SunPower Corporation (SPWR) 2005 Q4 法說會逐字稿

Good morning and welcome to SunPower Corp.'s fourth quarter year end 2005 earnings release conference call. Your lines are in a listen-only mode until the question-and-answer segment of today's call. This call is being recorded; if you have any objection you may disconnect at this time. I would now like to turn the call ever to Mr. Tom Werner, CEO of SunPower Corp. Thank you, Sir. You may begin.

Welcome to SunPower's Q4 2005 earnings call. Q4 was our first quarter as a public company. We are pleased to report solid financial results and to provide some color on what we feel is very strong execution by the entire SunPower team against our ambitious growth objectives.

During this call, we will report Q4 financial results, view highlights of our business and provide guidance for Q1 of fiscal 2006.

First I would like to described briefly why we at SunPower are so excited about our opportunities in the solar industry. We are addressing a large, rapidly growing market. Solar market is projected to triple in size by 2010 to $18.5 billion. And even at that substantial growth rate is still a tiny fraction of the overall electricity market. The residential market is the largest segment of the solar industry and is in fact the fastest-growing segment. It is the segment that plays directly to SunPower's strengths, superior aesthetics and higher conversion efficiency.

Our Company believes that it is within reach of mainstream electricity rates. The goal of our Company is to drive cost to parity with retail electric rates via superior technology. We will accomplish that through better silicon utilization, and I will talk more about that; increase manufacturing scale and productivity and cost leverage throughout the value chain of our higher efficiency advantage. Then, lastly, increase efficiency in the outbound channel.

We are also building a unique brand and a strong market position. It has been a major focus of the Company and continues to be. We are leveraging our unique differentiated product with the superior aesthetics and higher conversion efficiency. There is also a line with a strategic customer base, a top tier customer base and, again, I'll talk more about that in a few minutes. And over the last couple of years we have had a very consistent brand building program and positioning that we'll continue to invest in over the next several years.

Now I'll switch gears a little bit and I will cover some of the Company highlights before turning it over to Manny Hernandez, SunPower's CFO, who will report the details of our financial results.

In the fourth quarter, SunPower had an initial public offering. We began trading on NASDAQ on November 17th. Our IPO was very well received. We were able to price the high end of our revised range and we raised $145.6 million to fund our future growth.

In operations we began production of our second 25 MW solar cell line ahead of plan. This second line contributed meaningfully to our Q4 results and actually is outperforming our first line on some metrics. This is derived from our significant investment in the discipline manufacturing processes that we inherited from Cypress Semiconductor.

We are also installing our third line or we have installed our third line. We will begin ramping production during this quarter. In technology SunPower makes the highest efficiency solar cells available today. We are the only company shipping greater than 20% efficiency solar cells. In fact third party analysts tell us that the bulk of the market ships on average between 14 and 15% so we have almost a 50% advantage over the bulk of the market on this key product attribute.

However we are not resting on our technology lead. We continue to invest in R&D, actually, at substantially higher rates than most of the industry. And by the end of 2006, we plan to be shipping minimum 22% cell efficiency and we call that our Generation 2 technology.

In terms of silicon efficiency you all know that silicon is in short supply and the prices are going up. Because of our high efficiency advantage we have a -- we utilize silicon much more efficiently than most of the industry. Let me quantify this a little bit. SunPower is currently reducing our silicon -- in the process of reducing our silicon consumption and we measure that in terms of poly-silicon or watt produced. Our current measurement of that is around nine to eight, between eight and nine grams of poly-silicon per watt.

We believe our competition is between 11.5 and 13 grams per watt. As we work on various initiatives including improving the conversion efficiency of our cells we expect to reduce the poly-silicon consumption produce a lot of power between six and seven grams over the next few years. And you can imagine is, when the silicon shortage abates and silicon is more available we'll have incredible leverage because of this progress.

Let me make a few comments about silicon supply. 2006, we have purchase orders or contracts for more than 100% of our needs which reconciles with street financial expectations. As for 2007 we already have 75% of our requirements, either on purchase order or contract. Most of you know, silicon is one of the constraints of the industry and myself and the management team spends a considerable amount of time in this area and we will do so going forward.

Let me comment a little bit on our expansion plan. As I mentioned, we installed our third line and will begin ramping that line during this quarter. We have, during this quarter, will have a capacity therefore of 75 MW by the end of the quarter. We have also ordered the equipment for line 4. That will increase our capacity to over 100 MW. We will have that line starting to ramp in the fourth quarter of this year.

Also, the SunPower Board has approved an expansion plan for a new facility. This new facility is designed to house six Generation 2 production lines. This will add increment aggregate capacity of 200 MW. We expect construction to start in the first half of this year and we think our first production line will start up sometime early in 2007.

Now let me shift gears a little bit and talk about the demand side. Talk about demand visibility. Customers are responding incredibly favorably to our product value proposition that, again, is higher efficiency, meaning we produce more power for the same unit area and that reduces installation cost and our installer partners appreciate that leverage. Our residential customers which, again, is the largest and fastest-growing segment of the industry really appreciate the aesthetic advantage of our product.

Our customers have rewarded us with purchase orders and contracts. We have a backlog of over $700 million of orders. We have a five-year $300 million supply agreement with SOLON. We have a four-year $330 million supply agreement with PowerLight, North America's largest systems integrator and commercial installer -- also located with as in the Bay Area.

