SunPower Corporation (SPWR) 2008 Q1 法說會逐字稿

Good morning and welcome to SunPower's first quarter earnings release conference call.

Today's call is being recorded.

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

(OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr.

Tom Werner, CEO of SunPower.

Sir, you may begin.

Thank you for joining us today.

Today we will report on our first quarter 2008 financial results and update you on the progress of our strategy.

We will provide guidance for the second quarter and update our full year 2008 forecast.

First quarter was characterized by strong operational and financial performance.

We had increasing margins, a steady supply of silicon and the expansion of our global footprint.

Financially, our first quarter performance once again exceeded our top bottom line guidance.

Our Q1 2008 revenue was 273.7 million, up 92% year on year, with non-GAAP EPS rising at $0.39 per share.

Our system segment represented 65% of revenue.

Our component segment represented 35% of revenue.

In addition, as Manny will describe in detail, we are raising guidance for 2008 and confirming our outlook for 2009.

In the first quarter, SunPower continued to execute on our long-term strategy of brand, technology, cost, and people, which we internally used the pneumonic BTCP.

In the quarter we advanced our brand development and leveraged our vertical integration.

We supported this positioning with the best technology in the world while reducing costs consistent with our plan to drive costs down by 50% by 2012, and we recruited and retained the best people in the industry.

I will elaborate on how we successfully executed on these strategies in Q1.

Let me start with brand and channel.

We continue to see the benefits of getting closer to our customers through downstream integration, enabling us to drive superior customer experience.

SunPower offers differentiated high performance solutions across the key market segments built on our proprietary technology platform.

In residential retro fit, we provide the highest efficiency panels and best-in-class aesthetics.

In new home construction, we offer superior performance, aesthetics, and performance monitoring with our SunTile product.

In commercial, our T10 Roof Tile system improves energy capture by 10% and installs extremely quickly with no roof penetrations.

Lastly, in power plants, our T20 Tracking system delivers up to 30% more energy than conventional fixed tilt systems and dramatically reduces site labor and installation time.

Combining our technology, large scale systems expertise, and our growing global dealer channel, we can leverage the inherent scalability of our model, respond to rapid changes in market demand, reduce risks through geographic and segment diversification, and improve customer experience and build brand preference.

Let me elaborate with some market and channel highlights from Q1.

In Europe, we are leveraging our number one position in the United States as we launched our European dealer network and achieved rapid penetration in Germany, Spain, and Italy.

This is big news as it clearly demonstrates the scalability of our dealer network across global markets.

We grew on 50 over 50 dealers in three key markets by the end of the first quarter.

In Italy, our Solar Solutions acquisition, which completed in January, accelerated our market expansion where as in Germany and Spain we grew our dealer network organically.

Through one much these dealers we installed our first T10 commercial roof tile system in Europe, which is a non-penetrating and rapid installation solar system.

North America we continued to expand our residential and commercial dealer network while gaining momentum in commercial bar.

We now serve approximately 170 dealers in more than 25 states.

Turning to highlights across our other channels, new homes.

We see solid progress despite a very difficult market for new home builders.

Fact, according to a study performed by Ryness, soler is a key sales advantage for new production homes as evidenced by solar homes selling at approximately twice the sales velocity of non-solar homes.

And we have just signed two new agreements, an agreement with Woodside Homes for more than 1500 homes to be integrated with SunTile products in Sacramento, the second being Newell Land that just announced their Lennar community in southern California with a SunTile system as a standard feature.

In power plants we had another strong quarter.

In Spain we have more than 45 megawatts of systems under construction.

We are on schedule for commissioning in 2008, some of which is supported by our Spain T20 manufacturing facility.

In Italy, we are finding strong initial traction.

In the commercial segment, we continue our success with Macy's, where 14 stores were financed with MMA renewable ventures and we commissioned the first of our seven Wal-Mart systems.

Lastly, in other solar markets, we see solar is now penetrating markets beyond the top five.

We're starting to see traction in many diverse regions outside the United States.

We completed our first volume shipment to the Japanese market and we further penetrated the Korean market with component sales to Samsung, and we are gaining traction in other Western European countries like France, Belgium, Czechoslovakia and Greece.

Let me now move on to technology.

As you know, our channel and brand strategy is built on different technology.

Combination of our high proprietary, high performance solar technology and enhanced solar energy collection system provides us with a sustainable competitive advantage.

We are on track with our technology road map across our product lines.

We continue to ramp our Generation 2 solar cells which have a minimum efficiency of 22%, up to 50% greater than conventional technology, and we have started the development of our second generation automated panel manufacturing line.

We also completed our T20 manufacturing facility in Spain in support of more than 45 megawatts of power plant projects.

The T20 utilizes our proprietary tracking technology to deliver up to 30% more energy than a traditional fixed tilt system, and it includes several advancements from our Nellis design as well as customization for the European market.

Now let me cover our cost reduction strategy.

This is the third element of our overall strategy.

Our plan is to reduce installed systems costs by 50% by 2012.

We expect to accomplish two-thirds of this by 2010.

Our ultimate metric for success is levelized cost of energy measured in cents per kilowatt hour.

Levelized cost of energy is the total systems cost divided by the net present value of the energy produced over the life of the system, reducing levelized cost of energy, or LCOE, is what drives market elasticity over time.

So in terms of cost reduction, let me first cover silicon.

In general, we expect poly to remain tight this year and potentially into 2009.

At SunPower we have contracted polysilicon to support 100% of our capacity expansion plans.

In 2008, we forecast SunPower polysilicon costs to decline 10% as a result of delivery under our new contracts.

M.

Setek and DC Chemical production ramps are going well.

M.

Setek successfully performed their required maintenance in Q1 and all of their reactors are up and operating as planned.

DC Chemical was shipping according to schedule and specification.

More than half of our 2008 poly will be supplied by M.

Setek and DC Chemical.

Our other polysilicon partners' construction schedules are advancing as expected.

Within manufacturing, we are implementing a wide range of initiatives to improve installed systems cost.

For example, silicon usage improved to 6.3 grams per watt in Q1 due to higher conversion efficiency and thinner wafers.

Our transition from 165 micron wafers to 145 micron wafers is on track so that all lines will run on 145 micron wafers by year end 2008.

In our factory, we are getting economies of scale as we ramp our leading Gen 2 technology.

Finally, we are moving to a larger format panel which is reducing both our manufacturing costs and customer installation costs.

With the outbound channel of a solar system accounting for approximately 30 to 50% of the overall installed cost, we have a significant opportunity to leverage our vertical integration to drive down costs.

Examples include within our dealer network we are building infrastructure to support scaling of their businesses.

This scaling includes lead generation, logistics, warehousing, training, and financing.

In our systems business, we are moving labor out of the field by developing factory assembled designs, scaling our supply chain and logistics, and reducing our building materials through design improvements in our T20 Tracker.

