SunPower Corporation (SPWR) 2006 Q4 法說會逐字稿

Good morning, and good afternoon, and welcome to SunPower Corporation fourth quarter earnings and year-end 2006 earnings release conference call. [OPERATOR INSTRUCTIONS] I would now like to turn call over to Mr. Tom Werner, CEO of SunPower Corporation. Thank you, sir, you may begin.

Thanks for joining us today. Today we will discuss many things at the beginning of Manny's remarks when I turn it over to him, he will discuss the various filings that went in last night to help you keep track of what you should be looking at.

I will cover our fourth quarter year-end 2006 results as well as some comments on the historical results of Power Light Corporation and we will cover guidance for the combined companies for both first quarter as well as full year. Let me first talk about fourth quarter, we had another strong quarter, capping our first full year of operation as a public company. Our fourth quarter revenue was was $74.5 million which was almost as much revenue as we had in the entire year of 2005.

Our full year revenue was was 236.5 million which is almost three times the revenue of 2005. In Q4, we achieved non-GAAP gross margin of 26.2%. That is .2% higher than the number we committed to a year earlier in our IPO.

Our non-GAAP diluted EPS of $0.18 beat our guidance and for the year, our non-GAAP net income hit $36 million. This success is due to our technical team, our operating Sales and Marketing teams delivering.

In the operating side of our business, we had continued operational success in our first three lines. We also successfully launched the ramp of our fourth solar line. This completes the buildout of our first solar cell factory in Manila.

The fourth line is a 33 megawatt line and we are in the process of ramping that line which includes a technology transition to our 22% cell as well as the thinner wafers so we'll ramp to that capacity over the next two quarters and that will bring the total capacity of our first building to 108 megawatts.

As I mentioned, we are also phasing in our second generation technology which has a 22% conversion efficiency. That's a full two percentage points better than our first generation A-300 solar cell. In addition, the A-300 solar cell remains the world's highest conversion efficiency solar cell commercially available and that's compared to a 15 to 17% average for conventional efficiencies.

Next, I'd like to talk about the building of our second facility for solar cell production. That facility is on time and on budget. That facility will start with lines five and six in terms of production and in the third quarter of this year and by the fourth quarter, will add a seventh line.

All of these lines will be our second generation technology, 22% conversion efficiency and a name plate rating of 33 megawatts or a capacity of 33 megawatts per line, and that would bring the total capacity exiting the year of 207 megawatts.

Previously we've talked about our solar panel manufacturing facility that we're vertically integrating into. That is a 30 megawatt name plate capacity facility.

We started to ramp that and let me remind you that that is a semiautomated facility and our goal is to go to a fully automated facility and when we do that, we'll be able to put capacity near our end markets. So that facility is on track and on budget as well.

Now let me make a few comments about silicon. Our near term silicon situation is stable. I can confirm that we have silicon under contract for 110 megawatts of production in 2007 and 250 megawatts of production in 2008.

Let me add a little detail. [M. SENTECH], our ingot supplier, long term partner is is integrating upstream to begin polysilicon production. That project is on schedule and we expect to have capacity coming to us out of that facility during the third quarter of this year.

Additionally, DC Chemical, a Korean chemical company is building a poly silicon plant in partnership with us and we expect production by Q1 of 2008. That project is on schedule as well.

You also know that we do business and continue to do business with the top three incumbent silicon suppliers. In terms of pricing for silicon, we expect it to be slightly up in 2007 over 2006 on the order of 10% as we said in our last call. We are able to mitigate those price increases by using silicon more effectively with our next generation higher efficiency technology and through thinner wafers and better yields.

In terms of silicon utilization, our efforts to improve this metric of polygrams per watt continues to improve and the way we're doing that is through thinner wafers. We've actually accelerated our program and we're now in qualification of 165 micron-thick wafers and we've built solar cells with this thickness as well as modules and have submitted those to UL and to UV for testing.

Once that testing is complete, we will rapidly transition to these thinner wafers. That will happen towards the end of this quarter into next quarter. Unlike the last significant transition to thinner wafers, we don't expect or we haven't experienced a significant yield head and we've been able to hold our polysilicon grams per watt at 7.5. After we've gotten qualification and we start to ramp over to 165, we would expect to improve on our silicon utilization.

Now let me move to our downstream business. On November 15th, SunPower announced a definitive agreement to acquire the outstanding shares of Power Light Corporation and we held our first investor and analyst call on this transaction. We are extremely pleased to announce we closed that transaction with Power Light Corporation on January 10th.

With Power Light, SunPower acquires technology, product innovation, and project development expertise that will hasten the process of making solar power a mainstream energy source. This acquisition will also be immediately and meaningfully accretive on a non-GAAP basis and will substantially increase our revenues and accelerate our growth.

Let me explain the rational for this deal for a few minutes. We've talked quite a bit over the last two months about our company's goal to drive installed system costs down to the point where they will compete with retail electric rates. We think the important thing to talk about is installed cost , not the cost of a module or not the cost of a cell but the installed cost of a system. And as we drive to this goal of 50% reduction by 2012, we have more and more access to the trillion dollar global electricity market.

So Power Light offers us accelerated growth in revenue, immediately and meaningfully accretive earnings on a non- GAAP basis, and a broad and innovative solar system technology portfolio that compliments SunPower's heritage of being a technology leader in cells and modules, and they bring a history of product development that's unparalleled in their part of the market with that being solar systems.

Combined with SunPower, we have industry leading cell and module technology with Power Light's systems expertise that will accelerate our ability to reduce costs and we've communicated that it is our goal to reduce installed system costs by half in five years. Before we did the Power Light combination or merger, we had direct control of solar cell and panel portions of the value chain.

Now that we've added the outbound part of the value chain, the systems part of the value chain, we directly manage 50 to 70% of the total system installed cost. Now, we add this capability on top of the internal investment that we've been making in the outbound channel.

We've been organically growing our dealer network and growing the services that we offer our dealer network. Our dealer network is now close to 70 dealers in 13 states, so with Power Light, we now have strong presence in all segments of the market and we can accelerate our cost reduction for installed system costs.

Let me talk a little bit about PowerLight's operations. First, we're thrilled to have PowerLight join us at a time when their business is accelerating and has great strength. We will operate PowerLight as a subsidiary and it will be run by the Founder and CEO Tom Dinwoodie. Since this is a complimentary merger, meaning they're in a different part of the value chain, the combination of the two companies is relatively straightforward.

Additionally, we're happy to report that supply contracts signed over the last year are being honored by the strong and diverse portfolio of panel manufacturers that PowerLight has done business with. Additionally, I would comment that for SunPower, this has had no impact on our customer relationships.

PowerLight's business over the last few quarters has been very strong and is actually getting stronger and what I'd like to do now is finish my portion of the call with just a few highlights of PowerLight's projects so first let's talk about a project in Portugal.

It's the Serpa project. It is an 11 megawatt central station solar Electric power plant. It is either the largest or one of the largest power plants being built in Europe. The customer is an affiliate of General Electric company. It is under construction and it will be complete during the first quarter of this year.

In Korea, there's another power plant project, it's 2.2 megawatts and the customer is LG, located near Seoul Korea, it's also under construction and it also is expected to be complete in Q1.

Moving to our home State of California, you probably seen our announcements about our relationship with Lennar. They are one of the largest U.S. home builders. Last week, we dedicated an all solar neighborhood outside of Sacramento. That neighborhood, those homes utilize the product called sun tile.

