SunPower Corporation (SPWR) 2012 Q2 法說會逐字稿

Good afternoon and welcome to the SunPower Corporation's second-quarter 2012 results conference call.

Today's call is being recorded.

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

I would now like to turn the call over to your host, Mr. Bob Okunski, Senior Director of Investor Relations at SunPower Corporation.

Sir, you may begin.

Thanks Ed.

I'd like to welcome everyone to our second-quarter 2012 earnings conference call.

On the call today we will start off with an operating review by Tom Werner, our CEO, followed by Chuck Boynton, our CFO, who will review our second-quarter 2012 financial results.

Tom will then discuss our guidance for the year before opening up the call for questions.

As a reminder, a replay of this call will be available later today on the Investor Relations page of our website.

During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in our 2011 10-K, quarterly reports on Form 10-Q as well as in 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 also posted a set of PowerPoint slides which we will reference during this call on the Events and Presentations page of our Investor Relations website.

In the same location, we have posted a supplemental datasheet detailing some of our historical metrics.

On Slide 2 of our PowerPoint presentation, you will find our Safe Harbor statement.

Our prepared remarks will run approximately 25 minutes and then we will take questions.

With that, I'd like to turn the call over to Tom Werner, CEO of SunPower, who will begin on Slide 3. Tom?

Thanks Bob.

Thank you for joining us today.

On today's call, we will update you on our Q2 operational highlights and strategic position, review our second-quarter financials and provide our outlook for the balance of the year.

I'll start by commenting on the current PV industry context and why we believe that our strategy will allow SunPower to be a long-term winner.

We focus on four key strategies.

Please turn to Slide 4. First, a unique differentiated global go-to-market strategy, SunPower has strong downstream channels in both the rooftop and power plant segments in key global markets.

This allows us to capture downstream value during the current period of abundant upstream product supply.

Second, technology leadership in both panels and systems.

SunPower has consistently demonstrated that our product differentiation around superior performance and reliability allows us to earn a meaningful price premium while offering a compelling levelized cost of energy.

Third, an innovation-driven cost reduction roadmap.

By reducing the complexity of our high-efficiency panel manufacturing process, we can combine unique process cost reduction with broader industry supply chain methods such as lower wage for prices.

We are also driving similar efforts on balance the system costs.

Finally, maintaining a strong balance sheet and adequate liquidity.

Access to capital has become a clear strategic factor, both for large power plant projects and residential leasing programs.

Increasingly, lenders and customers want to ensure that they are dealing with a financially stable counter party.

Our strategy is well suited to the current industry environment and we believe that the benefits of this strategy will become more evident as PV industry consolidation proceeds.

Now, let me provide some specific Q2 operational highlights.

Please turn to Slide 5.

Q2 is a solid quarter.

We (technical difficulty) gross margin and bottom-line performance above our forecast, successfully reduced our operating expenses per our plan.

We also beat our cost per watt reduction targets for the second quarter while prudently managing our balance sheet and working capital needs.

In the Americas, we continue to benefit from our extremely strong power plant project pipeline as well as from our leadership position in the Residential Dealer segment and commercial market.

The CVSR project remains on track to meet our September milestones.

We've installed more than 30% of our total panels at CVSR through the end of July.

This project provides us with important volume, revenue, and margin visibility into 2013.

We're also in the process of financing the first two Southern California Edison Antelope Valley solar projects totaling 600 megawatts.

And we expect to start construction next year.

Initial interest in financing these projects has been very strong and we believe we will have financing in place in time to meet this accelerated construction schedule.

During Q2, we completed and sold the 25 megawatt Modesto Irrigation District project.

Additionally, we continue to gain traction with our C7 concentrator product and recently signed a 6 megawatt agreement with a major US utility.

Project completion is scheduled for the first half of next year.

More on C7 later.

In our North American commercial business, we completed a 10 megawatt system for Campbell Soup and started construction of a 2 megawatt system for Bloomberg.

In residential, we saw a strong growth driven by a combination of organic expansion and share gains due to the rapid adoption of our leasing program.

For example, we doubled the number of lease signings in Q2 versus Q1 and recently established a financing facility with Citi and Credit Suisse for up to $325 million of lease capacity to help fund the continued growth of this business.

Moving on to Europe, Middle East and Africa, Europe remains an extremely challenging market.

While volume increased sequentially with solid growth in Italy, significant ASP pressure impacted our regional profitability.

We remain positive on the long-term potential of this region due to a favorable combination of high electricity rates, good sunlight, very constrained rooftops and demonstrated popular support for renewable energy.

We are evaluating a number of different approaches to leverage our current market footprint while improving near-term profitability.

We believe that the Middle East and Africa offer attractive future growth potential and we are increasing our resources in these regions accordingly.

We are working closely with Total on a number of opportunities in the Middle East for our C7 product, which is perfectly suited for that environment.

We will continue to invest in this region.

