SunPower Corporation (SPWR) 2015 Q2 法說會逐字稿

Good afternoon, and welcome to SunPower Corporation's second-quarter 2015 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, SunPower Corporation.

Thank you, sir.

You may begin.

Thank you, Sheila.

I would like to welcome everyone to our second-quarter 2015 earnings conference call.

On the call today, we'll start off with an operational review from Tom Werner, our CEO; followed by Chuck Boynton, our CFO, who will review our second-quarter 2015 financial results.

Tom will then discuss our outlook for Q3 and 2015.

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 the Safe Harbor slide of today's presentation, today's earnings press release, our 2014 10-K, and our quarterly reports on Form 10-Q.

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

To enhance this call, we have posted a set of PowerPoint slides which we will reference during the 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.

Finally, we are currently targeting a November Analyst Day in New York City.

We are still in the planning stages at this point, but we'll provide additional details related to the timing and the agenda of the event at a later date.

With that, I'd like to turn the call over to Tom Werner, CEO of SunPower, will begin on slide 4.

Tom?

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

I'll start by providing some brief comments on the quarter before discussing our performance in greater detail.

Q2 was another solid quarter for SunPower.

In addition to meeting our financial goals for the quarter, we achieved three key milestones that position us well for future growth.

First, the launch of 8point3, our joint YieldCo vehicle with First Solar, which we believe will lower our cost of capital and provide a sustainable competitive advantage.

Second, the acquisition of Infigen's 1.5 gigawatt US solar project development portfolio, which significantly enhances our power plant pipeline through 2020.

Third, the introduction of three innovative utility channel partnerships for our residential business, including our announcements with Dominion and ConEdison Solutions.

I'll speak more about these milestones throughout my formal remarks.

Moving on to the specifics for the quarter.

The quarter was characterized by strong execution across all geographies and segments, reflective of continued growth in global solar demand.

We were pleased to successfully launch 8point3 Energy Partners.

Chuck will go into more detail on 8point3 in his comments later in this call.

For power plants, in addition to our Infigen portfolio acquisition, we achieved important completion milestones in a number of large-scale projects, including Solar Star and Quinto, while initiating construction at both Henrietta and Hooper.

We also continued to grow our international power plant business in key global markets.

Our distributed generation business remains solid, driven by residential market demand in both the US and Japan.

Our DG bookings rose materially in both the residential and commercial segments.

We added to our growing North American commercial pipeline with our recent 22-megawatt announcement for the Kern County School District.

Upstream, we performed extremely well, achieving record cell output and manufacturing yields.

Average solar cell efficiency across all lines was close to 23% during the quarter.

I would now like to provide more color on each segment of our business, starting with power plants.

Please turn to slide 5. In the Americas, as I mentioned at the start of my remarks, we were very pleased to announce the acquisition of Infigen's US power plant portfolio for $38 million.

We believe that this acquisition significantly enhances our visibility through 2020.

This portfolio consists of approximately 35 early- to late-stage projects of up to 100 megawatts in size.

With our strong track record of project construction and technology leadership, we are well positioned to develop these projects profitably over the next five years.

This pipeline also comprises projects that are very well suited for drop-down to 8point3, supporting significant volume growth beyond 2016.

We also completed construction in our 579-megawatt Solar Star project, and the world's largest PV power plant is now grid-connected.

We want to thank our EPC and supply chain teams for their incredible efforts in constructing this landmark project ahead of schedule and under budget.

In relation to our HoldCo assets, construction at both our 135-megawatt Quinto project and our 102-megawatt Henrietta project are on track.

And we plan to contribute these projects to our 8point3 joint YieldCo vehicle over the next 12 months.

We also continue to expand our pipeline organically, and recently announced a new 100-megawatt project for NV Energy.

In EMEA, we are focused on enhancing our market footprint in both South Africa and France.

In South Africa, our 86-megawatt Prieska project is on plan.

As we mentioned last quarter, we now have more than 150 megawatts of power plants either completed or under construction in South Africa.

France remains our top EU power plant market, and we continue to work with Total to expand our project pipeline.

In APAC, Japan remains a key power plant market for us, with 40 megawatts installed to date and a solid pipeline of future opportunities.

Additionally, we are working closely with our JV partners in China on new project development.

Our Apple projects remain on plan.

With more than 2 gigawatts of power plants installed globally, including the world's largest PV plant, and a significant and growing project pipeline, SunPower has a very strong competitive position in the power plant market.