Sun tile utilizes SunPower's high efficiency solar cells. These sun tiles are integrated into the roof and perhaps you heard on the previous call with Cypress, they actually replace the need to build a new roof whereas competitive products, you actually have to retrofit them or you have to build a roof to put them on. This subdivision had 650 homes inside of it and we expect significant growth in this sector for us going forward.

Let's move to Nevada. In Nevada, there's a three megawatt project for the Las Vegas Valley Water District, it's under construction this quarter as well. It's the largest solar power plant in Nevada and we would expect that to be done this quarter as well.

And let me end with a customer that is a multi megawatt customer. It's a Fortune 500 national retail chain and for this customer, we will be installing systems on a number of their stores. They will be utilizing a couple different technologies from PowerLight, that being the power guard product as well as the power tilt product.

So on an operational basis, PowerLight ended the year very strong and is accelerating into 2007 and we're thrilled to be merged and have one company under the name SunPower, so now I'd like to turn it over to Manny Hernandez.

Thanks, Tom. Good morning and thank you, everyone, for joining SunPower's earnings conference for the fourth quarter of 2006.

Before I go over the financial results, as usual, I'd like to remind everyone that during this conference, management already 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 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.

Prior to the financial summary, I'd like to mention that we had three files today that you might want to access and review. We filed a resale S-3 registration statement and that would register the shares that were issued in the PowerLight acquisition underlying the shares covered by that acquisition. We also filed an 8-KA that is an amendment of previous 8-K which updates our filing regarding the closure of the acquisition.

This might be particularly important since it includes historical financial information of PowerLight, including the nine month ended September 30, 2006, and we also filed an S-8 that would register the stock options and the stock plan of PowerLight.

Let me now give you a summary of our 2006 fourth quarter financial results. For the SunPower stand alone business, that means prior to any PowerLight impact. Revenue for the fourth quarter was 74.5 million, that's a 14 % increase from our prior quarter revenue of 65.3 million, and it's 154% increase over the year ago fourth quarter revenue of 29.3 million. Demand for our products in the quarter continued to be strong across all regions at slightly higher ASP's.

On a GAAP basis, we posted a net income of 11.3 million or $0.15 per diluted share in the fourth quarter compared to last quarter's net income of 9.6 million or $0.13 per share, and the year ago fourth quarter net loss of 640,000.

On a non-GAAP basis which we adjust to exclude non-cash charges for amortization of intangible assets and stock based compensation expense and the related tax adjustments, our fourth quarter net income was 13.6 million. This resulted in a diluted earnings per share of $0.18, an improvement over the prior quarter net income of 12.1 million or $0.16 per share. Our year ago fourth quarter was a net profit of 1.5 million.

Our fourth quarter 2006 net income, as usual, benefited from other income mostly interest of $2.5 million, absent this interest benefit, our operating income was was $11.8 million or 15.8% of sales. That compares to last quarter's operating income of 8.8 million or 13% of sales.

For the whole 2006 fiscal year, SunPower's revenue was was 236.5 million. That's three times our 2005 revenue of $78.7 million. GAAP net income for the year was $26.5 million compared to our 2005 net loss of $15.8 million.

Non-GAAP income for 2006 was $36.1 million compared to our 2005 net loss of $9.7 million. We're very pleased to report that we achieved our 2006 exit run rate goal of 26% non-GAAP gross margin in the fourth quarter where we posted 26.2% GM. This was 90 basis points improvement over last quarter's gross margin of 25.3 benefiting from higher revenue, slightly higher ASP's, and favorable product mix.

Very briefly on the balance sheet, we ended the fourth quarter with cash and short-term investments of approximately $182 million with most of the cash utilization during the quarter coming from capital equipment and advances for supply. We continue to have zero debt as of the end of the year. Our DSO was 63 days while our net inventory closed at 38 days.

Our capital expenditure for the quarter was 44 million, totaling totaling $109 million for the year, very close to our approximate guidance of 100 million, and depreciation for the quarter was 4.7 million which totaled up to 16 million for the year as projected.

Let me now take a moment to talk about PowerLight, starting with some of their historical financial results.

For those of you who had a chance to review our filings today, you would have seen their nine month, 2006 financial results of approximately 140 million of revenue and 3.8 million of non-GAAP operating income.

Just to give you some color as to how their fiscal year 2006 developed, PowerLight's third quarter revenue was approximately 67 million and their fourth quarter revenue just ended was approximately 105 million. This fourth quarter result would have them post a total 2006 stand alone revenue of approximately $245 million, a 127% increase from their 2005 revenue of approximately 108 million.

Their 2006 third quarter non-GAAP operating income was 4.7 million and their fourth quarter 2006 operating income was $9 million. They exited their fiscal year 2006 with gross margin of approximately 18% in the fourth quarter.

These fourth quarter results would have them post a total 2006 non-GAAP operating income of approximately 12.8 million.

Now, this third, fourth quarter and total 2006 numbers that I have shared with you are currently undergoing audit but we believe that they represent in all material respects PowerLight's financial performance for 2006.

Now, since this is the first conference that we're talking about Power Light in some detail, I would like to take some time to briefly describe potential fluctuations in our combined quarterly results going forward.

Now, for those of you who have followed SunPower's progress since our IPO, you have become accustomed to our reporting sequential quarterly growth in both sales and earnings. This is largely due to our continued strong end market demand, our initiatives to grow capacity, and our five quarter track record of executing on our operating goals. As we have seen little or no seasonality impact at all in our financial results.

With our merger with PowerLight, however, whose stand alone revenue is approximately equal to that of ours, a significant portion of our consolidated results going forward will or can now be exposed to several factors that could impact sequential quarterly growth.

First is the magnitude of certain construction projects and the rate and timing at which those construction projects are completed. Now, revenue recognition and construction projects as you know is done on a percent complete method and that would easily have completion of projects cross border boundaries.

Second is seasonal factors, which has historically influenced PowerLight's business to be stronger in the second half of the calendar year versus the first half. So these factors are not unique to PowerLight but rather common in the construction related business and their business segment.

Another factor that I would like to share with you about PowerLight is potential quarterly fluctuation in gross margin due to product mix.

PowerLight's business or sales comes primarily from construction projects; however some of the sales may or may not include solar modules, which can significantly alter the gross margin profile of a particular transaction.

Contracts can also vary in size from a small, couple of hundred kilowatt commercial implementation to a large multi megawatt power plant that Tom cited as a few examples.

The gross margin percent generally vary depending on project size. So another factor that could influence our sequential quarterly performance in gross margin percent and ultimately our net income is the mix of products and services that were sold by PowerLight in any given quarter.

I'd like to give you some color on this, like the 2006 fourth quarter margin of PowerLight as I mentioned earlier was approximately 18%. The PowerLight gross margin outlook for Q1 '07 is actually higher than that, whereas the outlook for the following quarter, Q2, is projected to be lower than the fourth quarter's margin of 18% so just to give you an idea that there could be some fluctuations within quarter boundaries in this business.

Now, having said all of that we are confident that we will see significant year on year growth in 2007, in PowerLight 's stand alone revenue and earnings, SunPower's stand alone revenue and earnings as well as the combined companies

Just be mindful that due to timing and seasonal factors, which impact revenue and due to product mix which impact gross margin percent, we expect to experience quarters where our combined revenue, margins and earnings may be flat or even decline compared to prior quarters due to these factors.

Another measure that might help you assess our growth, however, is by comparing our current quarter performance against the comparable year ago quarter. So to help you understand and model our financials going forward, we will continue to provide you quarterly guidance on revenue, gross margin, and earnings, and we'll also provide you annual guidance for revenue and earnings.

