SunPower Corporation (SPWR) 2008 Q4 法說會逐字稿

Good afternoon and welcome to SunPower's Fourth Quarter Earnings Release Conference call.

(Operator Instructions) I would now like to turn the call over to Mr.

Tom Werner, CEO of SunPower.

Sir, you may begin.

Thanks, Michelle.

It's actually Bob Okunski, Senior Director of Investor Relations here at SunPower.

I'd like to welcome everyone to our Fourth Quarter 2008 Conference call.

This is our first earnings call after our separation from Cypress as well as the first call with Dennis Arriola as our CFO so you will notice some updates to our approach.

We welcome your feedback and suggestions for next quarter.

On this call Tom Werner, SunPower's CEO, will give an overview of our Q4 performance and our outlook for 2009, followed by Dennis who will go into greater detail on our financials.

Following our prepared remarks we will open it up for questions for the remainder of this call.

In past quarters a 90-minute call has been insufficient to answer all the questions due to the size of our analyst community.

In order to address this issue we will allot additional time for our call today.

At 2:30 Pacific time we will keep the line open but allow our listeners to take a 45 minute break and then we will continue the call on the same dial-in number at 3:15 for an additional 60 minutes.

As a reminder, the dial-in number is 517-623-4618, the pass code is SunPower.

During today's call we will make forward-looking statements that are subject to various risks and uncertainties that are described in our most recent Q3 '08 10-Q filed with the SEC in November of 2008 and today's press release with our Q4 results so you see our 10-Q and press release for those factors that may impact these forward-looking statements.

Finally, I would like to remind everyone that we have posted a supplemental data sheet relating to our historical performance on the Events and Presentations page of our Investor Relation's website.

With that I'd like to turn the call over to Tom Werner, CEO of SunPower, who will provide an overview of our Q4 performance as well as our outlook for 2009.

Tom?

Thanks, Bob, and thanks to everyone for joining us today.

The fourth quarter of 2008 was the 13th time since going public that SunPower has met or exceeded our guidance.

Our results reflect the value our customers put in our technology and the strength of our model which enabled us to adjust to changing market conditions during the quarter especially in our global dealer channel.

We remain very confident in the long term industry fundamentals and we are well positioned in 2009.

Our team is leveraging our model to respond to the rapidly changing market conditions.

We recognize that no one will have clear visibility and we have adjusted our 2009 guidance to reflect the uncertainty and access to financing and timing of new market opportunities.

Our 2009 guidance is derived from our direct line of sight into our markets which provides us with a roadmap to growth and flexibility to adjust to rapidly changing market conditions.

Let me emphasize, our line of sight to demand is unmatched in our industry.

Let's discuss Q4 in greater detail and then move on to an overview of the Company's performance in 2008 and outlook for 2009.

Our team delivered very strong operational and financial performance in the fourth quarter as we met our revised revenue, gross margin and EPS guidance in a difficult macro environment.

We performed well because of our model, our technology and our strong operational execution.

Our multi-channel, multi-geographic, vertically integrated model enabled us to maximize opportunity and minimize risk for the fourth quarter.

Our Q4 2008 revenue was $401 million, up 79% year-over-year, as we benefited from strong global demand in the US commercial market in our expanding global rooftop dealer channel.

Our non-GAAP EPS of $0.70 per share was above our revised Q4 guidance as we successfully scaled our manufacturing and managed operating expense growth.

Please note that this includes a $0.07 gain for foreign exchange in our Korean joint venture.

Our Systems segment accounted for 44% of revenue.

72% of the panels installed in this channel were SunPower panels.

Our Components segment performed extremely well and accounted for 56% of revenue, up 22% sequentially, and delivered a gross margin of 36% capitalizing on our cost reduction programs.

We have a strong cash position.

We ended the year with a cash balance of $436 million.

In December we completed our loan agreement with the Malaysian government to support construction of our third fab.

Let me offer a review of our 2008 results and 2009 outlook using our strategic outline of brand and channel, technology, costs and people.

First on brand and channel, our multi-segment vertically integrated model has proved to be robust.

Our global dealer network is now operating in five countries on three continents.

In 2008 we tripled our dealer base adding more than 350 dealers on three continents in a single year.

We control the rate and location of expansion of our dealer network and have many new dealers prepared to join our team allowing us the flexibility to pace the expansion of this channel.

We expanded the average selling price premium for our world leading, high-efficiency solar panels demonstrating the value of technology differentiation.

Our US Systems business succeeded in installing dozens of systems in the fourth quarter to meet the year-end bonus depreciation deadline.

Our larger scale European systems we signed two multi-year supply agreements for a total of 230 megawatts with City Solar and Ecoware, both of which began delivery in the first quarter.

In the Utility and Power Plant segment we expanded our pipeline to greater than 1 gigawatt with projects ranging in size from 10 megawatts to projects larger than our PG&E plant which is the 250 megawatt plant.

