SunPower Corporation (SPWR) 2010 Q2 法說會逐字稿

Good afternoon, and welcome to SunPower Corporation's second quarter 2010 earnings conference call.

Today's conference is being recorded.

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

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

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

Sir, you may begin.

Thank you, Barbara.

I would like to welcome everyone to our second quarter 2010 earnings conference call.

On the call today, we will start off with the second quarter overview from Tom Werner, SunPower's CEO, followed by Dennis Arriola, our CFO, who will go into greater financial details on the quarter.

Tom will then discuss our outlook for 2010 and provide some color on 2011 before we open up the call for questions.

We have allotted sixty minutes for today's call, and a replay will be available later today on the Investor Relations page of our website.

During today's call, we will make forward-looking statements subject to various risks and uncertainties that are described in our 2009 10-K as well as today's press release.

Please see those documents for additional information regarding those factors that may impact these forward-looking statements.

To enhance this call, we have posted a set of power point 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 updated this quarter to reflect our Fab 3 rent schedule and the new business segment structure instituted this quarter as well.

On slide two of our power point presentation you will find our Safe Harbor statement.

Our prepared remarks will run approximately thirty minutes which will allow plenty of time for questions.

With that, I would like to turn the call over to Tom Werner, CEO of SunPower, who will begin on slide three.

Tom?

Thanks, Bob.

And thank you for joining us today.

We are pleased with the progress we made last quarter as well as our visibility into the second half of this year and through 2011.

On this call, I will cover each of these topics, as well as our cost structure, guidance, and long-term strategy.

First, let's look at the second quarter highlights on slide three.

Our results reflect very strong execution as we exceeded our plan for the second quarter.

Non-GAAP revenues for the quarter were up 31% year-over-year, and up 13% from Q1.

We think this growth reflects growing market share in our most important markets and segments.

Non-GAAP gross margins for the quarter was 26.3%, up approximately 400 basis points sequentially, while we tripled our non-GAAP EPS to $0.15 per share.

We remain on track to achieve our 2010 plan as we continue to benefit from strong demand in all geographies and market segments.

We were sold out in Q2 and are fully allocated for the balance of 2010.

We also have seen strong bookings going into 2011.

Moving on to slide four, we are providing a snapshot of the key drivers we see for our business over the next eighteen months.

First, based on what we are seeing in our business today, we are confident in our second half 2010 forecast.

We are forecasting that 65% of our 2010 revenue will be delivered in the second half.

This financial profile primarily reflects revenue recognition of our Italian power plants which remain on track for both construction and financing.

To that end, our team in Europe signed a definitive agreement to sell our Montalto 28-megawatt solar park.

We will look at our 2010 and 2011 power plant construction plan in more detail in a moment.

Second, we are encouraged by the increasing level of visibility into 2011.

Our pipeline remains strong with Q1 utility and power plants, or UPP, bookings at the best level in two years.

In our residential and commercial business, we are fully allocated for the rest of the year.

Third, our panel cost structure.

This is a major area of focus for us.

We took important steps this quarter, but we know we need to do more.

So we're accelerating our efforts.

We expect our panel costs in Q4 2010, when adjusted for our high efficiency panels of lower balance assistance costs, to be $1.36 per watt when compared to conventional 14% crystalline panels.

For Q4 2011, we expect that efficiency adjusted cost to drop to $1.08 per watt.

And we expect our Oasis project will further reduce balance and system costs significantly, starting in the first quarter of next year.

So those are the drivers we want to focus on during this call.

Let's start with why we are confident in the near-term as we review our UPP sales in 2010 and 2011.

I will start with slide five.

We expect more than 30% of our sales in the second half of 2010 to be Italian power plants.

This table shows our UPP pipeline in Italy over the next eighteen months in various stages of development.

We expect to recognize revenue on more than 100-megawatts of Italian power plants this year.

A key factor in hitting our Q4 target is our ability to finance and sell three large projects, Montalto 20, Montalto 8 and Montalto 44 as shown on this slide.

The megawatt statistics here are in AC megawatts, reflecting delivered power.

As we announced yesterday, we have successfully signed a definitive agreement for Montalto 20 and Montalto 8, representing two out of the three Montalto projects we plan to sell this year.

While power plant sales timing is never certain, we are currently in negotiations to sell Montalto 24 and we are confident we will close this transaction in Q4 of this year.

For 2011, we plan to construct more than 200-megawatts in Italy, as we leverage our acquisition of SunRay, in our 1.2 gigawatt EMEA pipeline.

We're already in negotiations with multiple partners about many of these projects.

Now, looking beyond Italy at our entire UPP pipeline, please turn to slide six.

As you can see, we have robust visibility in multiple markets.

This slide details our four gigawatts of UPP pipeline.

Green highlighted projects are already booked.

Those highlighted in yellow are in our pipeline, but not yet booked.

You can see that our 2011 UPP plan will more than double our 2010 forecast.

We are happy to report that our Q1 2011 bookings are at the best levels in two years.

Since our booked UPP business has agreed upon ASPs we have visibility on 2011 revenue in this business segment.

As you think about the drivers of our second half 2010, and 2011 results, we expect growth in our residential and commercial business, or R&C as well.

Please turn to slide seven.

Revenues in R&C are more linear and predictable than UPP and this business is performing extremely well.

We are confident in its performance in the second half of this year.

As you can see, there has been a close historical correlation between expansion of our dealer base, and our volume growth in this segment.

We expect the correlation to continue in the future, as we plan to grow our dealer base, 2,000 dealer partners by the end of 2011.