If we are faced with an unsequential growth in any given quarter we will give you appropriate guidance as well as any other changes to our annual estimates.

So, for the upcoming quarter, Q1 '07, in the fiscal year 2007, I'd like to now give you the SunPower, PowerLight and combined business financial guidance.

Let's start with the SunPower stand alone business and I'm doing this without any intercompany elimination for products sold to PowerLight. We estimate SunPower stand alone business to have revenue of $75 to 77 million in Q1.

We expect relatively stable ASP's in that quarter. The non-GAAP gross margin guidance is 26 to 27% and we still expect to achieve our model 30% gross margin in the fourth quarter of 2007. Non-GAAP operating income is estimated at 12 to 13 million and the non-GAAP EPS is expected to be $0.14 to $0.15 reflecting lower interest income and tax rate increasing from 5 to 15%, driven mostly by North America sales and profit becoming a higher portion of our business.

Now I'd like to give you PowerLight's stand alone business, also without any intercompany factors. So stand alone revenue for PowerLight in Q1 is estimated at 70 to 75 million.

As noted earlier, PowerLight's business has historically posted stronger revenue in the second half, so for comparison, this 70 to 75 million guidance for Q1 represent approximately 133% growth from their year ago Q1 revenue of approximately approximately $31 million. The estimated non-GAAP operating income for PowerLight is $6 to 7 million in Q1.

I'd like to now do the combined company guidance for Q1 '07. That will now include the elimination of modules that are shipped or sold by SunPower to PowerLight.

We estimate the combined company revenue to be $125 to 130 million. Non-GAAP gross margin combined of 26 to 27%, non-GAAP EPS of $0.18 to $0.20 per share, with a combined tax rate of 20%, and as an additional input for Q1 '07, we expect approximately 20 to 25% of SunPower's module output to be sold to or used by PowerLight.

Just other modeling points for Q1 '07 to get these out of the way , please consider net income, interest income of $500,000, tax rate of 20%, and total shares outstanding of 80.4 million shares.

I'd now like to do the last piece of guidance which is for the fiscal year 2007 for the combined company.

We estimate revenue for 2007 of $640 to 670 million, non-GAAP EPS of $0.90 to $1 per share, and for 2007, we expect approximately 25 to 35% of SunPower's modules or output to be sold to or used by PowerLight.

Closing items for modeling, please consider net interest income of $1.3 million for the year, tax rate of 20%, and average share count of of $81 million for the year. Sorry for the long segment but we felt it was important to share some of this information at this time.

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

Thanks, Manny. Manny's drinking Gatorade to get through a review like that.

I'm going to go to questions here in a minute. Let me introduce who's on the call with us that is allowed to take questions as well. We've got Tom Dinwoodie, the CEO of PowerLight, Dan Shugar, President of PowerLight, Howard Wenger, VP of Global Business Units, [Mike Arnsby], the VP of Finance for PowerLight, Peter Aschenbrenner, our VP of Marketing, Julie Blunden, VP of Public Policy and Corporate Communications, John Rodman, VP and Corporate Controller for SunPower and Jay Peer, Treasurer of SunPower. So I'm turn it over to questions now.

What we would like to do, because we have quite a few people on the phone is ask that if you have a multi-part question to do it all at once, so that we can get to as many callers as possible or as many questions or as many people as possible, so let's go to questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Sanjay Shrestha you may ask your question. Please state your company name.

First Albany. Good morning, guys, and good afternoon as well to some on the East Coast, but a couple of quick questions. What one wanted to clarify on the Power Light side in terms of the gross margin number kind of being higher here as it relates to the mix, so can you just talk about that a little bit more in terms of is it the service, is it the product into what exactly is it that kind of gets us at higher gross margin on any given quarter? Is it like the incentive clause on owner completion and things of that nature? Can you talk about that some more and then I have some other follow-up question on the ASP.

Go ahead with the follow-up. Let's get it all at once.

Sure. Another thing, Tom. You guys talked about a pretty stable ESP in the Q1 on a sequential basis, sounds like I just would like you guys to sort of tie that together with broader kind of the comment out there as it relates to sort of the overall price decline and how you have sort of managed to mitigate that.

Okay, great. Thanks, Sanjay Shrestha. So, this is Tom.

I will take the first question about seasonality and if there's subsequent questions that want to ask more or I'm sorry about gross margin, if there's subsequent questions that want to ask more I'll turn it over to Tom Dinwoodie.

Sure.

And on the ASP's we'll have Peter Aschenbrenner a comment on that so first time gross margins, Peter Aschenbrenner comment on that. So first on gross margins on the outbound channel and Power Light's business is managed differently than the sell in module business. It's different accounting and that has inherent, what I would say, inherent lumpiness associated with it. It's very much event driven, and so you could have a project that finishes inside or outside of a quarter boundary, so a quarter is almost too short of a time period to be able to project a project completion so the first part of the answer to your question is, depending on the size of a project, the margins vary and then those projects may or may not finish within a quarter and it's not perfectly predictable. You can imagine the variables associated with that.

Also, Power Light's business, as we've gone through a number of of their products, it is a technology business. It's a product business, and they sell or we sell on sun tiles. We sell power tilt. We sell power guard, so there's a variety of products.

In addition to that, there's a variety of channels for the new SunPower. We participate in all channels. So we participate in the new home residential retrofit, small scale commercial, large scale commercial, and power plants, so the margins vary between that matrix.

You can imagine products and end markets, and Sanjay, what I'd ask you and the rest of the folks on the call is to bear with us as we did with SunPower last year, for the next few quarters we'll develop a set of metrics with you to help you predict or better track our gross margins, but to summarize my long winded answer, it's project completion and mix both product and end channel. Those are the things that drive gross margin, and a number of those things are lining up favorably in Q1, and frankly, in my view of the world, that's a good problem to have. We've got a great start to the year.

Peter do you want to comment on ASP's?

Sure. Sanjay, we were at a blended ASP in Q4 of $3.64 a lot.

Okay.

We expect that that was up slightly versus we've seen very gradual increase each quarter over the last year. We expect stable pricing going into 2007. There are a number of factors why we think we can can or how we achieve that.

The first is as we continue to grow our capacity, we can unlock some of the latent demand that still exists for our product. We have a strong brand, great products, and a number of people that want to buy our products that we haven't been able to service yet so by bringing on some of these incremental customers, particularly in high ASP regions like Korea and southern Europe and others, then that enables us to continue to command a strong ASP.

The third factor is ongoing gradual shift in our product mix as we've said before.

Towards the module, right.

Towards the modules. We have a relatively stable and absolute term supply of cells and increasing supply of modules and that certainly helps and the last thing I'll mention is that as we continue to ramp up our activity in the dealer network, in North America, we're selling a little bit farther down the value chain than a commodity upstream supplier so that tends to command a slightly higher price as well so those are the main factors that support our forecast for stable pricing.

Okay, that's great. Can I actually just have a quick follow-up here on power light side?

No. We're going to cruise through these, if we could ask you to jump back in, please.

Fair enough.

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

High, thank you, Deutsche Banc and good morning. A couple questions. First from a bigger picture perspective, can you give us sort of an indication of what you're seeing evolving in the German, Spanish, and U.S. markets, and megawatts shipped in the quarter?

Okay, so on two questions there, kind of a market overview, and I'll let Peter take that and then the specific number on Manny can just go ahead and give you and then we'll go to Peter.

