SunPower Corporation (SPWR) 2009 Q2 法說會逐字稿

Good afternoon, and welcome to the SunPower Corporation 2009 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 Bob Okunski, Senior Director of Investor Relations at SunPower Corporation.

Sir, you may begin.

Thank you, Ed.

Welcome, everyone, to our second quarter 2009 earnings conference call.

On this call, Tom Werner, SunPower's CEO, will give an overview of our Q2 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 the call.

During today's call, we will make forward-looking statements subject to various risks and uncertainties that are described in our most recent 2008 10-K filed with the SEC in February of 2009, and today's press release with our Q2 '09 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.

In the same location, we have posted a supplemental data sheet related to our historical performance.

As usual 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.

Tom?

Thank, Bob, and thank you for joining us today.

Our solid results in the second quarter demonstrate the value of SunPower's vertical integration and diversified market and channel strategy.

We have been preparing for over four years to thrive in the transition to a demand-driven market.

In the second quarter, our diversified channel and geographic footprint allowed us to capitalize on demand improvements in a number of important markets by adding 100 dealers globally; improving our market share position in important markets; financing commercial systems in the United States; and substantially increasing our utility business with FPL Group, Xcel Energy and Exelon.

Before we detail our Q2 results, there are four things I want you to take away from this call.

First, execution.

We beat our goals in the second quarter, as our team performed very well in a difficult industry and macro environment.

Since we went public, we have consistently met or beaten our public forecast.

Second, technology.

We continue to innovate, launching our novel T5 commercial roof system, the most powerful rooftop product in the industry today.

Our solar cells deliver the highest energy delivery per rated watt in the industry, and we continue to invest to drive even higher cell efficiency.

Third, cost.

We will demonstrate with a new level of detail that we are a cost leader today compared to conventional crystalline silicon, and cost competitive within film players, and we are on a path with our roadmap that maintains our cost leadership into the future.

Fourth, our outlook.

We have the balance sheet, demand visibility and operating capabilities in place to hit our 2009 guidance and to deliver strong growth in 2010 and beyond.

After reviewing our Safe Harbor statement, let's start on slide three of our presentation available on our website.

You will see that our second quarter results reflected a continued strength of our vertically-integrated model and diverse tied market and channel strategy.

Specifically, the quarter was characterized by strong execution as we met or beat our stated goals for the quarter.

We drove a 39% sequential increase in revenue, based on expanding our global dealer network and executing our large-scale systems commitments.

We reduced inventory by more than 20%, as we transitioned to a demand-driven manufacturing model.

We signed $100 million financing agreement with Wells Fargo for the commercial rooftop market, to address PPA demand and utilize the facility's finance of two systems.

We increased our California market share leadership in both residential and commercial markets, and we delivered solid gross margins as we managed our ASP reductions over the quarter.

Our systems and utility scale backlog and pipeline continue to grow, as customers look to SunPower to supply them with solar rooftops and power plants.

Customers choose SunPower for three reasons.

First, because of our experience.

We offer our customers more than 15 years of turnkey system experience and proven performance on four continents.

We now have more than 450 megawatts of large-scale systems installed or under contract.

Second, technology.

We sale the highest efficiency panels in the industry, and incorporate this technology into high-performance, low-cost systems technology, like the T5 commercial roof system that we launched this quarter.

Third, return on investment.

Our customers enjoy strong ROI based on a competitive levelized cost of energy from our high performance solar systems.

I will discuss these three greater detail as we strike through reporting on our channels.

Our experienced technology and return on investment are central to why we are well positioned for future success.

In parallel, we have implemented strategies to improve our financial position by raising $458 million in capital in our second quarter, reducing inventory by approximately $80 million, lowering our operating expenses by 5% since the fourth quarter of 2008, and by implementing our regional panel manufacturing strategy through our agreement with Jabil.

Turning to slide four, let me touch on why residential and commercial customers choose SunPower.

As you know, since we went public in 2005, we have focused significant efforts on building our global brand and dealer network.

Our presence in the rooftop market continues to expand.

We added approximately 100 dealers in the second quarter, and our network now comprises approximately 600 dealers globally.

Residential and commercial dealers join the SunPower network because they know that customers value our experience, best-in-class technology, and our superior ROI.

Our advantage is that we not only offer our dealers the highest performance solar energy systems available, but also supply many value-added services including logistics, supply chain management, lead generation, training, and financing.

In the rooftop market, we saw demand recover from a difficult Q1, as seasonality eased and customers moved forward with solar system purchases.

We grew our volumes significantly in Europe, and increased our already leading market share in California.

In the large-scale commercial segment, we demonstrated continued progress.

We believe our $100 million agreement with Wells Fargo, targeted at the PPA market, is a litmus test for the accessibility of private financing for large-scale solar systems.

This facility is not dependent on stimulus funds being available.

Two systems were financed under our Wells Fargo facility, a 1.1 megawatt project for the University of California, Merced, and a 1 megawatt system for the Western Riverside County Wastewater Authority.

Both projects are scheduled for completion this year, and will use our high performance T20 tracking system.

In Europe, we saw improved market conditions as well, and are in construction on multi-megawatt systems in Italy as we speak.

Finally, we continue to see customer purchase systems outright, such as a 1.1 megawatt system for [Agelan], which will use our new T5 roof system.

In the second quarter, we also invested in what we believe is the first comprehensive solar brand building and lead generation advertising campaign in North America.

