SunPower Corporation (SPWR) 2009 Q1 法說會逐字稿

Good afternoon and welcome to SunPower Corporation's first quarter 2009 earnings conference call.

Today's conference is being recorded.

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

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

Bob Okunski, Senior Director of Investor Relations at SunPower Corporation.

Sir, you may begin.

Thank you Ed.

I would like to welcome everyone to our first quarter 2009 earnings conference call.

On this call, Tom Werner, SunPower's CEO, will give an overview of our Q1 performance, followed by Dennis Arriola, our CFO, who will go into greater detail on our financials.

Tom will then discuss our outlook for 2009.

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

During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described into the most recent 2008 10-K filed with the SEC in February of 2009, as well as today's press release with our Q1 results.

Please see our 10-K and press release for those factors that may impact these forward-looking statements.

To enhance this call, we have posted a set of PowerPoint slides, which we will reference during this call on the 'Events and Presentations' page of our Investor Relations website.

At the same location, we have also posted our standard Supplemental Data Sheet related to our historical performance.

Finally, based on analyst and investor feedback, we will keep today's call to one hour including questions.

With that, I would like to turn the call over to Tom Werner, CEO of SunPower.

Thanks Bob.

Thank you for joining us today.

I would like to start out with an overview of the first quarter; the most challenging quarter we have had since we went public in 2005.

Then I will move to 2009 and 2010 to discuss how we are well-positioned for long-term success, despite difficult near term conditions.

Please turn to slide three of our online presentation.

On slide three, you will see that our first quarter was impacted by seasonality, and continuing effects of the credit crisis, and difficult economic conditions.

Despite these headwinds, we were able to deliver strong gross margins, and positive non-GAAP net income, and we are well-positioned going into the balance of 2009 and into 2010.

Our balance sheet remains strong as we delayed capital spending and implemented a demand-driven supply chain; matching supply to demand as we exited the quarter.

Our revenue reflected this challenging sales environment but we see positive signs as we generated the highest number of residential leads of any quarter in our history, suggesting demand is improving.

In our Systems and Utility businesses we have seen both our backlog and pipeline for late 2009 and 2010 projects substantially expand since the beginning of the year.

As I will highlight in a minute with some data from California, the effort we have made with investments in brand, technology, cost and people have resulted in customer preference for SunPower products.

Because they value our industry-leading high efficiency solar panels and systems, they trust the performance of our systems which have a decade of monitored operating performance behind them, and we deliver competitively priced energy to our customers.

One of the reasons for this customer confidence is our financial position.

We have a strong balance sheet.

We have adjusted our capital expenditures and operating expenses to reflect market conditions.

And we can not only sustain our business during the downturn but invest to be able to flex in response to rapid growth, as demand accelerates in the future.

Dennis will go into further detail on our financial results, as well as our actions related to manufacturing capacity, operating expenses, and capital expenditure timing.

Let me offer a few highlights.

Our Q1 2009 revenue was $214 million.

We generated non-GAAP gross margin of 24.3% with components gross margins at 29.5%.

Let me emphasize our gross margin results reflect two important trends.

Our ability to maintain gross margin while industry-wide ASPs drop, and the strength of our dealer network.

We ended the quarter with non-GAAP EPS of $0.05 per share.

Let me reiterate a theme you have heard us discuss since we went public.

We have developed a vertically integrated diversified market model to deliberately prepare for the change in the supply/demand balance.

The market has now changed.

Supply clearly exceeded the pace of solar systems deployment in the first quarter.

However, our record lead generation in the first quarter, and our expanding backlog, pipeline, and market share, suggests that we will see revenue growth through the rest of the year.

Turning to slide four, let me address market share.

Our team conducts a weekly analysis of the data set provided by the California Public Utility Commission on the California Solar Initiative.

We encourage other markets to make their program data as easily accessible.

Based on this data for the first quarter, SunPower had the leading share of systems less than 10-kilowatts installed in the California Solar Initiative.

In fact, the second share position was approximately 21%, versus our approximately 38% share.

We have maintained the leading share position in this segment since the second quarter of 2007.

Because there can be a significant amount of panel switching by dealers between the application date and the time of actual installation, we focus on installed systems data rather than application data as the most useful measure of market share.

In the commercial segment, we have taken into consideration both SunPower systems with SunPower panels and third party panels when calculating share.

Let's cover how we think about pricing.

As we have seen over the past several quarters, our product commands a premium average selling price.

As the first quarter progressed, we closely monitored our customers' buying patterns to determine whether our ASPs were appropriate to maintain market share in this environment of competing market drivers and unprecedented price pressure.

With nearly 500 dealers worldwide, we have significant real-time visibility with respect to end market dynamics.

During the quarter, we reduced our components ASPs by less than 10%.

The Component segment is our shortest cycle business and therefore more accurately reflects current market conditions.

We saw during Q1 that our share of California residential systems; CSI applications, a leading indicator for share of installations, remained within our long-term range of 20 to 25%, indicating that our products were priced competitively.