I'd now like to briefly discuss our DG business.

Please turn to slide 6. Q2 was again a great quarter for our DG segment, with strong demand for our industry-leading smart energy solutions and financing options.

Once again, the US and Japan where the key drivers of the business, though we saw improvement in the EU with revenue and megawatts up sequentially.

We expect to end the year with more than 500,000 global DG customers.

In our residential business, Q2 was another strong quarter as we grew megawatts sequentially and saw further traction with our lease product.

Both lease bookings and installed megawatts doubled year-over-year.

We are further leveraging our residential solar platform by developing channel partnerships with electric utilities who want to bring the benefits of clean solar power to their customers.

This unique model combines SunPower's industry-leading solutions and channel platform to facilitate utility participation in the residential solar energy business.

For example, we recently announced partnerships with Dominion in New Jersey, as well as this morning's announcement with ConEdison for New York.

We expect these innovative channel partnerships will significantly expand our footprint in key markets in the United States.

We are thrilled to be working with electricity industry leaders to accelerate the adoption of SunPower's high-performance solar solutions.

We also made important progress on a number of technology elements.

As you know, last fall we formally announced our new microinverter panel, with shipments beginning in the first quarter of this year.

I can tell you that customer acceptance of this product has significantly exceeded our expectations, and we are increasing manufacturing capacity to meet this demand.

We expect further traction with this product, as we will be shortly launching our 96-cell solution that will drive even better economics.

Customers want this technology because it offers more flexible and quicker installation, superior aesthetics, and better performance.

Along with mobile investments in storage systems and software, our ACPV solutions are a key piece of our smart energy strategy and complete solution approach.

As a reminder, the goal of our smart energy strategy is to give customers greater control of their energy use in a superior user experience.

We are also pleased to announce that we will be launching our X-Series panel, the world's most efficient module, in Japan this quarter.

Global demand for this product remains extremely high.

As a result, we are increasing our production of this panel going forward, and expect X-Series manufacturing volume to increase more than 300% year-over-year.

In the commercial segment, we executed well and added to our pipeline.

For example, we announced the largest school district contract in United States with Kern County, California, bringing our commercial project pipeline to over $1 billion.

Under this contract, SunPower will deploy 22 megawatts over 27 district sites.

With construction scheduled to be completed at the end of 2016, the Kern County School District is expected to save $80 million in electricity costs over the next 25 years by using SunPower technology.

Additionally, we expanded our footprint in the retail sector with our long-term partner, Macy's.

We will install 10 megawatts for them this year in California and Maryland, and this will bring our footprint with Macy's to 58 facilities across the US.

Japan remains a key DG market for SunPower, both in residential applications as well as small commercial solutions, where we see increasing demand and significant long-term opportunity.

We are also investing in new technology and are also close to completing the development of a new suite of low-cost commercial products, including standard solutions for rooftop and ground-mount applications.

With the release slated for the second half of the year, we expect these products to further strengthen our position in the commercial market, as well as drive better economics for SunPower.

Finally, we expect 2016 to be a very strong year in distributed generation, as demand fundamentals remain solid due to technology improvements, cost reduction, and the ITC policy environment.

We are also increasingly positive on prospects for 2017 and 2018, as the DG pipeline continues to build, both in the US and internationally.

I would now like to touch on our project pipeline, as well as future deployment plans.

Please turn to slide 7. Overall, we remain very bullish on the global solar market as we see strong growth dynamics.

Our diversified end-market strategy continues to position us well across multiple geographies.

Our project pipeline now stands at 12 gigawatts, including a recent acquisitions of Infigen's US solar portfolio.

To put our development efforts into perspective, we have doubled our global pipeline in just two years while rapidly expanding our footprint in a number of existing and emerging markets.

We continue to aggressively manage our projects through the pipeline with greater than 50% of our pipeline in what we define as middle- to late-stage, with projected COD dates through 2020.

Both SunPower and 8point3 have significant project and drop-down visibility for the next five years.

I'd like to finish my formal remarks with a brief discussion of our deployment expansion through 2019.

Please turn to slide 8. This chart is very similar to the version we showed at our Analyst Day of November.

For 2016, we continue to see a very strong growth opportunity with deployed megawatts increasing approximately 25% year-over-year.

