SunPower Corporation (SPWR) 2007 Q2 法說會逐字稿

Good afternoon, and welcome to SunPower Corporation's second quarter 2007 earnings release conference call.

This call is being recorded.

If you have any objections, you may disconnect at this time.

Your lines have been placed on a listen-only mode until the question-and-answer segment of today's call.

I would now like to turn the call over to Mr.

Tom Werner, CEO of SunPower Corporation.

Thank you, sir, you may begin.

Thank you for joining us today.

Today we will report our second quarter 2007 financial and operational results.

We will also report our plans to raise additional capital and our guidance for our combined Company going forward.

First, our second quarter performance again beat our guidance with strong financial, operational and business development results.

As a reminder, we report results by business segment, consistent with the way we run our business.

Our Systems business segment generally represents products and services, service solutions sold directly to the system owner.

Our Components business segment represents the balance of our business, generally products and services sold to dealers and resellers.

Since we have unified our brands under the SunPower name, you will hear us refer to our large scale Systems business as SunPower Systems.

Now let me review the financials.

Our Q1 2007 non-GAAP revenue was $174.1 million, up 22% from Q1 2007 non-GAAP revenue of $143.2 million.

Breaking that down into our segments, our Systems segment had non-GAAP revenue of $104 million and our Components non-GAAP revenue was almost $70 million.

With regards to Components, you should note that SunPower panels used by PowerLight or our Systems business are accounted for within the Systems financial segment results.

In addition, both our gross margin and EPS beat our guidance and Manny will elaborate more on this later.

Moving to our sales performance, demand is strong and growing for SunPower's high efficiency solar panels and high performance solar systems.

We see several trends emerging.

First, growth in power plant scale systems around the world.

In Q2, we announced the following -- construction of several large-scale plants in Spain; and we announced multi-site sales for Wal-Mart and Macy's; as well as a multi-megawatt contract in Korea; and lastly a 1.5 megawatt power plant in Hawaii that will support about 30% of Lanai's energy needs.

The second trend is that the market continues to value our high efficiency solar panels as evidenced by higher cell and panel ASPs in Q2.

Examples of our strength in the quarter include we added -- included that we added another dozen dealers in the U.S.

as we launched our premier dealer program.

We now have over 100 dealers.

We also extended our agreement with Conergy in the European Union and we completed several high-profile installations such as the Colorado Rockies stadium and the Colorado Governor's Mansion.

The third trend is we see a broadening customer base.

For example, the military is making investments in solar power.

The largest photovoltaic solar system in North America is now in construction by SunPower at Nellis Air Force base.

In New Jersey, we dedicated a solar system for the Department of Military and Veteran Affairs.

In the retail sector, we see building owners who are seeking a return on investment from their rooftops.

For example, Tiffany's dedicated a system in our second quarter in addition to Wal-Mart and Macy's.

And lastly, in the new production home sector, we see that the home builders are investing in solar systems and that the result of this is that their homes sell faster.

In Q2, we announced that two of our partners have reported that their solar homes using the SunPower SunTile are selling at twice the rate of homes in neighboring communities.

These trends are supported by an increasing use of power purchase agreements and the value of our technology.

Most of our contracts in the U.S.

are now using a PPA structure, power purchase agreement structure, whereby the customer contracts for solar electricity instead of buying the equipment directly.

We also see major bulge bracket banks entering the market, which bodes well for the credibility of solar and for solar power purchase agreements.

These trends are driving strong demand for our technology as evidenced by our customers' willingness to pay a premium.

Let's review our technology.

We are currently shipping high efficiency panels that offer up to 50% more power per unit area than conventional panels and two to four times the power of thin film.

Our systems technology, which maximizes energy harvest, improves delivery per watt, energy delivery per watt.

These high efficiency and better energy delivery systems offer lower balance of system and other related costs, which makes SunPower valuable to power plant owners, as well as roof top systems owners.

Now, let me move on to discuss our expansion plans.

Yesterday we announced a major new contract with Hemlock for over 2 gigawatts of silicon and this is our largest contract to date.

Contract is a 10-year contract starting in 2010.

This contract adds reliable supply consistent with our diversified sourcing strategy.

This additional Hemlock contract supports our aggressive expansion for our solar cell Fab 3, which we are in the process of siting.

Our cell Fab 3 will be the largest yet.

It will have an expected capacity of 500 megawatts or more from which we would begin production in late 2009.

With greater visibility in the market place, we have decided to scale our production in larger increments.

This is a key to our cost reduction road map, one of the keys to our cost reduction road map.

In addition, in combination with cells Fabs 1 and 2, Fab 3 will allow SunPower to have a capacity of over 900 megawatts.

To support this expansion, we announced this morning that we are raising $400 million in capital, which Manny will speak about next.

This expansion is a critical component to SunPower's plan to drive installed system costs by 50% by 2012 to compete with retail electric rates.

Now, let me move on to our manufacturing technology teams.

Our cell Fab 1 continues to benefit from cycles of learning leading to improved performance.

For example, our silicon utilization improved to less than 7 grams per watt in the second quarter.

Our cell Fab 2 is now complete, on time and on budget.

We will inaugurate this facility with President Gloria Macapagal-Arroyo of the Philippines on July 30th.

Our first lines in this building are now beginning to ramp with our second generation technology.

Let me remind you, our second generation technology has a 22% conversion efficiency.

That's a full two percentage points better than our first generation solar cell.

And that compares to 15% to 17% for conventional technologies.

When integrated into our panel, our second generation cell technology achieves breakthrough performance, panel efficiencies of 19% to 20%.

This is 50% or more better than conventional panels and two to four times the efficiency of thin film panels.

In Systems we now -- are now in production with our SunPower T20 Tracker.

This is a next generation one-axis tracker.

It is tilted to maximize energy capture and minimize capital costs.

We achieve greater kilowatt per hour energy production per rated watt than our competition.

In fact, we produce up to 30% more energy per rated watt than fixed-tilt systems.

Regarding silicon, our near-term situation is on plan.

We congratulate our partner, M.Setek, who has begun production in their first polysilicon plant and they started production in May.

They are on schedule to deliver ingots using silicon from this plant to us during Q3.

Another of our partners, DCC, a leading Korean chemical company, is on schedule to begin delivery of polysilicon to us in the first quarter of 2008.

In summary, we have silicon contracts sufficient to support the following production levels -- 110 megawatts in 2007; 250 megawatts or more in 2008; 400 megawatts or more in 2009.

Regarding silicon pricing, we expect prices to be slightly higher compared to 2006, approximately 10%.