We also expect to begin monetizing our Israeli pipeline starting in 2013.

In South Africa, we are currently in the final stages of financing two large (inaudible) projects totaling 30 megawatts.

Our local footprint was a key element behind these project wins.

As many of you know, Total has a very deep presence throughout most of Africa and we are working increasingly closely with them to develop additional business opportunities in this region.

On to Asia-Pacific, our primary Asia-Pacific focus is currently on Japan, where local market characteristics favor our high-efficiency products.

We continue to benefit from our well-established channel to market via our partnership with Toshiba as reflected in our strong volume in Japan in Q2.

Australia and India remain key emerging markets for us, and we see a significant opportunity to expand our footprint in both countries.

As I mentioned earlier, we are seeing very robust market share momentum in North America due to our superior customer value proposition and a long-term investment in the development of our channel.

Please turn to Slide 6. SunPower residential lease proposition value proposition is compelling.

Homeowners can purchase the best solar technology in the industry and be cash flow positive from day one.

Both customers and systems financiers appreciate dealing with a financially strong supplier of high reliability products.

In California, by far the largest US residential market, SunPower has achieved leading market share from both an upstream and downstream perspective.

This chart shows our share trend as a [handle] supplier as reported by CSI Applications.

As you can see our panels were specified in approximately 1/3 of all California residential PV systems, including both lease and cash sales.

This share is more than twice that the next largest panel supplier.

SunPower also became the leading residential lease provider in California during Q2.

We submitted more than 35% of all residential lease CSI applications during the quarter, continuing the strong share gains we have seen over the past four quarters.

With more than 225 dealers in nine states now executing leases, and a total of more than 500 dealers in North America, we are well positioned to continue our leadership in the residential market segment.

Now let's move to technology.

Please turn to Slide 7.

SunPower's historical DNA is PV technology and we remain an industry leader on this front with an ongoing commitment to innovate through research and development.

Since introducing our first-generation 20% efficient solar cell technology utilizing our proprietary back contact design in 2003, we have consistently offered the industry's highest performance solar products and systems.

We are now manufacturing Gen 3 technology with cell efficiency of up to 24%.

As we mentioned last quarter, SunPower recently began shipping our world record 21% efficient panel to customers, and we have submitted our 22% efficient panel to NREL for certification.

We are committed to maintaining our lead in this arena because it is now increasingly clear to our customers that high-efficiency products yield lower lifecycle cost of ownership.

In addition to industry-leading efficiency and superior energy yields, our product technology benefits from over 25 years of reliability engineering and successful field testing.

Based on this experience, we are convinced that our cell and panel technology offer real and significant economic benefits due to reduced power degradation and failure rates compared with conventional crystalline silicon and thin-film technology.

We have been working for some time with a number of independent laboratories and institutes to corroborate and quantify these advantages.

Let me make a few comments about our C7 concentrator product, which in effect supercharges our high-efficiency technology platform.

When ramped in 2014, we believe the C7 technology will enable levelized cost of energy up to 20% lower than competing systems.

C7 also drives improved return on invested capital for SunPower.

As we ramp C7, we will be able to increase our existing cell capacity from 1 gigawatt to 4 gigawatts.

We announced our first C7 deployment at Arizona State University in Q4 of last year, and I'm happy to report that we recently signed a 6 megawatt C7 order with another US utility for the first half of 2013 installation.

We are also working closely with Total on a number of opportunities in the Middle East and Africa and look forward to expanding our C7 pipeline in both regions in the near future.

I would now like to provide a brief update on our cost reduction initiatives.

Please turn to Slide 8.

We beat our blended cost per watt target for the quarter by more than 10%, driven primarily by higher yields, improved overall equipment effectiveness, and lower raw material costs.

A step reduction initiative is proceeding well.

We now have four lines running the new processes at Fab 2 and we are achieving yields and overall equipment efficiency at or above plan.

We plan to roll out the new process in all 12 Fab 2 lines by the end of 2012 and in Fab 3 during 2013.

As a result of our success with these initiatives, we are accelerating the pace of our panel cost reduction roadmap and now expect end-of-year 2012 blended cost per watt to be approximately $1.10.

This is significant improvement versus our previous end-of-year goal of $1.25 per watt and 25% lower than our exit rate in 2011.

We also expect that our lowest cost panels will achieve costs of approximately $1 a watt or below $0.75 per watt, on an efficiency adjusted basis, a full year ahead of our previous targets.

In addition to our success in panel cost reduction, we have also significantly improved our BOS costs by leveraging our standardized Oasis block product.

With BOS now accounting for over 2/3 of the system costs, non-panel costs are playing an increasingly important role in offering customers a competitive levelized cost of energy.

Our execution in this area is paying off as we remain ahead of our plan on the utility scale roadmap and may have generated overall balance of system savings of approximately 20% over the last year.