Our success in this segment prompted us to increase our investment in building our team to support these sales.

We continue to see progress on our PG&E project in California and in Florida we have started construction of the first two power plants with Florida Power and Light and we have made substantial progress on installation in the first quarter of 2009.

This reflects our ability to install our proven technology quickly, within weeks of breaking ground.

As we look beyond our core geographic markets we see expanding opportunity as we sold panels in more than 20 countries in 2008 with systems now installed from Slovenia to Saudi Arabia.

For 2009 we've adjusted our allocation of products to markets and geographies that best position us for a strong year which is enabled by our long term strategy of market diversification.

Now let me elaborate on financing a bit further.

We have a strong pipeline of projects that are fully permitted or have permits in progress that will become buildable when appropriate financing is available.

In the scenario where financing frees up we have excellent visibility, the high end of our guidance.

We believe that our significant install base, leading technology and strong balance sheet will benefit us with early access to more attractive project financing when conditions improve.

In the scenario where financing remains less attractive, we have demonstrated the ability to shift more of our panel supply to our Components segment.

Please note that this adjustment in our planning approach results in a different product mix with a lower revenue per lot that is offset by higher margins.

Regarding pricing, and as we have discussed in our analyst day in November, we have tested our model and can sustain module ASP reductions in excess of 20% by accelerating our cost reduction programs and limiting our operating expense growth.

We see potential upside from several markets this year.

In the US we are working to maximize the near term market potential of the proposed federal stimulus plan.

We expect the Japanese market to respond to their new incentives and we see movement in Italy, Australia, France and Greece.

In the longer term, 2009 will bring progress on carbon market rules, renewable portfolio standards and government solar procurement, all of which build a foundation for long-term solar market growth.

Now let me turn to technology.

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

Our Generation 2 solar cell technology ramp is on track.

We now have 10 of 12 lines producing Generation 2 solar cells with another two scheduled to start in the first quarter of this year.

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

In 2009 we plan 450 megawatts of cell production as we complete build-out of our Fab 2 and we broke ground on schedule for Fab 3 in Malaysia.

Finally, we are constantly improving our Systems technology and our VOS costs.

For example, our T20 Tracker delivers up to 30% more energy per rated watt than fixed-tilt systems.

And we have made cost reductions to our design based on the experience gained through our significant installed base.

The additional costs of this tracking technology are minimal when compared to fixed-tilt due to our proprietary designs.

We have our third revision of the T20 Tracker releasing this quarter and on an AC basis we see capacity factors for our T20 Tracker in good sunlight of over 30%.

This is a huge competitive advantage for us in the Utility and Power Plants business.

We are also finalizing development of an upgraded SunPower product, our integrated roof product for new homes which increases watts per panel by 20%.

Our third leg of our strategy is cost reduction.

A plan to reduce total systems 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 next year.

Looking at upstream cost reduction in silicon, we've improved our average conversion efficiency as we add more lines of our Generation 2 minimum 22% cell efficiency.

We reduced silicon utilization to 5.6 grams per watt, a 14% quarter-over-quarter, through higher average efficiency and thinner wafers and we continued to benefit from our long-term portfolio strategy for polysilicon supply as we saw our polysilicon costs decline at least 10% in 2008 versus 2007.

2009 we will see further silicon cost reductions of at least 10%.

Our recent Hemlock agreement is consistent with our portfolio strategy and deepens our partnership with them.

On the downstream systems costs side we are continually improving our tracking technology as we refine our designs to be fast, economical, and easy to transport, install and maintain.

We've reduced power plant install times.

They are now 50% faster than historical rates, the results of cycles of learning from our significant install base.

We are creating global supply chain partnerships to leverage our scale resulting in more competitive cost structure than our competition and reducing non-nodule balance of system costs consistent with our 50% cost reduction plans.

The combination of 50% lower module costs, 50% lower balance of system costs and improved energy delivery allow us to compete favorably on a levelized cost of energy basis in all markets.

Finally, the fourth piece of our strategy - people.

We are building a company based on a team of excellent people.

We will focus our near-term hiring in areas of strategic importance, those being research and development, utility and rooftop sales.

We are also reducing variable costs and rationalizing our use of contractors and given the credit crises and climate of economic uncertainty, we have taken the opportunity to reevaluate our corporate organization in order to ensure our cost structure is in line with current conditions.

For example, over the last six months we've instituted a number of programs to minimize Company costs including reducing variable costs and rationalizing contractors.

In line with our approach to guidance for 2009, we are approaching this year with a focus ensuring we have the best structure for future markets and, as a result, we have reduced our non-manufacturing workforce by approximately 60 employees out of a total non-manufacturing workforce of more than 1,000.

This was a very difficult decision for the executive team but we feel it is critical to positioning the Company for long-term success.

In summary our model and focus on brand, technology, cost and people was designed for today's set of market conditions.

SunPower's great performance in Q4 reflects the benefits of our strategy.