Lastly, we've extended our agreement with Conergy into 2006. As we ramp our production, we are gaining market share. Our goal in 2006 is to have between 4 and 5% market share and in key markets to be in the top five. As we have earnings call throughout the rest of this year -- the balance of this year we will tell you a lot more about our marketing plans.

Let me tell you a little bit about the overall solar market and what is going on in terms of policy. First let's talk about Germany. As you know there was an election and the government has changed. There is a new administration in Germany and, post-election, the favorable solar feed-in tariffs are stable and that country remains -- that country continues to have the largest solar program in the world. Spain and Italy have also passed feed-in tariffs that are driving rapid growth and SunPower is participating in those countries significantly through key channel partners.

And in our own backyard -- California. California's solar initiative was approved on January 12th by the California Public Utilities Commission, establishing the world's third major solar market. The goal of this program is to install solar power on a million roofs. It is a $3.2 billion incentive program over 11 years totaling 3,000 MW. Just to put some specifics to it, the California market grew by 40 MW to over 130 MW in 2005. And our team has been working intimately with the relevant government agencies and the Schwarzenegger administration on this California solar initiative.

California is our home market. It is a major focus of SunPower and we will definitely be in the top five in California.

As we look to Japan, you see that the residential incentives have stopped. Yet you see a market that has 70,000 systems per year being installed. That market is still growing. Japan is an excellent example of incentive programs working where costs are reduced over the life of the incentive program and the incentive eventually goes away and the market can be self-sustaining and in fact growing.

Let me add my comments just briefly with some guidance. The way we are going to do this is we are typically going to provide topline and EPS guidance. So let me start with Q1. In Q1 we expect revenue in the range of $38 to $40 million. We expect non GAAP net income in the range of $0.02 to $0.04 per share. For the full year, we expect revenues in excess of $210 million.

So with that guidance, I would like to turn it out of Manny Hernandez who will provide details of our Q4 financial results.

Thanks Tom. Good morning, everyone, and thank you for joining our conference for the fourth quarter of 2005. Before I go over the financial results, I would like to remind everyone as you probably already noted that management made and will be making statements that are not historical in nature. Please consider those statements forward-looking in the meaning of the Private Securities Litigation Act of 1995. Such statements are based on our current expectations and are subject to certain risks. So you can refer to our press release and our SEC filings for a more detailed description of those risks.

Now let me give you an update of how we ended the 2005 fourth quarter. As Tom mentioned this is our first quarter as a public company; and we are very excited about the event as well as the results we achieved during the quarter. Revenue for 2005 fourth quarter was 29.3 million, a 34% increase from the prior quarter's revenue of 21.9 million. This was also an over 500% increase from the year ago fourth quarter combined revenue of 4.7 million.

We effectively ended the year with revenue of 78.7 million compared to the 2004 annual revenue of 10.9 million.

For those who pay particular attention to the financial statements I just want to clarify one thing. We are characterizing the year ago fourth quarter in our release as a combined result. The reason for that is our fourth quarter of 2004 is what FASB would consider having a predecessor and successor company that was when Cypress essentially purchased the minority interest of SunPower. So all our data with respect to the fourth quarter of 2004 is presented to you folks for a convenience, a standpoint where we add the results of the predecessor's successor company. For all intents and purposes, it is a normal Q4, is the way you should look at it.

So continuing on, on a GAAP basis we posted a net loss of $.6 million which translated to a loss of one penny per share. This is an improvement from our net loss of 1.6 million in the prior quarter or $0.06 per share and also an improvement from the year ago combined net loss of $10.4 million.

On a non GAAP basis where we exclude amortization of intangible assets and stock-based compensation, the fourth quarter net income was 1.5 million or a diluted earnings per share of $0.02. This is an improvement from our breakeven quarter in the third quarter in 2005 and also an improvement from the combined net loss of 9.1 million from the year ago quarter. We are very excited to have achieved profitability. Our fourth quarter results were aided by higher volume, good factory performance which led us to a gross margin of 19.8%.

Very briefly on the balance sheet, we ended the year with a cash position of approximately $144 million with zero debt. The cash infusion was from our successful IPO. Our accounts receivable increased with our sales growth and our net inventory closed at 50 days. Capital expenditure for the year was approximately $70 million and depreciation for the year, for those of you who want to model cash flow, was around $7 million.

One last note for those of you who are interested in details and reconciliation between our GAAP and non GAAP presentations is they are attached in our press release and they are accessible on our web site as well.

Let me now turn it over to Tom who will lead us through the Q&A session. Tom.

Thanks, Manny. I will open the call the questions now. I should mention I also have Peter Aschenbrenner, our VP of Sales and Marketing, and Julie Blunden, who is our VP of External Affairs, as well as a world-class expert on policy with me to help provide answers to your questions. We will take the first question, please.

Jesse Pichel.

Jesse Pichel from Piper Jaffray. I'm very interested in the SunTile product you've launched with PowerLight that uses your A-300 cell. So I think this is a building integrated shingle if I'm not mistaken that (indiscernible) customers their incremental cost of a solar installation would be near zero if they needed a new roof.

I'd like to know how much of your production do you think will be incorporated into the SunTile? And what is your margin profile with this product? Is it a revenue share or if you could just give us some color around that? Thank you.