Our view is that more rapid price decrease within Q1 would not have necessarily resulted in meaningfully higher shipment volumes within the quarter.

In this environment, we believe that the correct course was to maintain SunPower's premium pricing position, superior to margin profile.

Let me emphasize by saying that the CSI data and our margin performance in Q1, demonstrate that our brand, technology, cost, and people strategy is working.

We have developed a brand based on differentiating technology that offers us a leading cost position.

We have invested in the people who have created our technology, built our businesses, and continue to do so.

And we will continue to capitalize on these strategies.

Now let me turn the presentation over to Dennis Arriola, our CFO, who will report details of our 2009 Q1 results; discuss how we are positioning ourselves financially for the balance of 2009.

And after Dennis makes his comments, I will make a few more comments about market dynamics.

Dennis?

Thanks Tom, and good afternoon.

I would like to start with slide five, and begin with an overview of our financial results of the first quarter.

As Tom indicated, our first quarter results came in below our internal plan due to prolonged winter conditions in Europe, the difficult economic and credit environment domestically, and delayed purchasing decisions by many of our customers.

Revenue in the first quarter was $214 million compared to $274 million in the same quarter of 2008.

Revenue from our components business was $108 million in the first quarter, up nearly 14% versus the same quarter in 2008.

The long winter season in Europe this year, impacted our sales in Germany.

We also experienced challenging business conditions in our North American components segment as the uncertain economic environment and tight credit conditions influenced overall demand, and the timing of the customers' buying decisions.

For the quarter, revenue in North America components increased by nearly 20% over the same quarter last year.

We also experienced first quarter growth in Italy, as component sales made up over 28% of this segment's revenue for the quarter compared to 14.5% for the same quarter in 2008.

Sales in our systems segment were $106 million compared to $179 million in last year's first quarter.

Now recall that Spain was a big business for SunPower last year when sales in that country made up nearly 74% of our systems segment revenue in the first quarter.

By comparison, systems sales in Spain were only 3% of revenue in the first quarter of 2009.

Revenue and gross margins in the quarter were impacted by average selling prices, or ASPs.

Our blended ASPs were down less than 10% from fourth quarter 2008.

And based upon what we hear in the market, this reduction appears to be substantially less than what many of our competitors experienced in the quarter.

This illustrates, as that Tom pointed out again, that SunPower's products continue to command a premium in the market, even during difficult economic conditions.

Gross margin on a non-GAAP basis improved to 24.3% from 24% in last year's first quarter.

By segment, components gross margin improved 420 basis points to 29.5% in the first quarter, while our systems business gross margin business was 19%.

Non-GAAP operating expenses for the quarter were $40.3 million, down over 5% from the fourth quarter of 2008.

Other income and expenses, or OIE, on a GAAP basis was a loss of $12.1 million, and a loss of 7.6 million on a non-GAAP basis in the first quarter.

GAAP OIE and earnings for the quarter were impacted by a new Financial Accounting Standards Board rule, FSP APB14-1 to be exact.

That is a mouthful.

Under this new FASB rule, we are required to separate on our financial statements the value of the underlying debt from the fair value of the conversion feature of our convertible debt.

This noncash adjustment had a $4.5 million negative impact to our GAAP OIE.

Both GAAP and non-GAAP OIE also included a $1.4 million expense related to the foreign exchange forward options, which will benefit future periods.

And $1.7 million expenses for a reserve related to our remaining investments in the reserve primary money market funds and some losses on the sale of auction rates securities.

For the first quarter 2009, we recorded a GAAP net loss of $4.8 million or $0.06 per share of loss.

Non-GAAP net income for the quarter was a positive $4.2 million, or $0.05 per share gain.

The adoption of FASB rule 14-1, including the impact of taxes, reduced first quarter GAAP earnings and earnings per share by $5 million and $0.06 per share, respectively.

Going forward, we expect the adoption of rule 14-1 to negatively impact GAAP earnings, once again on a noncash basis by approximately $5 million to $6 million each quarter in 2009.

Now please turn to slide six.

While we were obviously not satisfied with our financial results in the first quarter, we recognized the severity of the challenging business environment, and implemented several actions and strategies that will help us manage our cash flow more effectively and continue to protect our strong balance sheet.

In regards to our operating expenses, we took a systematic approach to reducing costs throughout the Company.

We analyzed which of our expenses could be shifted from a fixed nature to variable based and reprioritized costs that could be eliminated or delayed until the business climate and overall demand improves.

As a result, we have identified and reduced more than $50 million in costs from our internal 2009 operating expense line, including the reduction of more than 60 jobs in January.

From a working capital perspective, we have implemented strategies that will help minimize the amount of cash we have invested in our business over the short term.

In order to optimize the inventory levels going forward, we have adjusted our factory outputs at our fabs in the Philippines, to better match the current demand environment.

In essence, we now have the ability to phase in our fab lines within two weeks to replenish inventory levels or if we see signs of demand picking up quickly.

Our model, as you know, also allows us to purchase third-party modules if that makes the most economic sense.

In 2010, we will have the manufacturing capacity to produce approximately 600 megawatts on an annual basis.