When people think solar, we want think to think SunPower.

Those of you in San Francisco and Los Angeles, you have most likely heard our radio commercials, viewed our online advertising, or seen our Bay Area billboards and transit ads.

This campaign resulted in record lead generation, as our customer leads increased 30% in the second quarter.

We are encouraged by the results, and believe that we will see a substantial return on this investment.

And we expect to continue to fund similar high return-on-investment campaigns in key markets.

Moving on to slide five.

As you know, the California Public Utilities Commission supplies weekly data related to the California Solar Initiative, or CSI.

Based on analysis of this publicly-available data, our overall market share increased to more than 30%.

We also increased our lead in the second quarter versus the first quarter, as compared to the number two market participant.

As a reminder, we focused on installed systems for our analysis, because many applications end up being withdrawn or switched between suppliers.

While it is understandable to track applications to discern future trends, we focus on installed systems, which is the most appropriate market share measure.

Due to the relatively complex categorization of commercial system completions, as discussed in an article in Photon International's July issue by Garrett Haring, it is easy to draw inaccurate conclusions.

We will continue to work with many of you on how to do -- access the full data set, and answer any questions you may have.

We can confirm that SunPower has maintained the leading market share in both the residential and nonresidential segments of the CSI and, with the strong initial feedback from our marketing campaign, we are well positioned to grow our business in the second half of the year.

While we are on this slide, let me comment on pricing.

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

This is a result of our experience, technology, and return on investment we offer our customers.

Our channel strategy was designed for a demand-driven environment, and gives us the ability to manage our pricing as a result of market conditions and long-term strategy.

In the second quarter, we have lowered blended ASPs less than 10% sequentially and in line with our forecast.

Given that our dealer business is our shortest cycle business, we get realtime feedback on our customers behavior with respect to pricing.

Based on the most recent CSI data, we maintained our leading share of completed systems in California and gained share in commercial segments.

These results, as well as feedback from our dealers and sales teams around the world, give us confidence in our pricing models and methodology.

Now let's take a look add slide six, and how we are benefiting from our experience and performance in the utilities and power plant market.

SunPower has been at the forefront of solar PV power plants since 2004, when we built the first 10 megawatt PV power plant in Bavaria, Germany.

This combination of our industry-leading high-efficiency panels and high-energy delivery trackers, gives us the capability to compete with peak wholesale energy prices.

Just recently, we surpassed 1 terawatt hour of solar energy generation across the hundreds of large scale systems that we monitor at our Solar Operations Center in Richmond.

The second quarter, we substantially completed our 25 megawatt installation for Florida Power and Light in DeSoto County, and are preparing to install another 10 megawatts at the Kennedy Space Center in the second half of this year.

As the North American power plant market has taken off, we are also investing in developing the European markets, and we just announced our new Head for the business in Europe, Gian Maria Ferrero, who comes to us with decades of experience in the power and transmission industry.

We also continue to establish partnerships and win business with FPL Group, extending our relationship with them to power plants both in and outside of Florida, as well as with Xcel Energy in Colorado and Exelon in Illinois.

We are driving the permitting process for our 210 megawatt power plant for PG&E in California, as well as transmission upgrades in anticipation of financing in late 2010.

Turning to slide seven.

At the heart of our technology advantage is our high efficiency solar panels, built with the highest efficiency solar cells available today.

We are currently producing mean cell efficiencies of 22.5%.

But efficiency alone does not represent the full story on energy production.

We are focused on delivering a competitive levelized cost of energy, which requires us to deliver superior performance in real world conditions.

On this map, you see the results of four independent tests at research centers around the world.

The metric is energy delivery per rated watt, which tells you how many kilowatt hours you get relative to the peak watt rating of the panel.

These tests include results in low light conditions, high temperature environments and other real world operating conditions.

SunPower solar cells have a number of unique features that together can provide more than a 5% annual energy performance advantage for our systems versus competing technologies.

This advantage is derived from several factors.

Our cells run cooler than conventional cells, since we convert more of the sun's energy to power.

We offer a superior temperature coefficient versus most technologies, providing better temperature performance in all applications, particularly hot, sunny environments.

Our panels have no light-induced degradation; most technologies experience in initial and permanent degradation in performance of up to 3% or more during the first 100 hours of initial exposure to daylight.

Our panels exhibit superior light capture and high angle performance, due to front and back surface architecture.

This is helpful in all applications.

As you can see from the slide, our panels consistently outperform a variety of technologies, in a variety of light and temperature conditions.

Demonstrated, measured, superior performance is another reason our customers choose SunPower.

Please see the Appendix for URLs that will link you to these studies.

Moving to slide eight, we are leveraging our high-efficiency solar panels with new products to amplify our superior energy delivery.

For example, we introduced our industry-leading 96-cell, 315-watt panel, primarily for the commercial rooftop and ground mount markets.

Additionally, in the second quarter we launched our new T-5 product for commercial rooftops which allows SunPower to offer the broadest array of commercial and public building products in the market.

SunPower offers the most powerful roof system in the industry today, up to twice the power per roof as compared to a conventional roof system.

It is also the industry's first all-in-one, non-penetrating photovoltaic roof system that combines solar panel, frame and mounting system into a single pre-engineered unit.

With its polymer construction, we eliminated the need for ground, which saves cost and installation time.

As an example of the speed of installation with the T5 system, one of our dealers recently installed a commercial system in less than 48 hours.