Before I hand it over to Dennis, let me say a word about his predecessor, Manny Hernandez.

You recall, Manny was with Cypress Semiconductor when they purchased SunPower and he was instrumental in the build of our early pilot line and first fab.

Since then he has taken us public, guided us through multiple fundraising events and kept a steady hand as we crossed the billion dollar mark in sales.

Congratulations to Manny for an incredible list of accomplishments and a personal thanks for transitioning us to a new CFO.

This is a time of transition for the Company.

We are moving rapidly into the utility and power plant market and have brought to our team a new CFO with significant utility experience.

Dennis Arriola has had the benefit of Manny's time over the last two months and will be working with me to adjust our segmentation to reflect the changes to the way we manage the Company.

Because of the significant opportunity we see in the utility space, we have made a strategic decision to increase our investment in this area starting this quarter.

We are investing in people and development activities to take advantage of a pipeline in excess of 1 gigawatt in the United States.

In addition, we have focused research and development and product management to further reduce our levelized cost of energy at utility scale.

Our next call we expect to report on the progress of these decisions by reporting along new segments - Utility, Power Plant and Residential/Commercial.

On that note I'm going to turn the call over to Dennis who will report details of our 2008 Q4 results and update our current 2009 guidance.

Welcome, Dennis.

Thanks, Tom, and good afternoon.

I'm pleased to be a part of the SunPower team and I'm looking forward to working with all of our investors and analysts.

I'd like to start with a summary of our 2008 fourth quarter results for the consolidated Company and by business unit.

Total revenue for the fourth quarter was $401 million, up 79% compared to the fourth quarter 2007.

Our revenue and earnings per share results for the quarter were both in line with the guidance range we provided on November 4th.

During the fourth quarter we continued to see strength in our global dealer network and the US commercial space.

Our geographical revenue breakout in the fourth quarter was 54% in the US and 46% in Europe and the rest of the world.

By business segment, Component revenue was $223 million, or 56% of the Company, up from 49% over the prior quarter in 2008.

The improvement reflects the continued build-out of our global dealer channel.

System revenue was $178 million for the fourth quarter and accounted for 44% of the total.

This compares to Systems revenue of 57% of revenue for all of 2008 and reflects a lower mix of Systems projects in the fourth quarter versus the prior quarter.

GAAP gross margin for the quarter was 27.9% and non-GAAP gross margin improved to 29.9% as the Company benefited from the strong performance of our Components business.

By segment for the fourth quarter, GAAP gross margin for Systems was 19.9% and was 22.7% on a non-GAAP basis, a 300 basis point improvement over the third quarter of non-GAAP results reflecting a continued mix shift to more commercial projects in the United States.

Components GAAP gross margin was 34.2% and was 35.6% on a non-GAAP basis compared to 39.2% for the third quarter on a non-GAAP basis.

ASP declines in the fourth quarter were significantly offset by continued cost reductions.

In 2008 we benefited from lower silicon costs and lower conversion costs through higher production volumes.

As expected, in the fourth quarter we saw blended ASPs decline less than 5% although overall ASPs were down about 10% when you include the impact of foreign exchange.

Operating expenses in the quarter were slightly higher than our model target of 10.5% of revenue on a non-GAAP basis.

As Tom mentioned, we've recently taken some actions to improve our operating cost structure by eliminating discretionary expenses.

Given the current economic and financial environment, we've decided to defer lower priority internal spending until we see a turn-around in the marketplace.

We will, however, continue to strategically invest in key areas such as R&D and the utility scale and rooftop businesses.

Operating income on a GAAP basis was $55 million in the fourth quarter, up nearly five-fold over the same quarter in 2007.

On a non-GAAP basis, operating income was $78 million, up nearly 140% over last year's comparable quarter.

Other income and expense was a negative $16 million in the fourth quarter related primarily to the implementation of a foreign exchange hedging strategy for 2009 and the write-down of a couple assets impacted by the current financial market.

Going forward, we're taking a much more systematic approach to managing our foreign exchange risk and have instituted a number of hedging strategies to minimize the impact of future currency volatility.

The Company's tax rate for the fourth quarter was 50% on a GAAP basis and 18.6% on a non-GAAP basis.

This resulted in a non-GAAP tax rate for all of 2008 of 24.9%.

We are now separating out our equity earnings related to our 40% investment in Korean-based Woongjin Energy.

The results from this investment were previously included in interest and other income or expense.

You'll see the new line item on the income statement as "Equity and Earnings of Unconsolidated Investees."

In the fourth quarter, SunPower's share of the equity earnings was $10 million and $14 million for the full year.

The results in the fourth quarter included $6.3 million, or $0.07 per share foreign currency translation gain, that related from the strengthening of the dollar versus the Korean won.

Finally, we recorded GAAP earnings per share of $0.35 for the fourth quarter with 85.6 million fully diluted shares outstanding.

On a non-GAAP basis earnings per share were $0.70.