And this year we plan to produce up to 400 megawatts.

In order to further optimize our cash flow, we have reprioritized our capital expenditure spending for the remainder of 2009.

For example, the last three lines in our fab 2 are basically complete, although we have held off on final ramp of capital and costs.

We do not plan to fully utilize these lines until we see stronger market signals that demand has picked up again.

This allows to us save on depreciation expense and the working capital related to the lines.

We have also rescheduled a major portion of the build out of fab 3 in Malaysia until 2010, and adjusted the timing of other non-critical capital expenses.

As a result, we now expect our 2009 capital expenditure plan to be in the range of $250 million to $300 million.

A $100 million reduction from our previous range of $350 million to $400 million for the year.

We are also working closely with our vendors and suppliers to reduce the lead time required to order capital equipment, and focusing on ways to reduce our working capital requirements by improving the terms and conditions of our existing contracts, including repayment requirements.

All of these actions will help SunPower optimize its cost structure and capital spending plans, and help maximize cash flow generation.

I would like to spend a moment on the progress we have made on our cost reduction road map.

As you will recall, SunPower set forth a strategy in 2006 to reduce its overall manufacturing costs by 50% by the year 2012.

We are well on our way to meeting or beating our goals, and we are currently on schedule to be two-thirds of the way to our target by the end of this year.

On slide seven, I would like to give you an update on some of our recent financing activities.

In late March, we renewed and extended our working capital facilities with Wells Fargo Bank.

As we reported earlier, we are funding our new fab 3 in Malaysia with a loan package from the Malaysian government.

And to-date we have drawn down approximately $104 million of the total facility.

We are also pleased to announce that last Friday we closed and funded new three-year $30 million material loan with Union Bank of California.

The proceeds for the $30 million financing do not appear on our first quarter balance sheet.

Lastly, we are making good progress on closing a $75 million financing package with the International Finance Corporation.

These new financings and renewed credit lines demonstrate SunPower's ability to raise capital, even in difficult credit markets.

We are committed to maintaining a strong balance sheet, and we recognize that customers and suppliers like FPL Group, Exelon, PG&E, and Xcel, to name a few, prefer to do business with a financially strong company.

As we have mentioned before, we will not use our balance sheet to permanently finance large utility scale projects.

Before I turn it back to Tom, I would like to spend a moment on the financial model we previously discussed with you, which is a 30% gross margin, 10% operating expense, and 20% operating margin.

Given the diversity of our business, both by type and geography, and our continued progress and success in the larger scale utility business, we recognize that our future success will be measured more by the growth of our operating cash flow, and how we efficiently utilize capital, than by whether we adhere to a 30/10/20 model.

By being flexible and continuing to reduce our costs, we can take advantage of market opportunities, profitably build market share, and generate more operating cash flow in the future and still produce operating margins of approximately 15% to 20% annually.

So as we continue to reduce our manufacturing costs, optimize our operating expenses, and flex our capital spending plan based on market demand, SunPower is well-positioned to maneuver through the challenging short-term economic environment and remain a leader in our sector.

We will continue to invest in research & development even in these uncertain times to insure that we continue to produce leading technology that will deliver competitively priced cost of energy to our customers.

While we can't predict the exact timing for the market turnaround, we are confident that we are managing the Company to succeed in the future.

And we expect to see an improvement in our performance in the second quarter.

With that, I will turn it back to Tom.

Let's turn to slide eight.

As we look forward, we see trends emerging in a number of market segments that give us confidence that we will see substantial growth in the second half of 2009, 2010, and beyond.

These segments include rooftop, distributed power plants, and utility scale projects.

I would like to briefly touch on each of these trends, and how we are well-positioned to take advantage of these trends, and provide you with some examples, systems in each category.

As you can see on slide eight, SunPower has been very successful in the Rooftop market by offering our customers the best net present value, or NPV, of any solar company in the segment.

We see this trend continuing.

We are winning customers in the commercial Rooftop segment, as evidenced by our recent dedications at Del Monte with 1.9 megawatts on two roofs, and J.C.

Penney with 3.5 megawatts over 9 roofs.

Additionally, we booked more than $60 million in North American commercial projects in the first quarter of 2009.

We will win commercial business for similar reasons as the residential market.

Our technology and systems expertise enables us to drive the highest power density within a given geographic region, with superior temperature performance, low light performance, and no light-induced degradation.

As a result of our superior technical and economic performance, SunPower products command a premium, even in this challenging market.

With last year's extension of the Federal Investment Tax Credit, or ITC, and continued progress in the development of guidelines for the implementation of the Stimulus Plan, the commercial rooftop market segment is poised to resume its growth, as credit conditions improve.

Turning to slide nine, another trend we are seeing is the increased interest in distributed power plants in the US.

The category that we developed as a core business in Europe over the last five years.

On this slide, we highlight our most recent dedication for the Inland Empire Utilities Agency.

3.5 megawatts over five systems located on four sites, using both roof and ground-mount technologies.

