SunPower Corporation (SPWR) 2013 Q1 法說會逐字稿

Good afternoon, and welcome to SunPower Corporation's first quarter 2013 results conference call.

Today's call is being recorded.

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

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

Sir, you may begin.

Thank you, Lisa.

I would like to welcome everyone to our first quarter 2013 earnings conference call.

Before we get started, I would like to address the early publishing of our results this afternoon.

A vendor inadvertently posted our supplementary slides and metric sheet without our permission prior to the public disclosure of our earnings release this afternoon.

As result of this premature disclosure, we felt it would be prudent for us to publish our results as soon as possible, hence the early release.

Moving on, on the call today, we will start out with an operating review from Tom Werner, our CEO, followed by Chuck Boynton, our CFO, who will review our first quarter 2013 financial results, before we open up the call to 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 uncertainty that are described in our 2012 10-K, our quarterly reports on Form 10-Q, as well as today's press release.

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

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

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

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

Given that our 2013 Analyst Day will be in a few weeks and we expect to provide significantly more detail on our business model at that time, our prepared remarks will be shorter than usual.

We will also provide our formal guidance for Q2, and the balance of the year at our event.

After our comments today, we will have a brief question and answer session.

With that, I would like to turn the call over to Tom Warner, CEO of SunPower, who will begin on slide 3. Tom?

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

On today's call we will update you on our Q1 operational highlights, and review our first quarter financials.

As Bob mentioned, we will be providing guidance for the balance of 2013 at our Analyst Day on May 15.

I will start with the general overview of our results and operational highlights.

Please turn to slide 4. Overall, Q1 was a solid quarter.

We exceeded our revenue, gross margin and earnings forecast for the quarter, and generated significant free cash flow.

Power plants continued to be a key driver of our Business with the CVSR and AVSP projects again contributing significant revenue and margin for the quarter.

In rooftop, residential lease remains strong with demand once again outstripping our available finance capacity during the quarter.

In Japan, demand for our high-efficiency panels is extremely high, and we shipped record volumes in Q1 as a result.

During the quarter, we launched our new X-Series panel, with world-record efficiency of 21.5%.

This panel is particularly well-suited for the rooftop market, where its higher efficiency, energy delivery and superior reliability offers significant levelized cost of energy savings.

SunPower's technology superiority was once again highlighted in Q1, as our E-Series panels took the top three spots in Photon Internationals' Annual Field test report covering 109 competing panel types.

We will cover the underlying reasons behind SunPower's panel technology superiority during our upcoming Analyst Day, and we will explain why product matters.

Finally, we exited the quarter with a solid balance sheet as we increased our cash position, prudently managed our working capital needs, and generated more than $216 million in free cash flow including lease financings.

I would now like to spend a few minutes talking about Q1 highlights across both power plant and rooftop applications.

Please turn to slide 5. The 250 megawatt CVSR project for NRG remains on track, with more than 90% of PV capacity installed as of the end of the first quarter.

We expect to complete PV installation in Q2 with full project completion by the end of 2013.

To date, more than half of this site has been grid-connected.

We also started initial construction at the 579 megawatt AVSP project for MidAmerica this quarter, and expect to materially increase our installation rate for this project during the second half of the year.

Project completion is scheduled for 2016.

These two projects, along with more than 200 megawatts of additional projects signed or under PPA, provide us with visibility to more than $3.5 billion in revenue, and approximately $1 billion in gross margin from 2013 through 2016.

We also dedicated our first megawatt scale C7 project for Salt River Project in Arizona.

We are pleased that the system is performing at or above our performance forecast, validating our experience in previous pilot projects, and providing an important milestone for further scale-up of this technology.

Our C7 solution will drive lower levelized costs of energy, compared with competing PV power plant solutions.

In the Middle East, we continue to work closely with Total, and are seeing good progress on a number of projects.

For example, we have formed a partnership with KAUST, a distinguished University in Saudi Arabia, to optimize power plant performance and to install a handful of demonstration projects in the region for data collection including our C7 systems.

As we stated in the past, this market will take a while to develop, but we feel that we have a strong competitive position by virtue of our partnership with Total.

Moving on to rooftop.

Please turn to slide 6. SunPower has been a leader in grid-connected rooftop applications since 1995 by virtue of Powerlight's pioneering work in this segment.

