SunPower Corporation (SPWR) 2008 Q2 法說會逐字稿

Good afternoon.

Welcome to SunPowers second quarter earnings release conference call.

Today's conference 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 report on our second quarter 2008 financial results and update you on our outlook and approach to our global markets, review the progress of our strategy, provide guidance for the second half of 2008, and update full year 2009 forecast.

Let's start with our results from the second quarter.

We experienced very strong operational and financial performance.

Our record second quarter once again exceeded our top and bottom line guidance and we increased margins consistent with better than expected execution of our cost reduction road map.

Our Q2 2008 revenue was $383 million up 120% year-over-year primarily due to our ability to pull in Spanish projects which assures us of beating the tariff expiration, and that delivered non-GAAP EPS of $0.61 per share.

Persistent segment with 71% of revenue, our components segment was 29% of revenue.

Both systems and components saw substantial progress on our cost reduction road maps as reflected by our margins this quarter.

Let me highlight that we achieved incredible results in our systems group as we installed more than 40 megawatts of solar power plants in Spain in the first half of this year.

While accomplishing these systems we further developed products and installation methods so that we can now install more than one megawatt per week per crew.

Let me next comment on what we know will be a key area of interest to our investors, the evolution of the solar power market and our confidence in our guidance for this year and next year.

We believe that our vertical integration and participation in all market segments in all meaningful regions puts us in the best position of any solar company to respond to new opportunities as well as market risk.

Manny will describe in detail how we are raising revenue guidance for 2008 to $1.39 billion to $1.44 billion and updating our revenue outlook for 2009, 2 to $2.1 billion in non- GAAP EPS of $3.50 or more.

We are very confident about both our second half 2008 guidance, 2009 guidance because we have built the company designed to flexibly respond to market opportunities and risk.

A policy driven business like solar is today, we will inevitably face new markets and emerge rapidly, and we are poised to respond to emerging market segments which demonstrated by the Florida Power and Light announcement which takes power plants to utilities scale, as well as new policy opportunities like those we see in the Asia Pacific region.

We will also face market uncertainty as we do today in Spain and the United States commercial market.

We have deliberately committed to building the infrastructure to serve customers in four continents across four market segments.

These segments are residential retrofit, new homes, commercial roof tops and power plants.

With the scale we have achieved, we have built and are now operating sales channels around the world across dozens of markets.

When an adjacent market emerges we can leverage our core sales channel in that region.

When a market exhibits risk, we reduce our product allocations and redirect our sales efforts to other markets and segments.

Let's look at Spain as an example.

We've set up our European dealer network hub in Madrid.

We expect to do a very strong business in the roof top market in Spain in 2009 based on the feed in tariff proposals to date.

The U.S.

market is another proof point.

Without an ITC extension, the commercial market will be challenged; however we expect strong residential sales and other opportunities like Florida Power & Light to support our business in the U.S.

And we have prudently set up a portfolio of market opportunities to manage our risks to any single policy outcome.

While we have proven that we can move between markets and channels, market disruption in any market has several consequences.

One will be more competition in other operating markets which can lead to more rapidly declining average selling prices compared to baseline assumptions.

Having said that, we have confidence that our model for 2009 can sustain market disruption in the Spanish Power Plant market as well as a delay in the extension of the United States (inaudible) investment tax credit.

Another consequence of market disruption will be the redeployment of company resources in order to create new markets by feeding unserved demand.

Given the visibility of the Spanish and ITC risk, I'm sure that SunPower is not alone in working on opening new market opportunities outside of our current markets.

Overall, a global demand for SunPower's high performance solar system remains very strong.

We have visibility into demand dynamics by directly taking orders from system owners in our dealer network.

Therefore, the basis of our guidance is from direct customer interactions around the globe.

We remain supply constrained with customer demand substantially exceeding our production levels.

Now let's review regional dynamics.

In Europe, Germany is a core market for SunPower and offers great opportunity for us to gain share in the next 12 to 18 months as we drive our brand in the residential, small commercial market through our dealer network.

Spain will be a growing roof-top market for SunPower regardless of how the power plant market is developed under the new feed in tariff.

Italy offers strong growth potential as evidenced by our announced 25 megawatt framework agreement with Infinity.

We're also seeing strong demand from our dealer network as we've more than doubled our dealer network across Germany, Spain, and Italy to serve the residential and small commercial roof-top markets.

In Asia, we further penetrated the Korean market during the quarter and in Japan, we have teamed with Toshiba on their newly introduced residential product line based on SunPower solar panels.

We believe that this partnership could result in significant incremental demand for our product in Japan since that country has historically been one of the largest the solar markets.

We've been working for three years with Toshiba to develop this program.

We believe that Japan is once again poised for accelerated growth and that SunPower's product attribute to high efficiency and superior aesthetics will resonate with Japanese consumers.

In the United States, we announced that Florida Power & Light has selected us to build the largest [photo voltaic] power plant in the United States.

That's a 25 megawatt plant in DeSoto County in addition to a 10 megawatt plant at the Kennedy Space Center.

We are very happy to be partnered with Florida Power & Light , a worldwide leader in renewable energy with world class expertise and utility scale wind and solar thermal electric power plants and we continue to see strong demand in the residential retrofit market as we increased our dealer network.

The ITC uncertainty will contribute to a strong finish with the commercial business in the second half of 2008.

Thanks to our global sales channels we expect any ITC driven softening of demand in the U.S.

commercial market to be an opportunity for us to better serve our other U.S.

market segments as well as other global markets.

Around the world, we're also seeing significant opportunities in the emerging markets such as Greece, France , Australia, Canada, Belgium, and other markets.

We also start shipping our product in the countries in the Middle East in the third quarter.

In summary, we are well positioned given this demand environment as our flexible model, geographic diversity enables us to respond rapidly to new opportunities and minimize risk such as is posed by the continued policy uncertainty in both Spain and the United States.

Turning to our internal execution.

SunPower continues to deliver on our long term strategic focus of brand, technology, cost, and people.

In the quarter, we developed our brand and leveraged our marketing channel integration, supported this position by advancing the best technology in the world, reduced cost consistent with our plan to drive cost down by 50% to 2006 levels by 2012 and recruited and retained the best people in the industry.

I will elaborate on how we successfully executed on each of these efforts in the second quarter.

Let me start with brand and channel.

Our vertical integration strategy and focus on improving the customer experience continued to pay dividends in the second quarter as I've detailed in my earlier comments.

Let me emphasize again, our global footprint and diversified market position puts us in a unique position.

With direct access to our customers, we are constantly optimizing our position to maximize our opportunities, and minimize our risk.

Our channel and brand strategy is built on our differentiated technology as we continue to invest in our cell, module, and systems technology.

We are on track with our cell technology across our product lines.

The ramp of our Generation Two technology continued during the quarter as we now have five lines producing our Generation Two solar cells.

We also announced a world record cell efficiency of 23.4% using our Generation Three technology, continuing to extend our efficiency lead, a key component to our cost reduction initiatives.

In systems, our expansive T-20 tracker deployments in Spain allowed us to reduce cost and make improvements in the design to allow for more rapid installation.

These technology developments directly result in cost reductions.

