SunPower Corporation (SPWR) 2008 Q3 法說會逐字稿

Good afternoon, and welcome to SunPower's third quarter earnings release conference call.

Today's conference is being recorded.

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

Your line has been placed on a listen-only mode until the question-and-answer session segment of today's conference.

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.

Let me start by saying we had a terrific Q3.

We anticipate a strong Q4, that with a long-term extension and expansion of the U.S.

investment tax credit, we are feeling very positive about our home field market and our global growth prospects in 2009.

With our strong balance sheet, free cash flow positive position in 2009, our brand technology cost people strategy, fully funded business plan, we believe we are the best positioned solar company to thrive in new opportunities around the globe.

Similarly, we are also the best positioned solar company to address the market risks with the opportunity optionality we have to shift allocation and sales focus between our diversified portfolio of market segments and geographies.

Today we will illustrate the benefits of our flexible positioning as we report on our third 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 fourth quarter of 2008, and update our full year 2009 guidance.

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

We delivered very strong operational and financial performance as we beat our revenue guidance, significantly improved our gross margin and beat our EPS guidance.

Our model continues to work.

We are fully funded to do achieve our plan and see no need to raise funds to execute on our current plan.

Specifically, our Q3 2008 revenue was $378 million, up 62% year over year as we benefited from strong global demand and the continued success of our multi-segment vertically integrated model.

Our non-GAAP EPS of $0.60 per share exceeded our guidance as we further reduced manufacturing costs and managed operating expense growth.

Our systems segment accounted for 51% of revenue.

69% of the panels installed in the channel were SunPower panels.

In Q3 we rebalanced our product allocation between the systems and components channels after the Q2 systems business surged in Spain.

This allowed us to aggressively ramp our dealer network in North America and Europe to meet the strong demand for SunPower's industry leading products.

Our components segment accounted for 49% of revenue, delivered very strong gross margins of 39%, up 750 basis points sequentially.

This strong performance was achieved through higher conversion efficiencies, improved silicon utilization, lower polysilicon cost, scale efficiencies at higher production volumes and modestly higher average selling prices.

Our systems business continued to expand even while we shifted our geographic focus from Spain to North America where we completed 10 megawatts of large scale commercial projects including systems for applied materials, Agilent, Toyota, the U.S.

Department of Energy, as well as providing our high efficiency solar cells for a building integrated system at the new California Academy of Sciences.

Very importantly, Q3 signaled our entrance into the rapidly utility scale PV market with our Florida Power & Light and PG&E announcements.

Let me explain in some detail what drove these product wins and what it means for our confidence in long-term demand.

These agreements are a watershed event for the solar industry and demonstrate SunPower's ability to deliver solar power at a levelized cost of energy that is competitive with other forms of peaking power.

SunPower achieves competitive levelized cost energy through a combination of high solar cell conversion efficiency and low cost, high capacity factor tracking technology.

LCOE is calculated by summing the net present value of total system installer costs including land and the O&M costs and dividing it by the net present value of the amount of energy produced.

We are reducing total system install costs through aggressive technology development.

Produced manufacturing productivity and scale as well as through our vertically integrated model which allows to us effect cost reduction across the entire value chain.

In the LCOE denominator, we have a strong competitive advantage, as we are increasing the amount of energy produced through higher efficiency cells and modules and industry leading tracking technology.

Let me discuss why solar PV is well suited for large scale utility projects.

With solar PV we have the flexibility to work across a large variety of sunlight conditions, locate power plants close to transmission and distribution lines, build modular systems at any locations that match utility load growth needs and distribution capacity constraints, and leverage fast install times.

In fact, we have installed over one megawatt per day at a certain project -- at certain projects.

The long-term investment tax credit allows utilities access to the ITC for the first time, improving the economies -- economics for utilities to own PV power plants, creating a new category of tax equity financiers.

The bottom line is that with our continued focus on cost reduction and further improvements in our technology, we offer utilities a very competitive levelized cost of energy when compared to conventional peaking generation.

That means their available market opportunity has just expanded through a completely new sector, utilities scale PV deployment which may be sold in multi-hundred megawatt increments.

Let me elaborate on why utilities choose to do business with SunPower.

SunPower has the highest power density, more power per square meter, which drives to us to a cost-effective levelized cost of energy.

In fact, SunPower has the highest efficiency cells in the market, up to 50% more than conventional crystalline silicon and two to four times more than fixed build.

SunPower's tracking technology increases the capacity factors of PV systems.

For example, SunPower's T20 tracking system improves the capacity factor up to 30% compared to fixed build.

And tracking generates more power during peak times when utilities need it the most.

Finally, SunPower has a credible track record, having developed and installed over 500 large scale systems comprising over 400 megawatts on four continents.

The rapidly emerging utility scale market contributes to our positive outlook for the global demand picture for 2009 and beyond.

Global demands remains very strong cross multiple geographies and we have robust customer demand in every market we serve.

The ITC has established the U.S.

as a core global market with accelerating demand over the next few years.

There is greater clarity in key markets like Spain, Germany and Korea which improves our visibility for product allocation in 2009.

Our manufacturing scale and technology advantage on which our brand is based is allowing us to improve our market share in both established markets such as Spain, Germany and the United States, as well as the emerging markets such as Italy, Korea and Greece.

Not only are we succeeding geographically but our diversified flexible market segment approach allows us to respond to new opportunities within a market as well as avoid risk by moving our sales and product allocation between segments.

Spain is an excellent example of this flexibility, as we have established a strong dealer network in Spain that will address the roof top market now that the feed-in tariff is refocused to that segment.

A key factor in meeting this strong demand will rely on our customers access to financing.

I would like to spend some time on the potential impacts of the global financial challenges.

First, let me talk about the overall environment and then discuss how we are positioned to succeed.

Overall fundamentals to finance solar systems remain in place though risk spreads have widened.

However, investors are looking for save options to invest and solar products offering investor a reliable predictable payment stream.

Financial terms in the alternative minimum tax provision in the ITC package may rebalance customer preferences to more cash deals and customer owned structure from PPA's.

SunPower's history includes a long period where such structures predominated.

We are comfortable that our scale and model flexibility would allow to us to thrive in such a scenario.