We have accomplished these cost reductions while delivering systems that have superior energy collection characteristics, including the world's highest energy conversion panels with superior real world performance and unique low cost mounting and tracking systems where we collect up to 30% more solar energy.

Combining near-term cost reduction initiatives with modest ASP declines in the second half of 2008, drives our forecast whereby we will attain our 30-10-20 model, non-GAAP, by Q1 2009.

Finally, our team is growing to meet our growth plans.

We added approximately 250 people during the quarter, as our team is now approaching 3,700.

We continue to attract top quality people to our company and I want to thank them for their hard work in the first quarter of this year.

Let me end by spending a few minutes talking about market growth and dynamics.

Demand remains strong across mobile geographies.

Solar is now becoming a mainstream alternative in conventional electricity generation.

In California, Southern California Edison is seeking rate-based treatment of large scale deployment of distributed rooftop PV.

In Europe, we see robust demand in Germany and Spain, strong growth prospects in Italy this year.

In Asia, more opportunities are opening up as new leading regional players look to invest in solar.

Around the world, demand is emerging outside of established solar programs.

In policy-driven markets, political fundamentals continue to favor extended or expanded support for faster solar penetration.

Solar has proven to be a reliable, renewable resource of power with little downside risk.

Turning to supply, SunPower is positively positioned when silicon becomes more abundant.

We have been planning for significantly increased competition in abundant silicon supply for several years and we are positioned for success in this new market.

The industry will be driven by increased demand as solutions become more economic.

Companies that are successful in driving costs down faster than ASPs while delivering superior customer solutions will succeed.

SunPower's model is designed to achieve and maintain margins as the market evolves, so we are all -- we are well positioned for long-term growth.

In summary, we continue to execute on our strategy of BTCP which is brand, technology, cost and people.

I would like to turn the call over to Manny Hernandez, who will report details of our 2008 Q1 results and provide initial guidance for Q2 2008, update our previous guidance for fiscal year 2008 and confirm our preliminary 2009 revenue growth.

Manny.

Thanks, Tom.

Good morning, everyone, and thank you for joining the SunPower earnings conference for the first quarter of 2008 which ended March 30.

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

Please consider the 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 in our SEC filings for a more detailed discussion of those risks.

Also, please note that we have posted a supplemental data sheet related to our historical performance on the events and presentations page of our Investor Relations website, so please visit there and get more information if you wish.

Let me now give you a summary of our 2008 first quarter financial results for the combined company and our segments.

We had a great quarter.

Total SunPower revenue for the 2008 first quarter was 273.7 million, exceeding our guidance of 230 to 250 million.

That's up 22% from the prior quarter revenue of 224.3 and up 92% from the year-ago quarter revenue of 142.3 million.

The first quarter's performance was aided by continued strength in demand in both our component and segment, systems segment as well as all our channels.

This was a great start for us in 2008 and also marks our first quarter at a billion dollar annual revenue run rate since going public ten quarters ago.

Our component segment accounted for 94.9 million of our first quarter revenue, exceeding our guidance of 75 to 77.5 million, representing a 6% decline from the prior quarter revenue of 100.4 million as we allocated more SunPower panels to our systems project.

Our systems segment accounted for 178.9 million of the quarter's revenue, also exceeding our guidance of 155 to 172.5 million, representing a 44% increase from the prior quarter revenue of 123.9 million.

Our systems segment represented approximately 65% of the company's total revenue in Q1 versus approximately 55% in the prior quarter.

Please note that the ultimate sale of a SunPower manufactured panel, which are allocated by the company to the systems segment, is reflected as revenue of the system segment.

In the 2008 first quarter, approximately 38% of panels installed in our systems project were SunPower manufactured solar panels.

We expect this allocation to grow to approximately 50% plus for the duration of 2008.

Now let's cover earnings.

On a GAAP basis, SunPower reported operating income of 14.8 million and a diluted net income per share of $0.15.

These figures include non-cash charges for amortization of purchase accounting intangibles of 4.3 million and non-cash stock-based compensation expenses of 14.5 million.

Also included in our first quarter GAAP results is a 2.2 million non-cash, one-time asset impairment charge relating to the discontinuation of our imaging detector business and a 3.3 million charge for the write-off of certain solar manufacturing equipment which has been obsoleted by a new process.

On a non-GAAP basis, adjusted to exclude non-cash charges for amortization of intangible assets, tax-based compensation as impairment and equipment write-off, SunPower reported a total operating income of 39.1 million and a diluted net income of $0.39 per share, exceeding our guidance of $0.33 to $0.36 per share.

This compares with the prior quarter's operating income of 32.4 million and a $0.39 diluted net income per share, or a $0.32 per share on a tax normalized basis.

The company's overall GAAP gross margin for the first quarter was 19.5% whereas our non-GAAP gross margin was 24%, which was within our guidance.

And this margin was influenced by our systems segment accounting for 65% of the quarter's revenue.

This compares with last quarter's non-GAAP gross margin of 25.3%, which was aided by a higher mix of high margin sales from our systems segment.

In the first quarter, our systems segment posted non-GAAP gross margin of 23.3% which was within our guidance of 23 to 24%, while our component segment posted gross margin of 25.4%, a 200-basis point sequential improvement from the prior quarter but lower than our guidance.

Our component segment gross margin benefited from higher volume and modestly higher average selling prices in the quarter.

The increase in component gross margin, however, was tempered by stable silicon costs rather than our expected slightly declining silicon costs as we secured incremental silicon supply to improve our factory linearity in the first and second quarters of the year.

I'll talk more about this later, but looking forward to the second quarter we expect our first meaningful reduction in average silicon costs which will contribute our estimated 510 to 610 basis point improvement in our component segments gross margin.

I would now like to go to the balance sheet and highlight a few points.

We ended the first quarter with cash, including short and long-term investments and restricted cash of approximately $357 million.

This includes approximately 39 million of auction rate securities, which I'll discuss more later.

Our DSO was in line, actually improved slightly to 52 days, while our net inventory ended at 82 days, up 8% from the prior quarter.

The growth in inventory days 3% are slightly higher silicon inventory, but more notably our staging of inventory for our big Spanish large-scale projects that have significant planned revenue in the second quarter.

Our total capital expenditure for the quarter was 51 million as we continue to estimate total CapEx for the year at the same range, 250 to 300 million, as we've disclosed before.

Depreciation for the quarter was ten million and we estimate full year's depreciation at approximately 52 million.

Now, at the last earnings call I took some time to walk you through certain elements of our working capital, specifically those accounts that are relevant in the construction or project-based business such as cost in excess of billings, or you might think of it as unbilled receivables, as well as billings in excess of costs, or you may think of them as unearned revenue.

You will note in our balance sheet that came with the press release that this account had significant changes, costs in excess of billings increased by 23 million and billings in excess of costs decreased by 42 million.

The changes essentially represent an increase in working capital in the quarter and this primarily relates to timing of billings on our significant European project which have significant revenue planned for the second quarter.

A significant portion of these receivables have already been billed right after the quarter ended.