In summary, we are executing well on our cost reduction roadmap and we believe we have significant opportunity to further reduce costs through step reduction, better supply chain management, higher cell efficiency, and improved balance of system costs.

However, it is important to note that panel costs per watt is a decreasingly significant customer-centric -- customer metric and predictor of behavior.

The vast majority of our customers now make purchase decisions on the basis of LCOE, or total cost of ownership.

These calculations take into account installed system costs, energy delivery, reliability, bankability, as well as other factors.

Therefore, we will begin to transition our discussion around costs to a more comprehensive approach over the next two quarters that takes into account the full range of customer costs and benefits.

We'll continue to provide panel cost updates during this period but expect to transition to new metrics starting in Q1 of next year.

To conclude my remarks, I would like to highlight our progress in strengthening the balance sheet in this quarter.

Please turn to Slide 9.

For the quarter, cash and cash equivalents increased to $366 million.

On the working capital side, we successfully reduced inventory by more than $65 million sequentially and met our project milestones.

We are also focused on managing our operating expenses, capital spend, and maximizing cash flow in order to invest in those opportunities that offer us the best returns.

With that, I'd like to turn the call over to Chuck for a more detailed review of our financial performance.

Chuck?

Thanks Tom.

Good afternoon.

Please turn to Slide 10.

Today, we'll discuss two key themes.

First, I will talk about our operational performance for the quarter and then provide additional detail surrounding the structure of our residential leasing program.

As Tom mentioned, our financial and operating performance in the quarter was better than our plan as we benefited from our diversified downstream strategy and execution on our accelerated cost reduction roadmap.

Our non-GAAP revenue for Q2 is $651 million compared to $592 million in Q2 '11, an increase of 10%.

We benefited from the strength in North America and Japan, but this was partially offset by a highly competitive European market, more specifically weakness in Germany.

Non-GAAP revenue in the second quarter includes approximately $178 million from the continued construction of the CVSR and $110 million from our 25 megawatt McHenry solar farm for the Modesto Irrigation district.

The difference between GAAP and non-GAAP revenue is due to GAAP-based real estate accounting requirements whereas non-GAAP revenue follows the IFRS convention for multiple element arrangements.

The difference between GAAP and non-GAAP in Q2 was $55 million and for the full year we're projecting a difference of approximately $80 million.

This will reverse in 2013 when we finish the projects and approximately $110 million more in revenue will be recognized in our GAAP results.

Global ASPs for the quarter were in line with our forecasts, and we maintained our meaningful pricing premium.

Cell production in Q2 was 257 megawatts compared to 205 megawatts in Q2 '11.

For the quarter, we recognized 232 megawatts in revenue, up 22% from 190 megawatts in the comparable period last year and up 18% from Q1.

Our lower-than-planned megawatt recognition in Q2 was primarily the result of weak European demand outside of Italy.

Q2 fab utilization was greater than 90%, where we benefited from the Philippine manufacturing consolidation.

Our non-GAAP gross margin for the quarter was above plan at 15.1% and compares to a non-GAAP gross margin of 12.7% last quarter.

The gross margin increase was attributable to strong execution in our North American projects business as well as our ability to leverage our geographic diversification.

Now let me spend some time on our regional performance.

In Q2, non-GAAP North America revenue was $447 million, accounting for 69% of total revenue with a non-GAAP gross margin of 19.1%.

We have installed more than 30% of our total panels of CVSR to date and the project remains on plan.

In US residential, we see continued strong traction with our lease product.

In EMEA, non-GAAP revenue was $155 million and in line with prior quarter.

Volume was up slightly over Q1, but this was offset by lower ASPs.

Our two largest markets in Europe, Germany and Italy, declined to 16% of total revenue versus 20% last quarter as shipment strength in Italy could not offset lower volume pricing in Germany.

Non-GAAP gross margin for the quarter was 3.1%.

In APAC, revenue was $48 million, and we continue to see strong demand dynamics in Japan, given the new subsidy adoption.

We expect continued growth in this market as our high-efficiency technology is perfectly suited for the constrained rooftop market and a consumer base that highly values our superior reliability.

This is evidenced by a recently extended supply agreement with Toshiba.

Non-GAAP gross margin for the quarter in APAC was 16.7%.

Non-GAAP operating expense for the second quarter was $66 million, down 17% sequentially as we manage our variable expenses during the quarter as well as benefiting by $8 million from the collection of a receivable that was previously reserved.

In Q3, we expect OpEx to normalize and increase from Q2.

Our goal of reducing OpEx by 10% year-over-year remains on plan.

Non-GAAP other income and expense for the quarter was a loss of $16.1 million, compared to a loss of $9.7 million in Q1.

In addition to the usual recurring charges like interest expense, our OIE loss reflects a $7 million write-off of an investment in a wafering joint venture.

We ended the quarter with non-GAAP profit before tax of $16 million and recorded a non-GAAP tax provision of $7.3 million.

It's important to note that our non-GAAP tax rate represents our estimated cash tax rate for 2012.