This is Peter Aschenbrenner. I'll take that question. So the SunTile is a roof integrated product that is being marketed by PowerLight Corporation out of Berkeley, specifically for new home developers where a number of -- .

I would really like to say something.

We've been developing that product with them for some time. The product is now on the market. We are shipping it in relatively limited volumes; and we expect that over the course of the year that will be a few percent of our revenue. It's -- the new home construction market is still a relatively small market in comparison to retrofit. I believe we are very bullish on its long-term prospect. We think it is a great product.

When you stand on the curb and look up at this product on the roof when fully integrated, you literally can't tell there is a solar system on the roof. So as we get more into mainstream markets where appearance and sensitivity of appearance becomes more of a factor, we think this kind of approach and the SunTile product, in particular, is a real winner.

I guess on the margin standpoint, the margins of this product for us our equipment to our other module products. Does that answer your question, Jesse?

Tim Luke.

Thank you and congratulations on your execution drive. I was wondering if you could touch a little on your expansion program? First just in terms of, that's a pretty significant scale of expansion in capacity and I was wondering if, as part of just looking at it, you could talk about it seems that with six lines, you are going to take your capacity up by 200 MW, obviously, with the four lines you are targeting 100. If you could also talk a little bit about the price per watt and the extent to which you have been able to secure poly-silicon supply for this dramatic expansion in your capacity? Thanks.

So there's multiple parts there. This is Tom. Let me first talk broadly about expansion and I will cover silicon a little bit and I'll ask Manny to cover expected sale cost per watt to the extent that we are going to detail that.

First let me say that we are going to be very aggressive in terms of capacity expansion. I think we have demonstrated that the operating team and the engineering team has proven that this technology works. Our second line was a significant success. We have every reason to believe that our third line will be as well; so we have very much a forward lean in terms of capacity expansion.

Our Board is very supportive of that and as I mentioned, I'm not sure I will be specific about this. We started actually with the engineering of the second facility. As you mentioned that will house six lines if the math works such that those lines actually will be a higher capacity. Those lines will be north of 30 MW, perhaps even north of 35 per line. What that means is that the capital cost per line as well as the labor cost per line and, therefore, our capital and labor per watt will be reduced in the second generation of product.

Now note we will do that; so we are expanding but we are expanding also by advancing the technology. And as I mentioned earlier our investment in Research and Development is substantial and is going to yield fruit by the end of this year in this new facility.

In terms of silicon availability for that facility. Of course, you've always got to reference how much silicon you have to -- revenue run rate or a number of watts produced and that sort of thing. A lot of variables go into that. Not only how many wafers you can buy but also how thin the waiters are. Therefore, how well you utilize the silicon really, critically, is how high your conversion efficiency is.

In other words, how many watts you can get out of each wafer. There's a number of other variables obviously being another one. So if you took all those variables that -- either at the aggressive rat or at the high end, our silicon coverage is about what I said before, which is perhaps around 75%. And that's probably how I would characterize (MULTIPLE SPEAKERS).

How would you characterize the coverage for '07? I think you said you got 75% of your requirements but would that have been excluding the capacity expansion or include that?

That includes it but I don't think we covered specifically how fast we will build that second facility; and of course we are -- as we engineer this facility and as we work through the next generation technology, we will refine those decisions. But it is inclusive of starting to build that facility, yes.

Let me for a complete list let me just have Manny say a few comments about cost structure as we go forward and then, Tim, we will see if we answered your question.

You just generally asked watts? I wanted some clarification exactly what you were referring to.

Maybe price per watt trends, maybe how they have been and just a very simple matter if for '06 we are kind of scaling to the capacity of 100 MW, and probably maybe able to give a figure of what you think the average is for '06? And then, if you add 200 in '07 and obviously that will scale, does that mean that you are in a 600 million run rated or how should we think about those metrics?

I'll answer the question on the pricing side. So the easiest way to model our business currently is to utilize a blended ASP of around $3.30 per watt. That is obviously a mix of solar cells and modules which sell at different prices. Going forward, we expect that -- certainly through this year -- we expect that to remain relatively flat, driven by two trends. On one hand, our mix shifting a little bit more towards the sell side. So we are going from what has been historically about a 20% cell, 70% module mix to something more like the 35% cell, 60% module mix with the balance being revenued for sensors and other products.

So we have on one hand, prices firming up slightly as we go through the quarter and on the other hand a shift in mix towards a lower ASP for watt product. Certainly not a lower margin product in the form of cells and on the average we'd balance it out about $3.30 a watt.

Going in 2007 is a little bit crystal ball gazing at this point. The question is really is when does poly-silicon supply capacity catch up with the industry's appetite for growth? To the extent that that starts to happen in 2007, we could expect to see pricing flatten out and maybe even start back when it's historical trend down between 5 and 7% per year. But we certainly don't know that that is the case yet.

And for '07 we should think about you being able to bring up most of that additional 200 of capacity? Or how should we think about average capacity through '07?

Yes; the way we are looking at it now is we are pretty bullish on putting the first line in, in early 2007; then depending on a number of variables. Silicon technology advancements, ramp of the third, fourth, and fifth lines will gate the second line addition. Currently we are thinking of that as a mid 2007 implementation but as quarters go on, in 2006 we will be more precise about that because we'll have more data and we will be making that decision a little more precisely.

But the six lines, not before the middle of '07?

Right.

