 11% increase over the third quarter and results from the combined impact of full capacity operation of Frankfurt/Oder and continuous throughput improvements on our production line.

Conversion efficiency averaged 10.6% for the quarter, up slightly from 10.5% in the third quarter. Cost per watt declined to a $1.12 including $0.03 of stock based compensation expense which represents a 6% decline over the third quarter. And revenues increased 26% over the third quarter, $200.8 million providing us with a GAAP net income of $62.9 million or $0.77 per share.

Construction of our Malaysia manufacturing center is progressing on schedule. Plant 1 construction has been completed and we are completing equipment installations and starting the initial stages of line qualification on a schedule consistent with our targeted production ramp in the second quarter of 2008.

We do have an anticipated slightly steeper ramp on Plant 1 giving upside to our previous production estimates for 2008 and Jens Meyerhoff will address that when he makes his comments regarding guidance.

Plants 2, 3 and 4 are in different stages of construction and are progressing inline with our previously announced capacity expansion plan. We expect to be at full capacity with all four factories in Malaysia by the fourth quarter of 2009 which will bring our total announced company wide annual production capacity to approximately 1 gigawatt based on the demonstrated fourth quarter 2007 production run rates at our existing lines.

Turning to market, demand for our products remain robust during the fourth quarter and we continue to experience market demand in excess of supply. We sold 75.8 megawatts in modules and at an average sales price of $2.60 per watt. As mentioned on prior calls First Solar is pursuing revenue growth on two fronts, first we believe additional growth remains in markets supported by feed-in tariff incentive structures including countries in Europe as well as South Korea and Ontario, Canada which has served largely through our key customers under long term contracts.

In 2007, the vast majority of our modules were deployed in Germany, approximately 55% of our modules were deployed in free field applications and 45% of our modules were deployed on roof top applications.

In 2008 we expect continued high volumes of module deployment in Germany and a similar mix between free field and roof mounted projects. With our expanded customer base in Europe, we also expect to see growing volumes deployed in other EU countries in Spain, Italy, and France.

Second, First Solar is seeking opportunities to open new markets with limited or no dependence on traditional PV subsidies. A core focus in this regard is the U.S. utility market where we believe low cost PV represents an attractive solution for regulated utilities seeking to meet RPS quotas.

Our expanded capabilities in First Solar electric enhance our ability to reduce balance of plant costs in parallel with our cost... marginal cost reduction efforts and we believe this will lead to a compelling product offering. In 2008, we expect to begin initial deployment of projects in the U.S. that are designed to validate key cost and performance assumption in preparation for higher volume deployment.

In conclusion our factories continue to run well and our 2007 results increased our position as the low cost leader in the industry and brought us closer to achieving price points that makes solar electricity viable without significant PV subsidy.

Market demand for our products remains strong and our long term contracts provide embedded revenue growth over the next several years and out Malaysian expansion projects are proceeding on schedule.

With that I would now like to turn the discussion over to Jens Meyerhoff, our CFO, who will discuss our fourth quarter and 2007 year end financial results and provide an update to our guidance for 2008.

Jens Meyerhoff - Chief Financial Officer

Thank you, Mike and good morning. During the fourth quarter of 2007, we were able to continue to demonstrate the scalability and operating leverage, underlying our technology and business model. Net sales for the fourth quarter were $200.8 million, an increase of $41.8 million over the third quarter of 2007, and an increase of $148.1 million compared to the same period of 2006.

For the year 2007, net sales were $504 million and increased by $369 million over 2006. The strengthening euro contributed 43.8 million to our net sales, during 2007 when compared to 2006. Gross margin for the fourth quarter was 55.3%, up from 51.6% in the third quarter of 2007, and up from 48.6% in the same period of 2006. Gross margin benefited from the leverage typically experienced, in a steady state quarter as incremental sales contributed the four variable margins, in excess of 70% to the gross margin line.

Gross margin in the quarter also benefited by approximately 1 percentage points due to further Euro appreciation over the prior quarter. Gross margin for 2007 reached 49.9% compared to 40.2% in 2006, and benefited by approximately 10 percentage points from year-over-year cost per watt reductions driven by increased conversion efficiency, throughput gains, and plant scale.

Foreign exchange gains contributed 3 percentage points to our gross margin effectively offsetting the majority of our annual contractual price decline for 2007. In order to further reduce volatility around our euro exposure, we have executed additional forward contracts between now and the first quarter of 2009 that allow us to sell 226 million euro at an average exchange rate of $1.45, hedging approximately 36% of our expected 2008 revenues.

Our cost per watt for the fourth quarter averaged a $1.12 per watt including $0.03 of stock based compensation representing a 6% decline over the third quarter, as we realized additional economies of scales from our German plant and continue to benefit from higher throughput rates. Please note that our cost per watt was negatively impacted by $0.03 this quarter, over the third quarter due to euro-denominated expenses at our Frankfurt/Oder plant.

For the year, we achieved a 12% cost per watt reduction when comparing 2007 over 2006 consistent with our long term plans despite an unfavorable foreign exchange impact and without yet benefiting from our lower production cost in Malaysia. Operating expenses excluding plant start-up cost were $28.6 million in the fourth quarter of 2007, down from $30.9 million in the third quarter which included $8.7 million of non-recovering stock based compensation expenses. Net of this charge, operating expense increased by $6.4 million, primarily due to increased compensation expense as a result of further hiring and due to compliance cost.

