SunPower Corporation (SPWR) 2006 Q2 法說會逐字稿

Good morning and welcome to SunPower Corporation's second quarter 2006 earnings release conference call. [OPERATOR INSTRUCTIONS] This call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Mr. Tom Werner, CEO of SunPower Corporation. Thank you, sir, you may begin.

Welcome to SunPower's second quarter 2006 earnings call. We had a very strong quarter and I'd like to start by going over some highlights.

First, we demonstrated strong execution with another quarter of operating results that exceeded our guidance. We also successfully completed our follow-on offering, which raised net proceeds of $198 million. We signed four silicon agreements and we purchased a new building with more space for expansion than our previous announced new building construction. Our cumulative available building space for capacity now is greater than 400 megawatts. And lastly, we continue to invest in corporate and product marketing and that's continuing to pay dividends.

So during this call we will review highlights of our business, report Q2 financial results, and then provide guidance for Q3 and fiscal 2006, as well a revenue forecast for 2007.

Let me start with operating results and get right into our silicon position. I believe everybody on the call knows that silicon supply is a gating factor for most of the solar industry. With the success of our follow-on offering, we have completed a set of silicon agreements that have positioned us for accelerated growth.

As we've mentioned on our previous two calls, we have a portfolio approach to silicon supply. That means that we are diversifying our silicon supply along three dimensions. First, in terms of term or duration of contract. We have contracts that are short, intermediate and long-term, the longest being 10 years. We are also doing business with incumbents as well as emerging players, and then lastly we are working with a range of technologies both established and emerging.

So let me go through the details of each of these silicon agreements. The first one was in May. We announced an extension and expansion of our agreement with M.Setek. Recall M.Setek is the world's leading high-quality manufacturer of monocrystalline ingots for solar. They have proven to be a very substantial and reliable partner to us.

This extension was for 2 more years and goes through 2010 and increases the amount of deliveries in the early years. It has the upside potential of more supply in 2007 and the value of this agreement is in excess of $500 million over 5 years.

Next, as a direct result of our cash position built from our follow-on offering, we signed agreements with three other companies. Let me start with DCC. They are Korea's largest chemical company. They have world-class expertise in specialty chemical processes. They have specific expertise in the precursor gases for poly manufacturing.

They will combine this expertise with the-- with buying Siemens reactors to build a poly plant. This will happen over the next 4 or 5 quarters so they'll be in production during the first quarter of 2008. Our agreement with DCC is a four-year agreement that starts in 2008 and the total value of that agreement is $250 million.

The next agreement is with the world's largest manufacturer of poly for semiconductor and solar markets. You're probably aware that they use Siemens technology, as well, and that agreement is a 10-year agreement that starts in 2009 and is valued at $70 million.

And our third agreement was a co-investment in a private company that is seeking to develop and commercialize an advanced polysilicon process that is-- we would characterize as unique or emerging and we would characterize this investment as a VC-style investment of-- modest in value and I would say, as well, that it perhaps has a low likelihood of working, but if it does work, it has a huge upside.

So now let's move on, stay with silicon, but move on to the cash impacts and let me quantify the amount of cash prepayments to accomplish these four things. From the second half of 2006, we will have cash prepayments to support these four agreements of $39.2 million. In 2007 we will have cash prepayments to support the silicon agreements of $48.3 million and then in 2008 we will have cash prepayments that will total $18.3 million.

Via these agreements and previous agreements that we have, we believe we have the silicon to meet the street estimates for the balance of 2006 as well as 2007. I should mention, as well, that we continue to work on other agreements and those agreements would be consistent with our portfolio strategy, time, duration and with various technologies.

So a bit more on silicon. We continue to capitalize on our high-efficiency advantage in our thin wafer program. Our silicon utilization is now under 8 grams of polysilicon per watt, whereas most of the competition is greater than 10. On our fourth line we expect our silicon utilization to go below 7 grams per watt and this is a 20% gain year-on-year. Beyond line 7, we continue-- we expect continued improvement on our grams per watt, certainly reaching the 6 grams per watt eventually.

Looking forward, as more silicon becomes available and prices decrease, because of the leverage we have with our high-efficiency product and wafers, we expect significant cost leverage or the prices to flow through our P&L very effectively.

Now let me move on to our expansion plans. We expect our installed nameplate capacity to reach 108 megawatts by the end of year 2006. By the end of 2007 we expect it to roughly doubly to 207 megawatts. By the end of 2008, we expect the-- our installed nameplate capacity to be 372 megawatts.

The way you should think of this is that we're installing our nameplate capacity that gives us 80% to 90% of our production volume for the previous year-- sorry, for the succeeding year. Additionally, we plan-- now plan to add 3 lines in 2007, whereas previously we planned on installing 2 lines. The first of these lines will be installed during the middle of next year and the last will be installed towards the end of next year.

As announced, we purchased a building instead of constructing a building. This building and land will allow us-- the building itself will house 10 lines and, as you recall, we had planned on constructing a building that would house 6 lines. So this acquisition of the building will allow us to add an incremental 300 megawatts as opposed to the building that we were going to construct that had a capacity of 200. So our total available capacity in the 2 buildings that we now own will be 400 megawatts and, again, we expect to add 3 of these lines during 2007.

Switching to our panel manufacturing, we continue to work on our advanced automated panel manufacturing plant and we expect to begin production during this quarter, toward the end of this quarter. The capacity of this new facility is 30 megawatts and the building that it's housed in has available space for 2 more lines for a total of 90 megawatts.

Now the reason we're doing this is to lower manufacturing cost through automation that capitalizes on our back-contact architecture. As we automate this process, that will give us the ability to replicate this automated panel manufacturing plant close to our end markets.

A little bit more on operations -- we continue to meet or exceed our operating goals. We had an excellent quarter in terms of yield, wafer thickness, silicon utilization and equipment utilization. And we attributed this success to the significant investment that we've made over the last few years implementing Cypress Semiconductor's manufacturing systems.

Now let me talk about technology. You're aware that SunPower makes the world's highest efficiency solar cells that are commercially available, that these solar cells have a minimum conversion efficiency of 20% and that this compares to most of the market that is between 14% and 15%. Yet we continue to invest in research and development to leverage our technology advantage.

By the end of 2006 we expect to be shipping our generation two technology where the cell will have a minimum conversion efficiency of 22%. In fact, we've already succeeded in prototyping this architecture in our Philippines factory and have produced 22% cells.

Let me end with a few comments about marketing before I give guidance. Our plans for geographic and customer diversification are on track. We shipped to 13 states in the United States so far this year and we're expanding our footprint in Europe and Asia. We have increased the number of customers during the first half of 2006 by more than 50% and we participate in all key market segments.

Just a few of those that I'd like to mention now is residential. In North America we have shipped 1200 systems. In the commercial market, let me give you a few examples. We announced during the quarter that Microsoft installed a large SunPower system. We have several systems in New York City on high-rises and a couple of wineries in Napa Valley that have installed SunPower systems. Lastly, let me highlight that power plants is also a market that our product is being used in. We are participating in 2 of the largest solar power plants in the world in Germany and in Portugal.

Let me end with guidance. We're going to provide top-line, gross margin and EPS guidance for next quarter and revenue for both this year and next year.

First, we expect Q3 revenue in the range of $60 to $62 million. Q3 non-GAAP net income will be in the range of $0.13 to $0.15 per share. Q3 non-GAAP gross margins will be between 24% and 25%.

In terms of revenue in 2006 we'll now move our estimate to between $225 to $230 million. For 2007 we haven't talked about this previously, but we'll guide now to a number that will be $360 million.