Just with sensors and controls, SPG, did you give a number for that in the quarter? About 3.3? The fourth quarter?

SPGs, as we've noted all along was always going to be below 10% of the Company. It was 8% in the quarter just ended and we expect it to be in the 6 to 8% in the following quarter.

Lastly, if I may you had a very strong gross margin so expectations in the quarter at 19.8. Could you give us just as sort of a framework for how we should think about it for the first quarter? Can you sustain this sort of 19 level?

Sure. Based on our guidance for the quarter with anywhere from 38 to 40 million of revenue, $0.02 to $0.04 EPS, corresponding gross margin model for that range is 18 to 19%. So consistent with how we have described our business in the past, notwithstanding us turning on new line and notwithstanding being a little bit more for silicon which we all expect it to happen in the quarter, we actually have a shot at staying at the 19% or even staying flat with the quarter we just ended.

(OPERATOR INSTRUCTIONS) David Edwards.

Dave Edwards from AmTech Research. Wanted to ask you a little bit about end customer pricing in the market. Can you talk a little bit about both sort of general trends you are seeing as well as any trends you are seeing in terms of the premium variable to charge over the average?

In general terms, we see very strong pricing power in the market in overall terms. It is really driven by two factors. On one hand, the cost of our raw material poly-silicon has been increasing as Manny and Tom have mentioned and there's also a certain amount of shortage-driven spot market pricing out there. In terms of our ability to capture that, we typically have been pricing our product on an apples to apples basis in our key markets at about a 10% premium. That typically or most broadly is seen the module business. And so I would characterize that as if we have an advantage -- a cost advantage to the installer and a price premium to the end-user we are keeping roughly two-thirds of that in that 10% margin advantage and giving our dealers the other 5% as incentive.

One more question. You talked a bit about increasing the silicon utilization efficiency and looking to drop down to six to eight grams per watt over a period of time. Can you talk a little bit about where you see the most potential for improvement there? I mean your guys are obviously at the top end of the industry today. So you are looking for incremental gains that no one else has really come up with yet. Just wanted to see if you could talk a little bit more about that.

Let me also comment on your previous question. In terms of general pricing environment. Some power is very focused on delivering a value proposition to the customer over time. It does not require incentive. So there's a general market guidance on pricing and what is happening competitively in terms and also in supply and demand. We never lose track of our long-term goal or even intermediate term goal and that is to get to a non-incentivized market so that as Peter rolls out our pricing strategy over the next years and our marketing strategy is going to be very much consistent with that.

In terms of the grams per lot in silicon utilization we've sort of operated under the "Necessity is the mother of invention" -- or innovation -- philosophy and gotten very aggressive and you can imagine variables for silicon utilization are significantly driven by conversion efficiency. In other words, when you have a wafer how many watts of power can you get out of that wafer and that is what SunPower does best in the world. Our product now has three watts of power per wafer and we are going to increase that by the end of this year.

So that is a huge driver. The other drivers are you get a wafer out of an [ingot] and that ingot -- the way you get that wafer is you saw it out so you have a pitch. So you get a wafer and you have what we call curve loss and you can manage the variables within creating that. Think of it as Moore's Law of Solar and that is to get a thinner and thinner wafer.

Actually to broaden that concept the idea is to get a thinner and thinner pitch. We do 85% of our wafering in-house and the balance that's done on the outside we partnered much the same as T.J. described Cypress as outside fab partners as if they were part of us. So we are very aggressively pushing pitch. We've looked at what most of the industry is doing, in terms of pitch. Again, a subset of that is thinness of wafer. away for. We believe we are either in a market waiting position on that variable or certainly very close.

Then there's another variable that aren't add significant but are drivers and that obviously is yield and there's some room to improve yield. Making sure that every wafer you start almost all of those ship. So those are probably the top three.

Shannon Mikus.

Credit Suisse. My first question is on geographic sales. Can you give a geographic sales breakdown and speak to any plans for focus on any particular market?

Be happy to. In 2005 we were just bringing up our first lines. We had relatively limited capacity. We chose to concentrate mostly in Germany and North America and our regional distribution in 2005 was roughly 70% in Germany and about 15% in North America, balance in a variety of other focused markets. This year as we have been able to add more production capacity we have proactively gone out and started to seed other markets and this year we see a much more balanced portfolio of regional shipments roughly equal waiting for Germany, Southern Europe which includes Spain and Italy, and North America each having a round a quarter of our -- each receiving about a quarter of our shipments with the balance then, again, in new markets that we hope to bring up in 2007.

What are your plans for Asia? If you have any specific plans. Do you plan to ramp up and add additional staffing there?

Absolutely. We see Asia as one of those markets that we are going to be very busy in this year from a market development standpoint. We have a number of key customer discussions underway and I think you can expect to see increasing activity in some of the key markets in Asia this year with some large volumes in 2007.

Let me add this comment on Asia as well. We have our fab, our solar cell fab is in the Philippines and we have almost 1000 employees in the Philippines. Obviously that is a low-cost region. We also have a partner in China with a substantial operation that is closely aligned with on where we make modules. So actually the most significant part of our Company is based in the Far East and then of course the headquarters is in California. So we are based and the headquarters is in the third-largest market or the third major market; and the majority of our operating group is in the Far East which would be a rapidly growing area.

So we have a footprint there. We do have sales offices there and as Peter mentioned, over the course of the year we will talk more about the partners in that region but there is no question that that is going to be a strength for us. For no other reason than that's the core of our operating Company.