Operating expenses excluding plant start-up cost were 14.3% of net sales in the fourth quarter and declined from 19.5% in the third quarter. For 2007, operating expenses excluding start-up costs were 19.3% of net sales, down from 29.4% in 2006, demonstrating the scalability of our focused business model. Plant start-up cost increased by $1.3 million sequentially to $4.1 million in the fourth quarter and are expected to peek in the first quarter of 2008, as multiple plants at our Malaysia plant site are being constructed and we are nearing the ramp of Plant 1.

Operating income for the fourth quarter was 39% of net sales, or $78.3 million compared to 30.4% or $48.3 million during the third quarter and $9 million during the same period of 2006. Operating income for 2007 was $137.2 million or 27.2% of net sales compared to $2.8 million in 2006. We continue to believe that First Solar's financial performance will be best judged by our ability to achieve the minimum 20% RONA threshold, underlying our long term financial model.

During the fourth quarter, we achieved this goal for the first time with an annualize RONA of 21.9%. Our business model remains focused on opening new markets that represent attractive trade offs between lower prices and higher long-term volumes and cash throughput coupled with less subsidy dependence. These opportunities will overtime provide further RONA scale, and higher asset returns, while possibly diluting gross margin percentages achieved in the second half of 2007.

Interest income for the quarter was $7.2 million reflecting an average pre-tax yield of 5.8% compared to $5.3 million in the third quarter of 2007. The increase in interest income was driven by higher average cash and marketable security balances in the fourth quarter, due to the proceeds from our secondary offering in august and positive free cash flows.

Net income for the fourth quarter of 2007 was $62.9 million or $0.77 per fully diluted share, compared to $38.5 million or $0.49 per fully diluted share in the third quarter, which excludes certain one time tax benefits of $7.5 million or $0.09 per share recorded in the third quarter. Net income grew sequentially about $24.4 million or $0.28 per fully diluted share excluding the impact of a long time tax benefits realized during the third quarter.

Net income for the year 2007 was $158.4 million or $2.03 per fully diluted share compared to $4 million in 2006. Our tax rate for the fourth quarter of 2007 was 27%. Cash and all other marketable securities increased to $698.3 million during the fourth quarter. Cash flow from operations during the fourth quarter of 2007 was $102.9 million due to higher cash based earnings and improved working capital performance.

We spent $118.4 million in capital expenditures during the fourth quarter against depreciation of $6.8 million. Cash flow from financing activities was $11.4 million due to proceeds of $15 million from the exercise of employee stock options partially offset by debt repayments.

This brings me to our guidance for 2008. For 2008, we expect to sell 400 to 430 megawatts driven by our demonstrated fourth quarter run rate and the steeper ramp of our Malaysian factories providing upside in the second half of 2008. We expect revenues of $900 million to $950 million subject to customer mix and foreign exchange fluctuations.

Revenues in the first quarter of 2008 are expected to decline sequentially over the fourth quarter of 2007, due to our contractual price decline which took effect January 1st of 2008. We expect plant start up cost of $28 million to $31 million up from $17 million in 2007.

Please be mindful that in addition to the margin impact of our price decline, the startup of each plant has significant impact on both operating and gross margin before we reach full capacity as seen during the first and second quarter of 2007. We have increased our estimate for stock based compensation to $35 million to $40 million due to stock price volatility and further expansion in workforce with approximately 20% of those cost allocated to cost of goods sold.

GAAP operating margin is expected to be between 25% and 27% of net sales and is subject to the timing of our plant starting up and ramping on time. Our tax rate for 2008 remains unchanged at approximately 30% and will not yet benefit from the tax holidays in Malaysia which will take effect in 2009.

Year-end 2008 fully diluted share count is estimated to be 83 million to 84 million shares. We expect to spend approximately $500 million in capital expenditures which is based on currently announced capacity expansion through Plant 4 of our Malaysian manufacturing center and infrastructure related investments.

This concludes our prepared remarks and we will open the call for questions. Operator?

Question And Answer

Operator

Thank you. [Operator Instructions]. We will take our first question from the line of David Edwards, your line is now open, its with Morgan Stanley.

David Edwards - Morgan Stanley

Good morning. One quick question for you, if you can talk a little bit about First Solar Electric Company, can you give us an idea of some milestones that you're looking for that in that business?

Michael J. Ahearn - Chairman and Chief Executive Officer

Yeah, David this Mike. Yeah, I think for 2008 the milestones are really around deploying several pilot projects to begin to form some key relationships and validate our cost consistent performance assumption, and we expect that to provide a basis to roll into 2009 and beyond and start building the higher volumes. So, I think of 2008 really as a year to lay the ground work.

David Edwards - Morgan Stanley

Alright, great. Thanks a lot.

Operator

We'll take our next question from the line Steve O'Rourke with Deutsche Bank. Your line is now open.

Steve O'Rourke - Deutsche Bank

Thank you, good morning. Can you help us understand, how we should think about ongoing efficiency improvements and can you speak a little bit to the repeatability of efficiency during an extended production run, that is it tightly distributed around the average that you give?