SunPower is also developing new financing partners to supplement the broad group of financiers we have worked through previously.

Project timing and industry dynamics are also very important.

In Q4 we expect minimal impact as we complete commercial systems in the United States that are already funded.

We expect credit conditions to moderate over time, see significant opportunity as a result of passage of the ITC here in the United States and improved policy clarity globally.

In fact, we expect to see a continued flight to quality where SunPower has an advantage.

In summary, our flexible model, portfolio approach and intense focus on cost reduction will enable to us leverage our scale and experience to manage through these risks.

Fundamentals remain strong, and near term impact is minimal.

Turning to our internal execution, SunPower continues to deliver on our strategic focus on brand, technology, cost and people.

Let's start with brand and channel.

In the third quarter we continued to benefit from our vertical integration strategy and focus on improving the overall customer experience in all channels from our dealer networks to direct sales through utilities.

Our direct contact with the customer enables us to better manage our business as we can capitalize on immediate visibility on merging trends and exercise our flexible model.

We added 25% more dealers with global dealer network with an emphasis on European expansion.

We completed the integration of our solar sales Australian acquisition.

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 line.

The ramp of our generation two technology continued during the quarter as we now have seven lines producing generation two solar cells.

We also continued our transition to 145-micron lines as we now have four lines running 145-micron wafers.

Additionally we made a strategic decision to transition to 145-micron wafers on our new lines.

This will further improve our industry leading silicon usage going into 2009.

This initiative had a modest impact on our Q3 production and the resulting production adjustments are included in our guidance.

Our adjusted ramp to launch lines on 145-micron wafers reduces our costs as we bring up our new lines and positions us well for lower cost manufacturing starting in 2009.

We reiterate our production plan of 450 megawatts or more in 2009.

Finally we are constantly improving our systems technology and our balance of systems cost.

Our T20 tracker delivers up to 30% more energy than fixed build systems and we have made cost reductions to our major -- to our design based on the experience gained on sites implemented in 2008.

And in the residential segment, we started shipping our new wireless residential monitoring solution.

These technology developments directly result in cost reductions.

Our plan to reduce total system installed costs by 50% by 2012 as compared to 2006 remains on track.

And we are well-positioned to reach two-thirds of this initiative by 2010.

Reducing costs 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 capacity factor and conversion efficiency, we are driving the competitive retail and wholesale electric rates on a cents per kilowatt hour basis.

We are also focusing on leveraging our scale internally to reduce costs.

In this quarter we upgraded to an oracle ERP system as an example.

In terms of silicon cost reduction, we have improved conversion efficiencies as we add more lines of our generation two minimum 22% cell technology.

We've reduced silicon utilization at 6.2 grams per watt and continue to benefit from our portfolio approach to polysilicon supply as we saw our poly cost decline for the second straight quarter.

We received poly deliveries to plan from (inaudible) and DC Chemical and we remain confident that poly costs will decline at least 10% this year as well as in 2009.

Due to strong industry fundamentals, continued execution on our vertical integration strategy, expected gross margin expansion and our progress on our cost reduction programs, we expect to materially meet our target operating model in the fourth quarter.

We are strategically well positioned for 2009.

We remain on track to realize our mission reducing installed systems costs by 50% from 2006 to 2012.

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

On that note, I would like to turn the call over to Manny who will report details of our 2008 Q3 results, provide updated -- and provide updated guidance for Q4, 2008, and update our current 2009 guidance.

Manny?

Thanks, Tom.

Good morning, everyone, and thank you for joining SunPower's earnings conference for the third quarter of fiscal 2008, which ended September 28th.

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

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

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

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

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.

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

Total SunPower revenue for 2008 third quarter was $377.5 million.

That's up approximately 1.6 times compared to our year-ago third quarter revenue of $234.3 million and exceeded the guidance we gave you on our second quarter call.

The third quarter revenue performance was aided by very strong performance in our components segment, which accounted for 49% of our revenue in the quarter versus 29% in the prior quarter.

Our components segment accounted for $184.2 million of our third quarter revenue, representing a 64% increase from prior quarter revenue of $112.2 million and approximately 2.4 times that of the year-ago third quarter revenue of $76.6 million.

Our components segment benefit from very strong demand in our bar channel, both in the U.S.

and Europe, where we continue to significantly increase our dealer network footprint.

Our systems segment accounted for $193.3 million of the quarter's revenue, up 23% compared to the $157.7 million last year, in line with our Q3 guidance as well.

Recall that the second quarter of 2008 systems segment revenue was heavily influenced by early completion of power plant scale projects in Spain.

Please note that the ultimate sale of SunPower manufacturing panels, which are allocated by the companies to the systems segment is reflected at revenue on the systems segment.

In the 2008 third quarter approximately 69% of panels installed in our systems projects were SunPower manufactured solar panels.

That's up from the 61% factor last quarter.

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

Now let's cover earnings.

On a GAAP basis, SunPower reported operating income of $50.2 million and diluted net income per share of $0.26.

These figures include non-cash charges, amortization of purchase accounting intangible assets of $4.2 million, and non-cash stock based compensation expenses of $18.9 million.

On a non-GAAP basis, adjusted to exclude non-cash charges for amortization of intangibles, stock based compensation, and their related tax effects, SunPower reported a total operating income of $73.3 million and a diluted net income of $0.60 per share.

This compares to the prior quarter's operating income of $67.6 million and $0.61 diluted net income per share.

Just a couple more notes on the $0.60 performance in Q3 that we are very excited about.

I will talk about some of this later.

But this result, this $0.60 performance includes higher share count from the (inaudible) reflection of the Lehman shares that I am going to talk about later.

It also includes a $900,000 provision for potential loss of value in an investment, which I am going to cover later.

And it also includes a higher tax rate.

We guided you to a 24 to 25% tax rated and ended up approximately 30.

And all of those factor were headwinds and we still delivered $0.60, which is better than our guidance for the quarter.

So the total Company's overall gross margin for the third quarter was 27.1%, whereas our non-GAAP gross margin reached 29.2%.

This represents a 280 basis points improvement from last quarter's non-GAAP margin of 26.4%.

In the third quarter, our systems segment posted a non-GAAP gross margin of 19.7% , a decrease over last quarter's margin of 24.2% largely due to regional mix of projects, specifically a higher North America project mix during the quarter.