Please note that when we speak about our power plants we do so in the power industry terminology of AC rating, rather than using the DC terminology common in the solar industry for rooftop systems.

We are winning in the distributed power plant segment due to our experience and track record.

We have more than 100 ground-mounted tracking systems, generating more than 200 megawatts of peak power.

We have been a solar engineer procurement and construction company since 1996, and constructed the first major power plants in the US with Nellis, and in Europe with Solar Bavaria I.

At the distributed power plant scale, experience and performance tipped the scales in our favor since we offer a competitive levelized cost of energy.

The drivers for continued growth in this segment include flexibility offered by solar PV to be sited anywhere at any scale and delivered fast, which makes it a very attractive way to meet our peak power needs.

And utilities and regulators see distributed solar as a way to efficiently fill in the grid, adding new clean, peak energy generation near load centers, so they don't have to wait for transmission investments to be permitted and completed.

Also State RPS legislation is being implemented at a time where we are able to offer an attractive levelized cost of energy to respond to these programs.

The Federal Stimulus package will fund projects for some of the public customer categories, where we have had substantial success in the past.

The emerging trend of utility-owned solar programs is a great market for us, given our credibility that we can deliver and perform.

Let me elaborate on our utility business on slide ten.

The utility business includes all segments; rooftops, distributed power plants, and central power stations.

We are working with utilities on all three categories.

In the distributed power plant category, we are on schedule for the construction of 25 megawatts in 2009, and 10 megawatts in 2010, for Florida Power and Light, a subsidiary of FPL Group.

Earlier today we announced a three-year 300 to 600 megawatts supply agreement with FPL group.

And we are very pleased to expand our partnership with them.

FPL Group is the leading owner of solar and wind in North America.

We are very excited to work with them to accelerate solar deployment across the country.

Earlier this month, we announced a 17 megawatt power plant with Xcel Energy in Colorado.

And on Wednesday, we announced an 8 megawatt power plant for Exelon on Chicago's south side.

We believe that our recent set of utility announcements is the function of our competitive pricing based on levelized cost of energy, our experience of more than s decade of large scale solar development, and the strength of our performance track record on other large scale systems.

The main drivers for the utility segment include state RPS requirements, which will generate demand for 70 gigawatts of renewables by 2025.

ITC grant which will directly benefit utility owners.

The Stimulus Plan which includes project grant and loan guaranty programs, which will improve near term financing options for utilities or third-party owners.

Carbon legislation which will require utilities to consider their aggregate carbon footprint.

And perhaps most importantly, the market data showing utilities how the LCOE of SunPower solar systems are now competitive with other resource options under consideration.

Finally, as you can see on slide 11, our long-term confidence in the Utility segment is a direct result of our growing project pipeline, which has grown to more than 1.3 gigawatts on a probability weighted basis.

Our pipeline is well distributed with multiple opportunities across many years.

Moving onto guidance.

Given the current market conditions we are revisiting our 2009 guidance and now expect revenue to be in the range of $1.3 billion and $1.7 billion with non-GAAP EPS in the range of $1.25 and $1.75.

Based on performance continuing on the path we have seen quarter to date, we believe we will drive revenues at least 20% higher in Q2 2009 relative to Q1 results.

While long-term fundamentals are strong, we remain cautious in the near term, and our guidance reflects this.

That being said, if conditions improve over the balance of the year, we are positioned to respond rapidly to improved market conditions.

Let me conclude by saying that we have responded to a challenging Q1 by taking the steps necessary to control our costs given current market conditions, while still retaining the ability to quickly respond as the environment improves.

I will 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; Marty Neese, our Chief Operating Officer; and Bob Okunski, our Senior Director of Investor Relations; so that they may provide some of the answers.

To provide ample time to address all of your questions, we ask that you limit yourself to one question and one follow-up.

We would like those of you who would then like to jump back in the queue to do so.

Operator, we will take the first question.

Thank you very much.

(Operator Instructions).

Our first question is from Sanjay Shrestha, Lazard Capital, your line is open.

Great, thank you.

Good afternoon guys, I appreciate the guidance and the commentary on the ramp up.

Just a quick question.

Tom, you talked a lot about the utility landscape.

It seems like you are getting great traction there.

Can you sort of talk about what's your market share there?

Especially as we start to get more and more visibility on this loan guarantee program, and funding under the grant program.

What would you say your market share is at this point in time, and what would you like that market share to be between now and over the next five years?

Okay.

Thanks for the question, Sanjay.

I will make a few comments and I'll turn it over to Howard.

Let me first say that in terms of target market share, I will let Howard amplify what I have to say, but our target market share is at least as high as we have in any other segment.

And the reason for that is we believe we are most competitive in the utility segment.

And that is because our product produces substantially more energy in the same unit area, and we have a huge balance of system advantage, while the cost of our panel is decreasing rather significantly.

And so on a levelized cost of energy basis, we are very competitive.

We offer other features that we think the utilities value a lot as well as our strong balance sheet, and almost 10 years of operating experience.

So for all of those reasons, we see utilities as one of our strongest segments, if not our strongest segment.

