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Power-One (NASDAQ:PWER)

Q2 2012 Earnings Call

July 26, 2012 5:00 pm ET

Executives

Larry Clark

Richard J. Thompson - Chief Executive Officer, President and Director

Gary R. Larsen - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance, and Treasurer

Analysts

Amir Rozwadowski - Barclays Capital, Research Division

Zach Larkin - Stephens Inc., Research Division

Jesse Pichel - Jefferies & Company, Inc., Research Division

Colin W. Rusch - ThinkEquity LLC, Research Division

Shawn E. Lockman - Piper Jaffray Companies, Research Division

Kelly A. Dougherty - Macquarie Research

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Power-One Inc. Second Quarter 2012 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Larry Clark, Investor Relations for Power-One. Mr. Clark, please go ahead, sir.

Larry Clark

Good afternoon, everyone. Thank you for joining us today to discuss Power-One's 2012 second quarter results. Joining me today are Richard Thompson, Chief Executive Officer; and Gary Larsen, Chief Financial Officer. By now, you should have received a copy of today's press release. If not, it is available on the company's website at www.power-one.com.

In addition, this quarter, we are including an accompanying slide presentation that you can refer to during the call. You can access these slides in the Investor Relations section of the website.

Before we begin, I would like to remind you that this conference call may contain forward-looking statements, reflecting Power-One's views of future events, projections or expectations. Any such forward-looking statements may deal with or include matters which involve risks and uncertainties. Power-One's actual results may differ materially from those results as discussed or information provided in the forward-looking statements. We refer you to the company's reporting documents as filed with the SEC for a discussion of the risk factors that may have a material impact on results. Today's call may also contain historical non-GAAP financial measures.

Additionally, in adherence with Regulation FD, we have opened up this call so that all interested investors are free to listen in. The press release and this conference call will be our only forum to answer your questions regarding our estimated performance going forward. Consequently, should you have any questions regarding our estimates of sales and profits or other financial matters for the upcoming quarter, as well as how they may affect our income statement models and balance sheet, this is the time that we are able to respond to those questions.

I will now turn the call over to Richard Thompson, Power-One's Chief Executive Officer. Please go ahead, Rich.

Richard J. Thompson

Thank you, Larry. Good afternoon. I'll begin today's call with a recap of our exceptional second quarter performance and a review of our progress on a recent initiatives, as well as industry dynamics. I will then discuss key operating metrics and drivers for our Renewable Energy and Power Solution business units. After my remarks, Gary Larsen, our Chief Financial Officer, will provide greater detail on the financial statements, including results for the quarter in third quarter guidance. After our prepared remarks, we will answer your questions.

In the second quarter, we've recorded total revenue of $322 million, up 24% year-over-year. Our Renewable Energy business achieve record performance in shipping 1.3 gigawatts of inverters in the quarter and we moved quickly to take advantage to higher demand in Europe based on anticipated changes in feed-in tariffs in both Germany and Italy. Our Renewable Energy business generated $255 million or 79% of total revenues and our Power Solutions business shipped $67 million or 21% of total revenue. We also generated strong cash flow and earnings per share in the quarter, higher revenue, coupled with reduction in material cost, results in operating income of $60 million or 19% of revenue. And net income of $47 million or $0.30 per share, which includes an after-tax gain of $0.06 per share on foreign currency remeasurement.

Now I'd like to share some operational highlights for the second quarter. First, we gained market share in the global PV market. Based on preliminary figures from IMS, we estimate that our worldwide market share increased to over 14% in the second quarter, up from 11% for the full year 2011. Second, our new product introductions are continuing to gain traction. Our recently introduced TRIO line of 20KW and 27.5KW inverters, that address rooftop applications, are being extremely well received in the marketplace. TRIO has already become our largest-selling product line representing 1/3 of our RE revenue in the second quarter and demand continues to be robust. Third, we experienced stable pricing in the second quarter as strong demand in Europe moderated industry pricing pressures. The average revenue per watt decreased in the quarter due to a shift towards higher-wattage products in the Commercial segment. These products contributed to our margin improvement in the quarter as they have a correspondingly lower cost. Lastly, we continue to reduce cost and improve our manufacturing operation, lower material cost and increased absorption on higher production volumes in Europe also contributed to higher margins this quarter. In addition, we have recently recruited new operations management in the U.S., where we have been capacity constrained.

