SunPower Corporation (SPWR) 2009 Q4 法說會逐字稿

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

(Operator Instructions).

Today's conference is being recorded.

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

And 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.

Thanks, Sarah.

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

On the call today, we will start off with an overview of the accounting investigation from Tom Werner, SunPower's CEO, followed by Dennis Arriola, our CFO.

Tom will then give an overview of our Q4 performance with Dennis then going into greater details on the quarter.

Tom will then discuss our outlook for 2010 before opening up the call for questions.

Due to the amount of material we will cover today, we will extend the call to 90 minutes, and a replay will be available later today on the Investor Relations page of our website.

Please note that we issued a second press release current currently with our earnings release today that discloses the results of our now completed audit committee investigation.

Both releases are available on our website.

During today's call we will make forward-looking statements that are subject to various risks and uncertainties that have been described in our 10-K, as well as today's press release.

Please see our press release and other SEC filings for additional information regarding those factors that may impact these forward-looking statements.

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

In the same location, we have posted a supplemental data sheet related to our historical performance, which includes non-GAAP to GAAP reconciliations.

On slide two you will find our Safe Harbor statement.

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

Tom?

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

Given that we have not spoken with you since November, our remarks will be a little longer than usual.

In fact, approximately 50 minutes Dennis and I will speak.

However, the call will be an hour and a half, so we will have 40 minutes for questions.

So please turn to slide three.

Before we go into the overview of the quarter, I would like to make some brief comments related to the investigation conducted by our audit committee.

As we announce today, the audit committee investigation that we announced in November has been completed.

As a reminder, a member of our internal finance team identified the problem, and we promptly brought this to the audit committee's attention.

The committee has done a tremendous job over the past four months in completing its investigation.

As a result, we published our restated financials today and will include them in our 10-K.

Dennis will go into specific details of the audit committee's findings in his comments.

I can tell you that we are disappointed that these issues occurred and understand our shareholders frustration.

As a result of the audit committee investigation, we have instituted a number of changes, including changes in our financial processes to lay a stronger foundation on which we will build.

Looking forward we firmly believe that changes recommended by the audit committee are the right actions to address these issues.

Additionally management has reinforced our commitment to high ethical standards and financial reporting integrity to all of our employees.

I just returned from the Philippines where I reinforced this message.

To our shareholders we will be working to strengthen your trust in us.

Our mission remains to drive shareholder value, and we believe that our stronger financial foundation is an integral element to deliver on that promise.

With that, I would like to turn it over to Dennis who will discuss more details of the investigation.

Dennis?

Thanks, Tom, and good afternoon.

There are three key areas I would like to cover in my presentation.

First, let me address the history of what happened.

Next, I will discuss the results of the audit committee investigation and the separate work conducted by SunPower's finance and internal audit groups.

After that, I will touch on the remediation steps and corrective actions we have already put into place, as well as our plans to mitigate the risk of these issues happening again at SunPower.

Let me start with slide four.

As Tom mentioned, our audit committee, the committee's independent advisors, and SunPower's finance and internal audit teams have worked tirelessly on this issue for over four months, and I would like to thank them for their time, dedication and professionalism.

I want to begin with a brief chronology of events.

In early November a new employee in our Philippines accounting group notified our internal audit group of unsubstantiated journal entries in our Philippines financial records.

This was quickly elevated to senior management's attention in the US, and we promptly notified SunPower's audit committee and our outside auditors.

As a result of the preliminary information we provided, the audit committee commenced an independent investigation supported by its own legal counsel, forensic accountants and other experts.

Based on our review of the information over the next several days, management and the audit committee to included that our financial statements in 2008 and 2009 could not be relied upon, and as a result, we issued a press release on November 16.

Since that time the audit committee's independent advisors conducted formal interviews with more than 30 witnesses and reviewed thousands of documents and files pulled from more than 1.3 terabytes of company data and computers.

There was no scope limitation placed on the audit committee's investigation.

We wanted this work to be done right and with no restrictions.

The analysis and fieldwork were thorough and identified various unsubstantiated accounting entries that generally misstated the Company's cost of goods sold in prior periods.

Both the investigation and management's work also uncovered other accounting errors that took place during the same time periods.

As a result of the investigation, our audit committee concluded that certain of the Company's finance personnel in the Philippines and intentionally proposed or approved journal entries that were not substantiated by actual transactions or costs.

The audit committee also concluded that executive management did not encourage or direct these activities and was, in fact, provided with inaccurate information concerning the entries.

While the audit committee conducted its independent investigation, SunPower's finance and internal audit teams separately focused on ensuring that the identified accounting issues were not impacting the financial reporting for the fourth quarter.

We made sure that senior accounting personnel from the US were on the ground in the Philippines, and we brought in additional resources from other accounting firms to supplement our accounting team.

Let me move on to the financial restatements that resulted from the audit committee investigation and the additional work completed separately by the Company.

We concluded that our cumulative non-GAAP pretax income in 2008 and 2009 was overstated by $33.2 million or $16.9 million on an after-tax basis.

Let me break it down by gear.

In 2008 we are reducing our full-year 2008 non-GAAP pretax income by $13.1 million or $9.7 million on an after-tax basis.

As for 2009 we are reducing our previously announced nine-month pretax non-GAAP results by $22.7 million or $7.7 million on an after-tax basis.

As a result of the restatement, the fourth quarter of 2009 will include a $2.6 million pretax benefit area.

All of these numbers by quarter are available on the supplementary tables we provided on our website, including restated GAAP to non-GAAP reconciliations for each period impacted.

We have also made the corresponding adjustments of the other financial statements of these restated periods.

It is important to point out that these adjustments did not impact our cash balance at the end of fiscal year 2009 as we finished the year with a strong balance sheet and over $925 million in cash and investments.

Additional details regarding the investigation and restatements will be included in our 2009 10-K, which we expect to file shortly.

Now I would like to discuss the remediation and corrective actions we have implemented since learning of the accounting issues in November.

First, we revised our review and approval process for manual journal entries by adjusting the approval levels for several of our employees.

As part of this change, we brought in additional experienced and knowledgeable personnel, and we have reconfigured our enterprise accounting systems so that certain manual adjustments automatically flow to senior accounting personnel in the US for additional review and approvals.

Among other changes we have created and filled the new position of Vice President and Controller for Asia.

Next, we have revised our process for account reconciliations, including those relating to inventory and Accounts Payable where many of these issues transpired.

In addition, we have added further levels of review for account reconciliation and plays certain reviewers with more experience and knowledge, including individuals from corporate headquarters.

We also strengthened our monitoring controls, including conducting more detailed reviews for the income statement, balance sheet and spending at the subsidiary level.

These are just some of the remediation measures we have taken, and we are implementing others as well.

Now let me talk about people.

We have already started making changes in our Philippines accounting operations, both structural and in terms of resources, and the personnel issues are being dealt with appropriately.

But let me be clear.

We will not tolerate behavior or actions that violate our code of conduct and put at risk the trust and credibility we have with shareholders, customers, vendors and employees.

Because of the issues identified late in the year, management concluded that the Company had three material weaknesses in our controls during 2009 from a [FOX] 404 perspective.