And one more question on the manufacturing side. Can you speak a bit more to how specifically you have been able to increase efficiencies there? How much further is it possible to go or what's your goal as far as make a lot of per production line?

You asked a number of questions there. I suspect that the research and development team is listening closely at SunPower, as I speak. The theoretical on maximum that you could get to with a silicon only wafer is probably somewhere in the mid-20s, maybe just a little south of that. Just broadly speaking of course we plan on being the first ones to hitting the theoretical maximum and investing appropriately to accomplish that.

Let me just comment on a few of the things that get you there and then, hopefully, I'll remember to comment as well on the capacity per line. The way you get there is, you have in our case unique architecture. All of the contacts, all of the semiconductor properties of our product are on the back side of the cell and because of that being the only company that has that architecture, we are the guys that can tweak that architecture. Much like you would in semiconductors.

So you do get into pure Moore's Law in terms of the semiconductor properties. Essentially, let me just broadly say that we refine the architecture of the back side contact. The other thing I want to say is that everybody wants to have thinner wafers so you can get more wafers out of an ingot. In our case, our technology allows us to increase conversion efficiency as we used thinner wafers. And I'll just broadly say that the reason for that is that the energy is absorbed closer and closer to the back side of the cell. So everybody in the industry that makes a silicon solar cell launch thinner wafers. In our case we drive that incredibly aggressively. We get both an efficiency gain as well as we get more wafers out of an ingot so that would be a second variable .

And then there's other parts of the architecture of the cell. Obviously the top side of the cell where we will be making modifications on, so broadly speaking we are making some architecture changes. We are thinning the wafer and we get a double win we send the wafer.

Now on to your comment about MW per line. That has the added benefit that every wafer we make on a production line actually produces more watts of power. So if that is all you did, you would have more output per line and thus less capital cost per watt but additionally we are able to improve the operating efficiency of each of our lines. That is because our lines are custom made for us. And you can imagine a year ago they were brand-new and now we are moving up the learning curve and we are able to bring out operating efficiency on each of the lines.

So we have two variables that are allowing us to take a 25 MW line and make it look like a 30 MW line. And, soon, within four or five quarters make it look like a 30 to 35 MW line via high a conversion efficiency and better operating effectiveness of each line.

You might have said this before but I didn't catch it. Did you say how you could have that entire second facility all six lines fully ramped?

I didn't say that and you said how soon. If you said when, I would say I don't know. If you say how soon we could have it. I think that it would be early 2008, would be very aggressive and of course it will vary over the next few quarters as we sort out the variables we talked about before.

Sanjay Shrestha.

First Albany. Congratulations on a great execution here. Just a couple of quick questions. First one. You are going to ramp up a line for (technical difficulty) in the fourth quarter 2006. And given that (indiscernible) benefit you have with less uses of poly-silicon if you want to gain more market share even during 2006. why won't you do that faster than waiting until the fourth quarter in 2006?

Let me take that question. We are the very technology driven solar company and so we are not only aligning the capacity ramp but we are also aligning that with the generations of new technology that we're bringing online. So the variables are just let me broadly speak -- the variables are lead time of the equipment, adding labor, training the labor to bring on another line on obviously facilitizing the line. And then aligning that with your technology roadmap. Frankly, that decision of when to bring that line on is essentially done because the lead time is roughly six to nine months. We've already bought the equipment and so, I guess I cut to the chase and say we balance but aligning with new technology versus how soon we can bring on all of the operating variables.

So just because you wanted to get the thinner wafers and the higher efficiency in the line four sort of, what would look like on the efficiency and wafer thickness on the second generation line is really the reason why it is the fourth quarter not the second or the third quarter of '06?

That would be the short answer. Yes.

Another question again and, Tom, how do you see the solar market dynamics playing out during '06 and '07 given the ongoing shortage of the poly-silicon? And do you think that means that you continue to get gain market share because you are the better utilization of that raw material versus the incumbent that sort of lose the market share here. And then, as we get into '06 more capacity comes online and all of a sudden you got an added benefit of the leverage and you've got a new -- the second gen line up.

Is that how we should think about it? That the growth could somewhat temper here in '06 but yet for you guys it's more of a market share gain and you continue to grow pretty rapidly?

I would characterize it this way, that 2006 is really a strategic year. It's a year of aligning with the supply base and pushing technology further, aligning that outbound channel with key strategic customers and growing our brand proposition.

I'll be a little more specific in just a second. 2007, it's possible that 2007 is the year that silicon shortage abates and if not, certainly 2008. We want to be in a position to exploit the renovations that we put in place in 2006 in 2007 and 2008. Because, again, we believe we will be a market-leading poly-silicon utilization and as that silicon shortage abates, we think we want to be in a position to aggressively drive that to market and add capacity very aggressively in '07 and '08.

One of the dynamics in 2006 is the silicon suppliers have more demand than supply so they have to decide who they're going to align with. And the silicon suppliers of course, some of them say, boy, the '90s were really tough. I'm going to just raise prices like crazy and make as much money as I can in the short-term. I think there's are also a number of players who are saying, "This isn't going to last forever and I need to align with players that are going to be strong when this cycle turns."