And therefore our target market share is at least as big as any other segment.

In terms of numbers, I will turn it to Howard.

This is Howard.

Thanks, Tom.

Sanjay, we are probably looking at market share on the order of 25%, plus or minus for this segment for us.

The utility power plant segment is much more mature in Europe, and there are many more systems there versus North America.

You have literally probably three systems that have been installed or under construction in this category.

And we are working on two of the three or we have completed one of the three, and we are working on the second of the three.

So it is pretty early in North America, but I would support what Tom said.

Okay.

Much appreciated.

Thank you.

Next question comes from Jesse Pichel from Piper Jaffray.

Your line is open.

Hello.

Congrats on the FPL wins and good execution.

Can you discuss your cost road map on components?

You have I guess a higher cost structure than the commodity module because of the end type wafer and the back contact metalization.

Are you seeing any alternative methods of patterning that could lower the CapEx and operating costs on the new fabs coming up?

Yes, Jesse, I think I will take the question.

This is Tom.

And what I would say to you, if we look back over the last few quarters.

Perhaps even four to eight quarters and compare gross margins, even taking into consideration likely selling prices.

I think you will find that our cost structure on the components segment, which specifically is modules is quite good.

And so we are actually quite confident that we can compete on a cost basis, although we expect to continue to command a premium.

We get the premium because we produce more energy per rated watt in each of these installations.

Now as we look forward, I think you have asked a very good question with the architecture of our cell and the cell type that we use.

Do we see other technologies or other ways of getting costs out?

First, the answer to your question is yes.

I think most of the callers are aware that we are vertically integrated or partnered in the production of ingots and wafers.

And there's been a fair amount of innovation in that space where end type wafers actually don't command a premium in terms of cost.

And in terms of our architecture, our R&D team has done a fantastic job of advancing the conversion efficiency of our cells while not increasing costs.

So that obviously has a cost reduction impact.

So there are some other technology things that we are working on with our R&D teams that we will be talking about in the back half of this year.

But I think you can expect us to have variations on our mainstream theme and not a new technology horse that we are going to ride, so to speak.

And for my follow up question, you mentioned 60 megawatts, I believe, of commercial rooftop programs that you won in Q1?

Can you discuss, give us a little more color on that 60 megawatts?

Is that fully financed?

Is it risk adjusted?

Thank you.

Yes.

And I will just say really quick comment, and then Howard can speak to it.

I appreciate the question, because when we talk about the Utility segment, we are talking about a profitability weighted pipeline, so we wouldn't consider that business to be booked yet.

Booking requires financing, permitting, a contract, et cetera.

In the commercial segment, we were referring to bookings.

So there is a substantial difference.

And then Howard?

Yes, this is Howard.

You may have been referring to $60 million of commercial projects that we booked in the quarter, Q1 in North America.

So that comprises roughly about 10 different customers in the retail, telecom, ag, public school sector, and these are distributed largely rooftop projects.

And that would be again, 60 million booked in the quarter.

None of them are dependent on financing.

They are 100% booked, and they will be recognized in 2009.

Thanks so much for the color.

Next question comes from Timothy Arcuri from Citi.

Your line is open.

Hi, couple of things.

First of all, can you give us the production number, and the portion of systems that went to your components business?

And then as a follow-up, looking at the inventory number and looking at the premium that your components are getting out there relative to the peers.

It is at its highest level that it has ever been.

As you look at that big inventory number, how do you assess the risk of having to write that down over the next two quarters, as pricing has to come down to close that gap?

Thanks.

Sure.

Let me speak to the second part of your question.

This is Tom.

And then I will turn it over to Dennis, who can give you specific numbers.

So in terms of the inventory and risk of write-down, we mentioned that we have implemented a demand-driven supply chain.

And what that means is that we will regulate or size the amount of manufacturing that we do based on the amount of inventory that we have between us and installation.

So by definition, we are able to manage that inventory level down by managing how much we produce.

And so we fully expect to absorb that inventory pretty rapidly in the first part of Q2.

The other thing that I said that is really relevant to this is that the first part of Q2 has started out substantially better than the first part of Q1.

And so the rate of installation is substantially higher than the rate of installation in Q1.

So you can't use the Q1 usage rates to calculate when that inventory will go away.

So very good question.

I can assure you we are on top of this.

And we are moderating production build, based on the amount of inventory as we install it.

In terms of the specific numbers of production, I think our guys are ready.

Dennis?

Yes, the overall production on a kilowatt basis was 93,686 for the quarter.

So, 94 megawatts approximately.

And Tim, I would like to let Marty Neese briefly talk about the supply chain approach in the next quarter or two.

And then we will take the next question.

Marty?

Thanks, Tom.

There are a couple of additional points to add.

Part of it is, as Tom mentioned, with the vertical integration capability.

What we are doing is managing the production of cells and holding that inventory to maximize our flexibility and responsiveness.

Once we get demand signals or purchase orders from customers, we convert it into finished grid modules, and then ship it to end destinations.