The large commercial systems, our US projects bookings are growing, and we are building out our infrastructure in EMEA, a region tailor-made for our value proposition.

These [interim] structures that benefit high efficiency rooftop solutions.

We're seeing good momentum at this stage of the year, as evidenced by our recent four megawatt parking lot and rooftop announcement with Dow Jones.

We delivered the best NPV of any rooftop solution in the industry which is why we are number one in the US and rapidly penetrating EMEA markets with our dealer model.

With the strong residential and commercial business and our growing US and EMEA UPP pipeline, we believe these businesses are well positioned to meet our goals in 2010 and 2011.

Now let's turn to cost structure.

On slide eight, we give you more color about our key cost reduction initiatives.

Our customers make purchase decisions based on total system price.

Our large customers evaluate on levelized cost of energy, or LCOE.

Our smaller customers consider total savings from their roofs.

More megawatts on the roof is more savings in a higher NPV.

Neither large nor small customers buy panels alone, and compare panel prices of SunPower directly to our competitors.

However, we recognize that our investors find it challenging to compare panel prices at different efficiencies to each other.

That's because panels with lower efficiencies require higher balance of system, or BOS, bus per watt.

We've decided to provide our panel cost per watt on an apples-to-apples basis with conventional crystalline silicon 14% panels and the best (inaudible) film panels at 11% efficiency.

This slide illustrates panel costs that our conventional and [pentil] competitors have to beat to match our high efficiency panels.

The lower the efficiency (inaudible) films would have to come in at even lower costs level than shown here.

Looking to Q4 2010, when compared to a conventional 14% panel, we expect our efficiency adjusted cost per watt at the panel level to be $1.36 per watt and our Q4 2011 cost per watt will be $1.08.

Thus, we are competitive today relative to most conventional manufacturers and have developed new programs as we accelerate our cost reduction plans in 2011.

As a reminder, these costs reflect a blended cost per watt across our entire product line, from our 22 cell sun pile product through our 128 cell utility solar panel.

Let me expand on how we aggressively -- how we are aggressively targeting further cost reductions.

First, our JV with AUO.

We just had our first JV Board meeting two weeks ago, and it is clear to me that AUO is an excellent partner with world class manufacturing experience.

We will produce our first solar cells in early Q4 of this year.

More on that in a minute.

Second, our R&D investments.

Last quarter, we announced that we have designed and produced a world record 24.2% efficient solar cell on our production equipment.

This is important as our analysis shows that every point of efficiency is worth $0.05 to $0.07 in reduced BOS costs.

Third we continue to improve our manufacturing processes to drive further reductions.

We have completely redesigned the back-end of our manufacturing processes, proving yields several percentage points over the last six months.

We expect to implement this new approach throughout all of our lines during 2011.

We are also looking at ways to improve our output per line as well as reducing the number of steps in our manufacturing process.

We expect initial benefits on our step reduction program to start in 2011.

In summary, the results from these and other improvements, have enabled us to increase our output per line by 25%, from Fab 2 to Fab 3 -- from 40-megawatts per line to 50-megawatts per line.

Now, let's take a more in depth look at the operational and cost reduction benefits of our Fab 3 JV.

Please turn to slide nine.

Specific to our cost reduction targets, we plan to reduce our Fab 3 CapEx per watt from $0.85 a watt to $0.55 a watt by 2014.

We expect to accelerate our ramp versus our pre-JV plan by tripling our current nameplate capacity available to SunPower by year end 2013, substantially improving our economies of scale.

Together with AUO we plan to accelerate our cost reduction programs, and expect to pull in our $1.00 per watt panel cost target by at least six months.

Note that our $1.00 a watt panel and cost target does not reflect efficiency adjustments.

We will transfer what we learned from Fab 3 to Fab 1 and Fab 2, to maximize our global cost reduction road map.

We expect to identify additional cost reduction opportunities as we leverage more of our collective operating experience.

In summary, our JV will allow us to accelerate our capacity ramp while reducing our overall costs.

More megawatts faster at a lower cost.

While we are making significant project progress on panel costs per watt, we also continue our intense focus on DOS costs in order to reduce total system costs.

Please turn to slide ten.

With about 75% of our revenue coming from the commercial and UPP segments this year, it is critical for us to reduce BOS costs to drive competitive LCOE's.

LCOE is how our customers economically evaluate projects.

One way to reduce BOS cost is to increase the panel efficiency.

But we've also made progress each year reducing our BOS costs through product and system design, supply chain, process standardization.

That's why we have won, and continue to win, power plant business from very sophisticated buyers like PG&E, Southern Cal Edison, Florida Power and Light, Xsilon, Xcel, and APS as we announced today, just to make a few.

On this slide, we illustrate the value of efficiency used in our California Valley solar ranch 250-megawatt power plant for PG&E as an example.

In this site plan, you can see a clear illustration of how our technology advantage and proprietary tracking technology enable us to offer our customers very competitive solutions for their energy needs.

Despite the footprints of this project, more than 2,000 acres, the site, like almost all of our solar plants, has faced constrain due to environmental and developmental requirements.

Land acquisition is a major consideration for power plants of this scale.

So having a smaller footprint is a strategic advantage.

As you can see, on the chart, our high efficiency panels tracking technology drives substantially more power on the available land.

With SunPower high efficiency solar panels, we will deliver more megawatts from the same site than other panel technologies.

Specifically, we will deliver 60-megawatts more to PG&E than a comparable layout on this site from a conventional 14% panel, more than 100-megawatts more than the best thin-film.