Overall, we are pleased with our non-GAAP earnings per share for the quarter of $0.08 which is better than our plan.

On a GAAP basis, loss per share was $0.71, also better than our plan.

GAAP loss per share included approximately $91 million in pretax items primarily related to $48 million in restructuring charges, a $15 million difference in GAAP gross margin for our CVSR and MID projects, $11 million in stock compensation, and $11 million in non-cash interest amortization expense.

Our weighted average shares outstanding were 118.5 million.

As Tom already discussed, we prudently managed our balance sheet and working capital during the quarter as we increased our cash position, reduced inventory levels by $65 million sequentially and significantly improved our DSOs.

I would now like to discuss our leasing product in greater detail, given the interest from investors.

This is not surprising as we've had significant success with our residential leasing program and it's rather new to most.

Please turn to Slide 11 where we will detail our residential leasing structure at a high level.

As you can see, there are three parties to the transaction -- the homeowner, the financing partner and SunPower.

I will talk to each one separately.

The information following is based on our 20-year lease.

First, let's turn to the homeowner's perspective.

As Tom mentioned, the value proposition for a homeowner is very compelling.

The industry's best technology and superior aesthetics for no money down and cash flow positive from day one.

Our customers utilize our monitoring solution to see actual production daily, weekly, even monthly.

We back the lease with our performance guarantee as well as lifetime maintenance for as long as the homeowner leases the system.

From a financing structure standpoint, the customer leases a system from our financial partner and pays rent on a monthly basis.

The program, however, also offers the homeowner the option to prepay all or a portion of the rentals, which similar to prepaying a mortgage, lowers the lifetime out-of-pocket rental payments.

From a credit standpoint, we only offer leases for systems on primary residences with homeowners setting FICO scores of 700 or greater.

In fact, our portfolio's average FICO score is over 760.

This strong credit base is coupled with a lack of default incentives because the solar rental is typically lower than the avoided utility bill.

In the event a customer decides to sell their house with the leased system, the buyer of the house can apply to assume the lease, subject to credit approval by SunPower and our financial partner.

Alternatively, the lease could be terminated and purchased for an agreed-upon payment which repays the outstanding lease balance.

After 20 years, the homeowner will either renew the lease, buy the system, or return it to SunPower.

Now, let's turn to the financial partner's point of view.

Our financial partners are sophisticated solar energy investors who earn an attractive rate of return in their investment.

For example, today, we announced a new agreement with two leading solar energy investors -- Citi and Credit Suisse, who are providing capital to support approximately $325 million of new residential solar energy systems.

In this recently announced program, the financial institutions will lease the system from SunPower and will sublease them back to the homeowner.

The financial institution will provide an upfront payment to SunPower and will earn its return on investment through a combination of the federal tax credit and rental from the homeowner.

The upfront payment to SunPower covers much of the cost of the system, including dealer installation costs.

Finally, now, how does leasing impact SunPower?

As I mentioned, SunPower owns the systems and will be leasing them to the financial institutions.

As the owner of the system, SunPower retains the system tax depreciation and residual system value at the expiration of the lease.

And in addition to the upfront payment from the financial institution, SunPower will also be receiving monthly cash rental during the latter portion of the homeowner lease.

Given the upfront cash payment from the financial institution, the tax depreciation benefits, the expected monthly cash rental in the future, and the system's residual value, leasing is cash flow positive with a good margin over the life of the lease.

On the accounting side, there are two types of homeowner leases.

A capital lease or sales type lease is typically a lease in which the homeowner pays monthly cash rentals.

This type of lease provides of manufacturer's margin recognized at the inception of the lease.

Financing revenue and margin is recognized over the life of the lease, and is recorded on the balance sheet as a lease rental receivable and residual value, offset by deferred interest revenue.

An operating lease is typically the result when the homeowner prepays the lease rental in a lump sum at lease conception.

With an operating lease, the revenue and margin are recognized ratably over its life.

For balance sheet purposes, system cost is recorded as a fixed asset and depreciated over the life of the lease.

From a P&L standpoint, revenue recognition depends on the type of lease.

A capital lease is recognized when sold, while an operating lease is recognized over the life of the lease.

SunPower's leasing program's value creation is driven by our levelized cost of energy advantage, which is particularly advantageous on space constrained residential rooftops.

Our cost of capital, along with our world-leading efficiency and reliability gives us a favorable competitive advantage against current leasing competitors.

I realize this is a lot to absorb in a brief conference call, so we've added a slide which summarizes these comments in the appendix of our earnings presentation.

For additional information, please see Slide 14.

In summary, we have seen significant growth in our leasing business over the last three quarters and expect it to be a meaningful part of our residential business in the years to come.

With more than 225 dealers in nine states now selling our leases, we are well positioned to leverage this product and expanding our footprint in this segment.

Our strong Q2 performance reflects the execution of our strategic approach to the market and ability to leverage our technology advantage.