Now for some more details on each of our SBUs. Our Renewable Energy SBU earned $55 million in operating profit on sales of $255 million. Record shipments of 1.3 gigawatts of inverters were up 88% sequentially and 76% year-over-year, driven by the strength in the Italian and German markets. As mentioned, the large part of our first half success is due to the phenomenal market acceptance of our TRIO 20KW and 27.5KW inverters designed specifically for rooftop commercial applications. TRIO provides our customers with a cost competitive product that delivers higher performance while meeting the increasingly more-stringent grid standards. The higher wattage of the TRIO results in fewer inverters versus our competitors' offerings, and at a lower cost per watt. In addition, installers appreciate the built-in combiner box that is also detachable, allowing easy installation and servicing, along with dual MPPT channels that allow maximum optimization of the strings. In fact, installers are finding that TRIO's futures can make this product the more economical solution than using central units on installations of up to several megawatts.

Additionally, we believe that our liquid-cooled Ultra family of inverters, that meet customers' demands for higher capacity units, will enjoy similar success in the marketplace. Our extensive internal study show that the Ultra provides best-in-class levelized cost of energy or LCOE. We accomplished this through our efficient liquid-cooled design, reducing material and assembly cost. In addition, the modularity of our design allows multiple MPPT and easier servicing, while our higher voltage outputs reduces cabling and other balance of the system cost. We continue to achieve positive feedback from our customers who are beta testing this product, and we are beginning to ship commercial units in the third quarter with a more robust rollout planned in the first quarter for 2013. Further, we expect to begin commercial shipments of our micro-inverters in the fourth quarter. We plan to initially approach this small market, but growing market, via panel manufacturers and EPC. And we will have over 300 units in beta testing this quarter.

I would like to spend some time discussing the global market outlook for PV inverters. First as discussed, Europe has been very strong in the first half of 2012, driven by demand in Germany and Italy in anticipation of changes in feed-in tariffs. In Germany, new tariff regulations were agreed upon by the legislature at the end of June and while the level of cuts remain as expected, there was a compromise on reintroducing a special tariff for medium-sized systems, which were popular in the country. The tariffs will continue until Germany reaches an installed base on 52 gigawatts from approximately 28 gigawatts today, which will take a number of years. IMS is estimating that German demand for the entire year of 2012 will be almost 8 gigawatts up from 6 gigawatts in 2011. The success of our TRIO product line has helped Power-One gain market share in Germany and this market now represents 26% of our Renewable Energy revenue.

Italy also experienced strong demand in the first half of the year. Conto Energia V was recently enacted into law, reducing feed-in tariffs by 25% to 30% and increasing the total subsidy cap by EUR 700 million, while exempting installations for systems at 12 kilowatt or below. The new feed-in tariff become effective August 27. We expect some reduction in Italian demand as the market adjust to the new incentive scheme. We believe the total market for Italy will be between 3.5 gigawatts and 4 gigawatts in 2012.

Turning to North America. IMS expects the market to grow by approximately 11% in 2012 to 3.6 gigawatts. The commercial and utility market in the U.S. is being driven by a state mandate for renewable energy and the residential market is being driven by lower systems cost and the widespread availability of installation and project financing. We expect to increase our penetration of the U.S. market in the second half of the year as we introduce new products and remove capacity constraints in our manufacturing facility.

Finally, demand in Asia Pacific is strong across the region and we expect it to continue. IMS predicts that the region will grow by over 80% in 2012 to almost 11 gigawatts, driven by strong growth in both China and Japan. Although our progress has been slower than anticipated in China, we are starting to gain traction.

In Japan, we are in the process of certifying our products and exploring options to accelerate our entrance into this market. While a small part of Asia Pacific, Australian remains a key market for Power-One as shipments increased in the second quarter both year-over-year and sequentially.

Turning to pricing. Q2 was relatively stable after the approximate 7% sequential drop in Q1. We anticipate that inverter price erosion for 2012 will be in the low-teens range versus 2011, a more moderate decline than we expected entering the year. As we have said before, we plan to offset pricing declines with improved variable cost in materials and logistics, better manufacturing efficiencies and the benefits of new products designed for lower cost.

Moving to Power Solutions. This SBU has maintained profitability for the past 7 quarters. Second quarter revenue was $67 million, down from $77 million in the last quarter, due to weakness in key end markets and some customers delayed their orders in light of uncertain economic environment. Operating income was $2 million and was impacted by lower volume shipped in the quarter. Despite the ongoing uncertainties regarding the global economy, we expect improvement in the second half of the year for the Power Solutions SBU on the strength in industrial end markets and our customers' return to more normalized ordering patterns.

Now I'll take a moment to discuss Power-One's goals for the remainder of 2012. As we have talked about on previous calls, we are focused on 4 strategic areas. First, we are committed to expanding our RE business globally. While we recognize that Europe remains an important market, we will continue to capitalize on our strong reputation there. We'll also position the company to take advantage of growth opportunities occurring in the U.S. and Asia Pacific. We expect to increase our market penetration in the United States in the second half due to improved factory utilization and the rollout of the Ultra product line. In Asia Pacific, we continue to do well in Australia and are taking steps to position the company for longer-term success in markets such as India, China and Japan.