However, we have been able to mitigate higher silicon prices through better silicon utilization, greater scale and manufacturing process improvements.

At this point, I would like to turn the call over to Manny Hernandez, who is going to report details of our second quarter results, as well as provide guidance for Q3 and Q4, and some thoughts on 2008.

Manny.

Thanks, Tom.

Good afternoon, everyone, and thank you for joining our conference call for the second quarter results of 2007, which ended July 1st of this year.

I would like to remind everyone that during the conference, management made and will be making forward-looking statements, statements that are not historical in nature.

Please consider those statements as forward-looking in the meaning of the Private Securities Litigation 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.

We had a great quarter and either exceeded or were on the top of the range for second quarter performance, not only for the combined Company but as well as for our business segments in practically all parameters, revenue, gross margins and earnings.

Let me give you a summary of the 2007 second quarter financials.

On a GAAP basis, revenue for the second quarter was $173.8 million, gross margin was 17.1% and a net loss of $5.3 million resulting in a fully diluted loss of $0.07 per share.

This GAAP figures include noncash purchase accounting charges of $7.6 million related to our acquisition of PowerLight, noncash stock-based compensation charges of $13.2 million and a write-down of an intangible asset related to brand unification of $14.1 million as we focus on promoting SunPower brand for the whole Company.

The next series of figures I will enumerate are our non-GAAP results, which exclude noncash purchase accounting adjustments and revenue, as well as noncash charges for amortization of intangible assets, purchase accounting and stock-based compensation and their related tax adjustments.

So here we go.

For non-GAAP revenue for the second quarter was $174.1 million, that's a 22% increase from a prior quarter revenue of $143.2 million.

Our Systems business segment accounted for $104.3 million of that revenue or 60% of the total Company revenue.

Also a 32% increase from our prior quarter's Systems revenue of $79.3 million.

Our Components business segment accounted for $69.7 million of the quarter's revenue, representing a 9% increase from our prior quarter's revenue of $63.9 million.

Note that the eventual sale of SunPower manufactured components, which are allocated by the Company to our Systems segment, is reflected as revenue on the Systems segment side.

Total Company non-GAAP gross margin for the quarter was 23% versus last quarter's 29%.

This quarter's gross margin was influenced largely by higher Systems revenue mix.

Also recall that last quarter we had a nonrecurring benefit of $1.1 million, as well as a higher than typical gross margin mix in our Systems business segment.

In the second quarter, our Components business segment posted gross margin of 27.8% versus our guidance of 26% to 27.5%, while our Systems business segment posted gross margin of 19.7% versus our guidance of 18% to 20%.

Our non-GAAP operating income for the second quarter was $22.1 million and our net income was $19.8 million, resulting in a $0.25 fully diluted earnings per share.

This compares with our prior quarter net income of $23.3 million or $0.29 fully diluted earnings, which benefited from the nonrecurring gain as well as higher Systems gross margin.

Briefly on the balance sheet, we ended the second quarter with cash and short-term investments of approximately $176 million.

Our DSO improved from 53 days to 49.

And inventory days closed at approximately 68 days.

Capital expenditure year-to-date now stands at $104 million.

That's $56 million in Q1 and $48 million in Q2, while we estimate the 2007 capital now to be approximately $200 million.

Depreciation for the quarter was approximately $6 million and our estimated depreciation for the full year remains at $32 million.

As we have noted in prior calls, our business results will reflect quarterly mix shifts between Systems and Components.

Also, even from quarter to quarter we expect shifts within the Systems segment due to mix and percentage completion factors that could lead to nonsequential or marginal growth in either revenue gross margin or earnings.

As we also noted, if we are faced with non-sequential growth in any given quarter, either for total Company or any of our segments, we will give you appropriate guidance.

As I enumerate the guidance following now for the rest of 2007, please note that we will expect our Systems segment to have a very strong Q3 sales, followed by a slight decline in the fourth quarter, influenced by contracted project schedules.

So the following is now our guidance for the third quarter, the fourth quarter and for the full year fiscal 2007.

Now, we normally just give you next quarter guidance and a revised estimate for the year, but since you can essentially derive the fourth quarter from all of those numbers we thought we would just make it easier for you.

So I'll just define them.

So for Q3, for the total Company, our estimated non-GAAP results are the following -- Revenue of $205 million to $215 million, that's approximately an 18% to 20% sequential growth.

We see gross margin at 20% to 22%, that's influenced by significantly higher systems mix.

And we are also ramping the factory, as we will talk about more later, and earnings per share for Q3 is estimated at $0.25 to $0.29 per share.

How that breaks out by segment for the third quarter are as follows.

A non-GAAP revenue of $130 million to $135 million for Systems.

That's a 25% to 30% growth.

And gross margins at the 18% to 20%.

The Components business side will have revenue of $75 million to $80 million, that's an 8% to 15% sequential growth, while gross margin is estimated at 24% to 26%.

That's unfavorably influenced by slightly lower yields as we ramp new lines, lines five and six this quarter.

Now, for the fourth quarter of 2007, we estimate total Company non-GAAP results as follows -- revenue of $210 million to $220 million, that's a 2% to 3% sequential growth.

Gross margin of 24% to 25%, that is favorably influenced by higher component mix.

And EPS, or earnings per share, of $0.33 to $0.37 per share for the fourth quarter.

How that breaks by component -- by segments are as follows -- the Systems segment -- business segment will have revenue of $105 million to $110 million.

That's a 19% sequential decline from our guidance for Q3 due to the seasonality and mix of business projects scheduled for that quarter.

And gross margin remains at 18% to 20% for that segment.

For the Components business segment, however, we see fourth quarter revenue of $105 million to $110 million.

That's a 38% sequential growth, now reflecting the ramp of the factory and gross margins improve to 28% to 30%, again, influenced by our factory's ramp.

That leads us to the total fiscal 2007.

We are raising our annual total Company guidance for the year as follows -- revenue of $730 million to $750 million; Gross margin of 23.5% to 24.5% for the year; and earnings per share of $1.13 to $1.20 per share.

And these earnings are all based on tax rates of 12.5% consistent with prior quarter.

Also as noted in the press release, for the fiscal year 2008, we now estimate Company revenue of $1 billion to $1.2 billion and a non-GAAP EPS of approximately $1.80 to $2 per share.

Now, very briefly on the announced financing event, as you can appreciate due to certain SEC restrictions, we are limited on what we could disclose regarding this transaction.

In the next several days we will market approximately $200 million of an equity offering, as well as a $200 million convertible offering.

These are all inclusive of over allotments estimated at this time.

These funds will be used for general corporate purposes, including working capital and capital expenditure for the expansion of our solar cell fab and panel manufacturing facilities.