Our view in the European Markets which I think was the core of your question is that Germany, we see demand strengthening out into the year, typically in Germany we see Q1 which is a slow start, lots of snow preventing installations in many parts of the country and I think we see the similar pattern this year. In southern Europe, I think the signs are almost universally towards strength there where some of the new entrance, Italy , Greece and France, the relatively new incentive programs are taking hold and firming up and the rules are becoming more and more transparent and Spain in particular, we see significant strength this year. So, on the whole, I think very strong picture for Europe, demand in Europe heading into 2007.

And Steve, the megawatts sold for the fourth quarter 2006 was 18.7 megawatts.

Thank you.

And Steve, I'd like to introduce Howard Wenger, who will comment also, on what's going on in Europe. And it's a good opportunity for me also to give everybody a sense of how we're organizing going forward. We're splitting our sales and marketing function, Peter Aschenbrenner will be responsible for the marketing effort of our new company and Howard will be responsible for all of the selling effort and as the title implies, all of the global business units so I thought maybe Howard could just comment just briefly.

Thank you. Power Light has both some of the largest solar power projects in Europe and starting with a 10 megawatt project in 2004 that we completed in southern Germany, as Tom mentioned in the call, we are now completing 11 megawatt project in Portugal and we haven't discussed on this call but we are also engaged in the number of very large projects , ten, 15-20 megawatt scale projects in Spain and we're active in other parts in Europe. We see continuing growth in strength of our business internationally, and in Europe it's becoming a larger portion on a percentage basis of our overall business. We've established an office in Europe that is now growing in staff and we're seeing benefits of that.

Okay, Steve. Thanks for your question.

Thank you.

Rob Stone, you may ask your question and please state your company name.

It's Cowen & company. I'll lob in too on the question. Manny, could you just talk briefly about how the gross profit gets eliminated from SunPower modules that are sold through the power light and then with respect to your external module suppliers, can you give us some sense of the concentration of supply? Thank you.

Rob, the second question was external module suppliers, concentration and I didn't catch the last piece.

Just the concentration of your external module suppliers for power light.

Okay.

And the first part was about how gross margin gets eliminated when modules go to power light.

Okay, so this is Tom. I'll do the, I'll talk to you power light supply and we've got, Dan Shugar, here who is expert at all of the details of the supply as well, and then we'll turn it over to Manny to do the gross profit calculation. So, first on module supply, Dan and his team have negotiated over the past year or so agreements with nine different suppliers, so it's a very diverse set of folks on SunPower is the largest and there's nobody that has everyone else is less than 20% of the supply, so it's diversified. There's nine negotiated over the last year, and the data, what we tried to do was similar with what we tried to do with silicon. We tried to get to the bottom line and that is that we have agreements to cover 100% of our guidance for the year. So what I'll do is I'll turn it to Manny to do gross profit elimination and subsequently if somebody would ask, like to ask more about modules I'll turn it to Dan.

Okay, briefly, Rob, the current thinking of the company here and that's how we bottled all of this guidance that we just went through is for SunPower to sell products to power light at a price no differently than they would have sold to another customer. So, call it fair market value pricing, and the one benefit of that is we can continue to measure the SunPower stand alone as far as achieving its model of 30-10-20. In reality though by th time you combine the two companies the profit that was realized in the SunPower side gets additive to the margin that Power Light was able to achieve by selling the system. So, that's our current thinking and that's how all of those guidance were built in.

So in terms of metrics for the future, are you going to continue to describe SunPower's margin performance as if all of the modules internal or external are going out at some market cost, market price I should say?

Yes. Rob, you're kind of cheating. You asked another question there, but we'll take it. That how do we report on subsequent quarters is something that's evolving and we will certainly talk to all of you folks. That always helps us hone in on the best way to report. I would tell you the current way we would lean towards not doing that because of course we're combining the two companies and it gets to be more and more difficult. But we'll take your input and like we did with SunPower last year, we'll hone in on a set of metrics that we all feel good about. Can we take the next question, please?

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

Hi, calling from ThinkEquity. Just wanted to go back to the CapEx question. Can you talk a little bit about CapEx guidance for 2007, help us understand what that's going for so that if we were to do an equation of CapEx per megawatt of capacity installed, how to figure out the numerator and denominator there?

Okay, Dave. You'll get Manny to go through that math with you and you're looking for guidance on CapEx for '07 and then some sense of how that's allocated so you can start to figure out various ratios, I think is what I heard, so Manny?

Yes. The capital expenditure forecast for 2007 is largely unchanged in the the $172 million and that's going to include spending for the new factory that we're building in the Philippines which is on schedule as well as procurement of two more lines that we told you we were going to deploy in the fiscal year, that would be our fifth and sixth production lines, that will be located in the new building.

One thing I caution you, Dave, is don't take our CapEx and divide it by let's say our guidance for incremental capacity and say that's the capital cost per watt, because there's a lot of factors that go into cross boundaries, fiscal years, as well as building versus capital equipment. Our goal as far as CapEx per megawatt is still okay.

Yes, I'll just interject, but I would have said it exactly the same and I'd say we're working towards below $1 range, all in per watt, and when I say all in, you know, CapEx for the equipment, installation costs, building costs, etc.

Great. Thank you.

Okay. Next question please.

Stuart Bush, you may ask your question and please state your company name.

Yes, hi, RBC Capital Markets, good morning. It seems that in order to reach your combined company operation of 30% gross margin target, it would be necessary to increase the supply of SunPower panels from the 25 to 35% you mentioned in 2007, but we see power light continuing to sign long term deals. First of all, has your gross margin 30% target shifted, guidance shifted to 2009 from 2008 and what's your thinking on how quickly you'll ramp the supply through the power light channel from SunPower? And then the second question is , it looks like you guys are getting skinny on cash in 2007. Can you provide any color on whether you'd be more inclined to pursue equity, straight debt, or a convert?

Sure. Excuse me. This is Tom. Let me comment on your first part of your question and Manny will comment as well on both parts of it, including the balance sheet. So, in terms of percentage of modules, as we said, the power light's business is very strong and getting stronger, and they have great module partners that they're going to sustain, so that will allow them to continue to grow their business more and more aggressively, I should say, us grow that business more and more aggressively. Of course, we are any new deals we manage that and the context of supply from SunPower. SunPower supply will become a more significant percentage of power light by virtue of us growing faster than the number of deals they signed with other people. That will play out over perhaps two years, meaning '07 and '08, and your question on getting to model 30-10-20, we didn't intend to move that. There was a little bit of uncertainty on our part whether it was Q4 '08 or Q1 '09 but there's no intention on moving that. It is still in that time frame and of course, that's something we'll cover each quarter to give you better sense of precision, so I'll turn it back to Manny for any further comments on that and of course your balance sheet question.

Okay, Stuart, thanks for the question, and why don't I actually take this opportunity to talk about how do you take a 30% gross margin cell and module company, combine it with let's assume out there to be 15% systems company and come out 30%. We've got this question a lot so if you bear with me, it will only take a minute, I'd like to walk you through some hypothetical math here.

Sure.

I would suggest you write it down, so that you could refer to it at a later point and for this particular example , let's just use a watt of transaction; okay? Let's assume that SunPower can sell a product at $4 a watt. That's very close to our average, and we can generate 30% gross margin in that business. That would generate for you $1.20 of absolute gross margin dollars. Now, let's shift to power light and let's assume they could market or sell a system at $7 per watt and in that business , they could really generate about 15 to 20% gross margin but let's use 15% gross margin for this exercise, so 15% gross margin on $7 is $1.05, absolute gross margin for that business. Now, let's assume now that power light in this particular $7 transaction actually uses aSunPower module. So as a combined company, our revenue can only be $7. We can account the $4 that I just sold the module for. However, the margin of the combined company is the sum of the $1.20 and the $1.05. So in this particular transaction, actually, the combined margin of the company is now $2.25 which is mathematically 32% of sales. So this is how you do a 30% plus 15% would actually be more than 30. Now, hypothetical is the word I used because this portrays 100% utilization of SunPower modules into their business. As Tom mentioned, we will evolve to that. It might take time, but that is the goal of the company.