Second, we will continue to introduce innovative new products. As evidenced by the success of our TRIO family of inverters, our customers are looking to us for next-generation products that offer leading-edge technology, superior performance and exceptional value. We're excited about this prospects we have for our game changing Ultra line of inverters and we also look forward to our -- to bringing our micro-inverters to the market.

Third, we are making progress towards improving factory performance at all of our factories with a strong focus on our Phoenix operations. We are encouraged by some of the early successes of our new operations management team. Our goals in Phoenix are to increase throughput, reduce cost, better manage our working capital and improve customer service.

Finally, we will continue to expand our global service team. This year, we will be increasing our servicing headcounts by 25% as we build out the footprint to service our over 7 gigawatts of installed base. We believe that a key differentiator of our success is not only to excel in the design and manufacturing of inverters, but to be a leader in customer service and we are investing resources accordingly.

I'd now like to turn the call over to Gary for a detailed discussion of Power-One's financials and guidance for the third quarter of 2012.

Gary R. Larsen

Thank you, Rich. Now I'd like to provide more details on our second quarter financial performance. During the second quarter of 2012, we recorded revenue of $322 million, significantly beating our guidance range of $240 million to $260 million. As Rich mentioned, this was driven by the strength in the Renewable Energy SBU as experienced higher than forecasted demand in Germany and Italy. Consolidated gross margin for the second quarter was 30%, a 600 basis point improvement as compared to the first quarter. Gross margin was positively impacted by higher factory volumes in Europe as well as lower material cost in a stable pricing environment.

Offsetting some of the improvement in gross margins were continued ramp-up cost in our Phoenix facility as well as the continued build-out of our global service operations. Operating expense were up sequentially to $38 million for the quarter versus $36 million in the prior quarter. The sequential increase reflects higher expenses in sales and marketing due to increased sales volumes. As a percentage of revenue, operating expenses were 12% of sales, down from 16% in the first quarter, demonstrating the significant operating leverage in our business model.

Income from operations for the second quarter was $60 million versus $19 million in the first quarter as we benefited from the higher revenues, the improved gross margins and the relatively stable operating expenses. Net income attributable to common stockholders for the second quarter was $47 million or $0.30 per diluted share. This quarter's net income included a $9.3 million or approximately $0.06 per share after tax gain on foreign exchange remeasurement related to the euro weakening versus the dollar. In addition, EBITDA improved to $77 million in the quarter, up from $14 million in the first quarter.

Our Renewable Energy SBU posted $255 million in revenue for the second quarter versus $149 million in the first quarter. Operating income was $65 million resulting in an operating margin of 26%. The operating margin in the second quarter was positively impacted by higher volumes, stable pricing and lower material cost.

Our geographic revenue in the second quarter reflects the strong demand in Europe as a result of the anticipated changes in feed-in tariff legislation in Germany and Italy. At the same time, we were capacity constrained in the U.S. and therefore, our shipments were lower in that market than planned. Europe represented 91% of RE revenue, with 50% of total revenue coming from Italy and 26% from Germany. North America was 5% and Asia Pacific was the remaining 4% of sales. Going forward, we anticipate our geographic mix will include a greater percentage from Asia Pacific and North America as we further penetrate these markets and as demand in Europe returns to more normalized levels.

For the RE SBU on the second quarter of 2012, distributors account for 67% of sales; engineering, procurement and construction or EPCs, 23%; and OEMs, 10%. Our end-market penetration for the quarter was primarily in the commercial segment, which represented 54% of megawatts shipped and was driven by the strong commercial rooftop segment in Europe and the success of our TRIO product line. Shipments in the utility sector were 27% of total megawatts shipped and the residential sector represented the remaining 19%.

Turning to the Power Solutions SBU, revenue in the second quarter was $67 million versus $77 million in the first quarter of 2012. As Rich mentioned, the sequential decline in revenue was the result of weakness in our key end market as some customers delayed orders in light of the uncertain macroeconomic environment. In addition, some customers reduced their orders as they work through their existing inventory. Partially offsetting these items was continued strength in the industrial market, where we are having success gaining market share. Revenue from the server storage and networking end market was 49% of the total Power Solutions segment revenue, while the industrial market represented 40% and the Network Power Systems the remaining 11%.