Also, as a result of our significant pipeline growth, we are increasing our deployment forecast for 2018 and 2019, compared to Analyst Day, as well as raising our compounded annual growth rate to 30% from 2015 to 2019.

We will provide further detail, including an update on product and geographic mix, at our next Analyst Day this November.

In summary, Q2 was another solid quarter as we executed on our project commitments, expanded our pipeline, and progressed on our cost and technology roadmaps.

With the launch of 8point3, the acquisition of Infigen's US pipeline, and our new utility partnership model, we are well positioned to achieve our short- and long-term goals.

With that, I would like to turn over the call to Chuck to review the financials.

Chuck?

Thanks, Tom.

Good afternoon, and please turn to slide 9. For today's call, I will focus my remarks on our Q2 results and 8point3.

Q2 was a very good quarter for the Company, generating $64 million in EBITDA while successfully managing our HoldCo asset strategy with the launch of 8point3.

Our strong performance was driven by North American residential, the completion of Solar Star, and the IPO of 8point3.

In addition, our Q2 results reflect the impact of our HoldCo strategy, which defers revenue and margin benefits to the future.

Q3 bookings and pipeline build have been the strongest we've seen in years and positions us well for long-term growth.

Specifically on the P&L, non-GAAP revenue and margin were in line with our forecasts.

Power plant revenues declined sequentially as we continue to build projects on our balance sheet rather than sell them prior to construction.

Our non-GAAP gross margin for the quarter was 17.6%, and also in line with forecasts.

Power plant margins were on plan, led by our large US projects, while commercial margins were stable.

We continue to expect our commercial margins to increase over time to the high teens, low 20s, as we launch new products later this year that offer significant cost reductions and decreased installation times compared to our current generation of commercial products.

In residential, our business was solid as we saw record North American installations in Q2.

Non-GAAP residential margin for the quarter was 23.3%, driven by strong cash sales.

North American cash and loan sales totaled 61% of our shipments, while 39% were leased.

Overall, we deployed 77 megawatts of residential products globally.

Lease bookings were 22 megawatts in Q2, with cumulative lease bookings of 263 megawatts.

Net contracted payments at the end of the quarter were $820 million, excluding the residual value.

This value is net of the approximately 6,000 leases we sold to 8point3, which represented $190 million of our contracted payments.

In addition, NCI for the quarter was $30 million, primarily the result of strong installs in the channel.

We also recognized $23 million in OIE, which was the gain of the drop-down of the residential leases we sold to 8point3.

Note that this sale was not recorded as revenue because the leases are already in service.

If it was recorded in revenue, our top line and margins would have been substantially higher, but with no impact to earnings.

Second quarter non-GAAP OpEx was up slightly as we prudently managed our expenses.

We expect OpEx to increase slightly as we continue to invest in pipeline growth and our smart energy strategy, as well as other key initiatives.

Our factories ran at full utilization, with record yields and cell output.

Additionally, we are continuing the construction of Fab 4 and expect output of at least 225 megawatts in 2016.

CapEx for the quarter was $44 million, and we expect spending to increase throughout the year as construction of Fab 4 nears completion.

I will now explain how 8point3 will impact our financials.

First, to get a better understanding of the impact, I would like to walk through an overview of the accounting of future transactions between SunPower and 8point3.

Please turn to slide 10.

First, the benefits.

We will recognize 100% of the revenue from the project sales to 8point3 at the time of the sale.

We will receive 100% of the cash for the project up front.

Additionally, we'll benefit from increased dividends from 8point3 over time as we drop down projects; and, over time, we expect to realize significant benefits from the growth of IDRs.

In contrast to our HoldCo plan, we will reduce project debt and de-leverage the balance sheet.

Now on the impact on our financials due to our ownership.

While revenues are recorded at 100%, gross margin is reduced by our ownership percentage in 8point3, approximately 41%.

This will understate gross margins and EBITDA for SunPower at the time of the initial sale compared to the cash we receive.

Additionally, we will record our share of the earnings from 8point3 on our minority interest line, based on our ownership percentage.

Finally, when 8point3 issues new equity, we would recognize part of the deferred benefit on the dilution.

Now let's move on to Q2 specifically.

Please turn to slide 11.

For the quarter, we deferred both revenue and margin, primarily due to Quinto, as the project has now been sold to 8point3, but will not reach COD until October.

We expect to recognize this revenue and margin in the fourth quarter.