Our plan to reduce total systems cost by 50% by 2012 as compared to 2006 remains on track, and we are well positioned to reach 2/3 of this initiative by 2010.

Reducing cost by 50% enables us to compete with retail and wholesale rates in much of the developed world on a levelized cost of energy basis.

By reducing system installation costs while increasing our energy collection and conversion efficiency, we are driving the competitive retail and wholesale electric rates on a cents per kilowatt hour basis.

In terms of silicon cost reduction, our portfolio approach to [Tally Silicon] utilizing established suppliers along with new entrants will enable us to reduce our polysilicon cost by at least 10% this year.

M.Setek and DC Chemical production ramps are going well.

Deliveries, are on track.

On the manufacturing side we continue to make material progress on our cost initiatives.

We expect silicon usage to decrease throughout the rest of this year as we deploy thinner wafers, and as we ramp we are benefiting from economies of scale and lastly, with our JV partner, [First Phillic] we inaugurated our wafer processing plant.

This facility is shipping ahead of schedule and is a key element in reducing our wafer cost.

Finally, we continue to reduce our balance assistance costs through our vertical integration strategy by further scaling our services we offer through our dealer network, standardizing systems technology products that are factory assembled which reduces installed costs in the field for commercial systems and utility power plants, driving adoption of our T20 Tracking product which collects up to 30 % more energy, and further ramp of our industry leading Generation Two cell technology which not only improves conversion efficiency but significantly reduces field costs as higher efficiency means less modules, less racking, less wires, less inverters, less labor and less land.

Combining near term cost reduction initiatives faster than our ASP reduction forecast in the second half of 2008 will allow us to attain our 30, 10, 20 model, 30% gross margin, 10% operating expense, 20% bottom line, on a non-GAAP basis by the first quarter of 2009 or sooner.

Finally, our team is growing.

We added approximately 100 people in addition to our manufacturing hiring during the quarter including the appointment of [Marty Neese] as our new Chief Operating Officer.

We continue to attract top quality people to our company and want to thank them for their hard work in the second quarter.

In summary we are executing on our strategy to focus on brand, technology, cost, and people.

Now let me end with some news.

It is with mixed emotions that I announce that Manny Hernandez has decided to retire as SunPower CFO.

He has agreed to remain fully engaged in his current role until our new CFO is on board to insure an orderly transition.

Manny's committment provides us with with a long runway into next year if needed for a careful search for his successor while he continues to help us grow and develop.

Our search firm is engaged and actively interviewing candidates.

Manny has given 15 years of service to Cypress and SunPower during our formative years as a company and I'll note that during those 15 years, he's worked for TJ Rogers as CEO and TJ Rogers is Chairman of SunPower, so that 15 years is the rough equivalent of 60 normal years.

During this time, Manny has built the team, the systems and the integration processes for our acquisitions which will position us for a clean hand off to his successor.

I'd like to thank Manny for all of its extraordinary contributions to SunPower over the years and I can't wait to see him on the bike race circuit some distance behind me.

On that note, I'd like to turn the call over to Manny who will report details of our 2008, Q2 results, provide initial guidance for third quarter of 2008, update our previous guidance for Fiscal Year 2008, and update our preliminary 2009 revenue

Thanks, Tom.

Good morning, everyone and thank you for joining the SunPower earnings conference for the second quarter of 2008, which ended June 29.

As far as the bike race circuit, I think I could do that but I don't think I'm adding Iron Man any time soon on my list of post-retirement activities.

Just a serious note, Tom and I have had this discussion quite awhile and we just decided, I decided, it's time.

All I want you folks to understand or remember is we're not going to put the company in harms way.

We're going to do this right, however long it takes and I'll be around to make sure that happens.

So let's go on with our earnings.

I'd like to remind everyone, again, that during the conference, management will be making and has made certain statements that are not historical in nature.

Please consider these statements as forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995.

Those statements are based on our current expectations and are subject to certain risks.

Please refer to our press release and our SEC filings for a more detailed discussion of those risks.

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 feel free to look at that table for more information.

Let me now give you a summary of our 2008 second quarter results for the combined company and our segment.

Total SunPower revenue for 2008 second quarter was a record $382.8 million, that's up 40% from the prior quarter revenue of $273.7 million and approximately 2.2 times that of our year ago second quarter revenue of $173.8 million.

The second quarter revenue performance was aided by a very strong performance in our systems segment as Tom alluded to, which accounted for 71% of our revenue in the quarter versus 65% in Q1.

Our component segment accounted for $112.2 million of our second quarter revenue, representing an 18% increase from the prior quarter revenue of $94.9 million and approximately 1.6 times that of the year ago second quarter revenue of $69.7 million.

Our component segment benefited from strong demand in our dealer channel in both the United States and Europe where we have significantly increased our dealer network footprint.

Our systems segment accounted for $270.6 million of our quarters revenue representing a 51% increase from the prior quarter revenue of $178.9 and approximately 2.6 times that of the year ago second quarter revenue of $104 million.

Our systems segment benefited from strong power plant scale demand in Europe, which as Tom noted we were able to pull in for delivery in the quarter in order to insure availment of the higher (inaudible) tariff in Spain.

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

In the 2008 second quarter, approximately 61% of panels installed by our systems segment were SunPower manufactured solar panels, and that's up from 38% just last quarter.

We expect this allocation to remain at or above these levels for the remainder of 2008.

Now, let's cover earnings.

On a GAAP basis, SunPower reported operating income of $45 million, which translated to diluted net income per share of $0.34.

These figures include non-cash charges for a more efficient purchase accounting intangible assets of $4 million and non-cash stock based compensation expense of $18.6 million.

On a non-GAAP basis, adjusted to exclude non-cash charges for amortization of intangible assets, stock based compensation and their related tax effect, SunPower reported a total operating income of $67.6 million and diluted net income of $0.61 per share.

This compares with the prior quarter operating income of $39.1 million and $.39 diluted net income per share.

The company's overall GAAP gross margin for the second quarter was 24.3% whereas our non-GAAP gross margin improved to 26.4%.

This represents a 240 basis point improvement from last quarters non-GAAP gross margin of 24%.

In the second quarter, our systems segment posted a non-GAAP gross margin of 24.2%, an improvement over last quarters margin of 23.3, benefiting from higher percentage of SunPower panels used in its project as well as cost savings we realized in the field implementation of our trackers.

Our components segment posted gross margin of 31.7%, a 630 basis point improvement over last quarters margin of 25.4, benefiting from lower silicon costs, sequential growth in volume, and also modestly higher average selling prices during the quarter.

Briefly on the balance sheet, we ended the second quarter with cash, which includes short and long term investments and restricted cash of approximately $336 million.

Our Day Sales Outstanding was 59 days while our net inventory ended at 65 days.

The growth in our accounts receivable that you see in our balance sheet represents timing of project billings within the quarter, mostly for systems we installed in Europe.

So the first two weeks of July we have already collected approximately $85 million of those receivables.

Our total capital expenditure for the quarter was $44 million, and we estimate our total capital expenditure for the year at approximately $300 million which is the higher end of our prior range and is being driven by the acceleration of two more lines that we're purchasing for 2009 implementation and we also have available options to purchase our Fab building that was previously owned by Cypress.