Regarding the renewal sales breakdown, North America accounted for 40% of revenue; EMEA, 25% and Asia Pacific, 35%. OEMs comprised 80% of revenue while distributors contributed 20%. Power Solutions operating income for the quarter was $2 million, resulting in an operating margin of 3%. Although the quarter was below expectation, we anticipate that the second half of the year will show improved results as new product introductions start shipping and customers replenish inventories.

Turning to the other income expense line. This has been volatile for Power-One over the past few quarters as the result of foreign exchange gains and losses. From a balance sheet remeasurement standpoint, Power-One is short euro, meaning that we record FX gains and other income when the euro weakens and losses when the euro strengthens. This reflects our currency exposures, including cash and intercompany balances denominated in U.S. dollars on the books of our European subsidiaries, which use the euro as their functional currency.

In the second quarter, we recorded a $12.2 million pretax foreign exchange gain as the euro weakened. Considering the revenue we generate in European markets and macro concerns on the euro, we believe the short euro exposures are prudent. However, this does mean changes to the euro can result in meaningful gains and losses on the other income line until we reduce these exposures. The second quarter effective tax rate was 35%. Based on the geographical distribution of our profits, we expect our tax rate to be in the mid-30% range for the full year.

Moving to the balance sheet. Our cash balance was $259 million ending the second quarter of 2012, an increase of $54 million since the beginning of the year. Cash generated from operating activity was $56 million, while capital expenditures were $5 million. In addition, we repurchased 1.1 million shares of common stock for $4.8 million. As of June 30, 2012, 5.3 million shares remained available for purchase in accordance with our existing 10 million share repurchase authorization, which expires in September 21, 2012. I would add that we view our strong cash position as a competitive advantage in the marketplace as it enhances our bankability in the renewable energy market and it provides our customers with the confidence that we will be able to stand behind our long-term product launches.

Looking at working capital, days sales outstanding decreased by 8 days to 74 days, due to strong collections in the quarter. Inventory turns of 5.2x were favorable impacted by higher demand, along with company-wide initiatives to reduce inventory levels.

To conclude, I would like to speak to you regarding our guidance for the third quarter of 2012. As demand in Germany and Italy is expected to moderate, our forecast for the third quarter revenue is in the range of $260 million to $280 million. At the midpoint of the guidance range, this would represent a 10% increase over the revenue generated in the third quarter of 2011. In terms of gross margins, while we do not provide specific targets or models, we anticipate margins for the third quarter will be slightly lower as compared to the second quarter. This reflects the absorption impact of the lower volume and will be partially offset by a reduction in ramp-up cost in our new factories and lower material cost. Regarding operating expenses, we will continue to invest to support this global growth of our RE business and expect a modest increase versus the second quarter.

Operator, we are now ready to poll for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first questioner in queue is Amir Rozwadowski with Barclays.

Amir Rozwadowski - Barclays Capital, Research Division

I was wondering if we could talk a bit more on sort of the progression of your gross margins here. Certainly, there was a pretty big pickup from the first quarter. You've mentioned a number of the factors and I was wondering if you could distill for us how much of that came from sort of the strong shipments that took place in the quarter or how much of it came from some of the cost savings that you guys have been investing in over the last several quarters?

Richard J. Thompson

Okay, great. So let me answer that question. As you look at the margins over the past few quarters, you have seen definitely a large swing from Q4 to Q1 and now a recovery in Q2. As we mentioned in our prepared comments, a lot of the recovery was due to the absorption on higher volumes. Having said that, we are not at full absorption or approximately only 25% absorption at our Phoenix plant, so we still have quite an opportunity in front of us to increase revenue in North America and to reduce cost. Additionally, the team did an excellent job in not just acquiring materials to meet the demand in Italy and Germany and particularly that of our new TRIO line, they did it at very reasonable cost, shows the strength of our commitment of our vendors and how robust our whole supply chain is. So having said that, I believe that as we said in the comments, quite a bit of our absorption improved gross margin. Materials, which are a permanent cost, were also a savings to us. We have to look forward to further savings as we go through the next few quarters. And not mentioned, we are expanding our service lines, but please don't mistake that as additional higher cost. We're actually replacing hybrid in our hybrid model, third-party services with their own employees and over time, that will partly reduce our ramp-up of the service cost. So there's quite a few moving parts in the gross margin line and one that I didn't mention and probably is a big contributor is the TRIO product line itself. This is a higher-kilowatt product. It's 20KW and 27KW. It actually moved our total offering from an average of 19 kilowatts on commercial units shipped, up to 21 kilowatts. And while that reduces your average price per watt, it certainly is very profitable product line and it will allow us, not only this past quarter but future quarters, to raise our gross margin.