We begin addressing each of these material weaknesses prior to the end of the fiscal year and fully remediated one of the material weaknesses and began implementing our remediation plan for the other two.

Additional details on these material weaknesses and our remediation plan will be included in our 10-K.

We recognize these last four months have been frustrating to all of our shareholders, customers, partners and employees.

And, as Tom mentioned and he will mention in a moment, our employees remain focused during this period and continue to grow our business, and we are working forward.

And with that, I will hand it back to Tom.

Thank you, Dennis.

Moving on to our performance.

Q4 was a strong quarter with record revenue and record production volume as we demonstrated the benefits of our long-term strategies.

During the fourth quarter and into 2010, we maintained our focus on building a thriving, financially solid company.

We continue to manage the company for growth, looking for opportunities to gain share and open new markets.

The pending acquisition of SunRay is a prime example as it strengthens our downstream position into Europe, the Middle East and Africa or EMEA powerplant markets.

Our long-term strategy of brand technology costs and people is paying off as customers look to SunPower as their preferred solar supplier due to our experience, industry-leading technology, bankability and competitive localized cost of energy or LCOE.

On this call I will provide a brief overview of our financial results and progress with our downstream channel strategy, update our progress on our brand technology costs and people strategies, comment on market dynamics and provide 2010 guidance following Dennis's summary.

Let me begin with the following Q4 highlights on slide five.

Our fourth-quarter results reflect the continued success of our vertically integrated model and diversified channel strategy as we delivered strong performance across all of our markets and segments.

Revenues for the quarter were up 18% sequentially and 38% year over year to a record $548 million as we gain share in our most important markets and segments.

Our non-GAAP EPS is $0.47 per share, which included $0.03 per share in expenses associated with the audit committee investigation.

We doubled both our dealer base and total megawatts shipped in 2009 relative to 2008.

We completed construction of more than 40 megawatts of ground mounted systems, including the largest PV power plant in Italy at Montalto, our Kennedy Space Center project for Florida Power & Light, and substantially completed our power plant for Exelon in Chicago.

We also achieved another technology milestone in Q4 manufacturing our first 24% efficient solar cells using our next generation cell process.

This is consistent with our long-term technology roadmap and extends SunPower's differentiated by efficiency leadership.

On the cost front, we met our panel manufacturing cost goal of less than $2 per watt in the quarter as we expanded quarterly production to a record 130 megawatts.

Organizationally we announced the realignment of the Company into two profit and loss business groups, providing more transparency and greater customer focus.

We are thrilled to have Jim Pape join us as President of the Residential and Commercial Business Group.

Jim comes to us with extensive experience at Trane, AlliedSignal and Johnson Controls.

I will provide more details on the specifics of each group later on this call.

Finally, we ended the year with over $925 million in cash and investments.

Turning to slide six, I would like to briefly take you through our progress on our downstream strategy.

Since 2005 our strategy has been to develop a diversified portfolio, geographic margins, market segments which allow us to flexibly respond to risks and opportunities while driving a superior customer experience.

As these pie charts illustrate, we are accustomed to demand moving between geographies and flexing our downstream channel model to adapt to these changes.

We believe that our vertically integrated channel model will outperform over the long term and give us a more predictable revenue base.

Turning to slide seven, our balance between market segments is further evidence of our ability to flex our outbound resources to where demand is strong.

Our downstream channel strategy eliminates distribution layers, enabling us to rapidly respond to changes in customer dynamics more efficiently than our competition.

Let me focus on the utility and power plant segment, or UPP, for a moment in the second pie chart.

2009 was a year of major investment in this business as we added very strong North American and European business leaders and built out their teams.

This is reflected in our total UPP pipeline, which now exceeds 4 gigawatts.

The North America UPP business includes central station power plants of hundreds of megawatts each.

And with the acquisition of SunRay, we have added a substantial near-term pipeline of distributed power plants which will accelerate our penetration into the EMEA markets.

In summary, we see a competitive demand driven market over the next few years, which is the exactly what we have been preparing for since 2005.

Our investment in our diversified vertically integrated model will provide us with better visibility during this period.

Turning to slide eight, let me give you a quick overview of the elements of our brand, technology, cost and people strategies as we have done for many previous quarters.

First, branded channel.

We are thrilled with the progress we have made since 2005, positioning our Company as a direct channel for the customer.

With the SunRay transaction, we will have made four acquisitions over the last five years that strongly positions us in key growth markets.

These acquisitions, combined with our organic channel investments in our dealer channel, North American Systems business, and UPP teams, gives us the ability to control our own destiny, lower overall delivery costs, and better serve the customer.

We remain very focused on our residential and commercial channels and expect to see continued strong growth in this business in 2010.

We now have approximately 1000 dealer partners across eight countries, reflecting the scalability of our distribution platform, as well as strong demand for our differentiated products and service offerings.

We gained share during the quarter in the Italian, German and French residential rooftop markets and continue to lead in the California market with approximately twice the installed residential share of our closest competitor.

We also expanded our footprint in Asia as we opened an office in Japan and recently announced a 32 megawatts supply agreement with Toshiba for 2010 delivery.

In the commercial segment, we continue to have a leading presence in key markets.

In the New Jersey commercial market in the fourth quarter, we completed more than 7 megawatts of rooftop systems for customers, including Johnson & Johnson, AT&T, [Harts] and Toyota.

This brings us to more than 70 large-scale systems in New Jersey with a total capacity of more than 20 megawatts.

For commercial projects like these, the financing environment continues to improve.

For example, we added Key Bank as a new financing partner during the quarter to augment our existing $100 million facility with Wells Fargo.

This new $50 million agreement further expands the financing solutions we can offer our customers.

Outside of the US, we completed our first T10 rooftop system in Japan during the fourth quarter, and we're expanding our global deployment of our new T5 roof tile system.

Turning to slide nine, we also had a great quarter in our UPP business segment as customers continue to choose SunPower due to our proven performance on many large-scale sites, superior technology and demonstrated bankability, all of which drives a competitive levelized cost of energy.

Our EPC team delivered strong results in Q4, completed more than 40 megawatts of power plants in Europe and the US, including 24 megawatts at Montalto, the largest PV power plant in Italy; 10 megawatts for Florida Power & Light at the Kennedy Space Center, our second powerplant for Florida Power & Light, following the 25 megawatts DeSoto power plant, which is the largest in the United States, and we substantially completed our 8 megawatts project for Exelon in Chicago on a brownfield site, which holds the title of the largest urban PV power plant in the country.

We've delivered these systems on time, on budget and producing power greater than or equal to committed output, leaving utilities and banks to have great confidence doing business with us.

As we look forward into 2010 and beyond, our UPP group is well positioned for further growth.

We now have a significant pipeline that is not only geographically diverse but also gives us strong near-term visibility and a path of predictable growth.

For example, with SunRay, which I will talk about in greater detail shortly, we will see an immediate positive impact as we add 1.2 gigawatts EMEA pipeline to our existing opportunities.

And with Southern California Edison, a world leader in the use of renewable energy, we are thrilled to announce a landmark 200 megawatts five-year supply agreement for their utility-owned rooftop power plant program.