Our component segment on the other hand posted gross margin of 39.2%, a 750-basis point improvement over last quarter's 31.7, once again benefiting from lower silicon costs, higher volume, more efficient use of silicon and slightly higher average selling prices.

Briefly on the balance sheet, we ended the quarter with cash including short and long-term investments and restricted cash of approximately $431 million.

That's up from the $336 million we had in the second quarter.

This marks the first quarter that SunPower has generated positive free cash flow and effectively added $95 million to our overall cash balance in the quarter.

The significant reduction in working capital was the primary driver of our cash flow results.

As Tom noted earlier we are fully funded for our current business plan.

Our DSO improved to 47 days, while our net inventory ended relatively stable at 65 days.

Our total capital expenditure for the quarter was $55 million, and we now estimate the total capital expenditure for the year to be in the $250 million to $300 million range.

Depreciation for the quarter was $14 million, while total year depreciation is now forecasted at approximately $50 million.

Now before I walk you through our guidance, I would like to take a moment to address recent developments in light of the market and credit crisis that we have all witnessed.

First as a result of the Lehman bankruptcy, the 2.9 million shares that we lent to Lehman for purpose of providing a borrow capacity for one of our convertible debenture offerings last year is now subject to bankruptcy proceeding as far as point potential recovery.

In the meantime, in accordance with GAAP rules, we have begun to show those shares as part of our outstanding share count.

For the third quarter results, we have to show the ratable effect of those shares, which added approximately 450,000 shares to our count.

Starting in the fourth quarter we will reflect the full 2.9 million shares as outstanding.

This represents a dilution of approximately 3.5%, which is now reflected in our guidance and as you'll notice later it's unchanged despite this factor.

Out of the approximately $431 million of cash and cash equivalents at the end of the quarter, about $26 million were invested in the primary reserve fund and reserve international fund, both longstanding safe accounts for money market type investments.

As some of you might have heard or read, these funds had some liquidity issues and had some exposure to Lehman related investments.

The funds are currently locked and the SEC has gotten involved with the orderly distribution of these funds, as well as establishing the potential loss of value to be shared by the many investors that were in these funds.

Our third quarter result includes an approximate $900,000 of provision for loss of value for these funds in accordance with fair value accounting guidelines.

We have reason to believe that we have now reflected the potential loss value and expect full recovery of the balance.

We also have taken additional steps to protect the principal and liquidity of our cash and investment portfolio, including investing more in treasury funds, diversifying cross money market funds and investing only in the highest rated securities.

Now, the impact of the recent credit crisis has obviously generated a lot of interest from our investors as to its impact on the solar systems business.

Now as some mentioned, risk spreads have increased for the required internal rate of returning for financing projects have risen.

We believe we are well positioned to emerge as a leading player in the market once conditions moderate, given our balance sheet, our scale and our experience.

To minimize our risk, we apply the same portfolio of principal to financing projects that we do to the rest of our business.

For example, we work with a number of different financiers for systems, from residential to utility scale projects.

The breadth of our market view allows us to evaluation terms, conditions and even consider taking an ownership position either temporarily or permanently for those systems if we feel that that would be the best option.

Also we recognize that the current situation could be a benefit longer term, as the consolidation and restructuring of financial systems may produce companies with the capability to finance even larger projects in the future.

In addition to our portfolio approach to financiers we have also accelerated some of our cost reduction programs to reduce the impact of potentially higher financing costs in our model.

On a geographic basis we continue to see diversity related to financing of projects which is positive, multiple markets, multiple structures.

For example, in Italy, we are seeing more private equity deals.

Spain on the other hand has been a very developer oriented with secured financing in place, though that may change due to the (inaudible) structure which emphasizes more rooftop projects now than ground mount, which incidentally plays to our advantage as well.

Finally in the U.S.

the passage of the eight-year ITC opens up a lot of doors including utility owned and rate based projects at the support of power and light project and a great variety of backed equity financiers because of the alternative minimum tax benefits in the ITC tax bill.

Now solar projects represent low risk, long-term investments with reliable returns for investors, particularly with extension of the ITC in the U.S.

and the resolution of the (inaudible) tariff in Spain.

We believe that we can continue to source financing for projects that require it, albeit at potentially higher costs near term.

Let me emphasize that we have a very small portion of our fourth quarter revenue expected to be derived from systems requiring financing.

Now let me talk about guidance.

As I begin, let me reiterate as we have noted in prior calls, that our business results may reflect quarterly shift in mix between systems and component segments revenue.

Also from quarter to quarter, we expect shifts even within the systems segment due to size, type of projects, regional deployment and percent of completion factor that could lead to nonsequential or even marginal growth in revenue margins or earnings.

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

These factors will continue in the fourth quarter as well as in 2009.

Here is the guidance for the fourth quarter of 2008.

For the Company, revenue of approximately $405 million to $435 million.

That's comprised of components segment revenue of $235 million to $255 million and systems segment revenue of $170 million to $180 million.

The segment mix for Q4 represents strong demand for component sales, both direct and through the bar channel, while also reflecting a higher mix of North America systems installations for the fourth quarter.

Gross margin for Q4 is projected at 29 to 30%.

That's why Tom mentioned we will materially or maybe even get to our targeted operating model.

This is influenced by higher components segment mix than the prior quarter.

Component segment gross margin is projected at 37 to 37.5%, taking into consideration slightly lower ASPs assumed in Q4.

Systems segment gross margin is projected at 18 to 19%, reflecting the projected regional mix for the fourth quarter.

That all results in a non-GAAP EPS, which is estimated at $0.73 to $0.80, largely unchanged from the last quarters guidance despite the other headwinds that we are confronting in the fourth quarter.

Now for fiscal 2008 total year, you could expect -- or this is what we expect as far as financial results.

Revenue of approximately $1.44 billion to $1.46 billion, estimated to be comprised of component segment revenue of $625 million to $635 million and systems segment revenue of $815 million to $825 million.

The total Company average gross margin for the year is now estimated at 27 to 27.5%, with the components segment ending the year at around 35 to 35.5% and the systems segment at 21.5 to 22%.

