Stephen Haymore - First Solar, Inc. Mark R. Widmar - First Solar, Inc. Alexander R. Bradley - First Solar, Inc..

Philip Lee-Wei Shen - ROTH Capital Partners LLC Jeffrey Osborne - Cowen & Co. LLC Brian Lee - Goldman Sachs & Co. LLC Colin Rusch - Oppenheimer & Co., Inc. Chirag Odhav - Bank of America Merrill Lynch Vishal B. Shah - Deutsche Bank Securities, Inc. Y. Edwin Mok - Needham & Co.

LLC Cynthia Motz - The Williams Capital Group LP Joseph Osha - JMP Securities LLC.

Good afternoon, everyone and welcome to First Solar's Third Quarter 2017 Earnings Call. This call is being webcast live on the Investor Section of First Solar's website at firstsolar.com. At this time, all participants are in a listen-only mode. As a reminder, today's call is being recorded.

I would now like to turn the conference over to Steve Haymore, for our First Solar Investor Relations. Mr. Haymore, you may begin..

Thank you, Ashley. Good afternoon, everyone and thank you for joining us. Today, the company issued a press release announcing its third quarter financial results. A copy of the press release and associated presentation are available on the Investors section of First Solar's website at investor.firstsolar.com.

With me today are Mark Widmar, Chief Executive Officer; and Alex Bradley, Chief Financial Officer. Mark will provide a business and technology update then Alex will discuss our financial results for the quarter and provide updated guidance for 2017. We will then open up the call for questions.

Most of the financial numbers reported and discussed on today's call are based on U.S. Generally Accepted Accounting Principles.

In the few cases where we report non-GAAP measures such as free cash flow, adjusted operating expenses, adjusted operating income or non-GAAP EPS, we have reconciled the non-GAAP measures to the corresponding GAAP measures at the back of our presentation.

Please note this call will include forward-looking statements that involve risks and uncertainties that could cause actual the results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in today's press release and presentation for a more complete description.

It's now my pleasure to introduce Mark Widmar, Chief Executive Officer.

Mark?.

Thanks, Steve. Good afternoon and thank you for joining us today. I'll begin by highlighting some of our third quarter financial and operational results. Firstly, we achieved record quarterly net bookings of 4.5 gigawatt DC, which brings our year-to-date net bookings to 6.7 gigawatts.

The strong bookings demonstrates the tremendous customer acceptance of our Series 6 product and the impact of market factors that are leading to an acceleration of procurement timing by certain customers.

Our financial results for the quarter were also strong with revenue of over $1 billion and EPS of $1.95, driven by the sale of both our California Flats and Cuyama projects. Turning to slide 4. Our Series 6 transition continues to progress according to plan and remains on schedule.

We are now more than halfway through our 18-month Series 6 journey which we started in November of 2016. I am very pleased with the impressive results the team has delivered so far.

At our Ohio factory, the frontend of our Series 6 line is now almost completely installed and most of the equipment is operational and in various phases of acceptance testing. We are also beginning the significant milestone as we run glass through the core semiconductor equipment including the CADTEL coater (03:10).

At our Malaysia factory yesterday, our first vapor transport deposition coater arrived on site. And the process of installing the tools will ramp up in the coming weeks with the added benefit of the learnings from our Ohio factory. While we'll save further updates until our Analyst Day on December 5, we continue to be excited by our progress.

Before continuing further, I'll briefly comment on the trade case. As we have said in the past, we're not a party to the proceedings, which excludes thin film.

However, we did recently make our voice heard on this matter but only after several responding parties opposing import release, repeatedly cited First Solar in their briefs and testimony to the ITC. With our name being used in this way before a U.S.

investigative agency, we couldn't stay silent, particularly when we recently were forced to eliminate hundreds of manufacturing and non-manufacturing jobs in the United States.

As we said, we have consistently witnessed seemingly irrational market behavior from foreign companies who have continued to expand production capacity, despite years of low or negative returns on investment. We believe that an effective and reasonable remedy on crystalline silicon PV imports can indeed co-exist with continued growth in the U.S.

solar demand in all segments of the solar industry. We believe that U.S.-based manufacturing is essential to sustainable economic prosperity, and we will support the U.S. government actions that best serve American workers, manufacturers and the solar industry overall. Continuing on to slide 5, I'll discuss our bookings in more detail.

We have booked in excess of 5 gigawatts since our last earnings call and netted against this volume is approximately 500 megawatts previously booked with customers under framework agreement which has now been terminated.

The net result is quarterly bookings of 4.5 gigawatts DC which, after deducting year-to-date shipments through September of 2.1 gigawatts, brings our total remaining expected module shipments to approximately 7.4 gigawatts.

As a note, the delivery timing of these bookings stretches over the next several years and includes volumes planned for shipment into 2020. The strength of Q3 bookings is a reflection of the positive customer response to our Series 6 products, as highlighted by the number of Series 6 contracts included in these bookings.