During the quarter, depreciation was $12 million and we expect total depreciation for the year to be approximately $50 million.

Now I want to shift to guidance and there's a lot of numbers here, folks, so bear with us, but before that, let me reiterate as we have in the past, that our business results may reflect quarterly shift in mix between systems and component segment revenue.

Also from quarter to quarter, we expect shift even within the systems segment due to the size and type of project 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 product panels or produced panels to the system segment.

So as we progress towards 2008, these factors will continue.

The following is our non-GAAP guidance, for the 2008 third quarter.

Revenue of approximately 340 to $355 million which is comprised of component segment revenue of 155 to $160 million, and systems segment revenue of 185 to $195 million.

Recall that at the last earnings call for Q1, we noted that the Q3 '08 revenue could be in line with Q2.

This guidance for Q3 remains consistent with our plans despite our having delivered a much higher Q2 and better financial results.

But I think one way you should look at that is if you just summed up our actual Q2 and the guidance for Q3, those two quarters are essentially up $40 million.

The segment mix for Q3 represents a strong demand for component sales both direct and through our dealer channel, while reflecting significant completion of Spanish based projects in the second quarter just ended.

Gross margin for the third quarter of 2008 is projected to improve to 26,5 to 27.5% influenced by higher component segment mix than the prior quarter and our continued progress in our cost reduction programs.

Component segment gross margin is projected to improve to 33.5 to 34.5%, approximately 200 basis points improvement from Q2 benefiting from combined and continued cost reduction and also higher manufacturing volume.

Our systems segment gross margin is projected at 21.5 to 22 % reflecting the project mix in that segment for the quarter.

The non-GAAP earnings per share for 2008 third quarter is estimated at $0.53 to $0.57 per share.

Now, since we're going to give you an updated 2008 guidance, from which you can derive effectively the Q4 '08 numbers, we would like to help you with that and then just provide you the following guidance.

Revenue in Q4 is approximately-- is projected at 395 to $425 million, comprised of component segment revenue of 200 to $210 million and systems segment revenue of 195 to $215 million.

The segment mix for Q4 also represents strong demand from component sales both direct into our dealer channel.

Gross margin for the 2008 fourth quarter is projected to improve to 29 to 30%, allowing us to potentially achieve our model of 30% one quarter sooner than our target.

Higher component segment margins-- sorry, higher component segment mix and continued progress on cost reduction programs are the drivers to this gross margin improvement.

Component segment gross margin in Q4 is projected at 35 to 36%, while systems segment gross margin is projected at 23 to 23.5%.

The non-GAAP earnings per share for the fourth quarter of 2008 is estimated at $0.73 to $0.80 per share.

Now for the Fiscal Year 2008 totals, we are once again raising our guidance for our non-GAAP results as follows: revenue of approximately 1.39 billion to $1.44 billion estimated to be comprised of component segment revenue of 560 to $580 million, and systems segment revenue of 830 to $860 million.

Total company average gross margin is estimated to average 26.5 to 27.5% comprised of component segment gross margin of 32.5 to 33% and systems segment gross margin of 23 to 23.5%.

The non-GAAP earnings per share for all of 2008 is now being increased to $2.26 to $2.36 per share.

We estimate the non-GAAP tax rate for the second half of 2008 will remain at 24.5%.

Lastly, we are providing early guidance for 2009.

We expect revenue in the 2 billion to $2.1 billion range with a non-GAAP EPS in excess of $3.50.

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

Thanks, Manny.

Don't sell yourself short.

I'd see you doing an Iron Man some time in the near future.

Well, maybe.

I'll open the call to questions now.

With me I also have a group of people I 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, [Bob Okunsky], Senior VP, Senior Director of Investor Relations and [Brad Davis], our Chief Marketing Officer.

What I'd like to do is take like we normally do at SunPower is take questions and one question and we actually would like to minimize follow-up and ask you to get back in queue.

We do have quite a few people here and we don't want to hold you too long.

So Michelle, we'll take questions.

Thank you, sir.

(OPERATOR INSTRUCTIONS).

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

Hi, this is Steve O'Rourke from Deutsche Bank.

Good afternoon.

Question on ASPs.

You commented that increased competition could have some impact on ASPs.

You've also talked about an abundant supply of silicon emerging maybe next year.

What is your outlook for ASPs in '09 at the module and system level and if ASPs are coming down how do you manage ASPs for modules with your dealer network.

Wow, Steve, you remember-- this is Tom.

You remember our comments well.

And so, what we'll do is take that in two parts.

I'll answer half or three fourths of your question and Howard Wenger will answer the part about the dealers and pricing with the dealers.

So broadly speaking the way we thought about pricing is consistent with our previous earnings calls; however, for 2009 since it's 18 months away, we have a range of prices, of price declines that we've modeled and obviously we have a range of cost reductions and it's fair to say that the range of cost reductions and the range of price reductions are consistent with the guidance that we've given for '09.

And that range is about 10 percentage points so it's very hard to predict in that time frame, but we see our cost reduction programs having significant range as well because of the time frame that we're talking about.

So we've contemplated that.

In short we've contemplated that in our 2009 guidance.

In terms of how we price modules to our dealer channel and the dynamics there I'll turn that over to Howard.

Thanks, Tom.

We greatly expanded our dealer network primarily in Europe.

We're approaching 300 dealers worldwide and that enables us to manage demand and ASP across geographies so in Spain, Italy, Germany and of course the U.S, where our dealer network is most robust.

We have a policy of uniform pricing across our dealer network, so we're very systematic and rigorous on how we set pricing, and we've modeled in potential price declines consistent with what we observe across the different channels and geographies and incentive support.

Thank you.

You bet.

Thank you.

[ Michelle Shaw], please state your company name.

Thanks, Lehman Brothers.

So Tom, question on the Spain and exposure to Spain, the 2009 guidance.

I believe there's a lot to talk about, incentives being 300 megawatts or 4 to 500 megawatts.

What are your thoughts about that and in your guidance what are you incorporating?

Okay, again I'll split this with Howard in terms of the regional guidance.

Interesting what's happening in Spain, there's, we don't quite know where the cap will end up but it's actually moving towards more of a roof-top market and what could be a better proof point of what our strategy has been to participate across each of the market segments in each of the regions.

So we specifically in Spain have a roof-top market both commercial and residential and, as you all know very well, we have a power plant market in Spain, so as Spain develops next year, and perhaps as it looks today, moves to more of a roof-top market it's not like we have to quick run and set up a bunch of dealers and set up a whole new program.

We just shift emphasis of that program, so our guidance is consistent with that, and Howard can give you the numbers, but as I said in my remarks, we shift business from where policy has become less favorable and that obviously means that you're going to have a lower percentage of sales in those regions so maybe Howard you can give a sense of specific percentages in those two regions.

Sure.

So for the second half of the year, we do not anticipate any or almost no power plant segment-- systems segment revenue from Spain the second half of the year.

We do have our VAR program where the policy there does allow for that program to thrive and we will get revenue in Spain from that program and that's where we're selling into the residential and primarily small commercial markets.