Additionally in this quarter, we are launching our regional module operation in North America which will allow us to fulfill in region and liberate a lot of working capital that is in transit by sea at the moment.

But that is what we are working on in this quarter, which will help the inventory issues going forward.

What was the portion that went to the systems business?

Do you guys have that number?

Let me look at that, and --

We will come back to that in a moment.

We are doing a little book searching here.

But we will answer your question.

Thanks.

Next question, please.

Our next question comes from Satya Kumar from Credit Suisse, your line is open.

Hi, thanks.

Question on inventories again.

You mentioned that you were looking to throttle the production in the second quarter.

Can you give us a sense of what the utilization rates you are looking to run in the second quarter and will there be any under absorption charges?

And how to think about that for margins?

And secondly, if I look at your peers and look at pricing trends for them, most folks are down.

Obviously a lot more in Q1 for pricing, and Q2 is down another 10% or so.

Is there a possibility that there is a sort of a catch-up quarter for pricing for you as you look forward to the rest of the year?

Are you comfortable in terms of maintaining that premium?

Thanks.

So, two parts to the question.

On percent utilization/under absorption, and then pricing.

Howard, I will let you take pricing.

I will take under absorption and utilization.

So, in a demand driven supply chain you build according to the demand.

And so the amount of utilization of the lines now that the market has converted to a demand driven market will be dictated by the amount of demand, obviously.

We are seeing demand pick up, so the utilization of our line obviously will pick up as we use the inventory from Q1.

So, we will see anywhere from a line or two that is not used to as many as say 30 or 40% of the lines, depending on how demand goes for the balance of the second quarter.

In terms of under absorption bookings, I am not a big fan of taking [such] cost hits.

So we have really, Marty's team has really managed absorption very effectively.

So the fact that we are producing less volume than planned, of course, makes it difficult to absorb the fixed costs.

All of the numbers we report will absorb the fixed costs in our reporting.

We don't expect to have a separate under absorption number.

Although, if it is beneficial at the end of the quarter, we could compare what it would have been had it been 100% loaded.

But the way we report, we will absorb everything.

Howard, do you want to talk pricing?

Could you repeat the pricing question, please?

Does the pricing -- I guess, is there a possibility there is a catch-up quarter for pricing as you look out into the remaining quarters of year?

What do you mean by catch-up?

In the sense that basically the pricing is down a lot more for your peers.

It seems like you guys did a very good job in Q1 maintaining market share without lowering prices as much as your peers did.

Your peers are dropping prices another sort of 10 percent-ish in the second quarter.

Is there sort of a pent-up price catch-up that you guys have to do at some point later this year?

Right, thanks for the clarification.

We intend to continue to be very competitive, and do what we need to do to maintain share.

We believe we will be able to maintain premium as we go forward.

One point I wanted to make is that we do see a lot less volatility in our pricing compared to others in the market, and that is largely due to our approach to the market and our robust network.

We do anticipate and plan for continued downward pricing pressure in the market, particularly in the components area.

And so our plan is up to 20% for the balance of the year.

As we get into the second half of the year, we do believe that ASPs will moderate as the demand picks up.

And Satya, I will pile on to Howard's answer, and then we will go back to Dennis to answer Tim's question earlier.

The sort answer to your question is no, Q2 will not be a catch-up quarter on pricing.

We won't have any abrupt changes to our approach, as Howard indicated, however we are prepared to change pricing as he also indicated.

Dennis, do you want to finish answering Tim's question?

Sure.

As far as how much did we produce specifically for the systems segment.

We don't release that type of information specifically by segment but I can tell you, obviously, the revenues for the quarter were roughly 50/50 and we have provided you with the gross margins.

The other thing to think about is, obviously, as we produce cells, we are very flexible in which segment we can put those into.

So we really don't look at it as far as manufacturing specifically for a specific segment.

Thanks a lot, guys.

Our next question comes from Vishal Shah from Barclays.

Your line is open.

Thanks for taking my question.

You reported in your 10-K, that your recognizable backlog was, I think, $450 million, and you did some $60 million of bookings in Q1.

Is the backlog higher now that you have recognized some of the revenue, or is it lower?

Yes, so this is Tom.

I will make a quick comment on that.

And as we have said on previous calls, the backlog is pretty difficult for us.

Because residential is a substantially different market than commercial and that is different than utilities.

And utilities we have given you a sense of the pipeline.

And in the commercial business, it is more a sense of a bookings rate which we gave you the number for Q1.

In residential, it is more of a turns business.

So for that reason, we haven't found a good bookings metric to report on a quarterly basis.

Perhaps it is a homework assignment we can go take.

What I would say to you, broadly speaking, is that our pipeline of all of those businesses, if you took pipeline and bookings profile and turns business, they are all pointing in the positive direction during Q2.

Okay.

So in terms of your revenue recognition, you are talking about a 20% sequential revenue growth in Q2.

And that would suggest that the midpoint of the guidance would require you to do something around $800 million exiting Q4, from the $200 million level.

So I just want to get a sense of what kind of visibility you have in the back half of the year.