Now I'd like to turn the call over to Manny Hernandez, who will provide more details of our Q2 financial results.

Thanks, Tom. Good morning, everyone, and thank you for joining our conference for the second quarter of 2006.

As usual, before I go over the financial results, I'd like to remind everybody that during the conference management has made and will continue to make statements that are not historical in nature. Please consider these statements as forward-looking pursuant to the Private Securities Litigation Reform Act of 1995. Those statements inherently are based on our current expectations and are subject to certain risks. Please refer to our press release and our SEC filings for a more detailed discussion of those risks.

Let me now give you a brief rundown of the 2006 second quarter financial results. Revenue for the second quarter was $54.7 million, a 30.4% increase from our prior quarter revenue of $42 million and a 233% increase from the year-ago second quarter of $16.4 million.

Continued strong end-market demand at relatively robust ASPs and incremental output from our third 25 megawatt line, which went operational last quarter, contributed nicely to our revenue growth in the second quarter.

On a GAAP basis, we boasted a net income of $5.4 million. That's 9.8% of sales and equivalent of $0.08 diluted earnings per share, compared to last quarter's near-break-even net income of $255,000 and a year ago second quarter GAAP net loss of $6.3 million.

On a non-GAAP basis, which we adjust to exclude non-cash charges for amortization of intangible assets, stock-based compensations and the related tax adjustments, our second quarter net income was $7.5 million or 13.8% of sales. This resulted in a diluted earnings per share of $0.11, a 165% improvement from the prior quarter net income of $2.8 million or $0.04 earnings per shares-- per share. Our year-ago second quarter had a net loss of $5 million.

Our gross margin in the second quarter rebounded to approximately 24% compared to last quarter's approximately 17%, a 660 basis point improvement benefiting from our incremental revenue growth, incremental output from our third line, slightly higher ASP and continued benefit from our cost reduction programs, most notably our thin wafer initiative.

As Tom noted, we expect gross margin next quarter or in the current quarter to improve to 24% to 25%. Let me remind you that we don't expect additional capacity to turn on until the fourth quarter, so the incremental revenue and improvement in margin in the third quarter will largely come from better equipment utilization and our continued cost reduction programs. Consistent with our prior guidance, we still expect to exit 2006 with gross margin around 26% and hit our model of 30% in 2007.

Briefly, on the balance sheet we ended the second quarter with cash and short-term investment of approximately $297 million, aided by the cash infusion of our successful follow-on stock offering. We continue to have zero debt. Our DSO improved to 59 days. Our inventories are holding at 47 days. Capital expenditure for the quarter was $13 million and depreciation for the quarter was $4.2 million, however the total year capital expenditure is still estimated at $90 to $100 million, as previously guided.

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

Thanks, Manny. I'll open the call to questions now and let me first let everybody know that we do have Peter Aschenbrenner, our VP of Sales and Marketing on the phone, actually from Italy. We have Julie Blunden, our VP of External Affairs, in the room with us in addition to Manny and myself, so we'll take questions now.

Thank you. [OPERATOR INSTRUCTIONS] Stuart Bush, you may ask your question and please state your company name.

Yes, hi. RBC Capital Markets. Great quarter, guys.

Thank you.

My first question is, is that, given that you have higher-efficiency products and that should theoretically reduce the total installed cost of your products, are you guys considering at all making some movements up in the supply chain into that area?

Yes, maybe I can make-- this is Tom. Maybe I can make a few comments and then, Peter, if you could jump in right afterwards.

On-- the-- it's a very good question because in the residential market half the cost of the system to the consumer is in the installation. In the commercial market, it's about a third of the cost. So that part of the value chain needs to be-- the efficiency of that part of the value chain needs to be rationalized and we will work closely with-- in some form or another we will work with the outbound channel to make sure that the value of our high-efficiency product flows through to the end customer. And that could be in partnership or in other forms.

So I think the answer is yes. Currently we do a number of things in terms of helping with the supply chain -- logistics, financing and things of that nature. Peter, would you like to add anything?

Sure. In the-- in the near term, I think the-- our efficiency advantages manifests itself primarily as our ability to get a higher ASP, all else being equal, to the intermediary or the end customer because the product's more valuable. It costs less to install.

In the longer term, though, we think that it enables both our company and our downstream partners to wring cost out of the installation and to make solar systems cost effective with conventional power. So we see it in the near term as an advantage to us on the ASP front. In the longer term, it helps us get to cost parity with grid electricity.

Let me just follow up with that. In the long-term scenario, how would the pricing work against the traditional panel players on an installation basis? How do you see that once there's a lot more supply in the market? How do you guys see yourselves comparing from a price-- price aspect there?

Peter, I'll comment and then you can add on if you'd like. If I understand your question, Stuart, it's sort of what's your pricing strategy and your cost strategy and how do you think you compare?

I think we tend to be a little more aggressive in terms of what we think market pricing will be over the next few years. We have talked consistently over-- since we had our initial public offering last November about the need to take 40% to 50% of the cost out of the entire value chain to get to grid parity. And we think we can do that within 5 to 10 years. And so we-- we sort of take that 5 year timeframe to grid parity and we presume that pricing will start to work its way to that.

And so we're driving our cost consistent with that pricing strategy. We believe our costs are at our better than our competition today and we think we've got a lot more room for improvement because we've got a technology that's only been in production for 5 or 6 quarters.

Peter, would you like to add anything?

No.

Okay, thanks. My last question is, is in regards to the contract with DC Chemical, is that a take-or-pay contract and is that different somehow than the contract with M.Setek? And also, how much of the new facility that they're building, how much of that capacity, will your contract represent?

This is Manny, Stuart. The four-year contract with DC is essentially a take-or-pay. It's a committed purchase of silicon. Fortunately, the way we plan our silicon procurement is such that not any one particular supplier dominates in the out years so that even if we have to take it, we know we could use it.

So as far as what percent of their plant capacity is aligned for us, why don't we just characterize it as a substantial portion of their capacity?

Okay. Thanks a lot, guys. Great quarter.

Thank you. Tim Luke, you may ask your question. Please state your company name.

Thanks very much. Strong quarter, congratulations. The-- just with respect to the revenue, could you just break out what SPG was in the quarter?

Hi, Tim. It's Manny.

Hey, Manny.

SPG was less than 5% of our revenue in the present quarter and the present growth of the solar piece of our business we believe that that's a good percentage to use on this particular business unit, less than 5% going forward.

Okay. And with respect to just the OpEx numbers, should we be thinking about sort of $7 million or something in terms of the OpEx going-- for the third quarter or how should we think about that growth in R&D and SG&A?

Yes. Let me take it on pieces, for R&D, which was $3-- sorry I lost my bearing here. R&D, which was $2.3 million or 4.2% of sales in the quarter just ended, we actually expect that to be at around $2.5 million in the ensuing quarter or still below 4%. I remind you that our goal or model for R&D was 4% of sales. So we're practically there.

SG&A, which was $4.3 million or 7.9% of sales in the quarter just ended, we expect to be at $4.5 million or 7.6% of sales in the following quarter. Our goal there would be to exit this fiscal year at around 7% of sales.

And then another just kind of a housekeeping thing. Should we think about your-- your other income with the higher cash balance being more like $4 million than $2 million?

Our guidance for Q3 with respect to other income and expense, so all-in, is $2.2 million income. And I might as well give you Q4. That tapers down to $2 million.

Thanks so much. And just to follow up on a question I asked earlier, Tom, you had this big jump in your gross margin and that basically results from the ramp of the new line and successful yields. Is that-- that's the biggest factor amidst several factors that are contributing to your improved better-than-expected margin?