On a GAAP basis, we do not expect to recognize any 2015 revenue or margin on our power plant and commercial projects sold to 8point3 due to the real estate accounting rules.

Note that we report non-GAAP for these sales based on IFRS results, which are audited and reported to Total for their financial results.

In a couple years, GAAP and IFRS will converge for revenue recognition, which, based on our current understanding, will be more in line with how we report non-GAAP results.

For the balance sheet, project assets increased to $423 million, again related to the continued development of our IPO and ROFO assets.

Of this amount, over $350 million is related to the 8point3 IPO projects.

Also note that while the market value of our ownership in 8point3 is significant, we are carrying this at a book value of $68 million.

We expect book value to increase as we reach COD for our projects.

Finally, we used part of the IPO proceeds to de-leverage our balance sheet by paying off certain construction loans and residential back leverage debt.

I would like to reiterate while we believe that 8point3 offers both sponsors significant opportunities to lower our long-term cost of capital, while driving shareholder value for 8point3.

Please turn to slide 12.

Also in the appendix of today's deck, we have added a detailed breakdown of both our initial and ROFO portfolios for reference.

There are (technical difficulty) key highlights for 8point3.

The projects are long-term contracted assets with a weighted average life of more than 20 years, ensuring stable cash flows over the PPA periods.

Additionally, we believe both portfolios offer investors a lower-risk profile due to our diversification by geography and end segment.

Our assets generally have escalators that exceed degradation that should provide an increase to cash flows over time.

8point3 is supported by two of the leading solar developers in the industry who have a combined pipeline of 13 gigawatts of mid- to late-stage projects which is growing, as evidenced by recent wins at NV Energy and the recent Infigen pipeline acquisition.

We have a conservative capital structure with 4 times leverage.

Finally, our focus remains on a long-term, sustainable, annual dividend growth.

We believe both our IPO and ROFO portfolios will enable us to achieve our targeted growth through mid-2018.

The additional pipeline development will allow for sustained growth.

I'd now like to provide an update to our HoldCo strategy.

Please turn to slide 13.

This chart summarizes the changes in our HoldCo asset portfolio for the second quarter, as well as the assets designated for 8point3, post-IPO.

At the start of the quarter, we held 679 megawatts on our balance sheet and added 131 megawatts during the quarter, for a total of 810 megawatts.

Net of our residential portfolio contribution to the 8point3 IPO, we ended the quarter with 764 megawatts.

Now please tune to slide 14, where we will provide a more specific view of our HoldCo asset status by project.

As you can see from the chart, we deployed approximately 140 megawatts in the second quarter, and expect to install an additional 50 megawatts of HoldCo assets in the third quarter.

All assets listed are either part of our initial 8point3 portfolio or part of the ROFO.

Before turning the call back to Tom, I'd like to let our investors know that going forward we will focus on EBITDA rather than earnings per share in both reporting and guidance.

As you know, we have been moving towards using EBITDA as a core metric since our Analyst Day last November.

There are a number of reasons for this change.

First, we'll continue to focus on our HoldCo strategy to maximize project returns, which means we'll be using our balance sheet for project development.

As you know, project timing is not linear, and as we move to a HoldCo asset strategy we believe EBITDA is a better way to measure the value in our business.

EBITDA fully captures all NCI benefits related to our project sales.

Some power plant and commercial projects will be financed with partnership flips, meaning we will have the NCI income along with revenue and margin from the sale.

As you know, under other models the NCI benefit is classified as revenue, and it is really the value received for selling the tax attributes.

We will provide non-GAAP net income, consistent with prior practice, to the end of 2015.

Looking forward, as a result of pipeline development, continued strong industry fundamentals, and the launch of 8point3, we are raising our 2015 EBITDA guidance from our November Analyst Day.

Tom will now cover this and the rest of guidance in more detail.

Tom?

I would now like to discuss some of the highlights of our guidance for the third quarter, as well as 2015.

As a reminder, per Chuck's comments, we feel that given our current model, EBITDA will be a more appropriate measure of our ongoing business.

We will be providing annual non-GAAP EPS guidance for 2015 only.

Please turn to slide 16.

For Q3, non-GAAP guidance is as follows.

We expect revenue of $400 million to $450 million, gross margin of 10% to 12%, EBITDA of $0 to $15 million, and megawatts deployed in the range of 300 to 330 megawatts.

On a GAAP basis, the Company expects revenue of $400 million to $450 million, gross margin of 11% to 13% (Sic-see press release 10% to 12%), and GAAP loss per share of $0.60 to $0.50 per share.