In 2005, we created North American's first independent PV dealer network, and we have expanded this approach to key international markets over the past five years.

In the North American residential market, our ability to offer customers the industry's best technology at competitive pricing compared to traditional generation continues to drive demand for our races.

As we mentioned last quarter, a key driver in this segment is the ability to attract a growing pool of third-party finance, and we have a pronounced competitive advantage in this segment due to our operating history, vertical integration, bankability and Total partnership.

With more than 16,200 leases signed to date, aggregated payments totaling $540 million, and additional financings in the pipeline, we are well-positioned to continue our growth in this business.

We also maintained our leading share of the North American commercial and public sector market, as we closed approximately $40 million in new school and water district projects during the quarter with project completions scheduled over the next two years.

Additionally this past week, we announced 5 megawatts in projects with Verizon, as part of their Green Energy Initiative.

This agreement with Verizon is another example of a multi-state project with a Fortune 100 company.

In Europe, we are starting to see stabilization in our Business.

Our primary focus remains on the France, Germany, and Italy countries where we believe that market technology and policy trends will create long-term opportunity.

Specifically, during Q1 we were awarded 65 megawatts of rooftop projects in France during the most recent tender process.

We worked closely with Total on these projects, underscoring the competitive advantage of this partnership.

Also our restructuring programs in Europe are progressing well, and we remain confident that we can return to profitability in this region by the end of this year.

In Japan, we are seeing continued market share expansion through Toshiba and Sharp.

Shipments into Japan accounted for approximately 25% of volume in Q1, which is a testament to the value of our high-performance, high-quality products in this extremely demanding market.

Before turning the call over to Chuck for a review of the financials, I would like to briefly outline what we plan to discuss in our Analyst Day on May 15.

Please turn to slide 7. We will be highlighting three key themes during our presentations at Analyst Day.

First, the value of our industry-leading technology and its importance in enabling industry-leading levelized cost of energy across a variety of end-use applications.

Second, our unique go-to-market strategy in rooftop and power plant.

Finally, Chuck will supply the tools needed for investors to properly value the three main segments -- end segments of our business.

We look forward to the opportunity to meet with many of you in person in a couple weeks, to provide more detail on why we are so bullish on SunPower's future opportunities.

With that, I will turn it over to Chuck.

Chuck?

Thanks, Tom, good afternoon, and please turn to slide 8.

Today I will discuss our operational performance for the quarter, and provide additional color and information on our Leasing business.

As Tom mentioned, we will cover our Leasing business and our financial model in greater detail at our Analyst Day on May 15 in New York.

We posted strong results for Q1.

For the quarter, both megawatts shipped and revenue were in line with Q1 of last year and better than our plan.

Non-GAAP gross margin increased 80% year-over-year, with net income increasing significantly as we recorded our fourth straight quarter of profits.

We also prudently managed our expenses during the quarter, and generated $216 million in free cash flow including lease financings.

Overall, our results were solid for both earnings and cash flow, as we executed on our project commitments, expanded our global rooftop market share, beat our manufacturing cost targets, and managed our balance sheet and working capital needs.

Moving on to the P&L.

Our non-GAAP revenue for Q1 was $575 million, compared to $580 million last year.

Our North American and Japanese markets again showed strong growth in the quarter, while Europe, as expected, was down sequentially due to seasonality and market conditions.

Non-GAAP revenue in the first quarter includes $212 million from AVSP, and $113 million from CVSR.

As we guided in last quarter's earnings call, we recognized the second tranche of AVSP development revenue this quarter.

In Q1, GAAP revenue exceeded non-GAAP revenue by $61 million, due to the differences between IFRS and GAAP.

Global ASPs for our turns businesses were down on average 8%.

We expect ASPs to stabilize in Q2.

We increased cell production in Q1 to 208 megawatts, up 36% versus Q4.

Megawatts recognized for the quarter totaled 172, while we shipped 186.

Our non-GAAP gross margin for the quarter was 22.7%, and above our plan.

Our strong gross margin performance for the quarter was attributable to our development margin in AVSP, execution on cost reduction plans and solid growth in the Japanese market.

Now let me spend some time on our regional performance.

In Q1, non-GAAP North American revenue rose 13% year-over-year to $423 million, accounting for 74% of total revenue with a non-GAAP gross margin of 33%.

In our Power Plant business, while we started construction of AVSP in Q1, we don't expect to see meaningful EPC revenue in margin until Q3.