Yes, the operations team delivered on thin wafers, which is significant. We were aggressive in Q1 and we got the benefit of that in Q2 in terms of thinner wafers. So silicon utilization improved.

And then on all key metrics -- yield, equipment utilization, throughput, et cetera -- were all better than planned in our factory in the Philippines. So, yes, the operating team delivered. That was the majority of the gross margin improvement.

And lastly, just as you-- it seems like you're addressing the capacity issues with your bigger capital base and you're moving into the production of panels and could you just give any incremental commentary with respect to your distribution reach and how you think it evolves in the next several months or year or so?

Yes. Peter, do you want to take that, please?

Sure. Tim, as we said during our secondary, we're looking at a number of options downstream. Most of our activities currently are going into, as Tom said, diversifying our customer base and our geographic portfolio and we've been quite successful at doing that over the last 6 months. So I think it's mainly sticking to our knitting, bringing on-- as we bring on incremental capacity to support some of these new major customers, starting to supply them and continuing to diversify our customer base.

With the biggest incremental change coming in the U.S.? Is that how we should see it or other geographies that are particularly inflection points?

I think the U.S. is certainly one of the fast-growing areas. We're relatively neutral with respect to our allocation strategy. I think you'll see our U.S. percentages creep up continuously. They're now a little over 20%, but there are other fast-growing markets out there.

Certainly Korea, Italy and Spain are at what you would call an inflection point and Greece looks very interesting coming on later. We think we have some interesting opportunities in Japan, which has been historically a market that's been difficult for some of the non-Japanese suppliers to penetrate, but we think is very well served by our technology and the combination of high efficiency and premium aesthetics, which is something that we feel the Japanese consumers will go for in a big way.

So it's really a story that's playing out in a number of areas.

Excellent. Thank you, guys, very much.

Thank you. Paul Leming, you may ask your question and please state your company name.

Soleil Securities. I was wondering if you could give us any more granularity, insight, into what you see going on within the German market this year. There are increasing numbers of reports coming out that installations could actually be down this year and that with higher cell and module prices we're really beginning to see some pushback relative to what the subsidy program in Germany provides for. Are you seeing any decline in demand out of Germany? And if you are, what markets really are coming on in the short run to supplant Germany?

Peter, you can go ahead and take that.

Okay. We're not seeing any softness in demand out of Germany for our products. We see continuing very strong demand. We were just at one of the largest trade fairs in June in Freiburg and we were essentially besieged by potential customers as we are generally there each year, since we started a few years ago.

So I think the demand for our product is still extremely strong. We see prices continuing to go up there modestly and I think that's a function of the leverage of the brand that we're starting to see an establishment of a real premium position, as evidenced by customers willing to pay a little bit more.

I think for the market as a whole, there's no question that we're starting to see what I'd call price demand equilibrium, which certainly wasn't the case last year and as the industry as a whole has passed through higher silicon pricing to the customer, we've seen for various applications, I think we've achieved price ceilings where incremental demand has slowed down considerably.

So based on the information we have, we see, I think we would agree with your fundamental premise that the market in Germany is, by consensus, looking probably flat this year, but there are a number of other strong growth markets around the world that are picking up the slack currently.

I'm just curious. What markets would you think would be most important and maybe from an overall industry standpoint rather than just SunPower-specific? What markets do you think are going to come on the fastest as Germany, perhaps, does slow some?

I think the southern European markets have the potential for the same type of explosive growth that we saw out of Germany a couple years ago. I think the precedent is when you put the feed-in tariffs in place and allow the market to work to couple customer demand with the supply base, which is now more mature at the system level than it was when Germany took off a few years ago, you see extremely rapid adoption. So certainly southern Europe would be up there and now that's filling out to look like essentially the whole Mediterranean, at least the top of the Mediterranean Coast, ranging from Portugal over to Greece.

As I said, Korea, I think, is leading in Asia, but China, I think, is perhaps a market also that could demonstrate some explosive growth -- probably not this year, but going into next year. So the history in this industry has been of an increasingly broad portfolio of support policies and I think we're seeing that work here as the industry has hit its price ceiling in Germany.

The demand for the product in Germany is still very strong. I think people overlook that. And as the price-- as more silicon comes on line, I think we'll see module prices perhaps go down slightly in Germany and demand turn back on again.

And if I could ask a two-part question on silicon, could you provide us any insight at all into where M.Setek secures their polysilicon from? Do they have 5-year, 10-year supply agreements? How diversified is their supply base?

That's the first question and then secondly, can you give us any insight into where DC Chemical is going to acquire the Siemens reactors? That I'm aware of none of the major existing producers have Siemens technology.

Sure. So this is Tom. First, on M.Setek, M.Setek is the world's largest monocrystalline ingot producer for solar and have been for quite some time. So they've been doing business with the incumbent polysilicon producers for quite some time and, therefore, have, then, partnered with them through thick and thin. Thin was the entire decade of the '90s and early 2000. So they do buy silicon from the incumbent producers and they have strong relationships to leverage over the past 15 years or so.

They are, in addition to that, building-- vertically integrated into polysilicon manufacturing. That will start in the middle of next year at a modest level and, depending on its success, would expand from there.

So it's both vertical integration and agreements with incumbents that are leveraged over the past 15 years or so.

Switching to DCC, there is a commercially available-- a vendor that sells commercially available Siemens reactors that has installed a number of them in the field. So DCC is doing business with that company. So there aren't many, but there are people who sell Siemens reactors that aren't, of course, from the incumbents. The incumbents are not, as you point out, not licensed.

I'm curious--

But there are third-party vendors, at least one, that has built Siemens reactors that have been installed and do produce silicon.

Is this basically Russian technology that's for sale?

It's actually not technology. The short answer to your question is no. It's not Russian technology, nor is it sale of technology. It's the sale of a reactor itself. So you buy the completed reactor and it's a design that's in production. So the probability that it works is extraordinarily high, because it's already in production.

And it's designs that are materially similar to Siemens reactors that the incumbents use. The technology to make a Siemens reactor is fairly well known and is public domain. I believe there are nuances of getting the efficiency and the purity to levels that are good enough, let's say, and this company that DCC is working with has proven the capability to do that.

Thank you very much.

You bet.

Thank you. Pierre Maccagno, you may ask your question and please state your company name.

Needham & Company. Tom and Manny, congratulations on the-- on the quarter.

Thank you.

I had a question about ASPs. So you're saying that within 5 or 10 years solar energy should be competitive with the grid. What type of ASP per watt do you expect you would be selling modules to achieve that-- that goal?

So to get that-- first, to get to grid parity, grid parity is A, a moving target and generally moving up because price of the fuel used to make electricity has gone up and we've plotted that over the last 80 years. It's either up or flat. It's never down. And it also varies by region, so you can-- some states in America you pay more for power than others.

So to get to the majority of the trillion dollar electricity market, you need to get to an installed system cost of $4 to $4.50 per watt, which would imply a module cost of, say, $2 or $2.25 per watt.

I see. And now for modeling purposes, you're still-- revenues are $3.3 per watt and CapEx still $0.90 per watt? Or has that changed? Or you expect that change?

Manny will take that and then, Peter, we may go to you on ASPs.

I will take the first one, Pierre. For modeling purposes, we declare our aggregate ASPs to you, anyway. So for the second quarter or the quarter just ended ASPs on a consolidated basis was $3.45 per watt. We assume that to be stable in Q3. So that's what we factored into our guidance.

And previous quarter was lower than that, correct?

Q1 was $3.30 per watt.