Using an 11% thin-film would require hundreds of additional acres to achieve a 250-megawatt power rating.

While the energy production from that plant would still lag by up to 20%, due to the fixed tilt configuration.

For more detail on the land advantage of our high capacity factor power plants, please see the slide in the appendix of this stack.

When you add these advantages to the savings from using less materials such as steel, cabling and concrete, we offer our customers one of the best LCOE's in the industry.

We are also using our scale and technology to drive new product introductions that lower -- lowers BOS costs.

An example of this strategy is our recently-launched solar power plant, Oasis Solar Power Plant, as shown on slide eleven.

Oasis reduces BOS costs by up to 25%, for large scale implementations, by standardizing on a single one megawatt platform.

With Oasis, customers design their projects to suit their needs, while benefiting from cost reductions due to standardization and rapid installation times.

We will be ramping this product in 2011, as utility customer feedback on Oasis has been fantastic.

In short, we think we have the right plan to generate revenue growth, group margins, and drive positive shareholder value.

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

Dennis?

Thanks, Tom.

As we mentioned earlier, for the second quarter results, reflect our new business segments, which are residential and commercial, or R&C, and utility and power plants, or UPP.

While comparable historical periods have been recasted to conform to our new business segments, the 10-Q we will file later this week will have additional information on the new business segments.

We've also updated our quarterly metrics sheet that is posted on our IR website with historical information dating back to Q1 2009.

Now please turn to slide twelve.

Non-GAAP revenue in the second quarter was $392 million, up 31% compared to the second quarter in 2009, and an increase of 13% over the first quarter of 2010.

Going forward, our non-GAAP total revenue will include electricity sales from our commissioned power plants that will be monetized later.

For GAAP reporting purposes, and under real estate accounting, we recorded $7.9 million in electricity revenue related to our Montalto 20-megawatt solar park, classified as income from discontinued operations.

This reconciled the difference between our GAAP reported revenue for the quarter of $384 million and non-GAAP revenue of $392 million.

Real estate accounting also applies to projects we develop that require us to defer revenue recognition on any module sales and related construction expenses until the projects are financed and monetized to third party owners.

On a segment basis, residential and commercial revenue was up 30% over the first quarter of 2010, as we allocated nearly 19-megawatts more to this business segment, in the quarter, to take advantage of the strong demand in Italy, Germany, and the US markets.

Utility and power plant revenue was $128 million in the quarter, compared to $144 million in the first quarter of 2010.

The decrease was primarily related to fewer megawatts allocated for sale through our components channel, and the impact of deferred revenues from projects under construction.

Total non-GAAP gross margin for the Company was 26.3% for the second quarter, compared to 22.5% for the first quarter of 2010.

The improvement was driven by strong market demand and increased allocation to our residential and commercial business.

On a segment basis, R&C's gross margin improved to 26.5%, from 21.3%, in the first quarter, as our higher value products and services continue to command a market premium compared to lower efficiency panels.

In the UPP segment, gross margin improved to 26.1%, from 24.3% in the first quarter.

Primarily as a result of the margin related to the electricity revenues from our Montalto 20 solar power plant.

In the third and fourth quarters of 2010, we expect our consolidated gross margins to be in the range of 18% to 22%.

The gross margin in the second half of the year will not materially benefit from revenues related to the sales of electricity and will include a larger proportion of sales from lower margins third party panels and planned price reductions in the US and Germany.

Operating expenses for the quarter on a non-GAAP basis were $70.3 million, compared to $64.6 million in the first quarter.

This quarter was the first time that SunRay's operating and development expenses were consolidated onto our books and was the main driver behind the increase in operating expenses quarter to quarter.

Other income and expenses on a non-GAAP basis increased to $17.5 million, from $10.8 million in the first quarter, primarily related to the incremental interest expense from our new convertible debenture issued in April 2010, and non-recourse debt related to SunRay's Italian projects.

Profit before tax on the non-GAAP basis improved to $15.5 million, from $2.8 million in the first quarter of 2010.

As a result of our increased profits from our European activities, our non-GAAP effective tax rate declined to 20.3% for the quarter, and was 21.1% for the first six months of 2010.

Earnings per share on a non-GAAP basis improved to $0.15 per share in the second quarter, from $0.05 per share in the first quarter of 2010.

It was a very strong quarter.

And this performance positions us well to meet our second half guidance for 2010.

Now, let me spend a moment on our GAAP operating results.

During the quarter, we had two non-cash events that are included in our GAAP results, but not in our non-GAAP numbers.

The exclusion of these two items is consistent with our view that our non-GAAP results more closely align with the economic operating performance of our Company.

First, let me start with our investment in Woongjin Energy Company.

As you know, SunPower has a direct equity investment in Woongjin Energy, one of our suppliers of silicon ingate.

And in June 2010, Woongjin applied for an initial public offering in South Korea.

As a result of the IPO, an even though we didn't sell any share, SunPower's ownership was diluted from 42.1% to 31.3%, and under new accounting rules, we were required to book a non-cash gain of $28.3 million in our GAAP results.

Our $67 million book investment in Woongjin has a market value of more than $260 million US based on yesterday's closing price of the stock.

During the second quarter, we also recorded a non-cash $34 million mark-to-market gain in our GAAP results related to our recently issued convertible debentures.

As part of our quarterly tax planning we've updated the GAAP tax forecast to include the impact of these two non-cash events.