Both the GAAP and non-GAAP earnings per share figures include the $0.07 per share related to the currency gain I just mentioned.

If we adjust out the $0.07 for the foreign currency gain, our adjusted non-GAAP results remain at the high end of our previous guidance range of $0.58 to $0.65 per share.

A full reconciliation of our GAAP and non-GAAP financial measures are included in our press release.

Now let's move to the balance sheet and cash flow statements.

More than ever a strong balance sheet and ample liquidity is a necessity and a competitive advantage in today's economic environment.

We are focused on maintaining sufficient cash on-hand and access to liquidity in order to fund our business and take advantage of strategic opportunities in the marketplace.

The silicon supply agreement we recently announced with Hemlock is a perfect example.

We ended the fourth quarter with cash investments and restricted cash of $436 million, slightly ahead of third quarter balance of $431 million.

We're confident that SunPower will have sufficient liquidity through our existing cash, our expected operating cash flow and identified sources of financing to meet our operating and capital plans.

Construction is on schedule for Fab 3 in Malaysia and the first two draw downs from the Malaysian government loan have already been received.

This financing will help keep the Company on track to meet its expected growth in 2010.

We're actively managing our balance sheet in order to try and mitigate unnecessary risk and minimize our working capital requirements.

The quality of our receivables has remained strong with days sales outstanding at 44 for the quarter compared to 47 in the third quarter.

And our unique relationship with our dealers provides us with good market information that helps us avoid unnecessary inventory build-up.

Days inventory increased to 78 in the fourth quarter from 65 in the third quarter and was driven by additional silicone purchases at the end of the quarter and also the staging of inventory for our large Florida Power and Light project that ramps up this quarter so the build-up was strategic.

On the liability side of the balance sheet, long-term debt of $55 million at year-end reflects the first draw down of the Malaysian government loan.

When fully drawn, the loan will total (inaudible) or approximately $278 million US Dollars and it is nonrecourse to SunPower.

Now let's turn to cash flow and capital expenditures.

Cash flow from operations was $46 million for the quarter and $174 million for the full year.

Depreciation for the quarter was $18 million and $53 million for the full year.

SunPower's capital expenditures for the quarter were $109 million and $260 million for the full year which was consistent with our 2008 guidance of under $300 million.

Now I'd like to spend a moment on how SunPower is managing through the global credit crisis.

Like all companies, we're not immune to the financial markets.

We have, however, prudently managed our balance sheet, cash and working capital requirements and we are confident that we will ride out the financial storm.

It remains uncertain as to how long the challenging markets will continue.

As a result, we're working closely with our advisors, customers and financial institutions to try and develop creative and cost effective project financing sources.

As Tom mentioned, the demand for SunPower's leading technology and systems is out there so it's a matter of timing.

And when we finalize financing and book the business.

Like many, we're hopeful that some of the recently announced corporate financings and some slight tightening of credit spreads are a sign of better days ahead.

But while we're cautiously optimistic, we're also realistic.

As a result, we're working with some of our customers to repackage larger projects into smaller deals that have a higher probability of getting financed in today's conditions.

We're also encouraged by the positive comments about the industry coming from President Obama and Congress.

Nevertheless, the credit markets remain challenging and will impact business for at least the next several quarters.

During these uncertain times, we'll focus more on cash deals.

About 25% of our 2009 plan requires project financing for customers.

And, as I mentioned, we're actively engaged in the process of arranging financing for several of our projects.

We expect these tough credit markets to continue through at least the first couple quarters of the year and our plan and guidance for 2009 reflect this uncertainty.

By most measures 2008 was a very successful year for SunPower.

Revenue and non-GAAP earnings were up 85% and 80% respectfully year-over-year, and we finished with a strong balance sheet of over $436 million in cash and cash equivalents.

We're continuing to make significant progress in our systems cost reduction program and we're focused on making sure that we provide our customers with the world's best solar technology at competitive level cost of energy.

Now let's shift to our 2009 guidance and some changes you'll see this year.

As Tom mentioned we made a decision to change our segment reporting in the future in order to better reflect our long-term focus in the utility and power plants market.

The US utility and power plant market demand for renewable energy is expected to grow over 50% annually over the next five years.

With SunPower's products and expertise in delivering cost effective systems, we see tremendous opportunity in this segment in both the US and European markets.

For example, more than half the states in the United States have mandated renewable portfolio standards totaling approximately 70 gigawatts of renewable power by 2025.

This is in addition to what may come from the Obama administration.

Congress is currently considering funding government buildings and facilities at a scale of billions of dollars over the next two years to improve their efficiency and expand the use of renewable technology.

In order to take advantage of this growing opportunity, SunPower will dedicate more resources to this market in the short-term.

We believe these prudent investments will significantly reward our shareholders over the long run.

We'll also adjust our segment reporting to reflect our business focus by customer, as Tom mentioned.

The two segments will be Utility and Power Plants and Residential and Commercial.