Okay.

And CapEx per megawatt was the second question, Pierre?

Yes, it's CapEx per watt.

Same thing. So for modeling purposes, we're using $1 per watt or $1 million per megawatt of CapEx. So a 33 megawatt line would cost you about $33-$35 million.

Okay. A little bit higher than compared to last quarter, correct?

No. That's been our modeling parameter. Our goal is to reduce that cost for every line we implement such that we go below $1 as we implement more lines.

So, Pierre, if-- what we mean to communicate is nothing new on capital cost per watt. We've-- we believe we've been consistent -- perhaps not -- but we-- nothing new. It's $1 a watt and improving as we add more lines and, of course, will get to your $0.90 per watt and we probably were talking about one of our subsequent lines and we think we'll go beyond-- substantially beyond that, as well.

I also should mention that our capital cost per watt is all-in. That's building, plumbing, installation, equipment, the whole deal.

Okay. And then could you take me through the logic of how you reach the guidance of more than $360 million in '07 based on the 108 million capacity that you will have at the end of '06? You're saying that assume 80% to 90%, correct, of that capacity for the revenues next year?

Yes. I'll mention a few things and then I'll turn it over to Manny, who can drill down a bit.

The way to think of that is the preceding year nameplate capacity will be substantially the capacity needed for the succeeding year shipments. And, by the way, we would produce more than we would ship because we have to fill the supply chain to a degree.

And we using-- we're using a planning number of 80% to 90% capacity installed the year before. And, as you point out, 108 leads to a shipment number of anywhere from 1 to 120 or 125 for 2007, if you did the math, essentially divide by 0.8 or 0.9.

Manny, do you want to add anything?

Yes, just--

I'm sorry. I said shipment. I meant production number.

So just to reconcile to that, then, Pierre, if you look at the press release, the nameplate capacity slated for 2007 is 207 megawatts. To get there we will need 7 lines, 4 of which are already slated for the first plant, line 4 being scheduled to be turned on in the fourth quarter of this year and, as Tom mentioned, we are now planning to implement or install three 33-megawatt lines in 2007. So that gets you to the 207. We plan that to at least support 80% to 90% of next year's production, which, on the table, you would see as 250 megawatts.

So to get there, what it would really require is for us to implement 5 lines in 2008. Obviously, not ramping fully but in different phases of their ramp. But we will have-- we will need to implement 5 lines in 2008 to get to those numbers.

Okay. Just to go back to what Tom was saying for the-- for your guidance in 2007, so the 108 megawatts divided by 0.8 or 0.9 and then multiplied by 3.4 watts-- dollars per watt, that's more or less how-- the logic that you're using?

Yes. We-- we would use an ASP lower. Again, we plan ASPs a bit more aggressively and I would divide by 0.9 and when you do that, you'll end up with a-- if you use an ASP of, say, $43.30 or $3.35, you're going to end up with a number of 360 to 365, something like that.

Okay. And then you grew sequentially 30% but your guidance, although above consensus, is growing 13%. Is it that you're being limited by the polysilicon or why-- why would it be lower than the preceding quarters?

Right. The preceding quarters had new manufacturing lines coming on line and then ramping. So Q2 had the benefit of the third line. Really the majority of that ramp happened during Q2. So Q3 does not have any new manufacturing lines, so that's why we're guiding to what we're guiding to. We get to a higher revenue, frankly, by running the 3 lines more effectively.

In Q4 we add a fourth line, albeit towards the end of the quarter or substantially in the middle to the end of the quarter, but we do add a line, so we'll benefit from that in Q4 and Q1. So it's really the line capacity that's available to us.

Of course, it's always-- the amount of silicon you have is always-- we try to match the two, the silicon capacity to the line capacity, but that's also a factor.

And now for '06 and '07 you have 100% available polysilicon, correct?

Yes. When we talk about those numbers we talk about ingots. Mostly our ingot producers buy polysilicon and, anyway, that's a long-winded yes.

Okay. And one last question. The number of shares I saw had increased by 2.4 million rather 7. So, what, I mean next quarter should we increase by 6 more million shares of maybe you can explain that?

Yes, Pierre. The share count in Q2 reflects only the ratio of the offering for the number of days that they were in effect during the quarter. So you're right. It added 2.3 million shares, the offering did. So the share count for Q3 should now be the full 7 million shares added and we estimate that to be 74.5 million shares in Q3.

Okay, great. Thanks.

Thank you. David Edwards, you may ask your question and please state your company name.

Hi. Dave Edwards calling from ThinkEquity. I just wanted to-- you mentioned a little bit about some example projects in the commercial and power plant markets. I'm wondering if you could characterize a little bit about how much of your business is non-residential today and how you think about those three different markets as sort of target markets and the balance of those markets looking forward?

Peter, can you take that, please?

Sure, Dave. The-- the majority of our business is still in residential. That's where we started out and we believe that's the core of our business and will continue to be, going forward. That's true in North America and also true in Europe.

We see the commercial business as a-- as a strong second leg, if you will, as we're able to bring on more capacity. The-- one of the reasons for starting in commercial is that we didn't really have the capacity a year ago or so to support a lot of these big jobs which tend to be in the multi-hundred kilowatt up to a megawatt size.

So we see commercial and residential as being kind of strong partners going forward. Clear demand in both-- natural demand in both market areas.

Power plants is something that we think there's great opportunity right now. In the long term we're sort of still on the fence in terms of how we view the power plant business. We see the power plants that are being built now as kind of a reflection of the policy makers to-- to try to de-bottleneck the industry and get capacity growth up there and bring costs down since power plants enable tens of megawatts to be installed at a time.

So we participate in the power plant business. Our product works extremely well there. Once-- once someone has made a decision to put a tracking corrector in, the ability to get up to 50% more watts on the same tracker system is highly advantageous from the cross-leverage standpoint.

And so I think we see-- I guess the short answer is residential and commercial as core markets going forward, power plants opportunistically.

Great. And one last question is are there any updates in terms of your project with PowerLite? How is that going? Do you see demand coming from California and any other sort of building-integrated product-- product initiatives?

You're on a role, Peter. Keep going.

I'll take that, Tom. The-- we're working closely with PowerLite on a number of fronts.

One of them is the-- for production home builders where we're supplying them a custom laminate that they're incorporating into their sun-tile product. That's going extremely well. I won't-- I won't answer for them, but I think it's fair to say that they're having-- their batting average is extremely high on projects that they've gone to the plate for in the last 6 to 9 months. The project's getting a lot of-- the product is getting a lot of traction in the home builder market.

As Tom mentioned, on the commercial side, we recently did a multi-hundred kilowatt for Microsoft, very close to our home in San Jose, and I think you'll see kind of a steady stream of larger commercial projects now with PowerLite and with other system integrators.

That's great. Thanks a lot.

Thank you. Tom Astle, you may ask your question and please state your company name.

Yes, National Bank Financial. A question on your production ramp. The-- the nameplate capacity going from 108 to 207, obviously, suggests three additional lines of 33 megawatts each. I take it then the existing three lines remain as 25 megawatt lines. There's no plans to retrofit those?

So the answer to your question is yes. And we kind of have our hands full implementing the four new lines that you refer to. We are evaluating what we can do with the first three lines in terms of upside and so-- kind of the short answer is, it's not easy but that doesn't exclude the opportunity to get more out of those first three lines than we do currently. It's not easy and we kind of have our hands full with the four new lines.

Those new lines are running new technology, so we're focused on that first.

Right. And the assumption going into '08 is those-- that 33 megawatts per line is static, although I supposed you could get some enhancements if you had better production?