As I noted in the last earnings call, these accounts will be influenced by the size and type of projects that we undertake as well as the project billing milestones and other contractual terms that we enter into, as well as the timing of when we end our quarters.

Further on the balance sheet, in the fourth quarter of 2007 we reclassified our 425 million of convertible debt to current liabilities because they hit the stock price trigger that made them convertible in the first quarter of 2008.

Incidentally, none of those bonds were converted during the quarter and given the recent trading price range of our stock, this convertible debentures are no longer convertible during the second quarter, so they have once again been reclassified to long-term debt.

We will continue to make this determination every quarter and advise our bond holders accordingly.

Lastly, on the balance sheet, as we have highlighted in our recently filed 10-K, SunPower has approximately 39 million of auction rate student loan-type securities, that's out of our total cash of 357 million.

Due to the current lack of liquidity of this investment, despite there being high quality AAA federal government backed, we recorded an unrealized valuation allowance, like most companies have done, of approximately 1.4 million in the quarter and charged that to what you call other comprehensive income.

That's in the equity section of our balance sheet.

Therefore, it was not a P&L impact.

We will periodically assess the liquidity of the securities and make the appropriate adjustments as we go through time.

Now, let me talk about guidance but, before that, let me read through, as we do every quarter, that our business results may reflect quarterly shifts in mix between systems and component segment revenue.

Also from quarter to quarter we expect shifts even within the system segment due to size and type of projects and percent completion factors that could lead to non-sequential or marginal growth in revenue margins or earnings.

Our margin mix between segments can also be influenced by the allocation of SunPower manufactured panels through the systems segment.

As we progress towards 2008, these factors will continue.

So following our guidance for the 2008 second quarter, revenue of approximately 330 to 350 million, comprised of component segment revenue of 95 to 100 million and systems segment revenue of 235 to 250 million.

You will note that at the high end of this guidance, that our systems segment is projected to be approximately 70% of the company's revenue in the second quarter and quite interestingly, actually could register its first $1 billion annual run rate as a segment.

Gross margin for 2008 second quarter is estimated to average 23 to 24%, heavily influenced by the systems segment mix in the quarter.

Component segments gross margin, we're guiding to 30.5 to 31.5%.

That's a 510 to 610-basis point improvement from Q1 benefiting from increased manufacturing volume, continued cost reduction in yield improvements, as well as our expected first meaningful reduction in average silicon costs.

Systems segment gross margin we're guiding to 20 to 21%, heavily influenced by large scale-type project in Europe and that also contains the continued use of third party product.

Non-GAAP EPS for 2008 second quarter is estimated at $0.48 to $0.52 per share.

For the fiscal year 2008, we are raising our guidance for our non-GAAP results as follows: Revenue of approximately 1.3 to 1.375 billion, estimated to be comprised of component segment revenue of 490 to 510 million, and systems segment revenue of 810 to 865 million.

Total company average gross margin for the year is estimated to average 26 to 27% comprised of component segment gross margin of 34 to 35% and systems segment gross margin of 21 to 22%.

Just a couple of notes here on the systems segment, we've demonstrated improving margins in the segment and we expect continued improvements in 2009 and I think the most important thing to note is management is managing the mix of the segment that we achieved our model of 30-10-20.

That is 30% gross margin no later than the first quarter of 2009.

Non-GAAP EPS for 2008 is also being increased now to $2.10 to $2.20 per share, and please note that the estimated tax rate for 2008 remains at 24 to 25% non-GAAP.

Just an additional note for 2008, though we have only provided you detailed guidance for the second quarter, we would like to give you some early directional guidance that our third quarter revenue in 2008 will likely be flat with that of the second quarter.

You will note that our guidance will point you to continued growth in the second half of the fiscal year, but did not want you to assume linear growth between the quarters.

Now, lastly, we would like to reiterate rough and early guidance for 2009.

We continue to expect to grow our revenue at least 40% of the now-increased 2008 guidance, or at the rate higher than projected for the industry.

We also expect our earnings to grow at this rate or slightly higher.

Just a last point of guidance for completeness on average selling prices, we expect stable ASPs in the second quarter of 2008, expect low single-digit declines in ASPs in the second half of this year and, as we said before, expect low double-digit decline in ASPs in 2009.

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

Thank you, Manny.

I'll open the call to questions now.

First, let me introduce who is with me.

We have Howard Wenger, our Senior VP of Global Business Units; Peter Aschenbrenner, our VP of Corporate Strategy; Julie Blunden, our VP of Public Policy and Corporate Communications; Mike Armsby, our VP of Finance, and Bob Okunski, our new Senior Director of Investor Relations.

So we'll proceed to questions now.

We do have quite a few people on the call, quite a few people in queue to ask questions.

So if I could ask you to ask one question and a follow-up, and if there's more, I would ask you to re-enter the queue, please.

Michelle, you can take questions now.

(OPERATOR INSTRUCTIONS) [Mark Keller], you may ask your question, and please state your company name.

We'll go to the next question.

[Jesse Patel], you may ask your question.

Please state your company name.

Yes, good afternoon.

Congratulations on the strong results from Power Light.

Last quarter you wanted to sell 50% of your SunPower modules through Power Light.

Did that come up short?

And why?

So I'll turn -- [Jesse] this, is Tom.

I'll turn that over to Manny.

Remember, recall our system segment SunPower systems, if you could help us brand that.

Sure.

Manny.

Hi, Jesse.

It didn't fall short.

Our stated plan for allocating products to our systems group we characterized as about 30% in '07, increasing to 50% in '08, and eventually 70 or better in the following year.

So we are essentially in transition to that mold, [Jesse].

For the quarter, 38% of systems used SunPower products and we expect that to increase again in the second quarter as planned.

And my follow-up would be you expect DCC and M.

Setek to contribute roughly half of your '08 requirements and I would like to know what percentage do these suppliers contribute to Q1 and what are they expected to contribute as a percentage of your total for Q2?

[Jesse], it's going to require me to do a little digging into my worksheets here, so I'll answer that, but it's going to take me a couple minutes.

So we'll go to the next question and then I'll answer it.

I'm just trying to get a sense on -- doesn't have to be exact.

I understand that -- numbers with me--

Okay, great.

Thank you.

Just give me a minute.

-- third?

-- yes, please.

There's been some noise in the industry about some talent loss within the systems business.

Could you please comment if that's true?

Yes.

Noise is appropriate characterization.

There's no talent loss to my knowledge and, in fact, we've added dramatically to the systems business in Q1.

So none.

Great.

Next question, please.

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

Thank you.

Steve O'Rourke from Deutsche Bank.

You kind of give some preliminary guidance on Q3 on revenue and obviously revenue growth slows in second half '08.

Can you help us understand how you see the market dynamic evolving in second half '08, what the regional drivers are?

Sure.

I'm going to ask Howard Wenger to take that question, Steve.

The demand continues to be very strong.