That all sums up to a non-GAAP EPS for 2008 that is also being increased to $2.34 to as high as $2.41 per share.

Now lastly we are also increasing our early guidance for 2009.

We expect revenue in the $2.05 billion to $2.15 billion, while EPS of at least $3.50 per share despite the tax rate drifting up on us a little bit at 25 to 28% for that year.

Now before I turn it over to Tom, who will lead us through the question-and-answer session segment of the conference, I just have one more thing to share with you folks.

This is the first quarter that the Company has closed its books using a new company-wide ERP system that was implemented during the quarter.

So as expected, the close took a little bit longer than usual.

It was a lot more fun than we thought.

One consequence of that, however, is our auditors, who would ordinarily be further along in reviewing our books, are still doing that or are in progress.

So let me now turn you over to Tom.

Thank you, Manny.

Before we go to questions I would like to comment that as you know in the quarter that Cypress semi-conductor completed the separation of SunPower and I did want to take just a moment to thank T.

J.

Rodgers.

It should be noted that in 2001 the company was seeking funding.

There were very few people interested in funding the company and T.

J.

Rodgers wrote a personal check for $750,000, and over the course of several subsequent years, sent people and systems over to make us the company that we became.

So we appreciate your support, T.

J.

and his team.

Make no mistake, however, we are fully prepared and look forward to being a completely independent company.

I'm going to open the call up for questions.

First let me tell you that we have Howard Wenger, our President of Global Business Units, Peter Aschenbrenner our V.P.

of Corporate Strategy, Julie Blunden our V.P.

of Public Policy and Corporate Communications, Mike Armsby, our V.P.

of Finance, and Bob Okunski, our Senior Director of Investor Relations.

So they may provide some of our answers.

We will answer questions about 45 minutes and I will try to limit to one and a follow-up as we have in previous calls.

So we will turn it open to questions, Michelle.

Thank you.

(OPERATOR INSTRUCTIONS) Steve O'Rourke, you may ask your question.

Please state your company name.

The crediting issues that we see now, are you seeing any direct impact on projects being pushed out or even cancelled looking out into 2009?

And secondly, when you consider a higher cost of capital, what do you forecast or what do you see for system prices having to come down maybe more than you previously thought in 2009 to maintain project ROIs?

Thanks, Steve, and Steve is with Deutsche Bank.

So we lost you there for a moment, Steve.

I am going to answer part of that and then turn it over to Howard Wenger.

So what we expect on the second part of your question was, what do we expect in terms of internal rate of returns, in fact on systems pricing.

I think more importantly, we expect two things -- new financiers coming to market and a mix, a change of mix in system financing or ways that systems are paid for from PPAs and cash.

Where the PPA structure would stay in place, you would expect on -- it's very hard to predict in terms of what percent of IRR increase and what that impact will have on systems.

But you can think of it as something more in the lines of changing mix than reducing systems prices and we'll see how that goes in time.

Howard, do you want to comment further?

Sure.

Thanks for your question, Steve.

As Tom mentioned, there are a lot of new players actually in the finance spectrum.

Manny covered that part in his comments.

And I'll be a little more specific including utilities, who now can avail themselves of the tax credit, and by utilities I mean both the regulated, unregulated affiliates of facilities, banks, particularly international banks, insurance companies and developers, who make it their living to develop projects and own assets.

And I was in San Diego the last few days and had no less than six private meetings with entities that came forward and scheduled the meetings and want to finance our rooftop and our large ground systems including the big plumb of the PG&E 250-megawatt project.

So there's a lot more credit and liquidity out there than meets the eye.

That's number one.

Number two, there is definitely an impact from the financial issues that surround us right now in terms of higher IRRs.

But we are seeing that mostly from our traditional sources of credit.

So in terms of demand visibility, Steve, it would be fair to say that there are transitions going on in financial markets that affects our visibility, but of course we are leveraging the channel diversity that we have planned into our business for the past several years.

So not only is there a change from (inaudible) to cash deals but there is also a shift of business between channels.

But, yes, it is impacting visibility to a degree.

Thank you.

Thank you.

Our next question comes from Mr.

Rob Stone.

You may go ahead and please state your company name.

Cowen and Company.

I wonder if you could just put a little more color on the pricing trends that you are seeing.

You mentioned ASPs were slightly higher in Q3 and you expect them slightly lower in Q4.

Can you give us any more color on that?

And a follow-on question if I may, in your guidance for 2009, what are you assuming with respect to euro dollar movements?

Thanks.

In terms of ASPs, I think it reflects -- the increase this quarter reflects the basic fundamentals for solar technology worldwide and a particular demand for our product, which is really strong in the traditional core markets as we call them in Germany, Spain, in the U.S.

And now that we have resolution with the policies in the U.S.

-- and by the way I want to comment that it's really, it's an historic event that took place.

Those of us have been in the business for 25 years trying to commercialize this technology, we have for the first time a Federal overlay for eight years, and a good one and a very strong one, that's actually improved on the ITC by removing the cap to residential.

And I think that dynamic is going to create very, very strong -- we believe very, very strong demand going into this quarter, Q4 and into '09.

So again, getting back to your question head on, Rob, strong ASP, strong demand in Q3 leading to ASP increases, primarily driven through demand for our product in core markets.

Can you give us any specific on the percentage change, what is slightly?

Low single digits.

Rob, let me take the second part of your question relative to the euro from a 2009 planning.

We essentially use a -- the lower of either the spot rate or a twenty bank forward-looking rate from a planning perspective and that's largely available, so pretty conservative when it comes to that.

And notwithstanding that we also have a hedging policy in the Company, where to the extent allowed by accounting rules, we do hedge accordingly.

So what do you estimate is going to be your distribution by currencies next year, if you can give any rough cut at that?

This is Howard.

I can give a rough cut.

Euros, roughly 30 to 40%.

For '09 total, '09.

All right.

Thank you, Rob.

Michelle, if we could get the next question.

Thank you.

Stephen Chin, you may go ahead.

And please state your company name.

UBS.

Thank you and congratulations on good execution in the quarter.

Tom, I wanted to see if you could give us an idea of how you see the health of the bar channel inventory levels, specifically ones that if you have any concerns that there could be solar modular inventory building in the channel?