We may also use a portion of these proceeds to purchase or make prepayments for raw materials, including polysilicon and we may also use a portion of these proceeds for the acquisition of or investment in complimentary businesses, technologies and other assets or to invest in joint ventures.

Thank you for your patience.

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

Thanks, Manny.

In a moment, I will turn it over to questions.

First, let me note that with me I have Howard Wenger, our VP of Sales, Peter Aschenbrenner, our VP of Marketing, Julie Blunden, our VP of Public Policy and Corporate Communications, Mike [Arnstein], our VP of Finance and Jay Peir, our VP and Treasurer.

These folks may answer questions as well.

In order for us to manage this call to probably around an hour and 20 minutes, a little shorter than normal because some of you have complained at the length of the call, I will try to take you with one question each and ask you to get back in queue if you have more than one question.

Estelle, we will take questions now.

Thank you, sir.

(OPERATOR INSTRUCTIONS) Steve O'Rourke, you may ask you question, please state your company name.

Thank you.

Steve O'Rourke from Deutsche Bank.

Tom, you mentioned in your prepared remarks that with greater visibility you can size expansions more aggressively.

What do you mean by greater visibility?

Is it just silicon?

Or is there more to it than that?

Steve, what I'm referring to there is the channel strategy that we embarked on when we acquired PowerLight was to have a direct touch to the customer in the commercial and public sector, as well as power plants.

Of course, in new production homes we install turnkey and legacy SunPower was developing a premium dealer network.

So those channel strategies are starting to mature and the benefit of that is that we are better connected with direct end market demand.

We have a better sense of where we excel and the size of that demand.

Because of the ability to tie what we can learn from the field directly into internal capacity, we can have greater confidence that we are not reacting to signals that perhaps would be buffered by a step in between us, again, since we touch the end customer.

So the reference there was that we have better visibility into the channel because of our channel strategy that we started out on about six or nine months ago.

Fair enough.

Can I ask one follow-up or shall I jump back in the queue?

If it's quick.

Okay.

What I was going to ask is you talk about a 30% power output boost from a tracking system.

What is the cost per kilowatt hour improvement rather than the power output improvement, because there's some cost tradeoffs there too, right?

Howard, I will look to you to give me a little bit of help here.

The -- just let me elaborate just briefly.

The idea, of course, is to have the panel oriented to the sun in an optimum position and you can do that by essentially tracking the sun through as it goes from east to west.

The key, of course, is to do that economically and produce more energy, but then, of course, you have to do that without adding a lot of costs.

Howard, can you give us an estimate of the cost per kilowatt hour?

Just a percent improvement if you have it.

The percent improvement is generally around -- it depends on the climate, so the clearer the climate, the better improvement you have of tracking.

So in most of our target markets where we are using our trackers, we are getting an improvement on the order up from 8% to 15%.

Thank you.

That's very helpful.

Okay.

Next question, please.

Thank you.

Michael Horwitz, you may ask your question.

Please state your company name.

Pacific Growth.

Hello, everyone.

Quickly I was running through some old notes in my model.

It appears to me that you are ramping lines five and six in Q3, like you said.

Is that a little bit quicker than you had expected maybe a quarter ago and are you able to do that, if I'm correct in assuming that, are you able to do that because you have had better silicon efficiency?

I will comment briefly and then Manny can add on to it.

I would say that we are either ahead or right on schedule.

It's primarily that we decided to put the capacity on line when we planned to get silicon and silicon came on plan or maybe slightly favorable and the execution of the operations team was excellent as well.

Note that the factory, the second factory, is twice as big as the first factory.

And to have that factory come online on schedule and on budget, something that we are really proud of.

So it's a combination of execution by the operations team and silicon being on plan or slightly ahead of schedule.

Manny, did you want to add anything?

That's pretty much it, Michael.

The only change here, if you will, is line six was originally at the beginning of the year anyway, planned towards the beginning of Q4 and what's happened here is we pulled it into the latter part of Q3.

Is that right?

That's kind of what I saw in my model.

And then just quickly, these are 33 megawatt name plate lines?

Yes, they are.

As was line four?

That is correct.

Thank you.

And in terms of technology strategy, currently our plan is to run 20% efficiency or Gen 1 cells in our first fab and 22% Gen 2 cells in our second fab.

So that's on top of the things we just mentioned.

Next question, please.

Thank you.

Sanjay Shrestha, you may ask your question.

Please state your company name.

Lazard Capital Markets.

Good afternoon, guys.

Good to see the capacity announcement plans here.

Just a quick question.

The standards are ramp of two lines, how much is that going to impact your margins in Q3?

Sanjay, it's Manny.

Good question.

If you just recall our discussion about the quarter results, the Components segment in the second quarter, so the quarter we just finished, posted margins of 27.8%, I believe, yes, 27.8%.

And we're now guiding Q3 for the Components business at 24% to 26%.

That is largely the reason for the decline, is as we ramp this time, two lines, line five and six, in the third quarter, there will be some start-up yield ramifications but we benefit from that nicely going into Q4, where the same Components business segment would now realize, in our estimate, margins of 28% to 30%.

Got it.

Now I just want to clarify.

That's what I thought, but I just wanted to clarify one point here, guys.

You did see a sequential somewhat of a benefit on your ASP front for the high efficiency cells and now this margin decline has nothing to do with your expectation that that ASP dynamics is going to change for you guys?

That's correct.

Okay, terrific.

I will hop back in the queue.

Thank you.

Thank you.

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

Soleil Securities.

If I could, a two-part question on the contract you announced with Hemlock yesterday.

You say that that covers or will be sufficient to source 2 gigawatts of modules down the road.

Could you give us any insight into what gram per watt you assume over the life of the contract.

And then the second part, when Hemlock announced that capacity expansion in Munich, they actually talked about two traunches of capacity, one that would start up in 2010, one that would start up in 2012.

Will you also be part of the purchasing consortium for the 2012 contract?

Or is that still to be determined?

The short answer is no and to be determined.

Let me elaborate just a little bit.

On polygrams per watt, we were less than seven.

We've made great progress there.

We assume that there's continued progress there, albeit at a slower rate.

But because it's an NDA we have with Hemlock, we can't give you a specific number.

In terms of the next expansion beyond that, the way we think about that is we look at the size company we are going to be in terms of capacity and then we look at the portfolio of supply that we have and we look at it across duration of the contract and incumbents versus new entrants.

So we are managing the portfolio such that we have a target percentage for both of those variables.

And as we assess our size in 2012, that will drive our decision, whether it's Hemlock or other incumbent suppliers, and that's a TBD.