In certain cases, when contracting this volume, we have included flexibility which allows us to meet our customers' demand with either Series 4 or Series 6 modules. Approximately half of the Q3 bookings have this contractual flexibility. Prior to this quarter, the only Series 6 bookings were designated for our own captive projects.

But with these recent contracts, we now have a substantial Series 6 pipeline with third-party customers. As mentioned last quarter, there has been a confluence of events that has driven a recent strong bookings performance. Firstly, global demand continues to be strong as solar becomes increasingly economical, relative to other sources of generation.

Secondly, while not impacting the underlying demand fundamentals, we have seen the Section 201 trade case in the United States accelerate module procurement timing by some customers. Lastly, the recent surge of demand in China has created, in the near-term, a relatively tight supply of Tier 1 module manufacturers.

Looking to the future, we anticipate the historical global module supply/demand imbalance to persist and therefore expect the global pricing environment for modules to remain aggressive.

For this reason a successful transition to Series 6 remains a top priority as it is expected to provide us with the most competitively differentiated product and best position the company for long-term profitable growth. I want to highlight an important point on Q3 bookings.

While most of the bookings for the quarter were third-party module sales, we expect to eventually add additional scope such as EPC and O&M services to some of these arrangements, which would increase our overall systems bookings number. Historically, a developer would contract for EPC and O&M services, concurrently with selecting a module provider.

However, in the current U.S. market environment, the procurement process is in some cases inverted, with developers looking to secure module supply in advance of contracting for additional services. For example, our bookings in the U.S., includes approximately 85 megawatt DC of systems bookings for a project in Florida.

The module bookings with this customer are much higher than 85 megawatts, and we are in the process of negotiating EPC agreements for the remaining volume. However, until the EPC agreements are signed, the bookings will be reflected as module-only sales and not shown in our systems project pipeline.

Once any additional agreements are signed, while it will not be reported as incremental megawatt bookings, it will represent revenue and margin on top of the original module bookings. We're excited to have been awarded this volume with a strategic customer in Florida.

Most importantly, this volume is representative of growing utility-owned generation market segment as our customer plans to own and rate base these projects. Another important and growing market segment is the utility-scale commercial and industrial segment.

In the U.S., we signed a greater-than-400-megawatt DC supply agreement for a project that will further a major corporation's goal to run its operations with 100% renewable energy. More detail will be available in the future.

Adding to our growing track record of successes with corporate customers, we have recently been awarded a greater-than-100-megawatt PPA for a project that will supply another major corporate customer with clean and affordable electricity. Once we finalize and sign the PPA, these opportunities will be reflected in our bookings.

Both of these projects highlight the growing demand from corporate customers for solar power and the expertise that we can provide to meet their needs. The remaining bookings in the U.S. were primarily for module sales in the southeast. Turning to our international bookings, in Australia, we signed new module supply agreements of 240 megawatts.

This brings our total contracted delivery pipeline to over 500 megawatts and highlights our leadership position in supplying large-scale solar projects in Australia. In Japan, we booked 21-megawatt DC systems project, which now brings our total contracted pipeline in Japan to over 240 megawatt DC.

Illustrating the opportunity for more Japan systems bookings in the future, our mid-to-late stage bookings opportunities are greater than 300 megawatts DC. In other parts of Asia Pacific region, we have also had significant module sales in both Malaysia and China.

With the bookings in the quarter, we have now sold through our approximately 3.6 gigawatts of Series 4 module supply, based on our current production plan. As we indicated in the last earnings call, we have been evaluating options that could extend Series 4 production beyond our current operating plan.

These options could add up to 1 gigawatt of additional Series 4 supply in 2018. As we said previously, any decision to extend Series 4 production would not impact our previously announced Series 6 rollout plans. We intend to make a decision on this later this year and we'll provide an update at the upcoming Analyst Day. Turning to slide 6.

I'll next highlight our mid-to-late stage bookings opportunities. Similar to prior quarters, this metric includes all of our advanced stage opportunities which have shipment dates that extend over the next several years.

Despite the current quarter's strong bookings, our potential bookings opportunities with 6 gigawatts have been very resilient and decreased only 2 gigawatts relative to the prior quarter. For reference, the opportunities shown here are almost entirely for Series 6 modules.

The growth in our mid-to-late stage Series 6 opportunities over the past several quarters demonstrates the extremely positive response from customers to our Series 6 product, both in United States and internationally. Included in the 6 gigawatts of potential bookings are over 2 gigawatts of systems opportunities. This includes U.S.

utility RFP opportunities, over 800 megawatts of projects with corporate customers and international opportunities in Japan and Australia. A meaningful portion of this volume has already been awarded and is in contract negotiations. If eventually booked, shipments to these systems project would fall primarily in 2019 and 2020.

Also keep in mind that we have a much larger number of early stage systems opportunities not included in this total. The number of mid-to-late stage opportunities, give us confidence in achieving our targets of an average of 1 gigawatt per year of systems business. Lastly, turning to slide 7.