This is Manny. Correct, Tom. For the moment, that's our assumption -- all new lines, all eight of them for the next two years are 33 megawatt-rated. We will obviously probe on how much we could improve on that.

Okay, that's great.

Tom, I do want to clarify. The third line in 2007 comes on materially at the end of the year, so we count it in our nameplate, because that's the capacity of the line. Of course, we won't be able to utilize it that much in '07.

Yes. No, I understand that. Any change to your backlog? Although it's huge as this point, is there any major enhancements to that this last quarter?

I think the short answer to that question is no.

Okay. So it's $700 million, I think it was, last quarter? Is that--?

Yes, it's-- that's-- Yes.

Okay.

Peter, any-- do you want to add anything there?

No.

And just one last little technology question. Of the silicon that you guys get, how much of it comes from a Siemens-type reactor versus, say, a float cell?

The vast majority is Siemens.

Okay. But you're capable of using both types at this point?

Yes.

Okay. That's all for me. Thanks.

Thanks.

Thank you.

Thank you. Pearce Hammond, you may ask your question and please state your company name.

Simmons & Company. Just a few questions. The first, what did you ship in the quarter in megawatts?

Hi, Pearce, it's Manny. 15-- 15.2 megawatts in the quarter just ended.

Great. And then a policy question. Are you seeing any new developments in Washington that look intriguing or in any of the states as it relates to solar?

This is Julie. You have definite activity at the federal level on a variety of parameters. We've got discussions going on on extension of the investment tax credit, for example. There's discussion about the Department of Defense buying more solar, as well as other renewable.

At the states we're seeing what I'd consider to be mostly implementation activity and a wide variety of states, half a dozen states, have active proceedings going on for implementation with still the biggest actors and movers in the next couple of years being California and New Jersey.

So are there any states that are kind of reaching a tipping point on making a big change in their solar plans?

No, most of the states that are out there right now have already provided visibility with a piece of legislation or some regulation, but the-- they aren't all fully active yet. For example, Pennsylvania's in the middle of the proceeding to implement their renewal portfolio, which includes a solar carve-out. So there's lots of work that's being done that will basically precede real market opening.

And then, Tom, just a lot of VC interest right now in the thin-film producers. Is there-- is it a possibility that you could make a strategic investment in a thin-film producer or are just busy enough with what you've got on your plate right now?

Yes, our strategy is a very focused strategy to exploit the advantage that we have now. We have people like Dick Swanson and others in our technology group who do scan the market and are very aware of the other technologies that are going into production or being funded. So focused on exploiting our current advantage, aware of others and always considering but continue with our focus strategy for now.

Thank you. Great quarter.

Thank you.

Thank you. Jeff Bencik, you may ask your question and please state your company name.

Sure. I'm with Jefferies & Company and just had a couple questions on your silicon contracts and in terms of the pricing on your new contract, can you give us an idea of how that compares to your existing silicon suppliers?

Jeff, I'm not surprised you're asking the details on the silicon contracts and you know that we mostly buy ingots but we have signed a number of long-term polysilicon deals. And our agreement with DCC is to-- via our NDA is to not disclose pricing. So I really can't because of that.

Well, that's why I was trying to ask it in a way that you could tell us a little bit in that just how it compares to your existing contracts. A little more expensive? Worse?

I would say that the market in general has evolved to long-term contract pricing that's more rational compared to what it was in the early 2000 timeframe and so most of the deals that are not short-term opportunistic are converging on roughly the same pricing of the early 2000 timeframe.

Okay. And can you just give me a little bit detail in terms of how the contract works, in terms of are there escalators or de-escalators built into it? Are there price declines built into it over time? Just any sort of color you can give us on that?

Again, the-- because of the NDA we can't get too specific. I would just tell you that largely think of it as a 4-year version of one of the 10-year deals or agreements that are common with the incumbents. We are closely partnered with DCC and we work very collaboratively, so it's different in that respect, but otherwise, think of it similarly.

Okay. And, I mean, obviously, DC Chemical is a big silicon contract for you, but at the same time, they haven't manufactured silicon previously. So what kind of gives you confidence that they will be able to meet the timeline of the first quarter of '08 and have they started yet? Have they broke ground yet? What metrics can we look to coming forward that will demonstrate that they are on track to, in fact, meet those kind of deadlines?

Sure. First, let me talk about confidence. DC Chemical is, as the name implies, a chemical company, and they're large. So they're a significantly sized company. Now to drill down on that a little bit, they do make some of the precursor gases and other-- other things needed to make polysilicon. And specifically they make various forms of silane, because they are one of the world's largest producers of fume silica. And that-- embedded in that statement is two important things, knowing how to make silane or permutations of silane and fume silica are very complementary to a polysilicon plant or integral to a polysilicon plant.

So the chemical side of making the poly plant, the confidence that the DCC team has is extremely high, not over-confident, but extremely high because they're in production of very like manufacturing systems.

On the reactor side, that's kind of-- think of that as a bit differently. That's kind of going from a flow process to a batch process and there we do-- we collectively are working with somebody we have confidence in, but that is a bit different.

Those orders are placed and we expect it-- moving now to milestones. We expect that they'll break ground late this summer and like contracts-- I'm sorry, construction projects of this size there'll be various milestones of ground breaking, the chemical side's done, the reactors have been received, first silicon, that sort of thing. So I think on the next earnings call as we-- as we work with the DCC team we'll try to give you some things to keep track of.

Okay. And in terms of just their location, being in Korea, does that make the environmental permitting easier and quicker than perhaps some of the other silicon manufacturers building new plants?

The short answer to that question is I don't know. What I do know is they have a large site. I was there 10 days ago. They have a large site and they have the land where they're going to build this facility. It's embedded in their current 55-acre site and they have worked with the Korean government and all the permits exist already. So it's fair to say that there's not much incremental permitting to be done.

Okay, thank you. Nice quarter.

Thank you.

Thank you. Michael Horwitz, you may ask your question and please state your company name.

Hi. Pac Growth. Great quarter. Lots of information, as usual. I just want to understand the ramp on the lines a little bit better.

Previously I think I only modeled line 4 coming up this year at the end of the year. We knew that. And then next year line 4 ramping and then a line 5. So now we're going to have a line 6 and a line 7, all of which are new technologies. But you must feel very confident -- with your revenue guidance and your comments about 30 gross margins in '07 -- you feel very confident about ramping the new technology that you'll do almost 4 in one year. Is that about right?

Yes, that's-- I appreciate the comment, because it-- from an operating standpoint, we-- because we've had three good quarters and the manufacturing team has delivered continuous improvement, we do want to be cautious. The-- it is not completely a new architecture, but there are some new architecture elements to the next generation cell and the team that's-- that's implementing those 4 new lines is materially the same team with some engineers added.

So, yes-- yes, we are confident because we can move the team that did the first 3 on to the next 4 and backfill with new people in the Philippines, but you correctly point out we shouldn't over-- be over-confident. There is quite a bit of challenge with that.

And so can we expect some fluctuation in gross margins in any one of those quarters, just as you're ramping and how should I look at gross margin? Obviously next quarter there aren't going to be any of those issues, but quarter four of '06 and then all the quarters in '07 will have certain issues on certain lines each quarter. Is that right?

Yes. The way it-- we have 3 lines of experience. So be aware that that's our dataset and the way it worked is the first line was a challenge and the next 2 went really smoothly and substantially faster than we had planned. So as look at the next 4 lines we would-- we would guide you to think of it similarly, that line 4 will have some challenges in Q4 and Q1 and then we'll be a lot better at it in lines-- the next 3 lines.