Thank you very much.

Thank you.

Our next question comes from Stuart Bush.

You may go ahead.

Hi, good afternoon.

You guys have highlighted your portfolio approach to silicon sourcing in the past.

Can you comment on the percent of silicon you expect to have at fixed prices versus what you expect to get on the spot market for 2008, 2009, and if your approach to the portfolio mix concept has changed?

Yes, I will -- this is Tom.

I will comment on the strategy and perhaps take a pass at the numbers.

I will ask Manny to if I'm not really close, he can -- he can refine it for me.

The strategy has not changed.

And that is that we have a target percentage of long and intermediate and short-term.

We actually can split it into three buckets.

And the short-term is not necessarily spot.

In fact, it's not a lot of spot, certainly less than 10%.

Short-term in our view is a year, maybe two years.

Intermediate term is up to five years and, of course, long term then is greater than five years.

We have a target percentage for those three buckets that we continue to maintain.

The Hemlock agreement is a result of aggressively expanding and actually needing another long-term agreement to keep in line with our targeted percentages.

We also target for risk purposes a number of new entrants to incumbents.

Perhaps a bit less rigorous there because we are confident with our partners, M.Setek and DC Chemical.

But we do have target percentages there as well.

In terms of 2008, why don't I let Manny take that.

Hi, Stuart.

The answer is actually related to what Tom said.

The general ratio that we try to achieve for this portfolio approach is a third, a third, a third.

So a third long, meaning longer than five years.

A third intermediate, which is within five years and a third current.

Not necessarily spot but I guess you could call it spot.

So for 2008, given the profile of our supply, about a third of them will be negotiated every six months.

The other thing I would say is that negotiation is more about short-term pricing, delivery schedules and things of that nature.

We are contracted for all the silicon we need for '08 and '09.

Right.

The main issue is just what, pricing?

Correct.

Okay, thank you very much.

Thank you.

Satya Kumar , you may ask your question and please state your company

Yes, hi, thanks.

Satya Kumar from Credit Suisse.

Tom, can you give us a sense of how much of your panel production was sold through the Systems business in the quarter?

And looking longer term, what is the expectation for panel production from the Components business allocated to systems in '07 and '08?

Could we expect that most of your -- and looking at it from the Systems side, I know you are ramping some agreements from Q-Cells and ersol and JA Solar, but at what point in time should we think that most of your system installations are actually in source from your Components business?

Can you give us some clarity on that?

Sure.

And again, I will take a pass and Manny may clarify.

So our internal module shipments remains consistent with our previous communication.

This year it will average or ramp to about 30%.

Next year, the internal supply will ramp to about 50%.

We maintain our strategy of continuing to partner with third party suppliers or continuing to procure from them.

You named ersol and Q-Cells are certainly two of them.

We continue to ship systems with their product and will for the next three to five years and we would expect to beyond that.

Of course, as we ramp up our SunPower production and the allocation to our Systems business, the amount that's third party reduces and in '09 and '10, we are moving from 50% to closer to 80%.

Quickly here, you said 50%, that's an average level of your Components production that's allocated to SunPower.

So there would be a linear increase through the year so you could actually end the year at a higher percentage, is that right?

This is Manny.

Yes, that's a reasonable assumption.

And a quick follow-up on polysilicon.

Given that you have this portfolio approach for procuring silicon costs, is it fair to say you're paying peak prices for polysilicon for you this year and how should we think about the pricing for SunPower as we progress through the next few years?

Thanks.

Sure.

This is Tom.

I will take that question.

First of all, I don't -- I talk about -- none of us talk about pricing from specific suppliers.

Two reasons, one, we have NDAs and the second reason is our competitors tend to go to our suppliers and say they want a better price than us, so we will let our competitors negotiate their own deals.

And when you talk about short-term pricing and are we paying peak pricing, I would just say to you that some of the pricing that you hear in the market place, particularly from suppliers from the far east, we don't buy silicon at those prices, at least prices that I have heard, I've seen written.

We -- any short-term silicon that we buy we buy from people that we're already partnered with, so we are not like buying from a broker.

We are buying somebody that we are partnered with.

I think it would be fair to say no to that question, although it is higher, clearly, than long-term contracts, but it is significantly less than the numbers I'm seeing for spot pricing.

Next question, Michele.

Thank you.

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

Thank you.

Merrill Lynch.

Hi, Tom.

For 2008, obviously you are giving us guidance and it looks like you're assuming pretty strong growth in your Systems business.

I'm just wondering how much of that is already on your books and how much do you need to show us that kind of growth?

Yes.

We are seeing significant growth in our Systems business.

Of course, you have seen that in Q1 and Q2 and Manny has given guidance for Q3 and Q4.

We expect continued strength in that sector.

We are not giving backlog numbers at this point.

We are still refining what metrics we give and part of the challenge with backlog is in the Systems business you are very sensitive to large projects booking in one quarter versus another and we could have people overreacting.

And currently they would be overreacting favorably because we have a very strong backlog and bookings are very good.

We have a rule of thumb of having at least half of the next year's revenue booked.

I would just say to you that we have got six months left, of course, so it's a projection, but we are comfortable, consistent with our revenue forecast.

Thank you.

Thank you.

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

Cowen & Co.

Hi, guys.

Hi, Rob.

I wonder if you could just put a little more color on your comments about ASPs.

You said ASPs for cells and modules increased.

Is that on the component side or were you also paying higher prices for modules that you bought in and can you be any more specific than just -- and I assume you mean that they were up sequentially.

Yes.

We will do this with two people.

This is Tom.

I will comment broadly and then I will turn it over to Peter Aschenbrenner.

When we talked about pricing, we were specifically talking about the Components segment.

I will let Peter refine that a little bit.

In terms of the Systems business, the third party modules we buy are on, in our terminology, intermediate-term contracts.

That being approximately five years.

So that pricing is already established, so we are not seeing quarter to quarter changes in third party module pricing.

Peter, do you want to take it from here?

Sure.

The price increase that we saw in Q2 was on the Components side, that's solar cells and modules sold to immediate customers of SunPower in the Components business.

And we saw a couple of percent increase in both -- in both products, which is consistent with our expectations, historically and kinds of sequential ASP increases that we have talked about the last four or five quarters.

So related to that, what is your pricing assumption in the guidance for the second half of the year?

We expect stable pricing for the second half of the year.

Okay.

And then a follow on question for Manny, if I may.

Are the additional shares that you are planning to offer included in your full year earnings per share guidance?

Yes.

Let me -- before Manny answers, let me comment.

I'm not doing a very job of managing one question each and now we are up to three.