And, going into 2009, we're anticipating that the (inaudible) tariff will resolve itself but, as Tom said, we can handle either a roof-top emphasis or power plant emphasis in Spain.

And overall, for the year, because of the uncertainty, we've actually modeled not nearly significant of revenue in 2007 in Spain, sorry, 2008.

Our plan in 2009 is much lower revenue from Spain than in 2008.

Great.

Thank you very much.

On a percentage basis I should add.

Thank you.

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

Thank you.

Lazard Capital Markets.

Good afternoon, guys.

Congratulations on a good quarter.

Well the question is on the FPL side, can you guys go a little bit into detail as to what was the selection process like there and how did they end it up sort of looking at SunPower systems as like the vendor of choice and seems like it's even going to get the Public Service Commission approval for putting it in the rate case dynamics.

Is this a beginning of a trend in the utility market here because that would be pretty significant if that's how things are going to start to unfold, so can you guys go into some more detail as to some of the dynamics there?

Sure.

I wish I would have taken notes as you were asking the question, Sanjay, and I thought for sure you would say it was a great quarter, we felt like it was a great quarter but thank you, nonetheless.

So first of all, Florida Power & Light is expert at renewable energy.

They've done over five gigawatts of wind, they're experts in solar electric as well.

These people know what they're doing so they had a very competitive process, and in the end, you have to compete, and as we've said in numerous investor meetings, the bottom line metric is the levelized cost of energy.

Now that's not the only metric.

Obviously credibility to execute strength of balance sheet, future technology, best technology, all matter and incredible utilities like Florida Power & Light want the system to work and they want it on time so there was some depth in terms of that part of the relationship and that part of how we do business with them.

I'm going to make one more comment and hand it over to Howard who was the person who worked with the people at Florida Power & Light so he can be more-- add a little color.

The last thing I'd say is this is an indicator of future utility business.

I think many of you on the phone are aware that there's renewable portfolio standards in almost 30 states.

Those are the real deal in that the dynamics with utilities are significantly different depending on which region of the country so it's hard to make a broad, spread the peanut butter statement but if I were to make such a statement I believe that this is the beginning of business in the utilities sector.

Very much, so.

And we believe that photo volpayic and specifically SunPower is the best solution because we know it works.

It can be installed over time, doesn't require utilities and you get levelized cost of energy numbers that aren't economically compatible.

Howard do you want to add anything?

Sure.

(Inaudible) you said, Tom, and that is Florida Power & Light is definitely one of the most, if not the most, sophisticated purchaser of large scale solar power and they own 300 megawatts of solar thermal electric in Southern California.

They also own and operate 5.5 gigawatts of wind.

They've added about 1.5 gigawatts per year, in the last three years, so they really understand the full equation.

It's not just about capital cost.

It's about the cost of of energy supply and so it's the cost and the energy delivery and as you know in our industry, there's a whole range of technology, of efficiency, of tracking , not tracking, a range of capability in terms of track record and delivering large scale projects on time where the companies stand behind the performance of those systems and we certainly do and I think that Florida Power & Light understands that well and that really helped us with the

Got it.

So if I understand you guys correctly, then it was really your lower level cost of electricity for this particular application and long term reliability lead you guys to be the vendor of choice here.

Yes.

Those are the two primary factors absolutely.

Is there any exclusivity with FPL for you guys going forward?

No.

There is no exclusivity.

Okay, terrific.

Thanks a lot, guys.

Thank you.

A strong partnership.

Thank you.

Our next question comes from Satya Kumar.

You may ask your question.

Please state your company name.

Yes, hi, thanks, from Credit Suisse.

A question on silicon availability as it pertains to Q3 guidance and initial (inaudible) PC chemicals and (inaudible).

A few parts to the question.

Did you reconfirm your 255 megawatt silicon production guidance for this year?

The grams per watt declined.

If you could add a little bit of color on that.

And also if I look at your component gross margins for the full year it's pretty good at 32.8 is what I calculate based on the second half but it's still about a couple hundred basis points lower than what it was a quarter ago and maybe 300 basis points from what you were told in January so if could you give me a sense of what's happening on silicon availability, pricing, would be really helpful.

Thanks.

Sure, and thank you for forewarning me that it would be multi-part.

I took notes.

So first, we are comfortable with 25 megawatts for the year.

On the reason why we took the table out of our press release is we are starting to decide, do we have a table that has cells, modules and systems, and start giving some sense of capacities and capital investment that got too complicated, so we pulled the table.

And it's also why we have a supplemental operating performance and manufacturing ramp information sheet we put out on the web.

Grams per watt is an excellent question.

We decided to be more aggressive with Generation Two ramp and thinner wafer implementation, and experimenting with thinner wafers, and we'll accrue the benefit of that in future quarters.

It's only .1 gram per watt it went up and it's strictly driven by that.

In other words you take a yield hit during the early stages of testing thinner wafers and of ramping the new efficiency-- oh, by way we're doing that in the new fab, but it was a very very small yield and we're projecting Q3 and Q4 to be significantly better.

Components gross margins when you look at-- I'm going to have Manny answer that question but I can't help but respond a little bit.

If you look at our components gross margin, almost 32% gross margin, we thought that was exceptionally strong quarter and great performance coming off of our Q1 or significant improvements from our Q1.

We are materially on or above our guidance for the year, and one of the things we said about our 50% cost down road map is that we are building it into our guidance.

you can watch our progress and in fact we've guided that way.

However, Manny will clarify this specific number, so Manny, go ahead.

Yes, your observation is correct.

I think the point to make; however, as Tom noted, 630 basis points improvement from Q1 is quite substantial.

We're raising it again in Q3 up to 34.5 and projecting to end the year at 36%, so a point or two in previous estimates, it's misrepresentative of looking at our line ramps and the introduction of Gen C into the mix so I think ending the year on average a 33% per component is quite a performance.

More importantly the exit rate of 36% is, we think, very healthy.

Very helpful, thank you.

Thank you.

Our next question comes from Al Kaschalk you may go ahead.

Please state your company name.

Wedbush Morgan.

Tom, I was wondering given the concerns out there in the marketplace both the street and in the street, can you talk a little bit about what your customers are saying in terms of locking in price over the next 12 to 18 months and business, for that matter.

And then as a follow-up to that, or in addition, what mix is assumed in the '09 guidance between systems and components.

Thanks, and Manny, good luck.

Thanks, Al

You'll be able to say that to Manny for several more calls, but he will start his training soon, I think.

So let me just comment on, well actually why don't you go ahead and take the mix question, Howard and then I'll follow-up.

Sure.

So going forward, we anticipate or are planning for a more balanced mix between systems and components going forward, so still a majority on systems but much closer to balance point.

Go ahead.

And in terms of the next 12 to 18 months of customer receptivity or desire to lock in pricing, as you would estimate or guess is that it varies by channel.

We very much have a dynamic in our residential or VAR network where we've been unable to serve demand into the VAR dealers on the phone.

We apologize for that and we are ramping as fast as we can.

In the systems business, it depends on the region of the world.

We in fact have many customers in almost every region of the world that would desire to lock in on 12 to 18 months for that matter multi-year agreements on pricing, and so it's more the rule, not the exception.