Not only are we leveraging our technology for commercial roofs, we are continually improving the cost profile and performance of our tracking systems.

Reducing tracking costs is a key variable in driving a competitive levelized cost of energy.

We now have tracking systems installed in six countries totaling more than 200 megawatts, and we're constantly improving the design of our trackers as well as the ease of installation.

As a proof point, we can now install one megawatt per day in the field.

We are also ahead of our five year plan to reduce tracking costs, and have reduced costs by more than 50% since 2007.

Finally, there has been lots of discussions and speculation in the past surrounding our tracking costs.

We can now install our trackers at less than a 10% premium to a fixed tilt system, while driving up to 30% improvement in energy generated.

Turning to slide nine.

we will now focus on costs, which links to return on investment.

In many markets around the world, our tracking power plants are competitive with peak wholesale energy prices.

This slide shows the 2008 market price reference, or MPR, in California.

This is the administratively set benchmark for the California renewable portfolio standard, prices against which all renewal bids are compared.

The MPR is neither a ceiling nor a floor, and is recalculated regularly to reflect current forward pricing for natural gas.

Each time the MPR is set, a stream of forward values is calculated for contracts that start in the subsequent years.

This chart shows the values for the 2008 MPR for 25-year contracts.

The MPR is adjusted to reflect the time of delivery for resources bid into the RPS request for offers, and thus the price shown here is increased by 15% to 30% depending on a specific utility value for peak energy deliveries from a resource like a tracking PV power plant.

Tying this to our cost profile, for central station power plants, with good sun in the United States, SunPower is pricing competitively with the 2008 MPR price.

That means we are now competitive with our key substitute product, that being wholesale peak energy.

Let's now move into manufacturing costs as a component of LCOE.

If you turn to slide ten, our panel manufacturing costs were less than $3 a lot in 2006.

In the fourth quarter of this year, we will be at less than $2 a lot, with 45% of that cost being the silicon wafer.

This is ahead of schedule relative to our 50% cost-reduction roadmap.

We are also examining ways to reduce our silicon costs.

Looking forward, we have a clear technology roadmap that will enable us to reach a panel cost under $1 a watt by the fourth quarter of 2014, with cell efficiencies of 25%.

Moving on to slide 11, let me translate our panel costs to our levelized cost of energy.

Since LCOE includes a range of variables, a direct comparison between panel manufacturers' cost of production can be misleading.

To aid in this analysis, this chart shows the benefits of our highest efficiency superior energy delivery systems.

Specifically, buying a SunPower power plant means less balance-of-system and installation costs, lower operations and maintenance costs, and higher energy delivery per watt installed.

To translate, in order to compare our module costs to conventional crystalline silicon solar panels, you would need to deduct approximately 20% from our cost per watt at the panel level.

In other words, our efficiency and energy advantage delivers a 20% benefit versus conventional technology at the system level.

To compare us to the range of thin films on fixed film systems, you would need to deduct approximately 45% from our panel cost per watt compared to a 10% panel, and approximately 80% compared to a 6% panel.

Thus, our manufacturing cost structure is more than competitive with our competition.

With that, I would like to turn the call over to Dennis Arriola, who will discuss our financial results in greater detail.

Dennis?

Thanks Tom, and good afternoon.

I would like to start with slide 12, and begin with an overview of our financial results for the second quarter.

As Tom mentioned, SunPower had strong second quarter results, and we executed effectively on several different strategic priorities, including our successful capital raise in May and our focus to improve working capital efficiency, including inventory levels.

All segments of our business performed well, and are positioned for an even stronger second half of the year.

Revenue in the second quarter of 2009 was $298 million, a 39% increase from the first quarter of 2009.

Recall that we had forecasted an increase of at least 20% sequentially from Q1 of 2009.

As we expected, we experienced a strong turnaround in the second quarter revenue from our components business, which mainly provides products and services to the residential and light commercial customer segments.

Revenue in this category was $189 million in the second quarter, up over 75% compared to the first quarter of 2009, and up over 68% compared to the second quarter of 2008.

The strong revenue growth in components came mainly from our North America and German markets, with especially strong performance from California, where SunPower continues to be the market leader in both the residential and commercial segments.

We are encouraged by the positive trends in the California market, and expect to see further payoff in the second half of the year and beyond from our new marketing campaign that Tom mentioned.

Revenue from our systems segment was $109 million, and consistent with our internal plan.

The majority of the revenues and megawatts installed were related to our Florida Power and Light contract.

Through the second quarter, we have installed approximately 25 megawatts of the Florida Power and Light program, and expect to complete another 10 megawatts in the second half of 2009.

We are also starting to see additional business opportunities in Italy, as the financing markets begin to loosen up.

Gross margins for the quarter held up fairly well, as SunPower's superior technology and value added services continued to command a premium to generic brands.

Gross margin on a non-GAAP basis was 22.6% in the second quarter, and was negatively impacted by approximately 400 basis points due to higher factory variances in the period, as we deliberately moderated our capacity utilization in order to reduce our inventory levels and optimize our working capital investment.

In order to maintain our pricing premium in the market, we are working closely with our dealers around the world to make sure that the services we provide them are valuable, and competitively priced.

Operating income on a non-GAAP basis grew over 130% in the quarter to more than $27 million, as we effectively managed our operating expenses, and continued to invest in areas that will help the Company grow further in the future.

Operating expenses as a percentage of revenues fell from just under 19% in the first quarter to approximately 13.5% in the second quarter.