I'll highlight some key points from our recently published 2017 sustainability report, which is available on our website. At First Solar, environmental and social responsibility, are a part of our core values. These are values we embrace each and every day as we produce modules and construct power plants that provide clean, affordable energy.

To illustrate this point, with over 17 gigawatts of modules installed worldwide, our PV solutions displace more than 12 million metric tons of CO2 per year, which is equivalent to powering more than 8 million homes annually based on worldwide averages.

We are proud of the positive environmental impact our technology has done on society and the progress we continue to make. While solar technologies have a lower impact on the environment and fossil fuels generation, a distinguishing feature of our technology, a substantial benefit it possesses compared to other PV modules.

On a lifecycle basis, our thin film modules have the smallest carbon footprint, lowest water use and fastest energy payback time in the industry.

In fact, a recent third party study evaluated the environmental footprint of five different PV technologies and found that the impact of First Solar's PV systems are about two-thirds lower than the average PV system.

Our lower carbon solar technology not only has positive environmental benefits but also provides a competitive advantage in commercial discussions. For example, as we announced earlier this year, we were awarded a 107-megawatt module supply agreement by Photosol as part of the third round of the French tender.

Photosol's decision to select First Solar's module was not only a result of our competitive offerings but also because of the significant environmental benefits that our module technology offers. First Solar's PV technology enables customers to decouple their business growth from emissions, water use, and waste generation.

As PV solar continues to become a dominant power generation technology, we expect that choosing low-carbon solar will become increasingly important for our customers, similar to what is already happening in France.

I'll now turn the call over to Alex, who will provide more detail on our third quarter financial results and discuss the updated guidelines for 2017..

Thanks, Mark. Before providing an update on our performance for the quarter, I'd like to highlight our 2017 Analyst Day which will take place on Tuesday, December 5, beginning at 10:30 AM Eastern Time.

The event will be webcasted live, and will include an update from our executive management team on strategic priorities related to our technology and capacity roadmaps, progress we're making in key markets, and our latest business outlook.

There'll be a link to a live webcast of the event available at the Investor Relations section of our website, and our executive management team looks forward to the opportunity to provide you with the latest updates on our business. Starting on slide 10, I'll start by discussing our third quarter operational highlights.

Module production increased slightly in the third quarter to 527 megawatts DC, an increase of 3% from the prior quarter. Production was 32% lower year-over-year resulting from Series 4 lines ramped down to make way for Series 6 production.

Capacity utilization, which excludes the lines taken out of service, was 98% compared to 99% in the prior quarter and 97% in Q3 of the prior year. The full fleet conversion efficiency improved to 17% in the third quarter, a 10 basis point increase quarter-over-quarter and a 50 basis point improvement year-over-year.

Module conversion efficiency on our best line was unchanged versus the prior quarter at 17% but improved 40 basis points year-over-year. As we've indicated previously, we expect the Series 4 fleet average efficiency to level off near our current 17% efficiency as future technology improvement and investment are focused on Series 6.

Continuing to slide 11. I'll discuss some of the income statement highlights for the third quarter, including some non-GAAP measures such as adjusted operating expenses, adjusted operating income, non-GAAP earnings per share and free cash flow.

And please refer to the appendix of the earnings presentation for the accompanying GAAP to non-GAAP reconciliations. Net sales in the third quarter were $1.1 billion, an increase of $464 million compared to the prior quarter.

The increase in net sales results primarily from the sale of the California Flats and Cuyama project as well as higher third-party module volume. Solar California Flats project was an important milestone to achieve our financial guidance for the year, and in Q3, we recognized nearly 70% of the revenue and margin on the project.

We'll have minimal revenue recognized in the fourth quarter, and project activity will pick up again in 2018 as we construct the remainder of the project with Series 6 modules. Cal Flats is another example of the growing corporate demand for solar power.

With 130-megawatt AC of the project off take contracted Apple, this represents one of the largest solar projects supplying power to commercial end user. As Mark mentioned, we're in discussions with corporate customers on a number of additional utility scale opportunities and provide more detail at our upcoming Analyst Day.

As a percentage of total quarterly net sales of solar power systems revenue, which includes both our EPC revenue and solar modules used in systems projects, increased to 72% from 63% in Q2. Third-party module sales increased to $300 million in Q3, up from $228 million in the prior quarter.

Gross margin improved to 27% in the third quarter from 18% in Q2. This increase results primarily from the higher gross margin on the California Flats and Cuyama projects in Q3. The gross margin of our components segment improved slightly to 18% in Q3 versus 17% in the prior quarter.

Adjusted operating expenses, which exclude restructuring asset impairment charges, were $84 million in the third quarter compared to $79 million in Q2. The sequential increase in operating expense is primarily due to higher plant startup costs associated with ramping up Series 6.

We expect plant startup costs to increase in the fourth quarter as Series 6 work in Ohio, Malaysia, and Vietnam intensifies. Year-over-year, our OpEx, excluding restructuring and plant startup, decreased by 23%, highlighting the impact of restructuring efforts undertaken last year.