With our continued execution on our cost reduction programs, prudent management of our resources, and support from Total, we are confident in our ability to drive profitable, long-term growth at SunPower.

With that, I'll turn the call back to Tom.

Thanks Chuck.

I would now like to turn to our guidance for the second half of 2012.

For Q3 2012, we expect to recognize approximately 225 to 275 megawatts in revenue and see non-GAAP Q3 revenues in the range of $550 million to $625 million, which will include revenue from our CVSR project and our residential lease program.

Non-GAAP gross margin is projected to be in the range of 10% to 12%.

Non-GAAP loss per share is projected to be a negative $0.20 to a negative $0.05.

We expect a GAAP loss per share of negative $0.25 to a negative $0.10.

Capital expenditures in the third quarter are expected to be in the range of $25 million to $30 million.

For the fiscal year 2012, we expect non-GAAP total revenue of $2.6 billion to $2.8 billion.

Volume recognized to be in the range of 900 to 1050 megawatts, and capital expenditures of $115 million to $125 million.

We remain committed to achieving breakeven or better non-GAAP profitability and year-end unrestricted cash balance of more than $300 million while investing in cost reduction initiatives.

In summary, 2012 continues to be a challenging year for the industry.

We will continue to benefit from a long-term strategy focused on technology superiority, demonstrated downstream value-add, solid balance sheet management and continued support from Total.

We'll now open the call to questions.

In addition to Chuck, we also have Howard Wenger, our Regions President, and Bob Okunski, our Senior Director of Investor Relations.

First question please.

Satya Kumar.

Thanks for taking the question.

Actually the detail on the (technical difficulty) on the leasing market, I was wondering -- (technical difficulty) -- if you could talk a little bit about pricing trend (technical difficulty) dynamic in this market.

Are the PPA rates and (inaudible) holding steady, rising or declining?

Are you winning share because of prices, brand, or other factors?

Thanks.

You were cutting in and out, so let me see if I can paraphrase your question as best I can.

And I'll pause and you can let me know if I've got it.

You appreciated the detail on leasing.

Your question was are we winning share because of -- how are we winning share in the difficult environment that we are facing.

Is that roughly the question?

Yes.

Also, Tom, I wanted to see if you have any comments on how lease PPA rates and escalators are holding up.

Do you see more demand or is the pressure on pricing or pricing -- any color on that would also be useful.

First, let me comment on lease.

And as we said a little bit last quarter, the lease, residential lease is sort of the perfect way for SunPower to bring its product to market because we have a high-efficiency product and in residential you typically have a small roof state.

So the value of efficiency is embedded in the lease economics.

And for our dealers, it's a pretty straightforward sale.

You get the world's best product at cash flow positive from market one.

Now, in terms of the environment in terms of PPAs in the structure of both lease and PPAs, I'll let Chuck comment on that.

Yes.

In our lease program, we do have options of building in escalators.

They could be zero or upwards of 5% and that's typically the homeowner's decision on how they would prefer to have the pricing structured.

Unfortunately, you were cutting in and out.

So maybe you could get another line and we will take the next question, we can come back to you.

Jesse Pichel.

From Jefferies.

Thanks also for that leasing discussion and congrats on the improvement in the quarter.

I've heard that you've taken a price increase to some of your VARs in Q3.

Can you confirm if that's true and how might that impact your business?

And secondly, what kind of tax equity do you have on the future of solar leasing?

Thank you.

Yes, you came in loud and clear.

This is Tom.

I'll say a few things and Howard, you can add on if you'd like.

So first, in terms of pricing and price increase, we adjust prices on lease quarterly.

So we've had -- this is our -- we will be entering our fourth quarter, and so we will have quarters where we adjust price.

And I'm not going to pronounce pricing for the next quarter.

But what I would tell you, because of course we want our dealers to give pricing first, but what I would tell you is that any pricing (technical difficulty) moves we make are within a narrow range and are not changing the value proposition to the homeowner, and that is they can be cash flow positive month one.

But to be fair, each quarter, you could ask the question and there will be some price movement.

In terms of tax equity capacity, all of the capacity we are using now is tax grant capacity.

Chuck's team is working with a number of tax equity partners and that's going really well and we expect to have tax equity capacity coming online as well.

So look for more on tax -- on the tax equity front in the next few months here, or perhaps the next quarter were two, comes to fruition.

So Jesse, hopefully that answers your question.

Maybe one follow-up and I'll then go into the queue is what type of non-GAAP revenue impact do you think leasing will have on your business?

And specifically I assume most of your business will be operating leases?

We intend to have non-GAAP and GAAP be virtually the same for our leasing program.

So we outlined the types of leases that would be operating versus capital leases.

Historically, the majority have been operating leases and we expect it to long-term be 50-50.

And the impact of that to the overall income statement?

Thank you.

So, yes, so the impact would be half of those leases would be deferred and recognized over a 20-year period.