In this program Edison will construct, own and operate rooftop solar systems, highlighting PV's ability to be flexibly cited within load centers on rooftops or parking lots, and demonstrating the value of SunPower's high-efficiency solar panels coupled with our simple and fast to install proprietary T5 roof tiles.

This is a critical win because it validates SunPower's cost as competitive in rooftop systems.

Finally, you will note that last month we completed the financing of our 19 megawatts power plant with Xcel and Colorado with new partners, MetLife for the equity and John Hancock Financial Services for the debt.

Turning to slide 10, let me tie together our organic investment in our four downstream acquisitions that have driven the success of our brand and channel strategy.

First, let's talk about our organic growth in the residential and light commercial channel.

We designed and built the core architecture of this channel in 2005 with the goal to drive better customer intimacy, reduced cost and build a scalable model to drive growth.

Our acquisition strategy focuses on companies that we know well and which expand our competencies in market access.

Beginning with our acquisition of PowerLight, which we announced in 2006, and then with the acquisition in Italy and Australia, we substantially increased our presence in Europe and Asia and our downstream presence both commercial and utility scale projects.

With SunRay we significantly increased our downstream UPP capabilities.

We now have implemented our downstream strategy across all segments and geographies where solar is thriving.

Now let me go into greater detail about our pending acquisition of SunRay.

Please turn to slide 11.

Founded in 2007 SunRay is a premier developer of power plants in Europe and the Middle East.

They have built a talented team of 70 people across six countries with skills in project finance, large-scale powerplant development, permitting and transmission.

SunRay partnered with us on the Montalto 24 powerplant, the largest TV power plant in Italy to date.

They have also developed a very strong pipeline of power plants to be delivered over the next four years.

More than 90% of this pipeline is near-term in nature and located in active feed and tariff markets, specifically Italy, France and Israel.

Also approximately 80 megawatts of power plants in Italy are already permitted and expected to be completed in 2010.

Additional power plants are in earlier stages of development in Spain, the United Kingdom and Greece.

Moving to slide 12, I would like to focus on the strategic rationale on the SunRay acquisition.

Financially the acquisition will deliver higher gross profit per watt with further vertical integration through powerplant development, as well as improved visibility on revenue in the second half of 2010, 2011 and beyond.

As a result, we will shift identified revenue from the first half of 2010 to the second half as we monetize these projects.

Three years ago we began discussing the United States UPP business and our plan to replicate our US downstream infrastructure in Europe as we saw a tremendous growth opportunity in multiple European markets.

This transaction delivers on that plan and extends our successful long-term strategy of controlling the downstream channel.

Another aspect of SunRay's EMEA powerplant pipeline is that they will typically exhibit a shorter cycle time to complete relative to the central station power plants we are pursuing in the United States.

We, therefore, expect them to monetize this pipeline sooner than an equivalent pipeline of US power plants.

SunRay also gives us a significant and sustainable leading presence in both the European and North American UPP businesses, allowing us to leverage our scale, experience and bankability to gain share.

Most importantly, with the SunRay pipeline, we now have significant more visibility for 2010, 2011 and beyond providing us with confidence in our long-term growth opportunity.

Finally, we also plan to continue to expand our roster of EU-based developers and IPP partners in parallel with our SunRay projects as we believe this will drive additional synergies.

Turning to slide 13, let me elaborate on how our UPP business improves our revenue predictability for 2010, 2011 and beyond.

As I showed previously, the SunRay acquisition adds substantially to our EMEA UPP pipeline and improves diversification of our UPP business globally.

Additionally it gives us the industry's most experienced global solar project development team and extends our proven technology in EPC platforms.

As you can see from the chart, we are now signing agreements that provide us with multiyear revenue visibility, some of which also provides us with flexibility in terms of delivery by quarter or year.

So we can optimize our construction resources and technology allocation.

To summarize, we continue to believe that the next few years will be characterized by a competitive demand-driven market, an environment we have designed our channel structure for since 2005.

Our investment in our brand and channel positions us well for the long-term success.

Moving on to slide 14, let me comment briefly on the success of our technology strategy.

We continue to drive technology innovation, reduce our manufacturing costs, and give our customers the best net present value available in the market.

In Q4 we became the first company in the world to receive [NRAL] certification of a 20% efficient panel.

Our Generation 3 cell technology also remains on track, and in Q4 we manufactured our first 24% efficient cell.

This efficiency record once again demonstrates SunPower's capacity for continued technology innovation and further raises the bar for our competition.

We also focused on reducing total system costs and introduced a new version of our T20 tracker in Q4 that reduces tracker costs by more than 20%.

Additionally we introduced our 400 W module, the world's most powerful solar cell panel.

This panel customized for our trackers maximizes the output of our systems while driving a lower levelized cost of energy.

As you can see on slide 15, our high-efficiency technology provides us with a significant cost advantage as we maintain competitive cost position with our peers on an efficiency weighted cost per watt basis.

For example, SunPower's efficiency weighted cost per watt is 20% lower on an apples-to-apples basis relative to conventional crystalline silicon.

Relative to thin-film, we see 45% lower cost on an efficiency weighted basis.

Bottom line we are very competitive on a cost per watt basis when you consider panel efficiencies effect on total system costs and levelized cost of energy.

Let me comment further on our strategic focus on cost on slide 16.

We are on plan with our panel costs per watt roadmap of less than $1.00 per watt in 2014, and we have implemented specific strategies to reach this goal.

In relation to our short-term efforts on slide 17, I will elaborate on some of the primary cost reduction levers that we have identified over the next few years before moving on to our 2010 and 2011 revenue drivers.

Overall we met our panel costs per watt goal of under $2 per watt in Q4, fully expect to reach less than $1.00 per watt in 2014.

We expect another 5% reduction in the first quarter.

We continue to drive down panel costs and expect to reduce our conversion costs by $0.20 per watt by the end of 2012 through five main initiatives.

First, maximizing our economies of scale and regional purchasing power to reduce our material costs by more than a third.

Second, improving our manufacturing line balance to increase throughput, accounting for another third of our savings goal.

Third, increasing yield by as much as 10 percentage points as our technology continues to mature.

Fourth, lowering polysilicon costs by 10% through our strategic partnerships.

Fifth, we are making significant progress on our regional modco strategy to improve customer response times and reduce supply-chain costs.

We initiated the strategy last year with our [JayVille] partnership in Mexico, recently started ramping our outsource EU panel manufacturing facility in Poland.

We will announce our US panel manufacturing location soon.

Let me now discuss the market dynamics and how they relate to our business on slide 18.

We continue to see strong demand for SunPower products in 2010 across EMEA, in the US and in Japan as public policy continues to support industry growth.

Notwithstanding the recent feed and tariff debates in Germany, we are gaining share in the German residential market as demand has been very strong for our high-efficiency technology.

Our panels maximize customer net present value, rewarding higher solar energy rooftop production.

One of the reasons for our sustained premium in the market is that feed and tariff markets are driven by net present value rather than merely internal rates of return.

As most of you know, we have no exposure to the German ground mounted systems segment, but given our position in the rooftop market, we continue to see significant upside in the German market.

Additionally our announced acquisition of SunRay shows that there are significant near-term growth opportunities in Italy, France and Israel with strong demand in Italy prior to the feed and tariff change at the end of this year.

Now let me comment on SunPower's revenue drivers for 2010 and 2011.