Given the refinement of our business strategy and the short term uncertainty in the financial markets, we will now provide annual guidance models for 2009.

While the utility and power plant market shows great promise, the timing of such projects can fluctuate from quarter-to-quarter.

Once again, we're being realistic and want our investors to understand the business model.

Furthermore, the current economic and credit environment make it unrealistic for the Company to provide tight range revenue and earnings forecasts in the short run.

So in 2009 we expect revenue to be in the range of $1.6 billion to $2.0 billion.

We expect the second half of the year to be stronger than the first half and our plan includes the assumption that the body of financing markets begin to improve in the latter part of the year.

We will continue to actively manage our operating expenses with a target OpEx at 10% of revenue.

We'll also begin to make the necessary investments in 2009 to help support our Utility/Power Plant strategy.

Our 2009 capital expenditure plan is $350 million to $400 million and the range includes approximately $200 million for Fab 3 in Malaysia.

And these investments will primarily be financed through our recently closed loan agreement with the Malaysian government.

We expect depreciation expense of approximately $90 million for 2009.

Our effective tax rate is projected at 35% to 40% on a GAAP basis and 25% to 30% on a non-GAAP basis and it will shift based upon the geographic makeup of our revenues.

These are the drivers that we use to generate our non-GAAP earnings per share guidance of $2.20 to $2.80.

The lower end of the range reflects the current credit markets and economic uncertainty while the higher end of the range assumes improved credit markets and stronger demand.

We'll also opportunistically use our equity to redeem some of our convertible debt in the market if it makes economic sense.

And finally, our 2009 plan assumes that we generate sufficient cash flow and have ample liquidity to fully meet our operating capital needs.

With that, I'd like to turn it back over to Tom.

Thanks, Dennis.

I'll open the call to questions now.

With me I also have Howard Wenger, our President of Global Business Units, Peter Aschenbrenner our VP of Corporate Strategy, Julie Blunden our VP of Public Policy and Corporate Communications, Mike Armsby our VP of Finance and Bob Okunski our Senior Director of Investor Relations so that they may provide some of the answers.

As a reminder, we will be doing a follow-up call at the same dial-in at 3:15 Pacific time this afternoon to answer any further questions.

And I'd ask you to limit yourself to one question and go back in queue for follow-up because we're going straight to the lightening round.

We have 26 minutes.

First question, please.

Thank you.

Satya Kumar, Credit Suisse.

Just wanted to get more color on your '09 guidance.

If the financing conditions continue at the current rate can you hit the low end of your guidance?

Also, if that's the case how should we think about production of panels?

To you intend to build inventories in the first half and sell them more in the second half?

Thank you, Satya.

The answer to your question is yes.

Let me provide some color.

As to our high-end guidance, 50% of the business is in cash, 50% is financed.

Of the 50% that is financed, half of that is project finance accomplished by us.

The other half which is financed is currently operating fine and we would expect it to continue to operate fine.

So if you do the math, the answer to your question is yes.

In terms of inventory, the answer is no.

You are correct we do have a back-end loaded year that is supported by our pipeline of business.

However, it is balanced to a point that the capacity growth in our factory actually matches the profile very well.

And don't forget that we have third party supply as a shock absorber for internal production.

So no, we don't expect to build inventory, at least not materially.

You may see a week here or there because of ocean shipments, but not as a strategy.

If I could have a quick follow-up?

In terms of currency, if the euro stay around this level, say around $1.30 or so, how should we think about the variability in your '09 EPS guidance related to where the currency is at?

Sorry, I said no follow-up questions.

I've got to make you stick to that.

We will cover currency though, Satya.

But let's go to the next question.

No worries.

Thanks.

Thank you.

Rob Stone, Cowen and Company.

I wonder if you could just elaborate a little bit more on your silicone portfolio for this year especially given what looks like material over supply at the upstream and are you seeing greater flexibility from your suppliers?

How much are you expecting to get on contract versus spot, etc?

Sure.

So we had a long-term strategy of a diversified portfolio of silicone procurement.

Those of the analysts, like Rob, who have been with us since going public know that that's diversified across technology, suppliers and timeframes, meaning that we have short-term, intermediate-term and long-term contracts and we've also said that in 2009 we had 100% of our solar came procured.

And so the way I would answer your question is that the long-term and intermediate-term contracts we signed in previous years are consistent or better than the current market environment for silicone despite the fact that it has obviously gone down in costs.

We are able -- yes is the answer to your question about further flexibility with our supply base.

We've partnered with a couple of the best silicone producers in the world and that's paying off so there is an opportunity for our operating team to be more linear and we think that will result in more effective costs.

And to a limited degree we can capitalize on short-term purchases which would allow us to expand capacity slightly faster.

Thanks very much.

Thank you.

Steve O'Rourke, Deutsche Bank.

Quick question, what's CapEx per watt expected to be for Fab 3?

Steve, I'll give you sort of a round number of $1.00 a watt and I'll let the finance team verify that I'm good.