Excellent. Thank you.

Stuart, just for closure, you asked about cash and what sort of financing vehicle we might use, debt or equity. Just to be honest, that's something we're evaluating all the time in terms of what's optimum and what's best, so we haven't really made any decisions.

Thanks a lot, guys.

Thank you. Next question please

Thank you. Srini Pajjuri, you may ask your question and please state your company name.

Thank you. Merill Lynch. Just a housekeeping question and then I have a follow-up. The SunPower shares that power light owners are getting, is there any lock up on that?

Srini, can you go ahead and ask your follow-up right now?

Yes, sure. And Manny, at a high level, do you know what the seasonality for the combined business will look like as you go from Q1 To Q2 at the end of the year?

Okay, so, you had two questions there. First was lock up for I believe power light shareholders.

Yep.

Second question was seasonality precision for the quarters. I'll take the second one. It will be obvious why in a second and I'll let Manny then comment further on both of them. In terms of seasonality, what we're kind of loathed to do at this point is try to predict Q2, Q3, Q4, because that's sort of the point that it's hard to nail down quarter precision on large projects. Collectively, we may get more comfortable with that as the quarters go on, but we don't have that comfort now. We are comfortable with guiding for the quarter and for the year, and Manny alluded to, gave you some sense of year, and Manny alluded to, gave you some sense of what Q2 would look like vis-a-vis Q1, so we would like to keep it at that level for now, and then as we work together and as this New Management teamworks together, we'll figure out how best to figure out how to give you a sense of mix and seasonality but what you have now is a sense of Q2, Q1 guidance and Q4 so you got pretty good sense of the year. Manny?

Okay, let's talk about the shares and to the other questions why don't I just give you the whole profile. For the acquisition of power light, a total of 5.9 million shares of SunPower were issued in the transaction. Approximately 3 million of those don't have any restrictions and the balance of 2.9 has some form of restriction in different forms. For example, about one and a half million of those are options, some of which are vested and some are not. So, some of them still have to go through a vesting period. Also, 200,000 of those wherein the form of an incentive bonus that would also vest over time and we've got about 1.1 million of those that SunPower core team have actually, as part of the deal, put a revesting period, something we've talked to you about before. So to recap, 5.9 million issued, but approximately, I might have done the math wrong here, sorry. I've reversed it. 5.9 million, about 2 million is unrestricted and the 3.9 is restricted in some form as I've enumerated.

Thanks.

Thanks for the question. Next please?

Thank you. Shannon Mikus, You may ask your question and state your company name.

Hi Shannon Mikus, Credit Suisse. Good afternoon. My question is on the recent power light announcement [Inaudible] and also the past agreement of Q-cell and SunPower. Can you quantify the agreements of these agreements and tell me the megawatts and timing of delivery for each contract and also can you quantify the total cell supply that power light has secured as well as the timing? Thank you.

Okay, so your question is, Q- cell specifically, size of the deal, megawatts, and while I answer the question broadly, I'll turn it over to Manny and he can give you the specific answers. Both of those have been put out in our press release previously and let me just comment overall. What we won't do is break down all of the suppliers because it is similar to our silicon supply. There gets to be a lot of detail that we could go through that would take too long. The bottom line is that we have agreements for 100% of the need to meet our guidance for the year, so we have the supply. You're right by the nature of your question. Both Q-cell is parts of it so I'll let Dan give you precise numbers for those two.

Thank you for the question. Power light has three multi-year contracts for PV cells. Those are with Q-cells, and [Jing Aw]. The Q-cell contracts have been five years to 2011 and feature firm annual quantities and provisions for decreasing annual pricing. As previously announced the Q-cell the and Ursol contracts will supply about $280million of PV cells over that period. At power light's option, the Q-cells and Ursol agreements can be increased to supply an additional additional $108 million PV cells. Those are additional to the previously, the values I've previously mentioned. Power light's agreement with [Jing-Oau] extends over three years and targets 120 megawatts of total supply. The first phase of the [Jing-Oau] contract features firm pricing and quantity. Subsequent phases of the [Jing-Oau] agreement require periodic renegotiation.

Thanks for your question. Next, please?

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

Needham. Congratulations on the quarter. I wanted to get an idea of how you expect to change the proportion of SunPower products sold to power light. I mean, what do you expect in 2008 or 2009? Second part of the question is the gross margin for the first quarter that you are projecting is flat, and how come you get flat? Shouldn't it come down since the gross margin of power light is slower and finally, can you give some guidance as to the total megawatts that you expect to sell in the first quarter of '07 and for the whole year?

Okay. So let's see. I got mix over the next couple years of SunPower and other and gross margin for Q1, how does it end up where it is, and then megawatts. I'll do my best and then I'll ask Manny to mop up anything I mess up. So over the course of 2007-2008, in terms of the mix of SunPower versus other, that's a little bit unpredictable because you get added to '08 and you start to forecast growth rates in the outbound part of our business, the power light part of our business. This year it will be from 25 to 35% SunPower. Next year, I'd just give you a rough range we would expect that to start to look like 50% or more, and as Dan mentioned , the number of these agreements go for five years, so it will be growth dependent on what that mix looks like, and by the way, Dan and his team will plan on maintaining those relationships, perhaps a very long time. In terms of gross margin for the first quarter, we talked about the seasonality of the power light business and we're using that word generically that includes mix and channel, so there is a function of season am it you would traditionally think of it as well as mix and channel that we sell into, and a number of those things have lined up favorably. Certainly, year on year, very favorably, so we have a strong gross margin in the power light business but frankly we have a strong gross margin in the cell and module business as well so you end up with the math that you see in subsequent quarters, I think the dynamic will be more like you're suggesting in your question. We would expect some seasonality and that could be interpreted as lower gross margins in our outbound part of our business and as we get to the next call, we'll give you a sense of that for Q2. In terms of megawatts, Manny can give you the number again for Q1. Pierre, we're not going to do today or what we want to focus on is revenue, subsequent calls we'll see if megawatts is a good metric to talk about the complete business. It's not clear that it is because not everything we sell now is de nominated in megawatts, so for today, we're going to stick with revenue but Manny can just touch on the megawatt numbers one more time.

Yes, for megawatt for the first quarter of 2007, we're estimating 19 to 20 megawatts for the SunPower stand alone, a number that we used to report to you folks and for the 2007 year, it's actually part of the press release. It's largely unchanged. We're targeting 110 megawatts of production for the year so we're not changing guidance there. Pierre, I just want to add a little color on the margin answer that Tom gave you and partly the dynamics of mix and math that I just previously helped you walk through, how you could combine two gross margins into a higher number.

One caution for everybody on the phone. Please go not extrapolate the Q1 performance of power light into a full year.

I really want everybody to be cautious about that.

Particularly, in my guidance earlier, I noted that the non- GAAP operating income of power light for Q1 is $6 to 7 million. Please bear in mind that that's benefiting from a nice problem to have, very good margins in Q1, only caution is please don't just automatically multiply it by four and the minimum expectation for the year. I think we can not emphasize it enough there's fluctuation in this business. It's a nice problem to have that Q1 is a great margin, just don't expect that every quarter.