As Tom mentioned, residential lease demand was solid, and it was an important driver to our free cash flow generation this quarter.

In EMEA, non-GAAP revenue was $69 million, down sequentially and year-over-year.

Megawatts recognized declined 28% sequentially, primarily due to seasonality.

We improved our gross margin compared to less quarter, but EMEA margins remained negative primarily the result of underutilization charges from the factory, which we anticipate will not impact our results in the second half of the year.

Overall, we are seeing improvement in the market, as well as measured success in our recently implemented restructuring programs.

As we have said in the past, we expect to return to positive margins and profitability in EMEA in the second half of this year.

Turning to APAC.

Revenue was $83 million, up 20% sequentially as we continue to gain share in Japan due to our high efficiency offering, and strong channel to market through Toshiba and Sharp.

For Q1, shipments into Japan were approximately 25% of total megawatts shipped for the quarter, and we expect megawatts to nearly double year-over-year.

Company-wide non-GAAP operating expenses for the quarter were $75 million, down 15% sequentially as we executed on our cost reduction programs.

We remain focused on managing our costs, and expect to reduce OpEx by approximately 10% year-over-year.

For Q1, EBITDA was $71 million, up $49 million from Q1 of 2012.

Non-GAAP profit before tax for the quarter was $32 million, and our non-GAAP tax expense was $11 million.

Overall, our non-GAAP diluted earnings per share for the quarter of $0.22, and GAAP loss per share of $0.46 were both better than forecast.

Non-GAAP weighted average diluted shares outstanding for the quarter were 125 million.

Before we move onto the balance sheet and cash flows, I want to discuss two important topics in more detail.

First, non-controlling interest also called NCI, and second, the impact of the US government sequestration on the Treasury cash ramp program.

As I discussed in detail during the last earnings call, our residential ITC financings provided a P&L benefit on our NCI line item.

This is effectively the gain we recognize by transferring the tax attributes to our tax equity partners.

In other transactions, this benefit shows up as revenue, or as a reduction in COGS.

In Q1, we recognized $7 million of NCI in the P&L, and expect our NCI line to show positive results in future quarters.

Additionally, as a result of the United States government sequestration being triggered, there were automatic cuts to the Treasury cash ramp program.

This impacted the value of certain outstanding cash grants for some projects and leases.

In light of this, we updated our cash grant expectation, and took a non-GAAP charge of $25 million in the quarter to accommodate this change.

We do not expect to record any additional charges related to the sequester.

And if not for this charge, our Q2 results would have been significantly better than reported.

The GAAP charge was $18 million due to the timing of revenue recognition.

Please turn to slide 9. We remain committed to prudently managing our balance sheet and working capital needs, and our Q1 results reflect this commitment.

We added $48 million in cash to our balance sheet during the quarter, while paying down our revolver by $175 million.

Our strong execution also enabled us to generate $167 million in cash flow from operations, and record $216 million in free cash flow including lease financings.

We also successfully managed our working capital during the first quarter, as our inventory declined by $10 million sequentially while ramping production.

Cash and working capital is a key focus, and we expect to generate between $100 million and $200 million of free cash, including lease financing activities in 2013, while investing approximately $80 million in CapEx for X-Series expansion and our step reduction initiative.

Please turn to slide 10.

Q1 was a solid quarter for residential lease, as demand again outstripped our financing capacity.

We anticipate that our lease capacity will continue to expand throughout the year, and SunPower's unique position will translate to a lower cost of capital and favorable terms.

As of the end of Q1, we surpassed 16,000 lease customers, and reached 116 cumulative deployed megawatts, while our aggregate contracted payments exceeded $540 million.

During Q1, we booked 18 megawatts of new solar systems, while installing 22 megawatts.

In closing, our vertical integration strategy is working, and we are gaining share in key markets.

We continue to prudently manage our balance sheet with a particular focus on maximizing our liquidity and working capital.

Looking forward, our Q1 results give us confidence that we will meet our financial goals for the year.

With that, I will turn the call back to Tom.

Thanks, Chuck.

We will now turn our call over to questions.

And in addition to Chuck, we also have Howard Wenger, President of Regions, and Peter Aschenbrenner, Executive Vice President of Strategy, and Bob Okunski, our Senior Director of Investor Relations.

First question, please.