And then the follow-on question I had was I wanted to follow up on the comment that polysilicon costs will be about 10% lower next year.

How confident do you feel that the companies will be able to keep these 30% gross margins if solar module prices are down more than 10% next year and silicon costs are only down 10% or are you just being conservative on some of the polysilicon cost savings?

Thanks.

So first on bar channel inventory.

One of the reasons why we created the bar dealer network was if we want to sell directly to the end customer and that means that we don't have an inventory stocking point between us and the customer.

Now there is a small amount of inventory that the dealer partners would withhold but it is very small.

So in our dealer channels, it's really important that there is no distributor in between.

We sell directly to the dealer who is dealing with the customer.

That's a long winded answers to your question, there is very little channel inventory in our dealer network.

And that's something we think is a strategic advantage for us in terms of the way we structured that channel and I can assure you we keep a really, really close eye on that.

Second question on polysilicon and next year cost reduction and can we hold 30% gross margins, the answer is yes.

The answer is yes because polysilicon costs are coming down 10% or more, but at the same time, we are improving silicon utilization and we are increasing conversion efficiencies rather dramatically, as well as we're improving scale efficiencies in our second fab that are very significant.

And we realized that our average utilization in our second fab was probably on the other of several lines whereas next year it's going to be in the order of ten, probably close to 13.

So there's a significant scale advantage.

So I think you have to take all of those factors into consideration and we are comfortable with 30% guidance of gross margin with the other things that you mentioned.

Okay.

Thanks, Tom, congratulations again.

Thank you very much.

Next question.

Thank you.

[Bushnell Shaw], you may ask your question.

Please state your company name.

Thank you.

Barclay's Capital.

Congratulations on a great quarter.

Tom, can you just comment on how you see your systems and component businesses in terms of revenue growth in 2009 and perhaps you can talk about some of the dynamics and differences in revenue growth in both businesses and I have a follow up.

Okay, and I think I will comment and if Howard wants to add on to my comment I will turn to him.

On the -- as you look at our channel strategy and how we've developed now to assure approach to three markets, arguably two, I guess, systems, we have both commercial rooftop and power plant and then the component business which is our bar channel, we have the flexibility to move between those markets depending on how things change.

Think about that in the last quarter.

The Spain feed-in tariff finally got released and it shifts the focus to commercial rooftops to a degree.

We finally got the investment tax credit, which creates a long-term scalable commercial market, brings in the utilities and creates a countrywide residential market.

So as these things happen sometimes in an unpredictable manner, like the ITC, we are able to capitalize, we don't have to shift the focus, it already exists.

So again sort of a long winded response to -- we see North America being quite strong next year, the bar channel is, i.e.

the residential channel is a real intense focus of the company and is growing dramatically.

We are unable to keep up with demand.

We are working very aggressively to help our dealer partners continue their growth.

And in the systems segment, we talked a little bit about the dynamics previously, shift probably to more cash deals on the commercial side and then we'll start implementing the Florida Power & Light utility projects in 2009 and preparing for PG&E in 2010.

So that's going to buy us towards large scale projects in terms of mix probably sufficient.

Anything else, Howard?

The only thing I would add are some percentages.

What's interesting for the guidance that Manny gave this quarter -- I mean for coming up for Q4 '08, we are looking at 60% of our revenue, plus or minus, components and 40% systems and then for the actual results guided for '08, is 40% components and 60% systems.

And I think you'll see is sort of quarter to quarter, we are going to be between these goal posts plus or minus 40% one side, 60% the other and flip the next quarter.

And the same between international and domestic, 40 %, 60% going back and forth as we manage our business.

Great.

Thank you.

Just one other follow up.

If you would quantify the potential positive impact of the ITC on the residential and commercial segment on your revenue growth assuming you are operating in a normal financing environment, what would that be?

We'll go to the person who effects policy and thinks about macro effects, Julie Blunden.

We think the opportunity with the ITC in the residential market is very substantial.

Essentially what we've just done is taken an investment tax credit that was short term and focused on a single market segment, the commercial segment, and created we've now a three segment long-term support mechanism that's nationwide and provides AMT relief.

So that means the residential customer who previously had conceptual access to $2,000 of support but was an AMT filer didn't even get that.

And now we have a situation where anywhere in the country customers can access that 30% tax credit without the double cap and with AMT relief.

So the residential market is now going to be supported by nationwide program that will especially take into consideration sun and electric rates and will see penetration move around based on those fundamentals as well as specific state support program.

It's a tremendous opportunity for the residential market.

This is Peter Aschenbrenner.

I would just like to make a comment with respect to the bar dealer network.

It's something as you know we've been working on now for three years really in anticipation of this kind of opportunity.

What we feel we have now is a really a fully scaled core of services including training, regeneration, logistics that we can very rapidly now scale into incremental states.

And we think that we are in the right place at the right time here with this ITC to ramp the network, the size of the network, which is now over 200 dealers very, very quickly.

Thank you very much.

Michele, next question,.

Thank you.

Satya Kumar, you may ask your question.

Please state your company name.

Credit Suisse.

Just want to do follow up on an earlier question on the silicon cost declines and the impact from euro depreciation, you mention that you could maintain your 30% gross margins for calendar '09.

As you look out specifically into Q1 giving the declining feed-in tariffs in Germany, are you comfortable maintaining your gross and operating margin levels 30 and 20% in Q1?

The short answer to your question is yes.

However, I would say to you that Q1 is historically a seasonal quarter.

Obviously you're installing solar systems outdoors and in the key markets, that's not a great time of year to be installing systems.

So there's a degree of seasonality involved.

But in terms of the specific question, of can you offset feed-in tariff with cost declines the answer is materially yes.

That's very good.

In terms of the U.S.

market.

In particular you are talking a lot about residential market, how much are you relying on state level subsidies to support the U.S.

market next year and still maintain your margin profile?

If you just had the Federal incentives, at what point in time do you think that you will have the cost structure to hit your margin targets and drive substantial demand in the U.S.?

This is Julie.

As you know, the opportunity with a national support mechanism like the ITC is to look at the pockets of demand that are competitive today and you work your way across the country.

So the other thing to take into consideration is that the scale of the residential penetration right now in the U.S.

is very modest.