The exception is in America, on commercial business, and even in America on commercial business, on their ways to do agreements over a 12 to 18 month time frame that have contingencies built into them.

So I would say too that in the VAR business, we need to increase supply.

Systems business we do have some and many more customers who would lock in on 12 to 18 months of pricing.

Would you like to go to the next question?

Please.

[Timothy Arcuri].

You may ask your question.

Please state your company name.

Citi (inaudible).

Thanks.

A couple things.

First of all.

Can you give us what the production number was, number one and also I'm wondering if you can talk a little bit about what the utilization was, I know you were kind of, it looked like you were in the mid 70% in March and I'm wondering if you're kind of up into that 80% target range and then I also wanted to know if you can give us what the delta is.

You kind of talked in the past about what the difference is between your price of your components relative to what the market price is, so can you talk about that and kind of how it's changed?

Thanks.

Sure.

Hi, Tim.

Let me pick up the first two items.

As far as production volume for the quarter, our factories produced 49.8 or 50 megawatts of product, that's up 29% from the prior and even if we don't give guidance for the next-- for this quarters output, you could count on significant improvement in output there given that Lines 7 & 8 that were only partially ramping in Q2 will now be fully ramped and we're also introducing or ramping Lines 9 & 10, so that leads to the utilization question.

The way we look at that is as far as the mature lines like Lines 1-4 that's been operating for awhile, those lines are operating at 90% and for the lines that are being turned on in the quarter, they're operating at about 55%.

In terms of the premium question, it varies by-- the markets very rational so where you're more space constrained there's a higher premium for SunPower product that varies between 5 and15%.

Tom I guess I'm wondering what the trend has been there?

I would say either stable or increasing.

Thanks.

You bet.

Thank you.

Jesse Pashel, you may ask your question.

Please state your company name.

Hi, Jesse Pashel from Piper Jaffray.

Congratulations on a great quarter.

I had a question about seasonality.

Q4, the components is going to be very strong.

Is that because of ITC pull-ins and thus would you expect that Q1 will be a down quarter?

Hi, Jesse.

Thanks for the comment on the quarter.

So the components channel serves dealers, and so that would be a reflection of predominantly outside of North America, frankly and to the extent that it is North America, it would be small business or residential, so to the extent that-- well obviously you have the numbers, as components ramps up, it's more an indication of the strength of our dealer network that is increased over 300 dealers.

That's what's driving that trend.

And as a follow-up, I'll pre-guess a follow-up question by somebody about what about the ITC affected business, that would be the commercial business in the United States.

We would see the ambiguity over the ITC to be a stimulus for the business during the back half of this year.

We do model that there will be a continuation of business in the commercial sector in the first quarter, but we don't model it same level as Q1 that commercial business I would point out that for example, let me just say that there are segments that don't rely on the ITC within the commercial business, it will focus more on and then we'll do more things like Florida Power & Light.

So if I'm hearing you right you don't really anticipate Q1 09 will be necessarily down significantly quarter on quarter but probably more in the flattish area?

I'm sorry if you're asking about the overall revenue --

Q1 09 relative to Q4 08.

On a revenue basis up.

Up, great.

And maybe just a follow-up on Sanjay's question on FPL.

Can you comment on the quoting activity from other U.S.

utilities in RPS states?

This is Howard Wenger.

Good question.

We are literally talking to dozens of utilities now, and what's happening is and by the way in this channel, it's exceeding even our expectations in terms of interest and definitive action that the utilities are taking, we're seeing many many RFP's coming up from utilities and in parallel we're talking to them, so there's a lot of action there.

Can the systems business maintain its historical margin rate or run rate with U.S.

programs being more of the mix?

Jesse, this is Julie.

I was going to emphasize that not only do we think that systems business has great run rate in the U.S.

but I think what will happen is that the U.S.

success in the utility business we're seeing coming down the pike is going to end up informing the rest of the world.

What's happening in the U.S.

right now is that utilities are recognizing that solar actually competes with a gas fired peaking plant.

That's a function of three things.

1) capital costs going up dramatically over the last couple of years by a factor of two to three and gas fuel prices going up by about double in the last year and thirdly, our ability now within a utility RFP or procurement cycle time frame to offer pricing that meets wholesale prices.

So we're at the point where the crossover has begun at the large scale utility level.

That's incredibly important because most of the rest of the world hasn't gotten there yet.

They're still looking around at programs that are based on prior views of where pricing was going to be, as it becomes clearer what's possible today we think that will end up being viewed by the rest of the world and have people reconsider how they're organizing their solar markets.

That sounds great, but, you know, is the margin in U.S.

Do you think it's comparable to the historical margins you've seen in the system business, say the low 20% range?

Jesse, we need to go to the next call, but the answer to your question is yes.

Great.

Thank you very much.

Thank you.

Stuart Bush you may ask your question.

Please state your company name.

Yes, RBC Capital Markets.

So Tom, you've generally commented on the ASP outlook for 2009 with Spain and the U.S.

as uncertain and it's a ways off, but three months ago on the Q1 call you threw out a forecast of low single digit ASP declines in second half '08 and low double digits in '09.

Should I read your statement now that you're forecasting a decline as more in 2009?

And as a follow-up to that if you're seeing more rapid ASP declines you could argue that may be driven by excess capacity coming to market versus demand, so how does that match with your decision to accelerate your line additions by two lines?

Thanks.

It's a very good question.

First, we see stable or increasing prices in Q2, slightly increasing, so that's very important.

In Q3?

I'm sorry, Q2.

I'll speak to Q3 and 2009 in a second.

We see more demand than we can supply yet.

We are paranoid so when we look forward we want to be prepared for what we see our boundary scenarios so we continue to think on high single digit price declines in the second half of this year, despite the fact that we have more demand than we can supply and despite the fact that we have yet to see price decline on our products since we went public.

In 2009, you should interpret my question or my answer or my statement as we've modeled a wider range of price reduction so, in fact, that would be accurate to say that it includes a higher price reduction and that our cost reduction plans internally cover that range of price reductions and thus our guidance.

Okay, and did you accelerate your line additions by two lines?

Stuart, it's Manny.

Yes, we made a decision to pull in Lines 9 and 10, the procurement anyway, so that we could realize earlier production in '09 from those lines.

The driving factor for that is the vertical integration strategy, margin stacking.

We want to be able to allocate as much product or systems group that's apparently starving for SunPower produced panels and in return, produce better results.

And as we more fully utilize our second fab, our costs come down as well, so our costs decrease and compounded with the higher vertical integration, so it improves, our cost position rather significantly.

Great.

Thanks, guys.

Thank you.

Michael Molnar, you may ask your question.

Please state your company name.

Sure.

Goldman Sachs, good afternoon, everyone.

Good afternoon.

If you had to pick from-- if I gave you a choice of these markets, France, Italy, Greece, Japan, or Korea, which would be the top one or two markets that you think could surprise the consensus view, if there is such a thing, to be upside for 2008-9 and I guess I could summit up by saying in 2009 who is going to be the Spain of 2008?

Okay.

I'll introduce Peter Aschenbrenner, VP of Corporate Strategy.

He will answer that question.

Mike, I'm going to pick three, France, Italy and Japan.