Whether it is just your backlog that is giving you the comfort or something else that you are working on.

Maybe you can help us understand that?

Thank you.

Sure, absolutely.

It is a very good question.

First, let me clarify, we said at least 20% for Q2.

And then, of course, you said Q4 but I think you meant back half of the year.

In order for the math to work, you add the two together and you do come up with numbers like that for the back half of the year.

And, of course, as we get closer to the back half of the year, we have more and more data.

Let me just clarify it by channel.

Utilities and commercial business, it is all identified.

So we are not speculating on business to go find a customer.

Now it is not all booked, but we have customers for everything we are committing to.

We have to finalize the bookings but it is all identified.

For residential, it is a turns business, and so on that business, we look at it from several different angles.

We look at size of market for the rest of the year, and the share we expect to gain or garner.

And we look at conversion of leads because we generate a substantial number of leads for our dealer partners.

And we look at the lead generation rates, and obviously we work with our dealer partners, to see their view of the next eight months.

So the dynamics are different in each part of the business.

So in residential, when we did those things, we believe it supports our guidance range.

But frankly, that drives how wide the range is.

Then in the systems and utilities business, all of the customers are identified.

Thank you very much.

Yes.

Okay.

Let's go to the next question.

The next question comes from Nick Allen from Morgan Stanley.

Your line is open, sir.

Hi.

Thanks for taking my question.

Could you give a little more clarity on pricing?

You just said you were expecting, possibly a 20% down from here.

Is that the assumption that you are using in your guidance?

Yes.

So you expect another 20% decline in pricing over the course of the year?

Yes.

The way you should think of it from our perspective is that we are prepared for or we tested into our models up to 20% more price decline this year.

Okay.

Thank you.

Next question comes from Al Kaschalk from Wedbush Morgan.

Your line is open.

Tom, I am trying to balance the outlook, the guidance, and the manufacturing production starting in Q2 here.

And maybe you could just shed a little bit of color?

I am not necessarily asking you to call a bottom.

But are you comfortable as you roll out Q2 that you can remain pretty steady state on the manufacturing side, and not necessarily building inventory further?

Or do you need a few more things to open up in the visibility channel to make that statement?

No, we are comfortable that we can lower inventory consistent with our manufacturing plan, yes.

Does that mean production could be at least 20% above what you produced in Q1 of 93 to 94 megawatts?

Yes, let me be clear.

We have already adjusted our manufacturing to lower the amount of inventory that we carried from Q1, and satisfy what we expect our business to be in Q2.

And what we will do is moderate the amount of manufacturing we do based on inventory levels, which is driven by demand.

So hopefully that is helpful.

The answer to your question is, yes, we will lower inventory levels consistent with our expected build plan.

Okay.

And then can you give any color on revenue split, either for the full year or the forward looking period?

Yes.

If you are meaning the confidence level in revenues --

I am sorry.

I think the revenue split in the quarter was 50/50.

And I was just trying to get a sense of how we can think about the Q2, and as we move out.

I am not asking for specifics but how do we think about the 50/50, 60/40 type thing for the full year?

This is Howard.

I will answer that question.

60/40 is something that we talk about when we talk about quarterly, and even on an annual basis to account for variability quarter to quarter.

But 50/50 for the full year in terms of a revenue split is a good working assumption.

And what is the 60/40?

What is the 60 component?

Oh, just how the revenue split can fluctuate quarter to quarter.

So that you can be 60% systems one quarter and then it can go to 40 the next quarter.

Thank you.

All right.

And we are going to go to the pseudo lightning round, which means we have five or six minutes left.

Next question, please.

Next question comes from Pavel Molchanov from Raymond James.

Your line is open.

Target for 50% all-in cost reduction by 2012.

Given that poly pricing has collapsed much faster than pretty much anyone would have expected, do you see any upside to that target?

Thanks Pavel for the question.

I will take this to keep us moving quickly.

We also guided that two-thirds of that cost reduction would happen by 2010 or sooner.

And yes, we are seeing some opportunity for that to accelerate.

And of course, you have to compare that to the rate of ASP decline as well.

And I know you understand that but I wanted to point that out.

I will also comment on silicon price as well.

I'm not sure I would use the word collapse.

They have come down substantially.

But at $80 or $100 per kilogram they are still higher than they should be, and we expect them to continue to come down.

So, yes, I think is the short answer.

Thanks.

Next question comes from Paul Clegg from Jefferies.

Your line is open.

Hey, guys, thanks.

Dennis talked about the flexibility of the business model.

How you buy third-party models when that makes sense.

I wanted to dig into that comment for a second, and just try to understand how you think about that tradeoff.

What is the point where market ASPs come down by relative to your own?

Where you just say, let's buy competitor models when you had originally planned to use your own for an installation?

How do you think about that point of inflection?

That is a really good question.

And it is evolutionary, because the market is changing rather rapidly.

We still have a huge bias towards using our world sized efficiency panels.

Our sales guys, we continue to have the challenge with our sales guys.

That they are always selling highest watt rated panel because it makes the economics best on all of their projects.

