SunPower Inc. (SPWR) Q1 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the SunPower Corporation First Quarter 2012 Results Conference Call. Today's call is being recorded. [Operator Instructions] I would like to turn the call over to Mr. Bob Okunski, Senior Director of Investor Relations at SunPower Corporation. Sir, you may begin.

Thank you, Victor. I'd like to welcome everyone to our first quarter 2012 earnings conference call. On the call today, we will start off with an operating view from Tom Werner, our CEO; followed by Chuck Boynton, our CFO, who will review our first quarter 2012 financial results. Tom will then discuss our guidance for the year before opening up the call for questions. As a reminder, a replay of this call will be available later today on the Investor Relations page of our website. During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in our 2011 10-K, our quarterly reports on Form 10-Q, as well as today's press release. Please see those documents for additional information regarding those factors that may impact these forward-looking statements. To enhance this call, we have also posted a set of PowerPoint slides, which we will reference during this call on the Events and Presentations page of our Investor Relations website. In the same location, we have posted a supplemental data sheet, detailing some of our historical metrics. On Slide 2 of our PowerPoint presentation, you will find our Safe Harbor language. Our prepared remarks will run approximately 25 minutes and then we will take questions. With that, I'd like to turn over the call to Tom Werner, CEO of SunPower who will begin on Slide 3. Tom?