Please note that our Q3 and 2015 GAAP guidance reflects the impact of our HoldCo strategy as well as the deferral of revenue and margin due to real estate accounting treatment.

Capital expenditures in the third quarter are expected to be in the range of $100 million to $125 million, and full-year CapEx of between $250 million to $300 million as we continue to ramp construction of Fab 4. We expect meaningful volume from Fab 4 in Q1 2016.

For 2015, our guidance is as follows: non-GAAP revenue of $2.4 billion to $2.6 billion, gross margin of 21% to 23%, earnings per share of $1.50 to $1.80, and megawatts deployed in the range of 1.25 to 1.3 gigawatts.

On a GAAP basis, the Company expects 2015 revenue of $1.5 billion to $1.7 billion, gross margin of 10% to 12%, and a GAAP loss per share of $2.35 to $2.05 per share.

We are also raising our 2015 non-GAAP EBITDA guidance, first given at our Analyst Day last November, to $425 million to $475 million.

And we expect 2016 EBITDA growth of approximately 20% from the midpoint of our 2015 guidance, or approximately $540 million.

With that, I would like to turn the call over for questions.

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

(Operator Instructions).

Ben Kallo.

Robert W. Baird.

Thanks for taking my question and congratulations on all the work, guys.

Looking ahead on the acquisition of the pipeline you announced yesterday, could you just talk us through, post-ITC world, it looks like you have some faith in the US market.

And so just walk us through there.

And then also maybe give us an update on Fab 4 and the cost structure there.

It looks like output was a little higher on production this quarter.

Thanks, guys.

Sure.

Thanks, Ben.

First on Infigen, so we're really pleased with the acquisition because, A, it's scale -- it's 1.5 gigawatts -- and the pipeline is split into thirds, where one-third of it is fairly advanced; a third, kind of intermediate to advanced; and then one-third of it is early stage.

So we'll build those, as you pointed out in your question, over probably the next five years, the majority of those.

And, in fact, 55 megawatts of it includes the PPA with SoCal Edison that is particularly well-suited to drop down in 8point3.

Now, to your question.

If you look to one of our projects that we announced recently, you saw a sub-$50 megawatt hour on project.

And if you do the math on that and you project post-ITC, and you continue protecting our cost down and performance increases in our systems -- that's where we get our confidence in a potential post-ITC world.

So, we think that our solar energy is interesting to utilities already post-ITC, assuming there is a post-ITC, and we'll see what that looks like.

So that would be my comment on Infigen and the economics pre- and post-ITC.

Secondly on output, we in fact had really, really good output.

We are getting more output, primarily a result of more output out of our two large fabs, one in the Philippines and one in Malaysia.

Both outperformed in the quarter, both beat yield, and both beat the utilization of the equipment, so-called OEE or overall equipment effectiveness.

So we got more output because the two fabs performed better.

As I mentioned on the last earnings call, the technology for Fab 4 has already been run in large scale, and is performing at or above plan.

And the Fab will be coming online later this year and will have a material impact on 2016, which will be all X-Series, the latest generation of our technology.

Great.

Thanks, guys.

Brian Lee.

It's Goldman Sachs.

Thanks for taking the questions.

I had two, both on the outlook.

Maybe first -- and I apologize if you went over this -- but if I look at the Analyst Day guidance from late last year, I know you guys had withdrawn that, given the HoldCo and the pending IPO of 8point3.

But it looks like the deployed megawatts forecast for 2015 has actually come down here versus what you had talked about last November; although the out years are going up.

I understand why the recognized megawatts would be going lower, but just wondering what might be driving the deployed megawatts guidance coming down here in the near term.

I'm sure that quick answer to your question is that we're going to do somewhat less of our C7 product in China.

While we have to put in 100 megawatts so far this year and things are going well, and we're doing more than any solar Western company is in China; such a great market.

Having said that, we are going to install a bit less C7 in China this year.

Okay.

That's helpful, thank you.

And then the follow up was just on the updated guidance around the EBITDA.

It implies you guys are maybe pulling forward your 2016 EBITDA outlook versus what you outlined at the end of last year.

So, wondering what the drivers of the improved outlook are here, and if that implies anything is coming out of the 2017 view, or if it's all incremental.

Thanks.

Brian, thank you for the question.

It's Chuck.