As a result of our strong forecasted earnings profile for the second half of the year, and the taxes related to the Woongjin gain, SunPower booked a $47 million tax provision in the second quarter which resulted in a GAAP loss of $0.06 per share for the quarter, and a positive $0.07 GAAP earnings per share for the first six months of 2010.

For the full year, we expect our GAAP tax rate to be in the range of 52% to 56%, and our full year GAAP EPS to be in the range of $0.25 to $0.55 per share.

Now, let me turn to our balance sheet and liquidity on slide thirteen.

At the end of the second quarter, SunPower had $737 million in cash and investments on our balance sheet, and we had $75 million of available liquidity under our loan facility with the international finance corporation.

Since the end of the second quarter, we have repaid $143 million in convertible debentures and so far have received cash proceeds of approximately $50 million from the sale of our Montalto 28-megawatt project.

With the closing of our JV with AUO on July 5, 2010, both our balance sheet and cash flow positions will continue to strengthen.

First, all of the Malaysian debt related to Fab 3 will no longer be consolidated on SunPower's balance sheet, since it is recoursed directly to the Malaysian assets at the JV.

This essentially removes over $230 million of debt from our balance sheet.

Additionally, our cash flow will also improve since AUO, our partner, will now help fund 50% of all capital required to complete the buildout of Fab 3.

And AUO will contribute its share of polysilicon prepayments.

As a result, we expect our debt to total capital ratio to improve further from 42% at the end of the second quarter to approximately 33% by the end of this year.

In the second quarter, SunPower invested $62 million in capital expenditures, and recorded CapEx of $106 million for the first half of the year.

Going forward, our contributions to our Malaysian JV with AUO will be recorded as equity investment in the JV, rather than capital expenditures.

For the full year, we expect capital expenditures to be in the range of $150 million to $200 million.

Let me spend a moment now on our foreign exchange risk management.

For the remainder of the year, we have hedged 93% of our net Euro exposure at a rate of $1.35 to EUR1.00.

Our unhedged Euro exposure for the fourth quarter assumes a US dollar rate of $1.28.

As a result, every $0.01 change in the exchange rate will impact our operating margin by only about $400,000.

In addition, we have commenced hedging a portion of our first half 2011 net Euro exposure and will continue to increase our hedge positions as we further build out our book of 2011 business.

Before I turn it back to Tom, let me give you an update on where we stand on the financing and sale of our Italian projects in our SunRay business unit.

As Tom mentioned and as we announced yesterday, the sale of our Montalto 28-megawatt solar park is an important and expected milestone that we achieved on time and consistent with our planned sales price.

The financing and sale of these projects requires a closely coordinated effort amongst various parties and timing is not always controllable.

Our success with these two projects, however, further demonstrates SunPower's ability to develop and construct the world's most efficient solar parks as well as to finance and monetize them with leading banks and equity investors.

We're taking a similar strategy to monetize an additional 80-megawatts of projects in Italy before the end of the year.

Let me provide you with a little more color on how we're going about monetizing the remaining 44-megawatt solar park at Montalto.

Given the sale of the financing required for this project, we've decided to pursue both a bank and capital market solution.

Since the beginning of the year, our SunRay finance team has been working closely with several of Europe's leading project finance banks, experienced institutional investors, credit rating agencies, and governmental agencies, that will credit enhance the debt on the project.

We are on schedule to complete the debt financing for the remaining 44-megawatts of Montalto before the end of the year.

On the equity side of Montalto 44, we're working closely with both European and international investors that are familiar with SunPower's world-leading technology, and who seek high quality opportunities under Italy's (inaudible) tariff.

While there is still a lot of work ahead of us, based on the progress we've made to date, I'm more confident today that we will be able to finance and monetize the power plants necessary for SunPower to meet its second half revenue and earnings guidance.

With that, I will hand it back to Tom.

Thanks, Dennis.

Now, I would like to turn to our guidance on slide fourteen, and then close with a brief discussion of why we will compete, and win, in what is clearly a changing solar energy marketplace.

First, guidance.

As I mentioned in my opening remarks, our manufacturing capacity is fully allocated for 2010 and we have clear demand visibility in our rapidly growing UPP business in 2011.

We have a high degree of confidence in our 2010 revenue guidance.

With more than 20 EMEA power plants currently under construction, and clear visibility in our R&C segment, we are also well positioned for 2011.

For the year, we are reaffirming our revenue guidance of $2.0 billion to $2.25 billion, up 33% year-over-year, and raising our 2010 non-GAAP EPS guidance to $1.35 to $1.65.

Our gross margin forecast for 2010 remains unchanged at 20% to 22%.

As we have mentioned, 93% of our net Euro exposure for the remainder of the year is hedged at a US dollar rate of $1.35 to EUR1.00.

Our guidance also assumes a non-GAAP tax rate of 10% to 12% for 2010.

We remain committed that we will construct, monetize, and execute on more than 175-megawatts of UPP business in 2010.

Our production plan remains at approximately 550-megawatts with an additional 50-megawatts to 100-megawatts coming from third party solar cell supply in the second half of 2010.

And Fab 3 remains on plan for initial cell production in September 2010.

I would like to conclude my remarks by moving to slide fifteen, which is familiar to many of you.

This slide shows the solar industry value chain from raw commodities and markets.

During the last five years, upstream has been a great place to be.

Demand for solar systems has outstripped capacity to manufacture the plant -- panels and their buildings blocks.

As a result the industry has been in allocation.

That is, all of the supply was allocated by the manufacturers, and it was a seller's market.

We don't see that continuing over the long term, however.