Thanks, Bob, and thank you for joining us today. On today's call, we will review our Q1 operational performance, update you on our Q -- our 2012 strategy, detail our first quarter financials and outlook for the balance of the year. Please turn to Slide 4. Overall for the quarter, we executed well, leveraging our downstream channels to mitigate the impact of challenging industry conditions. Our North American utility business outperformed and offset the price pressure in the rooftop business. We also executed on our technology roadmap during the quarter as we started volume production of our Gen 3 solar cell technology and met our manufacturing step reduction targets for the quarter. We also made the strategic decision to consolidate our Philippine fabs to lower our expenses. With a conservative capital structure, flexible balance sheet and the continued support of Total, we are well-positioned to successfully manage the business through this industry transition. Before discussing the details of the quarter, I want to remind everyone, we have resegmented our business into a regional geographic split, which better aligns our business with our local market focus. Revenue and gross margin for the quarter were better than our plan as our North American utility business outperformed. In North America, our 250-megawatt California Valley Solar Ranch project remains on track, and we are confident that we will meet our September milestones. As of the end of Q1, we had installed more than 35 megawatts at CVSR. We also continue to monetize our pipeline as evidenced by our announcement yesterday on the sale of our 25-megawatt McHenry Solar Project to K Road Power, an independent power producer. The project will create up to 144 local jobs with power generated being sold to the Modesto Irrigation District under a 25-year PPA. We continue to see significant momentum in our U.S. residential lease program as we nearly doubled the number of leases signed in Q1 versus Q4. We are on track with our integration of Tenesol, and we see significant opportunities for the second half of 2012 in South Africa, as well as in the off-grid business. In Asia Pacific, Japan remains our largest market where we shipped record volumes during the quarter. Our high efficiency panels are extremely well-suited for this market. We increased our lead in efficiency by starting production of our world record 21% efficient modules utilizing Gen 3 cell technology. These new products once again took the standard for the industry. Last month, we announced a strategic decision to consolidate our Philippines manufacturing footprint. This decision will drive supply chain efficiency, lower expenses and reduce cost per watt by at least $0.02 this year. We met our accelerated cost targets for the quarter, and we are confident in achieving our 2012 goal of $0.86 per watt or better on an efficiency adjusted basis by the end of 2012. Our step reduction initiative is on track, with 2 lines at Fab 2 running the new process. Initial yields and efficiency are at or ahead of plan, and we expect all 12 lines in Fab 2 to be running on the new process by the end of this year. Finally, we retired $199 million in convertible debt in Q1 and carefully managed our working capital resources. Moving on to Slide 5. As we mentioned last quarter, we are well-positioned to succeed as the solar industry moves closer to competing with traditional generation. We are focusing on 4 key strategic drivers: Our unique differentiated global go-to-market strategy, expanding our technology leadership position in cell and systems, accelerating our cost reduction roadmap and prudently managing our balance sheet and liquidity. Now let me provide specifics on each driver. On Slide 6, we show an overview of our go-to-market approach in each region and how we'll approach intersects with current market trends. I'll spend a few minutes on this slide since it explains key aspects of why SunPower is well-positioned to win during this period of industry transition and beyond. First, Americas. SunPower is extremely well-positioned across all segments of our home market, which we believe will remain one of the largest fastest-growing and most sustainable PV markets. We have invested more than $1 billion over the last 5 years developing our North American downstream channels, and this investment has created a strong platform in all major customer segments. SunPower products are well-known in North America to represent the highest standards of performance and reliability, and our utility team has established an unparalleled reputation for industry leadership based on project quality and bankability. In the North American residential and light commercial market, our approximately 500 store and dealer channel is a key competitive advantage. This network provides us with unmatched market reach, while driving the SunPower brand and a superior customer experience. According to the most recent California Solar Initiative data, 1 in 4 panels sold in residential systems in California are SunPower panels. By far, the largest market share of any solar panel manufacturer. Leasing has become a key growth driver in the residential segment and has the potential to significantly expand the addressable market. With over 200 dealers in 8 states supporting our residential -- U.S. residential leasing business, the scale of our dealer network has allowed SunPower to achieve leading market penetration in residential leasing only in 3 quarters after launch. The SunPower value proposition to the homeowners is compelling. Purchasing the best solar technology in the industry and be cash flow positive from day one. Additionally, homeowners also receive SunPower's performance guarantee in maintenance services. These economics are proof that the solar industry is rapidly approaching parity with traditional generation in the residential market, and we are well-positioned to capitalize on this growth. In the commercial business, our focus on the U.S. public sector is paying off as evidenced by our recent announcement of China Lake, a 14-megawatt DC project for the U.S. Navy. This is the first federal government project utilizing a 20-year PPA. Finally, we are well-positioned to capitalize on our 5 gigawatt North American utility pipeline over the next 3 years with over 1 gigawatt of projects already under PPA. With our extensive EPC experience, highly bankable Oasis system hardware, and the