Restructuring and asset impairment charges to accelerate our Series 6 transition were less than $1 million in Q3 compared to $18 million in the second quarter. Excluding restructuring-related items, adjusted operating income in the third quarter was $208 million compared to $32 million in Q2.

The increase in adjusted operating income was primarily due to higher revenue and improved gross margin. On a GAAP basis, our operating income for the quarter was $207 million. Tax expense was $8 million in Q3 and includes an $11 million benefit from the expiration of the statute of limitations on various uncertain tax positions.

This compares to a $40 million tax benefit in Q2, which included a $42 million discrete tax benefit resulting from the acceptance of our election to change the tax status of a foreign subsidiary. Third quarter EPS was $1.95 on a GAAP and non-GAAP basis. And this compares to Q2 GAAP EPS of $0.50 and non-GAAP EPS of $0.64.

Next, turn to slide 12 to discuss select balance sheet items and summary cash flow information. Our cash and marketable securities balance ended the third quarter at $2.7 billion, an increase of approximately $490 million from the prior quarter. Our net cash position increased $467 million to $2.4 billion.

The increase in our cash balance is primarily related to cash received from the sale of the California Flats and Cuyama projects. Net working capital in Q3, which includes the change in non-current project assets and excludes cash and marketable securities, decreased by $415 million.

The change was primarily due to a decrease in project assets from the sale of the California Flats and Cuyama projects. Total debt at the end of the third quarter was $344 million, an increase of $23 million from the prior quarter. The increase resulted primarily from issuing project level debt for a project in Australia.

And as a reminder, essentially all of our outstanding debt is project-related and will come off the balance sheet when the project is sold. Cash flows from operations were $581 million in Q3 versus cash flows used in operations of $168 million in the second quarter.

Third quarter free cash flow is $484 million, compared to negative free cash flow of $272 million last quarter. Capital expenditures were $98 million compared to $105 million in the prior quarter. The improved operating cash flow and free cash flow in Q3 was driven by the aforementioned project sales.

Turning to slide 13, I'll review our updated full year 2017 guidance. With the sale of the California Flats and Cuyama projects in Q3, the largest components of our guidance for the year are now complete. Looking ahead to the fourth quarter, we anticipate the majority of our revenue to be generated from third-party module sales.

We expect minimal system sales in the U.S. as the remaining revenue recognition on the second phase of California Flats will largely occur in 2018, and as we look to optimize other projects in our systems portfolio for Series 6.

In terms of international projects, the sale of the small Japanese projects originally included in our 2017 guidance, is now expected to close next year. Regarding our project portfolio in India, our guidance continues to assume that we close a portion of these project sales in the fourth quarter with the remainder in 2018.

With that context, I'll discuss the updated guidance ranges in some more detail. Firstly, as it relates to net sales, we're leaving our forecast unchanged. We've updated our gross margin guidance to approximately 18%.

Our non-GAAP operating expense range is unchanged, but we've lowered the high end of our GAAP operating expense range by $10 million, as we expect lower restructuring expenses. Operating income guidance has been raised as a result of both the improved gross margin forecast and from the lower restructuring expenses.

The flow-through impact to EPS is to raise our GAAP EPS midpoint to approximately $2.20 and our non-GAAP EPS to $2.50. Our non-GAAP EPS assumes a full year tax benefit of between $25 million and $30 million which is unchanged from our prior assumption.

In comparison to our initial expectations coming into 2017, our year-to-date performance reflects not only the strength of our systems and module businesses, but also tremendous execution during the course of the year.

Relative to our non-GAAP EPS of $2.86 for the nine months ending September 30, the $2.50 midpoint of our full-year guidance implies a loss in the fourth quarter of around $0.35. There are several factors impacting the fourth quarter which account for this loss.

Firstly, plant startup levels in Q4 will be much higher than in Q3; and while this expense is necessary to ramp up Series 6, it does present a transitional impact. Secondly, as mentioned previously, we expect minimal systems business in Q4 due to project timing and as we optimize projects for Series 6.

We continue to have a strong product pipeline and anticipate selling a number of projects in both the U.S. and international markets in 2018. And lastly, with Series 4 production taken offline earlier this year to support the series 6 transition, lower volume is also impacting sales.

All of these factors combined to impact our fourth quarter, but our full-year earnings remain strong. Finally, we've left our net cash, operating cash flow, CapEx and shipment forecast unchanged. I'll now summarize our third quarter 2017 progress on slide 14.

We had solid financial results in the quarter, driven by the sale of our California Flats and Cuyama projects. Our net sales were $1.1 billion and EPS was $1.95. Our ending net cash balance was $2.4 billion, an increase of $467 million from the prior quarter. We raised the midpoint of our non-GAAP EPS by $0.25 to $2.50.

Our Series 6 transition is progressing well with the installation of the front end of the line in Perrysburg nearly complete and with the arrival of the first coater in Malaysia. Our net bookings are strong and exceeded 4.5 gigawatts and our mid- to late-stage opportunities were resilient and currently stand at 6 gigawatts.