We have really strong demand fundamentals throughout our business across all of our channels and geographies and we expect to have a very strong finish to the year in the second half of 2008.

Can you comment just a little bit on what you see?

I mean what's driving the slowdown, shall we say, in growth in Q3?

What's going on in Spain, for example?

So we are -- from quarter to quarter, we have a shifting mix between our systems business and components business and you might recall in last year in Q3 we had a very strong systems contribution to our overall revenue.

We're seeing that again in Q1 and projecting that for Q2, and I think you can continue to see that pattern of strength in one channel versus another channel.

For example, in Q4 of this year you'll see the systems channel again pulling perhaps more of the load relative to our components.

So it's something that depends on the cycle of our projects and has nothing to do with the overall fundamentals for demand.

And, Steve, I would just add that realize that we have beat Q1 and raised the year, so we are offering a favorable picture and the way we guide, because we're vertically integrated and we have visibility to our customer demand, we guide what I would say is consistent with what we have clear visibility to, which is relative to some other people might be a bit conservative.

And then let me answer [Jesse's] question.

[Jesse], I'll just give you the number.

The number's approximately 50 metric tons increased Q2 on Q1 from those new suppliers rather than work percentages.

Go to the next question, please.

Can I just -- sorry, Michelle.

Steve, sorry, I just it wouldn't make sure that we have characterized the second half correctly.

Second half is actually based on our guidance projected to grow or be bigger than the first half.

At the lower end of our guidance, the second half is at least 12% bigger, but at the higher end of our guidance is 24% bigger.

So I just want to make sure that we don't conclude that the second half is slowing down.

No, understand full well.

Just the growth seems to slow a bit and there's obviously concerns in places like Spain, when you think about feed and tariff reductions and wondering if you're seeing that kind of an impact.

That's all.

Okay, thanks.

Yes, no, I would say, Steve, to close that we have very strong visibility and we have no -- there's no signal here of caution in Spain.

Thank you.

Next question, please.

Thank you.

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

Yes, hey, guys, thanks for taking my call.

Now that we got the second half of '08 sort of out of the way, I was wondering if you could comment on the visibility out into 2009 since you gave pretty strong guidance there?

What percentage of that revenue guidance you have under contract now and what the geographic mix might look like.

Do you want ASPs as well?

Sure, why not.

It's Tom Werner.

Let me start by just giving you an overview.

So, again, why our vertical integration strategy, of course we touch customers and work directly with those that are using the product.

So we have a very good sense of the dynamics both for '08 and '09.

As I said, sort of the macroenvironment is very favorable towards policy extension.

That hasn't necessarily happened definitively yet in all markets and perhaps we'll talk about that more later throughout this call.

But our customers reflect that optimism.

So our engagement with our customers is what leads us to the guidance that we gave which we see is very solid positioning or very solid sense of the future.

So I would give you that as a preamble.

And Howard, I don't know if you want to add any detail.

I would only add that we've been very practically building demand on a multi-year basis now for some time and that's paying off.

In addition to -- the vertical integration's giving us the visibility, as Tom mentioned, and we're seeing some new emerging markets and some new emerging sectors, such as very large scale systems, coming into play that's helping us have increased visibility and confidence as we go into 2009 and beyond.

Okay.

Unless there's a follow-on, if we could keep going.

Next question comes from Kelly Dougherty.

You may go ahead and please state your company.

Thanks.

Calyon Securities.

Congratulations guys.

I just wanted to know, I mean we are all aware of this large utility project that was just announced and I won't necessarily ask you if you were a part of it, but feel free to share with us.

I'm wondering if that's what you see with the U.S.

market going forward if that's more the norm, kind of huge projects with multiple suppliers or are things more on the size of Nellis or even smaller than that, what you expect going forward.

This is Howard.

We see a continued strong demand in the U.S.

in all segments.

As you know, we're the leader in the residential segment, as well as the commercial large scale in the U.S., and we're seeing fundamental demand across all segments as to the emerging piece.

That is something that we're very well positioned for.

We're working on talking about the large scale, very large scale systems working with utilities and energy providers and with our technology and our tracking systems, we're very well positioned to take advantage of that.

I appreciate that, but I guess my question more is do you expect these orders of magnitude larger projects to be what's happening going forward that are likely going to use multiple suppliers or do you think that most utilities are looking to do things on a much smaller scale?

Yes, this is Tom.

I would just briefly comment and I would say that the utility on the way that the utilities are going to evolve in this space is unclear and each of them have a different approach.

I will say that the significant utilities are extremely active in sorting out how they might go about deploying PV.

It's important to note that no utility to my knowledge is actually done EPC of PV projects nor is it their core strength.

So a company like SunPower is a nice complement to whatever approach each of these take.

And more to the core of your question, on their, the RPSs that the utilities have are real and are driving lots of opportunity.

So is there a trend?

Not yet, but is there likely to be a trend?

We think so.

And do you get the impression people or utilities, I guess, are just assuming that the ITC will be expanded to cover them and working forward kind of proactively under that assumption?

This is Julie Blunden.

I think we can say definitively the utilities are actively engaged in helping to move the ITC forward.

The Edison Electric Institute is definitively behind both PTC and ITC extension, because of the reasons Tom pointed out, is not in the utility's best interest to miss their RPS goals.

In many states they get penalized financially to do so.

So it is very constructive to have EEI as engaged as they are right now in DC.

Great.

Thanks for the comments.

You bet.

Next question, Michelle.

Thank you.

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

Needham & Company.

Congratulations, Tom and Manny.

If you could comment on the ASP, second half low single digits and then 2009 low double digits.

So from what you see in the markets, what do you see as the main driver here?

Is it the lower feed in tariffs?

Is it the greater supply of silicon?

What is it that you see?

So we're going to -- I'm going to have Howard answer that question.

I mentioned just really quickly, this is Tom, by the way, mention really quickly that on -- we're probably a little different than most solar companies in our prediction or our preparation for single-digit decline in low double digits in '09.

Part of that is a phrase we sort of run the company by and that's only the paranoid survive and we think it's a good position to be in, that you're overprepared.

Having said that as a backdrop, Howard.

Yes.

I think it's very difficult to predict ASPs going way out into the future, but we are preparing for more abundance of silicon.

We're preparing for the need to reduce ASPs and with that we get higher demand and that's just part of our plan.

We've been wrong in the past, as you've seen.

We've been able to maintain or increase our ASPs in the last couple of quarters.

So we'll keep a sharp eye on that, but this is our best view at this time.

And I think, Pierre, when you look to '09, the short answer to your question is yes.

The structure of the significant incentives has declines built into them and some of them are driven by volume and not time.

So the short answer to your question is yes, it's incentive-driven, is the core of our thinking.

Okay, great.

Thanks.

Thank you.

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

Yes, thanks, from Credit Suisse.

Just wanted to get a clarification.