So 2006 is the year when I think that you are one is the separation of silicon suppliers. Those that are thinking long-term and aligning with the strong players, the ones that are going to be differentiated post silicon shortage and those that are just capitalizing on the short term. So I see 2006 as, yes, gaining share, moving technology further, laying the foundation for very aggressive ramp in '07 and '08 as we have chosen our strategic spots.

One last question if I could. I can't stop thinking about the technology curve here for the second generation line. And if let's say the silicon dynamics were to be slightly better than anticipated going utterly into 2007 and not 2008 so we might expect you ramp up that production capacity faster than maybe what is the [prognosis] at this point in time? Sort of like early '08 is where the majority of that will be up and running?

Yes. You've really hit on some of the variables. The one to add obviously is how much silicon you can get and of course how efficiently you can use it. And over the next few quarters we will collectively narrow that variable space into fine line additions into '07 and '08 more clearly. But, yes, silicon supply is a variable that could cause us to fill that facility and its shortage, say, five or six quarters or as long as the course of a couple of years.

So yes. I think those are the variables and I think that we really have to let the next couple of quarters play out before we really start to narrow it down to the precise capacity expansion.

Rob Stone.

S.G. Cowen & Co. Congratulations on the good results. I wanted to follow up on the new facility a little bit and see if you could comment on roughly what you think the CapEx will be for the building itself and then on a per line basis? Some range?

Let me take this and then I'll turn it over to Manny. Very rapidly, just broadly speaking, we are different than other solar companies in as much as we essentially design our manufacturing lines and custom build them with our supply -- our equipment suppliers. Mostly, I should say on and so I -- the precise numbers are evolving because we are custom designing and as we roll out the second generation of technology that is not to say that we will fill most of the facility with the generation 2 technology perhaps all of it, but the equipment will probably be going through subsequent generations, meaning we will reduce steps. Will increase throughput and perhaps link some steps. Things of that nature.

So that number, Manny will probably give you a range and that is why because things change as we add lines. So I'll turn it over to Manny to give you some numbers.

Maybe as a calibration point and we've mentioned this to some investors before, reminding that it wasn't too long ago that we brought up our first line. Fourth quarter of 2004, purely invented by some power, unique and custom equipment, etc. and it cost us approximately $1.30 per watt to bring in that line. So happy to report that two lines later, that now is down to $1.00 instead of $1.30. And our projection for lines five to 10 would populate our new expansion could be as slow as $0.90 per watt. So just using 200 MW incremental as a bogey for now, that could translate to a capital expenditure of $180 million for [fly and swipe] to 10, say, and add another 50 million for facility would be more or less the kind of capital you are talking about. So 230 million for that expansion.

These are, obviously, very rough numbers. As Tom said. we will take some time to plan it out. There will be further improvements in manufacturing process, throughput, so hopefully there's more improvement available for this.

I would probably range that between 2 and kind of a worst-case scenario 250. I should also mention that as you probably will do is go comp that against other people on that people -- you have to know what's in the equation. We kept it simple. That's everything. So that's pipes, that's engineering facility. That's everything to flying the equipment in, installing the equipment, paying for the equipment. The whole deal. Just so we sort of have an apples to apples when we look at that.

Are you thinking in terms of a site where you can buy/construct your own building or would this be a leasehold?

Let me comment again and if Manny would like to elaborate, he can. So our site location is likely the Philippines and likely adjacent to our existing facility. But that depends on work that we are doing with the Philippines government as we speak, and hope to be finalizing that very soon.

We have a great relationship and we are incredibly happy with the quality of the workforce in the Philippines and how it's going. So siding is near now, if we can get those things done. We have several alternative sites identified. They are all in the Far East. At least currently. And that is especially where we are at in terms of siding.

But the general goal is to own the facility or lease it, that was (MULTIPLE SPEAKERS)

I apologize. On lease, do you want to take that one?

For this purpose, Rob, really almost irrelevant because when you lease you are literally leasing it for 90 years so you are practically a virtual owner. So we look at the economics. If it's better to own it, we will own it. If it's better to lease it, we will do that too.

Our current -- the way we currently do things is -- .

Our current facility is on a land lease with this 90 years so effectively owned by SunPower.

But then building is owned by Cypress or did you guys already buy it? I know you had an option.

We have an option to buy. We have not made that decision. We will make that, hopefully, shortly. It is relatively inexpensive to buy. If we chose to do that it is anywhere from $8 to $10 million if we chose to.

So the 50 million figure for the building you were describing would be for the fitting out of a building that would be leased?

That is correct. That is complete with all the fittings and all the facilities needed to run that kind of capacity.

Let me ask you a couple of much easier questions. One, can you say what the average thickness was of the wafers you were running in Q4?

Let me just give you a -- the broad answer and I will tell you why. The thickness of our wafers is a moving target. Again in subsequent calls we want to focus probably on pitch which would be the thickness of a wafer plus the amount of loss. And roughly speaking in Q4, we were in the low 200s and we are moving aggressively past that.

And that's thickness as opposed to pitch?

No. The 200 microns, the low 200 microns would be the wafers thickness as used in the (inaudible).

Manny, the headcount at the end of the quarter?

Give me a second. The headcount of the whole corporation at the end of the year was 951. The way you should think about that is that we have about 100 here at headquarters in Sunnyvale. And the rest are in our factory in the Philippines.

Can you comment at least in terms of the trend? The gross margins were very nice. I assume solar margins improved. Underneath that can you say what the directional trend was in sensor margins?