That's ballpark.

Right.

So $1 plus or minus.

And that's all in Steve.

That's like shipping, installation, the equipment, the building, the whole deal.

Fair enough.

Thank you.

Thank you.

Sanjay Shrestha, Lazard Capital Markets.

Quick question, when you talk about your guidance for 2009 how much of that is kind of already in the backlog and into the mix of business, power plant versus residential and commercial, and how much of that is actually going to be the completed System business versus the Component business for you guys?

I will give you some data and if Howard Wenger would like to drill down a bit I'll turn it over to him.

So our residential business is a substantial part of our revenue in 2009, certainly north of half of the business and that business is with dealer partners who commit to schedules with us that are greater than equal to a quarter, although they tend to give us visibility for beyond that.

In the Systems business, we either have the business booked which means financed and ready to be built or permitted -- or permits filed but not financed for a substantial part of our Systems business this year, not all of it but a substantial part.

So we have really good visibility as to where our business would come from.

The reason for the range of our revenue guidance is, of course, financing and the mix could change as well.

Some of the projects that get financed may have a different profile than those that don't get financed and, therefore, creates a fairly large range.

We'll leave it at that, Sanjay.

That's it.

Thanks, guys.

Thank you.

Christopher Blanset, JP Morgan.

I was wondering, what kind of level of internal sourcing for your modules are you assuming for your system integration business and then how does this play into your capacity expansion plan on a volume basis?

I'll ask the finance team to help with the percentage.

I'll answer the question in terms of capacity expansion.

We remain with the targeted internal supply of 80% which I believe we've been consistently communicating over the years.

I would say that we've become slightly more aggressive in terms of internal supply over time.

Things remain pretty well balanced so we don't find ourselves with third party contracts in excess or short of what we need and we have flexibility in our third party agreements so it's allowing our internal operations team to keep the pedal to the metal, as they say, and to expand as fast as they can and as effectively as they can.

I think we'll leave it at that.

Thanks.

Thank you.

Vishal Shah, Barclays Capital.

Tom, can you elaborate on the ASP premium that you discussed in the call?

You said your premium increased during 2008 and as you look at 2009, what kind of pricing trends are you looking at in the first half and the second half and what does your guidance assume?

Thank you.

Sure.

And for Satya I should be careful answering the second part of that.

Let me just broadly answer your question, however.

So as you know we've increased the efficiency of our solar cells and therefore we've increased the ratings of our panels.

And so the idea that our premium is increasing is not based on just market dynamics.

It's based on a superior product.

That also includes, by the way, systems technology that is improved.

And I mentioned capacity factor and the energy produced per rated watt and that's improved as well.

So people are paying a premium for technology that's improving and also that the advantages of high efficiency are being monetized by the channel.

They are seeing the result of smaller system size, smaller balance system and/or more watts for the same roof.

So because the market is becoming more mature they are able to quantify the advantage of a high efficiency panel, is our belief.

In terms of price trends, I don't think we have a lot more to add to -- we're prepared for and we've modeled up to 20% or slightly more in our guidance.

Thank you.

Thank you.

Michael Horwitz, Sanford Group.

Can you, as you look at the US market, kind of describe how that competition in the US market might differ from some of the other markets that you've competed in in the past?

And clarify along those lines how you view your argument about levelized cost of energy since there seems to be pretty good discussion within the cell site and [bi-site] community about that.

Thank you.

Well, it's discussion now that I can answer your question.

It's been (technical difficulty) so far.

Let me -- so I will go ahead and answer sort of both of those.

On US market I think we've been consistent over the years about being the incumbent in the US market.

Therefore, considering a market that's a priority for us and that market, of course, you have to talk about residential versus commercial versus utility.

And in the residential market we see a premium for high efficiency because our product works really well in [plysolar] insolence regions of the world and our product works well where you are space constrained and that fits the US market very well.

It's also a market that values customer service and we believe we've set up a superior dealer network that has taken years for us to develop the service profile that we're now delivering.

In the commercial market we're leveraging power lights decade of experience in the number one position, substantial North American number one position.

And that's true in utility as well where we have hundreds of megawatts installed so we can go to utilities in America and say, "Can beat your REPRESENTATIONS.

You can use (inaudible) from SunPower really where you can get a proven technology that it's installable immediately, that you can start generating power immediately because we can be done in step [wide] fashion and it's incredibly fast to install so that I think the ability to match what the market wants in the United States fits really well with our product.

On levelized cost of energy base is, I think, some of what's been written is frankly a bit confusing to me.

Recall that the equation is cost divided by energy.

Cost is module plus balance of the system plus maintenance and energy can really be thought of conversion efficiency multiplied times capacity factor.

Since we have -- do, in fact, have a higher cost than at least one thin film company on a module basis but we have a factor of two advantage on balance of system in most cases, we're almost at neutrality on a cost basis and the denominator we produce more power by virtue of the fact that we have a higher capacity factor and a higher conversion efficiency.