Michael J. Ahearn - Chairman and Chief Executive Officer

Yeah, let see. I mean here is... the way we think about efficiency in general, to achieve the targets we set for 2010 to 2012 in terms of pricing capability. Our average conversion efficiencies need to be in the range of 12%. And if you start from 2007 through 2012, that implies half a point a year of conversion efficiency improvement and we are obviously tracking to that. These efficiency improvements are largely event driven, so it's difficult to pin them down into time frames, certainly quarterly time frames and even annual. So, there is some lumpiness to how they get integrated if you will but we are tracking that and we still feel confident around this, around hitting the longer term objectives. In terms of the variants, the dispersion, there is some, its relatively tight, we saw... that is reflected in several power SKUs in our product line. I think that's basically an ordinary course type situation for us.

Steve O'Rourke - Deutsche Bank

Okay and then one follow up. With the gross margin performance you have on fully ramped factories now, even if we start to assume you have some utility scale business building in over the next couple few years at lower gross margin ramping at its plants, is the long term guidance that you have for your model, should that be revised upward do you think?

Michael J. Ahearn - Chairman and Chief Executive Officer

No, I think Steve, at that this point in time, we still believe that the long term model is intact and as you know, I think if you look at the cost reduction, the cost per watt reduction is probably the key measure in here which was year-over-year 12%, which is slightly ahead of just a linear rise 10% underlying our long term grid parity goal. I think we believe those relationships are still intact. Also be mindful that there was a pretty sizeable contribution from a very strong euro build into that gross margin performance.

Steve O'Rourke - Deutsche Bank

Fair enough and one last question. The question was asked about First Solar Electric, what should we expect on a utility scale this year as far as pilot programs building in, will there be any revenue derived from that do you think and is First Solar Electric focused only on utility scale projects right now?

Michael J. Ahearn - Chairman and Chief Executive Officer

There will be some revenues Steve. I wouldn't call it significant from an overall perspective, given the fact that what we are trying to do is execute on a few relatively small pilot projects to get through that validation process. Forgot the second half of that question.

Steve O'Rourke - Deutsche Bank

Focus on utilities.

Michael J. Ahearn - Chairman and Chief Executive Officer

Oh, yeah, we got to focus on utility scale. That's correct. There are few projects that were carried over from Turner Renewable Energy that are of a distributed nature but the focus right now is just on utility.

Steve O'Rourke - Deutsche Bank

Fair enough, thank you.

Operator

We will take our next question from the line of Michael Molner with Goldman Sachs. Your line is now open.

Michael Molner - Goldman Sachs

Hey, good morning, guys.

Michael J. Ahearn - Chairman and Chief Executive Officer

Good morning.

Michael Molner - Goldman Sachs

Question for you on your manufacturing inputs, specifically tellurium, how do you manage your input and specifically how much do you have under contract already and what is the risk that some of your inputs become scarce if other Cad-Tel players come to market.

Jens Meyerhoff - Chief Financial Officer

So, Michael, we have multiple suppliers, who are qualified for both the raw materials off as well as for the subsequent compounding into Cad-Tel. So, we are managing those closely. When we make investment decisions like right now as Mike mentioned in his script, that we are building out roughly a gigawatt of capacity, right, we asses the capability of our supply chain again, for capacity expansions. And, so we will make a decision on those capacity expansions without checking the box, and so we feel comfortable with our supply chain situation on Cad-Tel and tellurium, in particular and something we continue to manage obviously and we got a team working like all other supply chain matters.

Michael Molner - Goldman Sachs

Okay. And, just one other question. It seems like every other day there is a new thin-film entrant being funded. And, two related questions, do you feel a potential massive over supply for thin-film and number 2, is it possible or even something you are looking at to use your technology on a flexible substrate?

Michael J. Ahearn - Chairman and Chief Executive Officer

Yeah, I mean okay, let me take the first question. I think, that well first of all, how do we think about a competitive threat? Primarily, it's around whether some company or a set of companies could come in to the market, while we are all dependent on PV subsidy pools and take a share of the market that we are counting on to be able to scale and achieve the cost reductions that lead to our targets over 2010 to 2012. We think if we get to the pricing capability targets that we have set for 2010 to 2012, very large markets open for everybody in the PV industry. Our competition really becomes cost of deal based solutions.

So the question we look at is whether the threat that somebody takes share in the next several years that we are counting on to be able to scale and in that regard, we don't currently see a strong probability of that occurring. We feel pretty good about our position. To the extend that other thin-film technology to scale well and reach price points that can achieve the same kind of about group parity type pricing. We would think that's good for the industry and is eventually will occur. So that's sort of a thought on competition, in terms of over supply we also think there is a distinct possibility that that could occur sometime in the next year or two but the timing is difficult to handicap but that would be driven in our view more by more by crystal and silicon supplies rather than thin film that reached in the short term.

Oh, on flex substrate, yes, Cad-Tel... its capable of being deposit on flex substrates, its not something but its been our product road map currently but it is not a technical barrier to doing that, so we have looked at it from time to time.

Michael Molner - Goldman Sachs

Okay. Great, thank you.

Operator

We will take our next question from the line of Satya Kumar with Credit Suisse, your line is now open.

Satya Kumar - Credit Suisse

Yeah, hi thanks, what was the actual ASP in the fourth quarter?

Michael J. Ahearn - Chairman and Chief Executive Officer

Can you ask that again?