(Operator Instructions)

And our first question comes from Sanjay Shrestha, and please state your company name?

Great, thank you.

Lazard Capital Markets.

Good afternoon, and first of all, congratulations on a great quarter.

The two quick questions I had.

Number one, just want to make sure that I am understanding the North American non-GAAP gross margin right.

Can you give us a sense of how much of that gross margin improvement was due to ongoing cost reduction that we are seeing?

And was there -- what was the contribution if anything, from the double up in related margin for the AVSP in the quarter?

And, Sanjay, and thank you for the comment on our Q1.

What was your second question?

So we can --?

Go ahead.

The second question was, how much if any contribution from margin associated with the double up in work for AVSP in Q1?

Okay.

So I will just say, do a really quick comment, and turn it over to Chuck.

The answer is both.

As Chuck mentioned, we beat our cost reduction target, which means that we accrued better gross margins as a result of that.

And also the way we managed our capacity, resulted in almost complete absorption of all of our overhead.

There was a development effect -- or an effect from a development margin as well.

Chuck?

Thanks.

Sanjay, the -- obviously, the cost reduction applied to the entire base of our business, and was pretty solid.

We don't give the exact metric for the cost per watt, but we beat our numbers, and it was less than 10%, but a great quarter on the cost side.

As it relates to AVSP development margin, we don't break that out separately.

It was over $200 million in total as we disclosed, and that drove 33% margins across North America, which was a big driver of the positive margins.

Okay.

Great.

One quick follow-up on a comment about Total in France, then.

So that is a big one for you.

Finally, the relationship I think is starting to show up in the contract wins.

So at what point, Tom, do you think, given there is some talk about movement in the Middle East that given Total's presence there in that market, we might start actually to hear about project win for SunPower.

Given that you are probably one of the best-positioned companies to really do a lot of work there?

Yes.

Thank you for the question.

And you are right.

France was the result of our teams working together.

And as everyone would expect, Total has this -- world-class relationships throughout the country.

And to your point, Total has been doing business in the Middle East for 90 years.

And since, similarly has some really, really deep relationships.

I was, in fact, in Saudi Arabia last week as well as Abu Dhabi, and I can tell you that generally speaking, the market is going to take a little while to develop.

I -- what I would tell you is, that we feel really confident about our position, and I would tell you around the world, they have 130 countries they operate in.

Many of which we are doing similar things to what we did in France.

We will have announcements in the next few quarters of similar wins to France.

So, it is near term.

Okay.

That's terrific.

Once again, congratulations.

Thank you.

Our next question comes from Vishal Shah, and please state your company name.

Deutsche Bank.

Thanks, thanks for taking my question.

Tom, just a couple quick questions.

First on the AVSP and CVSR projects.

Are you still expecting to recognize about a $1.3 billion of revenues from those two projects this year in 2013?

Let me have the team, Chuck, do you have the number?

Yes, Sanjay, We don't have any -- sorry, Vishal, we don't have an exact number for the year.

We have disclosed that there are $3.5 billion of revenue between '13 and '16, and a $1 billion of margin.

So that is a -- but we didn't break out the annual numbers.

Okay.

But the trajectory for revenues for the rest of the year, we should assume flattish revenues, growth in the back half?

I mean, how should we think about Q2, and the rest of it in the second half?

I would say, Vishal, we are going to give you a lot of that color, or probably all of that color in two weeks.

Just to give you a sense of that, the back half of the year should be quite strong for us.

Think of Q2 as in line or transitional quarter to a very strong back half.

Again, we will give you a lot of detail on the call in two weeks -- or in the Analyst Day in two weeks.

Okay, that's very helpful.

And then, you seem to be doing a great job on the execution of some of these projects.

But I would like to get a sense from you -- on what your thoughts are for new project activity in the US, in the larger community of projects, now that you are starting to see a much lower cost structure.

Are you seeing any more utilities looking at the solar, and starting to evaluate SunPower technology?

Hi, Vishal, this is Howard Wenger.

I will answer the question.

Yes, we are really pleased with our two existing projects that we talk a lot about, California Valley Solar Ranch and Antelope Valley.

We just dedicated the Antelope Valley project last week.

We installed our first megawatt there, and we have only 578 megawatts to go.

So that is a great project for us and we are going to be building that out over 2.5 years.

So completely underway.