First, we entered the year with strong momentum with great customer relationships in all important markets.

Second, we will continue to capitalize on our investment in the outbound channel to leverage third-party supply and accelerate 2010 growth.

The use of third-party panels is an established strategy for us and an integral part of our flexible model.

Third, SunRay strengthens our UPP presence in EMEA and adds significantly to our overall global 2010/2011 UPP pipeline.

Fourth, we will continue to grow our dealer base and focus on increasing our dealer share of established markets.

Fifth, we continue to drive down costs consistent with our 50% cost reduction plan.

Finally, let me touch on the last aspect of our brand technology cost and people strategies, the people aspect on slide 19.

I would like to spend a moment on our decision to align our Company into two different business groups.

We will begin reporting along these lines in the second quarter.

This slide compares our historical segmentation by business unit on the left and our new customer-aligned product and loss structure on the right.

Going forward we have made the decision to manage our business along customer segments.

This will enable us to provide our customers with a more flexible set of products and services tailored to their specific needs while maintaining clear organizational responsibility.

Our Residential and Commercial group, or R&C, reports to Jim Pape.

This is the rooftop part of our business, and Jim will leverage our global RLC dealer base, as well as our direct system sales to larger scale customers.

Howard Wenger's UPP business consolidates our historical large-scale systems business into a fully integrated profit and loss group spanning project development through turnkey EPC and operations and maintenance services.

UPP group also has responsibility for SunPower's Components business.

This is a reflection of the growing importance of utilities such as Southern California Edison and other large-scale industrial customers within our Components business.

Both Howard and Jim will have full profit and loss responsibility, driving all aspects of their business from new product definition and development through final systems construction.

The reasons we are doing this are better alignment of our organization to end customer segments, improving our decision-making process by delegating directly to the business groups, and driving an increased customer intimacy.

With that, I would like to turn the call over to Dennis to go over the financials in greater detail.

Dennis?

Now all references to the income statement will be on the non-GAAP basis, and I will focus the majority of my comments on fourth-quarter 2009 results.

In addition, all prior periods comparison will use our new restated financials.

The full-year 2009 versus 2008 comparisons are included in our slides and financial tables, and we have also included our GAAP to non-GAAP reconciliations for all reference figures.

Please note that we are using our historical business segment definitions on this call and that starting in the second quarter we will begin using the business groups that Tom just mentioned.

Now please turn to slide 20.

Revenue in the fourth quarter was a record $548 million, an 18% increase from the third quarter of 2009 and a 38% increase compared to the fourth quarter of 2008.

Both our Systems and Components groups contributed solidly to our performance as we experienced continued strong demand for SunPower products and our teams executed on the buildout of planned projects on time and on budget.

As Tom mentioned, our business model is focused on diversifying our revenue base by both geographic market and customer segment.

In the fourth quarter and the full year, our most important markets continued to be North America, Italy and Germany in that order.

We continue to target these markets for sustained growth in 2010, but we also are expanding our presence into other growth markets, including France and Japan.

Revenue for our components segment was $340 million in the quarter, up 14% from the third quarter of 2009 and up over 53% compared to the fourth quarter of 2008.

Our Systems business also had a strong quarter as revenue increased to $208 million, up 24% over the prior quarter of $167 million.

The main driver in our Q4 performance was the completion of a number of large-scale utility and power plant projects.

Approximately half of the Montalto 24 megawatts project revenue was recognized in the fourth quarter as we constructed the solar part on time and on budget.

The team at SunRay successfully financed this deal at the end of the third quarter, and the project financing was recently recognized as the European Solar Deal of the Year by Project Finance Magazine.

It is this type of project finance experience in Europe that makes the SunRay acquisition so attractive to us.

Let's move to gross margins.

The consolidated non-GAAP gross margin was 21.7% in the fourth quarter of 2009.

Now average selling prices, or ASPs, for our modules in the quarter were stable relative to the third quarter of 2009 due to the continued strong demand in the market.

On a year-to-year basis, ASPs were down about 20% and consistent with our previously announced expectations.

The Systems segment recorded a non-GAAP gross margin of 21.9% in Q4 compared to 17.2% for the third quarter.

The Components segment had a gross margin of 21.5% compared to 26.3% gross margin for the third quarter.

Operating expenses in the fourth quarter were $58 million or 10.6% of revenue compared to $43.5 million or 9.3% in the third quarter of 2009.

Our fourth-quarter operating expenses included approximately $3.6 million related to the audit committee's investigation and approximately $1 million related to our work on the SunRay acquisition.

Excluding these items operating expenses would have been less than 10% of revenue.

Our effective tax rate for the fourth quarter was 20.3% compared to 25.3% for the third quarter.

For the full year, the tax rate was 22.8% versus 25% in 2008.

Net income on a non-GAAP basis was $45.9 million versus $47 million in the third quarter.

Earnings per share in the fourth quarter were $0.47 per share compared to $0.46 per share in Q3.

The fourth-quarter earnings per share includes a $0.03 per share negative impact from expenses related to the audit committee's investigation in our SunRay acquisition.

Overall it was a solid quarter.

Let me turn to the balance sheet, our cash flow and liquidity position on slide 21.

Our focus on cash management and working capital efficiency continues to pay dividends as we strengthened our balance sheet during the quarter.

At the end of Q4, as I mentioned, our cash and investments on hand totaled more than $925 million with over $615 million available on an unrestricted basis.

From a cash flow perspective, we continue to make some central progress to reduce the amount of working capital invested in our business.

Inventories are down quarter over quarter and year over year.

This is primarily a result of our shifting to a regional modco strategy where we can efficiently ship cells to assembly locations closer to our customers.

This means fewer modules on ocean freighters and less inventory in transit.

This also provides us flexibility to adjust to changes in markets and customer demand.

As a result, inventory turns in the fourth quarter were 9 times compared to 6 times in the third quarter of 2009.

Our plan is to continue to improve inventory turns and overall working capital efficiency even more in 2010.

We are also focused on ensuring that the credit quality of our receivables remains healthy and that our Accounts Payable are consistent with market terms.

Capital expenditures in 2009 were $168 million as we completed the full buildout of Fab 2 in the Philippines and continued the construction of Fab 3 in Malaysia.

As of year-end, we now have 574 megawatts of manufacturing capacity in our two fabs in the Philippines.

We expect to have our first lines in Malayasia in production by late fourth-quarter 2010.

Now let me spend a couple of moments on our SunRay acquisition and the impact it will have on our business going forward.

Overall the SunRay portfolio and team provides SunPower with a highly developed and advanced pipeline of transactions that will contribute to our growth this year in 2011 and beyond.

And SunRay will now be wholly owned by SunPower.

We will now recognize revenue on those power plants when the projects are financed with debt and equity.

We plan to start construction on over 80 megawatts of projects in Italy in the second quarter of 2010, and the project finance team there is in advanced discussions with project financing sources to provide construction and permanent debt financing this year.

More than 60 megawatts of the identified projects are related to the existing Montalto 24 megawatts power plant.

The SunRay team has already received strong interest from potential third-party owners for all of these projects.

So we are very confident that we will recognize revenue from these assets in the second half of the year.