So I will try to do a better job.

Manny, do you want to take that one?

Thanks for the question, Rob.

The guidance that we all just talked about exclude the transaction that we are about to execute here.

Thank you very much.

Thank you.

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

Yes, Simmons and Co, International.

Just curious what the outlook is for federal legislation in Washington.

What's likely to happen, market impact, timing, et cetera.

Hi, Pearce, this is Julie.

We certainly have seen a lot of constructive conversation at the federal level on energy policy generally, and specifically on renewables.

We had anticipated that it would take later into the summer and possibly into the fall before we saw actual action on any renewables tax title and that certainly appears to be the case now.

We do feel pretty good about the position, based on what we have seen coming out of committees and we certainly are cautiously optimistic that we will see some movement to extend and possibly expand the investment tax credit for solar this year.

Do you think the utilities are going to get involved in the business, based on that?

As you know, the utilities in drafts on both houses have been included in the investment tax credit.

Certainly that provides political support for the investment tax credit extension that's useful in the political discussion.

Certainly in Europe we have seen a lot of activity at a large scale level.

I think the dynamics change in the U.S.

a little bit if the utilities end up with ITC.

In general, we would expect that to mean more demand, more sales.

Thank you.

Thank you.

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

Good morning, Carboy at Signal Hill here.

Tom, a bigger picture question for you.

On the plan to consolidate the brand names, PowerLight has had a very strong franchise name.

Could you elaborate a little bit on why you have chosen to consolidate everything under the SunPower name?

Sure, I will say a few words and Peter, let me know if you would like to add to it.

So it really boils down to clarity of message and it costs money to support two brands.

When we looked at the brands, there was strength in both of them and PowerLight has done an incredibly good job of becoming North America's largest solar EPC and systems designer and having a significant footprint in Europe and Asia as well.

We felt, though, that we could capitalize on that by transitioning in time the strength of that name to the SunPower name and frankly driving economics because we could support one brand.

And since they are both early stage, the market is growing rapidly, we could make that transition and drive clarity of message through one name going forward.

Peter was the -- is the architect behind our branding programs.

Peter, do you want to add anything?

Sure.

I'm just going to make a couple of quick points.

First of all branding is something that we think about and talk about quite a bit.

It's a factor that hasn't been a significant part of our business yet.

We think it will be going forward, that is the industry as a whole.

So we tend to focus on brand issues quite a bit.

We think that there's a very large brand opportunity that there isn't a clear brand leader in our business yet and we would like to become that brand leader.

And when we looked at the -- the way that in which we feel a leading brand would be created, we felt that would typically happen more at the consumer level and then translate to the commercial and systems businesses by association.

And it was in the consumer business where SunPower had a very strong start to building a leading brand.

Those were really the considerations that led to knitting everything together under the SunPower brand.

But so far, I think the response has been quite good.

Okay.

Tom, you have talked in the past about the objectives of lowering system costs over the next several years at a pretty predictable rate.

I'm wondering if I can get you to kind of start putting some stakes in the ground with regard to the degree of achievement you have already experienced with regard to balance of system cost reductions.

Sure.

Let me answer that question and then comment a bit more on brand.

In terms of driving costs down, we -- let me just say that we spent a lot of time internally modeling the next five years.

We have got each of the operating units, cells, models systems and projects.

We are the only company that has integrated that way, so we can project cost reduction internally for each of those areas.

Each of the operations people responsible for those four segments has given us a five-year plan and then we have put that into a levelized cost of energy model and we maintain our plan and our confidence to reduce costs by 50% over five years.

In terms of balance of system cost, it's actually where we have made the most progress.

I'm not prepared to give numbers and I know there's interest in also breaking that over time -- breaking down our targets over time and we will do that but we are not going to do that on this call.

I would say to you that the balance of system costs are coming down faster, actually, than most of our other costs primarily because we have got the benefit of scale, and secondly, our T20 Tracker that we just introduced is phenomenally cost effective.

So we've had most progress there.

I would also like to comment on brand.

One of the things that people should remember about SunPower is our unique distribution strategy.

We have a presence in all geographies, we have a presence in all significant applications, and we have a different channel approach in each of those applications.

So think in residential retrofit, SunPower premium dealer program; think new production homes, SunPower SunTile turnkey; and then in commercial, public and power plants, think of us as a SunPower systems company and using our tracker technology and our tilt technology.

So it makes the Company easier to understand as well and via our distribution strategy, we believe we are going to drive brand presence very effectively.

Okay.

Thank you very much.

Thank you.

Our next question comes from Pierre Maccagno.

You may ask your question and please state your company name.

From Needham.

Congratulations on the quarter, Tom and Manny.

Could you tell us what is the amount of megawatts produced and the amount of megawatts shipped?

This is Manny.

Just give me a second.

Megawatts produced, which is what we would normally share with you, is watts 24.5 megawatts for the quarter.

And remind me, what was it last quarter?

It was 19.1 last quarter.

And shipped, you don't share that with us?

We don't.

As you can imagine, there's not necessarily complications, but there is WIP inventory growing, there's transfers of products to the Systems segment which may not necessarily be used for revenue recognized in the same quarter and for those same reasons.

Okay.

Thanks very much.

Thank you.

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

Yes, Natexis Bleichroeder Can you comment on the type of relative pricing and momentum you are seeing in your key geographic markets and maybe the outlook for ASPs for 2008?

I know you already addressed 2007.

Yes, this is Tom.

I will quickly turn this over to Peter.

Let me say that for 2008 we are still six months away from starting the year.

We are actually out in front of ourselves a bit relative to what we have done the last two years in terms of forecasting the following year.

And so we are mostly going to talk about '08 in terms of revenue and EPS.

We certainly can talk about geographic pricing and give you a sense of what's going on in '08.

And, Peter, can you do that, please?

Sure.

So for the balance of this year, as we mentioned, our forecast is for stable ASPs.

There are a couple components to what we see as our pricing leverage.

The first is that we have a great product.

I think if you talked to our customers, they will tell you that we have a great product and an increasingly strong brand reputation and, of course, that translates into pricing power.

As we bring on more and more capacity each quarter, we're able to unlock the next incremental slice of demand and we tend to do that not exclusively but largely with new customers in relatively high ASP regions and high value applications.

And we also increasingly sell farther down the value chain, closer to the customer which gives us a little bit of pricing power as well.

So we continue to see stable pricing and strong demand for the product.

For 2008, we think it's a little early, as Tom said, to offer specific guidance.

Are you seeing the adoption of the PPA model having any impact on ASPs going forward though?

In and of itself, no.