We have got a couple of other projects that we have announced, Quinto and Henrietta, these are each 100 megawatts, great projects.

We have got the permits for those.

We have got the PPAs for those, we have got the interconnection.

So you can expect subsequent announcements about the progress of those projects, including the financing.

As far as new projects in the US, the answer is, yes.

We are developing more there, or more here, I should say, in the US.

Our costs continue to come down at the system level, and we drive the system costs down religiously.

And we don't have anything to announce right on this call, but you can expect more significant news in power plants in the US.

One of the things that we are very excited about, is the growth of our pipeline internationally.

I will just pivot there for a moment, and Tom already spoke about it.

But just to add to that, we are working very actively with Total in many countries.

And I am happy say that our international power plant pipeline is now in excess -- well in excess of a gigawatt.

And we will provide more details on that at the Analyst Day.

That's very helpful.

Just one last question.

How do you see the recent discussion about MLP for renewables impacting fundamentals?

And also year-over-year your ASPs in Japan, in the first quarter looked like they were about $1.40 per watt.

Am I looking at that number right or?

The [stepped FY], the ASP movement that you see in the Japanese market?

Thank you.

Vishal, I will take the MLP question, and Howard can address the Japan question.

We are excited about the different financing structures coming to market.

We think the ABS market, MLP, REITS, a lot of the discussion that you are reading about will be favorable for the solar industry over the long-term.

In the very short term, I think you will see other structures come to light first.

But we are excited about this means to the industry for liquidity and lower cost of capital.

And as to your ASP question, this is Howard, in Japan, we are not giving out country by country ASPs.

But you are in the neighborhood, I would say, of what we are doing there.

We are really pleased with the growth of our business.

We have doubled our megawatt volume from 2011 to 2012, and we expect something along that order in 2013.

So things continue to go really well there.

Thank you very much.

Our next question comes from Shahr Pourreza, and please state your company name.

Hi, it is Shahr at Citigroup.

How are you?

Good.

Thanks, Shah.

Yes, congrats on the strong quarter.

Just two quick questions real quick.

The Saudis are, I guess, conducting their reverse auctions this year.

I think they are looking for about a gigawatt, that should increase about 2 to 3 gigawatts in 2014, and another 1 in 2015.

How active are you right now, or will you be in the reverse auctions occurring in Saudi Arabia?

This is Tom.

And I was in Saudi last week, and let me just comment on the structure of the market in Saudi Arabia.

As you know, Saudi Arabia is a dominant oil producer, and Saudi Aramco is a world-class oil producer, in terms of volume as well as technology.

And so when you think of the structure of the market, that Saudi Aramco produces oil, sells it at a preferential price to the Saudi Electric Company.

And if they could instead sell that to the open market, and Saudi Electric Company buy solar power, they would be better off economically as a country.

So they have recognized this.

They formed an entity called K.A. Care, and perhaps you know most of this, just to make we sure we are on the same page.

K.A. Care is responsible for the structure of the market, and what they have announced is that they are going to have a tender.

That tender has not happened yet.

It is going to happen in the near-term.

They had a conference last week.

They did not announce the timing of the tender, but they gave further detail as to how they expect this to roll out, including centralized solar thermal.

So we expect second half of the year, there will be a tender.

We will definitely participate, we have a very strong position.

Our technology, particularly our C7 technology, is already installed and being tested.

It works great.

We have strong relationships with all of the parties that I just mentioned, including KAUST.

So the University, K.A. Care, Saudi Aramco, and you can imagine that Total has an outstanding relationship in Saudi having done business for 90 years.

So, yes, we will be participating on -- just be careful on timing.

The tender hasn't happened yet.

But this will be a big market, because the economics are apparent.

Got it.

Very helpful.

Is there -- just on that topic, is there -- can you circumvent or can you work around the local content requirements down there?

Or where do we stand there?

Well, you probably know that Saudi Aramco is actually a joint venture with an American company, a couple decades ago.

And they have subsequently become more autonomous, or they are completely autonomous and have great technology.

And so that adds, sort of an example, I think the Kingdom of Saudi Arabia is saying, we want to develop our renewable market or our own renewable economy.

And we have experience -- we are doing that same sort of thing in China as we speak with a four-way joint venture.

So I think we are uniquely positioned to do that in Saudi Arabia.

So a key part of the K.A. Care conference last week was about local content, and they have a phrase called Saudization.