We -- it's good news bad news.

The good news is we will have better visibility in the residential program but there's a little bit of a revenue deferral.

But we view that as in the long-term very favorable.

Thank you very much.

Vishal Shah.

Deutsche Bank.

Thanks for taking my question.

Tom, I wanted to just understand your shipment exposure to some of the emerging markets, particularly markets like Japan.

Can you talk about what kind of momentum you're seeing in some of these new markets, and how should we think about the pricing environment in some of these new markets?

Yes, thank you for the question.

So, you mentioned Japan specifically, so I'll talk about that briefly.

And again, Howard, feel free to add on.

The Japan market is growing quite rapidly.

And of course, it's tracking a lot of competition.

We fortunately had created a partnership with Toshiba several years ago and so we've had a couple years of volume shipments together and it's a deepening partnership.

And so we have a great channel to the market in Japan.

It's going very effectively, and it's crossing 10% of our business.

I believe it was just short of 10% of our business.

So it's going to be a meaningful part of our business.

In the future, it is I think going to continue to be strong for quite some time, particularly for SunPower because our product works great in space-constrained markets, and of course Japan is a space-constrained market.

As we look to other parts of the world, our near-term new emerging markets have been South Africa, Israel, and India, all of which have been ground-up markets.

It would be fair to say that because I believe two of those three are structured in a tender environment, that pricing is following what we see in North America.

It is very aggressive pricing.

The key I think, as we look at emerging markets, is how you -- markets that don't exist today get opened by virtue of the economics and solar are getting so compelling that it just makes economic sense for the country to go solar.

There's always the structure of those markets, so I'm sure you can guess I'll say Saudi Arabia is one of those countries, I'd say the Middle East in general, and I'd say pockets of opportunity in South America and Africa because there is electricity consumers who would be way better off economically if they switch to solar.

And I think over the next year or 18 months, we are going to be in a great position to start announcing those.

And those should have more favorable pricing because they are more difficult to access (technical difficulty) markets.

Kelly Dougherty.

Maybe just a follow-up on that one.

I know you're not giving guidance further out, but can you help us think about how you expect the megawatt mix to look like from a geographic perspective?

Obviously Europe declining you know what happens with the US and Asia-Pacific in that case.

Let me say just a few seconds and then I'll turn it to Howard.

Broadly speaking, we're doing great in America across all segments.

And Japan is increasing rather dramatically for us.

So you are right to point out those two regions, Italy also, and we think Italy has long-term sustainable economics.

It makes completely sense.

So broadly speaking, think of those as sort of the core, and then we need to add some emerging markets.

Howard, maybe you could point to some specifics.

Sure.

So yes, just to build on what Tom said, you can think of roughly 60% of our activities in those core markets that Tom mentioned -- Italy, Japan, the US, and a lot of that in California, and then 40% in stable, mature markets and growth markets.

The emerging growth markets, not a lot of volume right now, but the stable and mature markets, Germany we are still an active player there, France, the UK, Belgium, and then in Spain.

And then the emerging markets, we're talking about Africa, the Middle East, India, Australia, which is growing quite rapidly.

So that gives you a sense of where things are today.

And we will be shifting more megawatts in the emerging growth area.

One comment I want to make is, in the core areas, those areas are growing.

So Italy, the US, Japan, those are growing markets and we have substantial share in those markets.

So as those markets grow overall, our shipments will be growing as we retain and grow share.

I would say broadly that, in a couple years, we don't know precisely of course, but I'll bet a quarter of our revenue will be in the emerging markets.

And what we would call emerging for us would be (inaudible) parts of Africa, South America.

Great, that's helpful because obviously the margin differential is pretty wide regionally.

So, can you maybe give us any kind of color on where you think the margins can go in the particular region?

I was just trying to get a sense of maybe overall blended if you have a target for the relatively near term, and then a little bit longer out.

Sure.

Our business is going to run in the 10% to 20%, so 15% plus or minus range for the next two to six quarters with the goal of the management team or the plan of the management team to (technical difficulty) 15%-plus.

That requires us to improve Europe and (technical difficulty) if we improved Europe, then our average will be 15%-plus.

As we enter new markets, our job is to make those new markets fit the way we go to market or conversely we fit that new market development.

And what you see is where SunPower product works fast, that being high sunlight and space-constrained and interestingly, on the other extreme, ground-out where you are not space-constrained, particularly when we can use our C7 product, those markets are where we can deliver a value proposition that allows us to command a 15% to 20% margin.

That's why I purposely referenced the areas I did, because they fit that profile.

Australia, Africa, obviously including the Middle East, and South America.

Great, thanks.

One more quick one from me.

Maybe, Chuck, can you give us a sense as you move further ahead with the projects, how much working capital is required for -- I don't know if there's a metric as a percent of sales or cost per watt, anything we can think of for working capital needs?

It's different for every product.