So the most penetrated market in the country is PG&E with 25,000 interconnects in a market where you have over 4 million customers in PG&E's territory.

So you have a long way to go where you reach anything approaching saturation in the markets that are strong today and therefore even small state programs create an tremendous opportunity for us in the long-term as electricity prices go up and solar prices come down.

We have a long runway for growing our business based on over 200 dealers that we have in over 25 states today.

Understood.

But I presume that your competitors are also looking at the similar sort of incentives at a state level.

What I was wondering was, from your perspective, when does your cost structure get to the point that -- I understand that in the next maybe year you have all these incentives, but if you just had the Federal incentive at what point does SunPower's cost structure become good enough to drive demand at your margin profile, be it residential or commercial?

Is that some point end of next year or is that some point early 2010, just wanted to see how I could think about that?

I think, Satya, on very state specific, so as we reduce install costs by 50% between 2006 and 2012, there's more and more states where there's economics at work.

And as you know, we expect two-thirds of that cost reduction by 2010.

So broadly speaking, I think the answer to your question is you are going to see quite a few more states becoming economically viable in the 2010 time frame and, of course, many more by 2012.

Perfect.

Thanks.

Next question, please.

Thank you.

Sanjay Shrestha, you may ask your question.

Please state your company name.

Lazard Capital Markets.

Quick point of clarification, guys.

Did you guys say that you expect the overall system pricing to be down less than 10% during 2009?

This is Howard.

We've -- haven't given specific guidance on systems pricing but we've given overall guidance of 10 to 15% ASP declines for 2009.

So with the passage of ITC here and given what's going on I guess in the financial market, am I hearing you guys right that there is more and more financial players, maybe not the traditional type, but a different type of financial guys that are coming into the market.

And therefore, now with the passage of ITC, you don't see it being a negative impact of what's going on in the financial market and yet you could see a pretty substantial growth in the U.S.

market.

Can you talk about that some more?

Am I reading that right?

Is that what you guys are seeing or talk about that a bit more?

Yes, things are changing rapidly, so the pace of the different variables is not terribly predictable for sure.

But essentially what you are seeing is capitalism works and as incumbent financiers raise their internal rates of return, there is new entrants who have been sort of waiting in the wings who say, solar has proven over the last five years to be a very predictable return payment stream.

And so as you look at risk profiles, there is sort of a flight to quality and I think solar power systems in general and SunPower specifically have a low risk profile in terms of their systems.

So we have that in our favor, of course.

There's a tightening of money supply and it's difficult for everybody.

But I think I would, I wouldn't go to the extreme of saying we see no impact and next year is clear.

On the other hand I would say to you that we believe we can work our way through this.

Got it.

Great.

And related to that, Tom, so with the utilities being able to take advantage of ITC, do you see them even wanting to participate more on the residential application now and not just the large scale utility application and does that actually end up helping expedite the growth of the U.S.

market?

I would say to you that utilities in general fit the profile of new financiers whether it's retail, commercial or large scale power plants and you will see leaders like PG&E and Florida Power & Light be aggressive for sure.

And how that mix ultimately ends up, if they end up doing residential or commercial is hard to predict but they will be definitely -- indications are definitely more active, yes.

Great.

Congratulations on a good quarter, guys.

Thank you very much.

[Manny Hosini], you may ask your question and please state your company name.

Sure.

It's Manny Hosini from NPR Capital Markets.

Tom, I understand your commentary regarding supply and how you view the end market demand and I respect that, But one thing that I'm still not sure and am struggling with is the fact that when I talk to regulators like in the case of California, CPUC, I get a feeling that some of these PPA might actually be sent back as they try to keep the rate at a reasonable level.

So I want to get your commentary or your opinion as to how the regulators are looking into this, not so much of what you see or hear from utilities.

And I have a follow-up question.

Sure, Manny.

This is Julie Blunden.

Our PPA with PG&E is already into the PUC.

And the -- we have had no negative comments on the application.

So we are in an excellent position there.

And Florida Power & Light, the commission has already approved that contract with FPL.

So I think what you are finding is that when you look at renewable opportunities in general, there is differentiation by the regulators about more competent technology and less competent technology.

The beautiful thing about photovoltaics is that it's a highly competent technology with decades of experience behind it which is one of the reasons that the utilities liked it.

For the same reason the regulators like it.

Sure.

As a follow up going back to the PPA, if I understand correctly that is going to be turned on in 2010 assuming six months lead time for installation.

That means that you have to get the financier or yourself be involved in the ownership over the next six months.

So again help us understand, what are the key milestones and what would it take for you to have ownership given the current capital markets?

Would you have to go and actually strength then your balance sheet?

This is Howard Wenger, I will answer your question.

First of all just for clarity, the plan for the PG&E project is a three phase build out, so 25 megawatts in 2010, 75, 2011, 150, 2012.

So we are able to -- as you know we delivered and installed in the first part of this year 50 megawatts in one region in Spain, so 25 megawatts we can do very handily.

So we have more runway than just six months to get the project financed.

I just want to do provide some color on that.

And I'll let Tom weigh in on this as well.

The second part of your question, we do not plan on owning very large scale systems like PG&E.

Thank you.

Thank you very much.

Next question.

Thank you.

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

Wedbush Morgan.

Tom, just to change the subject a little bit from ASPs and things, can you talk a little bit about operations and capacity build, given which now is a pretty dynamic forward calendar that you have?

Sure, you're speaking specifically of our fab?

I mean you have, what, there's I believe scheduled megawatts of 574 for '09, so I don't -- you are fully funded for the business model, which we anticipate to continue.

But wanted to see if you had any update on outlook, given what seems to be a very strong building calendar out there, '09 to 2010 on line.

Absolutely.

Let me -- I will just speak broadly.

On our second fab is very effectively coming on line, will complete that next year, and as you point out fully funded and we are going to complete that.

We are a little remiss in mentioning that we've broken ground on the third fab and we are proceeding on that fab as well for production in 2010.

And that is built into our guidance as well.

So broadly speaking, all systems go in both fabs, all three fabs, obviously.

Did you have a follow up, Al?

No follow up here.

I will let others take the three part question.

We will go to the next question then.

Thank you.

Mark Heller, you may go ahead.