On a GAAP basis, operating income increased to $10 million versus a loss of $2 million in the first quarter.

Other income and expenses on a non-GAAP basis improved in the quarter to a loss of $1.3 million, from a $7.6 million in the first quarter.

The improvement was mainly driven by lower foreign exchange volatility, and negatively impacted by the additional interest expense related to the $230 million of 4.75% convertible debentures that we used during the second quarter.

On a GAAP basis, other income and expenses included a one-time non-cash, non-taxable benefit of $21 million, related to our convertible debt issue in strategy.

This mark to market accounting benefit resulted from a new accounting rule implemented in 2009, and is not expected to have any recurring impact on the Company's financial statements.

SunPower's non-GAAP effective tax rate for the second quarter was 23% On a GAAP basis, the effective tax rate was 16%, and was positively impacted by the $21 million non-cash non-taxable benefit I just mentioned.

Looking forward, we expect our full-year 2009 non-GAAP tax rate to be in the range of 22% to 25%, and the GAAP tax rate to be in the range of 40% to 45%.

For the second quarter of 2009, SunPower recorded net income on a GAAP basis of $24 million or $0.26 per diluted share.

And on a non-GAAP basis, net income was $23 million or $0.24 per diluted share.

But first year results include the effect of the capital raise completed in May.

The GAAP and non-GAAP reconciliations to our financial presentation are are included in the Appendix of our slides, on SunPower's website.

If you turn to slide 13, I would like to now spend a moment on our balance sheet.

In an offering that we completed on May 5th, SunPower made the strategic decision to further strengthen its balance sheet by issuing $458 million in equity and convertible debt securities.

The market responded favorably to this capital raise, and as a result we finished the quarter with nearly $700 million in cash and investments.

We have already used a portion of our cash to retire at a discount approximately $73 million of convertible debentures that could have been put back to the Company in 2010.

We will continue to evaluate when to retire the Company's maturing convertible debentures in a cost-effective manner.

Given the difficult economic environment, we are paying extra attention to the aging of our accounts receivable.

Overall, I'm comfortable with the quality of our receivables, and we have not seen any material increase in our bad debt reserves.

As for inventory, we indicated in the first quarter earnings call that we were shifting to a demand-driven manufacturing strategy, and would therefore optimize our inventory position.

I am pleased with our execution so far, which has reduced our inventory level from $343 million at the end of the first quarter to $263 million in the second quarter.

We still have a lot of work to do in working capital optimization, but we are definitely headed in the right direction.

Let's turn for a moment to the financing environment.

Overall, the financing markets remain tight, although we are definitely seeing some signs of improvement.

A great example is our recently-announced $100 million commercial financing facility with Wells Fargo Bank.

Through this arrangement, we are already constructing SunPower solar systems for several of our customers, and expect to add more in the second half of the year.

This financing vehicle will help SunPower utilize its long-term capital resources more effectively, and provide our customers with a cost-effective way to finance their energy systems.

It will also help us build an annuity revenue stream, as the underlying power purchase agreements are 15 to 20 years in duration.

The power of this structure is that SunPower is repaid nearly all of its cash costs when the construction of the project is completed.

But we also build a long-term revenue stream for the future.

We are also working on additional financing facilities for the residential and light commercial market, and hope to have these in place in the second half of the year.

In Europe, we are also seeing signs that the financing markets are continuing to open up, particularly in Italy.

We plan to see additional business from Italy in the second half of the year, as our customers work to finalize permanent financing for their projects.

On a limited basis, we may consider arranging or participating in the construction financing of some smaller projects, if our customers are well down the road to finalizing permanent financing, and the returns are available.

On the Federal side, we are pleased that the US Treasury has issued its rules surrounding the cash grant portion of the investment tax credit program.

We believe that the ability to utilize a cash grant, along with the highly-anticipated Department of Energy's loan guarantee program, will further open up the financing markets in the United States.

Our capital expenditures plan for the year remains in the range of $250 million to $300 million, and year-to-date we are at $112 million.

The majority of the expected spending for the remainder of the year is related to our new Fab 3 in Malaysia, and the resources to fund the 2009 expenditures will come from our 1 billion ringgit Malaysian loan.

Overall, we are pleased with our second quarter results, but we also recognize that we have a lot of work ahead of us in the second half of the year.

As Tom will explain further in a moment, we are growing more confident daily that we can deliver the financial results consistent with our revenue and earnings per share guidance, in spite of the challenging economic and financial environment.

Going forward, we will continue to focus closely on improving our cost structure and working capital optimization.

We will also continue to invest in research and development, so that we can maintain superior technology and products.

With our strong balance sheet and superior technology, SunPower has the resources and products that customers desire, especially in these uncertain times.

We have all of the tools necessary to win in 2009 and beyond.

With that, I will turn it back to Tom.

Thanks, Dennis.

Now I would like to turn to our guidance for the remainder of 2009.

Given our strong second quarter results, and our visibility into the second half of the year, we are increasing SunPower's full-year revenue to a range of $1.35 billion to $1.7 billion, from our previous range of $1.3 billion to $1.7 billion.

Let me spend a moment on the drivers impacting our revised revenue expectations, before I go into our earnings per share guidance.

As Dennis and I mentioned in our comments, we are starting to see additional positive momentum in our residential and commercial business segment, especially in California.

We are starting to see the dividends from our marketing campaign in California, which is helping to strengthen our leadership position in the state.