It's all incremental.

We had a very strong year.

8point3 has certainly helped, better than we expected.

So it's good news, and we've increased 2016 outlook as well.

So the overall view is it's fundamentals to the business.

Okay.

Thanks, guys.

Vishal Shah.

Deutsche Bank.

Just wanted to (technical difficulty).

Okay, yes.

I just wanted to better understand the cost [outlook] at the system level between both the residential and the utility scale market.

What do you think the cost reduction potential is?

And when you are signing these deals (technical difficulty) pricing environment, what kind of cash-on-cash yield are you looking at for these markets right now?

Thank you.

Okay, I'll comment on the cost reduction potential, and maybe Howard, you can add to that.

And the cash-on-cash yield, Chuck, if you would take that.

So, we introduced an Oasis product or solution for the power plant market two or three years ago.

And we're now on the third generation of that.

And the concept has worked great, and that is to have a preconfigured box that are -- also take labor out of the field, particularly the expensive labor, and then reduce the amount of material content.

So these are engineered solutions for power plants.

That concept, we can -- now are porting the similar concepts over to both the commercial and residential segments.

That's part of the cost.

And then there's also the soft costs that are a meaningful part of the cost in both of those markets, particularly residential, and we're attacking that as well.

And I'll say one more thing and turn it to Howard.

And that I would say that those two markets, commercial and residential, have been a little bit untapped for us on the cost reduction side.

So I think there's a lot more potential to take cost out.

If you look at what we've been able to do in power plants, and the kind of PPAs that we're signing and making profitably -- if you took that trend, I think -- and you started to look at commercial and residential, you could expect us to replicate that.

Howard, can you add anything?

Sure.

What Tom stated is exactly right.

We're focused on complete solutions in both residential and commercial DG.

And just wanted to note that for commercial we're developing complete solutions for the roof and for carports and ground tracking systems.

So the reduction is on the order of 5% to 15% per year, depending on residential, and which type of commercial solution we're talking about.

And that's at the solution level.

So we're very focused on standardizing all of our systems across distributed generation, taking cost out, and improving quality.

And then this is Chuck.

On your cash-on-cash yield question, Vishal, obviously there's a lot of variables in North America: things like tax equity, and then which channel we're selling through.

What we've seen with the assets that we've developed and sold, and selling to 8point3, the unlevered returns are quite significant mid-teens.

We have not provided this level of detail or granularity.

And if you look at other markets around the world, they could be higher in some locations, and lower.

But it's hard to generalize, though, across the portfolio.

Thank you.

Patrick Jobin.

Credit Suisse.

Thanks for taking the questions.

A few here.

First, just briefly on Q3 gross margin guidance, and I apologize if I missed it earlier in the prepared remarks.

Why is guidance for a lower gross margin on a non-GAAP basis sequentially into Q3?

So, Q3 -- so we don't have the large project margins hitting in Q3.

What we expect are very strong residential margins.

We see increasing commercial margins, which you saw two quarters in a row of increasing commercial margins.

And the power plant margins are a little bit lower than what we've seen in Q1 and Q2, and quite a bit lower than what we'll see in Q4.

So, Q4, you'll see very, very strong margins based on our Quinto project and commercial projects.

And we expect longer-term commercial to be in high teens to low 20s.

So I think Q3 is a bit of a transitional quarter from a margin standpoint, between the Solar Star model and the HoldCo model now evolving into recognition with 8point3.

Got it.

Thank you.

And then just two higher-level questions.

First, could you maybe talk about your market expectations for the residential segment?

The DG space in 2017, just given the ITC rules as they stand today, with going to 0% ITC for a cash sale.

And then the second question would be on the longer-term strategy for allocating assets to get monetized through 8point3 versus third-party sale of -- how you dial that percentage, and if there's any difference in your realized profit, that'd be helpful.

Thanks.

Okay.

So Howard, why don't you take the first question about 2017 in DG?

Sure.

So, first of all, we're really pleased with the performance of our residential team.

Kudos to them.

They are increasing customer satisfaction while scaling the business.

We doubled over year-on-year the residential business in the quarter.

And the outlook is really strong, where we're looking to increase by on the order of 50% first-half 2015 to second-half 2015.

And so the outlook for the residential business is really good, going into the back half of 2015 and into 2016.

And that will give us a great basis for attacking the business in 2017.

As we mentioned before, we're reducing cost; we're scaling the channel; we're deploying more lease.