Please state your company name.

Thank you, Merrill Lynch.

Manny, I had a question on the systems revenue for Q3 and Q4.

So Q3 looks like it was in line, but it looks like the guidance was taken down for Q4.

I think previously you guided for 195 to 215 and now you are looking for 170 to 180.

So I'm just wondering what the change was there?

Yes.

Thanks, Mark.

It's largely just reacting to opportunity.

The fact that you've seen the first significant increase on components segments mix as Howard pointed out, it's a shift from quarter to quarter.

The opportunity, partly because of demand on the bar and residential channels being so strong, as to allocate more product to that segment in the fourth quarter.

And that's really all just the power and the flexibility of the business model is being able to shift between segments.

And on the gross margins, so it went down to about 19.7 in Q3 and between 18 and 19 in Q4.

What's the long-term outlook for the margin of this business and I guess when are we going to see the margins stacking benefit here?

Very good point.

First off, to just put some color on why it's going to stay at around 19% for couple of quarters, it's largely because of regional mix, most notably higher North America system deployment.

Contrast that for example in Q2, where we were very heavy Spain and this segment had a very good gross margin.

So that's part of the answer is we have to get the regional mix that is more fitting of blending of margins of different regions.

As you guys know, the European deployment typically commands better margins.

Also as we achieve more allocation of SunPower modules to the segment and that's going to be approaching 80% to hit the model, that would also help us get the segment to a better margin profile.

So more SunPower allocation in a regional mix that plays out to the average.

Mark, I would just add that the experience of this year with many North American systems being implemented by SunPower, we've been able to build cost reductions into our systems design that we expect margins to improve even on a mix basis in North America.

So do you have a follow-up, Mark, or we'll move on.

No, thank you.

Thank you, next question.

Thank you.

Michael Horwitz, you may go ahead.

Please state your company name.

The Stanford Group.

Congratulations, great quarter.

How do you anticipate perhaps your business mix systems and components over the next few years, how does that change in a more robust residential demand and maybe how that plays out in margin and then I will just ask my follow-up.

To the point of balance of systems, what benefits do you see with declining materials prices currently and probably going forward into next year?

Thanks.

Sure.

As you look forward in terms of business mix and then sort of margin profiles associated with that, our fundamental premise is it's very hard for us to predict over say a five-year horizon how the mix is going to move from residential to commercial and/or power plants.

That's why we really emphasize the excitement we have over the investment tax credit because there are positive attributes for each of those markets.

As we look nearer term, clearly the utility business is going to be a big driver perhaps over the next few years.

And we have every reason to believe that the residential segment is going to be quite strong.

So frankly, the best we can do is to say we model a third, a third, a third, out of sort of the intermediate term.

Margins vary a little bit less from channel to channel , and a bit more as Manny pointed out within the systems business depending on region.

So that's the best I can do, Michael, on that question.

In terms of balance of systems, we have not been -- we are in a position to capitalize on declining commodity prices, not our systems builds.

I'd like to say we predicted the decline in those balance of systems costs and to a degree we did make a decision to not go long and we are going to capitalize on that.

So I think that that -- you will see us capitalize on that directly through our P&L over the next few years assuming that trend continues.

And, of course, we are designing less of those commodities into our systems as

Thank you, Colin Rusch, you may ask your question.

Please state your company name.

This is Colin Rusch from American Technology Research.

I guess I want to get into the circuitry of the cell improvements that you are making.

So can you talk about any initiatives you're working on to improve the transmission of electricity within the cell circuitry, and particularly related to the metallization process.

That's a very specific question.

Let me talk broadly and see if you want to -- or somewhat broadly and let me see if you want to ask a follow-on.

We have, I don't know, 25 to 35% of our R&D is on cell technology and, yes, we are looking at every aspect of the cell.

In the last quarter we announced that we had -- our generation three cell, we had done prototypes, small scale prototypes and, of course, we have advanced since then on our generation three technology -- that obviously increases, I shouldn't say obviously, to reiterate that increases the conversion efficiency of our cell, we believe, by another percentage point.

And that has a lot to do with the geometries on the back side of the cell, essentially thinking more is a lot on the back side of the cell.

Specifically whether that includes metallization changes, I'll leave that as a positive surprise down the road.

Excellent.

And then just a quick follow-up.

Can you talk about spreads between high efficiency and lower efficiency models?

Are you seeing ASPs increase -- the spreads on ASPs increase between high efficiency and low efficiency models or what are you expecting in the fourth quarter of next year?

This is Howard.

We've seen spreads increase in Q3.

We expect that same trend in Q4 and into next year.

Fantastic.

And again congratulations.

Thanks very much.

Thank you, Mark Bachman, you may ask your question.

Please state your company name.

Pacific Crest.

Tom, I'm curious, looking at your 2009 guidance I know you took it up a little bit, but I thought you would have raised it more substantially.

Following the passage of ITC, you actually did a pretty substantial interview with Reuters and you had discussed immediately hiring people.

And I think that one could assume that this is hiring is a direct reflection of new growth opportunities, but I didn't see it come through in the guidance.

Can you explain that?

Sure, I think your intuition is right, we are positive about United States in 2009, but sort of found the credit markets and the financial markets to be a bit unpredictable in the last month.

So not trying to be cute or anything.

It's sort of a combination of feel very positive about investment tax credit and very positive about all three segments in the United States in '09 and beyond, but we have to be realistic that the overall financial markets and the changes going on there, I don't think anybody is able to predict what's happening in those markets.

So it's a combination of those two things that causes us to -- I would characterize it as a realistic view of 2009.

So maybe the hiring might not be an immediate, but maybe towards the back half of the year as you get more visibility?

No, we still plan on growing from $1.4 billion to over $2 billion, so we are hiring immediately.

And I also want to indicate that we plan to be offensive.

In this difficult time, we think we are in great position as a company and we are going to exploit that.

So I did mean to say we are hiring immediately and that's consistent with the growth that we've guided.

Okay.

And then, just a question for either you, Tom or Howard or Peter, can one of you explain the relative strength in your components business here?

I conducted several checks with a SunPower dealer -- people in your dealer network and found that the U.S.

residential installations actually are slowing considerably in Q4.