Satya Kumar - Credit Suisse

What was the actual ASP of your products in the fourth quarter?

Michael J. Ahearn - Chairman and Chief Executive Officer

2.60.

Satya Kumar - Credit Suisse

2.6?

Michael J. Ahearn - Chairman and Chief Executive Officer

Yes.

Satya Kumar - Credit Suisse

What are you assuming in your '08 guidance for the un-hedged portion of the euro in terms of exchange rates?

Michael J. Ahearn - Chairman and Chief Executive Officer

On an average of $1.33.

Satya Kumar - Credit Suisse

$1.33 and you now have seven lines up and running between Germany and Ohio, your city produce 77 megawatts, I know one of the lines have a little bit high capacity but, what's the weighted capacity per line, how should we think about that, what's the mechanical group of potential and how can you...

Michael J. Ahearn - Chairman and Chief Executive Officer

I think mathematically you see right now, we are having a run rate right, annualized run rate for a line of about 44 megawatts.

Satya Kumar - Credit Suisse

It's still only at 11 megawatts, okay. And just last question, it was a great quarter but second time in row the numbers are coming significantly above guidance, why wouldn't you have pre announced and just was wondering what your thought process were there on that?

Michael J. Ahearn - Chairman and Chief Executive Officer

Okay, so I don't think we have to have a practice of pre-announcing the upside and total [indiscernible] on it.

Jens Meyerhoff - Chief Financial Officer

And maybe just to reiterate what our practices has been on the guidance. We base the guidance on the production volumes that we are committing to the marketplace, that we were out trying to sell. And in a market environment where demand exceeds supply and there are uncertainties as we bring up new factories, it is prudent in our view to be somewhat conservative with respect to the expectations in the marketplace and so I think that as much as anything explains why we have been able to beat these guidance, that drives up the production numbers.

Operator

Will take our next question from Vishal Shah with Lehman Brothers, your line is now open.

Vishal Shah - Lehman Brothers

Thanks for taking my question. Can you talk about what sort of considerations would be when you, for you to start thinking about your next set of capacity expansion, now that you have executed ahead of schedule on your Malaysia ramp?

Michael J. Ahearn - Chairman and Chief Executive Officer

Yeah. Vishal, there is a few things. I mean we start with the notion that we are currently building four factories at once and that is fully occupying our organization and our external partners. So we have got our hands full right now. In addition, our production line rate as we have been discussing have increased. So we have got more supply to work with from existing factories, which is obviously a good thing. The expansion of additional production capacity would really be driven by the need to meet existing demands or new demands with additional productions and that's something, we are assessing constantly. We do not have a set timeline or a rhythm to these expansion projects. So we will continue to asses that and it will largely be driven by market demand condition.

Vishal Shah - Lehman Brothers

Okay, great. And one follow-up. On your 2009 capacity assumptions assuming a similar run rate and capacity expectations, what percentage of your total production do you think would be under long term contracts?

Michael J. Ahearn - Chairman and Chief Executive Officer

Well Vishal, since we really haven't given any guidance right on 2009, it is kind of hard question for us to answer right. I mean typically we have always talked about roughly a two-third capacity utilization we are striving for in our long term contracts, but that is more with respect to the build off, but I don't think we can give you a specific percentage here for 2009.

Vishal Shah - Lehman Brothers

Okay, great. Thank you.

Operator

We will take your next question from the line of Rob Stone with Cowen and Company. Your line is now open.

Robert W. Stone - Cowen & Company

Hi guys. Another nice job as usual.

Michael J. Ahearn - Chairman and Chief Executive Officer

Thanks Rob.

Robert W. Stone - Cowen & Company

Looking forward to, related to your 2009, senior rates are coming down in some of the significant markets, Germany, Spain, and potentially market prices may go down in high single digits, may be as much as 10% in 2009. What are your customers, telling you about that forward view, is your 6.5% annual schedule adequate or what?

Michael J. Ahearn - Chairman and Chief Executive Officer

We think the current pricing is adequate to deal with the range of outcomes around these aggression rates, and as you can imagine when we negotiate at these long-term contracts, the uncertainties around feed-in rates, in the out years, was a key topic of discussion and we had comments for last couple of years, about why we set our prices so low, but the answer was to make these customers partially answer was to make these customers comfortable against the range of outcomes on feed-in rates and frankly interest rates. And we are still operating within the range that's priced into the contracts. So, we feel pretty confident about our ability to execute.

Robert W. Stone - Cowen & Company

So, is it fair to say that, you are essentially operating now at a level below what you could do if you weren't on a long term schedule, in terms of ASPs?

Michael J. Ahearn - Chairman and Chief Executive Officer

Well, I guess, yes, if the question is today could we sell in the spot market at higher ASPs, it is probably true. It's probably been the case for the last couple of years. I think the issue is over the periods through 2012 we are going to see... we may well see supply demand in balance shifting and we've always thought it was a good trade off to get the visibility and go ahead and lock the prices down.

Robert W. Stone - Cowen & Company

So, with respect to delivery schedule but I know you haven't given specific guidance for 2009 full year or never mind quarters, but do you see signs of continued steady deliveries or is there potential of any disconnect as we get to the end of this year.