Because of course if you did that math you'd say our guidance for the year doesn't make sense and Manny's explained why our guidance for the year does make sense. We took that into consideration when we guided for the combined company for the year. Thanks for the question. Next one, please?

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

Simons & company. Just one quick question. How are customers taking the acquisition of power light? I think you referred to it earlier that they've been receptive to any additional color?

Sure. Yes, if you look at our channels, pre-power light, you can see that there were a few significant customers, a couple significant customers and then there was sort of a broad number across other regions and the receptive it has been fine and positive. I'll let Peter say anything more specific.

Yes. With the exception of power light, who was one of our major customers before, we have two major German customers. Obviously, we've been in close dialogue with them as we've announced this deal and are still talking on a regular basis , and I think it's fair to say that they're fine with the deal. They understand why it makes sense to us and it's not a-typical for some of their suppliers to have regions around the world with some competition so I think in general terms they're quite fine with it.

We have another large customer class which is our dealer base in North America and this is an area where our customers are extremely excited about the opportunity of getting access to some of the power light leading edge products for their small, commercial business, so I'd say there, the response has been overwhelmingly positive.

And Pearce, let me end the comments with when you look at power light's customers, on the response from power light's customers has been very positive and frankly, that's why the power light team merged with us is because they knew the customer response would be positive because that's what the they were seeing with the combined product offering and in fact that's been the case, so for power light and for the dealer channel for us has been a real winner.

Great. Thank you very much.

Thank you. Kevin Monroe, you may ask your question. Please state your company name.

Hi, it's Thomas Weisel Partners. Two questions. One, for your silicon supply in '07 and '08 to hit your guidance in terms of the megawatt production, how much of that is fixed price versus potentially variable or negotiable, and second question is Manny, can you walk us through the difference for '07 EPS guidance, non-GAAP versus GAAP, in terms of what the elements are and how it narrows over time?

Okay. So the first question was silicon supply for '07 and is it fixed price? Second question was difference between GAAP and non-GAAP and how that might narrow in time. I'll comment on the first one. So we've got on contract all of our needs for '07 for 110 megawatts and as I speak to you now that all of that supply is priced, and so the answer to your question is it's already priced for the year. The second question of GAAP and non-GAAP, I'll now turn over to Manny who is sorting it out as I speak.

Okay. I was'nt expecting that question, Kevin, but here is the data we've got. First of all, just for clarity, there will be still two elements of adjustments for our GAAP and non-GAAP numbers. One is stock based compensation expense for the FAS 123 R, which will now include the stock options of the power light folks, and two is amortization of intangibles from purchase accounting and as you know, that would run the gammet of intangibles with respect to patents, trademarks, backlog, etc. So, why don't we do this. I think it's best to just call you after this call rather than to bog everybody down while I try to get you the elements, but those are the two adjustments that sum up to the difference between GAAP and non-GAAP. Stock comp and amortization of intangibles from the purchase.

Okay.

Thanks Kevin. Next question, please?

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

Thanks, Lehman Brothers. I was just wondering, Manny, it's very helpful you gave the guidance for the two businesses, for the first quarter. Should we think about you continuing to do that? I mean, I think that was in a somewhat earlier question and the second thing I was going to ask Manny was in framing the EPS range, I'll say the revenue for the full year, do you have a range of gross margin that we should think about using? And for the full, for the SunPower business, would you still think about a sequential progression in the gross margin so the 30% I think you reiterated for the fourth calendar quarter of '07.

Okay, thanks, Tim. Guidance for what we do guidance for both companies on GM range and the stand alone SunPower business, it's sequential growth, so let me just comment on guidance. In fact, it's our intention to probably in Q2, almost for sure in Q3, to talk combined company only. That's why we guided combined company for the year. We may, in fact, figure out other break outs that make more sense and we will do that working with folks like yourself, Tim. Those could be channels or those could be products or things of that nature, so we'll work together and sort out what the best way to record is, but probably not two companies because there is as we'll explain over time, there is a fair amount of merging that we're doing. The other two questions, I'll pass to Manny.

Okay. The question is will we continue to give gross margin range for the year. I think we're going to defer that for the next conference call, Tim. We're quite comfortable with guiding you through the revenue and the earnings as we did, but as Tom mentioned, as we have a couple more of these meetings, we'll get to have a better feel for which metrics makes a lot of sense from a modeling standpoint, so if you could bear with us we'll defer that until next.

Sure. Was I right then Manny in thinking, or perhaps it was Tom, who reiterated that it was, you were targeting a 30% SunPower stand alone of gross margin for the calendar fourth quarter of '07?

Yes, so what Tom said was regarding the timing of the combined company getting to the 30-10-20 model, 30% gross margin, 10 OpEx and 20% operating income, and that's unchanged Q4 '08, Q1 '09. Manny maybe mentioned SunPower stand alone as well.

Correct. We are not abandoning that goal. The 30% gross margin stand alone SunPower goal that we've previously quoted to be achieved the fourth quarter of 2007 is something that we're keeping our eye on, on the ball.

Can I slip in a question because we haven't had one yet, just on the U.S. market and the Regulatory Departments?

Sanjay Shrestha is going to kill me because I let you do it, so --

All right

What's your question?

It was just the U.S. Market and how the current sort of regulatory and incentive regime might be impacting the market.

Okay, thanks, Tim for your questions, no more. Can you do that fast, Julie?

Yes. Because of the implementation of the California filler initiative, we are seeing a lot of attention in about U.S. filler policy and addition to the changes in Washington have clearly focused additional attention on energy generally in renewables in particular, the fact that the President mentioned global climate change in his state of the Union address I think is acknowledgement of the change of mood in Washington, and we certainly are seeing enthusiasm for additional opportunities for regulatory movement for solar in a variety of states that we're working on diligently this year.

Okay, thank you.

Next question, please?

Thank you. Jesse Pichel, you may does your question.

Jesse Pichel from Piper Jaffrey. Good afternoon. It looks like the upside in Q4 came from detector revenues of about 6 million. I'd like to know is it sustainable at this level or was it seasonal? And then two, Connergy and Phoenix in Europe publically stated they're installing large scale projects at $5 a watt and it seems to me and maybe you could confirm this, that the vast majority of power light revenue is project based and in Europe, and it looks like 45 megawatts are in its backlog for larger systems so the question is, can you please reconcile what I'm hearing in the market versus the $7 a watt number that Manny throughout there? Thank you.

Okay. So I was thinking about question two first. Do question one, Jesse, remind me.

Detector revenues came in heavy this quarter.

Got it. Julie saved me. Okay.Two questions. Detector drove upside in Q4, is it sustainable, second one is basically AST, large projects, Europe. I'll let Howard take Question two, and Manny and I can take Question one. Manny can give you the precise number. That's a little high for the detector business. That business is a little bit seasonal, not significantly so , and I would consider it to be an overstatement to say it drove any upside. It was a good quarter for the detector business but it remains a small part of our overall business although we are very happy with that business. Don't get me wrong. And I guess a short answer is yes, it is seasonal. Manny?

Ditto to what Tom said. We've always said that will be approximately 5% if not lower than our business and that was the case in Q4 06, Jesse.

Okay.

Second part of your question was pricing basically, and then Howard, if you could also comment just roughly on percentage of business, it's large projects or power plants, European based.