strong balance sheet support of Total, we are very confident in our ability to execute on our project pipeline. Moving on to Europe, Middle East and Africa, in Europe, our primary focus is on countries with conditions that will allow rooftop PV systems to compete with conventional sources of power in the near future, even with dramatically reduced economic incentives. Renewable energy policy in Europe is undergoing significant changes. However, we expect to see continued support of distributed rooftop PV systems. Our products and channel approach are well-suited to this segment as our high efficiency panels and go-to-market approach are ideal for the rooftop applications, and we remain positive on the European rooftop business for 2012 and beyond. The Middle East and Africa offer strong future growth potential, and we are increasing our resources in these regions accordingly, including in South Africa where we have a 75-megawatt AC panel manufacturing facility in place. Unlike in Europe, we expect significant opportunity for solar power plants in this region. Our C7 concentrator technology delivers an extremely competitive levelized cost of energy in high sunlight intense heat regions, and we are working closely with Total on a number of large-scale C7 initiatives. Now let's focus on Asia Pacific. Given the large and diverse Asia Pacific region, our strategy is to develop partnerships with regional players who have strong local market presence. Our go-to-market approach is, therefore, tailored to each country. For instance, our long-standing relationship with Toshiba in Japan has allowed us to steadily grow our share of a market where customers demand the highest performance, quality and reliability. In India, we are working closely with several partners such as Mahindra, while in Australia, we are directly engaged in the residential and commercial markets through our local SunPower partners. We believe that these 3 markets and China will become key drivers for the PV industry, and we are shifting investment into this region to capitalize on this opportunity. Now let's move to technology. Please turn to Slide 7. System performance, reliability and quality remain key competitive advantages in today's market. High-efficiency cells and panels drive peak system performance. Based on a number of studies in multiple geographic regions and varying weather conditions, SunPower panels provide over 5% more energy than standard panels per rated kilowatt. This performance benefit leads to increased customer net present value. Our technology also delivers improved reliability, a critical factor considering the up to 30 year expected economic lifetime of most solar systems. SunPower's cell technology has over 25 years of successful field experience, and this reliability is a direct result of our superior product design, as well as rigorous testing and quality control programs. The numbers speak for themselves. For instance, if we look at the warranty return data for all Gen 2 panels produced over the past 6 years, for every 1 million panels shipped, only 27 panels have been returned. Bottom line, in today's highly competitive market, the SunPower brand stands for higher panel efficiency, increased energy production and superior reliability. I'd now like to provide a brief overview of our cost reduction initiatives on Slide 8. As we announced a few weeks ago, we made a strategic decision to consolidate our Philippine manufacturing footprint into a single fab. This process has already begun, and we believe it will reduce our cost per watt by at least $0.02 this year. From a capacity standpoint, we expect minimal impact as the closer of Fab 1 will be significantly offset by yield and overall equipment efficiency improvements in Fabs 2 and 3. With respect to our step reduction initiative, we now have 2 lines running the new process at Fab 2, and we are achieving yields and overall equipment efficiency at or above planned. We will roll out the new process on all Fab 2 lines by the end of 2012. Given this momentum, we are confident in achieving or beating our cost target of $0.86 per watt on an efficiency adjusted basis by the end of 2012. We are also seeing continued success in our panel manufacturing operations. Execution at our Milpitas, California panel manufacturing facility is on track. We are now operating 3 shifts and ramping capacity to meet the needs of the growing California market. Our Mexicali panel plant, which serves the North American market, has ramped faster than any of our previous panel manufacturing facilities, and the ramp is ahead of our forecast. I want to make one final point on cost. Balance of system cost typically dominates total installed system cost and by extension levelized cost of energy, which drives our customers' investment decisions. At SunPower, we are focused on a total system solution, panel cost and efficiency, low-cost BOS, simple and efficient field installation and superior performance and reliability. As you can see on Slide 9, this integrated system approach drives a highly competitive levelized cost of energy, cost reduction roadmap. In the case of our C7 concentrator product, we expect to deliver levelized cost of energy at up to 20% lower than competitive offerings starting in 2014. We've already announced our first C7 deployment at Arizona State University and feedback from utility companies has been very positive. C7 is perfectly suited for high-sunlight regions such as in deserts, southwest in the U.S., as well as for applications in the Middle East and Africa. For regions with less ideal sunlight regimes, our Oasis power block product also offers customers a very competitive levelized cost of energy. Chuck will address the balance sheet in more detail in his comments, but I want to take a minute to highlight that we remain focused on optimizing our liquidity and working capital position on Slide 10. For example, a key metric for us is inventory turns, and we continue to drive higher turns through 3 factors. The first, better supply chain management due to increased demand visibility in large projects like CVSR; second, working closely with our vendors to optimize raw material inventories; and finally, increased leverage from our regional panel manufacturing facilities in the U.S., Mexico, Europe and South Africa. With that, I'd like to turn the call over to Chuck for a more detailed review of our financial performance. Chuck?