And with that, we conclude our prepared remarks and open the floor for questions.

Operator?.

Thank you. We will take our first question from Philip Shen with ROTH Capital Partners. Please go ahead..

Hey, guys. Thanks for the questions. Congrats on the bookings. What are the key factors influencing whether or not you book the remaining gigawatt of Series 4? Can you describe also the terms of the Series 4 contracts for delivery in 2018? Our checks are coming back with – that you guys have meaningful cancellation fees.

And then finally, given the flexibility of some of your contracts to ship either Series 4 or 6, what is the potential number of megawatts of Series 6 modules that could be sold in 2018? Thank you..

All right, Phil, I'll try to take those as best as I can. At first off, as it relates to decision points as it relates to continuing the production of the Series 4. We're continuing to evaluate the options and alternatives that we do have.

One of the primary things (26:39) which we said is we won't do anything that's going to compromise our transition to Series 6. First and foremost, that's the most important thing that we need to do. And any decisions we make, we'll make sure that we preserve the original committed-to Series 6 production schedule as we highlighted for 2018 and 2019.

Look, as we've created optionality within the – these contracts, it's given us the flexibility. As we indicated, about half of the volume that we have booked allows us to either fulfill those contracts with Series 6 and Series 4.

If you take the 4.5 gigawatts in net bookings, it would highlight then that there's a meaningful portion of that that would be – potentially could be served with Series 6, which would then give you an indication that most of the volume through 2019 could be contracted with Series 6, assuming we made – did not make a decision to extend Series 4 production.

Some of the contracts also go out to 2020, so I'm going to make sure that that's highlighted as well. The volumes go out that far. Also though remember that 2018 volume for Series 6 largely was consumed within our own development assets already. So most of that Series 6 shipment profile is mainly going to sit within 2019 and in 2020.

Have we put provisions within those contracts, especially those that have mainly focused on Series 4, but also we've incorporated similar provisions in our Series 6 agreements, as we book that far out, we do want to make sure that there's – the contracts are an obligation by both parties to perform.

There's implications for us if we don't perform and there's implications to our customers for whatever reason, if the contracts or the purchase orders were terminated. And so it's protecting both people's interest to ensure long-term fulfillment against those contracts.

Again, we're going out much further on module sales than we would historically and so we have included certain provisions within our contracts that would protect both our interest and I guess also make sure that our customers' interests are protected relative to our ability to perform and deliver against those obligations..

Great. That's helpful.

And if it's possible, is it – can you give us a sense for the gigawatts in 2018, 2019 and 2020? Is it possible to give us a sense of that mix at all, Mark?.

No, we're not breaking out the detail. I think the way to look at there's 7.4 gigawatts now that as you think about the balance of this year going out into 2018, 2019 and 2020, so that's a tremendous amount of volume that has been contracted at this point in time.

As we said the 3.6 that has been originally identified in our production plan that is sold through at this point in time, so that entire volume has been sold through. And if you remember, this year we'll end up producing another – the run rate would indicate about 500 megawatts this year.

Then what we had indicated for next year was a gigawatt of Series 4 effective and a gigawatt of Series 6. So that incremental gigawatt of – for that we could produce with Series 4 next year, it could take Series 4 production up to 2 gigawatts next year.

Look, we'll have to make a decision, as we indicated in our prepared comments by the end of the year.

We're looking at various events that could inform our views around that and the ability to fulfill those contracts and what's the best product mix to do that with, and I would expect to have a lot more information, as we indicated in our prepared remarks in the Analyst Day in the first part of December..

And we'll take our next question from Jeff Osborne with Cowen & Company..

Yeah. I heard you – thanks for the question. Alex, if I heard you right, I think on the startup costs you mentioned that there would be a Vietnam-related start-up cost.

Can you just talk about what that's for?.

As I think we talked about on our last call we have an old factory in Vietnam that was built but never commissioned, and as part of the optionality that we're keeping around continuing our Series 4, we are moving to use that factory for Series 6.

So as we do that there'll be start-up costs associated with bringing that up in the same way they would be with taking the existing Perrysburg and Malaysia facilities over from Series 4 to Series 6..

Yeah. I think as Alex indicated, what we said in our last earnings call that are effectively third Series 6 plant was going to be in Malaysia. We've made a decision now to move that to Vietnam, and what that provides now, is this gigawatt of optionality that we're referring to around Series 4.

We could continue to produce more Series 4 in Malaysia for an extended period of time. That's a decision that we're still evaluating but making that decision to go to Vietnam has freed up some optionality around Series 4 production in KLM, Malaysia..

And we'll take our next question from Brian Lee with Goldman Sachs..

Hey, guys. Thanks for taking the questions. I have two.

So first off, given the record bookings, is there a strategy that involves accelerating CapEx in Series 6 as opposed to just keeping Series 4 online longer or maybe potentially doing both in a parallel track? Just thinking or just trying to get a sense of how you're thinking about the Series 6 out-year ramp, given the initial demand seems to be pushing lead times out here.