Michael J. Ahearn - Chairman and Chief Executive Officer

We don't, I mean it's hard to say what happens in 2009. I think, in general by contracting a significant part of our production, we are attempting to become robust against market dislocations. And, we just have to get deeper into the year and see how things progress in terms of '09.

Robert W. Stone - Cowen & Company

And finally with respect to the feed-in rate, the new numbers haven't been finalized yet for Spain and Germany, are you hearing anything different than the last proposed that the rates have been discussed?

Michael J. Ahearn - Chairman and Chief Executive Officer

No, it's pretty much the same discussions as several months ago.

Robert W. Stone - Cowen & Company

Okay, thanks very much.

Operator

We'll take our next question from the line of Eric Brown with Banc of American Securities. Your line is now open.

Eric Brown - Banc of America Securities

Hi, there have been some rumors flowing around, maybe if you could address the issue whether you are having a yield problems in the field?

Michael J. Ahearn - Chairman and Chief Executive Officer

To our knowledge, we are not. And, we checked with the number of our customers and we have as you know pretty extensive internal quality controls and external field testing data. So, we are not aware of anything Eric. I think based on the note you published late yesterday, I think you know more about it than we do frankly, at this point as to where that rumor may have come from but we don't have any information now.

Eric Brown - Banc of America Securities

Okay. Jens, on the exchange rate question before the $1.33, that was associated with the non-hedged or is that the average for the entire...?

Michael J. Ahearn - Chairman and Chief Executive Officer

No, that's the un-hedged portion. The hedge was valued at about 145.

Eric Brown - Banc of America Securities

Okay. The comments on the ramp of Malaysia, so is the Malaysian facility now going to ramp the first one at least similar to how the German facility ramp.

Bruce Sohn - President

Eric, this is Bruce. The ramp is on the same schedule that we had mentioned previously. Malaysia one, basically mimics Frankfurt/Oder 12 months later. So, it's on a similar start-up schedule with ramping in Q2 and Q3 and will be at full production in Q4. Both Mike and Jens made reference to the fact that we anticipate the ability to have a slightly steeper ramp than we had communicated previously and that's reflected in the updated guidance.

Eric Brown - Banc of America Securities

Okay, and so we expect that Malaysia two through four should have the similar ramp pace as well?

Michael J. Ahearn - Chairman and Chief Executive Officer

We are still looking at those. The current schedule is for the original plants, so they maintain the current schedule and we watch as the equipment comes in and gets qualified and we will communicate any changes as we see them.

Eric Brown - Banc of America Securities

Okay and then one more, on the DT Solar or Turner Renewable legacy projects, what kind of influence is that in the '08 revenue guidance and what kind of margins, gross margins will you expect from that business?

Michael J. Ahearn - Chairman and Chief Executive Officer

Yeah, I think if you look at the impact out of First Solar Electric on 2008 it can be deemed immaterial as we are talking sub 5% levels.

Eric Brown - Banc of America Securities

Okay, thanks.

Operator

We will take our next question from the line of Jesse Pichel with Piper Jaffray. Your line is now open.

Jesse Pichel - Piper Jaffray

Yes, Hi Mike and Bruce. Could you give us some additional color on the utility sales channel in terms of how many utilities Mike do you think will deploy trials in '08 and are you seeing greater interest from the European utilities, thanks to the new EU directives for 20% renewable targets by 2020?

Michael J. Ahearn - Chairman and Chief Executive Officer

Well, on European side, first of all, Electric is just focusing on U.S. utility right now.

Jesse Pichel - Piper Jaffray

Okay.

Michael J. Ahearn - Chairman and Chief Executive Officer

We do have through our... on module sales efforts in U.S. we had exposure to utilities in Europe there. We are not seeing any greater interest from that now, I think the discussions are sort of proceeding along the same lines they have in the last six to 12 months. In terms of First Solar Electric, you know we are at such an early stage of flushing out the division strategy and plans that we don't really talk about those kind of details and if we did I mean it wouldn't be very good information because its still in flux, its still dynamic at this point. But there are a number of states that have RPS. Our focus right now is on load serving entities that have a legal or regulatory requirement to procure renewable energy. That's driving off these RPS programs and there are obviously a number of potential utilities in that space.

Jesse Pichel - Piper Jaffray

Would you potentially sell your panels through an electrical utility components company, you know as kind of an OEM solution or would you... to the utility?

[Technical Difficulty]

And as cash structures come down across the globe, how that might play into our hand competitively?

Michael J. Ahearn - Chairman and Chief Executive Officer

Yes, we've focused but from the time when we went to market in 2003 through today, we've focused on larger sized systems both ground-mounted and roof-mounted. And the roof-mounted applications that we are speaking of are primarily commercial industrial roof-systems, so larger systems. These are the most efficient channels for us in terms of optimizing the system level performance and economics and scaling the company getting large volumes in to the market in concentrated ways where we can observe and understand system performance and scale our company effectively. So strategically we like the larger system size and the modules look well whether they are mounted underground or on roof top.

Now that we are achieving the efficiencies north of 10%, we don't see any reason why we couldn't if we chose to bring those system sites down, all the way down to 3 kilowatts type size, to the residential market. But we haven't done that today and part of it is, we are having a hard enough time supplying the demand in the segments were operating at and serving our customers and strategically we think we are on the right path here and we have to start large and scale down over time.