Thanks, Tom. Good afternoon and, please turn to Slide 11. As Tom mentioned, our financial and operating performance in the quarter was consistent with our forecast. We also undertook a number of strategic initiatives to improve our model for long-term profitability and cash flow generation. Today, I will discuss 3 key themes. First, I will talk about our operational performance for the quarter, followed by an update on our key strategic initiatives and lastly, discuss how our business model positions us for future growth and sustained long term cash flow generation. Let me first cover our operational performance. Our non-GAAP revenue for Q1 2012 was $580 million compared to $451 million in Q1 '11, an increase of 29% and above our plan. We benefited from strength in North America, but this was partially offset by market uncertainty in Europe. Non-GAAP revenue in the first quarter 2012 includes approximately $176 million from the continued construction of CVSR. We also recognized $90 million in GAAP revenue from the project in Q1. The delta between GAAP and non-GAAP revenue is due to real estate accounting requirements, and we expect non-GAAP revenue will be approximately $100 million higher for the year and this will reverse in 2013 when we finish the project. Additionally, Q1 '12 is the first quarter that Tenesol was included in our financial results. Global ASPs for the quarter were in line with our forecast, and we maintained our significant pricing premium. Cell production in Q1 '12 was 297 megawatts compared to 184 megawatts in Q1 '11. We also recognized 196 megawatts in revenue, up 47% from 133 megawatts in the comparable period last year. Q1 utilization was greater than 90%. Our non-GAAP gross margin for the quarter was above our plan at 12.7% despite a sequential revenue decline of 28%. This compares to a non-GAAP gross margin of 11.3% last quarter. We benefited from our North America utility business and our ability to flex our model to minimize geographic risk. Now let me spend some time on our regional performance. In Q1, non-GAAP North America revenue was $368 million, accounting for 63% of total non-GAAP revenue with a non-GAAP gross margin of 16.5%. For Q1, we installed more than 35 megawatts at CVSR and continue to ramp our installation rate. In U.S. residential, we continue to see strong traction with our lease product. I'll provide additional detail on our leasing success later in my comments. In EMEA, non-GAAP revenue was $156 million and declined 37% sequentially due to challenging industry conditions, policy uncertainty, as well as typical seasonality. Our 2 largest markets in Europe, Germany and Italy declined to 12% of total revenue versus 14% last quarter. Non-GAAP gross margin for the quarter was 2.9%. In APAC, revenue was $57 million. We continue to see good demand pull for our product in Japan where we shipped a record volume of panels to our partner Toshiba. Non-GAAP gross margin for the quarter was 14.5%. Total non-GAAP operating expense in the first quarter was $79.6 million, down 18% sequentially as we started to see cost savings from our Q4 restructuring and successfully managed our variable expenses. We remain committed to reducing OpEx by 10% year-over-year, including Tenesol. Non-GAAP other income and expense for the quarter was a loss of $9.7 million compared to a gain of $6.3 million in Q4 '11. Q4 '11 non-GAAP OIE included a $16 million onetime non-GAAP gain related to the sale of our equity stake in Woongjin Energy compared to a $3 million non-GAAP gain in the sale of the remaining equity interest in Woongjin in Q1. We ended the quarter with a non-GAAP loss before taxes of $15.8 million and recorded a non-GAAP tax benefit of $5.8 million. It is important to note that our non-GAAP tax rate represents our estimated cash tax rate for 2012. Loss per share for the quarter on a non-GAAP basis was $0.12, which was in line with our outlook for the quarter. On a GAAP basis, loss per share was $0.67. GAAP loss per share included approximately $54 million in pretax items, primarily related to $12 million in stock-based compensation, a $16 million difference in GAAP gross margin for our CVSR project, $3 million noncash interest and amortization expense. $9 million for the write-down of third-party inventory and approximately $7 million in restructuring, integration and acquisition charges. Our weighted average shares outstanding were 112 million, which included the shares issued in conjunction with the Tenesol acquisition. Please turn to Slide 13, and I'll provide some comments on our balance sheet and cash flow performance. We continue to focus on maintaining our conservative capital structure and flexible balance sheet for the first quarter. Cash and cash equivalents at the end of the quarter totaled $302 million and reflects the redemption of $199 million of our convertible debt in February. Available revolver capacity was $125 million at the end of Q1. We also continue to work closely with Total during the quarter, and finalized a $600 million Liquidity Support Agreement to provide assurance to the DOE in support of Energy's CVSR loan guarantee. With this agreement, we now have strong visibility on revenue and cash flows for the project through at least the end of 2013. We remain focused on ways to improve our working capital efficiency and reduce the amount of cash tied up in our business. In the first quarter, we had negative cash flow from operations of $137 million. This is primarily due to strong performance in working capital in Q4 2011, our seasonal inventory build and projects under construction such as the recently announced MID project. We expect positive cash flow from operations for the balance of the year. Capital expenditure for the quarter was $33 million. Now I'd like make a few comments regarding 3 initiatives that we feel will position us for success in both the near and long term: Our fab consolidation, the Tenesol acquisition and our residential leasing program. First, our announcement related to the consolidation of our manufacturing facility in the Philippines. As a result of our consolidation, we expect to record pretax GAAP restructuring charges totaling $51 million to $69 million, of which $47 million to $63 million will be reported in the second quarter with the balance of the charges taken over the rest of the year. Of the total restructuring charges, $40 million to $54 million will be noncash asset impairment charges, with the balance of $11 million to $15 million being cash-based charges. As we drive Fab 2 to lower costs, we'll transfer some equipment from Fab 1 to ease manufacturing constraints, which will improve our overall equipment effectiveness and accelerate our step reduction plan. As such, we expect to record noncash accelerated depreciation charges over the rest of 2012 in the range of $12 million to $15 million, including Q2 charges of $5 million to $6 million. These charges are related to equipment replacement and elimination in Fab 2. As a result of the consolidation, we expect to reduce our fleet-wide cost per watt by at least $0.02 and improve our cash flow generation. Second, our Tenesol acquisition. As we announced earlier in Q1, we closed the Tenesol acquisition and are beginning to leverage their global footprint and the integration is on plan. Additionally, given the timing of the Tenesol transaction, we have consolidated their results into ours for Q1, as well as recast our financial statements for Q4 '11 to reflect the financial position and operating results of Tenesol as required under the accounting guidelines for a transfer of an entity under common control. For 2012, we expect Tenesol to account for less than 10% of our total revenue and are forecasting their bottom line results to be neutral to slightly accretive to our 2012 performance. On leasing, as Tom mentioned, demand for our leasing solution is very strong. The value creation for SunPower is driven by 3 factors: First, a competitive leasing rate with SunPower's industry-leading technology, quality and reliability; Second, higher energy output and lower design and installation cost, which is incorporated into our leasing price; And third, our lower cost of capital and operating efficiencies resulting from scale versus other industry participants. In addition to the traditional cash sale, SunPower offers consumers system lease financing solutions with a variety of options from no money down to fully prepaid leases. In the case of a fully prepaid lease, it is typically treated as an operating lease and revenue and margin are recognized over the term of the lease. Generally, the monthly leases are treated as capital or sales-type leases and revenue is recognized upfront. The program is structured for SunPower to receive cash upfront from our financial partners to cover the cost of system, components and labor cost. As the leasing program grows over 2012, our use of cash and working capital will grow and some of our revenue will be deferred. This structure will drive a higher backlog in both the medium and long term, leading to better visibility in our RLC Channel. Also, we plan to post a primer on our leasing program on our Investor Relations website by the end of the quarter in order to provide investors additional transparency as to the mechanics of leasing. Finally, I will wrap up and discuss how our business model positions us for future growth and long term cash flow generation. In anticipation of the current oversupply environment, we have built a diversified set of products that we sell across multiple geographies. Financially, our focus remains on reducing the cost of business in both operating expenses and COGS, while prudently managing the company for cash flow and liquidity. We've taken a number of strategic steps to achieve these goals during the first quarter, including our Philippines fab consolidation, the Tenesol acquisition and launch of residential leasing. Given our diversified business model, strong execution on our cost-reduction programs, prudent management of our resources and support from Total, we are well positioned to drive profitable long-term growth. With that, I'll turn the call back over to Tom.