CVSR is not very capital intensive.

But I would use as a rule of thumb on average $100 million as a run rate of working capital tied up for project development activities.

Okay.

Was your question project development or lease?

Just in general the working capital that we should assume.

Obviously, I think it's going to have to expand as you begin to do more and more projects.

Is that fair to think of it that way?

Yes, I think project -- large-scale project and lease being capital consumptive in all the other businesses is either not or minimally so.

And Chuck answered the question on projects.

And lease, maybe you'll want to just comment briefly on lease.

Sure.

Lease today is probably about $50 million, and that will change as the program accelerates and we bring in new financing partners.

So capital consumptive on the front end on lease.

As we grow the lease program, less so.

Great, thanks so much guys.

Sanjay Shrestha.

Lazard Capital Markets.

Great.

Two questions here.

One is on the leasing rates, could you share with us some of your (technical difficulty) how large do you think your [ramp] will become?

And then how should we think about potential returns, either from a lender perspective or from SunPower (technical difficulty)?

Unfortunately, the line is not that hot.

The first question was how large can lease become.

Why don't we answer that, and then we'll ask you to repeat the second piece of it.

Howard, can you comment on the growth of lease and what you think the prospects are?

Sure.

It's grown incredibly fast.

We went from zero four or five quarters ago when we initiated it.

We signed over 10,000 leases to date.

So if you multiply that by 5 or 6 kilowatts per lease, that gives you a sense for how fast we've grown it.

We are at a rate of about 1.5 to 2 megawatts per week, so it's a substantial part of our business and we think we are just beginning to expand this program.

So, it's easy for us to see, in a year or two, it becoming 20%, 25% of our total business.

Got it.

The second question was actually on the returns which potentially one could earn rightly.

If you could share any comments on what are some of the potential returns, either the lender with earning on these leases or what would SunPower expect (inaudible) deploy its own capital and operating leases.

I think the question was what were the investor returns on the [program] --

Correct, correct.

-- and they would be --

That's right.

Yes, say an average 10% after-tax returns.

Got it, great.

Thank you.

Ben Kallo.

Robert Baird.

Thanks for taking my question.

My first question is on the C7.

How do you view your capacity on the sell side as you look at deploying more of the C7?

I know we are in early days here.

And my second question is, as it relates to guidance, the step down, could you give us some puts and takes for Q3 and having the loss there?

It looks like for to get to full year positive EPS we have to have a pretty big step up in Q4.

Thank you.

Thank you for the question.

So first, on C7, so we make a cell that is a cut out of our main production cell.

In other words, it's a laser cut out of an existing production cell.

And then it's made in to a receiver that is built into the C7 form.

So when we think of capacity on C7 cell, we really think of receiver capacity.

The cell itself comes off of our main production line.

And as we mentioned in my comments, today we have over 1 gigawatt of cell capacity, and if we put a portion of that capacity in the C7, we have over 4 gigawatts of capacity with our existing fabs.

So receiver capacity for C7 would be somewhere between 50 and 100 megawatts next year with our ability in relatively short time to increase that capacity rather dramatically.

It's a highly relevant question, because the pipeline is building rather robustly for C7.

And it tends to be very large projects.

So if some of those projects turn into bookings, we'll need to ramp rather quickly.

And the good news is it's an inherently rampable technology.

In terms of puts and takes on Q3, the primary thing is timing of projects.

There is a little bit of European what I would call a little more conservative forecasting of Europe, but the primary driver is timing of large scale projects.

And large-scale in this context would be multi megawatt or above.

And we had several of those projects that we moved from Q3 to Q4, and when you move those from Q3 to Q4, all of the income moves with it and then you have a back-end loaded or a Q4-loaded quarter.

The key of course for us will be to close those projects.

And certainly when we do our next earnings call, we will talk in specifics about which they are.

There's less than half a dozen of those.

You can imagine that the Company is intently focused on getting those done and we also have a lot of experience getting projects done like that in the fourth quarter.

Thank you.

[James Mehdef].

Sorry, I had it on mute.

Thanks for taking the question.

Let's see.

Some of these have been answered, but I'm wondering just a follow-up on that last one.

The projects that are going to move from Q3 to Q4, these are projects that you had planned to book and have not actually closed.

Is that what I understand?

It's a mix of projects that are completing financing and when they get financed, then we take the revenue recognition.

And then in just a couple of cases, it is our completing the actual booking itself, which would be the final stages of negotiation on PPA.

Okay.

Oh, so these are utility scale, multi-megawatt utility but they are not commercial?

Correct?

No, the majority of these are commercial projects.

Commercial projects, okay.

The other question that I have is could you just -- haven't had an update on capacity in some time.

Could you -- and you kind of hinted at what is there in Fab 2. And could you just let us know maybe what the line speed is at those 16 lines and what the project progress is on Fab 3?

If you think about on our datasheet we do provide our fab ramp capacity.