Jesse Pichel - Piper Jaffray

And so maybe just a bit up of follow up there, as customers, there were time look at the cost efficiency metrics and tariffs do come down and you'll be in a better position I suppose to compete even with your lower efficiency. And maybe put it another way, if there is another supply situation in the traditional PV arena, you can take advantage of that in the market, clearing at a lower price lower price may play into your hands?

Michael J. Ahearn - Chairman and Chief Executive Officer

Well it's possible. I mean the way we are thinking about that is, you know we do have some pricing capability here and we would like to use that to find ways to broaden the market broadly entire time, to the solar industry by finding markets that aren't relying on traditional PV subsidies and using the pricing capability to build in those markets. And I think the U.S. utility RPS market is an example but there could be as you say smaller systems driven markets as well. It doesn't mean we wouldn't continue to participate in the PV subsidized markets at the same time and in fact there is long term contracts in that revenue streams pretty important to our ability scale and hit these cost targets but I think its helpful for us and the industry to work to expand the overall market and in ways to demonstrate decreased reliance on the traditional subsidies rather than piling on and taking share from the highly subsidized market. So, that's the direction we'll likely get to move in.

Operator

We will take our next question from the line of Kelly Dougherty with Calyon Securities. Your line is now open.

Kelly Dougherty - Calyon Securities

Good morning and congratulations again. It's obvious that cost need to come down all along the value chain to get to grid parity and we saw the Turner acquisitions last year and its evidence that you have begun to move downstream, just wondering if this was a one off effort to break into the U.S. market or if we could possibly see something similar as you tried to get into other markets as well?

Michael J. Ahearn - Chairman and Chief Executive Officer

It's sort of hard to predict what the future will bring in that regard. I think we are in a stage right now where these markets are evolving and the learning is pretty iterative. I think the U.S. is the first real opportunity to try to expand outside these traditional PV subsidized markets. I think we are going learn a lot through the U.S. utility effort about what we need to occur elsewhere and I also think as channels mature, your need to do many things obviously than that issues, I would imagine that our roles will be dynamic in the channels overtime, as the markets mature.

Kelly Dougherty - Calyon Securities

So, there is not any kind of concerted effort at the top to vertically integrate further, this was just kind of an opportunity that you took advantage of in the U.S.?

Michael J. Ahearn - Chairman and Chief Executive Officer

Yes, it's true. I think in Europe and to state it in another way, in Europe we have very good relationships with highly capable partners if you will, better allowing us to serve that market very well. So, there would be no need to consider anything of a more vertical nature at this time.

Kelly Dougherty - Calyon Securities

Okay. Thank you very much.

Operator

We will take our next question from the line of Sanjay Shrestha with Lazard Capital Markets. Your line is now open.

Sanjay Shrestha - Lazard Capital Markets

Great, terrific. First of all, congratulations on a great quarter here, guys. Most of my question have been answered but, just a couple of quick one. In terms of the manufacturing output, its been phenomenal going from 25, 39, 44 but guys, are we now kind of running at the point where we are going to continue to make a gradual progress but a step change like that is probably not going to happen in the near future and probably more likely a longer term type of an event if that would have lay out?

Bruce Sohn - President

Well, this is Bruce. The real strategy has been to progress towards our long range plan and to achieve our goals in that 2010 to 2012 timeframe. We really needed to continue to scale at a rate of about a 0.5% per year from '07 to 2012 from an efficiency perspective, talking about a 3% perspective from a line capacity and capability. The factories and engineers are working very hard to maintain the improvement rate. The company has a core value around continuous improvement as well as driving for results and so, they continue to look for all sorts of opportunities to improve the yield to de-bottleneck the line, improve cycle time, and generally improve the technology and the efficiency and so work is on going.

Sanjay Shrestha - Lazard Capital Markets

Got it, terrific. And, one quick follow-up and, given that you guys are focusing a lot in the utility market here in the U.S. and somewhat of an uncertainty here on the ITC front but, since majority of your focus is here on the pilot and the sort of the demonstration project right now, what's been the overall interaction up to this point? Can you guys talk a little bit about that as to some of the positives, some of the negatives, and how big of a roll this somewhat of an uncertainty here in the near term related to ITC is playing in terms of the negotiating process?

Michael J. Ahearn - Chairman and Chief Executive Officer

Well, I think most utilities, low serving entities in the U.S. under this RPS obligations, are negotiating. They are out in the market negotiating to procure renewable energy without in the event that the DTCs or ITCs aren't extended. So, I think the discussions are proceeding generally across the board. It is not like there is a freeze on discussions, because of the uncertainty concerning those tax benefits. As far as the tax percentage themselves, its hard to... its obviously hard to predict what will happen there but we don't have any knowledge that they don't have, we are monitoring it pretty closely, and we will just have to wait and see how it plays out.

Sanjay Shrestha - Lazard Capital Markets

Okay, that's great. Once again, congratulations on a great quarter and execution, guys.

Bruce Sohn - President

Thanks.

Operator

We will take our next question from the line of Steven Chin with UBS. Your line is now open.

Unidentified Analyst

Hi, this is Jagdish on behalf of Steven, congratulations once again. I just wanted to find out you called out Spain, Italy and France and U.S. utilities of near term goals. What kind of geographical spilt would you expect in 2008, please?