So, yes, I think Q4-Q1, certainly less so as we get to mid-year and the balance of '07. Manny, do you want to add anything?

Yes, I just want to add, Michael, to maybe give you a little bit of color on the penalty of turning on additional lines from a depreciation standpoint. Using the, let's just $35 million for a line, we depreciate our assets over 7 years, so that's $1.25 million per quarter and generally the way we turn on lines they are mid-quarters. So you have a penalty of about $600,000 every time you turn on a line in a quarter and if that line just delivered 1.5 to 2 megawatts of output, you're not terribly penalized.

So we-- we manage it such that as we turn on lines we don't necessarily erode in margins that way.

Okay, all right. That's very helpful. Great quarter and a very helpful call. Thank you.

Thanks, Mike.

Thank you. John McGinty, you may ask your question and please state your company name.

Credit Suisse. Good morning.

Good morning.

I missed part of the call in the beginning and did you cover, of the silicon that you have laid on and you've got the capacity supported by the silicon procurement in the table, is the pricing set on all of that?

We didn't cover that.

Well, is it, then?

No, I, of course, would answer that. Although I'd like to stick with, we didn't cover that. The answer is, I don't have the precise number off the top of my head, but it's around 80% priced and the balance, by the way, is with people we've worked with. So I think I explained this on the road on the secondary a number of times that so we're partnered with the pricing of the balance of the silicon.

But when you were talking earlier, answering somebody's question about how the long-term contracts were getting more rational and going back, the-- that's-- when those are priced, those are priced with long-term contracts that would be back towards that area, I assume?

Yes. Those contracts materially-- Yes and they materially start in 2008.

Okay. And then if I go to that chart for a second, the increase from 110-- the silicon required to support capacity at 110 in 2007 up to 250 in 2008, is that 140 megawatts of silicon capacity increment in '08, is that the DC or is DC a portion of that? I'm trying to understand, because DC starts, I think, in '08. Is that all DC or can you talk to that?

Yes, substantially it is a significant part of that, but we do have another contract that comes on line during the first quarter of 2008.

So it's that and another one?

Yes.

Okay. And then what-- if I want to think of average selling prices, because this is an industry like any of these industries that the long-term trend is down with the conflicting thing being the-- the increase in polysilicon price. Is the $3.45, Manny, that you talked about versus $3.30 in the first quarter, is that all selling price or is there some mix issue in that, as well, and what was that versus a year ago?

First of all, as to your first point, that already comprehends the mix. As you are aware, we sell a mix of cells to certain of our customers--

But it's a comparable mix? In other words, whatever the mix was at the $3.30, the mix at the $3.45 is the same?

Yes, there is a little bit of a mix impact. Go ahead, Manny.

I'm done.

As you-- the cell-- the amount of cells we sell reduces some and the amount of modules we sell increases, so you do have a mix impact as well as just the general market and I would say that it's more general market than mix, but there is a mix impact because we're shipping more modules than cells.

Which would actually reduce the-- reduce the impact of whatever price increases you put in?

Yes.

And so what-- where is the price on a like-versus-like basis versus the year ago? In other words, what's happened in a year?

A year ago, Q2 '05, our average ASP, blended, was $3.39. So now we're at $3.45. There are a couple of dynamics working there. One is, we today sell a greater portion of our output in cell form rather than module form, compared to a year ago--

Okay.

--largely because of our contract with one of our biggest customers announced a couple of quarters back. As we add more capacity, and grow the top line, I think the cell content or percentage would diminish-- reduce, anyway.

Okay. And then if I go back to that table for a second -- which is a great table, by the way -- you've got the-- the nameplate-- nameplate capacity at year end. If we want the average-- in other words, the average in '07, the average in '08, should we take the 110 and the 250 and assume that that's 80% or 90% of what the-- of what the average capacity is? Is that the way to look at it?

I didn't write your algebraic equation--

Well, no, no, no. In other words, at the end of-- at the end of 2007 you have a nameplate capacity of 207. At the beginning of the year you had a nameplate capacity of 108. So the question is, how does that come on.

I see.

But what you're saying is that you can support-- that the 110-- 110 megawatt capacity in '07 is supposed to be 80% to 90% of, I thought, the production capacity. So I'm just trying to figure out what the average nameplate capacity was, not the year end.

Yes, no, I understand now. And the-- the only way, really, to get to that is to model line-by-line, quarter-by-quarter and Manny and his team and Julie will be more than happy to work with folks after this call to sort of drill down. But it's-- I don't think we can generalize beyond the-- and let me be precise, the 108 is, call it, and it really is more like 90% or 95% of the capacity we need for 2007 and then the 207 megawatt capacity in 2007 is probably 80% to 90% of what we need for 2008. We gave you that-- that 80% to 90% is just to give you the logic of how we were picking our end-of-year nameplate capacities.

But to get to a general formula. You need to know when a line is installed and the ramp rate and, again, the team will be making calls this afternoon and will be happy to talk to people to help refine that.

Fair enough, but am I correct then that if-- that without accelerating any of the lines, because you're not up-- I don't think you're up to your-- you're not up to all 10 lines by the end of '08, are you?

Manny's going to do that math for me. While he's doing that let me-- or he's going to look at the table. Let me just comment, too, one thing to be aware of is in '06 and '07 silicon's a factor, less so in '08, so on top of the ability to add lines we have the amount of silicon.

That was my other question was if, in fact, silicon came into-- so are you-- are you, in effect, assuming in '08 that you're not silicon constrained?

Broadly speaking, yes, and in '06 and '07 we are assuming we are.

No, I knew you are in '06 and '07, but you're assuming in '07 there isn't-- I'm sorry, in '08, that there is not a constraint?

Correct. We're matching our capacity ramp to the amount of silicon we estimate to get and number of lines, Manny?

Number of lines. The 372, John, that's on the table in '08--

Right?

--calls for 12 lines, okay? A total of 12, plant one for 4 lines, plant two the balance.

I thought plant two was up to-- or plant two is-- how many lines does it--

It's got the capacity for 10, so we would be--

Oh, 10. Okay, so then--

--80% full by the end of '08.

Now that's just the nameplate. That how you get the nameplate capacity of 372--

Right.

--on the assumption that the first 3 lines stay at 25 megawatts and succeeding lines are implemented at 33 megawatts.

At 33 megawatts. Okay. And then final question, when you all did the offering, you talked about two uses for the cash. One of them was for the kinds of things that obviously you did with DC Chemical and, if I'm looking at this table correctly, you need something in the neighborhood of about $100 million, using cash required for silicon and advanced delivery adding up the $39, the $48 and the $18.

The question is, when are we going to see you do something with the rest of the money? And you're actually generating something in terms of going-- you were moving toward looking at acquisitions in kind of the proverbial downstream and has-- did you just not-- is there just not anything out there that you can find or is it taking longer or what-- where-- how shall we think about that?

Yes, we think that on having a strong balance sheet is a good thing and I'm sure you agree. So it's not like we feel the need to spend it. And so when we did the secondary we said that we want to look at the outbound channel for opportunities and we continue to do that and whether something happens there or not is uncertain. What we know-- what we know for sure is that we're going to work in the outbound channel, either by organic investment in the company, meaning spending more in sales and marketing of via acquisition to get that outbound channel to be cost reduced at the same rate that we're cost reducing the panel.

So I hope that answers your question. We continue to look at the outbound channel, but we wouldn't do anything unless the economics were clear and we're also conscious that the strong balance sheet is a good thing.

Fair enough. Thanks very much.

Thanks, John.

Thank you. [Lavon von Redding], you may ask your question.