Therefore, we will shift identified revenues from the first half of 2010 to the second half.

Our visibility and confidence in our revenue guidance for 2010 is based upon the higher-quality nature of our current book of business, the continued strong demand trends in our key markets, the customer diversification of our business model, and the overall improving financing markets.

From a liquidity perspective, we will close the SunRay acquisition with cash in the next several weeks and begin to fund the near-term projects that will generate revenue in 2010 and 2011.

We will also use available proceeds from the Malaysian loan to help fund our Fab 3 construction.

In order to maintain a strong balance sheet and adequate liquidity, we may incur additional debt this year.

Any project financing debt that we raise in conjunction with the SunRay projects in Europe will reduce the amount of debt we would raise at the SunPower level.

Now let me reiterate our business model as it pertains to financing projects.

While we may temporarily use our balance sheet to start funding an advanced project, our intent is to still obtain project financing as soon as possible and to monetize these assets at or near completion.

With that, I will turn it back to Tom.

Thanks, Dennis.

Now I would like to turn to guidance on slide 22.

As I mentioned in my opening remarks, we continue to see strong demand across multiple geographies and end segments.

To meet the demand of our customers and drive for growth, we will leverage our third-party panel strategy.

We will continue to expand our global dealer partner network while gaining share with our existing partners.

In UPP we will deliver on our 2010 construction plan as we execute on a very robust power plant pipeline that now extends further into EMEA with our SunRay acquisition.

Specifically for 2010 we see revenue in the range of $2 billion to $2.5 billion.

We expect non-GAAP earnings per share in the range of $1.25 to $1.65.

As I mentioned previously, our acquisition of SunRay will extend our European downstream integration into power plant development, shifting a majority of our 2010 revenue and EPS to the second half of the year as we monetize more than 80 megawatts of power plants we expect to construct in Italy this year.

Our confidence in the sale of these power plants is high as we have already had discussions with potential buyers for all these projects.

As a result, SunRay will substantially improve our visibility in the second half of 2010 to position us for greater than 40% revenue growth in 2011.

In the first quarter, we expect revenue to be in the range of $330 million to $350 million with non-GAAP earnings per share of approximately $0.05, which is impacted by approximately $0.03 per share associated with our SunRay acquisition and $0.04 per share related to our accounting investigation and identified revenue for projects that will shift into the second half of 2010.

Our guidance takes into account year-over-year ASP declines of up to 20% and a foreign exchange rate of EUR1.37 to the dollar.

We expect solar cell production to be greater than 550 megawatts, capital expenditures of $375 million to $475 million as a result of our continued buildout of Fab 3.

Over the year we expect gross margins in the 20% to 21% range, operating expenses of approximately 11%, and a non-GAAP tax rate in the range of 18% to 20%.

With that, I will open the call to questions now.

With me I also have Howard Wenger, President of our UPP Group; Jim Pape, President of our R&C segment; Julie Blunden, our VP of Public Policy and Corporate Communications; Bruce Ledesma, our General Counsel, and Bob Okunski, our Senior Director of Investor Relations, so that they may provide some of the answers.

Since we are now 48 minutes into the call and we would like to provide ample time to answer all of your questions, we ask you to limit your questions to one and a follow-up, and we invite you to jump back into queue If there is a question beyond that.

So we will take questions now.

(Operator Instructions).

Steve O'Rourke.

Deutsche Bank.

Tom, just first a quick clarification.

I heard at the end of your prepared remarks and I may have misheard that you said the SunRay acquisition and visibility prepares you for 40% growth in 2011?

Yes, Steve, good to talk to you again.

We guided 2010 and we were giving you a sense of our thoughts on 2011 because we see the SunRay acquisition as transitioning the Company to a different model, and I should say the last piece of the transition to a different model, and the benefit of that model is increased developer margin, as well as better visibility into the future because of the pipeline that we have associated and because of the long sales cycle associated with UPP projects.

I should clarify that is topline growth.

We are not guiding anything beyond topline.

Okay.

And the one other question just a follow-up, is the Q1 revenue guidance, is that also a function of pushing projects from first half to second half, or is there really a 2Q phenomenon?

Yes, if I understand your question correctly, the answer is yes.

It is moving -- it is shifting projects from both the first and second quarter, and I should say shifting revenue recognition from projects from first and second quarter into the back half of the year.

We are building those projects, and that is why we specifically state that they are not ambiguous, that they are actually -- we know what they are.

But the revenue recognition is in the second half, so yes, to your question.

Satya Kumar.

Credit Suisse.

Tom, 80 megawatts that you mentioned, is that the total amount of projects you plan to compete in Italy, and what is your outlook for the Italian market and how it will develop from an incentive standpoint in 2011?

I think what we will do is we will split that question up.

I will comment briefly and then hand it to Howard, and we may even have a third person, Julie, speak about long-term prospects.

The answer to your question in short is no.

In a sense we have done two acquisitions for the Italian market.

One that largely was a R&C acquisition a couple of years -- about 18 months ago, and now SunRay, which has a significant footprint in Italy.

So we expect more than 80 megawatts.

What we are commenting on is that which we expect in terms of revenue recognition.

So we will be building projects in excess of that.

Howard, if you want to clarify anything I said and comment on the long-term prospects of the Italian market?

Sure.

This is Howard Wenger.

SunRay has 1.2 gigawatt pipeline, and we are taking land positions and permanent positions for projects in 2010, 2011, 2012 now.

So we are already positioning for 2011 with that group.

In parallel, we are going to continue to work with other partners and developers.

We have a full team that we have built out organically over the last several years.

They are going full force.

We are going to continue to put projects together, and in our plan for this year, we have projects with that group with other development partners in Italy and Spain that we will build in addition to the 80 megawatts that we mentioned.

And I would just add in terms of the long-term prospects of the Italian market, we are putting our money where our mouth is, frankly.

We think it is a great long-term market.

As you know, it has got great solar insolence.

It's got relatively expensive power, and we have a solution that works in those -- in the high-end solar insolence environment excellently.

So we are bullish on the market, and we are bullish on our position in the market.

There will -- we are prepared for when the cap is hit for a transition in the feed and tariff, and that is built into our business modeling and all of our comments so far.

Okay.

And a question on component gross margins.

Q4 component gross margins were down about 500 bps, and most of your Asian peers have reported higher margins and lower ASP declines in Q4.

Could you help me reconcile the reason for component gross margins trends in Q4?

The change from the third quarter to the fourth quarter was primarily driven by FX changes in the two quarters, and that was the driver.

Rob Stone.

Cowen & Co.

I wonder, Tom, if you could just comment on how your customers and suppliers have reacted during the last four months to the distraction?

You know what?

There is the immediate reaction, a few comments.

But not a whole lot because they have worked with SunPower now for quite some time, and I think there was a credibility built up that they are thinking of long-term.

And so there was maybe a little bit of discussion out of the box.

As I recall, that was November 16 for maybe a week or so, and then it was back to business basics, and they saw us as a growing company, particularly as they saw the SunRay acquisition, Toshiba and Southern California Edison announcements.

There is -- I will let Dennis comment a little bit.

It did influence some project financing, and that does influence the profile of our revenue for 2010, and I will let him comment as well about any banking relationship effects.

Dennis?