In addition, the growth in our dealer network, both domestically and in Europe, should provide additional revenue opportunities later in the year.

We have also made a concerted effort to enhance our market position in both Germany and Italy, where we have already commenced adding more resources to our sales team.

On the systems side of the business, we have set a high degree of confidence in our ability to reach our internal revenue plan based on projects currently being constructed, like Florida Power and Light.

In addition, we have a highly visible pipeline of sizable deals in both North America and Europe that we expect to close in the third quarter, and construct before the end of the year.

While some of these deals could get delayed until the fourth quarter, we are far along in both negotiations and the financing process.

We also expect to book some additional business this year using the Wells Fargo facility; although transactions financed under this facility will receive deferred revenue recognition, and will not be included in our 2009 revenues.

As a result, we expect third quarter revenue to increase 40% sequentially compared to the second quarter of 2009, and non-GAAP earnings per share growth of at least 40%.

As far as ASPs, our revenue range is modeled to incorporate decreases of up to 15% in the second half of the year.

We expect to maintain or potentially improve our gross margins in the second half of the year, as we increase the capacity utilization in our fabs, factor in planned price reductions in our poly contracts, and leverage our scale in the Philippines.

Our revised non-GAAP earnings per share guidance of $1.15 to $1.60 is consistent with our previous guidance, as we adjust for the new shares outstanding from our May capital raise.

Earnings per share on a GAAP basis are expected to be $0.45 to $0.90, including the impact of the $0.21 per share one-time item previously mentioned.

Okay.

I would like to open the call now to questions.

With me I have Howard Wenger, our President of Global Business Units; Peter Aschenbrenner, our Vice President of Corporate Strategy; Julie Blunden, our Vice President of Public Policy and Corporate Communications; and finally, Bob Okunski, our Senior Director of Investor Relations.

So they can answer some of the questions with me.

We have a little less than 25 minutes.

We do plan on ending on time, because we know many of you need to get on another call at 2:30 Pacific time.

So please limit yourself to a question, and maybe a really, really fast follow up question, since I haven't done a good job of holding you to one question previously.

So let's go ahead and start with the first question, please.

(Operator Instructions)

Our first question today comes from Rob Stone.

Your line is open.

State your affiliation, please.

Hi.

Thank you.

Cowen and Company.

I am pleased to have been wrong in my preview.

Thanks for a good quarter.

Could you comment on your price expectation up to 15% in the second half, do you see that mostly in view now in the third quarter or are you baking in something more that you haven't seen yet in the fourth quarter?

No, you know, Rob, I would say it is a combination of the two quarters, you know, and I think we are in a great position to have a sense for that pricing dynamic, because of our forward integration with our dealers, and that gives us great visibility into the customer dynamic, and it also allows us to match our aggressiveness on cost reductions well with what we expect on pricing.

So we feel like we are in one of the best positions in the industry to have a sense of where that's going, and I guess the short answer to your question is our sense is that that would be divided between the two quarters.

Okay.

So with good visibility on pricing, what is it that accounts for your range of revenue expectations?

What are the puts and takes?

Let me just answer that really quickly, and I think Dennis can add some color.

As we mentioned in our prepared remarks, that -- we have a number of projects, or what we characterize,, I think, as deals that are deep in negotiations and deep in financing, and you know over the last few quarters, the timing of when those complete has been a little more difficult to predict.

So that's what is built into our range.

Dennis, did you want to add something?

I would just elaborate a little bit.

Three things, as Tom talked about, the pricing, you have the financing as Tom said, and as I said in my comment, we are actually pretty well along the way on these, and there could be some slippage from one quarter to the next.

But obviously if the closing of the deal doesn't happen until the fourth quarter, then we probably won't be able to get much construction done in the fourth quarter.

So that impacts what we can deliver in 2009.

Then, obviously, a big part of our business as well is our residential and light commercial, which is a high turns business.

So far we have seen really good momentum coming out of the second quarter, which gives us confidence.

But those are really the three main drivers.

Great.

Thanks very much.

Next question comes from Sanjay Shrestha.

Your line is open.

State your affiliation, please.

Great.

Thank you.

Lazard Capital Markets.

First of all, congratulations, guys.

One more follow up on that range question, if I may, on the revenue side.

Does the high end of that range take into consideration that we have to see the release of loan guarantee money or we have to really see, you know, pretty much expected movement on the Treasury's grant program, or those are additional, if they were to happen some time during that -- say Q3 or Q4 2009?

Sanjay, this is Dennis.

We are not expecting to see any material benefit from the loan guarantee program.

Okay.

In 2009.

No comma, upside, Sanjay.

Okay.

Great.

Our next question comes from the Steven Chin.

Your line is open.

State your affiliation.

Steven Chin, your line is open, please.

Hi, this is Amar Zaman calling in for Steven Chin.

You mentioned -- just to go back on the utilization, how should we think about your utilizations ramping back up in the second half of the year?

I'll let Dennis take that, and apologies Sanjay for changing your name, but Dennis?

As far as the utilization, it has already started ramping up based upon the demand that we're seeing, both on the residential and on the system side.

So what you could think about, in the second quarter we were be below 50% and we are creeping up based upon the demand that we are seeing.

Thank you.

Next question comes from Satya Kumar, your line is open.

State your affiliation.

Yes.

Satya Kumar from Credit Suisse.