And then just as a follow-up, I'll squeeze this in now. On the margin trajectory, if we look at components it's been pretty consistent here in the past couple quarters in the high-teens which makes sense given the pricing stability in the market.

If we take your prior comments around end of life margins for Series 4, it sounded like the first half of 2018, we'd see much lower gross margins than where you're tracking at today.

If you do the 1 gigawatt optional Series 4 volume moving through the next couple of years, is it fair to assume though that 1 gigawatt optional volume would be in the range, margin-wise of what you're seeing today, as opposed to the end of life commentary you've made in the past? Thanks, guys..

All right.

I'll take the Series 6 acceleration comment and let Alex take the margin comment .Look, Series 6, at least in the near-term, if we roll through what previously highlighted by almost a year ago I guess, when did our guidance call, that we would roll out and ramp to about 3.5 gigawatts or so of production by the end of 2019 with an exit rate that would be north of that number, call it 4 gigawatts.

The ability to do anything within that timeframe is largely constrained by lead time from our equipment manufacturers. So anything to really accelerate Series 6 within that window, call it over the next 8 to 10 quarters I guess, it would be very, very difficult.

But when you go beyond that, as we think about in the 2020 and into 2021, there could be some optionality and some decisions that we could make around acceleration. But the problem is, it's why there's kind of simultaneous equations here, but the constraint still to get to Series 6 is the ramp down to Series 4.

And so we have to play through that equation and that mix, we've got to solve and what we think is the right production profile for Series 4 and then that'll sort of give us the parameters and the goalposts I guess that we can make a decision around Series 6. So there's multiple constraints near term, it's the equipment lead time.

Alternatively, there was also the transition from 4, and how much longer we choose to continue to run Series 4 in order to potentially look at options around the timing of accelerating Series 6. But to the extent there was optionality, it would be out in the 2020 timeframe..

Yeah. And Brian, on the margin point, so we have previously indicated that we are not spending money on improving the efficiency of Series 4. Our competitors are not standing still and we expected the Series 4 to be added to most challenged, just before we start production. So as we moved into 2018 under the current plan.

Competitors won't stand still and at that point, we would have our most challenging gross margins. As Mark mentioned in his prepared remarks, we have seen an acceleration of procurement in the U.S. And we've also seen a relatively tight Tier 1 supply demand market globally based on the current dynamics mostly in China.

And that's had a stabilizing impact on pricing in the near-term. So in the near-term, that's why you're seeing margins hold up. I would also say that if we do extend the Series 4 production beyond our current plan in 2018, we would only do so if we have acceptable margins to us.

So I think you can assume you would see a similar margin profile going forward into 2018..

And we'll take our next question from Colin Rusch with Oppenheimer..

Thanks so much, guys. Can you talk a little bit about the pricing mechanisms in these contracts? I appreciate that you've got teeth in it for both sides.

But is pricing fixed on these forward bookings here, and how should we think about that?.

Yeah. So, they're very similar to bookings that we've had historically, right? So, there is a fixed price associated. There's fixed price from Series 4. There's a fixed price from Series 6. Now, we do have, this will primarily relate more to Series 6 because there's not going to be a significant difference of bin availability for Series 4.

But we do have provisions in our contracts that would give us what we refer to as bin adder or price adjusters such that if we ship them a higher watt panel, then there's a price increase associated with that. But these are fixed prices that go out for an extended period of time, as we've indicated.

They potentially have some bin adders, more that will be in the Series 6. There'll be some in Series 4 as well. But think of them as firm fixed prices, obligations by both parties to perform and implications to the extent that those parties do not perform..

And we'll take our next question from Krish Sankar with Bank of America Merrill Lynch..

Yeah. This is Chirag Odhav on for Krish.

Can you guys generally see higher marginal prices leading towards lower IRRs for the project business? Do you expect this to make things a little less attractive for future projects?.

So if I look at the IRRs we're seeing in the market today, I think you have to look at the total underwriting assumptions in it (37:32). So the IRR headline number itself has stayed, I think relatively resilient despite potential headwinds around tax reform and interest rates and other things. So I think we're seeing IRR stay relatively stable.

If I look to whether the module pricing is impacting those, clearly, the model is pretty simple, right? You've got your input costs, your revenue stream, and your return on capital. So if you change one of those, you're going to have an impact on one or other of the remaining two. So I think, clearly, there's going to be some impact.

I think if you look at the increase in pricing we are seeing on the module side, it is not significant to the point where it's going to have hugely detrimental impact on IRRs.

And depending on when your project was bid and the assumptions that you used at the time around forecast, interest rates, yield curves, cost of tax equity, other operating expenses, merchant curves (38:31) and other things, I think the general level of increase in module pricing is still allowing viable projects today..

Yeah. I think the thing to remember, too, is that I think the module represents something close to about 20% of the overall LCOE. And so, it is a small component relative to the other 80% when you aggregate everything else up. So it shouldn't have a significant impact, but the reality is what was the assumption that was used when those PPAs were bid.