Jens Meyerhoff - Chief Financial Officer

Yeah. We don't really break it out geographically. I mean, we found it's pretty hard to predict that because we just don't have the granularity. And I think this project pipeline is somewhat for us break it out precisely. But we do see in general, there is lot of projects as you may know being deployed in Spain ahead of the extension potential extension of the feed-in tariff. So Spain is robust right now. Italy seems to be a functioning viable market at this point, France is earlier stage but we do have two French based companies and we see... we do see project pipeline beginning to build there. So I think it's tough to give you a lot of specificity on what those numbers would actually be.

Unidentified Analyst

Okay. Then, just a quick follow-up on that, you said that on the, cost per watt goes, since you lowered your cost per watt by about 12% in 2007 should we think that to be a reasonable goal for 2008?

Michael J. Ahearn - Chairman and Chief Executive Officer

No, I think if you look at our road map, in order to achieve $1.25 to $1 pricing capability, right, in the outer years which is in line with our good parity goal of $0.08 to $0.10 per kilowatt hour, that requires us to achieve cost per watt of about $0.65 to $0.70 and that's our long term goal. So we believe we are on track for the road map.

Unidentified Analyst

Thank you.

Operator

We'll take our next question from the line of Adam Hinckley with Oppenheimer Capital. Your line is now open.

Adam Hinckley - Oppenheimer Capital

Hi good morning. Just a quick question Jens, has there been any positive revisions with your existing customers for the amount contracted for 2008?

Jens Meyerhoff - Chief Financial Officer

I'm not sure whether I get your question Adam, can you may be rephrase that?

Adam Hinckley - Oppenheimer Capital

I believe at the Analyst Day, you said that there was about 319 megawatts for 2008 which is under the take-or-pay agreements, have there been any amendments to make that any higher?

Jens Meyerhoff - Chief Financial Officer

So, I mean we generally as, you know, we have the ability right to exercise certain put options and so based on how product pipelines evolve and how global demand evolves we do exercise those options, and I will discuss with those customers.

Adam Hinckley - Oppenheimer Capital

Okay, then I guess, if with the expectation of what's not under contracts for fix price take-or-pay agreements, on the euro basis what's the underlying assumption through 2008, for ASPs?

Jens Meyerhoff - Chief Financial Officer

So as you know I don't think we ever really guided around the ASPs right. Some of that un-located volume, I think as we stated in prior calls was not used opportunistically, its used strategically to see if new markets and as Mike mentioned in his comments, the focus here is the U.S., is the U.S. utility market right, which may have more... and does have more challenging economics right, and could possibly happen at lower pricing point of the contract.

Adam Hinckley - Oppenheimer Capital

So then for, existing DT agreements, how many megawatts of commitments do they have from other module suppliers and how much would you be internally supplying them, can you provide any color on that?

Jens Meyerhoff - Chief Financial Officer

As I mentioned, I mean if you look at right now, the impact of First Solar Electric on 2008, right is immaterial and the remaining pipeline that we took over is small and module supply have been secured for those projects.

Operator

Will take our next question from the line Colin Rusch with Broadpoint Capital. Your line is now open.

Colin Rusch - Broadpoint Capital

Good morning, gentlemen and congratulations on the continued phenomenal execution. My questions about price elasticity in the U.S. utility market, maybe a little bit too early for you guys to have real hard data on this but how are you thinking about elasticity in the market, are you looking at RPS requirements post the market, price reference and if you could give me a little bit more... little bit of guidance on how to frame that?

Michael J. Ahearn - Chairman and Chief Executive Officer

Well, in general in risk market segment, our offering is competing against all other renewable energy alternatives. So we are not running the gamut, so you are going to have to be at a price that's competitive with non-PV technologies. And in general, things are evaluated for lease costs and best fit. So that's a broad enough criteria to allow some consideration for time and date generation of peak offsets and that sort of thing. So, it wouldn't be a straight comparison to wind generation for example because we are more peaking solution but that is the competitive universe and I don't think we really know the answer until some large projects are under firm contract and have been approved by the relevant regulatory commissions. So we are little ways away from having the kind of data I think that we all would like to have.

Colin Rusch - Broadpoint Capital

And then and going over to French market, if the EU decides to define Nuclear Energy as not clean energy for its 2020 targets, have you guys done a preliminary assessment on what the market opportunities would be in France for PV if they weren't able to consider all those nuclear assets as clean energy?

Michael J. Ahearn - Chairman and Chief Executive Officer

No, we really haven't done that Colin. We are... our market analysis right now in Europe is more around the feed-in tariffs and what market opportunity and market structures would drive off of those and what's a reasonable base line to plan on in terms of availability of the structures. I think that next chapter that you're referring to is that's probably the more interesting question but we just haven't reached that yet.

Colin Rusch - Broadpoint Capital

Great, thanks so much and again congratulations.

Michael J. Ahearn - Chairman and Chief Executive Officer

Thanks.

Operator

We will take our next question from the line of Paul Leming with Soleil Securities. Your line is now open.

Paul Leming - Soleil Securities

Good morning and congratulations on a great quarter. I have got a question for Mike, you've raised this specter of over-capacity couple of times on the call and I am wondering if you could just walk me through how you see that playing out over the next 12 to 18 months given the un-kept nature of the German market? Are you worried about a shortage of capital to buy and install systems as long as installed cost hit the levels needed to generate desired project returns? What, really is going to be the limiting factor on installation of modules of projects in Germany to absorb all the capacity that's coming?