Thanks, Chuck. I would now like to turn to our guidance for 2012 on Slide 13. For Q2 2012, we expect to recognize approximately 250 to 275 megawatts in revenue and see non-GAAP Q2 revenues in the range of $575 million to $650 million, which will include revenue from our CVSR project and our residential lease program. Non-GAAP gross margin is projected to be in the range of 12% to 14%. Non-GAAP loss per share is projected to be a negative $0.20 to a negative $0.05. We expect a GAAP loss per share of a negative $0.95 to a negative $0.80. Capital expenditures in the second quarter are expected to be in the range of $35 million to $40 million. For the fiscal year 2012, we are reiterating our previous guidance. We expect both GAAP and non-GAAP total revenue of $2.6 billion to $3 billion, volume recognized to be in the range of 900 megawatts to 1.2 gigawatts and capital expenditures of $110 million to $130 million, including our CapEx reductions related to our fab consolidation. We remain committed to achieving breakeven or better non-GAAP profitability in the year end, unrestricted cash balance of more than $300 million, while investing in cost reduction initiatives. In summary, we see 2012 as a year of industry transition, where the strongest companies will gain share. With our solid downstream positions, industry-leading technology and product differentiation, cost-reduction programs and successful balance sheet management, we are well-positioned for future success. We will now open the call to questions. In addition to Chuck, Bob and myself, we have Howard Wenger, President of Regions.