Tom, I appreciate the two new slides you had on cost, I think it is very helpful and goes a long way in thinking about SunPower.

I have two questions.

What is going to drive the decline in your costs from the $2 level at the end of 2009 to the $1 level in 2014, given that your efficiency is already very high, silicon costs are low, and your factory is fairly well ramped in Asia.

That's the first part of the question.

The second part is that you said that there's a 45% cost benefit for using SunPower compared to a 10% efficiency panel.

That implies that there's a $0.90 cost benefit based on your Q4 power costs.

If I look at the leading [capital] company, they claim their VOS is $1.40 now, and if I look at a SunPower panel with the leading company, capital company's VOS, I should have a VOS of $0.50 if I combine the two, which doesn't make sense.

So I was wondering if you could expand a bit more on what I am missing between those two arguments?

Sure.

I will take first part of the question and ask Peter to take the second part.

He may need a little clarification.

But I think we will take a shot at both of them here real quick.

The first one is quite straightforward, frankly.

We are shipping a 22.5% cell, we think we can get 2% to 2.5% more out of that, which is another 10% cost reduction across the entire value chain for making a module; that is significant.

Obviously that's the case, because every solar manufacturer in the -- that exists is working on improved conversion efficiency.

We still have room in terms of silicon utilization, and we think that can be significant, actually.

As we scale our business, we had significant materials cost reduction opportunities that you will see talked about over the relative near term.

And also, we are seeing great improvements in yield, and a combination of those things, plus the last thing I would say is we have got some interesting designs you will see come out from us as well, that reduced cost, and the investment we are making in research and development I think is going to give us a real advantage on the cost side.

I won't give you a sense of timing other than to say it is certainly within the timeframe that we conveyed on our slide.

The second part of your question, I think Peter will take?

Satya, this is Peter Aschenbrenner.

Actually, I think the missing element in the calculation and we don't have time to go into it in detail right now, but I think the missing element is the tracking piece.

So when you are comparing a relatively low cost per square meter lower efficiency thin film panel typically installed on a fixed-tilt system to one of our systems, you have to add somewhere between 25% and 30% more energy.

What you would -- in the calculation that you mentioned, you would essentially multiply the VOS advantage for the fixed-tilt system to include that factor, and then hopefully the math should work.

So maybe we can -- we can follow up with you offline on that.

Thank you.

The next question comes from Burt Chao.

Your line is open.

State your affiliation, please.

Yes.

Simmons and company.

Good afternoon, everyone.

Just a quick question on the US, kind of the global market demand environment and how that ties into ASPs.

I know there's been a lot of improvement here in the US, and you did touch on that earlier in the Q&A.

but what do you foresee from a market sizing standpoint as far as opportunity overall, and then SunPower obviously can gain bigger share than some other players in the US market?

What do you see that as an opportunity in the next couple of years?

And then also how does that affect kind of ASP development maybe in the back half of this year and also next year, because I think it's kind of 50/50.

Some people think it will stabilize, some people think it will kind of fall through the floor as well.

This is Tom.

Howard is going to answer most of that question.

Let me just give you a be couple of bullish comments.

We fully expect to disproportionately capitalize on the United States market growth for sure, that would be both residential -- or I shouldn't say both, all residential, commercial and utility scale projects, of which you can see significant growth in each of those markets.

So I think it is a really good question.

In terms of broadly speaking size of the market, ASPs -- I will let Howard comment a bit more.

ASPs, you know, have changed quite a bit in the last six months.

So you could say everybody has been right or everybody's been wrong, frankly, because the change has been so significant.

You do -- presuming the companies don't want to sell below cost, I think you see a natural break point, and there's been a lot of estimates of companies' costs, I think you have a pretty good idea of what our costs are now, and I expect we have a pretty good idea -- a very good idea of other people's costs.

So that, and the behavior of solar manufacturers, I think that will give you some sense of what's going to happen.

Howard, perhaps you can add some comments?

Sure.

Thanks, Tom.

So the US market we are talking about is one of the largest markets in the world now, certainly one of the fastest-growing, and many think will ultimately be the largest market in the industry over the next few years, and it is great that we have a leading share in that market and growing it.

As far as ASPs coming into -- getting more competitive, I would say, more players in the market.

But what is differentiating SunPower is our product; we have a clearly differentiated product.

Our marketing, as Tom and Dennis talked about in their comments, and also our very extensive dealer network, which we back up with services and such as inventory management, delivery, training, all of the things that we need to do to ensure an excellent customer experience.

And those things are differentiating us in the marketplace, and enabling us to maintain and actually increase share.

We are, per our plan, reducing pricing over time.

This is good because there's price elasticity; so as we reduce demand -- reduce price, demand actually increases, so that's by design and the policy is designed that way as well.

So you have decreasing -- incentives, decreasing pricing, increasing demand, all good.

On the commercial side, I will just comment on commercial utilities, because those are important parts of the US market.

On the commercial side with the Wells facility, that certainly gives us a leg up as we go into the second half of the year and into 2010, and so we believe that's going to be material to our leadership position.

On the utility side I think we have to talk about that because it is clearly one of the biggest opportunities in the United States for larger scale and distributed power plants, and we are well positioned there.

Okay.

Great.

Thanks so much.

Next question will come from Paul Clegg.

Your line is open.

State your affiliation.

Jefferies and company.

On the $2 per watt cost by the end of 2009, what sort of silicon or wafer price are you using in that assumption?