You mentioned earlier on that your '09 revenue guidance of 40% or more is more than what you think the market will grow, but if you look at the supply projections almost the growth of 80 to 100%, I guess in a sense what you disagree with more, the supply projections or do you think that your ASPs would be down less than what it might be for other companies?

Sure.

We're going to have Peter Aschenbrenner, our Vice President of Strategy take that question.

I think our view is that we're confident in being able to grow faster than the market as a whole.

Market growth has been a little bit difficult to predict in the past and it's based on demands at the end of the day, not supply.

So aside from the, how much polysilicon supply is coming on when, part of the debate.

We view market growth at the long-term historical rates of 40% as being a good baseline for us and we're confident in being able to grow faster than that.

Okay, and just a quick question on your Q1.

I thought you guys had a good quarter there with revenues coming in [$35] million above the midpoint of your guidance.

I recall back in January your revenue guidance was actually below consensus back then.

Given that you've had a significant upside to your guidance, I was wondering what surprised you in the quarter relative to your guidance that you had the upside in Q1?

Let me see if I can paraphrase and you can tell me if I got it right.

Your question is why did I guide 230 to 250 and then come in 35 ahead, what caused that?

Yes, it seems like Q1 was a bit below consensus to begin with and perhaps you had sufficient visibility to be a bit more aggressive or was there something that surprised you positively in the quarter?

Sure.

First -- this is Tom.

First I would say thank you to the project teams and the construction management teams.

They are executing very well and our projects in Spain are very much on track and they are doing a great job.

Secondly, as we've said on previous calls or consistent with previous calls, we plan our silicon based on the expected value of silicon.

In other words, probability weighted.

And in Q1 things came in favorable, in terms of our probability weighting, and we capitalized on that.

Awesome.

Thanks.

Thank you.

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

Hi, from Morgan Stanley.

Just a quick question back on the sort of second half of '08 question.

What you're basically doing is forecasting a fairly significant jump-up in Q4 and wondering if you could walk through some of the, a little bit more detail of the visibility you have, especially with the concerns our own recalling changes that may or may not happen towards of the end of the year.

You obviously got a lot of confidence as to what could happen at the back end of the year.

This is Howard.

So that's right, you got us spot-on.

We are very confident about the second half of the year and our Q4.

The ITC runs through 2008 and so any project that gets installed in 2008 benefits from that.

We also have Italy coming online as (inaudible) market (inaudible) of Spain and we have some projects there that are in the queue and so we have quite a bit of visibility going into the second half of the year and that's what's driving it.

Okay, thanks.

Thank you.

Next question, please.

Al Kaschalk, you may ask your question.

Please state your company name.

Wedbush Morgan.

Tom, just a follow-up on what everyone seems to be focusing on.

Is it fair to say your numbers or even the strength of the business is not dependent on success of policy in the U.S.

and that Europe, particularly a couple of markets just cited, are going to provide significant strength?

In other words, it seems like order patterns and customer opportunities remain very robust regardless if you take the market in whole and the U.S.

market is really just a small portion currently.

I was wondering if you could comment.

Yes, actually I would love to comment on that.

I think there's some really interesting things here.

If you look at SunPower's history of our regional mix of business, which is now posted so it's easy to look at, you can see that it moves around significantly.

We see that as an advantage.

We see our ability to move through markets as they grow as significant advantage for our company and it's demonstrated historically, as you look back on the regional mix, on -- and what we've talked about in our prepared comments was there are a lot of new markets.

Italy is one that everybody knows about, but a lot of other new markets that are becoming very important.

As you point out, some of those markets could catch up with you in the United States.

The other comment I would want to make is when you look at energy in general and you think about the probability of incentives staying positive for solar, there's sort of this macro setting that fossil fuel derived power is becoming more and more unstable and obviously more expensive, so there's an obvious preference or desire to move to renewables.

And when you look at renewable options, there are only a couple that have met their promise and we believe solar is one of those, and solar is providing a lot of jobs.

So, yes, I think that we can offset movements of ITC in the state, in the United States and feed in tariff changes in Spain by other countries, although having said that we expect those end up in a favorable way some time this year.

If I could, I'll just have Peter add to that.

Just to provide a little more granularity on some of the moving parts that might not be immediately visible at the surface.

With our three channels, the components of the solar cells and modules, our Var network, the dealer network and then the systems business, we have different cycles for the development of those channels in a given territory.

And what you see is that we're able to very quickly enter new markets with the components channel, test the waters, establish relationships.

When things appear to be going in the right direction, we move in with Var and now you're seeing in Europe -- replication of what we've done here in the U.S., so we have that strong infrastructure back office, internet portal to support that.

And then when we've hit a really solid market, which is characterized usually by what we consider long-term policy support, good sunlight, high electricity rates, we can go in with the systems channel and really mine the deep mother load there, which we're doing now in Spain and starting to do in Italy and I think we're confident in doing in North America over time as the policy environment clarifies itself.

Would it be fair to say you did not expect a drop in backlog even though you don't talk about that in terms of what you're seeing in the U.S.

because the market, demanding markets remain very robust?

Yes, if you mean dropping backlog generally speaking rather than regionally speaking, yes, is the answer to your question.

We do not expect a drop in backlog.

Thank you.

Thank you.

Stuart Bush, you may ask your question.

Please state your company name.

Yes, RBC Capital Markets.

Tom, you mentioned that poly could "potentially be tight" in 2009.

Which are you more concerned about, the incremental supply expected or risk to projected demand levels on a relative basis?

When you say incremental supply, do you mean for SunPower or for the industry?

For the industry.

It's interesting that supply of solar can, in an odd way, the longer it takes for silicon to come online is actually an advantage for SunPower because our partners are delivering and we have a great relationship and they are doing an awesome job, so it's become a competitive advantage.

So to the extent that silicon is short for a longer period of time, it's actually a positive.

And the demand environment also, as I alluded to in previous answer, seems favorable.

Of the two, I would say I would have to pick demand again because we're paranoid, but both look good right now.

Okay, great.

And then you talk about flexibility in your business model with the margin offsets downstream.

Can you talk a little bit more in detail about how it works when panel prices decline in the market?

Wouldn't the system prices come down, too, or how do you see that margin expansion work on the systems side if in areas where tariff levels dictate what the IRR is on return?

So I think I'll make a couple points and Howard or Peter may want to add on.

On our channel strategy, whereby we have a components channel and we have the Var channel and systems channel allows us to enter markets in either one or all three of those, and as Peter alluded to, sometimes we enter our market with the components channel to supply that market and understand the dynamics more clearly, and then we can bring in the other two channels.

Now, in terms of if panel pricing goes down, wouldn't systems pricing follow?

What our customers look at is the price per -- the end economics that they are looking at for the economics part of the decision is cost per kilowatt hour, cents per kilowatt hour, and of course as a company we forecast what we think the pricing will do and then we drive the cents per kilowatt hour equation, which obviously means cost reduction, which is silicon conversion efficiency, downstream channel costs, and then we drive the energy delivery up, which is the T10, T20 products that we talked to in our prepared comments, and the combination of the two obviously Var is cents per kilowatt hour so we drive that faster than the expected decline in modules.