[Operator Instructions] First question comes from Vishal Shah.

This is actually Chad Dillard dialing in for Vishal, from Deutsche Bank. I was just curious, what percent of your 2012 revenues will be from capital projects?

Yes, sorry about that, we didn't hear the question. Your connection is not that good. Can you try one more time?

Sure. So what percent of your 2012 revenues will be from capital projects?

Okay. What percent of 2012 revenues will be for...

Regarding capital projects.

Capital projects, okay. So capital projects would be self-developed and that would be North America, Howard or Chuck, roughly half of the projects that we built. Is that the number?

Yes, 50%.

Okay. And then can you talk about the downstream development efforts in international markets, specifically what areas or geography are you focused on, as well as has Total made any capital commitments to downstream project development efforts?

Yes, this is Tom. I'll say a few words and Howard you can take the majority of the question. Probably really where we've -- previously over the last 12 months or, really restructured our company, we eliminated all of our European self-development. We focused on our American development, and we've increasingly invested in developing projects throughout the rest of the world. And with that, Howard, I think maybe you could talk about specific regions and how things are going.

Sure thing, Tom. We are focused primarily in the Middle East and Africa in terms of self-developed larger ground-based systems of 10 megawatts or greater. So places such as Israel, and then the Arabian Peninsula and then in Africa. We have a significant amount of megawatts that we're developing in South Africa. Those are the primary areas for international development. We also have some development still in Greece. And we're looking in areas of the Asia Pacific such as Thailand and China. One thing I would add is that with our partnership with Total in some of these areas, we're working with them to provide systems at their own facilities, these are again larger ground-based systems in these parts of the world that I just mentioned, as well as working with them in areas where they have a particular advantage or a long-term presence such as the Middle East.

Our next question comes from Satya Kumar. Brandon Heiken - Crédit Suisse AG, Research Division: This is Brandon Heiken speaking on behalf of Satya Kumar from Crédit Suisse. I was wondering if you guys could talk about the lease program and how that's contributing to margins. I know last quarter, the Residential and Commercial margins were a bit weaker than the utility, and I was wondering if this rollout of the lease program is reversing that or if there are any other observations there?

Okay. Yes, this is Tom. Let me say a few comments and then I'll ask Chuck to continue. The lease product is a really, really successful product for SunPower, and it's really successful because broadly speaking you can get the world's best product at pricing that allows you to be cash flow positive day one. So you have what is, therefore, could be interpreted as a approaching grid parity today with the world's best product. And what works well for us is that the advantages of high efficiency are embedded into the lease itself. So the homeowner no longer needs to understand high efficiency or high energy production or standard reliability or life or any of those things. It's built into the lease. They simply need to understand, world's best product and cash flow positive day one. So our lease volume doubled quarter-on-quarter. Now specific to your question, the impact on the P&L, Chuck.