Yes, specifically there were a couple of projects that we were very far along getting ready to sign in the fourth quarter that because our financial statement were not valid.

We had to hold off on them.

So, as Tom said, we're going to see a couple of those projects also shift to the second half of the year.

The other point that I would make from a relationship standpoint is we were very fortunate to have strong good relationships with our banks and financial partners and they have stuck with us.

They understood what was going on, and they recognize that this was something we were going to get over and we have and we are going forward.

And Rob, I would say to you that we know of no relationship that has ended because of this.

There are none that we know of.

That is great.

My follow-up is for Dennis.

If you could just shed a little color on what drives the over and under on your range of revenue and cash EPS for this year?

Sure.

To a certain extent, it has to do with FX.

As Tom said, we have an FX forecast of EUR1.37.

Also, the overall split geographically of the transactions that we are talking about as well as customer mix.

As you know historically, our components are Residential and Commercial has had a higher gross margin than what we have had in systems.

So overall depending upon where that split is both by customer and geographically and whether we -- if we do better than the 20% reduction in ASPs, that can also lead us to the higher end of the range.

And I would add to that our project finance environment is improving but still not as fast as it used to be.

And, you know, what we have had is much or more success as anyone, but that is one of the reasons why -- another reason why there is a range.

Jesse Pichel.

Piper Jaffray.

Could you just clarify that guidance for 2010 with the accounting for ASP declines of up to 20%?

Does that mean the guidance is based on a worst-case scenario of the 20% decline and then anything less would be upside?

What it means is that there's a lot of variables as I just mentioned whether it is depending upon what the customer breakdown is or geographically.

But overall we anticipate our forecast accommodates a 20% reduction in ASPs.

Great.

And then should we assume the cost decline schedule from $2 a watt in 4Q of '09 to the $1 a watt in 4Q of 2014 is fairly linear, or should it be faster in the earlier years?

And then would you expect the rate of ASP decline to outpace the cost declines in the near term, but then converge in the further years out?

I would say that it is linear with a slightly more aggressive short and near-term cost reduction schedule, slightly beyond linear.

In terms of ASP declines, we are really only prepared to comment about 2010.

We certainly could talk about possibilities with feed and tariff changes and RPSs in the United States and other macroeconomic factors that, frankly, we would tend to think that it is -- that our cost reduction plan is going to keep us in good shape relative to those things.

Paul Clegg.

Jefferies.

Your comment going back to the ASP reduction, the comment on 20% declines in 2010, does that anticipate any compression in the premium you have been getting, and where would you put the premium today?

Where do you see it going over the year?

Okay.

So what I will do is I will maybe make a broad question and either Jim or Howard can comment further.

The premium in terms of the short-term is the number that ranges because we sell complete systems with inverter and racking, and in some cases we sell just the modules.

So there is a range of premium, and I would give you color that it has stayed the same or maybe slightly improved.

And I also want to note that we offer a set of services to our dealer channel that we get compensated for.

Those services are things like financing, lead gen, other marketing and development, supply chain logistics, things of that nature that reduced their costs, and therefore, they compensate us.

In terms of further color, Jim, do you want to add anything?

No, Tom, all I would do is add more to that I think the ability to continue to use brand technology, costs and people as a culture to continue to earn that premium.

I don't see that going away.

So the 20% was more of a market general decline then?

Yes.

And then if I may, you have been talking a lot about developing the brand and the distribution channel, and sometimes your models for better or for worse are not always the right solution for the job.

The customer goes to someone else.

Do you see any opportunity down the road to distribute other modules through those channels to further leverage the investments you have made in the downstream in your distribution channel?

Yes, I got it all.

Absolutely.

So we will this year sell a reasonably significant amount of third-party modules.

In fact, it would make us one of the largest customers for some of the other module producers.

So yes, we will.

We will do that in a unique way however.

It will not simply be buying a module.

We will be adding our intellectual capital so to speak to the process, the configuration of the model, the testing, things of that nature, and we will do that because of our brand position that, of course, we need to make sure it's consistent with our brand position.

So it is a strong yes to your question.

And I would give you broad guidance if you look to us over the next few years that we will do that with more than modules.

But there is nothing imminent, but that is certainly our intention to leverage our channel.

Vishal Shah.

Barclays Capital.

Can you maybe comment on Q1 guidance, specifically around the Systems business?

What kind of Systems revenue should we think about for Q1 and for the full year?

Sure.

I will let Dennis give you closer to specifics on that.

I would tell you that the combination of the SunRay acquisition on shifting revenue recognition to projects out of Q1 to later in the year.

The finance environment for other developers that we work with shifting some projects out, that those things directly influence the nature of the numbering, the system's number in the first quarter.

And the third thing I wanted to mention is that the accounting issue caused the timing of some of our own projects to shift as well.

So those three factors led to the Systems number in Q1, and you are going to see a very heavily back-end weighted systems number for the year.

Dennis, do you want to add color?

Yes, the only other thing I would add is based upon the overall expectations for systems or the UPP business for the full year, given the guidance we have given on revenue, we are expecting 45% to 50% of that is going to come from the UPP side.

And, as Tom said, it will be heavily driven in the second half of the year.

Okay and then one other follow-up.

As you said, I think on your prepared remarks that your costs are going to decline by 10% the first quarter, and I believe pricing environment is relatively stable.

So do you see gross margins and the components in this increase in the first quarter?

Yes, what I said was that costs would come down 5% in the quarter, and, of course, we need to be cautious of mix.

But, otherwise, I would not disagree with your question.

Now what I mean by mix is mix within the component segment, you know how much of it is BOS versus modules and how much components we have relative to the rest of our business.

Burt Chao.

Simmons & Company.

I guess my first question remains around sourcing.

I guess with the way that the markets have gone specifically with polysilicon and among some other items, is there any shift in your strategy towards sourcing your materials, or is it pretty much going the same with some flexibility built for the future?

When you say materials, are you thinking raw materials for sales and modules?

Yes, I guess primarily it would be polysilicon.

I mean the source around that has changed at some companies but not at others.

I was wondering what you are thinking right now.

Well, I tell you what I will comment on both.

First, I will answer your specific question on polysilicon.

I would say that we have not had to modify our strategy much at all.

That our long-term strategy with polysilicon is working as we forecasted it to work, so we are satisfied with what we did.

We, of course -- or what we implemented.

We, of course, live and learn, so there are a couple of new suppliers that we have added to polysilicon, and we have actually position ourselves to have some flexibility as we grow our business in the near future in the next few years.

So our strategy has been, as you recall, to have a mix of long-term contracts, as well as intermediate and short-term contracts with the percentage of short and intermediate rolling off over the next few years so that we can capitalize on what we believe will be a, let's say, robust supply environment.

Let me comment on materials other than polysilicon.

As you scale your operation from 500 megawatts or 550 of capacity to 1.6 gigawatts with our third fab, you start to buy raw materials in much larger quantities, which opens you up to a new supply chain and also a different supply chain because we are moving call it mainland Asia.

And what we found is that offering significant cost reduction and we can capitalize on that, we can move that cost reduction back to our Philippines operation.

So that first bullet that I referenced in our 50% costs down slide, our comment was very purposeful because our third fab is really enabling some very strong cost reductions.