Amir Rozwadowski - Barclays Capital, Research Division

So if I understand. I mean, it sounds like, yes, you benefited from some of the investment that you folks have made, but given a variety of other tools or factors at your disposal, be it ramping North America or some of the investments you made in terms of your product lines, you do believe that there are a number of factors that could help you expand gross margins even further?

Richard J. Thompson

That's correct. I gave you a very long summary but our gross margin, I apologize, this is a very complex issue, particularly with a global company, multiple factories, delivering products in different geographies that have different pricing models in each of those and have the segments that are different. So these are things we manage in our business on a daily basis. Dr. Levran and the team in Renewable Energy do an excellent job of servicing our customers and managing all of these dynamics. At the end of the day, it's a very complex market but a very good market to be in if managed properly.

Amir Rozwadowski - Barclays Capital, Research Division

That's very helpful and then we very much appreciate the actual detail on the gross margin factors. If I may, just one other question. I think most of us that follow the solar industry have expected the North American market to pick up in terms of overall contribution to global demand environment. You have made some comments, obviously investment in Phoenix, in terms of your Ultra product line, there have been some challenges with other folks in the sector in North America. And I was wondering if you could give us a little bit of color in terms of what you see for your opportunity in North America and how we can think about the trajectory of that business over the next several quarters?

Richard J. Thompson

Okay, I'll be glad to. As you see in our numbers, we didn't do very well in North America. It's certainly an element that we believe we can overcome. Our products are excellent. We did a -- I'll be as critical as I can, we did a poor job of ramping up the Phoenix factory. We have recognized that. We have a very strong new management team. Some of them are just joining us this week, but we're already seeing, from the new leadership now for about 4 weeks, we're already seeing improvements in deliveries in the factory, reduction of cost and most importantly, increasing customer satisfaction with better on-time deliveries. Having said that, we have a long way to go. Once we get there, we believe confidently that our strong product line will allow us to take share very quickly. Again, we have a very strong product line in the commercial and residential side. We're improving it. We're actually launching and we have in beta site, our Ultra unit. We have 2 in beta testing in North America, 700-kilowatt unit and 1.0-megawatt unit. And we'll move forward from there. So we're looking forward and we're looking forward to competing successfully in North America.

Operator

Next questioner in queue is Zach Larkin with Stephens.

Zach Larkin - Stephens Inc., Research Division

Rich, as you look at guidance, you've mentioned kind of the near-term demand helping out in Europe, but as you look across geographically thinking about mix shifts, what are some of the key assumptions that you guys have made in looking at your 3Q guidance?

Richard J. Thompson

Okay, great. As we looked at it, and we build bottoms up in our forecasting so that we can give you a range that we fill confident in. As we see Europe, it's still loading nicely in the first 2 months of the quarter. We expect Europe to be -- pardon the pun, but a tale of 2 cities. We expect a strong July and August and a little bit weaker September. We still have strong demand in both Italy and Germany and in other locations throughout Europe. As we go to the West, North America is very strong. As I mentioned in my last response, we are fixing our issues as we speak. That's allowed us to already make large weekly shipments this quarter than we did last quarter. And as we go into Asia, Asia Pacific for us is predominantly India, China, Australia and as you learned, we are entering into Japan. Australia has been a very strong market and we are certainly the market leaders there. As we look at China, China has been a bit of disappointment. They tend to bias, I shared with you last quarter, with the indigenous manufacturers, but we're continuing to make progress with both EPCs and the utility companies themselves. So we expect higher shipments in China in the second half of the year. As for India. India had a lot of capacity to absorb shipments at the tail end of last year. We expect to be able to penetrate India more successfully in the second half of this year. Financing may be an issue. We'll have to work through that. So all in all, we see a reduced but not a dire circumstances in the third quarter for Europe. We see a strong first 2 months of the quarter and we'll see where orders go in the third month, but we're extremely well loaded entering into the quarter on the backlog situation. North America, there's ample business there. Our customers like our products. There were very open with us in the last few weeks when we were at Intersolar North America and San Francisco. We understand the advantages of our products, and based on our customers' feedback and our own data, we know where we must improve. And lastly, we do have a factory in Asia. We have to get more throughput from that factory. Because we shared the site with the Power business, we've been able to ratchet up and down our cost structure there. So our P&L wasn't hurt as much with the lower volume this past quarter. So we look forward to higher volume, and higher volume will give us very good fall-through margins in Asia.

Zach Larkin - Stephens Inc., Research Division

Thank you very much for that color. Maybe just following up on Asia a little bit. You mentioned that it's not quite lived up to what your expectations were, your penetration into that market. Is there anything specific based on having been over there in renewables for a couple of quarters now that you've changed in the approach or how you're thinking about addressing that market?