We doubled our lease volume year-on-year, 25% sequentially, quarter-on-quarter.

And so what we see for 2017 is to be in position to continue to drive that business going forward.

You mentioned the 30% tax credit going away for cash customers, for the customer that owns the system, and that's correct.

So we do see the economics for lease continuing to be strong, with the 10% ITC, which is the default decline for commercially owned systems -- or third-party owned systems, and with the MACRS depreciation.

So the economics, with the cost reduction, performance increase, channel scaling, customer acquisition costs being driven lower, we should have a robust business going into 2017.

And then, Patrick, I'll comment briefly and then turn it to Chuck on the allocation of direct sale, or outright sale, versus 8point3.

And I'd say, just broadly, we're in a position for several years where we in fact will have that option.

We have an abundance of drop-down assets.

And, of course, with the momentum that we have, we think that will continue, but we'll see.

And just one quick point about that choice.

There are customers who have preferences for what interest rate they use to discount the cash flows of a project.

And depending on what interest rate they use, that may favor drop-down versus an outright sale.

And then sometimes there's tax reasons that Chuck could elaborate on.

So, we've always been about customer choice and customer orientation in the residential channel, offering cash, lease, loan for several years now.

Similarly this will -- the advent of 8point3 will help us customize things for our customers.

Great, thank you.

So Patrick, I think the key way to think about this is we will build up our HoldCo strategy and have assets on the balance sheet that we'll sell to 8point3.

When we'd sell outside of 8point3, it would primarily be because it's a geography that is not suitable for 8point3.

Think about that like non-OECD countries or areas where there's a different risk profile.

Or there could be things with the PPA or the contract that maybe are -- don't meet the high standards that we're setting for 8point3.

We might sell those to other parties.

But I'd say the majority of the assets that we'll develop in OECD countries, we would intend to sell to 8point3.

The benefits are obvious.

We get a great cash sale up front.

We get 100% revenue treatment.

We will not recognize the full margin of the sale to 8point3, as I mentioned in the prepared remarks.

But the great thing is we will get dividend growth and future IDRs.

So we are very motivated to develop assets, hold them until completion, and then sell to 8point3.

Got it.

Thank you.

Krish Sankar.

It's Bank of America Merrill Lynch.

I have two questions.

The first one, it's on the [modeled] economics associated with the ConEd deal that you announced.

How do you balancing business like that when there is no long-term cash flow upside because of no drop-down to 8point3?

And the second follow-up question is more on Asia.

Japan and China is a focus for you.

I'm curious what you see on the China demand side, given all the noise you are hearing on the macro.

And also on the Japan side, you guys price in US dollars.

Are you seeing any competition because of the module -- other competitors pricing in Japanese yen?

Thank you.

Sure.

I'll take the first one, Krish.

Thank you.

On the ConEdison deal, this is a terrific transaction for SunPower.

We have a channel that we're going to sell in New York that is a great partner.

And so we look at this as accretive to our overall model.

We're going to do business in many different ways across the country and around the world.

Many of those it will be a buy-and-hold, and sell to 8point3; and many of those will be a cash sale.

And we look at ConEd as a terrific partner and a win-win for us and the utility.

I will expand on China and Japan, and I will also comment on ConEd.

First, China: the short story is that the fundamentals remain quite strong for power plant business.

And the reasons China is going solar, of course, are the economics that we're seeing around the world, and the obvious need to improve air quality.

And those macro trends I think supplant the near-term concerns that you read about.

So, China is quite strong and will remain quite strong.

And as I mentioned, we've installed 100 megawatts, and our pipeline is growing in China.

On Japan, you're right; there's FX headwinds.

Howard runs the DG business.

It's a global business.

He's allocating product, as you can infer from our comments in our financials, around the world.

And we've had a long history as a company.

It's one of the reasons why we are diversified in all meaningful solar markets, so that we can flex when there's things like FX or policy change.

And, in fact, you are seeing that in our financials.

And the tie to ConEd is that, as Howard remarked, our residential business is doing great, and we expect it to do even better.

And one of the ways that will happen is we'll have a diversity of channels through the customer.

And ConEd is just a great example of how things are evolving.

Thanks, Tom.

Thanks, Chuck.

Julien Dumoulin-Smith.

UBS.

Good afternoon.

So, a quick question here, more in the context of thinking about the pipeline here.