So that leads us to a preference towards significant utilization of internal product.

And what Marty and his team have been able to do is reduce the lead time to turn on capacity.

So that we can actually flex capacity internally a lot better than we ever could previously.

They are very optimistic that they can continue to reduce that lead time.

So if anything, I see us using more internal production.

Now having said that, there are some key partners in third party supply, who are working with us on the way they price the product.

And also the evolution of their product so that we will always have a third-party component.

In terms of a trigger point where we would use a lot more third party, the thing that we would want to look at is at pricing, long-term sustainable.

What we wouldn't want to do is accept pricing that could go away six months later.

We would want to make sure that we are part of a model that is going to make sense in the long term.

And I would say that there is a fair amount of room before we hit that point.

Can you can you say who that partner or partners are?

Well, I think we have said previously that we have done business with people like Q-Cells, as a primary partner.

And historically, Sanyo has been a partner, among others, Suntech as well.

So I would include that list plus a couple of others.

Okay, great.

Thanks.

You bet.

Next question, please.

Your next question comes from Rob Stone from Cowen, your line is open, sir.

I wonder if you could comment on a couple of things that affect the cost side and help you maintain your margins.

One is, can you give us some of the operating metrics?

How much grams per watt you are using?

Wafer thickness, that sort of thing, and then where do you see the trend of your wafer and silicon costs for the rest of year?

Thanks.

Sure, okay.

Let me talk about trends and then Dennis and his guys will give you grams per watt and thickness of wafer.

And maybe we can give that to you in a sense of what percentage of lines we have converted to our thinnest wafer.

I think you have hit some of the important ones, grams per watt, thickness of wafer.

I would include average conversion efficiency, which we are seeing two really good trends there.

We are seeing almost all of our lines around the minimum 22% cell.

And all of our lines, even on the cell configuration they are running, are improving in the conversion efficiency based on manufacturing improvements.

The other thing I would point to is there still a fair amount of room for yield improvement.

And we have got a great deal of focus there, because that money goes straight to the bottom line.

I think on the next call we will be able to quantify the amount of yield progress we are making.

Back to the original question though, in terms of the grams per watt, we will turn that to Marty.

Yes.

Just to comment on the lines, we are running 100% 145 micron cells at this point in time.

And with a range of 5.6 to 5.7 grams per watt.

And Tom, comment on the purchasing cost of wafers and silicon?

If prices are going to go down another 20% what is going to happen to your cost inputs?

Yes.

So we had, I will do that quickly.

I will take one more question and then I will make a wrap-up comment and we will end the call reasonably close to -- within the schedule that Bob conveyed.

So we had contracts for all of the silicon we needed this year.

Some of those contracts were what we characterize as short term in nature.

And some of those are rolling off throughout the year.

So we do have an opportunity to capitalize but obviously not 100% of our supply.

So it is a weighted average.

And if you said 20%, it would certainly be south of 10% that we could capitalize on.

But it is a nonzero amount that we will capitalize on.

It is also important to note that our most important partners are the partners that are expanding and are the biggest silicon providers in the world.

So, we are pretty comfortable that we have partnered with the right people, and that they are going to drive the cost curve most aggressively.

So the answer to your question is probably half of that, 10% or less.

Let's take one more question please and then I will wrap up.

Next question comes from Corey Tobin from William Blair & Company.

Your line is open.

Hi, good afternoon.

On the balance sheet, any other significant adjustments to the balance sheet aside from the $30 million you mentioned, either on the asset or the liability side?

And then what do you expect the operating cash flow to be in '09?

Thanks.

On the balance sheet.

There have been no other subsequent events since the end of the quarter.

So, other than $30 million, that would be the only thing.

And as far as the cash flow for the year, we have not provided a forecast.

What I can tell you is, we have shifted out our CapEx, so we have been able to reduce the overall need for cash flow until 2010.

And I can tell you that we are still using more cash than we are generating.

Okay.

Let me end now with a wrap-up comment and we appreciate everybody's time.

There are some people left in the queue.

Over the next few days, we will certainly try to make sure we answer your questions.

We are sorry we didn't get to you.

I would like to make a comment about the agreement we have with FPL's Group.

We are very, very excited about our relationship with the FPL Group.

I think one of the things that people need to realize is that these existing solar PV plants get built by us in conjunction with FPL.

They will be the second largest solar PV state.

And by their work with the Governor of Florida, they hope to expand that with the balance of the utilities in Florida to an even bigger market.

The Governor of Florida has been a real leader.

And so we expect Florida to continue to be a great market.

And the FPL Group, I should point out has a great development team, a great land position countrywide, and a strong balance sheet where they can provide financing of projects.

And this is a team that has proven their mettle as a world leader in the wind industry.

So we are really excited about that relationship as we go forward throughout this year.

So we appreciate everybody's time during this interesting first quarter.

We look forward to our next earnings call.

And we will have a limited amount of callbacks, but we will try to connect with some of you.

Thank you.

At this time that will conclude today's conference.

You may disconnect, and thank you for your attendance.