So what that means is, that company -- or utilities like Pacific Gas and Electric and Florida Power and Light have done that levelized cost of energy arithmetic and concluded that SunPower is cost effective aside from the fact of the credibility of all of the systems we've installed and the advantage is in the technology and other things that they look at.

So a question that I was happy to answer so I answered it kind of long.

Thank you.

Thank you.

Jesse Pichel, Piper Jaffray.

Congratulations on what appears to be massive market share gains in an otherwise weak market.

What type of seasonality do you expect in Q1 and do you have any utility revenue recognition that can offset the seasonal weakness noting that your exposure in the US is particularly high in terms of percent of revenue?

Thanks.

Sure.

I'll keep answering here.

So seasonality, utility and US exposure.

We look at US exposure as the key advantage.

The residential market in the United States is doing very well for us so it's a real advantage.

And if you -- as you look at the data sheet posted on our website you'll see our geographic mix has shifted over the last 12 quarters and that's on purpose and it's working in our view.

In terms of the utility, we do in fact have utility revenue.

Within the quarter we're aggressively building out the first 25 megawatt power for Florida Power and Light.

We expect significant progress on that project this quarter.

That is very much part of our strategy that we have been articulating for quite some time now to participate in each end market segment and that's paying off because as we have pointed out, business moves between those segments.

So, yes, in fact utility is supplementing our business because the commercial business has slowed down because credit markets are frozen and it's taking longer to finance commercial projects and that business is lower.

So, yes, the utility business is offsetting weakness -- or I should say a shift in timing of commercial business.

There's still quite a bit of demand with commercial business, it's just not being financed in a -- as quickly as it used to be.

And lastly, seasonality is a very good question.

We do have seasonality.

It's pretty darn cold in most of the regions that solar gets installed in.

In fact, we have some sites in Italy where they are clearing snow off the roof to install the system.

That obviously slows down the market.

We actually also, because of the credit crises, have a more back-end loaded year and you can think of our year, although we're not guiding quarters, you can think of our year starting out very similar to last year, if you were to at least try to get some sense of it and then you can see how the -- if you have a sense for that you can see how the rest of the year would profile.

Thank you very much.

Thank you.

Stuart Bush, RBC Capital Markets.

My question is about the PG&E plant.

I know the original timeline was to install over three years.

Is there a faster deployment included in your guidance assumptions?

And also if you can comment on if there is any advantage you guys can take from upsizing that contract given that OptiSolar seems to have laid off half of its people.

Thanks.

I'm getting all kinds of non-verbal cues from the team here.

The answer to your first question is, no, we have not assumed a pull-in of the PG&E install in our guidance.

That's not to say, however, that it's not on track.

It definitely is on track but, as I think you are probably -- or I know you are aware, the permitting cycle for a large project like that takes quite a bit of time, up to 18 months.

And that's not something that's easy to compress.

So, no, that's -- fully netted is not built into our guidance.

Although once it is permitted and financed we will build it very aggressively.

The second part of the question -- I can't read my writing --

The answer to your question is, no, we're not exploiting any specific position of any of our competition.

However, the opportunity to upsize projects absolutely exists and as we execute on projects we will be pursuing upsizing regardless of who the competition is or the situation and, yes, utilities are receptive to that.

Great.

Thanks.

Thank you.

Colin Rusch, Broadpoint.

Can you give us an update on syndication of tax equity and if there is a secondary market developing for tax equity?

And, also, if you could break out the utility opportunity between power plants and distributed generation aggregation?

Sure.

So I'm going to defer tax equity to Dennis in just a second and I'm going to ask Howard to talk about power plant versus distributed.

I would just say to you, broadly speaking in terms of the financing market, there's certainly positive signs and there definitely is a new mix of players and new methods of financing projects that's evolving.

And I use the word "evolving" purposely.

I would not say "evolved," past tense.

So why don't I let Dennis make a comment about tax equity structure in the market and then I'll turn it to Howard just briefly on the power plant and distributed power.

And, sorry, Satya, maybe I cut you off too fast on the first question.

So go ahead.

Colin, as far as the tax equity market, it's definitely leaner than it has been in prior years.

If you look back in the end of 2007 and 2008, there were probably anywhere from 10 to 12 major players in tax equity market.

Today you can probably name those that are really active on one hand.

Obviously, the banks and other financial institutions that are having their challenges don't have a lot of tax appetite right now.

Hopefully we're going to see that change in the coming quarters and everything but the tax equity market is tight right now.

Now having said that, there are companies out there that do have profits that probably haven't participated in the tax equity market today that are starting to look at it.

And we're starting to talk to some people, and we know that other people are trying to broker deals even if they aren't participating themselves, so we're out there pounding the streets trying to get the people up to speed.

Thanks, Dennis.

Howard?

Regarding distributive generation aggregation versus power plant, we're seeing a rapidly emerging and evolving utility segment that's growing very fast.