Richard J. Thompson

Yes. Initially, we didn't have a large enough direct sales force. We have increased the number of salesman on the street. We are again trying to cement relationships with EPCs and we've decided, with these new feet on the street, to go direct to utilities. Initially, we were going more through the EPCs alone, and we found that the bit difficult. Please keep in mind China, regardless of the high volumes, you see estimates up to 5 gigawatts for China, that is a very price-sensitive market. It's one that we must be successful just because they're about 1/10 of the whole global market or projected to be. But those markets are again very, very price sensitive. We believe that with our localized presence and our supply chain that we can be successful there.

Operator

Next questioner in queue is Jesse Pichel with Jefferies.

Jesse Pichel - Jefferies & Company, Inc., Research Division

So not to just harp on the negatives but, so without capacity constraints in the U.S., would you have achieved your 14% share there or -- I mean, it's dragged on a long time now? Do you either need to outsource or do you need to acquire someone to bring up your share. Because I think what investors may be worried about is that the Italy business next year is challenged. So we really need to grow the U.S. and other markets and could you comment on that in relation to Italy possibly coming down next year?

Richard J. Thompson

Okay, great. Thanks, Jess. Everyone, including particularly IMS, has Italy coming down. Conto Energia actually pointed to that. We would expect Italy next year to be reasonable but much reduced from 2012. We still have opportunities in Italy to take further market share, particularly in sites under 12 kilowatts where it's quite a bit better for feed-in tariffs there. Looking at Germany, we think we can continue to take share in Germany as well. Having said that, year-over-year, and when you look at 2012 to '13, you will see a decline in revenue from Europe. It's unavoidable. As we look at North America, we could have shipped easily $10 million to $20 million more in revenue in Q2 had we not had supply chain issues and manufacturing operations related issues. These were -- other than to say shame on us, I don't know where to go on this. It's -- we understand it. We've done very detailed root cause and corrective action. We took very strong and quick management actions. We've now brought in a team and they're incentivized to be very successful very quickly. Again, the marketplace is telling us our products are desired. These products -- even some of the customers who we missed their on-time delivery dates poorly, they continue to tell us these products are easier to install. They perform better with the multiple MPPT channels. They're more higher -- there are higher efficiencies and these are desired units by our customer base. Some of our customers have told us they'll return the share to us as soon as we can prove to them that we can meet our on-time deliveries. So our goals are pretty well set in front of us. It's an embarrassment, frankly, Jesse, that we've performed this poorly, and personally, that I let it go on for a few quarters. But we know what to fix. It's not a design issue. It's an execution issue, and as you've been following the business for years, you know that regardless, they are easier to fix, it's always in our rule.

Jesse Pichel - Jefferies & Company, Inc., Research Division

Right. Well I also know about your R&D development there, and given your prowess there, can you give us a little bit of the spec for the micro-inverter product to get our appetite going?

Richard J. Thompson

Well, the micro-inverter was actually designed in Italy, where we have a number of former power engineers. The micro-inverter and -- we're still working on it. We're working on advanced communications in getting the portal correct, but it's a very powerful unit. Some of our competitors go up to 220 watt. We go all the way up to 250 and to 300 watt. So it's a very strong unit, it can cover all panel ranges today, and it's going to be -- come to the market at very favorable price point. I won't go in with that -- or go into that detail here. I will wait for our product rollout. Our team is -- because these units, as I mentioned last earnings call, and as you know, as they go to the marketplace in hundreds of thousands, even during a ramp-up period, we're taking a little extra care to make sure that the units are very robust and we can -- manufacturing them in a very cost-effective manner. We're likely to manage -- I'm sorry, manufacture the first units in our Italian plant, but they're already being introduced to the China factory as we speak. And once we get production going, we believe we can make a reasonable market -- market share. Having said all of that, Jesse, we realize this is a small market. The micro-inverter, as we've talked before, was introduced because we didn't know if it was a disruptive technology and we weren't going to conceive any of the market to a different technology. What we've now found is this market will be small going forward. It looks like a very small market today, 650 megawatts to 800 megawatts depending on who you speak and growing from there. So it's not a gigantic market. It's important to us so we can give a full-featured line from a micro-inverter to the largest inverters in the world.

Operator

Next questioner in queue is Colin Rusch with ThinkEquity.

Colin W. Rusch - ThinkEquity LLC, Research Division

Can you talk a little bit about your strategy for entering the Japanese market? Are you working with a local partner? How aggressive are you going to be? And what's the manufacturing plan?