Great.

And my second question is, just with I guess the political winds obviously affecting the returns and the availability of demand in certain markets, it's not unreasonable to think a market might appear out of nowhere or a market that we think might be somewhat robust may go away over time.

Just to try to get a better sense of the operation of SunPower, I know you make a lot of commitments and a lot of investments in specific markets.

What is your view on how quickly and how capital intensive a shift between markets would be or maybe to grow a new market?

How do we think about that in terms of how invested you are in current incumbent markets and how new markets would affect that strategy?

I have very little doubt when I tell you I think we're the best positioned solar company for the environment that you are suggesting.

And that is because a lot of the management team for SunPower has lived through the renewables market, the solar market, for quite some time.

And if you look back into early 2000 and late 90s, you saw radical shifts in the geographic demand in market segments.

And people like Howard Wenger and Peter Aschenbrenner and Julie Blunden are very aware of that, and so they have had a great deal of influence over the structure of the Company.

Now specific to your question, that is really a good question because that is the key, of course.

As you saw in Spain, we go from virtually no market to a 2 plus gigawatt market to back down to say 300 megawatts and over the course of less than two years.

A fairly radical transitions.

And, as you saw in our pie charts, we shifted very -- in a very efficient fashion to each market.

So what we are trying to do is lower that capital expense or call that that fixed cost expense that would be amortized over a very small market, and then you have to shift to a new market.

So what that means is you set up small fixed costs and then you establish a variable cost that allows you to flex up, and then led by Julie Blunden's team, they give us their projection of the expected policy environment and the expected stability in the market.

And then we will allow a greater degree of fixed cost.

Now we are going to have to think about it bit more to give you some guidance on numbers.

But I can assure you that your question is directly influenced the way we have structured our Company.

Thanks so much and kudos for completing the account investigation.

Sanjay Shrestha.

Lazard.

A couple of quick question, guys.

The first one I'm looking at slide 15 and slide 16.

So slide 16 suggesting you guys will be more cost-competitive than any other crystalline player on a long-term basis.

But in the near term, you guys are talking about costs below $2 a watt, and some of the Asian players are offering margins at less than $2 a watt.

So help us put it in context as to what is the right way to look at your cost versus Asian players given your higher efficiency, your brand, your bankability, which allows you to get lower cost of debt and put us into context as to what is the right metric when you're actually making that comparison?

Sure.

I will answer that question rather directly.

If you see in the slide and you see 20% (multiple speakers) as you normalize cost comparison, and if you set our cost on a module because, of course, we are reducing costs every week and it turns out it is late in the quarter, if you say our costs were somewhere between $1.80 and $2.00, let's say, with a gain of (multiple speakers) $1.90, that would mean that our 1.8 times $1.90 would be what, $1.52 of costs in terms of normalized costs.

Now that is a normalized number.

If you have a high solar insolence region where you are using tracking and it is going to be better than that and if you have low solar insolence and obviously where you cannot have tracking, then it would not be as good, and that also turns out to be consistent with the profile of where our business is.

Got it.

So when you really think about it, the right market for you guys, so the cost is really more at parity versus the Asian players versus what is the stated number here?

That is the right way to think about it, right?

Yes, exactly.

And, frankly, if you do the math, which I have done a lot with our team, what you will find is there is one or two Chinese companies that are in that range or lower but very close, and the rest are not.

Got it.

One quick follow-up.

It seems like based on your large-scale project pipeline, visibility is even stronger in 2011 than even in 2010.

My question is, can you give us an update on DOE 1705 program, what is an update on FIPP, and given the better clearing price in Italy, could 2011 be a year where the ASP does not fall as much as it has been falling in '08, '09 and 2010?

Okay.

Let me take the first part of your question, and I want to paint the big picture and then give it to Julie who can answer the specifics.

The nature of your question is whether it is those programs or feed and tariff changes or built-in digressions or (multiple speakers) you end up with a policy environment that changes.

So what we believe is that we would like to control our investing.

We would like to either control or heavily influence the channel and be in the regions where we have best visibility and have nice diversification.

And what we have done very purposefully for 2011, as we show it on slide 13, is that Howard and his team have built a profile of our pipeline that gives us sort of a lot of flexibility in the back half of 2010 and 2011.

Not complete flexibility but a lot more, and that is not by accident.

It is very much on purpose.

Now specific to your question, I will turn that to Julie so she can comment on the programs you mentioned.

I think so what you are referencing is the fact that a lot of the adjustments that you are seeing people, policymakers make in 2010 is a reaction to the price reductions that happened in late 2008 and 2009, and the goal is to set up a predictable path for feed and tariff into 2011.

In fact, one of those interesting dynamics in Europe is watching the multiyear or within intra-year digression plan to recognize that even over the course of the calendar year there is an opportunity to soften the feed and tariff digression over time closer to the way that California Solar Initiative works where you have got the opportunity for a separate to digression during the year rather than a single one at the beginning or the end.

So that whole process is evolving in a kind of natural manner.

And when you add to that, the benefits of the RF funds that are starting to flow for example we just announced Yolo County yesterday, which is a great example of RF funding actually making it to market and driving megawatts now.

I think you will see consequences of the combination of positive policy mechanisms and adjustments to feed and tariff digression, which will settle down the policy market in the 2011 timeframe.

Okay.

And about the DOE and update in the US, anything to share there, Julie?

Yes, DOE is clearly moving forward on one guarantee program, and manufacturing and tax credit acceptance was due Monday.

So good solid progress forward.

We certainly are not limited in our ability to apply for 1703, as well for a lot of the early stage central station plants that we are working on.

Pavel Molchanov.

Raymond James.

You have talked about the evolution of the geographic sales mix over time.

Can you give some detail on how you see it changing in 2010 and perhaps into 2011?

Yes, I will take that, and I will look around the room after I say a few words to see if anyone wants to add anything.

So what I would say is we expect Germany to be a continuing strong market with a predictable increase in the digression of the feed and tariff.

Predictable in rough size and a little less predictable in terms of timing.

But we still expect that to be a very strong market.

And if you do the IRR calculation or more importantly the NPD calculation in Germany, you see that, particularly in the rooftop market, our technology is a great fit in selling Jim's channels.

His business is growing quite rapidly.

Italy, likewise, will be a transition at the end of the year, but we see that being a very strong market because it is the right thing for the Italian people.

The economics are very good.

And that is a market that we believe will become self-sustaining, one of the earliest markets to become self-sustaining.

By virtue of SunRay, we have great visibility into project development pipelines in Israel and in France, and we expect France to be coming online soon as well, and I will let Howard comment on that.

And then let me end with, there was a comment earlier about how SunPower enters new markets.

We do have an international business development group that has a small team in three or four large emerging markets, and you see the fruits of that effort in the Toshiba announcement.

And so what you see is a long scale pipeline, and then after, in that case several years, there is an announcement with a great partner, Toshiba.

And in three other markets, we have similar teams working, and Howard, do you want to comment on any of the above?

Sure.

I will just add that it takes a while and some measure of foresight to predict what is going to happen.

The Toshiba alliance was something that we worked on for probably four years.

So it is really good -- great to be in a position as that market revitalizes and is starting to take off again.