Michael J. Ahearn - Chairman and Chief Executive Officer

That's a good question. I guess one question is where we see additional supplies coming into the market as a result of, for example Silicon feedstock constraints being alleviated and possibly removed. That's a scenario we looked at definitely as probability. But the timing of that is kind of hard to... at least for us to pin down because it is fairly empirical and you are getting announcements it seems like every week that bear on that question. So, whether that's 12 months to 18 months or close to 18 months, I think at least for sale it's a lot a little softer and little fuzzy on that but we think it's a distinct possibility that there would be a lot more volumes, crystalline silicon-based coming into the market. In terms of -- yeah, we're with the constraint the down strain from the modules to observe it. We have them looking at the adequacy of projects finance to continue to support the projects in Europe, given the issues in the credit markets in general. So far we haven't seen any issues there, and we haven't learnt anything that would suggest that it is right for you to be a constraint, but obviously that's a dynamic situation in itself. So, we got to keep an eye on that.

There could be other, there could be other constraints with respect to, inverter supply or just personnel to install these things and a number of pieces of the value chain downstream from the module, when you get to return key install project that any number which could be a constraint depending on how rapidly, and how significantly volumes would come into the market. So, we haven't looked at that more generally, we look at that in terms of our own network of customers, their projects pipelines, what its going to take to deploy the volumes that we planned to put into the market. We have a pretty good feel around that. So, I didn't exactly answer your question but it's hard to pin that down because of the dynamics and the uncertainty around.

Operator

We will take our next question from the line of Adam Krop with Ardour Capital. Your line is now open.

Adam Krop - Ardour Capital

Good morning.

Michael J. Ahearn - Chairman and Chief Executive Officer

Good morning, Adam.

Adam Krop - Ardour Capital

Forgive me if the question has been answered already but my question is on gross margin, how should we be looking at it, can you give us a little bit more color on a quarter-by-quarter basis for 2008, given the dynamic for our declining ASPs and the ramp of Malaysia one.

Michael J. Ahearn - Chairman and Chief Executive Officer

I think if you look at it from a full working profile brought before you and I think 2007 actuarial are pretty good proxy here with respect to the profile. So, I mean in Q1 you get the hard impact obviously of the contractual price decline hitting your gross margins. And then since the first Malaysia plant essentially is coming up a year offset to what we have seen in Frankfurt/Oder, you should expect as we move into Q2 and we are starting to ramp, right before the start-up cost of being reclassified into cost of goods sold, that would reduce gross margins in that quarter and due to under-absorption of overhead. And then as you start to benefit from the capacity obviously as you go into Q3 you start to see recovery and then in Q4 we are talking about the same phenomenon again for the second Malaysia plant trying where you start to get the impact as a ramp on the margin.

Adam Krop - Ardour Capital

Okay. That's helpful, thanks very much. And just switching gears, actually we have been looking at CapEx in 2009 and 2010, you have any guidance there?

Michael J. Ahearn - Chairman and Chief Executive Officer

No, really haven't. We really haven't guided that far out right and that obviously is subject to capacity decisions and so on.

Operator

We'll take our next question from the line of Michael Carboy with Signal Hill. Your line is now open.

Michael Carboy - Signal Hill

Good morning, ladies and gentleman. You had mentioned earlier on the call that you felt it was easy to optimize around C&I installs rather than IOU installed, I was wondering if you could elaborate a little bit on when you think you would be able to achieve your bonus target on IOU installs rather than on commercial industrial plans?

Michael J. Ahearn - Chairman and Chief Executive Officer

Let's see if I can maybe recap a little bit. The long term target modal we have for 2010 to 2012 is really looking at the question as where could we price if we chose to and still be able to drive a minimum 20% return on net assts. And it's really a metric we use internally to drive continuous improvement and so the target is to be able to price at a $1.25 a watt, that's the blended ASP in 2010. It still drives this 20% RONA threshold and then move that down to $1 a watt by 2012. If we have the capability to do that, then the question would be, would we actually do that across the board. And that would really depend on the segments, the market segments and the pricing strategy which we would do on a segment-by-segment basis. But if we have the capability to do that, we think in the utility, the IOU markets for example there is likely to be pretty good demand elasticity around those price levels. And we don't know if we have to do that low or maybe have to be a little bit lower. I think that's going to have to play out, but it seems like reasonable place to put a stake in the ground and drive toward. So that's really how we are, when we speak about this pricing capability target, that's really how we are thinking about it.

Operator

We will take our next question from the line of Brian Gamble with Simmons and Company. Your line is now open.

Brian Gamble - Simmons And Company

All my questions have been answered. Thank you very much.

Michael J. Ahearn - Chairman and Chief Executive Officer

So operator I think we are running a little bit over on the call, there is I don't know how many questions you got left queued here. But we probably should be thinking about wrapping, wrapping the call up. Operator?

Operator

And there are no further questions at this time.

Michael J. Ahearn - Chairman and Chief Executive Officer

Very good, thank you everybody.

Operator

This concludes today's teleconference, you may disconnect at any time. Thank you and have a great day.

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Source: First Solar, Inc. Q4 2007 Earnings Call Transcript
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