If there were assumptions that module prices were going to fall very quickly and that there was an assumption of a continued oversupplied industry, that therefore, people would be selling at or below cash costs in order to liquidate inventory.

Where pricing is now settling to, could have a more impactful impact to somebody's return expectations because of a very aggressive assumption they had when they bid into a particular power price.

But on a normalized basis, if you're just looking at the delta from where module prices were at the low to where they are now, it's not going to have a significant impact. But if you were taking a low point and then further assuming price erosion against it, you could have a more significant impact from that standpoint..

And we'll take our next question from Vishal Shah with Deutsche Bank..

Yeah. Hi. Thanks for taking my question. Mark, what percentage of your bookings historically have been module plus bookings? I appreciate the comments you made about negotiations you've had with some of your existing customers.

So, should we assume 30%, 40% of these bookings would eventually get converted to module plus or could that be a smaller number? And then also, what percentage of your bookings are with some of the utility customers and corporate buyers versus some of the smaller developers and distributors that could potentially negotiate, renegotiate on pricing? Thank you..

So, in terms of – I guess what I'll throw into the bucket for – when you say module plus, I'll throw in kind of EPC and O&M services into that discussion.

As we indicated in the call, there's multiple hundreds of megawatts of opportunity against the bookings that we've recognized that we could capture additional services for OEM and EPC in particular. And what's happened is that there's obviously a desire, we're constrained, and there's a desire to lock up on module prices as quickly as possible.

We're still in negotiations with some of our customers that would include additional scope beyond just the module. But it's a relatively significant number. But there's a lot of work still to be done to determine whether or not we can capture something beyond just the module side of the equation. So we'll work through that.

As it relates to the C&I bookings, what we said in the call, I guess, 400 megawatts or so of module sales that were related to a customer – commercial industrial customer. There's 800 megawatts of late-stage negotiations against the 2-gigawatts of systems business that we highlighted that is for C&I. That segment of the market is relatively robust.

We're seeing a lot of activity there and really, it plays strongly to First Solar's capabilities and brand strength, bankability, balance sheet strength, the buying decision-maker there I would align more to utility who's looking for utility owned generation.

We're not selling into a developer who's only looking to develop and then sell down the asset as quickly as possible and not thinking about total lifecycle cost of ownership and performance and those types of things.

We're selling to a much more sophisticated informed buyer that can clearly understand the differentiation capabilities that First Solar can provide them. So it's a very exciting segment of the market and one that we expect to continue to grow..

And Vishal, you mentioned small developers that could renegotiate. I just want to reiterate that the contracts we signed today are firm obligations on both sides with penalties for failure to perform on both sides. So regardless of size of developer, we have taken bookings with contractual terms that we think will hold on, on both sides.

There had been security deposits paid. So I don't see a significant risk of renegotiation..

And we'll take our next question from Edwin Mok with Needham & Company..

Hi, guys. Thanks for taking my questions. First, mainly my questions are on bookings, right? So I guess first, if I remember, you guys are targeting around 2 gigawatt next year and maybe a little more than 3 gigawatt in 2019.

So does that mean that you're fully booked out for 2020 since you mentioned that your bookings stretch out to 2020? And how – maybe the other way to ask is how linear is that booking? And then just quickly in terms of converting those projects from third-party module to lighting (43:43) systems sales.

Does that mean that as you are successfully doing that, there could be pretty meaningful upside to this 1 gigawatt target – per year target that you laid out?.

Sure. So, I guess on the bookings side – and then I'll let Alex take the second one.

Well, if you take – what we said in the November of last year, we have about 2 gigawatts in 2018 – 2 gigawatts in 2018, about 3.5 gigawatts in 2019, and then you got a run rate number that gets you to about 4 gigawatts in 2020, right? So you've got 5.4 gigawatts plus 4 gigawatts, so that's 9.5 gigawatts over those years.

2 gigawatts, 3.5 gigawatts and 4 gigawatts plus you still have 500 megawatts or so this year. And so you can add that into that number. So you're starting to get to a number north of 9 gigawatts. And what we said is that we contracted 7.4 gigawatts, is what we still have left, right.

So I would tell you that assuming nothing else changes, assuming we do nothing on Series 4 and adding incremental capacity, assuming we don't do anything to try to accelerate some Series 6 into 2020, then we've got somewhere in the range of 2 gigawatts left to sell over that horizon. I mean that's kind of what the pure sense of the map will tell you.

And that's the kind of backdrop of analysis that we're looking at right now, to look at various scenarios and determine what is the best thing to do to best meet the needs of our customers as well as drive to the optimal financial results.

And the one thing I want to continue to remind people on is that variable contribution margin flows through to accretive EPS expansion.

Right? So, we've said before, we showed you a slide last year, refer to those slides we showed you in the last guidance call, right, that we can leverage fixed cost in our manufacturing but more importantly, in our OpEx.