So it's a long-winded yes that module prices come down.

There is a direct correlation to systems pricing coming down.

We've obviously built that in and are driving our cost road map more aggressive than we expect that to happen.

Having said all of that, let me ask Peter to just add a couple comments.

I'll be quick.

Stuart, our view, the system prices are set by tariff levels or investor returns, the absence of tariffs or in addition to them and some of the other structural financial and weather issues within a territory.

Module margins are really set by, or the distribution of margin within the value chain that is affected by the demand/supply balance.

So to the first part, those things are independent.

Over time we would expect system prices to be driven by the overall price elasticity curve fluid the product.

So over time that will come down and the markets get very large very quickly when that happens.

In the near term it, the distribution of margin in the current value chain can change and the advantage we have as a company is we can pick that up in either spot.

We can pick that up in upstream spot, through module sales.

We can pick it up downstream through our systems channel.

Excellent.

Very helpful, thanks.

Thank you.

Mark Bachman, you may ask your question and please state your company name.

Pacific Crest.

Tom, you had commented 2009 you said that your customers are optimistically looking forward.

I guess I want to get a sense of conviction level here.

Maybe this is a better question for Howard.

But, Howard, have you signed any contracts for any major projects in Spain with completion dates past the September tariff cutoff?

And then, likewise, have you signed any major contracts in the U.S.

with completion dates in 2009?

And if you could be specific and maybe answer or quantify your answer in terms of megawatts it would be really helpful.

Well, Tom will substitute for Howard at the beginning at least.

The answer to your question is none that we have announced.

Obviously the nature of my comments indicate that people we do business with don't think there's some kind of step function at the end of this year that they are preparing for continuity of business levels and that they are aggressively pursuing continuity.

Now, that's not to say that there's an assumption of what will happen in some of the ambiguous parts of the world, but other than they are assuming that it will work out within a certain range, and so the positive indications we're getting obviously is direct interface with those customers.

I don't know if you want to add anything.

No.

So we're not prepared to announce anything yet, Mark.

Tom, do you get the sense, though, that cash flows are important in this industry, are your customers waiting to sign those contracts until the cash flows are guaranteed or are they -- do you -- if you have signed any contracts, did you have to change them at all to offer opt-out clauses or cancellation clauses or anything to get them to start booking into after some of these subsidies may or may not last?

Okay.

Maybe to the chagrin of the team in the room, I will answer that question.

In the markets other than Spain and the United States, no.

And there is business in 2009, absolutely, and then in those two markets absolutely that is dealt with between us and the customer, what might happen with feed and tariff or ITC, it is built into the structure of the relationship, yes.

Okay, and then just one question for Manny.

Manny, can you explain your use of restricted cash on the balance sheet and how we should think about that in terms of using these funds for capital needs?

I'm assuming here these are all, all these restricted funds are tied to your long-term poly contracts, is that correct?

Not really.

It's a different class of cash all together.

The restricted cash on our books totals 161 as of the end of March.

38 of that was auction rate securities that we already talked about.

So the balance really represents predominantly letters of credit coverage for projects that we do.

Ironically, they also move around quarter to quarter depending on project completion.

For instance, we already reduced or decreased a restricted cash by 60 million just last week, so the balance is already too high, for example.

But just to complete, there are certain projects, Mark, where we have to post letters of credit to guarantee completion of projects and then those LCs get released on completion.

So we mark cash against those LCs so that we don't have to pay a lot for it, and it's actually quite economical seeing we have the cash anyway.

Those are predominantly what we have in restricted cash.

If I move those cash out of your available cash then and I forecast out your balance sheet and what I think your cash flows are going to be, I actually seeing you needing to revisit the market here in early 2009.

Do you see -- do you foresee any need for you to visit the capital markets to shore up your balance sheet?

Not from our current outlook, Mark.

We are projected -- the current burn on working capital, for example, that we've seen in the second quarter also changes from quarter to quarter.

For example, we were negative cash flow in Q1 by $65 million, predominantly because of that growth in inventory and unbilled receivables, but we see that flexing to positive immediately in Q2 as we collect those monies.

So our long-term outlook from a free cash flow positive is actually from our modeling going to hit as early as Q3 '08, we're going to be generating enough from cash flow operations to actually fund capital expenditures for that quarter.

However, as we again undertake large projects in Q4, like one of the questioners was alluding to earlier, we're going shift capital again to fund those projects.

So I think from a sustainable free cash flow positive position, we're probably looking at '09.

To your question of do we need to get back to the market?

We don't think so.

We have enough cash from operations and even taking into consideration the restricted cash balance, we have enough to fund our CapEx for the year.

Thank you so much.

Thank you.

(inaudible) you may ask your question and please state your company name.

It's Pearce Hammond from Simmons.

Just following up on the prior question.

Manny, you're saying operating cash flow for Q1 was minus 65 million?

That's correct, minus 65 million.

Two drivers to that, increase in inventory 48 million, increase in unbilled receivables 23 million.

And then you were saying you expect that to reverse in Q2?

Positive $30 to $35 million as we modeled it today.

Great.

Then my second question, how does SunPower preserve its competitive advantage in the downstream market in light of more midstream players integrating further in the chain?

Do you see pursue acquisitions or do you look to grow organically?

This is Tom.

I suspect Peter will want to add on to the answer.

The answer to your question is both.

What acquisitions does for us is it accelerates our footprint.

I suppose it's kind of obvious, but to the degree we do that effectively it really accelerates our footprint.

We think we're going to be able to accomplish that as a really good example.

The competitive advantage in the outbound channel is very much sustainable because it includes elements of design and very large scale projects as well as a strong balance sheet, and so there's a number of variables that you're able to differentiate on and you can think of many industries where the outbound channel has very sustainable differentiation, particularly when there's an engineering content involved and the examples we've been giving in the last couple calls are our T10 products and are T20 products.

It's important to note that the T20 product is significantly customized for Europe, so it's really a substantial engineering job to take two access tracking around the world.

So the ability to do that is long-term sustainable in my view and, therefore, we're going to continue to invest in that.

Peter, Howard, anything you want to add?

I would just like to point out that there are, we believe, significant scale advantages in the downstream business that might not be immediately apparent and so the ability to serve multiple lower markets out of a single back office, for instance, that has significant scale, the ability to negotiate with financing partners for financing programs, et cetera, these are things that I think some of the emerging mid tier players are not going to enjoy to the same extent.

Great, thank you very much.

Thank you, and our next question comes from Colin Rusch.

You may go ahead, and please state your company name.

Colin Rusch from Broadpoint Capital.

Manny, I'm wondering if you can give us a little bit guidance how you're using -- how your foreign exchange assumptions are changing over the course of 2008 and giving guidance, are you increasing your ratio of the dollars to Euro?

And how much is that affecting your guidance?

Hi, Colin.