Okay, could you just elaborate a bit on why?

Well, Italy has been relatively well discussed within the industry press, good (inaudible) tariff, lots of sun, some momentum, high cap and we're quite active here on the ground so we have a good feeling for it.

France, I think that's a market that's been developing a little bit under the radar screen.

We've been spending an increased amount of time there recently and like what we see there.

So I'll say that I think that could be one of the surprise candidates and Japan, Japan has been one of the top markets historically, one of the top two markets until last year for a very long time, extremely mature, and now through our relationship with Toshiba, we think we have a great entree there.

So we think we can-- we expect accelerated growth in Japan as a new set of incentives that are currently being discussed start to take place, take hold.

Okay, great and GAAP tax rate, is it the guidance there the same going forward on GAAP taxes?

GAAP tax, yes, no change.

Okay, great.

Thanks, Manny.

Thank you.

Nick Allen, you may ask your question.

Please state your company name.

Nick Allen with Morgan Stanley.

Two questions.

First, can you talk about your percentage exposure to Spain in the first half on the systems side, and then also can you explain the dynamic between the systems business and the components business in that the gross margin on the components side appears to be going to 36% roughly, while the systems business is maintaining a more stable gross margin while the mix between SunPower panels and other panels in the systems business is also staying stable?

Sure.

So Howard will take Spain.

Manny will take gross margin and Tom will clarify a statement he made earlier to Stuart and that is on second half price decrease is low single digits, I said high, I apologize for that.

Low single digits.

Howard?

Spain percentage.

Well for next four quarters our exposure on the systems side in Spain is zero.

We planned around it, we've got bookings for the second half of this year, fully allocated and into next year.

So what was it, I'm sorry the first half of this year?

Just briefly I'd point you to the information sheet that we put on the website and you can get a lot of mix, historical mix and we do give it for all of Europe and that was 61%.

I'm sorry, it was 82% for all of Europe in Q2 of '08 and Spain was significantly a part of that.

Okay, Nick, it's Manny.

Let me take your second question on margin difference within component and systems and trends.

The component side is heavily influenced by the fact that SunPower manufactured products and we sell them either directly to customers or through our dealer network, and the model initially for the company there was to achieve 30% gross margin.

But with the cost reduction programs, reduction in silicon costs and also greater volume, we're actually able to achieve better than 30, in this case 36% exiting '08.

That also has to do with premium discussion earlier that Tom answered, our products do command a premium anywhere from 5 to 15%, where specifically when sold to those channels.

On the systems side, the gross margin of systems is highly influenced by the allocation of SunPower modules to that group, as I noted in Q2, 61% of the systems used SunPower panels and in our margin stacking model, when you start approaching 75 to 80% mix, you could theoretically achieve 30% gross margin, so what's usually taking that down is a mix of third party modules which we have to buy in the open market and as you can imagine, that does not result in a higher margin as our own product.

The other factor that often influences system margin trends is the regional mix as well, in terms of whether you're implementing it in North America Or Europe, as well as the size of the project itself.

There's a very different margin profile between a 10 megawatt implementation or 10 one megawatt implementation.

Great.

Thank you.

Thank you.

Rob Stone you may ask your question.

Please state your company name.

It's Cowen & Co.

Congratulations on an excellent quarter.

A two part question, Tom, if I may.

First of all, the industry has this overhanging anxiety it about the supply and demand balance next year.

You refer to modeling through paranoia.

When do you think we might reach a point where there's greater confidence across the industry and investors in the supply demand outlook for next year, and then related to that, I noted that you mentioned the Middle East, Could you talk about how you see that market evolving, how it might compare in relative significance to other emerging new markets, thanks.

Okay, so supply and demand, when will there be more comfort in the Middle East.

Peter will take the second part on Middle East.

Supply and demand has the dynamic of how fast will supply increase which is both crystalline products as well as thin film products.

Like many of the people on the phone we probability weight that and that creates a range of when that supply is going to come on line and of course we do that by groups of-- of suppliers.

And of course, on the demand side, we look at probable ramp rates of different countries and then one of the things that was really important on the call today is we talked about making markets, markets that have been unserved and that's sort of a wildcard because of course they've been unserved so it's hard to predict those, and Japan's largely been unserved as an example, utility markets and emerging markets and one that's hard to predict, and so specifically to your question, Rob, I think when you get towards the end of this year, you're going to see-- get a much better sense of those emerging demand drivers and I think you're going to be able to nail down some of the supply numbers.

I will admit that I thought that there would be more silicon supply by this time, fortunately our commodities management team was able to manage through this, very capably, and we have 100% of our silicon but I thought that the supply side would happen sooner than it actually has.

So that's a long winded end of this year probably would be my best guess, Howard?

I'm sorry, Peter?

So in terms of the Middle East markets, our view is that those are still in the early stages of development.

We see genuine interest from a number of countries there which is a combination of their desire to invest strategically in the next cycle of energy, beyond fossil fuels and to a certain extent competition between the countries, so both those things are driving interest.

The policy processes and decision processes are relatively compact down there, I would say, compared to what we see in Europe and the United States, so decisions can happen very quickly.

So net-net, I think we're looking at something between one and two years before we see volumes out of that region that start to become market driving in terms of volumes on the scale of some of the approaching European markets for instance.

As a follow-up to this concept about the broadening portfolio of markets, would you say that it's fair to conclude that during this period where Spain had such exceptional returns, that it has actually resulted in unmet demand or pent-up demand in other markets?

Yes, absolutely.

Great.

Thanks.

Thank you.

Brian Gamble, you may ask your question and please state your company name.

Yes, it's Simons & Company.

Multi-part if I could real quick.

When you mention the 61% of panels rolling into the system segment but then you also mention the systems segment is still starving for your components, wondering what that looks like for '09, you mentioned it would be flat the back half of the year.

Additionally looking at the supplement headcount, significantly increased quarter on quarter, wondering A) how do you maintain quality and standardization of installations there and then also with the cost trend for '09 looks like and then lastly, when discussing RFP's and the utilities, Howard and Julie mentioned it earlier but wondering other than cost what the sticking points are during those discussions and how short-term utilities are thinking versus if this is kind of an end of 2009 looking to 2010 type event.

Thank you.

Okay, Howard Wenger will take that question, those questions.

Okay.

On the systems versus components mix question, 61%, talking about 2009, we will be roughly the same in our model, maybe even more of a balance and just want to make the point that we manage our company in a portfolio format so we're not going to necessarily over emphasize one channel or another.

It's true that our systems segment is starved for SunPower product, but we're going to be very deliberate and continue to manage our channels, our geography, in a portfolio approach, more of a measured approach so we could skew it but we're going into a more balanced approach going into next year.

With respect to the RFP's and utilities and so fourth, they are looking out beyond 2009, we're talking about 2010, 2011, 2012, talking about very significant projects on a scale that we have not seen before in our industry's history, and so there's an exercise that's going-- taking place with respect to technology development and cost reduction, and we feel like we're in the best position to take advantage of that market given our crossroad map and technology road map.

Brian, it's Manny.

Let me just, I think, clarify your first question you were asking about percentage of systems that use SunPower products.