I should have mentioned in my prepared remarks, our PPA program is called SunPower Access and if anything it, because it gives the customer comfort because they are used to paying for power, it almost insulates them a bit from our pricing but nonetheless we call it SunPower Access and we are seeing more adoption of that model.

Next question.

Thanks very much.

Thank you.

Al Kaschalk, you may ask your question and please state your company name.

Wedbush Morgan.

Tom, I was wondering if you could add a little bit more meat to the Systems business and in particular, maybe duration of contracts, mix in terms of the customer types and related margin, given the strength you are expecting over the near-term, but also the variability of causes in that consolidated margins on the results.

Thanks.

I will -- we will do a two-part, like we have done many of the other questions.

Howard, you can follow up and make sure that you can add some specificity.

On terms of cost in the Systems business it's driven really by the mix of modules coming from SunPower versus external.

As I mentioned earlier, that third party modules are not changing in price quarter to quarter, nor do we expect them to over the course of the next few years, other than what's built in the contract and is already planned into our business.

In terms of the mix, it is moving towards larger systems and more scalable systems.

So larger systems, that being Nellis and Serpa, the contract in Korea, Hawaii, several contracts in Spain.

And the retail sector, we've got a model that works well for the retail sector.

They obviously have a lot of roof space.

The roof space tends to be similar and therefore they can work with a SunPower Access program, whereby they pay for power, a model they're used to.

They are insulated from the rising costs of electricity and that sector is growing rapidly, as well.

So in terms of mix, it's biasing towards larger systems and towards scalable customers, like retail and, as I mentioned, the military, as well.

And I also mentioned that it's a very strong sector for us and we see an increasing backlog.

Howard, did you want to add anything?

I think that was a great answer, Tom.

I don't have anything further to add.

If I may just follow up then.

In terms of like a retail customer, I assume you are going through corporate versus having to do with a geographic cell and therefore can negotiate?

Howard, go ahead?

Could you repeat the question, please?

I just wanted to make sure in terms of the procuring the contract with the sale to a retail-type customer, for instance, Wal-Mart, is this a national sale or do you have to go in specifically to either a regional manager or are you going through corporate?

It depends.

In the case of Wal-Mart, that's a national sale.

In the case of our Macy's, that was also a national sale.

So it just depends on the customer and with respect to on our builder, new home sales, we are frequently working with both national and regional divisions of large home -- of the top builder 100.

So it just depends.

Thanks.

Thank you.

Jesse Pichel, you may ask your question and please state your company name.

Piper Jaffray.

A question for Manny.

Given the strength of the lower margin Systems business, are you worried that you will not hit the 30% gross margin guidance by the end of '08 to early '09?

And then part B of that, does Components' gross margin include sales of the higher margin PowerLight products, like the Tracker or the PowerTilt or the PowerGuard, if sold to another systems company?

Thank you.

Hi, Jesse.

Let me start with the last point.

What you just described are the other components for a system or what we call balance of system.

Those sales are reported with the Systems business segment revenue.

So the Components business segment we talked about are just the cells and modules that you used to know as the old SunPower, if you will.

As far as the goal of the Company to achieve its business model or financial model of 30% gross margin, 20% operating income, our goal has not changed.

We believe we could achieve that either on the fourth quarter of 2008 or early 2009.

That would obviously be assisted by a higher percentage of our output being allocated to our Systems segment.

And as noted by Tom, we are trending towards 30% of our output being allocated to the Systems group this year and that would increase to 50% next year.

And one thing to understand, Jesse, is the allocation of SunPower produced products is not the only way we are going to try to get there.

As noted by our cost reduction discussions, we have cost reduction initiatives in all fronts, right?

We have got the silicon costs we are expecting to come down.

We are continuing to expand the efficiency of the product, which ratably takes the cost per watt down.

The cell cost reductions that are occurring, the downstream system cost reduction.

So among the cost reductions and allocating more products to the Systems side, we believe we could still achieve the 30%.

To that point, Manny, if I could follow up.

With this latest Hemlock deal, do you have enough wafering assets in place in Korea to produce wafers and might you have to ramp up your CapEx there, which could affect the gross margin down the road?

Yes, Jesse, this is Tom.

I will take that.

Just on the last question, hopefully this is helpful.

Systems sales equals -- is sales to the customer or owner, Components sale is a sale to a reseller or installer.

So what Manny said aligns with that.

And then in terms of wafering capacity, as polysilicon becomes more available, we felt a year ago that you needed to have a good ingot strategy and wafering strategy, so you have seen us do the joint venture in Korea, that you mentioned, on ingot making and we are partnering ever stronger with M.Setek as well.

And our wafering strategy is to capitalize on three things, our internal capacity, and, yes, that requires CapEx.

That's built into Manny's CapEx estimates.

Third party on wafers, people that just do wafering.

We have relationships with two of those.

Then our ingot suppliers, that we've mentioned previously, are either increasing their wafering or entering into wafering.

You know that REC has announced that they will be doing wafers and perhaps in time we will buy wafers from them instead of ingots.

So it's split, Jesse, between internal CapEx and partner CapEx.

Okay, great.

Thank you.

Thank you.

Pavel Molchanov, you may ask your question.

Please state your company name.

Raymond James.

Question on -- are you guys facing any increased level of competition that you perceive from unconventional photovoltaics -- in particular, of course, thin film -- especially as it relates to your PowerLight Systems segment?

Sure.

As we look at the way SunPower segments the markets, the answer is no in residential retrofit.

In new production homes, the answer is no.

In commercial and public, it's fair to say materially no.

In power plants, the answer is yes, although you can see that, I think, in time we are going to see the power plant market segment some.

Obviously one of the ways it's going to segment is the cost of land.

You know that we use two to four times less land to get the same amount of power and therefore where there isn't much land or it's expensive, then you are not going to see competition from those other technologies.

Where land is abundant, then, yes, definitely we see competition from those new technologies.

Howard, did you want to add anything?

I think you've covered it, Tom.

The only thing I would add, I guess, is that clearly on the -- even in the power plants, we don't see material competition right now and in the very near-term from unconventional technologies.

Got it.

Thanks very much.

Pavel, this is Peter.

Let me just add one note there.

In the power plant business, which largely in Europe and Korea is being practices of a piece of open land on to which you build a power plant, there's really two ways to go to achieve the objective of lowest cost kilowatt hours over the life of the system.

One way is with a relatively low efficiency panel, low cost per watt and very low cost fixed structure.

The other way is with a high efficiency panel, like we have got, and a tracking collector, which is marginally more expensive than the low-cost fixed-tilt structure that generates, as we've said it previously, about 30% more kilowatt hours than the fixed-tilt system in many cases.