And so they are very serious about developing a renewable economy.

And I think we are really, really in a good position to deliver on that.

So it is real, and we are ready to participate.

Got it.

Very good.

And then, just shifting to Japan.

It seems like the relationship with Sharp and Toshiba is working out fairly well.

The question is, where do you think, if you look at your gross margin or revenues, where do you think the mix can be coming -- sourced from Japan?

Especially in light of -- obviously with the -- the high-profile bankruptcy -- the insolvency that was announced a couple months ago.

And I am curious to see, that was a large player in Japan.

So I am kind of curious to see where you think your mix will turn out from a gross margin standpoint, sourced from Japan?

Yes.

Let me comment briefly, really briefly, and hand it to Howard.

The relationship with Toshiba is over five years old, and it is deep, and it is strategic and working really well.

Sharp, as well.

And we expect that our product fits so well for the market that we expect it to continue on the current trend, maybe not grow as fast, but continue on a very positive trend.

In terms of margins, I will turn it to Howard, and he can talk about that, and Japan in general.

Thanks.

So, as Tom mentioned, Toshiba, excellent partner.

We are working with them principally in the residential area.

But we are also beginning to do some work in the mega solar, large-scale system area.

They are really our preferred partner in Japan, and most of the volume is from them still today.

Sharp, in that relationship, is going just fine, and they are doing a good job.

We are getting paid on time.

And everything is going well.

And all systems are go, there.

As you think about margin, and for Japan as a country overall, what we are seeing is that there has really been continued demand, exceeding our own forecast.

Right.

And when you have demand exceeding available supply, and demand for high efficiency because of the country dynamics of having constrained roofs, constrained land areas, we think that our average selling prices and our margin should be fine.

Somewhat tempered by foreign exchange, but an excellent market for us going forward.

Got it.

And do you recall what market share Sharp controlled in Japan, prior to you making the deal?

They are -- I don't have the precise number, but Sharp is a pioneer in photovoltaics.

I mean, they were one of the first companies, if not the first company to manufacture PV on a large scale, over five decades in this business.

In fact, they still have a buoy in the Sea of Japan that is powered by PV from 1968, it still works.

Pretty impressive.

And they are one of the leading -- if not leading market share.

We think they are over 25% of the overall market in Japan.

So a really strong player there in PV.

Thanks.

Questions answered, and congratulations on a great quarter.

Thank you, Shahr.

Our next question comes from Satya Kumar, and please state your company name.

Yes, hi, thanks, Credit Suisse.

Chuck, I was wondering if you could spend some time explaining the GAAP and non-GAAP reconciliation of the [utility] segment.

The revenues for non-GAAP were a bit lower, and the gross margins have an add back, I was wondering if you could just give a little more color on how it works?

Sure, Satya.

As I mentioned in prior calls, the differences driven by the real estate accounting under GAAP, which is tied to percent complete, but limited by cash collections.

Whereas IFRS, which is the convention we follow for non-GAAP, follows what we would call more basic economics.

There is development margin for the development activities pre- EPC.

And then the revenue and margins follow the EPC build-out on a percent complete, which better follows the real flow of commerce.

And this quarter, just based on how the progress on CVSR and AVSP were, GAAP was higher than non-GAAP.

And in the end, they will all net out to the same number.

But we, again, we report non-GAAP using IFRS, and had a real solid quarter on both fronts.

So the non-GAAP gross margin add back in the quarter, was that a good way to think about the development fees for AVSP?

Yes, specifically for AVSP, and the same thing happened on CVSR.

In the Q4, we had part of the development revenue in AVSP, and the final development revenue for AVSP was recognized in Q1.

That on a GAAP basis, that gets amortized over the life of the project.

Understood.

And then on slide 10 of the presentation that has information on the residential leasing market, I was wondering if you could clarify -- is this the net retail value that is accruing to SunPower or just the nominal contracted payments?

I was wondering if there was a way to think about, after your financing costs, and if you want to think about for present value standpoint, how much does that -- how much of that net value accrues to SunPower?

And also, does this assume any post contract payments, or is this for the contract duration?

Yes, great.

We look forward to sharing all of those details with you at Analyst Day.

The data that we have been reporting the last couple of quarters is simply the net contracted payments from the lessee.

It does not include the residual value or any other additional up sells that we may have post contract term.

It also does not include the financing payments that we might pay to an investor.