As a baseline we are 18% or so in Q3. 18.1 and we ended the December quarter at 19.8 and as I mentioned earlier, we are guiding Q1 to an 18 to 19% gross margin range. And that's taking into consideration the growth in the factory, turning on the second and third line, or ramping the second and third line as well as being a little bit more for silicon. So actually, quite excited that margins are not taking a big hit despite the two negative forces. So margin should hold at around 19% and improving thereafter.

I'm sorry. I was actually thinking of the Q3 to Q4 margin trend in the sensor segment of your revenue.

Oh, the sensor part. Sorry. Relatively unchanged. The only difference in this case is we had a slight decrease in the sensor sales because of customer reschedules. But nothing really material to discuss.

Jesse Pichel.

Piper Jaffray. Tom, the new 200 MW plant expansion was a real surprise to me. It seems that your total Company ramped at 300 MW would require about 3000 tons of poly annually, assuming 10 grams a watt. This is about the output of a poly plant today. And I am just wondering what are your thoughts there on backward integration, because if solar approaches grid parity we are going to need 100 of these poly plants. And also I'm asking this because I do anticipate that at least one poly producer may announce a forward integration strategy.

Yes. You introduce a number of interstate topics there. Your math, obviously, it's pretty accurate. Of course as we, as I stated in my remarks we use nine grams of poly-silicon ramping down to 8 so our math is a little bit more favorable than literally what you said. You still end up with a substantial amount of poly-silicon needed. And let me say that there is a lot of activity -- there is a lot of discussion of forward and backward integration. And there are several poly-silicon providers talking about forward integration. One, I would agree -- one that is pretty serious and there are several companies that are backward integrating.

I'll tell you that our current strategy is not to become a poly-silicon producer. We think we can partner there. We think there are poly-silicon providers that see the value of our positioning in the value chain that want to partner with us. And we think that that partnership will be incredibly competitive in the ensuing years.

So our current strategy is to not backward integrate the partner in various forms. And the other comment I'll make is that you are probably aware and people are going to see that the margins in poly-silicon production are excellent today. And capitalism will work. I came from the networking industry wherever there were high margins. competition swarmed to that segment. I think that will happen here. It's a little longer lead time because it takes a while to bring on plants.

But when people see the margins and people are analyzing them, you are going to seek capitalism work. You and I have spoken before that's at best, case '07 and probably an '08, '09 proposition. Did I answer your question?

Yes. You did. Thanks very much.

Mark Fitzgerald.

Bank of America. Is there any big pricing differences across the regions here that you are selling into?

The pricing differences that have historically have existed primarily between Europe and the rest of world, driven by exchange rate movement over the last few years as the euro strengthens have really dissipated largely. And we're seeing certainly at least in our case, relatively uniform pricing environment around the world. Now there are certainly spot opportunities and there you see, in some cases what might be described as desperation pricing.

So you have relatively recently growing markets that find it very difficult to get sufficient product and perhaps markets with slightly richer incentive programs bidding up some spot pricing. But aside from that factor, we see a relatively uniform pricing environment.

I assume this is about getting your cost down in the factories and when you look at some of your major competitors, Sharp and Kyocera, I mean, would you consider yourself low-cost producers at this point, given where they're producing, and the regions they are producing it.

I certainly won't comment on bears or are any other competitors' cost structure or that sort of thing. We feel that -- a couple of comments that our cost per watt is -- yes, short answer -- is competitive and so you have the unique position if you have a premium product that is cost competitive. Why is that? It's because, of course, costs are cost per waft. Denominators watts and we have more watts because we have higher conversion efficiency.

We, also, I think people haven't completely gotten on the same page with us. Realize we started the idea of a low-cost manufacturing region day one when Cypress bought the Company in the Philippines is on a par with, we think, anywhere in the world in terms of low-cost manufacturing area. So not only do we think we're cost-competitive we think we can improve upon that because it's the foundation of the Company. We have the technology advantage.

By the way just so the folks on the call, we are going to take another question or two and then I will wrap up.

Tim Luke.

My questions are answered.

Thank you. Alex Gauna.

UBS. I was wondering, Tom, you mentioned where you were in terms of your efficiency profile. And you just mentioned that you weren't going to go too much into your competitors' cost structure. Are you able to walk through a little bit what you are seeing in terms of the efficiency being delivered by some of your key competitors? I am particularly interested in the Japanese and also interested in what you are seeing on the thin film competitive front.

Let me say a few words and I will turn it over to Peter whose had a 20 plus year perspective and is intimate with every region in the world.

What we're seeing in terms of shift efficiency, what people can buy, we are seeing the bulk of the market at 14, 15%. There are spots and announcements of higher efficiency product and as I mentioned at the beginning our product is greater than 20% efficiency itself. And will be moving that farther.

There is, I think, most solar companies are talking about improving efficiency although I don't think that's unique. I think this is happening for 20 years. I'll just briefly comment on thin films. I'm a bit of a novice here so I will let Peter sort of elaborate.

Thin films are increasing shipment some because they obviously either use very little silicon or none. On -- the market is constrained so by definition there will be some more shipments in that area. The efficiency ranges of that product are a significant range. We believe averaging below 10%. Peter, you want to add anything?