In particular, we see new manufacturing capacity is starting to catch up to demand.

As early as next year, we will start to see a transition to a buyer's market.

We believe this is a market dynamic that favors our business model and will play to our strengths.

One of the features of our business structure that we have been investing in our downstream channel to excel in these more competitive market conditions.

As you can see from this chart, our business strategy has been to partner in the upstream part of the value chain, with partners that bring scale and expertise.

In contrast, we've directly invested in the downstream part of the business where we can get close to the end markets, and customers.

Our investments have given us strong marketing, and distribution capabilities, and some of the world's most important geographies in each of the three major market segments -- residential, commercial, and UPP.

We offer a differentiated value proposition in each of those segments, and we are reinforcing our position in each.

In summary, we are confident in our forecast and have positioned the Company well for today's chaining market conditions.

Our pipeline and downstream reach provide us with good visibility for 2011 and we continue to accelerate our cost reduction programs through our JV and industry-leading technology.

With that, I will open it to questions.

In addition to Dennis, I also have with me Howard Wenger, President of our Utilities & Power Plants Group, and Jim Pape, President of our Residential and Commercial Group, and Julie Blunden, our EVP of Public Policy Corporate Communications, and Bob Okunski, our Senior Director of Investor Relation, so that they may provide some of the answers.

Like usual, in order to ample -- allow enough time for as many questions as possible, try to limit your questions to one and a follow up.

And those of you who would like to, you're more than welcome to jump back in the queue.

Now, with that, Operator, we'll take questions.

Okay, thank you, sir.

(Operator instructions) Our first question comes from Satya Kumar with Credit Suisse.

Yes, hi, thanks for taking my question.

And thanks for providing the extra color on the projects, the UPP pipeline and the detail and the cost per watt.

I guess I have a couple of questions.

One, on the Montalto projects, if I look at the 45 million debt financing you did for the 9-megawatts and the same place for equity, I (inaudible) which is, I guess, north of EUR6.00 per watt.

I just wanted to make sure that math, if it made sense?

And how I should think about the profitability of the remaining Italian projects.

Is it going to be similar to that?

This is Dennis.

Let me walk through it.

On the roughly EUR45 million financing that you mentioned, remember there were two components to that.

There was EUR40 million that was a straight financing, and then EUR4.5 million that was related -- it was there for VAT financing.

Though, you know remember the VAT is really just a pass-through.

It is a financing vehicle so that we can pay for the taxes, but I'm not sure it is appropriate to think about that, as to how that adds to the ASP.

But as far as the EUR40 million in financing, not -- the entire amount has not been drawn down.

And if you could go ahead with your next question, I would say in terms of profitability, we're not going to give profitability by project.

I would say that you should think of the remaining Italian projects for this year to be materially similar to the, to the search project, the first two projects.

That answers my question.

Thanks.

The second question I had was, if I look at the project completions in Italy you need to physically connect these project the at the end of the year to lock into 2010 tariff.

But the sale of equities is sort of what's driving the accounting rev rec.

You did mention that you are working with equity buyers for the projects for the remainder of the year, but if you had to, would you prioritize rev rec for the projects this year, over potentially getting a higher equity value if you were to defer the sale of equity into 2011?

We're trying to do both.

We're on schedule right now with the buyers and the financiers that we're talking to, to be able to construct, have them hooked up, and be able to transfer them before the end of the quarter.

Before the end of the year.

Excuse me.

All right.

Thanks.

Okay.

Thanks Satya.

We're going to have to go to the next question.

And our next question comes from [Jesse Bushell] with Jefferies.

Hi.

Big picture question, Tom.

Are there any quantifiable O&M or LCOE savings from your new Oasis power plant?

Or is that just a one-time savings?

Could you give us some more color?

Sure.

On -- there's a road map of savings with Oasis.

So, first of all, thank you for the question, Jesse, and welcome back.

Thanks.

Yes, there is a road map of savings for Oasis, rev one is what will be implemented in the first part of next year.

And those savings are primarily from standardization, and essentially ease of assembly.

In time, we will roll out other features that will give our customers savings on LCOE basis, in terms of the way they operate the power plant, and I don't want to preannounce those, but what I want to do is say that, yes, we have, I believe it is four revisions of Oasis laid out and rev one is the first half year, standardization, and then we add features to it that do influence the way the power plant runs, and do offer rev life cost of energy benefits.

Some of the -- your peers are saying that the ASP declines in '11 look a little bit more stable than, than previously thought.

Could you comment on what you're seeing from a pricing perspective in your talks with -- with your dealers regarding 2011?

So, excluding your project business, how does the residential market look in terms of pricing?

Sure.

So you accurately point to the residential business, because the project business is booking actually into the back half of next year.

And of course, you know what that pricing is.

Even the systems business is back -- is largely looking in the first part of next year and towards the middle of next year.

Residential business, is a turns business.

It is quarterly business.

And you know, so you would mostly be talking about how you project together into the new year, and not so much as a commitment, because our residential business is very much driven on a three month cycle.

So let me turn it to Jim who runs the residential business, and maybe he can give a little bit of dealer color.

Yes, Jesse, Jim Pape here.

Specific to what you're hearing, I think we, we generally agree, with what you're hearing, relative to what we see going into next year, with the issue being Germany, we're a small share player in Germany, and we think we're, we're well positioned to weather that storm.

Thank you very much.

Okay, Jesse, thanks.

Next question, please.

And our next question comes from Rob Stone with Cowen and Company.

Hi, guys.