Richard J. Thompson

Okay, great. The -- as you know, Japan is going to be more of a rooftop market, commercial and residential that's about 90% to 95% of the market today. We'll likely manufacture the products that go into Japan either in Italy or in Phoenix and we can do it in China as well. So we have a lot of different opportunities to ship -- or plants to ship those products from. Entering the market is more difficult. The Japanese market is a relationship market. We believe that we'll be most successful if we partner with a very large conglomerate, and we're in advanced discussions at this time. So you would see us, perhaps, private labeling products into Japan, we think we can have a very successful offering. It looks like a great market. Our products are teed up well for it. We're in JET certification now, and we hope to be able to go on a lot more detail over the next few quarters of when we can actually sell product there.

Colin W. Rusch - ThinkEquity LLC, Research Division

Great. And then you've generated an awful lot of cash in the last 2.5 years, somewhere north of $300 million on the operating cash line. Can you talk about what you expect to do with the cash. Do you think about the dividend? Do you think about buying back more shares? What else could you be thinking about on that?

Richard J. Thompson

Well, we do have the share buyback plan. You saw us nibble at it towards the end of the second quarter. Our intention would be to finish off the buyback, I believe, there's about 5 million or 4.5 million shares you have to buyback, a pretty modest sum. There will be total of 10 million shares. And then we'll likely discuss with the board what the next step is. For a technology company like us and particularly one who has opportunities for investment, we're excited about some of the other market areas we're looking beyond PV. Areas like storage. It's really exciting. Off-grid is very exciting. So we're looking at a lot of different areas and it always helps cash to be able to execute those strategies quickly. Addressing again the cash, please keep in mind, Colin, most of our cash is in Europe. And to bring it back to the U.S., there is a tax cost. So we'll have to be very careful how we do it and when we do it to make sure that we do it under the best tax scenario that we can in compliance with the laws.

Operator

Next questioner in queue is Ahmar Zaman with Piper Jaffray.

Shawn E. Lockman - Piper Jaffray Companies, Research Division

This is Shawn for Ahmar. I was wondering if you could talk a little bit about your utilization overall going forward for RE? Apparently, it looks as though, of course, it wasn't very high in this quarter, but what should we think about it sort of a sustainable sort of utilization level for the company going forward?

Richard J. Thompson

Very good question. We have to have factories in each of the geographies as you're aware. So we're in North America, Europe and certainly Asia. Our plans in Europe are set that factory, it can do 1 gigawatt a quarter, so it's a total of 4 gigawatts and we could actually have burst capacity a little bit higher than that. We believe that's, first of all, we're not going to take 100% market share of the European market, so it's likely to be enough capacity. As we look in North America, as we put in the factory, it had room for 1 gigawatt, we're operating or we have capacity for 0.5 gigawatt today. Unfortunately, we're only about 25% filled due to the mistakes we made in the supply chain and a few other areas as we bought products in North America. So you would expect us to get to that 1 gigawatt over the next 3 to 4 quarters because we're introducing the Ultra product, which per machine is 1 megawatt. So that will raise capacity in that factory very, very quickly. Looking at Asia, we manufacture out of Guangming which is in Shenzhen. The factory is largely meant to be a 200-megawatt and 500-megawatt machine factory. We will do micro-inverters out of our Power line there and that will certainly help utilization. As we look at other parts of the geography, Australia, we can service either from Italy or from the U.S. We would preferably like to service from the U.S. for a lot of reasons, utilization reasons and some tax advantage reasons as well. I know it's hard to think of the U.S. as a tax haven, but when you have NOLs, it certainly can be. So hopefully, we've given you a good picture. I think, as important to us is the capacity of our service organization. That's very complex business to start up. We've got 7 gigawatts globally installed. We're using the hybrid model as I alluded to earlier, both Power-One employees and third parties. So we have to increase our capacity to be able to serve our installations and also to do commissioning, which a lot of our customers ask us to do.

Operator

Next questioner in queue is Kelly Dougherty with Macquarie.

Kelly A. Dougherty - Macquarie Research

Rich, you obviously had impressive gross margins in the quarter and alluded to the fact that you think even though they may dip down in the third quarter, that they can go any -- can go even higher. Can you give us a sense of once you get up to the utilization levels you want and the service levels, that where you think margins would be sustainable? And maybe when you think you can get there?