So as you think about that contribution volume flow-through, it's going to flow through to a very attractive EPS impact, not only because of the fixed cost structure and their manufacturing OpEx but as most of you also know, we have a very efficient tax rate.

And so, a lot of that incremental contribution margin flows through almost 100% to EPS expansion. So we're looking at all options. As you know, it's very complicated, a lot has happened very quickly, and we'll share more of that information and what our views are around that in the Analyst Day in December..

And Edwin, on the gigawatt of systems business and the upside there. So we mentioned before that we're tracking to about 1 gigawatt a year on average of systems business, the self-development, and third-party EPC work. It's possible that in 2018, we may be under that average as we are looking to optimize our self-development platform for Series 6.

However, in the near-term, if you look today towards that gigawatt, we're about two-thirds of the way there for 2018 today. There are a lot of opportunities, as Mark said, to bring that 2018 number up to the 1 gigawatt given this recent accelerated procurement dynamic where modules are being locked in ahead of other services around EPC and O&M.

If we can bring that beyond the 1 gigawatt, we're very happy to do that, and we'll continue to work as opportunities in both 2018 and then beyond into 2019 and 2020..

Yeah. And I think the other thing, too, is that this is – obviously, it's a very impactful decision, strategic long-term in nature.

I think our assessment around that and the rationale on how we think through that, to me, is better communicated in a forum such as the Analyst Day, right? So we can give more detailed, thorough discussion, quality of discussion around that.

And so, I know everybody is going to continue to sort of ask the same question, but at this point in time as we've indicated, we are who we are. We'll give you more information in December..

And we'll take our next question from Cindy Motz with Williams Capital Group. Please go ahead..

Hi. Congrats on the quarter. Thanks for taking my question. Well, I was going to rephrase that 2018 guidance another way, but I guess we will get it at the Analyst Day. So – but would it be fair to say that just everything you've been talking about, Mark and Alex, just the demand you're seeing from utilities and I guess C&I.

And I was going to ask you about community solar, how that's going, about that you're feeling like better about 2018 and then also, in general, I was thinking about the sustainability thing you said that people are coming to First Solar because of the sustainability metrics and everything. Is that just overseas or is it in the U.S.

as well? And then I had one follow up. Thanks..

Yeah.

First of all, I guess I'll take the sustainability question first is that it is – it's really – it's impactful and it's driving where it really hits and resonates extremely well is with large scale commercial, industrial customers in particular, all right? I mean, their whole intended objective is obviously to focus on clean renewable energy and not only for their own consumption, but they're also looking at that from the standpoint of their supply chain.

So some of our customers are actually making the requirements to have flow-through into their supply chain and using that as a criteria that they're making supplier decisions around.

And so when our sustainability efforts come through and we highlight the benefits that we can provide to the environment, it really resonates extremely well with the number of our large scale commercial industrial customers. And sometimes that even get us into the table and into the discussion.

It's just that concept in and of itself is sort of facilitating some conversations with our customers. The international side though we highlighted, the tender process that was done in France and it is more impactful.

And actually I was over in Europe recently speaking at a conference and that even some of the other European countries are even looking at that as the criteria.

And I think it may evolve deeper into other regions of the world and it's something that we think is, needs to be taken in consideration because when you look at the payback period relative to our technology, compared to other technologies, it's a much quicker, faster payback and if you really focus around (50:14) reducing greenhouse gas emissions.

It's a better solution and way of doing that..

Okay..

Yeah. On the – Sorry, Cindy, so on the utilities seeing like community solar demand, I think as we mentioned in our scripted comments, there's over 800 megawatts of projects with corporate customers in that list.

So, as Mark said, the sustainability is very helpful and we're seeing that drive the C&I interest – significant interest across the board for utility as well.

There's a lot of interest in getting solar in – a lot of people have targets for end of decade and across the IPP space and the developer space is seeing interest to get in ahead of ITC expiree. So across the board, utilities, C&I communities, all of us seeing a lot of activity and a lot of driving force..

And we'll take our final question from Joseph Osha with JMP Securities..

Hey. I made it. Thank you. If you look at your production plans for 2018 and 2019, what you've just said about Vietnam, the 3.5 gigawatts and so forth, it seems as if there might be room for a greenfield fab in here somewhere. I'm just curious as to your reaction to that statement and whether there might – that might be part of the planning process.

Thank you..

You know, we're looking at all options, and as we go further out into the horizon, that type of option does come into play more so than near-term. Near-term is the fastest way to get more Series 6, just use the existing brownfield that we already have.

But as you go further into the horizon, a greenfield or a modified greenfield, it could be an expansion to one of our existing facilities. It could be a new building to – in Vietnam or it could be a new building in Malaysia or it could be a new building in Perrysburg, right, so it's an attachment to an existing manufacturing operation.

It would probably be the priorities in how we would think through it, but clearly that's part of the decision making that we're evaluating, but again those would be situated further out in the horizon in 2020 and beyond..

And this concludes today's question-and-answer session, as well as the First Solar's Q3 2017 financial results call. Thank you for your participation and you may now disconnect..