Sure. So I believe you mentioned that the vast majority of our revenue was from large projects in Europe. That's not accurate. It's actually less than half of our total revenue by substantial margin. With regard to the $5 per watt, for a company like Phoenix, they're installing thin film material, very low efficiency on fixed systems. We use higher efficiency products on tracking systems. We're able to command higher ASP's in general and also, Phoenix is and companies like Phoenix and Connergy are more concentrated in the German market where the solar regime and the tariffs that are available for solar are not as favorable as other parts of Europe, southern Europe, Spain. We mentioned the Portugal project and we also have large projects that Korea which also have a different profile with respect to the ASP's we can command. So, when you take into account the U.S. part of our business , which is still growing strong, roof top projects, predominantly roof top projects, different product mix, we also have the homes, part of our business, our ASP profile is different, and that's driven by the value of the products and the systems that we're delivering.

Okay, thanks, Jesse.

Thank you.

Thank you Al Kaschalk, you may ask your question.

Wedbush Morgan. Just real quick, on the solar panel installation, you said it's semiautomated what time frame should we reach 100% automation, and secondly, with the power light acquisition in getting installed cost, within five years, into parity, what progress do we make with this acquisition? Thank you.

Okay, so I'll take these questions. First part is panel automation, and I hope I said, I meant to say that it's a manufacturing of panels and we're automating that. We actually have a pretty significantly automated first passat it in our first 30 megawatts and we'll install two more lines likely that look like that and then we'll move very soon thereafter to completely automated line in precisely middle of '08 is the time frame we're targeting. In terms of progress towards the 50% cost reduction at the installed level, let me go through a number of things.

First, I think you wanted to highlight via this merger, and there are significant things out of this merger, because half of the cost have been residential installed systems in the outbound channel and about a third is in the commercial channel, and of course if your target is to get half the cost out of the value chain, then you better have an outbound solution. So power light has a lot of programs that they were working on in terms of how to do site engineering more efficiently, how to finance projects more efficiently, and of course, logistics, and then most importantly is the nature of their product, how do they pull cost out of the product design and increase the amount of energy that can be harvested.

Now, there are a number of things that they were doing that SunPower was working on as well in the residential channel that we can then combine forces and do more effectively and then those of course would be stuff like supply chain and the financing effort, so over the course of this year, you're going to see the power of the combination in the outbound channel in the areas that I just described and as we move up to the upstream part of the channel, there are some huge things that are happening in the next four quarters. First, we mentioned thinner wafers, 165 micron wafer is a very aggressive transition that will happen in the first half of this year, higher conversion efficiency, 10% higher conversion efficiency gives you ten more watts for the same effort so I can provide virtually every step in the supply chain by a number that's 10% bigger so as we transition to that that has a dramatic impact of getting to lower installed cost and then we have agreements with poly silicon suppliers and ingot suppliers that start coming in towards the end of this year and materially in '08 that will lower the cost of our silicon, so broadly speaking, those are the things that I would highlight, but as your question suggested, a lot of that is the merger in the work we could do in the outbound channel so thank you for the question. Next question, please?

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

Thanks, Citigroup. Good afternoon, guys. Can you just give us first of all a sense of what the operating costs as a percentage of sales were at power light and then secondly, can you talk a bit about roof top systems? Really in terms of weight? There seems to be a general view that on larger commercial-type roof top systems that it might be too heavy for your type of or poly type product as compared to a thin film product. Can you just discuss that?

Yes. Thank you for asking that question, actually. So, the OpEx question, Manny can just do briefly and then Tom, the CEO, and the inventor of power guard would love to take the second question, so first we'll start with Manny.

Yes, David. Let me use the Q1 guidance as a basis for that. Briefly speaking here, it's very similar to the SunPower stand alone profile, so you could practically model the two businesses as a 10 to 11% OpEx. On a combined basis though, as you eliminate revenue, that percentage jumps up by a point, so it's a 12% on a combined basis.

Great. Thanks.

Thank you. Paul Craig --

Hold on. The second part of the question was that our product too heavy vis-a-vis a thin film for commercial uses, roughly speaking. Howard you want to speak to that?

Yes, I'd be happy to speak to that. Power light has pioneered in the development of products which are lightweight and penetration free for roof tops and the commercial sector, so we have reduced by a factor of ten the way of installing affordable relative to systems on commercial roof tops. We have not had an application yet where we're unable to install a power guard or power fit system due to weight, so that I'm aware of, so with respect to a commercial advantage of thin film product, I'm not aware of such a commercial advantage.

Yes, so we can appreciate the question and we can say that that's not an issue, unless we learn something new going forward that's not an issue. Thank you. Next question, please?

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

Hi, good afternoon, guys, Paul Clegg from Natexis. What's your production capacity for producing sun tile and power guards, two obviously very interesting products and how quickly could you ramp those and then secondly, on your last call, I believe that you talked about reaching a billion dollar run rate in conjunction with that 30-20-10 model, but think you were talking about doing that in 2008 for the combined company. Does that mean that you do not expect at this time to actually hit a billion dollars for the full year 2008 in revenues for the combined company?

Okay, Paul, thank you for those questions. So you asked about sun tile capacity and you asked about going in run rate in 2008. I'll defer to Manny on Question two and I may look to Howard for help on Question one. You're right though, your characterization of sun tile being an exciting product that has a lot of upside. Today, it's an emerging part of our business and it's growing quite rapidly. My guess is it's growing faster than any other part of our business and it has incredible amount of upside. It also has upside in the combined company because in the previous way we operated before we combined, there were three steps in the supply chain that we believe we can get down to either two or one, and there's cost reduction associated with that in time. We also think we can do things as a combined company and combined design teams in terms of making the product deliver more energy and probably some things in terms of the way the product looks, so there's some design leverage as well so we're extremely excited about the product in terms of capacity, I'll let Howard take that.

Sure. Right now, we do not have a constrain on capacity with respect to making sun tile product for the home builder market. Right now, the company is exclusively utilizing this product for new home construction and new communities. We could change the demand for this product if we offer it in a broader fashion, it's something that we are considering.

So you should think in terms of low single digit megawatts, but it's actually the operating team is probably listening and clenching as I say this but it's easier to produce than a court module so they would love to see more demand. There's a lot of upside here. The second question was billion run rate?

Yes, it's Manny. Your recollection is correct. We did state that our objective is to get a billion dollar run rate some time in 2008. We would like to keep our guidance the same for now. We obviously would love to be a billion dollar company then, but the visibility we've got right now is safe enough to say on a run rate basis, so we'll update that as we go, but keep the guidance the same.

Thanks very much.

Thanks for the question. We've got I see six people in queue and we've been at it almost an hour and a half, so we're going to get through these six and I apologize to folks that I've been rude to but we'll try to get through the last six here. Next question.

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

CIBC. Real quick, any impact from purchase accounting next quarter and also could you remind us what the cash balance will be once you report next quarter, expected cash? Thanks.

Okay, purchase accounting. This was actually Kevin's question earlier. Jeff, I don't have the quarterly here with me but this would give you a magnitude because I think this would be ratable over the year. To year. To answers earlier question as well, the total adjustment from GAAP to non-GAAP, which includes stock based comp and all the amortization of intangibles is projected to be $67 million in 2007, $53 million in 2008, dropping to to 21 million in 2009, and about $20 million in 2010 and then 10 million in 2011 so this thing is going to be with us for awhile. That's just the consequence of purchase accounting, and for 2007, Jeff, I'd just take a quarter of that.

Okay, thanks for the question. Next question, please?

[Michael Carb], you may ask your question. Please state your company name.