I wonder if you could just give an over and under on how the quarter came in versus your previous guidance for the puts and takes?

Specifically, were you expecting to recognize revenue from electricity sales?

How did ASP perform relative to your expectations?

Some might have thought, for instance, that in such a red hot demand environment as, as we see right now, if there would have been more upside on the, on the top line.

That's my first question.

Thanks.

Sure, Rob, this is Tom.

I will take the, the -- I'll take it first and then you can do a follow-up and maybe the follow-up will hand off.

But we had a great quarter.

And we're positioned excellently for the rest of the year.

We're exactly on plan, and in Q2 we're ahead of plan.

So when you look at our UPP business, it performed exactly to plan.

And note that we acquired SunRay at the end of Q1.

So it was a little hard to completely build it into our projections.

And that acquisition has gone excellently, we're thrilled with the team.

And one of the benefits, of course, is that you get the income of the projects while you're selling them to pay on the timing of the bill.

So, I would call that maybe a minor upside.

But certainly a positive of the acquisition.

And I would say ASP's came in favorably, and we are positioned, in terms of the buildout of the projects for the rest of the year, better than what we did our last call, so I don't know, we, we doubled the midpoint of our previous guidance in the quarter, and are positioned really well for the back end of the year.

So we like we're capitalizing just fine on the existing market, or we're performing very well on the existing market.

Perhaps you could ask your second part of your question.

The second question had to do with the BOS adjusted cost metrics, which still look like they're ahead of some of the, of the 14% efficiency cost leaders in the industry.

That is, your costs are going to be higher.

Would you still expect to get a premium of some kind on a cost adjusted basis by way of ancillary services that you provide through your dealer channel for instance?

Yes, thanks for the question and the answer is absolutely, as we have said, on several previous calls, we not only sell panels, we sell complete systems, and beyond the system, we sell services like supply chain, lead generation, financing, et cetera.

And nobody has, in the residential and commercial sector, nobody has the supply chain network that we have, as a monetizable example of difference in ASP's.

I think also, as you look at the efficiency adjusted costs, just be careful to compare -- remember, we're using a blended across all of our SKU's and we're selling all the way from [New Hong], for 22 cell sun tile to a very large panel for utility scale.

So when we go one on one with a competitor, in a utility project, for example, the economics would vary a bit from what we show on the slide.

We would obviously use both Oasis and 128 cell panel for utility scale project, as an example and our costs would be lower.

So yes, and be careful with the overall blending.

Great.

Thanks very much.

Next question, please?

And our next question comes from Vishal Shah from Barclay's Capital.

Yes, hi, thanks for taking my question.

Tom, you've been able to forecast forward revenue and earnings pretty accurately in the past and I was wondering, given the strong visibility you have with the UPP business, if you can take a stab at 2011 revenue growth expectations for your business particularly?

And then I have a follow-up, please.

Sure.

We've given, on one of the slides here, we've shown you, the megawatt production that we expect for next year and you know the allocation of SunPower, I believe we've also given some color on third party supply, which would be more than it was this year.

And so from that, you can start to infer solid growth 2011 from 2010 for sure.

And I'm a little cautious because of the residential business is a meaningful part of our 2011 and gives specific guidance on overall growth, expected to be very strong, possibly strong -- as strong as 2010, as a sort of a broad statement.

And the production growth should give you a sense of, of what drives that.

Okay.

Maybe I can ask another question then.

You know, yesterday the press release you put out suggested that you were -- the statements from the CEO of SunRay said that you intend to complete construction of an instrumental 280-megawatt of Italian (inaudible) managed by the end of 2011.

So can you talk a little bit about that?

And can you also elaborate on the financing environment at (inaudible) as we speak and on 2010 and early 2011?

Thanks.

Vishal, this is Howard Wenger.

I will speak to the first part first and we may have Dennis follow-up on the second, on the financing.

The -- we are in construction right now on Montalto 44.

That is one of the projects that we showed on the slide.

And on Montalto 8, we are in fact two weeks ahead of schedule on that project.

And we have land control and expect license acquisition on an additional 200-megawatts that we intend to construct in 2011.

So you heard it right.

We're on track.

We're in construction.

And we are looking to monetize 280-megawatts between 2010 and 2011 in Italy alone through the SunRay pipeline.

As far as financing environment, I will go ahead and take a crack at that.

It's -- since we successfully financed not only the Montalto projects but it's a global finance pool that, that we're working with.

So when you look at our, our solar farm in Amherstburg, in Canada, when you look at that successful financing, on top of the successful financing of our Colorado project, both of those were at 20-megawatts AC, and then you look at the successful financing and sale of the Montalto 20 and Montalto 8 projects, we built up a lot of momentum in building some of these parks.

And so the demand for the acquisition of these high quality parks is unprecedented.

And we're feeling very good about financing and selling the parks in 2010 and into 2011.

Yes, Vishal, this is Dennis Arriola.

A couple of things.

On the 200-megawatts that [Diarma Mega] referred to, if you go to slide five in our package, you can see the breakthrough of our three largest projects.

And then the other 160-megawatts there, as described there are numerous other smaller projects.

And then on the finances real quick, just to support what Howard said, we are really seeing -- not just in Italy, but in other parts of the world, there are more and more banks that are becoming much more interested and aggressive on the financing side, and one of the benefits that we definitely have is that we've got so many projects that have been financed in the past, that the credit committees, the, the technology consultants that the banks use are very familiar and comfortable with our technology, and our ability to deliver projects on time and on budget, and that definitely is the competitive advantage that we have.