And you'll note we highlighted our fab utilization for Q2 is over 90%.

Total capacity at the fab level is 1.2 gigawatts, and that is gross before AUO share.

And so that would be total fab capacity and output this year.

We guided megawatt revenue of 900 megawatts to 1.05 gigawatts.

So then the plan, if you're going to grow, then you have to grow capacity.

And what's the plan there and what might CapEx look like for the next two or three years while you do that?

That's where Tom mentioned the advantage of C7 and the lift that we get from C7.

So we feel that we can meet our revenue plan for the next few years, next couple of years, with our current Fab 3.

Let me just add onto that.

It's -- C7 will give us more capacity.

We are now seeing significant opportunities in yield in overall use of our equipment where we are doing some debottlenecking.

And we're going to be able to release a significant amount of capacity in '13 and '14.

And our current plan is to build the next fab capacity in the first half of '14.

So we've taken a lot of the CapEx out of next year, and that CapEx, we do have is to debottleneck and to cost reduce in our existing fabs.

And the previous question about C7, to put the receiver capacity in for C7.

Okay, thank you.

We'll take two more please.

Chris Blansett.

JPMorgan.

Guys, I just wanted to ask about the competitive nature of this new leasing market you've entered into versus maybe the traditional rooftop market.

Any difference?

Is there a competitive element there or has this opened up so many new types of potential customers that it's really not a pricing environment yet?

I'll say a few words first.

The great thing about lease is, aside from it fits our product well, is that it opens the market to a broader customer base, and so it's taking solar more and more mainstream.

There is some pricing competition on lease.

Interestingly, I think a competition tends to be more -- less on pricing but more on performance, more on -- in SunPower's case of course we can say that we are one-stop shopping.

We make the module; we guarantee the quality; we service it; we make the monitoring.

So everything comes from us, and so if there's any issue, one place to get it fixed.

And customers really tend to say -- want to know more about energy output when they're thinking about lease, and those two things tend to favor us.

I think we would leave it at that.

As a quick follow on as related to your participation in the Japanese market, you're really the only US company that has a good position.

I guess how does your competitive situation compare in Japan where you may be competing against more Japanese companies and maybe in the US where it's a more diverse set of competitors?

Yes, I think it would be fair to say for a number of reasons of which you were directly on target, I think as well the Japanese market is more space-constrained and also has a greater near-term need for new sources of energy.

For those three reasons, the environment, while compared to America, is less aggressive, that's not to say that it's not competitive.

It is very competitive but less so than other parts of the world today.

Thanks guys.

Tim Radcliff.

From Morgan Stanley.

Thanks for taking my question.

Can you please provide some color on bankability of the new C7 products?

Are you seeing interest among financial institutions to finance the first round of those projects?

Yes, I think that's what's so important about the announcement of the new order, the 6 megawatt order, that as we build more C7s, then we can send independent engineers to look at existing installed projects and it makes it inherently bankable.

It is an environment where bringing new solar technologies to market is extremely difficult because the consumer can say I just want a risk-free product that's been built over and over.

And as we add scale to our C7 install base, we eliminate that concern.

So you are right to ask about bankability.

And let me just say that the 6 megawatt order does not have -- is a finance project.

I would just add -- this is Howard -- that our vertical integration put us in a great position to design the C7 from a clean sheet of paper, and the overarching design principle was bankability.

And what I mean by that is every element that Tom mentioned, we use our production solar cell in the C7.

So, there's nothing new about the solar cell technology.

We use our conventional production cell technology.

The receiver is made with conventional module manufacturing approach that we have today in the Company.

So it's nothing new about making the receiver.

The tracking approach, we have -- we are the leader worldwide in tracking systems.

And so we've evolved our tracking system to accommodate C7, again, from a bankability perspective.

So, that was an overriding and overarching principle, and we are getting really positive feedback.

Tom mentioned a lot of large opportunities in our pipeline that -- interest from financiers and investors.

So, we feel very good about our progress.

Great, thanks.

Then one quick follow-up if I may.

Can you quickly mention the pricing premium or margins that you're receiving on those first C7 projects?

Let me repeat it to make sure we got it.

It was premium for C7 in the first orders?

That's right, and margin, if you can provide that information.

I'll give you some color.

Let me put it that way.

The premium, there is not a premium.

We are competitive in C7 right out of the box.

And as we scale, we think we can be 20% more cost effective.

In terms of margin, margin on the first orders will certainly be in line with the Company is our plan.

And depending on the pricing, of course if the backlog gets fulfilled, we should see the ability to have favorable margins compared to the current Company average as we scale that product.

So it's an incredibly important part of the Company by virtue of the competitiveness of it, how it capitalizes on our core cell technology, and how efficient it is in terms of use of capital.

We appreciate the various questions on C7.

Thank you.

Thank you all very much for dialing into the call, look forward to our call next quarter.

And thank you.

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

You may disconnect.

Thank you for your attendance.