Or if you can't tell us that, would you say whether or not you need additional reductions in your contracted silicon prices to get there, above what's already built into your contracts?

Yes, this is Tom, I will answer the question.

First, it is less than $2 a watt.

Second, it is .45 times that number.

And third, we are working with our silicon providers in a very productive way because we still have a lot of additional silicon we are going to purchase, and that puts us in the position to work proactively with our silicon providers, while lowering costs.

So I think that answers all of your questions.

I'm sorry, the .45 refers to just silicon costs, not wafer costs?

I'm sorry, it is the wafers.

So that includes the wafer, ingot growing and polysilicon.

Very good.

That's what I thought.

Thank you.

Next question comes from Vishal Shah.

Your line is open.

State your affiliation.

Barclays Capital.

Thank you.

Tom, your lower end of the revenue guidance, full-year 2009 guidance, implies relatively flat Q4 revenue growth; can you maybe talk about your assumptions between the components and systems business in Q4, especially as you get into a seasonally weak [time] for the industry?

And secondly, just in terms of your costs, can you maybe help us understand how your costs are going to look like in the second half, as you are expecting 15% ASP reduction and margin expansion during the same period?

Thank you.

Sure.

I will comment, and then either Howard or Dennis if you want to add on, that's great.

When we look at Q4, I'm not sure we see it as a seasonally weak quarter, frankly; it's traditionally been a seasonally strong quarter.

You know, we do have Julie Blunden, who has got a team of people with herself that are quite on top of the market.

So we are certainly keeping track of industry dynamics, but our sense it is not necessarily weak quarter.

I know that's in difference to what some other people are saying.

We are not seeing what they're seeing.

In terms of the balance of systems in what we call residential and light commercial business, otherwise known as components, you know, I think we see a reasonable balance between the two, which is in difference to the first two quarters, which means that our systems business is growing quite a bit in the second half, and particularly in the fourth quarter; which is good news because that's pipeline business, and you have visibility into what you're planning to build.

In terms of costs, we commented in our prepared remarks about maintaining gross margins or improving gross margins, so I think that answers your questions about costs, it means that costs will keep pace or faster than the ASP decline that we projected.

Do you want to add anything?

This is Dennis.

I think the only other thing I would add is that you should remember that in 2009, and in the fourth quarter, we're operating under a 53-week year, so there is an extra week of revenue that we're picking up in the fourth quarter.

Thank you.

I just wanted to also -- on the costs side, I wanted to just make sure that -- your silicon costs it looks like are already below spot pricing, so is cost [aggression] going to mostly come from the non-silicon side, or are you looking at even further silicon cost reduction?

Yes, I think if you -- if you do the math on our silicon costs, they're actually higher than many analysts had projected.

But nonetheless -- you obviously have done that math and have a sense for what it means.

And yes, is the answer to your question, we expect silicon costs to come down continuously, and that's built in.

Now, the non-silicon conversion comes down, then -- at least [proportionately] and that's driven by primary two factors, that's utilization and yield improvement.

Thank you.

Next question from Jesse Pichel.

Your line is open.

State your affiliation.

Jesse Pichel from Piper Jaffray.

Hello Tom and team, congrats on a stronger than expected quarter and guidance.

You said systems are growing in Q4 from Q3; do you think components will grow as well?

And part B, while the advantages somehow are very clear, the difference in pricing between your panel and a Tier 1 China panel has never been greater, and I would just like to know what is your dealer network saying about potential share gains from China, and how should we think of the appropriate SunPower premium to these Tier 1 Chinese brands for a rooftop application, not necessarily a tracker application?

Thanks.

I will take a pass, and then if either Howard or Dennis want to add on, that's great.

The question of [Q3] components growth, so with a 15% decline built into our modeling in ASPs, the answer is in megawatts, yes definitely, in fact I think we grow beyond that, and again -- and this will get the premium question as well.

The way we work with our dealer network is a much deeper relationship than just the phrase "dealer network." As we mentioned in our remarks, there's financing, lead generation, supply chain logistics, et cetera, and that puts us very, very close with our dealers, partners with our dealers, which gives us a real sense of how the customer, the end customer, is thinking about pricing, and how they're making that decision.

That allows us to match and manage directly our cost reductions and our aggressiveness on cost reductions, as well as our strategy on pricing.

Now we -- if our dealer network hasn't gotten to a point where they say, you know what, you've lowered price enough, and we can sell systems infinitely, so many of the dealers of course are either happy or pursuing lower pricing, but as you saw from the statistics, the model is working.

And now the last thing I would want to say is some people have calculated the premium off of a rumored spot price, and they're using prices that in fact in some cases I think are real, but I think those are one-time -- end-of-quarter or one-time large quantity prices, and I think you have to be careful with that, and I think you also should consider comparing those against costs, and see how sustainable that is.

Having said that, I think it is a very fair question, and I think it is a combination of those things, Jesse.

I hope that helps, and Howard -- and I think we will leave it at that.

Jesse, do you want to follow up at all?

Yes.

Sure -- no, did you have anything to add to that, Howard or no?

No.

I think we are all set, unless you wanted to have a follow-up question, Jesse?

Yes, maybe the follow-up is can you talk about the utility megawatt backlog you expect to realize in the second half, or what is the range of that backlog?

Sure.

I will make a quick to that because we are starting to run out, and we will try to get to a few more people.

The -- what we talked last quarter is the pipeline, and just to give you color on the pipeline it has gotten better, and perhaps by hundreds of megawatts.