Sure. Starting backwards, working backwards, the thin films have been expanding their market share in the last couple of years driven by the fact that they really aren't constrained by silicon availability. But still shipping under 10% of total market MW. So in terms of competitive factor it's not what I would call a mainstream benefactor.

If you look at published module efficiencies which in the case of thin film is what is easiest to capture because the cell is not a traditional crystalline cell that you can quantify. Published module efficiencies range between 6 and 10% and so I think 10% reflects the high-end of that technology as it is currently available in the market.

In terms of crystal and silicon, as Tom said, people have been working to improve efficiency for a number of decades in the conventional technology, which most people produce today. And there's been increased interest recently as companies like SunPower have demonstrated that you really can move that quite a bit forward, albeit with a different architecture. The problem that most of our competitors are facing is one that Tom alluded to earlier and that is kind of caught in a trade-off. On one hand we are trying to, as an industry, reduces cell thickness and reduce wafer thickness as a route to cost reductions. Unfortunately in a conventional cell, when you reduce wafer thickness, the efficiency typically suffers and tends to go down.

So it is a little bit like swimming upstream, trying to increase efficiency while reducing cost with thinner wafer. So I think that has constrained the ability of the mainstream technology to increase efficiency over time.

You've clearly explained how you benefit from the penny wafers. What about yields and manufacturability and how susceptible to breakage are these as they get thinner?

We'll take this and one more question. Thinner is more fragile. If you make a multi-crystalline wafer, we believe they become even more fragile, job because they tend to break on the crystal planes and of course as multi-crystal implies there's multiple crystal planes. Whereas we use mono crystalline silicon so it becomes more fragile but let's say at a less rapid pace and we also think we have an architecture advantage. So it's not to say that is not a challenge. Let's just say we think it's a little bit less difficult for us.

Having said that, we are exploiting our low-cost manufacturing operations. So we have well over a dozen engineers and probably two dozen engineers in the Philippines, working on customizing our manufacturing equipment that will minimize and handle -- minimize losses and handle those thinner wafers more effectively.

Thank you very much and congratulations on the results.

Paul Leming.

[Princeton Securities]. I was wondering if you could just walk us through where you see significant increments of poly-silicon coming on later this year and through '07?

I'll take -- this is Tom. (indiscernible) anyone else on my team here add precision on. The big players in poly-silicon are the folks like Hemlock and [Tokiyama] and Vakker and Renewable Energy Corporation. All of those people announced dramatic capacity expansions. What you see is the big numbers are being added by those folks that are being added in -- as soon as this year. And some of that is just bringing out capacity to the existing reactors and some of that is adding reactors where they already had the feed gaps to make more poly-silicon. So we are seeing 6000 metric tons added in 2006, predominantly by the big players by wringing out efficiency and adding reactors sort of Brownfield. And then the Greenfield. there is some Greenfield activity in 2006 and substantially so in 2007, where there is another perhaps 8000 metric tons being added in 2007. What we think we start to see in 2007 is some new players adding capacity.

Of course the new players would have more of a broader confidence than (indiscernible) actually gets added because they are new. Those new players are in all regions of the world; but we are seeing a lot of activity in China and a lot of activity in Russia; and whether that happens in 2007, 2008, the amount of investment and the amount of human capital being poured into it, we are quite confident that that will happen.

So summarizing 2006, the big players and 2007. the big players are substantially increasing capacity. 2007, 2008 the big players continue to expand and we see new players coming on predominantly in China and Russia.

If I could just follow up. Who of the big players that you see are really adding significant increments in '07? I know Hemlock is bringing on capacities right now and then as their next round ends January February of '08 but Hemlock is really bringing nothing incremental on in '07. I'm not aware that Vakker starts up of anything in '07. And it really is that '07 timeframe I'm kind of curious about. Can you attach any names to who you see particularly on the Greenfield side bringing poly capacity on in '07?

I'm going to be a little cautious here, Paul, because I don't want to be doing product announcements for the poly-silicon companies. Let me just say that I believe these are publicly announced and so I'll say a couple of specifics and then answer broadly. We see Vakker adding capacity both in '06 and '07. We think they started expanding in 2004. Their expansion plans so that expansion comes both in '06 and '07. I have numbers here of anywhere from 1000 metric tons to 2000 in 2006, perhaps more than 2000 metric tons in 2007.

However, in terms of what the precise numbers are what I will let Vakker answer that. As you know Renewable Energy Corporation acquired [Asimi] and they owned Solar Great Silicon up in Moses Lake. And they are going to be shipping more in 2006 and I think a reasonable amount more in 2007. So those are the two specifics I give. There are some new players that will ship to lower grade silicon that will allow some solar players to exploit that which, obviously, adds to the total amount and there is a number of those. So that's as precise as I want to get.

Thanks.

Let me wrap up. We appreciate everybody's time and let me just reiterate a few of our key themes.

We are executing on our plan. We grew our revenues 34% quarter on quarter and 520/520% year on year. We are continuing to make significant investments in our brand, significant investments in research and development. Excluding intangibles and stock expenses, we delivered Q4 non GAAP net income of $0.02 per share. Lastly we expect to grow revenue by 30% or better in Q1 as we ramp lines two and three. We expect to increase sales for the full fiscal 2006 to more than 210 million.

Thanks for joining us on this call. We appreciate the support of our stockholders. We are looking at, I can assure you, we are working hard to grow SunPower into a market leader and thanks for your time.

Thank you. This does conclude today's conference call.