Richard J. Thompson

Okay. We don't give very long forecast, Kelly, so let me talk around that if I can. The Power business, which operated at about a 20% gross margin this quarter on very down revenue has opportunities to raise its margin probably to the mid-20s at best, into the high 20s. That business would operate very well with, let's say, a 12% to 14% OpEx and a gross margin in the mid- to high-20s, that would be excellent performance. We think the team is teed up to do that. New product introductions in Power should allow us to do that over the next year. In Renewable Energy, it's really a matter of mix and price. Our engineers do an excellent job. They are basically tasked with engineering products at a price point that gives us a reasonable margin and over a 3-year price target. So let me see if I can say that a little better. We take today's price, project what it will be 3 years down the line, it takes about 1 year to bring a product to market, 1.5 years, and we expect to be able to come out with some very healthy margins after the design period and having about 1.5 years to do some engineering -- value-added engineering to reduce -- further reduce the cost to the then market price. And so it's a strategy that's worked well for us over time. I think you have to look at the standard margin and the net margin differently. You see our net margins in that business in the low 30s. That's with 2 factories who are not well absorbed at all. So I think the answer is somewhere north of here to get to a sustained number. Having said that, Gary alluded to in his comment, Kelly, we believe that we have to increase slightly our OpEx. We believe that our product roadmap is so robust and we've shown that our marketing business development teams are able to really choose the right products that our customers desire, that we would like to have more engineering resources to be able to bring products to market quicker. So you'll see us adding engineering cost certainly over the next year. I'm sorry to be so vague, I think it's necessary so I don't end up giving you a forecast, but intrinsically, I've talked about the Power business, you can summarize the RE business in somewhere to the mid-30s on net margins and OpEx in intrinsic model is probably 10% to 12%.

Operator

Our next questioner in queue is Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

First, I wanted to follow up on a theme that you mentioned in the Q1 call, which is focus on emerging market opportunities? So I'm not thinking so much Japan but more places like Thailand, Morocco, South Africa, Latin America, et cetera. I don't know if you can quantify how much sales into those nontraditional markets have been ramping up and maybe what the competitive landscape looks like there?

Richard J. Thompson

Certainly, we've had very few sales on those marketplaces. We do have a few installations in Thailand. That, frankly, has been a very difficult grid to enter into but now through the school of hard knocks, we understand the grid in Thailand. South Africa, we are in the process of establishing an entity in South Africa, looking for a country manager. And for a sales force, we believe that's going to be an excellent market. We're making headway in Israel. That's a country you didn't mention, but Israel has a very, very healthy-looking marketplace unfolding and we should be able to perform well in there. We haven't been to Morocco yet. We'd looked at some tenders. We have also -- are exploring South America, particularly in Brazil. So we've been there on a couple of trips already, done some business development and we like what we see in the Brazilian market as well. I think that coverage generally the geographies we discussed. Japan is important just because of its size and its commitment to discord nuclear capabilities from their country. So that's the market that we are spending more and more on and as talked to earlier, we understand that we just can't take our passports and go to Japan and be successful. That there's a lot of work to be considered a viable vendor in Japan.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

And then a follow-up, you're obviously taking pretty meaningful market share just globally in 2012. I'm curious if there are any specific geographies where you think your share gains maybe have been particularly notable or conversely lagging behind that you aim to focus on for gains into 2013?

Richard J. Thompson

Okay, great. Italy has always been an important market to us. We have a significant share in Italy. Having said that, we believe we can capture more share. So we're doing it. Italy in some instances, in Sicily and southern Italy are in grid parity already. There's a number of tenders that are coming to market, pretty large-scale ones that should easily attract financing. And we believe we can take more share there. As pointed out to me, if we're between 40% and 50%, someone else has the other 50% of our revenue, and we're going to go attack it. Germany, we made a lot of progress in Germany on the strength of the TRIO. It's an excellent product. It gives our customer a lower cost point to much more efficient unit. It allows them to reduce their energy at a lower cost. So we believe we took some reasonable share in Germany. Having said that, the market leader is in Germany. We will continue to work very hard to gain more. Thirdly, in Europe, we did well in the U.K. That's been a great market and I would have to be remised if I didn't mention our first 2 Ultra units actually shipped to the U.K., which is a little bit hard to believe given its radiation, but it's a very large project and they saw a need for the Ultra product. So we were pleased with that first shipment. I think that -- does that answer your question? Okay.

Operator

And at this time, that does conclude our time for questions. I'd like to now turn the program back over to Mr. Richard Thompson for any additional or closing remarks, sir.

Richard J. Thompson

Okay. Well, thank you, all, for listening to us. We had a good quarter. I think I would also point through at our trailing 12 months, as you look at our numbers, in the face of varying quarters, from time to time, each quarter has been a particularly difficult one, certainly Q3 -- or I'm sorry, Q4 and Q1, you saw us recover, do well in very good market. So the resiliency of this company is something I think people sometimes underestimate. Having said that, I do want to thank the men and women of Power-One for doing an excellent job and to continue servicing our customers. With that, I look forward to seeing you next quarter. Thank you very much.

Operator

Thank you, gentleman. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. Attendees, you may disconnect at this time.

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