Yes, my question was also related to silicon. In terms of these kind of take-or-pay contracts, to the extent that DCC or others may not be able to supply the silicon, are you in a position to get some type of monetary damages? Or how would that work or what would you do or is there a contingent plant if they can't produce on time?

Yes, the-- this is Tom. I think the primary thing is that you don't want to get there because we've-- a lot of folks talk to us about this and I think that, for example, if DCC's factory weren't working and we were-- how can we extract a pound of flesh? That would be sort of a Pyrrhic victory or something to that extent. We'd still have the silicon or we can't run. So 99% of our effort is on being a good partner and making sure we're able to produce silicon.

Having said all of that, I can't go into the details, but it's a contract that both parties are comfortable with that is very much performance-based and consistent with success.

Okay and I guess the other question becomes, from the established silicon producers, I know you can't talk about the specifics of the contract and price, but I'm-- is it safe to assume that you are receiving a better price from a DCC than you would if you would have contracted with existing producers to expand capacity?

I would say it's safe to say-- I wouldn't go to that level of detail. I'd say it's safe to say that when you work with an emerging player and you're partnered to a deeper degree in terms of equipment buying and technology sharing and project management, a number of variables that you might work closely together, that the overall agreement is different than what you would get from an incumbent because an incumbent pretty much writes down the terms and says here's what they are whereas working with an emerging player you write those terms together.

In total, we would-- we would consider that to be-- I guess the word “better” is okay in total, but that gets to be a bit subjective, but yes.

And final question, you said they were working with a vendor to help optimize this Siemens equipment. Are you able to name that vendor?

Currently we're under an NDA and-- so, yes, we have a name, but as of now both that vendor and DCC would like us not to go public and I suspect in time that DCC would make an announcement, not us.

Okay. Thank you.

Thank you. Sanjay Shrestha, you may ask your question and please state your company name.

Great. First Albany. First of all, congratulations on a great quarter, guys. A couple of quick questions here. Number one, Tom, I think you mentioned in your prepared remarks that there is a chance for some potential upside of ingot supply from M.Setek during 2007 and I take it that that certainly is not reflected in that 110 megawatt polysilicon secure number that you guys provided, right?

Yes. If it's okay, I'll add a little color right now and just briefly say that somebody asked about M.Setek's polysilicon sourcing--

That was going to be my next question.

So the upside would be that if their vertical integration, for example, happened sooner or ramped faster, then-- and then, of course, the M.Setek team needs to decide where they would allocate that capacity and that's the nature of my comment. Now conversely, the plant could go slower or other things could happen. So there is sort of it could go either way, although we made our comment purposely.

Got it. Got it. Okay and to kind of follow up on that, so when you guys first starting talking about '07 you said 70% of poly or ingot is available. The next quarter you came out and you said 80%. Based on that 360, 110 megawatt shipment, $3.30 kind of the ASP, you've got 100% now. Now you have a portfolio approach. I understand that. So that incremental supply that became available to you, was that more of a strategic reserve that came to you or was it also some of the long-term contract? And I have a quick followup question after that.

Yes, we did switch from the percentage thing to-- we just thought we'll give the number and we'll give it in megawatts--

Yes.

--and just cut to the chase.

Absolutely.

In terms of-- no, that's our partners being great partners.

Got it. So now when we take that into consideration, when you look at your-- obviously the ASP's going down because that's what this industry needs to do and the second thing is when you look at your poly and the ingot contract pricing, '06 versus '07, is it flat? Is it trending down? And clearly it looks like '08 is going to be a normal year and because of that, are you also starting to see incumbents, the majority of them, at least, willing to sort of look at it from like it's a long-term value proposition, let's be rational about the pricing and, hence, you're actually seeing a declining curve from the poly pricing standpoint from '06 to '07 and clearly a dramatic drop, maybe, into '08?

Yes. You've got quite a bit of content there. Let me split into two. One, the incumbents are fully allocated and-- and, therefore, there's not a lot of pricing dynamic.

Sure.

It's really on future capacity expansion and I would say the same thing I said earlier. I think it's rational to-- back to the early 2000 timeframe.

In terms of what we assume, we do assume that the average silicon costs will either be flat or up some in '07, offset by improving grams per watt, is the way we're modeling that. And, of course, we can drill down on that later.

Got it. One last question, then. As we go into the second half of '07, I guess, when the Renewable Energy Act kind of-- the report on that gets presented to the German parliament, if there were to be some of a slowdown in that market, how do you see your strong position in the U.S. market playing out in your favor, especially as we go into '08? Or another way, do you think that the U.S. is going to be that much more of an import market as we go into '08 and how do you see that playing out for you guys?

Sure. You correctly state that you just can't have increasing prices in solar. The-- I believe you've got, eventually, to get to grid parity and you've got to reward the people that have incentivized this market and that's exactly what we're driving to and we think will happen in time. And so we're-- the way we're doing it is we're structuring our company and we're driving cost reduction programs consistent with getting there.

In terms of regions, the-- North America's very important because we know a lot about that market. We're in-- 80% to 85% of the North American market is in California and that's where our company is located. We also have a vice president of sales and marketing who knows the downside of being country-dependent, so we've got a very concerted effort for diversification, which, by the way, affects ASPs because ASPs are lower in some regions that we would sell into for purposes of diversification.

So North America is a big deal. Julie has worked with the PUC and other important constituents in California and collectively they've gotten an 11-year program and because we're incumbents, it's extremely important to us.

One last thing, actually, the CapEx number for the quarter?

CapEx, Sanjay, was $13 million in the quarter and projected to be $33 million next quarter, Q3, and I guess best information there is the total year guidance is unchanged. It's $90 to $100 million.

Terrific. Once again, congratulations on great execution here, guys.

Thank you.

Thank you.

Thank you. Our next question comes from Rob Stone. You may go ahead and please state your company name.

Hi. It's Cowen & Company. I wonder if we could spend just another minute or the 110 megawatt production supported by the silicon. I think you've said in the past that not 100% of what you produce at the cell level can translate into modules and then revenue within a given quarter or year. So can you help us understand sort of how much to shave off of 110, thinking in terms of what makes it into revenue for the year?

Yes. I can provide broad comments and Manny may choose or not to detail it.

The supply chain varies because the region we ship has different terms. The more we ship to North America the more that it moves to our balance sheet versus other regions. And so it's a mix-dependent question.

Therefore, the number for '07 in terms of actual shipments is still moving around a little bit. You should think of 10 megawatts, maybe 15, which would put our output, say, between 105 or so and maybe a little north of 110 is the way we've thought of it internally. And, again, the reason why it's moving around a little bit is you've got to allocate the entire year, particularly the end of the year, by region because it-- mix influences the supply chain.

Does that answer your question, Rob?

Yes, it does. Anything you wanted to add, Manny?

No, that actually flips through the math that we've done.

Okay. Just a quick housekeeping question. How much did you pay for the building?

The building project stays at $59-- call it $60 million. It was the original estimate and that's still the case.

That's the building plus--

The building and all the facilities needed. The building itself and the land was $6 million.

And then a housekeeping comment. We've got 6 people in queue on questions through Tim Luke. We'll take those questions and we'll try to answer them rapidly so we're not taking everybody's time today and we do make ourselves available for calls the balance of the day.

One last question, then, Tom, if I could. You're on gen two now. the 4 lines that are coming up in the next year are going to be gen two and 22% efficiency. What's the next waypoint after that?

You could think of it as gen three. I spent a lot of time--

I could guess that number.