Bob will work with you on what is the best way to track that business and communicate that business, because there's some challenges with the pipeline metric.

But positive and growing, and think hundreds of megawatts, is how I would think of it.

Thank you very much.

Next question comes from Steve O'Rourke.

Your line is open.

State your affiliation.

Thank you, Steve O'Rourke from Deutsche Bank.

A couple of question, did demand in Q2 live up to the expectations you had early in the quarter?

And second, could you comment on how you are looking at and planning for 2010 from a broad demand perspective?

Demand was better than we expected in most regions.

I would say there were a couple of spot agreements or deals that in the ideal perfect world would have come through in the second quarter, but generally speaking demand exceeded expectations.

When we look at 2010, frankly the way this year has gone, we weren't real happy with our first quarter, we're very happy with our second quarter, so we are a little loathe to get too far out in front of ourselves and be real aggressive about 2010 comments.

Having said that, we couldn't be more positive about the pipeline of products coming out of our research and development team going into 2010.

We think we extend our lead, so we go into 2010 very aggressive, and from what we can control very positive.

Steve, did that answer your question?

It did, thank you.

One quick follow up if I could.

How much would you consider allocating to construction financing of projects over the year?

I will let Dennis answer that question.

Yes, Steve, it is -- I don't know that we have a magic number in mind.

I think we look at it on a project-by-project basis, and we just want to make sure that we are not stretching our balance sheet.

So no magic number but -- you know, we will be prudent about it.

Fair enough.

Thank you.

Next question comes from Steve Milunovich.

Your line is open.

State your affiliation.

Bank of America/Merrill Lynch.

Can you comment on price elasticity?

I think last quarter you were indicating that it wasn't really worth cutting prices more, given the market, but Tom has referred to price elasticity; are you seeing that now finally, or is it more an expectation for the future?

This is Howard.

I will answer that.

We are seeing that now in the marketplace with the economy, and customers -- I wouldn't say sitting on the sidelines, but making decisions, and it's certainly influencing it.

And we are very mindful of our competitors' pricing, and what our dealers need to win.

So we are making adjustments accordingly.

Steve, you can imagine that the fantastic return you get in California if you buy a solar system today, given the changes in the first half of this year compared to some of the time of -- cost of power.

So we are clearly getting into a zone where the economics are very easy to communicate with the customer base.

So you are seeing some elasticity, no question about it, and I think you are in that range.

You start to question, you know, whether you know, sort of dropping prices regardless has a meaningful impact.

And so again, we partner with our dealers, and we work together to make those decisions.

Understood.

And then on the advertising campaign, can you talk about how much you are spending on it, or at least the kind of direction, and will it be be noticeable in your SG&A spend?

I can tell you that get to talk to the Chief Marketing Officer frequently about that topic.

I don't think it is a meaningful number in our overall total operating expenses this year.

Meaningful meaning it is nowhere near, you know -- anywhere near double digits in terms of percentages of OpEx.

It is way below that.

Now, our Chief Marketing Officer, who we are very proud to have, used to run marketing for Visa, and knows how to roll out these kind of campaigns in a very targeted way, so that has something to do with the cost.

Great.

Thank you.

Next question.

We are going to have -- let's limit this to one maybe two more questions, so that we honor people's time.

They need to go to other calls.

We apologize to people who didn't get their question in.

Our next question comes from Tim Arcuri.

Your line is open.

State your affiliation.

Citi, thanks.

First of all, Tom, can I assume that basically all of the systems business was your own captive modules?

And then second question, if I look at your revenue guidance you have to come up with $125 million in September versus your, you know, June revenue number, and then another $175 million in December to hit sort of the midpoint of your full-year guidance.

I am wondering, of those two numbers how much of that has to be on the residential side?

Thanks.

Sure.

I'll comment on both, and I think Dennis will correct me on the second one, or hone me in.

The first one is, meaningfully yes.

We did use some third parties but meaningfully, it is SunPower-provided material.

And when I say meaningful, if you were to use conventional rounding techniques it would be close to 100%.

The second answer to your question is the systems business accounts for a majority of the revenue increase.

We are counting on some increase in what we call our residential light commercial and components business.

Dennis, do you want to comment further?

No, I think you are right.

The majority of it from the second quarter to third quarter will be from systems.

And then also from third to fourth quarter, Dennis?

Third to fourth quarter, we are going to see more contribution coming from the residential and light commercial components.

Great.

So, I think you see small increase in RLCC in Q3, and a little bit larger in Q4.

Okay.

Thank you.

Last questioner, please.

Our last question comes from Pavel Molchanov.

Your line is open.

State your affiliation, please.

Raymond James.

Thanks for taking my question.

You have previously stated that you have US utility pipeline of at least 1 gig of projects.

Can you give us an update on that?

Sure.

This is Tom, and I will do that quickly in case you have a quick follow-up.

We actually said 1.3, and the color I gave was think of it as getting better and think or it in terms of hundreds of megawatts.

The last comment I would make is please work with Bob, because we think there's probably better metrics for tracking our utilities business in general.

So as we work our way towards the next call, we will probably transition to other metrics.

Thanks very much.

Okay.

We really appreciate everybody's time today, and we appreciate your support.

We look forward to our call in the third quarter, which is in October, and thank you very much for your time.

At this time, that will conclude today's conference.

You may disconnect, and thank you for your attendance.