We believe that the approach that we are installing and they're having a lot of success with, is highly competitive in terms of achieving that end goal, which is lowest cost per kilowatt hour.

If I could just add one thing, this is Howard, to Peter's addition is that one of the key things for power plant and in the PPA environment is to provide a reliable and proven power and energy output over 10 to 20 years.

And so the banks and the financing entities are quite conservative, understandably, and they have a lot of experience with other technologies in renewables, they're very attuned to the track record of the technology and the company behind the technology.

And I believe that's one of the fundamental elemental drivers of our advantage going forward.

Okay.

Very thorough.

Thanks, guys.

Thank you, [Alberto Vassetel], you may ask your question.

Please state your company name.

AJ (Inaudible) Capital.

Good morning, gentlemen.

Tom, can you share with us that the ASP for modules in second quarter in the dollar per watt?

The short answer, Alberto, is no.

Sorry.

The reason is is because we materially only have one cell customer and if we separate pricing, then we have given our pricing to that cell customer.

And we have confidentiality agreement that we won't do that.

So we do give you pricing, however, for the combined and I think from knowing mix you can get materially to your number.

Can I do a follow-up very quick?

Hello?

Yes.

I think that the base on at the higher efficiency of your modules and cells, you guys are able to charge kind of premium on ASP without talking about specific dollar amounts.

And I would like to see your comment on these web thing coming into the US, in particular from China and modules with efficiency around 16%, 16.5%, nearby $3 per watt or even below?

I think there are a couple of projects with a decent size into US that were close at that level in terms of ASP.

And with the assumption, and I guess I am right, that you are able to charge a premium.

Can you explain how a (Inaudible) bought that premium is (Inaudible) and how you can sustain that going forward?

Sure.

There are times that you will see low pricing on modules.

And our premium is against the average of the pricing of all competitors that have efficiencies in the range that you spoke of.

We, of course, don't chase the lowest bid.

There's no reason to do that.

Our product is particularly well suited to where balance of system costs are an important part of the equation and where you're space constrained and where you count the space in the case of power plant, land is an important part of the balance of systems cost, so we focus primarily on those markets.

We get a premium because you need between a third and as few as 30% less space to get the same amount of power.

You can look at it two ways.

In the same space, you can make substantially higher rated energy delivery, solar systems or you can use a lot less space and that typically is in retail -- I'm sorry, in residential, both retrofit and new production homes as well as the public sector buildings.

So space is a big driver and people will pay a premium because balance of system costs are important and because system rating is also very important.

Thank you very much, Tom, and congratulations for the quarter.

Thank you.

Thank you.

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

Great, it's Thomas Weisel Partners.

Just a couple quick questions for Manny and then one for Tom.

Just quickly, Manny, can you just discuss the tax rate for '08?

Are you assuming 12.5% or 20% in the guidance?

And then also can you break out the stock compensation expense?

Yes, the tax rates for the rest of this year or for all of 2007, we are using 12.5% and consistent with how we guided last time, we are staying with a 20% to 25% for '08, Jeff.

And as far as stock-based compensation, there should be a whole table there at the end of the release.

I believe it's about $13 million this year -- this quarter.

Yes, I didn't see the R&D versus SG&A breakout on that.

I think that is actually on a table as well.

Okay.

I will find it later.

That's fine.

And just for Tom, TJ mentioned on the prior call that the book-to-bill was 1.15% for SunPower.

Can you just talk about what that was last quarter, if you are not going to give a backlog?

So your question is what was it for Q2?

It was 1.15 this quarter according to TJ, but what was it for Q1.

Let me get my quarters straight.

TJ said 1.15 for Q2 and your question is what was it for Q1?

Exactly

I think TJ's giving a weighted average number and, again, we haven't given book-to-bill ratios.

We are not quite settled on how we are going to report that.

And remember, our distribution strategy is to have a strong presence in all channels and bookings look differently in residential retrofit than they do in a Systems business.

So when you think of book-to-bill, it's very relevant to the Systems business, or we are more and more thinking that's an important metric, less relevant in a premium dealer network in the residential retrofit market.

So you can't talk -- we don't think it is a good idea to talk about an overall book-to-bill ratio.

I will tell you that when you look at the Systems business, the number was materially similar in both quarters and is actually north of the number that TJ spoke to.

Very good.

Thanks.

Thank you.

David Smith, you may ask your question.

Please state your company name.

Longbow Capital.

Hi, guys.

I think most have been answered but just the only thing outstanding is just a follow on from the prior question about non-GAAP expenses.

What, Manny, going forward between say now and 2011, what -- what kind of non- -- I guess non-GAAP adjustments do we see beyond this year?

Okay.

If I could give you a little bit of color.

The stock-based compensation would obviously be with us for a while and that was $13 million this quarter.

$8 million of that was related to the PowerLight acquisition where there's some revesting of certain shares.

That would only last a couple of years.

So you could assume that from a stock-based comp, it's about $13 million for the next two years and then it will drop to around $5 million per quarter after that.

With regard to the other amortization of intangibles from the acquisition of PowerLight, that's totaled about $7 million a quarter as well.

I will give that about another four years, David, because most of the intangibles are right around that life.

Okay.

So that's the total of the two.

And like if I look at a guidance that you gave on a GAAP basis setting for next year, I haven't got the result or the release right in front of me, but it's just -- should I be able to come to the number just by adding back the items you just said?

Yes, sir, with the exception of one thing.

The only thing special in this particular quarter was the $14 million impairment charge for the unification of the brand.

Otherwise you should be able to get to it.

If not, please give us a call.

Thanks.

Okay.

Let's move on.

We have seven more questions.

If I -- if we do them quickly, we will get through this in about five or six minutes.

Let's take the next one, please.

Thank you, Sir.

Thomas Ligotti, you may ask your question.

Please state your company name.

[Gilly Geizenhau].

How are you, guys?

Good.

Your products in the new home market with sub prime meltdown, has that affected any of your sales?

It has affected the rate of growth.

The growth rate is excellent.

We have 3,000 homes in queue in terms of backlog.

We have an excellent product.

And it would be even bigger, growing even faster, so, yes, it's affected it, but it is a matter of the slope of the line up and to the right.

Okay, great.

Thanks.

Jeff Bencik, your line is open and please state your company name.

Sure, it's Jefferies & Company.

Hi, guys.

I just wanted to know, in terms of your silicon suppliers, can you break down the percentage that is from what you would call new suppliers versus existing suppliers now?

And how that will change between now and 2010?

Yes.

I can give you just a sense of that.