We have a hedging policy in the company we follow quite rigorously and it is essentially math-driven, that way we don't have to guess and speculate.

We try to cover our Euro exposure in the current quarter up to 80 to 90% of the exposure and a little bit less than that for the second quarter.

So although there's some benefit or a little bit of hit sometimes in the quarter, they're relatively not significant because of our hedging coverage.

Great.

So the increase in guidance isn't due to foreign exchange assumption changes is the basic conclusion?

Right.

We generally follow where the exposure is.

We make our decision every quarter as to how much of that is covered.

So think about it, if you're at least 90% covered in your exposure, the only flex is really the remaining 10% and that could go either way.

Great.

And then one quick question on pricing in California.

I'm thinking of some anecdotal data points that module sales are actually, prices are coming down about 5% and modules are on the market for down kind of mid single digits.

Are you guys seeing that at all in your pricing scheme?

This is Howard.

We're not seeing that for us and that's probably attributed to the strength of our dealer network and the differentiation of our product in the market.

If I can squeeze one quick final one in, as you enter non-subsidized OECD markets, could you talk a little bit about that process?

Will you go in likely with an installation scheme or strategy or are you looking to produce modules and geographies similar to the Brazilian market or some of the module system sales that we're seeing in India?

Yes, this is Tom.

That was four questions, so I'm going to give you a really quick one.

We got to move on.

Quick answer to that, our channel strategy allows us to enter new markets as you alluded to with our, what we call our components group where we would sell as the title implies, components to dealers.

Then as we understand the market, we would perhaps bring in other channels.

In terms of module manufacturing, it continues to be our strategy to automate module manufacturing and to eventually do that in region and of course that would be driven by the size of the market.

We should go to the next question.

I will tell the people in queue we'll do our best to get to your questions.

We are going to stay here until close to 12:00.

I apologize for those of you that don't want us to, and let's -- we'll do the best we can here.

Thank you.

Our next question comes from Michael Molnar.

Please state your company name.

Hello.

Goldman Sachs.

Hello, everyone.

Hi.

Just a quick question.

Question on the margins and the systems business, the guidance for 2Q I believe is around 20, 21% and the 30% target for 1Q '09 consolidated implies these margins will be expanding dramatically.

Is that the right way to think about the margins in this segment?

If so, can you give some additional details on how this will be achieved?

Hi, Michael, it's Manny.

To the first question of Q1 '09 achieving 30% for the company what profile should the system margin be, you're correct.

That 20 to 21% current projection for Q2 will improve to more like mid-20s by then.

How we get to 30% as a company, however, is the component segment will exceed 30% by then and that's how we're managing the company to get the model as we've committed or targeted.

Okay.

Can you give some color on how you're going to expand?

Is it just the nature of some of the projects that are in the systems business?

Oh, sure, sorry.

Second piece, how do we expand it?

Two things, one much like the component and factory piece where we have cost reduction initiatives.

That, too, is being done on the system side..

As you heard Tom talk, we have different products there, T10s, T20s.

Those are all opportunities for cost reduction as well, but one of the movers of the margin needle is the allocation, allocation of more SunPower product to the systems group which is really the power of what we call margin stacking and that's what drives most of the margin improvement.

But I'm not minimizing the cost reduction that our folks are doing to the systems product itself.

Okay, thank you.

Mark Manley, you may ask your question.

Please state your company name.

Hi.

With Natixis.

Just wanted to focus a little on production.

How many lines are fully ramped at the moment?

Currently we have seven lines that have been ramped, and as you'll see on the data sheet that's now available on our website, we have a little chart that conveniently answers the questions we get every quarter.

We'll be ramping line eight in Q2, two more lines in Q3, and in the final two lines of the year in Q4.

So that indicates fully ramping, that little table?

Those are the -- thanks for looking at the table.

Those are when they do ramp and generally it takes about a quarter to ramp.

We identify name plates, so when they begin ramp it's conceivable that during the course of the year they will start earlier or later, so you have to be careful in assuming a reasonable estimate for average utilization during the quarter.

And Tom was commenting earlier to Satya's question.

It sounded like silicon supply was a limiting constrain on production.

Did I get that right or--

On -- so it's a little complicated, in the terribly, but we try to match equipment capacity to our expected silicone and as I mentioned earlier, our expected silicon is a probability-weighted amount.

To the extent that supplies exceed what we have expected, then we're no longer silicon constrained for short periods of time.

Our operations team has shown a great ability to find now ways to get capacity outlined.

We're in a period of time where it ebbs and flows.

Sometimes it's the equipment capacity and sometimes it's silicon.

And are you at above name plate on some of the lines?

Name plate output versus the 40 megawatt let's say on the new line.

I would say to you that as we go to thinner wafers, higher conversion efficiency you do get on the median efficiency of a line may run better and then of course you try to replicate that across lines, it's probably early to indicate that, well, it is early to indicate that we're able to exceed any name plate capacities.

Have we done that on a spot basis on one line for a short period of time, the answer is yes.

Okay.

Thanks very much.

Thank you.

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

Cowen and Company.

Two-part question.

One, if you could just comment on your production internally in Q1, how many megawatts, and arrange on that for Q2, and then based on the stock price there seems to be great concern about the flattish nature of Q3.

Could you comment on how the mix of internal transfer of panels from components to systems might also be influencing what looks like a flattish total revenue?

Thanks.

Rob, let me take the first question.

Production capacity for the first quarter of '08 was 38.5 megawatts.

That's a 20% growth from the prior quarter.

We do not disclose our production for the second, for the next quarter.

You could assume pretty much significant growth again.

And then in terms of flattish Q3, we almost want to as a company start guiding perhaps because that's in fact the way the projects business runs.

In can't, one could argue even three quarters of a year projects span multiple quarters so to overreact on one quarter versus another doesn't really give you any fundamental signal into the core business.

You almost have to take the average of the two and you see very positive signals, in terms of the average of the two.

Now let me comment on margin because I think you may have alluded to that.

The bottom line is, the company, we are guiding to attain model for the entire company 30-10-20 by Q1 of 2009.

That's the bottom line.

As you break that down, you have to be very careful of overreacting to breaking that down because you have margins that vary by size of project, by region, by degree of third party utilization of third party, and sometimes by which product we choose to use in the field and that's offset.

Obviously we're looking at the complete set of products and regions and not one at a time.

So the bottom line is Q1 '09 model, and you're going to see variation between quarters and we would ask you not to overreact to that.

It's a multi quarter business we have.

I agree with you completely.

I think the market is going off half-cocked.

My question about the mix wasn't so much about margins, but the fact that when you transfer more panels internally to SunPower systems, that causes the total revenue to be less than if the systems were integrated with third party panels, but it actually has a beneficial margin stacking effect.

So I was just wondering if the increasing mix of internally supplied panels is also influencing the Q3 total revenue.

I see.

The answer to your question is kind of a combination of quarters.