The models are varied so we expect both large scale power plant systems greater than 250 megawatts.

We also expect distributed power plants in the 10 to 50 megawatt range on the ground.

And we're also seeing opportunities for aggregation of distributive power plants on roofs so you're seeing utilities such as [Sanyo] Gas and Electric, Southern California Edison, Duke, Power, FPL, PG&E.

They are all pursuing different approaches to power plants and DT and with different ownership structures.

Some utilities are interested in owning the projects, some are interested in buying the electricity in a PTA style agreement.

So we think that there is going to be a broad spectrum of ownership and size of plants and types of plants.

Great.

Thanks, Howard.

Next question, please?

Thank you.

Pavel Molchanov, Raymond James.

You mentioned one gigawatt number and I just wanted to clarify what that was when you said it's your pipelines.

Should we think of that as your backlog or is it something else?

This is Howard Wenger.

This is regarding the comment that our utility sector pipeline specific to North America is greater than 1 gigawatt.

And you can think of that 1 gigawatt in a range of development from permitted sites to sites that are not yet permitted yet.

We have a signed [TAR] purchase agreement that's getting commission approval such as the 250 megawatt project with PG&E.

So we are actively negotiating with utilities or we're developing sites all aggregated greater than 1 gigawatt for that sector.

Thanks very much.

Ahmar Zaman, UBS.

This is Ahmar Zaman calling in for Steven Chin.

Congratulations, guys, on a great quarter.

The first question I have is how should we think about the segment -- your revenue breaking up into the different segments -Residential, Utility and Power Plant in 2009?

Is it still going to be a one-third/one-third/one-third like it's been in the past?

First of all, this is Dennis, first of all there's going to be two segments.

It will be Utility and Power Plant and then the second segment will be Residential and Commercial.

And as we continue to grow in the Utility and Power Plant market, that segment will continue to grow obviously but the largest -- the majority of it is going to be in the Residential and Commercial in the short-term.

Then in terms of split perhaps we could go into that a bit more on the follow-up call.

I'm going to take two more questions, please, and then we we'll defer the balance to the call that we have set up at 3:15.

Next question, please?

Thank you.

Nick Allen, Morgan Stanley.

Quick question.

As you move to larger scale markets in the utility space in the 30% capacity factor which is obviously better than I've heard anybody else be able to do, can you talk about managing your working capital as projects get bigger and you deal with pre-payments for silicon, expansion plans and also you mention the possibility of buy-backs of your convert?

And also, are you making any progress with the IRS on possibly collapsing the dual share structure ahead of the two-year timeframe window that was previously discussed?

Yes.

So the question about management of working capital is -- the answer is built into our forecast on cash flow for the year.

And you are right, in fact, that due to project accounting you can see inventory that's tied up on a project.

Having said that, we've improved our supply chain in ways that we think we can actually improve the velocity of our working capital as the mix changes throughout the year.

And perhaps on the follow-up call or on subsequent calls we can talk more about that so I don't think you should assume that we'll have lower asset turnover as the mix changes.

In terms of the IRS, I don't believe we can give an update on this call other than to say that to our B shareholders we take it very seriously and we are doing the things we can do to pursue -- to rectify the gap between the two shares, the value gap between the two shares.

But we're not prepared to give an interim update on the call today.

We have time for one more, please.

Thank you, sir.

Michael Carboy, Signal Hill.

Could I ask you to comment please on the complexion of the credit metrics for those portions of business that are in the pipeline that are requiring financing outside of SunPower?

You talked about it roughly 25% that was still sort of in need of finding financing.

What's the credit picture look like there?

What does the credit picture look like for the 25% of projects that need to be refinanced?

I'll comment briefly and then Howard you can follow-up.

So first I would say to you the 25%, of course, is projects within the United States as well as Europe and you know that the United States are tax equity financed in Europe.

It's just access to credit in general.

And you know that country by country, of course, the banking situation is different and I indicated in the space tax (inaudible) is different.

And so you do, in fact, see a different dynamics in terms of getting projects financed.

If I had to predict I think that the European market is likely to free up first because, again, it's not dependent on tax equity.

Howard?

Yes.

I would just add that in Europe which is the fee and tariff-based system, as Tom mentioned, there seems to be plenty of equity and the debt is freeing up.

We're seeing risk premiums that are 50 to 200 basis points higher than they were in 2008.

So the debt is freeing up, it's at a higher risk premium which of course has an impact on the economics of the project.

But we do see those compressing now and particularly we're seeing early action in Germany.

I'm going to have to end this call now.

We will go to the 3:15 call with more time.

We really appreciate your time.

I apologize for those people in queue.

I see some people that we would have liked to have taken questions from - Mark Bachman, Jim McCurey, Gordon Johnson, Betty, etc.

We apologize.

We've run out of time.

We'll take calls on the next call.

Thank you very much.

Thank you.

That does conclude today's conference call.

Have a nice day.