Thanks Vishal.

Thank you.

And next is Michael Horwitz with Robert Baird.

Great, thanks for taking my question.

Nice quarter.

Just quickly, a gross margin question, and understanding some of the guidance that you gave around what happened with gross margins in the quarter, you just reported, but given your visibility, it would seem that your gross margin guidance appears to be quite conservative.

If we understand some cost declines going forward, but we also have some -- a pretty good outlook into prices, and even taking into account electricity sales and some other factors, you know, perhaps you could give me a little bit better view on, on the gross margin guidance?

Thanks.

Sure.

This is Dennis Arriola.

What I would say first is that the guidance that we've given is consistent with what we -- our original plans, so it is coming off a very strong second quarter, it's -- we're building into the second half of the year.

We're also continuing, as Tom said, to benefit from our cost reduction road map.

But in the third quarter specifically, we are -- we did announce a price reductions in US and Germany, and we're implementing those.

So those are rolling through in our gross margin.

And we also are introducing a larger proportion of third, third party panels in order to take advantage of the strong demand in the market.

So those are at a lower margin as well.

But I would say overall, the margins that we put out there for the third and fourth quarter are consistent with our original plan, and are going to help us meet our numbers for the full year.

Great.

Thanks.

And next is Kelly Dougherty with Macquarie.

Hi, thanks for taking the question.

I'm just wondering in the guidance range, the revenue range is dependent on when you recognize some of the Italian projects, I assume?

And then wondering if it includes the Serengeti contribution, or that extra 50-megawatts to 100-megawatts to be on top of the revenue guidance?

The answer is yes and yes.

It includes selling the projects and it includes the 50-megawatt to 100-megawatt of Serengeti.

Okay.

And that range is -- for Serengeti -- is largely based on how many cells you can get?

Because the availability is tight right now?

Is that the way to think about it?

Yes.

I would say the economic availability of cells.

Okay.

Fair enough.

And just looking forward into 2011, how much flexibility do you have around some of these larger projects?

You know, if you wanted to accelerate the buildout of some of the Italian projects before the feed-in tariffs decline more, could you push the US projects further back?

Or just kind of an idea around how much flexibility you have around those things?

Hi, Kelly.

This is Howard Wenger.

We have a lot of flexibility with these projects.

It's one of the reasons why we acquired SunRay and go further downstream into development so that we can control the acquisition of land and the licenses.

And we built a great organic, organic, organically grown team in North America that is doing the same thing.

So, since we have control of the land and the projects, we do have flexibility, and as to where we ship product and where we build the projects.

Kelly, to add a little color, it turns out the sales and operations planning role in our Company is one of the most important roles.

Fortunately, we have a great person doing the job.

Because allocating on SunPower PV is a very difficult decision and because of the flexibility we have in UPP, we can do exactly as you suggested and that is preferentially build in the US or in Europe, and to the degree that we can, we would obviously do that [dripping] based on the feed-in tariff economics.

Great.

Thanks.

Just one more quick question.

Any kind of help in thinking about maybe the split-out between the residential commercial and the UPP business for next year?

Since that was your third question, we're not going to answer it.

Actually, I think the finance team is going to need to take a minute.

Yes, Kelly, this is Dennis.

We're, we're in the process of putting to -- finalizing our 2011 annual plan and our five-year plan.

But based upon our current numbers, from a revenue standpoint, UPP, given the projects that we've already booked and will be building out, will be the majority, not, not the -- it won't be driving it, but will be the majority of the overall revenues in 2011.

Thanks very much, guys.

Thank you.

Thanks Kelly.

Next question please?

And the next is Sanjay Shrestha with Lazard Capital.

Thank you.

Good morning, guys.

Just a quick follow-up on this 100 plus megawatt facility in Italy.

Did I hear you guys correctly that you have all the permits in place for that so the -- we just make sure we close on the financing for those projects?

This is Howard.

We do not have all of the permits for these projects.

We have the land, and the permits have been filed for.

But they are in our plan and given our history there, we have all the confidence that we will obtain the licenses for the remaining amount.

We have the majority of the licenses.

I will give you that number.

Okay.

(Inaudible)

While you guys are looking for that number, just a follow-up then.

So you guys are obviously a great bankable product.

So with your traction to date, in Italy, what is now the expected return threshold for the equity owners of this project?

And how do you see pricing dynamics change with that probably coming down and adjustment in the feed-in tariff in 2011?

Is there a scenario where the pricing stays flat because the return expectation has gone down?

Sanjay, this is Dennis.

What I would tell you on the pricing returns, the expectation, based upon what we've been able to close, they are very attractive, both for the sellers and for the buyers, given the feed-in tariff.

Obviously, everybody has a different cost of capital but I will tell you is, given that we are in the process of negotiating deals, we are not going to give away all of the information, but they're in the single digits.

The, the levered IRR's, they're in the single digits.

So we're seeing competition.

And competition is good.

Just to be clear, that was unlevered IRR's and Howard do you have a number?

Just over 100-megawatts out of the 160.

(Inaudible)

Okay.

That's --

And Sanjay, sorry I corrected them incorrectly, it is levered.

Okay.

It is levered, single-digit.

Perfect.

Thank you for the visibility guys, and again, congratulations on a great quarter.

Okay, thanks Sanjay, for the question.

I think we are going to take a couple more, please.

Our next question comes from Hari Chandra from Deutsche Bank.

Thank you.

What are your cash requirements in terms of working capital, CapEx, and equity contributions to the joint ventures, in absolute terms or as a portion to your sales?