It is hard to make a fine split Q2 to Q3, but broadly speaking across those quarters, the answer is clearly yes.

And that's exactly what you said in allocation of SunPower product, so yes.

Thanks very much.

Thank you.

(inaudible), you may ask your question and please state your company name.

Yes, thanks.

Lehman Brothers.

Firstly on margins, I think the guidance for full year 2008 component margins 34 to 35%, I think there's some confusion as I think in last quarter you had mentioned 36.5% gross margins.

So the reduction, would it be just because of the first quarter lower margins or would it be more than that?

It's Manny.

It's essentially that.

If you just modeled based on Q1 actual, the profile for the rest of the year shouldn't have really changed dramatically for the component group.

It will still exit at a very nice margin in Q4.

Great, thank you.

And secondly in terms of your growth rate for 2009, you mentioned 40% plus.

Can you just comment on what kind of growth rate you expect for your revenues from the U.S.

and Spanish markets combined?

Well, this is Howard.

The way we look at -- yes, I'll comment to that.

We have in our plan both a favorable or rational resolution of the feed and tariff in Spain.

We also have in our plan we do expect the ITC to pass.

However, we have run scenario analysis.

We have built in options into our plan and if either of those don't go the way everybody wants to, we're strong on our guidance and nothing is going to change.

We have options.

So the specific split depends on what happens and so we're prepared to move business and then if everything came out positive obviously, then obviously you have a capacity challenge.

Great, thank you very much.

I should tell everyone that we have less than 8 minutes left.

We will honor that time.

I apologize to those questions we don't get to.

We at SunPower do follow-up calls all day today and tomorrow, so most of you in queue we're going to be talking to on the phone.

So if we don't get to you, I apologize.

Next question.

Thank you.

Jeff Osborne, you may go ahead, and please state your company name.

Just wanted to foul up on Howard's question, or Howard's response to previous question about visibility over multi years with your strategy and I think in the annual report last year you talked about visibility or backlog of 521 million in the systems business.

Can you just talk about how much backlog you've built for 2009, how much visibility you have for that 40% growth because I think at that time only about 10, 11 million was flowing in for 2009.

We don't speak to backlog on a quarterly basis, annual basis.

I will tell you that the demand fundamentals and the number of opportunities is extreme and we are working 24/7 on the emerging markets that are coming online on the existing markets and in growing our core business as well as the emerging business.

Okay.

If you can't answer that one, can you just give us an update on Italy, what your expectations there for megawatts for the country as a whole for this year?

You seem pretty excited about the back half of the year.

Yes, this is Tom.

Let me just characterize this.

We were actually resourced constrained on dealing with our sales funnel for both '08 and '09.

We can't add resources fast enough to deal with the incoming opportunities.

And Italy is, it's early days yet.

We only closed the acquisition 60 days ago, but it was a very solid Q1 and in terms of, Howard I think characterized Italy as having the growth potential of more than Spain, so hopefully that helps you calibrate some perhaps a year or two behind Spain.

Very good, thank you.

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

Signal Hill Group.

Good morning, ladies and gentlemen.

Tom or Howard, if you could address this question.

How late do you think the ITC can be finally resolved here in the U.S.

before we start to see any adverse influences on the large deal pipeline that require tax equity that's going to look for certainty on the ITC existence?

I'll just broadly say something and then Howard or Julie may want to add on.

We operate under one of the laws of thermodynamics, necessity is the mother of invention, so that lead time it takes to put projects in is getting shorter and normally, or I should say normally, traditionally we would have said 6 months lead time.

I think we're able to cause that to happen faster, so you can do the math and that gets to you mid summer.

It's already an earlier question asked, it's already part of the dialogue with customers though, so we're already in the timeframe where it's relevant.

Okay, thank you.

And the only thing I would add, this is Howard, is that that lead time and that overview that Tom just gave is applicable to a portion of our business.

If the ITC goes away, for example, we do not see or anticipate an appreciable reduction in our residential business, which is very strong, and on the -- we have what we call CEVAR, commercial evaluated resellers that sell components into the commercial, smaller commercial testers.

That has actually shorter lead time from booking to billing to installation.

Great, thank you.

Thank you.

[Randy Gorsman], you may ask your question, and please state your company name.

Hi, [Randy Gorsman] with Baron Capital.

Good afternoon, guys.

Could you talk a little bit more about the LCOE that you have brought up earlier in the call, Tom?

How are you competitive on LCOE basis versus your other silicon and thin film competitors and how does that relate to some of the larger RFPs that have sort of come out that have been in the news?

Thanks.

Yes, if we weren't competitive on LCOE, then it would be our duty to diversify technologically and find another technology that allows us to be competitive on LCOE and that is not our strategy.

So our conclusion is that we can be the leader on levelized cost of energy.

Now, as you work from the large projects utility power plants towards commercial and residential, LCOE becomes either the predominant or significant driver of the large projects in the utility and power plant business and then less so as you work your way towards residential where power density and aesthetics and the customer experience becomes significant drivers.

So it varies by end market but, in the end, people are buying power and you have to be cost competitive on that and we are currently and our plans keep us that way or improve it.

So basically, I mean even though people talk a lot about cost per installed watt, it really comes down to the net present value of the electricity costs and you're basically saying that because of the technology you have as well as the balance of system, technology and cost advantage that you guys are at least as competitive as thin film expects to be so over the next few years?

Yes.

Thanks.

I think we'll take the last question and then we'll wrap up and we'll follow up with the balance of you after this meeting.

Thank you.

Pavel Molchanov, you may go ahead and please state your company name.

Raymond James.

Thanks.

When a utility makes a purchase decision, can you just talk about what their decision process is between solar thermal, which is of course mainly utility scale technology, and PV?

Okay.

So your question, last question is utility makes a decision between solar thermal and PV, just how they--

Pros and cons.

Yes, okay.

Howard will do a really short version of that and then I'll wrap up the call.

So obviously the cost of the electricity is first and foremost, but there are other factors as well and, by the way, we believe we are competitive with solar thermal at the very large scale and in the time frames that solar thermal is anticipated being installed.

Other factors include transmission access, land use, and my final comment, which is PV can be installed at smaller scale or smaller chunks, 10, 20 megawatts.

It's modular.

We can install it faster.

We don't require water so there's other factors in permitting, transition, land use, that come into play.

So the way we would -- the strengths that we would lead with is you can rapidly deploy PV.

It's proven.

We've done very many large projects.

You can generate power as you build and you don't need utilities on the site.

And obviously, you don't need direct solar the way that you do for CSP, if you're speaking specifically about PV versus CSP.

You don't need normal sunlight.

Okay.

Broader degrooiveg range that you can deploy--

Quite a few people want to answer that question, but we're out of time.

Thank you very much.

We had a solid first quarter.

We appreciate your time on the call today.

We have a very positive outlook on the ensuing quarters, and we look forward to our next call.

Thank you.

Thank you.

Thank you.

This does conclude today's SunPower conference call.

Have a nice day.