61% in Q2, your question is '09 profile.

The way we've modeled guidance for '09, essentially puts us on a 70 to 80% SunPower modules or panels in systems implementation and that as you could deduce from earlier comments you reconciled our 30, 10, 20 model with incidentally comprehended in our guidance also.

Thank you guys very much, that was great.

Thank you.

Steven Chen, you may ask your question.

Please state your company name.

Hi, this is (inaudible) calling for Steven Chen.

Just a question with a quick follow-up.

So the linearity for 2009 sales guidance, how should we think about modeling the sales?

We model the 2009 sales to be more back end loaded for the second half or similar to what we've seen in 2008 and is that mostly due to lower sales (inaudible)?

Okay, I'm going to let the modeling guys answer that question and the finance team, and I'd just note on that we're not prepared to guide by quarter so we'll just make some general comments since we're six months away from the start of the year.

Hi, Steven, Manny.

Pretty much as Tom said we're not prepared to give guidance at this time, with the quarter of granularity for '09; however, the way we've modeled the guidance we've given you as a linear or sequential growth quarter on quarter as modeled.

Let me just caution you that using 2008 as an example, where we have over delivered and over performed, even within 2008 we've had non-sequential quarters just the way the projects line up, so for modeling purposes, reasonable to assume linear sequential, but please always be cautious of our statements that because of our business we're in the systems and project business, we could have lumpy quarters.

Great.

And then one quick follow-up if I may.

For silicon cost savings in '09, is it reasonable to assume another 10% reduction?

I'm not prepared to, everybody is waiting in the room to see if I'll give a number.

I'm not prepared to give guidance on cost reduction and silicon next year, but it continues, and I'll make a commitment to do that on next quarter call.

But it does continue.

Thanks.

Next question, please?

Thank you.

[Christopher Blanset].

You may ask your question.

Please state your company name.

Hi, from JPMorgan.

I had just, you aren't going to give absolute guidance or cost reduction for next year but if you could maybe prioritize where the most cost reductions are going to come from tops down and how should we look at that next year?

Absolutely.

So our cost reductions let me just overview it really quickly and I'll answer your question very fast after that.

Silicon is lower priced silicon in less silicon utilization.

The module in (inaudible) benefits from scale.

In the systems area , we benefit from factory assembly and faster install in the field and then update drivers channel efficiency by scaling elements of the channel and moving them into our business.

And lastly conversion efficiency which if you can do that without any cost is a direct cost reduction, so the top three are going to be silicon, conversion efficiency and channel efficiencies by scaling the channel and by the way, that last piece varies by channel so for VAR, it's scaling the channel and for systems, it's value engineering the product so there can be factory assembled and have less cost.

So it is sort of very close between those three things.

Last thing I'd like to note about that is all three of those things are things we're doing this year, implementing this year so it's not things we're committing to doing some research on.

This is all

On the transition of more internally sourced modules from SunPower, your own systems business, how does that rank up there as far as either cost reduction or margin improvement, however you want to look at it?

Is your question how much system margin improvement is driven by cost reduction versus more module utilization?

No.

I was just looking at the artifact that as you do progress to more internally sourced modules from a systems point of view could you almost view it as cost reduction as much as you could view it as margin expansion and I just want to understand the magnitude of that next year in the context of my initial question.

It's Manny.

It's a bit early to be talking about that but for modeling or just analytic sake, you could assume that it's going to transition us from say the low 20s to transitioning more towards the 30% for systems as we use more and more SunPower product, so mid 20s approaching 30.

Okay, thank you.

Thank you.

Pierre Maccagno, you may ask your question.

Please state your company name.

Raymond James.

Question about your utility scale PD projects.

We've seen a lot of solar thermal projects particularly in California that are topping the hundred megawatt range.

Do you anticipate having or participating in PD projects of that scale in the near future?

Okay.

Let me just comment on the call, management here, we're going to go to 12 or slightly before 12.

We still have quite a few questions, and we'll answer questions as quickly as possible and get as many in as we can.

The Howard spoke earlier about the number of RFPs and the RFPs do have a very broad range and yes, there are RFPs that are larger than 100 megawatts.

Specifically in the U.S.

Or in some of your overseas Markets?

I would say yes.

Sounds good.

Thanks.

Next question, please?

Thank you.

Michael Horwitz, you may go ahead and please state your company name.

Sanford Group.

Hi, everyone.

Maybe a little follow-up on what Rob Stone was saying, when you talk about pent-up demand possibly being in other markets because everybody was so focused on Spain, as you move your product into some other markets and focus on other markets, is it possible that you'll be taking share from other players in those markets because some of that demand that you were unable to fulfill and wanted your product and so now that they can get your product they are going to take more of it?

Good question.

Absolutely and we pointed to Germany earlier, and then the second point is that you open markets through various ways, obviously one is supplying them and another one is you lower your cost, you lower your price, and that opens markets up.

So following on when you model out those price declines, how do you view elasticity?

That's a difficult question to answer quickly, and that's one of the reasons why we're vertically integrated towards the customer so that we can influence the elasticity, in other words we can test pricing and demand response, and so it varies dramatically by part of the world because utilities are regulated completely differently all over the world.

In the VAR channel and residential channel it's more straightforward, and what we found is electricity prices go up and VAR channel residential demand has gone up rather dramatically and the utility channel would be far too complex to cover here.

Yes, Michael, this is Julie.

I'll just add-on the price elasticity questions there's two things to take into consideration.

One is the absolute level of the alternative rates that the customer would pay and the second is the pace at which changes happening and the thing that I think is really relevant to the current situation is if you just looked around world and you look at how fuel prices have gone up and you look at where rates are, you would have to kind of universally raise rates by multiple times, the average rate increases that we've seen historically given the way that fuel prices have increased so that's having a major psychological effect on peoples willingness to pay to hedge their prices going forward whether that's a residential customer, a commercial customer or a utility customer.

And Peter is going to make one comment and we need to go to the next caller.

From a SunPower perspective, we see the price elasticity demand for our product extremely high.

If you just think about our market share around 5%, and the premium that Howard mentioned between 5 and 15% that gives you a pretty steep price elasticity right there.

Okay, thank you for the question.

We need to move now.

Thank you.

[Cory Tobin], you may go ahead.

Please state your company name?

Hi, Cory Tobin for William Blair.

Good afternoon, everyone.

Quick question the Toshiba contract, could you provide any additional details particularly with respect to installation or margins on that arrangement and also what's the potential for other agreements of this nature in different geographies?

Thanks.

Peter Aschenbrenner will take that.

So we're not prepared to offer any details on the agreement with Toshiba.

That's something we would need to coordinate with them.

I think the prospects of similar arrangements in other countries are good and we're working on a number of them.

Could you expand at all in terms of which geographies or at this point, is it wait and see?

Well, I think we're very active across Europe, so I would look as Europe is a place where we would be crafting these kinds of incremental arrangements.

Japan is a unique case because it's been very difficult for non-Japanese suppliers to crack that market and it's been a market that frankly hasn't been the focus of most of the industry for the last couple of years, so we've been working on that as Tom said for three years now and we're starting to bear the fruits of that.

Great.

Thank you.

Thank you.