Your 12 gigs to 13 gigs for 8point3, and then ultimately the 1.5 gig Infigen deal, how do we think about reconciling those three, ultimately?

Ultimately what's reflected in that 13 gigawatts for 8point3 as far as we should be thinking about the latest developments here?

Sure.

Mark and I spent a lot of time in the road show talking about the pipeline.

We have a very strong pipeline between both companies, and that's the medium- to late-stage pipeline.

It's not the combined pipeline between the two companies; and primarily in the OECD countries.

And so the way we look at this is we have the ROFO list that effectively allows us to go through the guidance period at 12% to 15%.

And then beyond there, we have the additional portfolio of assets between both companies.

And so I would look at that as additional firepower for sustained long-term growth in execution.

Both of us are very motivated to have a very low cost of capital, long-term.

We see that as a competitive advantage for both companies.

And I think it's a big advantage for the 8point3 shareholders to have such great visibility for long-term execution.

Right.

But just to be clear, the Infigen portfolio didn't qualify as medium stage, for instance?

As Tom mentioned, Infigen is in three buckets.

It's in early-stage around many different states in North America; medium-stage, which is concentrated in a few states; and late-stage, which, for example, 55 megawatts is already contracted and would be great assets to sell to 8point3.

Okay, fair enough.

And then just on the partnership side, obviously the utility announcements are great.

I'd just be curious, how are you thinking about that scaling that up across the country?

What are you hearing out there in the marketplace to realize those opportunities, be it on the residential or utility scale side?

Yes, this is Howard.

We're really excited about the three utility partnerships, two of which we've announced in Dominion and ConEd Solutions.

Just a quick word about the ConEd Solutions which makes it particularly interesting.

It's in probably the second-leading market in the US, in New York.

Its sister company is the incumbent regulated utility, and ConEd Solutions is the unregulated utility, and marketing in the same location.

And the reason why I bring that up is it's really an indication of the trend of what utilities really want to be part of the solar business now.

That's what we're seeing.

There's a -- no longer really fighting solar, but trying to figure out a solution to combine solar with the traditional utility business.

So we are in talks with a number of companies to -- and we are well positioned, because SunPower has a great, differentiated solution.

We're developing a turnkey solution with both hardware and software.

So we're able to essentially white label, and be a co-marketing, co-branded offering to customers in partnerships with utilities.

You asked about scaling up.

This will be my final comment is around how we're going to do that.

The utility business, if you look at it, there's over 3,500 electric utilities serving North America.

So it's unlike other parts of the world where you might have one or two dominant utilities.

In the US, there really aren't single, dominant utilities.

So we see the way to scale up is partnering with a number of utilities while continuing to develop our own independent channel in parallel.

Solar delivers less than 1% of the electricity business in North America, so there's a lot of room for growth.

Got it.

But just to be specific here, are you having conversations with vertically integrated regulated utilities, in the context of providing them a solar platform, or a solar product market?

Yes.

One of the emerging new models is called community solar or shared solar.

There are a number of different models that are subsets of that.

And we are working with a couple of the utilities to -- for example, regulated utilities -- to develop a product and offering around that model.

So, the answer is yes.

Great.

Thank you.

Pavel Molchanov.

Raymond James.

As I'm sure you've noticed, guys, your stock is trading like you are in the oil business of late; same as six months ago.

So I thought I would just ask you to comment on any linkage between your operating geographies -- certainly Japan, Mideast -- to petroleum pricing, vis-a-vis power economics.

And if you can quantify what the percentage exposure of your business mix is, that would be helpful.

Yes, Pavel, thanks for the question.

And I think you've written on this, but if not, hopefully I'm consistent with your comments as well; which is that I think it's like 10% of the world's electricity is actually made from petroleum.

Or less than 10%; I think it's actually 9%.

So the direct correlation is quite low on that measure.

There are macro correlations, right?

You have FX, and FX influences both businesses.

So, it would be fair to say that it's not really an economic tie.

It's certainly not a direct economic tie between the two.

It is perhaps a macro environment tie only.

And, in time, as we drive the economics of solar, I think that that correlation will be broken.

And, in fact, countries, when there are macro challenges, will actually be incented to go to solar.

So we would expect that correlation to not be very good going forward, but we'll see.

All right.

Appreciate it.

Okay.

Thanks, Pavel.

Thank you all for joining us today.

We look forward to talking to you in three months on or next-quarter call.

Thank you.

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