Yes, Brandon the overall lease margin will be low double digits. And the driver of that is the lease revenue will be in the full system value, not just on the panel or the panel and the inverter. So the actual margin per watt is higher, but the gross margin percentage is lower. Brandon Heiken - Crédit Suisse AG, Research Division: Okay. And I'm not sure if you mentioned it or not, but did you talk about your direct exposure to Japan? And I was wondering if you could give an update on the JV with Toshiba and how that's affecting sales in Japan?

Yes, we've commented it on Asia Pacific. It's really dominated by -- currently dominated, by our relationship with Toshiba, and we shipped record volume in Q1 to that region. So for the company that we are, thanks to Toshiba's excellent performance, we're doing quite well in Japan. Howard, can you comment further?

Yes, we're really pleased with how things are going with Toshiba. We're entering our second full year with them. We have multiyear master supply agreement with them, and as Tom mentioned, we had a record quarter in terms of shipments. So they're very well-positioned in the market, and we are looking to expand our presence there, even beyond Toshiba. But they're clearly the centerpiece of our strategy in Japan. Brandon Heiken - Crédit Suisse AG, Research Division: Did you mention the specific exposure to Japan for megawatts or the revenue?

I believe we gave the number of megawatts for Asia-Pacific and that is -- the majority of that is Toshiba.

Yes, about 27 megawatts in Q1.

Our next question comes from Kelly Dougherty.

Yes, this is Marina Shvartsman on behalf of Kelly Dougherty from Macquarie. We have a question, when you talk about being cost competitive on efficiency adjusted basis at $0.86, what are you guys assuming some of your Chinese peers produce by the end of this year?

Okay, $0.86 per watt, what did we -- did anybody here, what...

Adjusted basis and cents per watt.

Yes -- no, I can't hear the last part of your question.

I just wanted to see what are you guys assuming the Chinese peers are producing by the end of the year when you talk about meeting your 2012 cost reduction plan being $0.86 per watt on the efficiency adjusted basis? Do you see yourself being competitive with the Chinese peers? And is $0.86 pretty much going to be enough to be competitive?

Yes, okay. Thank you for the question. The answer to your question's unequivocally, yes. We compete with the Chinese today favorably. Wherever BOS is most expensive, high efficiency has the highest high-value, and we compete very favorably on a levelized cost of energy basis. It would be fair to say where there's low sunlight and low-cost BOS, the competition is difficult for us today. Over the next 2 quarters to 8 quarters, we think we can get cost down on our product faster than conventional technology, so that we'll be cost-effective in even the low-cost BOS areas. So to give you specific segments, in residential today, we compete on a cents per kilowatt hour basis today, and we will be more effective, even more effective over time. In utility, large-scale power plants where you have land mitigation and your footprint is quite large, we compete very favorably. And in between, we compete, but we bring other things to bear to win and over time will be able to compete directly on the economics. So it's a long winded yes, but it depends on the end market.

Next question comes from Tim Arcuri.

It's Seth on here for Tim. I was just wondering if you might -- do you have any idea on how much you added to your pipeline in the quarter?

Sure. Question is again, we're having a little trouble with our line. The size of the pipeline, I think, is that your question?

Yes, specifically what you have added to the pipeline in the quarter for larger scale projects.

Okay. So what's been added to the pipeline. I think Howard can take that and talk about the medium-sized projects, which gets a lot less attention and then give you a sense of the additions to the pipeline.

Yes, as we mentioned during Tom's remarks that we have approximately 5-gigawatt pipeline, and what happens with this pipeline over time is we continue to evolve it and bring it to the point where we can construct the project. And so we achieved a number of significant milestones on projects in the quarter, namely Antelope Valley, which is the project 601 megawatts on 2 sites. We've got an unconditional approval of the permit with a fully approved PPA. So we can proceed to financing for that project. So that's really good news. We announced the Modesto Irrigation District project that we sold to K Road. We announced that yesterday. That's a 25-megawatt AC project. And then as Tom mentioned, we have 4 or 5 other projects in the 10 to 30 megawatt range that we'll be constructing over the next 12 months in North America. And so we continue to evolve the pipeline, add to it, get them ready for construction, and so it's moving to plan for the coming year.