Good morning, [Sigma Hill Capital]. Tom, for you, you've talked a little bit about getting operating leverage here to drive cost down by 50%. I'm wondering, what scope do you see for being able to get some planning leverage to address the calendar quarter irregularities that you may have to deal with or minimize the calendar quarter irregularities that you may face with the contract nature of the business and then secondly in the contingency section of the 8-K, I noticed there's a potential substantial $30 million to $40 million issue floating around out there there for 44,000 panels that have been supplied by an unnamed supplier to power light earlier on. I'm wondering if you might update us on where that is. I note in particular your reference of verbal assurance rather than relying strictly on the contract warranty terms. Thank you.

Okay. So we'll figure out who is going to to Answer Question two in a moment. First question, first question regarding planning leverage. It's a really good question and it's going to be one of the advantages of an emerged company, and the merged company has a merged supply chain now and so you do eliminate several variables, the biggest one being the predictability of PV supply over time. That becomes more and more predictable, and I do think that as we combine Management systems, we'll become better at planning the whole value chain and probably be able to manage down the " Seasonal". Many of you on the phone know Dan sugar. He's very effective at motivating what he needs and now that we're all part of one company can, that I think he will do a great job of making sure stuff shows up on time for the outbound part of our business, so yes, I think there's going to be leverage there and we'll have to see over time how that goes. We'll comment on that over the next few quarters. Second question was a very specific one about 30-$40 million contingency and I'll let Tom just make any statements we have there.

I'd be happy to. So yes, indeed, we were notified by one panel manufacturer that there are future potential defects in their panels and this manufacturer, we have contractual assurances for this manufacturer of a replacement of those modules including the physical installation of the replacement.

Thank you for the question. Next question, please.

Thank you. [Kent Wilson], you may ask your question, please state your company name.

Thanks, [Trellis Management]. Good morning, you guys, thanks. The question in regards to just going through the approved systems for California right now, I notice you guys have a wide swath of product and maybe the molts broad but I only notice a couple of the 210 to 220 watt power guard roof tiles, I think that they are SunPowers. Can you comment in regards to the 25% of the mix will be coming from SunPower so in the next year, what will this lift look like and how will it be populated with SunPower vis-a-vis, Sanyo, VP, Shell, Siemens, etc.

Oh, when you say the list you mean the CEC list?

Yep.

Oh, okay. CEC list and Peter can maybe help me with the question. The way I interpret it is when we look and see SunPower and power light, what are the products of the combined company, what's going to have SunPower in it?

Yes.

So, I think you'll see SunPower skew SunPower product model names show up in a variety of types of products in the California CEC report. We of course historically have focused more on the residential retrofit part of the business, and we have to be a little bit careful about whether the product has been identified historically for instance as a power light product did in sun tile which wouldn't have showed up historically as SunPower so it take assist little bit of work to peel back that onion but you're going to see SunPower products showing up across-the-board, it's already showing up across-the-board in power light projects, in California, across the country, and internationally as well. We don't anticipate any specific concentration in one region.

Now, having said that the part of your question or maybe what you're getting at is theres a real opportunity for the combined company, the CC date is up to 30 kilowatts and there's a part of the market that the combined company is going to address more effectively, so if that's where you're heading, yes, we expect our presence to grow. I don't know what the exact split would be or the break off would be, but call it 10-30 kilowatts, something like that.

Okay, excellent. I can't wait to get mine up on my roof. So we'll see you soon. Thanks.

Call me and I'll make sure you're happy.

I think we got it under way, it's just the process is slow, but I get it.

All right thanks. Appreciate your business. Next question, please?

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

Needham. Manny, if you could comment on the R & D and SG&a as a percentage of revenue, how does that change from the fourth quarter to the First Quarter, and do you see a gradual decline by the end of the year and what do you expect there? And second part is the base of power light systems using SunPower modules, is that higher than ones not using SunPower Modules and by how much?

Okay. So R & D, Q4-Q1, and expected trend and then ASP of modules, and was your question ASP of SunPower modules to power light ?

Yes. I mean the ASP of the power light systems that use SunPower modules, is that different from those that don't?

Yes. I can answer the second question. If you looked at the average price and you can compare that to the other price of the other suppliers that you find is very close, so it's very similar, and then in terms of R & D quarter on quarter?

OpEx in general was your question, Pierre, so I already gave the answer for Q1. I'll repeat it though. For the two stand alone companies, they practically mirror each other, about 10 to 11% of sales OpEx, with the elimination of revenue, just percentage wise that increases to about 12% on a combined basis for Q1. As far as what that would look like for the year as a whole, I would just discount all those numbers by 1%, so it should improve by 1% on a combined basis as well as on a stand alone basis.

But the granularity between SG&A and R & D, how that changes?

Why don't we defer that as we get the integration of the two companies more farther along. We obviously in the SunPower stand alone had a 442 profile but would lake to defer that as we integrate the two companies because we might want to redirect certain of those dollars. The most important thing to point is the combined company is still focused on achieving a 10% operating expense on a combined basis.

Thanks.

Pierre on your question on power light's, what the essentially the transfer price was, I was commenting on a per watt basis and on a per panel basis since SunPower has panel than more watts, the transfer price would be higher but that's by nature of having more. So thanks for the question. Next question, please?

Thank you. Timothy Walker, you may ask your question. Please state your company name.

Thank you. Camco. Tom there's a sense at some point in the next year or so, SunPower will be fully independent from Cypress, should SunPower (company corrected after the call) holders be worried that SunPower is going to be at a disadvantage relatively speaking after such a separation or SunPower going to be competing on it's own?

So SunPower capitalizes on it's relationship or significant shareholder of Cypress and I mentioned those a number of areas on the Cypress call. Among those, the financial backing of this transaction as well as some of the systems we're using, where basically the foundation of the systems we're using is a combination as well as HR systems and things of that nature, so we can productively leverage those systems for sure and they advantage us and in time with effort by both companies, sure those systems could be embedded in SunPower, but that would happen in time.

Thank you.

Next question, please?

Thank you. [Paul Lemmer], you may ask your question. Please state your company name.

[Inaudible]. I had two topics I wanted to touch on. First, on the wafers for your cell operations, was everything in the fourth quarter at 180 micron and could you give us a figure for what your Graham per watt usage averaged in the fourth quarter and then on the cash flow side, what was depreciation in the fourth quarter and could you talk about what you think payments po to poly silicon suppliers, advanced payments will be in 2007?

Okay, good. And you have the distinction of being the last question of the meeting. I'll take the poly grams per watt and then I'll turn it to Manny to the depreciation and the advanced payments question. So, first, grams per watt, it was mid seven's in Q4, which you'll find is similar to Q3. We transition to 165 Micron wafers in Q4 meaning we proved it out and we worked out what we need to do on the manufacturing floor to do that, so we got some benefit from that, but we also had to invest to achieve that, so 7.5ish is the number for Q1. It starts to improve in Q2. It starts to improve more as we have a higher mix of 165 micron wafers. In terms of depreciation and advanced payments, Manny?

Okay, I hope I heard the question correctly, Paul. The depreciation for the fourth quarter was 4.7 million and that totaled up to 16 million for the year as projected and your second question of how much advances for supply are we expecting to disburse or pay in 2007, it's actually in the face of our press release, it's $48.3 million in 2007.

Sorry, I missed that. Thank you.

No problem and thanks for the question. We appreciate everybody's time. We very very much appreciate the support of our shareholders. We had a very strong Q4. We believe we're starting 2007 on a positive note. We're thrilled to be now a combined company with power light , and we will be excited to tell you about the result the of the combination over time over the next few quarters. Thank you very much for your time.

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