And the reason for that is the customers are just weighting for the new 30% investment tax incentive that starts on January 1st.

And some of the installers I talked to couldn't stomach the cash flow in Q4 because of sales weren't going to be completed until Q1.

So I'm just wondering, how does the guidance that you gave for this components segment take into consideration what I found in the U.S.

market?

Is some of that what you're experiencing or is it just explained away by the 25% increase in the dealer network over in Europe?

This is Howard.

As I mentioned before, I was in San Diego and we held a dealer conference there.

So we had many of our dealers, we had over 300 people at our dealer conference.

These are premier and authorized dealers and it was incredibly energizing to be there with them and they are really the reason why we have the leading market share in the U.S.

in the residential sector.

And I didn't hear the same thing that you heard.

I talked to over 30 of these dealers, either on one-on-one or in small group basis in private meetings, and to a dealer, they are increasing their growth projections from say 40 or 50% to more than double that for 2009.

And they are projecting very strong demand in Q4 as well.

And Manny has some color on that.

Yes, hi, Mark.

I'm glad you asked the question because there's a bit of a misunderstanding of a Q4 cost on residential partly because of this new ITC.

It is absolutely true that if you are a residential customer, you might be better off waiting in '09 so you are getting the uncapped benefits of the ITC.

However, what some of the dealers are doing because of how good the demand is, is continuing to take on business and make sure that they turn on the system in 2009, which is really what you have to meet to be entitled to the higher credit.

So from a supplier standpoint, SunPower, we continue or plan to continue to supply to these dealers to be able to recognize revenues since that's what we do with dealers, we recognize revenue upon sale.

We are not necessarily harming a customer by just ensuring that they turn the system on at the time where they are entitled to the higher credit.

So I think it's good for everyone.

Okay.

Do we need to be concerned, Manny, about those dealers -- will you show higher receivables then if some of these dealers don't pay you until Q1.

I'm not sure of the credit terms that you extend to them, but is there anything going on there where maybe receivables are higher in Q1 for you -- I'm sorry, at the end of Q4 and then you collect the cash in Q1?

Sure, Manny, if you can answer that and then we -- Mark, thank you for the questions.

We will need to move on after that.

We don't expect that to be an issue, Mark.

The product is very much in demand.

That's why, because of the advantages of using SunPower product on those projects.

Thank you.

Jesse Pichel, you may go ahead and please state your company name.

Piper Jaffray.

Congratulations on the strong results and more importantly on your leadership in working behind the scenes to get the ITC passed.

Can you quantify how much of the components upside in the quarter was due to opening 50 new bar channels?

And secondly why is it some of these dealers are charging about $2 more per watt on a residential install versus Germany?

Is there any fundamental reason why?

And what can you help do to bring down that cost?

Thank you.

Jessie, thank you for the comments on ITC and thank you for your support driving that.

We are obviously all thrilled with that development.

Howard, you want to answer the questions, please.

Sure, hi Jessie.

I'll go to the ASP question.

The, quite frankly the U.S.

market is still probably a few years behind the German market, the largest market in the world, Germany, and that market has -- a lot of the cost has been driven out in the delivery side of the business for smaller systems in Germany.

And so I believe that the higher ASPs is a reflection of that's what the dealers can charge.

They are going to try to maximize ASP and it's also a reflection of, I think, a lesser maturity on the fulfillment side in the U.S.

Okay.

Jessie, thank you very much for your question.

We are going into the incredibly brief lightning round of two questions and consistent with the time frame we committed to and to let everybody move on with their busy days, so we will take two more questions.

And I apologize for those of you who didn't get an answer to your question.

We will make sure next time you are moved up in the cue and we will certainly call back this afternoon and tomorrow.

So next question, please.

Thank you.

Corey Tobin, you may go ahead.

Please state your company name.

Hi.

Good afternoon, everyone.

Corey Tobin from William Blair.

Quick question on CapEx, it looks like you brought the guidance down a little bit here for 2008 but still implies a pretty big ramp in Q4 versus what we saw for the first three quarters.

So one, if you could just confirm that that is correct, and second, a little bit of commentary what's going on there, and third, any preliminary thoughts on 2009 CapEx.

It's Manny, thank you for observing that we have taken the range potentially down rather than just a flat out 300, potentially 250 to 300.

That is a deliberate action on our part as far as part of our cash conservation initiatives to see if we could push out some of this expenditures without impacting the output, which as you could see, we did not change.

So we haven't really given out guidance for 2009, but I think it's safe to assume it's likely going to be in the same range of 2008.

Thank you very much, Corey.

Last question.

Thank you.

Our last question comes from Mr.

Michael Molnar.

Please state your company name, sir.

Sure, Goldman Sachs.

Good afternoon, everyone.

Just a quick question.

I just want to make sure I understand the views on discretionary demand in the U.S.

over let's say the next 12 months, say for distributor, residential and commercial.

On one hand, I definitely hear the arguments on the ITC.

It was a great pass, the cap removal is a terrific thing.

On the other hand, given the current economy, some people might say, how many residential -- how many people are actually going to plunk down $20,000, $30,000 on a residential install if unemployment goes up and disposable income is down?

Is what I'm hearing correct, that there's so much pent-up demand and such a low penetration that the economy really will be way outweighed by the ITC for discretionary demand in the U.S.?

Thank you for answering the question so eloquently.

That's exactly what's happening.

You've got as Julie mentioned PG&E, which has the highest penetration in the United States for residential and small commercial hookups, 25,000 out of 4 million customers.

Okay?

That's the highest level penetration.

So given the growth rate of our company and the industry at large, there is tremendous room for growth.

And getting to your point about disposable income, we see really unprecedented demand in the U.S.

sector right now.

Just briefly, Michael, I think there's an increasing desire by our customers to control what their energy cost is.

So you combine that with the very still early stage penetration and you get things or you get in a market situation that is not intuitive if there was deeper penetration.

All right?

Thank you very much.

Thank you, Michael.

Thank you all very much for joining our call today.

We will be making call backs this afternoon and tomorrow.

We very much appreciate the support of our shareholders and we look forward to a positive Q4 earnings call in January.

Have a nice day.

Thank you.

This concludes today's SunPower conference call.

Have a nice day.

You may disconnect at this time