And we have work we're doing on the latest generation of RFOs, but the work is not far enough along to talk about publicly.

Our next question comes from James Medvedeff.

It's Jim Medvedeff from Cowen. Sticking with the line of question we were just on, when you talk about evolving the pipeline, 5 gigawatts is that the, that's -- how much of that is actually sort of set to be -- ready to be constructed and how much of it is still sort of a year or 2 away in terms of permitting and PPA and that sort of thing?

This is Howard. I'll answer that question. 1 gigawatt of about 5 gigawatts have been announced and are set for -- they're either in construction, which includes California Valley Solar Ranch, that's a 2-year construction schedule. We're just underway there. That's 250 megawatts. I mentioned the 601 megawatts of the Antelope Valley, and then we have additional projects that fill out that 1 gigawatt that we've announced and are ready to be financed and constructed. So then you have behind that another 4 gigawatts that are in various stages of development.

So if you don't book any additional -- is it buying the land or booking, how is it that something gets into the -- if you do nothing, it'll end the year at 4 gigawatts, what is it that you have to do to get it back up to 5? And sort of what is the milestone that gets it from a glint in the eye to in the pipeline?

Okay, to answer the pipeline, the projects that we mentioned that are in pipeline are projects that we have a line of sight to in terms of the land where we actually have control of the land. And then there are various stages of development. The 3 key elements of development to get a project ready for financing and to construct are: You have to have the land, of course; you have to have a viable power purchase agreement; and you have to have a building permit for the project; and I guess the fourth element is a valid interconnection agreement to deliver the power to the grid. You have those 4 things and you've got to a project. So we are evolving the remaining 4 gigawatts to get those 4 elements in place. And then to add to that pipeline, we get additional land positions, and we're looking in the various geographies, North America and the geographies I mentioned internationally.

So the 4 gigawatts has at least one of those 4 things in place. And to become a project, it needs to get one or more of the other 3. But in almost all cases, I believe in all cases, we have a land position.

And our final question comes from Ahmar Zaman.

This is Karen calling on behalf of Ahmar. Okay, I wanted to dig a little bit deeper into your cost reduction roadmap. What was your efficiency adjusted cost in the first quarter? And how does your Generation 3 cells affect your overall processing cost? And what other steps are you taking in terms of cost reduction, is it diversifying some of your wafer suppliers?

So I'll take the last 2 parts of the question, and then Chuck I'll turn to you for the efficiency adjusted Q1 cost. So Generation 3 is materially the same processing cost, yet a point higher of efficiency. So we get the system benefit of higher efficiency without adding processing cost. We can take Generation 3 and also step reduce it. So we think in time it will be a lower processing cost than previous generations, while still being higher efficiency. The third part of your question is, what are the big drivers to reducing cost? That would be the step reduction programs that we're making, the same generation of cell technology with less steps or less complexity. And it's roughly proportional to the number of less steps, so by the end of this year we'll have 15% less steps and therefore, roughly 15% less cost because of that. Also because we're in an oversupply environment, so our suppliers and that means there's opportunity to get cost down in the supply base, and we, in fact, are doing that. We're also using this as an opportunity to value engineer our developed material, and we can see significant progress. And then really importantly is balance of system cost dominate the overall total system cost, and so as we go forward, it's really critical that companies attack balance of systems cost. And we've got both a rooftop project called Halo and a ground-mounted project called Oasis. And those are -- Oasis is particularly far along. Chuck, efficiency adjusted Q1 cost?

Yes, Karen, if you look at our last quarter we provided a chart in our earnings release that showed the efficiency adjusted chart versus our actual roadmap. We were actually below our plan for Q1. We can give you more color on the call afterwards, we're not providing the exact efficiency adjustment for Q1.

Okay. Thank you, and thank you for joining our call. We look forward to our call next quarter. Thank you very much.

Thank you.