Incidentally, obviously, with a tax equity investor, typically there is not a lot of payments to them, because they are monetizing the tax benefits.

And then lastly on the 1 gigawatt international pipeline that you mentioned, what is -- is there any -- is that a pipeline which has a firm PPA signed in the backlog, or is that pre-backlog -- pre-PPA?

This is Howard.

Pre-PPA.

We are very close on -- we are very close on several projects to getting PPAs.

But it's pre-PPA.

Understood.

Thank you.

Thanks, Satya.

Our next question comes from Brian Lee, and please state your company name.

Hi, Goldman Sachs.

Thanks for taking the question.

I jumped on late, so I apologize if some of these have been asked.

The first thing I was wondering on, was if you could comment on the variability between the $2 billion and $2.5 billion sales range that you originally stated on AVSP?

If that's -- if you have more clarity on that.

And also, what actually is driving the variability there?

There is no variability.

It's just a matter of what public disclosures that we make in conjunction with MidAmerican.

Well, I guess, my question is just -- why would there be a range, as opposed to one specified purchase price?

It's a specified number.

We just -- in agreement with MidAmerican, we have not publicly released that number.

Okay.

And then I guess, on AVSP, again, I think there was a notice to proceed on phase one, and then maybe on phase two you had not received that.

Has there been any updates on that front?

Thank you.

This is Howard.

Yes, the update is we have a full notice to proceed on AV1 and AV2.

So the entire project.

All right.

Thanks.

Our next question comes from Ben Kallo, and please state your company name.

Robert Baird.

On the leasing model, you mentioned that I think the tax equity is a bottleneck.

How should we think about that going forward versus you and competitors out there?

And then, securitization is a big topic out there.

Where do you stand on that?

And then finally, on the movement to Antelope Valley after CVSR, is there going to be a lag in between revenue recognition?

Or is it kind of seamless in the transition?

Okay, Ben.

First on the tax equity side, the demand for our product was so strong, that it basically was more than what we forecasted in tax equity needs.

We expect to make some announcements here shortly on additional tax equity partners.

And we do think that we are uniquely positioned to benefit from a disproportionate share of the capital, as well as better terms than other folks in the industry.

In terms of transition CVSR to AVSP, I think of a perhaps a quarter of transition.

To the answer to your question, is yes, there is a transition period.

And that is why I called Q2 a transition quarter.

And then, Tom, if I can, just on a macro level, we have talked about the shakeout in some of the Chinese module manufacturers, and the impact on the industry.

Where do you think we stand as far as consolidation is, and are you seeing that on the ground and business, your balance sheet and your track record of a couple decades now, I guess, of being able to win business.

Are you differentiated there?

Is that actually a reality now?

Yes, Ben, my comment would be, it is really brutal to be exclusively a module manufacturer.

And frankly, I think that is -- as we look at SunPower we have moved from being module originally to systems maybe a couple of years ago, to most of what we sell today is energy in the form of lease or a PPA.

And we think that is going to become almost all we sell is energy.

And as we switch, and as we transition and drive the industry and be an energy provider, we are in a great position because we have vertical integration.

We have our own technology, we have a strong balance sheet, we have been active since 1995 via PowerLight.

And so we have a real unique depth of experience.

And so, as you think of consolidation, I think it is a less topical now and less relevant to talk about consolidation, and more relevant to talk about who is going to most successfully and make the transition to an energy provider.

Having said that, the market dynamic is very interesting as a module manufacturer.

And we are seeing a rationalization of capacity worldwide, no question about it.

You are aware of probably all of that consolidation.

I think there is some capacity coming off-line in China, and a lot of it being absorbed by the Chinese market.

So what you see is a stabilization in Europe, and perhaps even an uptick of pricing in Europe.

So there is a module dynamic here, but for us it is more of a transition to a new model for the whole company.

Thank you.

Thanks, Tom.

Our next question comes from Rob Stone, and please state your company name.

Cowen and Company, thanks for taking my question.

A couple things if I might.

You mentioned in the prepared remarks, that you expect to have less of a drag from factory underutilization, and I guess other costs in Europe in the second half.

Can you provide some more color on that please?

Sure.

Rob, the factory charges effectively are, I mean, an idle factory.

There are costs that you incur.

We are ramping the factory to full capacity, and so those charges go away entirely.