And, again, we target more specifically short, long-term and intermediate term contracts.

It's a primary thing we are managing.

But we are also managing incumbents versus new entrants and that does vary a bit over time.

Let me have Manny just give you a little bit better sense.

This is Manny, Jeff.

It's really a definition that some of our vendors might not accept themselves as being referred to as new entrants.

I understand.

So excluding them from the top five of the world, let's say.

Okay.

That there's a significance portion of our, for example, '08 supply that is going to be from the new entrants, that would include M.Setex, which we have talked about, and DC Chemical, and that would be in the 60% range is going to come from those guys.

And over time that will drop off some.

Okay.

And then with that, can you talk about relative price versus incumbents versus new suppliers?

And then also on the Hemlock contract, is that on a fixed price and is there a deflator built into that?

Just a little more color on that contract.

I can give you color on a lot of other things, except those two questions.

I just say that the nature of the deals or the agreements with new entrants are different.

The amount of money up front, the length of the agreement, how we work together, and so you kind of have to look at it in composite.

We've previously said that those are very competitive agreements.

In terms of Hemlock, we definitely can't talk about does it go up or down but we obviously did it because we thought it made sense and they are a great partner.

All right.

And then finally, last question, can you just talk about the different regions.

Was there a particular ASP strength in certain regions, like down in Germany, up in Spain, and overall demand in the different regions?

Sure.

Peter can you try to do a quick version of that?

Yes, the short answer is no.

There were no significant price movements regionally for us in Q2.

Okay.

I don't think that got to the question.

Were there price differences between different regions?

Oh, I'm sorry.

I thought you meant within the regions.

Yes, we've historically seen in terms of hierarchy, highest pricing currently, at least for our products, in some of the very rapid growth markets, including southern Europe and Korea.

Those are also markets where the predominant application today is in the power plant sector, in many cases using tracking collectors and that's one of the applications where a very high efficiency product we offer has outstanding value.

So we tend to see very good ASPs there.

German market has tended to be below that in terms of ASP, but still a little bit higher than what the prevailing prices are in North America.

Okay.

We are going to have to move on so we can wrap this up.

Mike Stern, your line is open and please state your company name.

Western Gas and Electric Company.

My one question goes back to your projection of 30% gross margin in 2008 and I was wondering if you could give a little more detail on the source of your confidence in that number, given increasing capabilities of competitors on both module and systems business.

Yes, this is Tom.

What we do is, of course, project pricing and we have now got two years of experience with -- with price we get relevant to our peer group.

And then we project costs by cell module, system and projects.

The operations people that own each of those give us a cost projection over time and, of course, we compare the two.

We drive our operation internally to very aggressive cost reduction targets.

And we feel confident that the next six quarters our operations team has a solid plan that keeps -- that drives this model.

The other thing, of course, is we have mix in our favor.

We could do nothing other than increase our mix of internal models and our margins would improve.

So we have got that compounding factor.

Thank you.

Paul Leming, your line is open and please state your company name.

Soleil Securities.

Question for Julie.

I was wondering if I could get you to take a stab at looking out to 2010 and hazard a guess as to how many separate countries in the world will be at or above 2 gigawatts of consumption of solar installations at that point and what would you peg those countries as being today?

Paul, I'm a little averse to trying to do forecasting, it is not our business to provide external forecasts.

We do keep, obviously, substantial detail on internal forecast.

However, to maybe provide some illumination, what's useful to recognize is that we think about those forecasts in scenario terms.

So we are looking at scenarios where you have accelerated activity at the policy level in response to carbon issues, et cetera.

Other scenarios where you have strength in one geography versus others.

You can clearly come up with cases where you would have multiple countries over 2 gigawatts in 2010, and obviously the ones that are furthest along now are the best candidates to be in that position then.

Okay, if we could move on, because we have three in queue and we will do them quickly and we will wrap this up.

Michael Carboy, your line is open and please state your company name..

Thank you.

Signal Hill.

A quick follow-up, Tom.

You talked about the degree of cost savings coming from larger plants.

Can you give us an idea of the magnitude of that margin improvement that you get from going to your larger footprints?

I'm not prepared to do that here.

I will give you an element of that and then we'll work on it.

We will take that as a homework assignment.

We're seeing balance of systems costs go down high single digits and sometimes within a quarter.

Okay.

Thanks.

Rob Stone, your line is open and please state your company name.

Cowen & Co.

Just a quick follow-up on silicon.

You've said that your blended cost of silicon should be up about 10% this year.

What do you assume for 2008?

Our blended costs of silicon in 2008 will be down year-on-year and, Rob, with the team here we will take that as a homework assignment and provide greater clarity.

I would say that it's materially down.

Thank you.

And our last question comes from Tim Luke.

Sir, your line is open and please state your company name.

Released to get a question in.

(Inaudible) Clarification from Manny just on the '08 implied revenue, where you say a mid-point of 1.1, given that the ramp in the Systems business, if you could give us a sense of a range of what the expectation in terms of percentage contribution from Systems versus Components in that revenue that you are outlining.

And then the question really would be just on how you seen the competitive dynamics develop, Tom, in the different segments in that it seems that there are a lot more larger systems versus residential and in the other key arenas.

Hi, Tim, Why don't I take the first part of that.

We have purposefully not guided the segment mix for '08.

As you can imagine we are even six months away from beginning that year.

Yes.

However, I think from our current guidance of '07, take the mean of $740 million to now the mean of the '08 guidance of 1.1, that's almost 50% growth for the whole company.

We'd like to have the flexibility of being able to manage that between the segments depending on where the opportunities are.

So we will give you more clarity as we get closer.

Sorry, but we can't be more definitive at this time.

And, Tim, on segmentation, in strength in the segments we purposefully sell into all four segments, the way we segment the market.

We do see movement between those segments.

Policy still drives a lot of the end markets, particularly the power plant market.

On where we are strongest, and then you can infer from that, that we are most comfortable with our business model is where it is space constrained, and that tends to be the new production homes, residential retrofit and a number of, actually, power plant locations.

In terms of the competitive pricing, that's all relative, right, and so outside of those markets they would tend to be more competitive from our vantage point.

Tim, we will be able to follow up with you as well.

So I am going to wrap up the call now.

Thank you all for joining us.

We had a solid quarter once again.

We beat our expectations.

We've given you guidance for Q3 and Q4, as well as 2008.

We are really confident in our strategy, that is to have a differentiated approach to distribution, to have market leading technology, and to drive 50% cost reductions over the next five years.

We look forward to our next earnings call with you.

Thank you very much.

That does conclude today's conference call.

Thank you, all, for participating.