--coming up with that name. And we're looking at some time in the first half of '08 and that's capital cost reduction primarily and we will move efficiency up, but we're not ready to talk about what that number will be, because it's still very much R in the R&D side at this point.

Thanks very much.

You bet.

Thank you. Paul Leming, you may ask your question.

Two followups on silicon. Can you give us any insight into whether the polysilicon that M.Setek is building will be Siemens or fluidized bed?

I don't know if I'm allowed to say that. I'll tell you that I think of it as traditional technology at this point.

Okay, thanks. And then back to DC Chemical, I think you said earlier that while you don't want to get terribly granular, you will represent a large percentage of the output of that plant?

Yes, “significant” is the word Manny used.

And I think you said that that contract is a 4-year deal?

Correct.

Could you give us any insight into why it's just a 4-year deal and not a 10-year deal? New entrant, helping to get them into the business, big portion of the output -- you kind of roll that all together and that strikes me as something that I would think of as typically a very long-term kind of relationship. Why just 4 years?

Yes, that's a good question, Paul. In the contract there are ways to extend it beyond 4 years is the first part of the answer. The second answer is both companies were real comfortable with that. We think 4 years is the perfect timeframe for us to be committed. There's a lot of silicon capacity coming on line over the next few years and for them, they need to get into the market, look at what mix they want and how fast they want to grow. Do they just build one phase or multiple phases?

So you work your way to what was a good number for both companies and I will add that it is-- it is exactly what we talked about when we talked about a portfolio strategy and having various timeframes.

If I could, one last quick followup. I know both Wacker Chemie and Hemlock and the 10-year deals they've done with solar have a declining price curve in their contracts in the out years. I think they get down into the high 30s on the solar material over the life of the 10-year contract. Could you talk at all about the first year you absolutely are contractually guaranteed a decline in polysilicon prices where you have contracts? Is that '08? Is it '09? Is it 2010 that the decline starts?

Yes. It starts phasing in in Q1 '08.

Thank you very much.

You bet.

Thank you. Stuart Bush, you may ask your question. Please state your company name.

Yes, hi. RBC. Two quick followup questions. One is are you guys able to-- or what is your plans to transitioning or retrofitting the existing lines with the new, thinner wafer technology? Maybe if you can just give some color on that?

And then secondly, any-- any color or can you talk a little bit about the imaging business? Thanks.

Yes. The first question first. The thin wafers, the gen two technology will have equipment that's more capable, although that's not going to be a factor of two or anything like that. We're talking tens of microns more capable.

As you-- as we think about the first 3 lines and getting more megawatts out, perhaps increasing efficiency and getting the thinner wafers, the more we want to do, the more it costs, the more equipment you have to replace. We don't know what that answer is. We are experimenting during this quarter running lots of thinner wafers, finding out which piece of equipment is the bottleneck. So I think we'll have a better answer on the next quarter on that question and that's been asked another time during this call.

The imaging business or otherwise known as SPG or opto, we've decided to keep that a very focused business. So we're not purposely expanding our customer list. We're trying to serve the heck out of our existing customer list. So the strategy is, therefore, that business will grow, but not at the rates that we might have talked about, say, three or four quarters ago.

Great. Thanks.

Thank you. Steve O'Rourke, you may ask your question. Please state your company name.

Hi. Deutsche Bank. Just to followup on some of the pricing with respect to your 2007 revenue guidance, how should we consider module pricing and volumes in that guidance and what are your assumptions for module ASPs in '07?

Yes, we don't split out module ASPs and cell ASPs because significantly our cells are sold to one customer and we're under NDA not to reveal pricing for obvious reasons. I will tell you that we, again as a company, are working towards a lower price in 2007, delivering a lower price to the market, as much as $0.10 or $0.15 lower in 2007.

So you're assuming declining module ASPs through '07? Is that a fair statement?

That's correct.

Okay. Thank you.

Thank you. Pierre Maccagno, you may ask your question. Please state your company name.

Needham, yes. Followup -- would you give an approximate breakdown of modules versus cells?

Manny can give an approximate breakdown, yes.

Okay.

Manny?

Give me a second. It was about 40% cells, 60% modules in the quarter just ended.

Okay. And then if I understood well, are you saying that gross margins could go to 30% in '07?

To 30% in '07? Yes.

We believe we can get to model during '07. Our model is 30% gross margins, 10% OpEx, 20% PBT.

That's exiting '07 or for the whole year?

We believe we could get to our model by mid-year or early second half of next year.

Okay. Could you repeat one more time. Gross margin 30% and the other two that you said was--?

10% OpEx and, therefore, 20% profit before tax.

Okay, thanks.

You bet.

Thank you. Tim Luke you may ask your question. Please state your company name.

Sure. It's [Gordon Johnson] in for Tim Luke.

Hi, Gordon.

How are you? I just had a quick question around some of the new deals that were announced, looking at the three deals and if you guys could give us any guidance on your silicon supply under contract in 2007. I think previously you stated 80%. If you could provide any update on that and actually if you can provide any incremental update on '08, that would be helpful.

Sure. The reason why we put the table in the press release was to avoid the percentages and cut straight to the chase. So the line that says production capacity support by current silicon procurement is the way I would answer that question. It's 65 megawatts this year, 110 next year and 250 in 2008.

Okay.

Megawatts.

All right. Thanks a lot, guys, and congratulations on the quarter.

Thank you.

Thanks, Gordon.

Thank you and our last question comes from Jesse Pichel. You may ask your question. Please state your company name.

Hi. Piper Jaffray. These calls are getting crowded. So you sourced an additional 25 megawatts of poly in '07 versus your last call to 110 megawatts. How much of that is under contract? I believe last-- last conference call it was two-thirds.

Yes, the 110 megawatts is under either contract or purchase order.

So should I guess it's about 50/50, then, that the additional came from PO?

That would be a little on the high side, probably more weighted towards contract.

So how should we look at the 110? Is that something we should bank on? How confident are you in the 110?

Jesse, it took you a while to get on the phone and welcome. Of course, as an operating guy, I hesitate to use the phrase “bank on,” because, again, the lines we're adding are new technology and the silicon market requires constant diligence. But having said that, we wouldn't put that in a table if we didn't think we could deliver it.

Great. And could you talk about the 8 grams per watt? Is that at the poly level or the ingot level and are you including curf loss?

The answer to your question is yes and yes.

And what would the gross margin point delta be between line 1 and 3?

The 3-- well, Manny can-- it's-- the 3 lines run materially similar. So there really isn't much difference.

Yes.

Now when we go to the fourth line, we'll start to see a difference, but the first three lines run materially the same.

And lastly, on DC Chemical, is the precursor TCS?

I can't answer that question. It is silane based and one of the forms of silane.

Okay, fair enough. Thanks very much. Great quarter.

You bet. Thank you. Okay let me wrap up.

I would like to reiterate just several key themes. We are executing on our plan and our plan is to meet or exceed our operating and expansion goals. Our follow-on offering provides us with the means to procure enough silicon so that we can accelerate our growth. We decided to purchase a facility as opposed to build on. That had the benefit of improved economics and more capacity. We are going to add 3 lines in 2007, up from 2, starting mid-year and ending at the end of the year would be the third line.

Our revenues grew 30% from Q1, 230% year-on-year. On a non-GAAP basis we hit gross margins of 24%, earnings of $0.11 per share and we gave guidance on revenue for the year of $225 to $230 and $360 for next year.

Thank you very much for joining our call. We appreciate the support of our shareholders. We're pleased to report our success in rapidly growing SunPower into a market leader.

Thank you. This does conclude today's conference call. Have a nice day.

Thank you, Michelle.

Thank you.