One of the things -- a final comment is that one of the things that we have talked about before as sort of the goalpost on mix around geography and channel of 40% and 60%.

And, as you look into 2010 and 2011, you will continue to see probably on the same percentages for North America 40%, international 60%.

You will see by channel a third, a third, a third residential commercial and utility as we go forward.

Those are good benchmarks to work off of as you look to the next two years.

I appreciate the comments.

Very quick follow-up.

Can you tell us what the overall manufacturing utilization was so far this year?

Yes, 100% plus.

Every watt we can get out of our factory, and the two presidents remind me and our COO of that frequently.

So all kidding aside, that is our comment about line balance as well that line balance becomes very relevant.

Unlike conventional technologies, you cannot go buy a previously balanced power solar cell in a box production line.

Ours is custom and over the years we are dialing in our line balance, and we believe we have considerable upside in line UPHs by line balancing.

So it's a long-winded 100% utilized.

Now for any semiconductor analyst out there, that does not mean that our overall equipment effectiveness or OEE is 100%.

I'm obviously not saying that.

I would say that our OEE is at or above semiconductor companies.

Okay.

We are going to take three more questions.

It has been a lengthy call, and Julie and Bob will certainly schedule follow-ups.

So let's take three more, please.

Mehdi Hosseini.

One question, two parts.

Tom, given your network of dealers especially in Germany, it appears to me that you may have a better assessment of the inventory at the local installers, especially following a worse than expected winter period in December, January and February.

So when you talk to your dealers, installers, what do they tell you about inventories that they are holding off for the weather to improve?

And the second part of my question has to do with inverters.

Do you see a shortage of inverter holding you back from installing as much as you want to?

Okay.

I will answer both of those, and then I will look to my SunPower team here to see if they want to calibrate my answers.

In our dealer channel, the short answer is there is very little if any inventory.

And if you were to talk -- I'm sure you do -- but if you talk to a broad set of our dealer base, you would find that they are not happy that we have not been able to supply them with enough product.

And for those dealers listening, I can assure you we are working on rectifying that.

So we really don't have great insight into inventory in general in Germany, just with our dealer channel.

All I can tell you is that happened in several previous quarters, there is not the risk of an inventory overhang with us unless there is some force majeure event.

In terms of inverters, I think that is an insightful question.

I would say it is fair to say there is a worldwide shortage of inverters certainly as we speak into the next few months.

SunPower is one of the largest customers in the world of inverters.

I would be surprised if we are not number one with our primary suppliers.

So we believe they will work effectively with us to ensure that we have adequate supply.

But it's going to require really close coordination.

It is a challenging inverter supply environment.

That is a spot-on question, yes.

But do you think that the selections were actually taking place in December, January and February in Germany?

Absolutely.

Michael Horwitz.

Robert Baird.

Can you give us a little bit more color on the Toshiba deal, what that means for future business in Japan?

And then can I extrapolate at all that now that that market is rejuvenated, that some of that product that was historically coming out of Japan may be captive and some of that product is actually high efficiency, so perhaps that opens up some other opportunities around the world where that product might not be entering anymore?

I will make a really brief comment and then turn it to Howard because historically he and Peter Aschenbrenner were the people that work with Toshiba.

They had spent a multiyear project, and they are a great partner for us because they bring the breadth of their company to bear in terms of electronics as well as -- that complement our module.

And I'm sure your intuition tells you correctly that a high-efficiency module is very much rewarded in Japan because there is a very significant space constraint with that.

Howard, maybe you can give a little color on the nature of the relationship and will it absorb Japanese supply, the market in general?

Sure.

We have a great relationship with Toshiba.

We have a multiyear agreement in place, and so far we have just announced what we're going to do in 2010, which is 32 megawatts, which is a very significant figure for a new customer.

And Toshiba, as you can imagine, has been planning their entry into the photovoltaic market for a number of years.

Very careful planning.

And they have an extremely successful launch of the product in Japan.

They have a network of dealers and installers and retailers that are carrying the product and the Toshiba brand with SunPower.

So we do expect and plan on a multiyear supply to Toshiba and supply that would be increasing each year.

And in terms of your question about absorbing supply of perhaps high-efficiency [spars], we don't, frankly, have great insights there.

I would say it is a very rational hypothesis, and there might be a little bit of anecdotal evidence that we see consistent with that.

But it certainly makes a lot of sense.

Stephen Chin.

UBS.

Tom, I was wondering if you could give us a ballpark estimate of how much cash you think the Company might use to fund projects in 2010, and do you need to fund projects to hit that 2010 sales guidance?

I will let Dennis take that question, and we're going to have -- or we should be very precise about the word fund.

So, Dennis, perhaps you could talk about the project, the use of capital for projects and specifically what would be funded.

Sure.

Stephen, as we mentioned in the call, at the end of the year, we ended up with $925 million, and $615 million was available for investments in CapEx and in the funding of these types of projects.

As we look at the SunRay portfolio specifically, as I mentioned, we already -- or the team there and our soon to be team is already in discussions with quite a few financiers on the project financing side.

So we are expecting that we're going to be able to do a lot of that financing under those projects with construction financing that they line up.

The other thing is part of that acquisition, there already is the Montalto 24 megawatts transaction at our solar plant that is operating that we intend to monetize very quickly.

So we will be able to use those funds from that project and basically repurpose it to fund the other transactions.

So it really depends upon how quickly we can line up the project financing for the existing projects, how we use the Montalto 24 proceeds.

I think, as we said, we do intend to use some of our resources initially to kickstart these because it makes sense given how attractive the gross margins are in the feed and tariff environment.

But I think that we are comfortable that we will continue to maintain a strong balance sheet in liquidity and make sure that we have sufficient cash on hand to take advantage of these opportunities.

And Stephen, I should comment that Dennis had over 10 years experience, 10 years of gas and electric at SunPower companies.

And so he has been down this road before, and so I think we've got a capable hand at the wheel here in terms of managing the amount of exposure.

Do you have a follow-up?

Yes, so just to be clear, Tom, just a quick follow-up.

So you don't need -- so you believe you have enough cash on your balance sheet to fund these projects without needing to go to the capital markets or for other additional external funding?

No, I think -- to be specific, as I said in my comments, given everything that we are doing -- there is the acquisition of SunRay.

We are continuing to build out Fab 3 in Malaysia.

We have got about $143 million of converts that may be put back to us in August.

We have cash on hand to do those things, but we are going to, as I said, potentially incur some debt later this year whether it is in the form of project financing related to the SunRay acquisitions or another form to make sure that we continue to maintain a strong balance sheet and have liquidity.

Okay.

Thank you all very much for your questions.

I'm sorry that we did not get to everybody's questions.

Julie and Bob will be scheduling follow-up calls, and you can certainly find Bob if you would like to talk to us further.

Bob, Julie and I will be hitting the road to see you.

Unfortunately we go very soon into a quite period, so it will be after our next earnings announcement predominantly when we will see you.

But we will be out to see you and be able to give you more clarification.

So thank you very much for joining us.

We appreciate your support, and I can assure you that we have maintained focus on a stable, driving, growing Company, and we look forward to our next earnings call.

Thank you very much.

That does conclude today's conference.

Thank you all for participating.

You may disconnect at this time.