Adam Crock, you may go ahead and please state your company name.

Hi, (inaudible) Quick question on your 2009-- your guidance.

Do you have a capital raise modeled into that 2009 guidance of $3.50?

Can you make comments on that and if I missed it can you just provide a little bit more detail on what you're expecting for your capital needs for 2009, thanks.

Hi, Adam.

The answer to your question is " No".

The 2009 guidance does not assume a capital rate.

We have noted in prior calls that we're expecting to be free cash flow positive early '09 and that's still on track.

The only qualification we've made to that statement is subject to us not doing a material transaction, sets us an acquisition for cash that would obviously have a different dynamic or a radical change in our business model that might also require different kind of financing.

But for 2009, no capital raise.

We-- why don't we take that as a homework as far as 2009 CapEx, we're not ready to provide an answer at this point.

Okay, thank you.

Thanks for the question.

We could take the next one.

We have about eight minutes left, then we will have to stop.

[Jonathan Hoops].

You may go ahead.

Please state your company name.

The company is ThinkEquity.

Thank you for taking my question.

Tom, during your prepared remarks and during the Q & A, you were clear on about at least two things with regard to Spain that there's a shift in Spain to the roof-top market, where you plan to leverage your dealer network and number two it sounds like you have zero power plant business exposure in your business mode.

And until the (inaudible) gets worked out, my question is about how your systems business in Spain will be affected by these dynamics specifically will you have idle systems employees in Spain in the fourth quarter and early part of '09 until the new role (inaudible) arrives and if so how will the business model absorb the cost of the under utilized employees and is there a way for you to take under utilized systems employees and maybe temporarily move them to other parts of the EU where you can put them and keep them working?

Yes, we believe business will move to the roof-top.

Yes we said virtually no or zero systems business.

When we entered the year, we talked about participating across geographies and across segments because of policy can change or policy uncertainty, we knew that in September, that there would be a new feed in tariff in Spain so we're very careful about how many people we added to our payroll in Spain, and we leveraged subcontractors rather dramatically so we're talking about less than 20 employees and the answer to your question is yes we can utilize them elsewhere.

Thank you very much.

Thank you.

Jeff Osborne you may go ahead.

Please state your company name.

It's Thomas Weisel.

Two quick ones.

Tom, at $5 total install cost per watt per power light assuming no trackers can you make low 20s gross margin?

Depends on the time frame, the answer to your question is yes, and in the very foreseeable time frame.

Very good and then just to gauge your paranoia on pricing, you mentioned range several times and I didn't hear the high and low of the range.

I was wondering if you could comment on that.

Almost made it through the call.

Range, we've modeled both from a price and there for can you cover it on cost reductions 10 to 20.

Very good.

Thank you.

Thank you.

Michael Carboy, you may go ahead.

Please state your company name.

Good afternoon, Signal Hill.

Tom you've talked a lot about potential disruptions and demand coming out of Spain, and we also have to deal with the ITC issue in the U.S.

Thinking about the fact that disruption to the business or to the overall solar PV business has impacts on the component supply chain, do you see any potential bottlenecks unfolding in the first part of the year once we have greater clarity on an ITC and on the Spanish degrees?

I think there's two perspectives on that.

One is the overall solar sector which I won't comment on a lot other than there's been discussions about some module component by class or some of the other plastics components and then there's, of course, the SunPower-- SunPower coverage and the answer to last question is yes.

We have a commodity strategy for not only silicon but other large components and we plan through 2009 and we have what we need to cover demand.

We're also on the macro question, we are attempting model overall global capacity and perhaps we can talk more about that on our next call.

And with regard to any contingent exposure, Manny, on pricing, any police guarantees on ITC?

So, I think I'll take that question.

As I said, earlier, that on the 12 to18 month question that yes there's business around the world that books in that time frame and then I alluded to in the United States with commercial ITC business that those get contingencies built in so the word contingency is the key.

Thank you.

Thank you.

Paul Clegg, you may go ahead.

Please state your company name.

Hi, Jeffries.

A question about the residential financing market and developments there.

Are you seeing efforts to develop residential PPAs taking off?

And then kind of ancillary to that what about the abilities to create and monetize wrecks in the residential market?

Hopefully Peter or Howard can help me here.

The answer is at a high level that PPAs are very early stage and they aren't a material part of the residential business yet.

Rex obviously are a significant part and important part of New Jersey business, having said that, Howard do you want to add anything?

Just a little bit.

We do have a number of financing options for our residential customers through our dealer network, and we are evolving new financing vehicles but ,as Tom mentioned, not a significant part of the business at this time, but see it increasing over time.

Okay, we'll take maybe two more questions because we're basically at noon.

Thank you.

Colin Rush, you may go ahead.

Please state your company name.

Good afternoon.

Colin Rusch from Broadpoint Capital In the utility quoting process are you seeing any particular thresholds for go, no go decisions based on Summer, Winter peak ratios, effective load carrying capacity or total percentage of total capacity for the entire asset base?

Okay, I'll let Howard answer that question.

That's a deep question.

Go ahead.

Yes, having worked at Pacific Gas Electric Company for over five years I understand what you're getting at.

The utilities do look at the production profile from systems, so they do evaluate whether it's flat on a roof, if it's tracking, non-tracking and they are making decisions on the effective peak capacity from the systems, and that's an integral part of the equation.

But the other factors that we mentioned we think are more dominant which is around cost of energy and then capability in mitigating their risk and giving them assurance of delivery and performance.

Just to clarify the effective peak capacity can you put some parameters around that about where it's coming out?

Sure.

There have been a number of studies that depends on the utility, the geography, the load shape but for summer peaking utilities, the effective load carrying capability is between probably 60 and 80% of an equivalent gas fire dispatchable peaking generator and so horse tracking gets you towards the upper end of the range and that's what we provide.

Perfect.

Thanks so much and congratulations on the execution.

Thank you.

Our last question comes from [Sam Dabinsky].

You may ask your question.

Please state your company name.

Hi, Stan Dabinsky, from Oppenheimer.

Just a couple of quick questions.

Not too much on the pricing front but question number one, it seems like your pricing today is below the industry average when compared to let's say Chinese module manufacture, so do you think your pricing at the full, do you think your pricing can fall less than the industry average, number one, and then a housekeeping question is just in terms of percentage of internal modules I know you give a panel number.

Could you give just on a megawatt shipment basis what percentage was internal?

Thank you.

Okay.

So I apologize to everybody that's in queue that we didn't answer your question.

We do call backs and we can do a call back on this question as well.

The answer is that our pricing is actually at a premium to the market between 5 and 15% and we expect to maintain that premium because we're increasing the efficiency of our product, there for more watts per panel so we don't expect to fall below the market mean.

And in terms of megawatts moving to the systems channel that's not a metric that we've included in our data sheet.

Perhaps we can help you in some other ways in a follow-up call.

Okay.

Okay, thank you very much, and thank you, everybody that stayed all the way through the hour and a half.

We really appreciate your support.

We're looking forward to talking to you in October.

I can assure you this team is dedicated on delivering the guidance that we've communicated to you today.

Thank you very much.

Thank you.

This concludes today's SunPower conference call.

Have a nice day.