I assume you're speaking for 2010, or what time frame?

This year and next.

Okay.

For 2010, remember that we're now just contributing 50% of the overall capital that is required.

So for 2010, SunPower's contributions are about $75 million for the next two quarters.

And then for 2011, it works out to under $200 million.

And from an installation standpoint, can you size a minimum cash requirement per megawatt, assuming that amount can be cycled twice a year?

Can you clarify the question?

With manufacturing capacity, or was that a per project question?

Project question, for installation.

Oh, what -- and your question is, what is the cost per watt of installation -- per an installed project?

No, no, is there a minimum cash requirement for you to install?

Oh.

I see.

I see.

So you're trying to get a sense of the working capital commitment for a project on a per watt basis.

What is a minimum.

Why don't I -- the team is doing some computer work in their heads.

Why don't we take the next question and see if we can answer that in a minute.

Thank you.

And our last question comes from Burt Chao from Simmons and Company.

Good afternoon, guys.

Thanks for taking the question.

Just looking forward in your business, I know you're utilizing some third party models these days.

In the future, if the business were to grow faster than your actual planned capacity expansion could catch up, and what's your sensitivity, and what is your level of comfort with using an increasing amount of third party modules to satisfy the demand for some of the flexible projects that you have?

On -- so they're, they're -- would say our comfort level is high.

We are a substantial customer this year alone, we will be a single customer with up to 100-megawatts of demand.

Next year, will be more.

And that makes us a meaningful customer to various people throughout the world.

I would say that it varies significantly because the view of 2011 varies considerably by supplier.

So I would say we're confident.

I think we're developing some strong partnerships.

Multi-year partnerships.

But it is complicated.

There is different views of the world in 2011.

Sorry, just and so when you're looking at the projects that you've got, whether it is the sun vai pipeline or you're outside of that, what is the flexibility of those projects that dictate that you only use, say, your tracker system and your actual modular?

I mean, I guess is there a breakout, maybe a rough breakout of contracts that you couldn't use third party modules for?

Or are all of them pretty flexible?

Yes, I would say to you -- and Howard, you can add color, and then we will go back to Dennis on the working capital question on projects -- that I would say to you that once you get a license, it gets a little more difficult to switch product.

So pre-license, I believe you have a great deal of flexibility.

This is Howard Yes, Tom, I agree with your comment.

We are able to change from SunPower into a third party, but it is much more difficult once we get the license.

And of course, we have to take into account the efficiency benefits with our loss.

So we -- most of the time are space constrained, and that means building a smaller plant.

But on the margin, if we are unable to keep up with demand, which is the case in 2010, getting third party is good, as we're adding earnings on an incremental basis.

And as to your -- there was a question around working capital on the project construction piece.

It really depends on how we're financing the projects.

So in the case of the Xsilon project, and the Florida Power and Light projects, for example, the customer is providing the construction financing and it requires no working capital on our part.

Or very little.

And for the projects that we're developing ourselves, that really depends on when we get the construction and project financing and the sale of the equity.

And for planning purposes, probably three to six months in terms of when that happens, in a project lifestyle, post, post-construction, or post-notice to proceed, three to six months from when we're beginning construction to getting project financing, it is probably a good value for modeling purposes.

Okay.

I think Burt, we're going to have to move on and we will take one last question and wrap up the call.

That was it.

And our next question comes from Stephen Chin with UBS.

Great.

Thanks, hi, Tom.

The question is on the guidance.

On the sales guidance, it looks like you increased the SunRay pipeline and the other UPP pipeline by about 50-megawatts compared to last quarter but you didn't raise the 2010 sales guidance.

So I was just wondering how much conservatism is being built into the 2010 sales?

Yes, what I would say is the bigger driver of 2010 revenue guidance is two-fold.

One is SunPower module production and the second is sale rev rec of the projects being built.

As the two presidents have noted during the call, they have more demand than we have product.

So the, the drivers are rev rack and SunPower panel availability.

And really, it would be fair to say, panel availability in total.

And that's how you get the range that you see.

Yes, Stephen, this is Dennis.

I guess the other thing I would say is even though we did increase the overall high end of the range, we did bring up the bottom from $1.25 to $1.35.

So I think that, that shows a little bit more confidence on our side of being able to deliver some additional projects.

Okay, that helps.

And then the second question, Tom, on the production guidance, it looks like you produced about 273-megawatts in the first half which would suggest the second half production is flat.

Is there any work going on in these existing factories that, that could enable some production growth in the second half?

Yes, there's a couple of variables here.

One is our third Fab will make FIR silicon in early Q4.

It is a very large Fab.

And so there is a little bit of variability in the back, in the last quarter, in terms of what it can produce.

And we're seeing -- we added a lot of engineering support, about a year ago, in the first two Fabs, that has redesigned the back-end of the lines, and how rapidly we can implement that in the first two Fabs, will influence yield improvement .

During the last quarter, we did see on, on lines that were implemented, several points of yield improvement.

Of course, that is -- that goes direct to incremental megawatts as well as direct to the margin line.

So think of yield largely as a driver on the first few Fabs, with a little bit of back-end retrofit and then timing of the

Thanks, Tom.

Thank you.

Well, thank you all for joining us today.

We're unfortunately going to have to end the call here.

I believe several of you have to join a another call.

We appreciate the support of our stockholders and we're looking forward to speaking with many of you over the next month.

Thank you very much.

And that concludes today's call.

Please disconnect your lines at this time.