The factory charge in Q2 is less than Q3, and -- or sorry, less than Q1.

And we expect this to be zero for the back half of the year.

So, what drives the uptick in utilization?

Is it local?

Or are you using the factory to support other markets?

Is it just seasonality in the Q1?

Yes, it is simply demand from end customers and building out projects.

Yes, it is a ramp of AVSP and demand.

Rob, the one way to easily characterize this is we are sold out.

Okay.

Thank you, Rob, we will take one more question.

One follow-up on China and the C7 tracker.

Ah.

So I wonder if you could just provide an update on the status of the joint venture there?

And then, any bits on your operational experience with the tracker, things like maintenance, use of water, et cetera.

Yes, okay.

And then after we answer Rob's question, we will take one more.

And then we look forward to seeing all of you at the Analyst Day.

So, just to get everybody on the same page, we have a joint venture with three other parties in Inner Mongolia China.

That joint venture started several months ago, at the beginning of this year.

The purpose is to assemble C7 -- seven times concentrating systems in the region, and to develop projects.

We were on track to build projects in the near-term, perhaps by the end of this year.

So it's going very well.

Howard, do you want to comment on the balance?

Sure.

This is Howard.

I will comment on the product and the technology.

We just dedicated a megawatt scale project in Arizona with the Salt River Project.

They serve part of Phoenix, Arizona and their utility.

And it is really an excellent system.

We leveraged our know-how from our Oasis power plant product that we have deployed over and over again in California Valley Solar Ranch, and are deploying now in Antelope Valley.

We took all that learning, and the benefits of our solar cell, which can accept high concentration and low to high concentration.

Married it together into the C7 tracker.

That is now a commercially available product that has now been fielded commercially.

It is a beautiful product.

The person has to sell it, it's beautiful not only from aesthetic perspective, but in its performance.

It is exceeding expectations in terms of performance, and reliability.

You had a question around cleaning.

It is a factor of seven in terms of concentration, so it has mirrors that do need to be cleaned on a regular basis.

We are dialing in the frequency of that.

But the cost is very, very minimal, and more than offset by all the tangible and real benefits of going with a seven to one concentration.

So we are really pleased with the progress there.

Yes, I went to grad school outside of Phoenix so I know it's pretty dusty around there.

If it can work in that location, it should be all right.

We completely agree.

Thanks, Rob.

Thanks.

Your last question comes from Stephen Chin.

Please state your company name.

It's UBS.

A question on the volumes.

It seems Japan is exceeding your expectations.

So wondering if any update to your expectation for the full year, as well as the 60% volumes you expect from North America?

Then, your lease signup run rate for the first quarter was in line with the 2012 run rate.

Could you maybe give us some color on how we should think about the seasonality of the leasing business?

Thank you.

This is Tom, and then I will give it to Howard.

And Howard, if you could wrap up the call.

So, volume in terms of mix around the world, or I will let Howard give you some sense as the dynamic with the following -- a little bit from me.

Japan, most certainly will be as strong in the back half as it is in the first half.

But that is how we think of it, as strong.

In terms of lease, lease is a really, really good fit for our product, because as we have said for years, we can compete on levelized cost of energy, that's what lease is.

So we have a superior product at same or similar pricing, better pricing than conventional electricity.

So the demand is really strong for our solution.

And currently, what is gating the uptick of lease is, how quickly we bring on new lease capacity.

And as Chuck mentioned, we expect that to pick up in the near-term.

But that is a gating factor, currently.

This is Howard.

I will just add a little color on the lease, which is that, as Tom mentioned, we have more demand for our lease than we can supply from of finance capacity -- financing capacity perspective.

In terms of -- for the year, we expect to continue at the pace that we are at, and increase it in the second half of the year.

So thank you very much that, Steven, unless you have a quick follow-on.

Yes, just a quick follow-on the cash grant and sequestration you talked about?

Just want to make sure that was all about the legacy 1603 cash grant program, and nothing to do with the 30% ITC?

Yes, primarily.

So as we looked at the impact for the company, and evaluated our reserves, we booked $25 million, and we think that we are covered going forward.

It is cash grant, though.

the specific answer to your question, yes, it is cash grant.

Okay.

So, thank you very much everyone.

We look forward to Analyst Day.

We will see you in a couple of weeks.

Thank you.

That does conclude today's conference.

Thank you for your participation, and you may disconnect at this time.