SunPower Corporation (SPWR) 2015 Q4 法說會逐字稿

Good afternoon, and welcome to SunPower Corporation fourth-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 now begin.

Thank you, Tori.

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

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

Tom will also discuss our strategy, post the ITC extension, as well as our outlook for Q1 and 2016.

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 on 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 also 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 as well.

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

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

I'll start by providing some context in the overall solar market and growth potential, before discussing our strong fourth quarter and 2015 performance in greater detail.

Please turn to slide 4. Fundamentals for solar have never been better.

As you can see in this slide, our current forecast for global solar deployment to approximately double over the coming five years, with shipments exceeding 100 gigawatts by 2020.

The scale and continued growth of the solar power industry is being driven by three interrelated factors.

First, cost reduction.

This industry is scaling and innovating across the entire value chain in both DG and power plant applications, driving down the cost of power to the point where solar power is increasingly competitive with conventional sources of electricity.

Second, global market expansion.

More competitive solar power is driving market growth in all key regions, with particularly strong growth expected in USA, and in new emerging markets.

In the USA, solar power capacity additions in 2015 already exceeded those of natural gas fired generation according to Bloomberg New Energy Finance.

Third, policy support.

The reality of clean power solar power at prices competitive with conventional electricity is galvanizing support by regulators and policymakers worldwide.

2015 was a landmark year for solar policy.

Please turn to slide 5.

At the COP21 conference in Paris, close to 200 countries signed an agreement pledging to significantly reduce their carbon emissions, and numerous other multilateral and private initiatives were announced, all with the aim of accelerating the pace of global decarbonization.

Here in the US, Congress passed a five-year extension of the Investment Tax Credit and extended bonus depreciation which will enable further growth and tax equity financing.

This legislation should provide a stable backdrop for accelerated long-term growth of the US market.

We were also pleased to see the California PUC approve a revised net metering proposal.

This rule is very constructive, with respect to further growth of the California DG market.

Finally we believe that the President's Clean Power Plan could be a broad driver of solar adoption throughout the USA, well into the next decade.

Let's focus a little deeper on the implications of the ITC extension.

Please turn to slide 6. As I previously said, we expect that the five-year ITC extension should drive a significant acceleration of US market growth through 2020.

As you can see, US market demand is currently expected to be almost twice as large between 2017 and 2020, as in Greentech Media's Research's previous forecast.

2016 is also expected to be a year of very strong growth, although slightly less than in previous Greentech Media forecasts.

It is important to note, that even assuming this very strong five-year market expansion forecast, solar power will still only account for approximately 3% of total US electricity demand in 2020.

The scale of the opportunity in the US is huge.

We are a long-term market leader in all three segments, and we are planning to meaningfully increase our spending here in the near-term to further expand our leadership position.

If you recall, we also acquired Infigen's 1.5 gigawatt US project portfolio last year.

This portfolio of primarily early and mid stage projects positions us very well for development between 2017 and 2020, given the extension of the ITC.

More on that later.

In summary, we have seen a significant improvement in the solar market landscape over the last 12 months, and the market fundamentals for solar have never been better.

We believe that SunPower is uniquely positioned to capitalize in this environment.

Please turn to slide 7, which we showed at our Analyst Day last year, and which reiterates the key elements of our strategy.

Technology remains the basis for our competitive market advantage, and we continue to invest and innovate in key areas including further improvements to our industry-leading solar cell and panel technology, productization of complete solutions for all customer classes, and development of smart energy software platforms to streamline customer acquisition, and give customers control over their energy environment.

Given the unprecedented global market opportunity, we feel the time is ripe for SunPower to aggressively expand our market share and footprint.

In the upstream, we plan to expand our total panel capacity to over 4 gigawatts by 2019, including investments in both back contact technology, as well as our new performance series products.

This upstream capacity will be increasingly bundled into complete solutions for residential, commercial, and power plant customers around the world, enabling us to expand our channels to market.

We also expect to continue to increase the scope of our partnership with Total internationally.

Finally, we remain focused on prudently managing our balance sheet and cost of capital, while leveraging our joint venture YieldCo, 8point3 Energy Partners.

We see our strong balance sheet as a significant competitive differentiator.

Now let's review our record Q4 performance.

For the quarter, we executed well across all end segments.

Our Q4 financial results benefited from early completion of several projects that were scheduled for completion in Q1 2016.

More on that point later.

In the upstream, we took a $33 million charge in conjunction with the sale of polysilicon.

Excluding this charge, which Chuck will explain in further detail, our Q4 performance would have been even better.

Bottom line, we posted record Q4 and 2015 results.

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

Please turn to slide 8. In the Americas, our performance was solid.

We achieved commercial operations at our135 megawatt Quinto project in Q4, and revenue recognition for this project was a material portion of our fourth-quarter financial results.

This project is owned by 8point3, and currently generating strong cash flows for them.

Our 100 megawatt project for NV Energy is now under construction, and we officially dedicated our second 15 megawatt project at Nellis Air Force Base, bringing our total to 30 megawatt at Nellis, the largest military solar installation in the United States.

We also expanded our international market presence with the award of a 36 megawatt PPA in Mexico for ASUR, a leading airport operator.

Construction of this project is scheduled to start later this year.

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

In France, we added an additional 30 megawatt of projects to our backlog in a recent tender, while in South Africa development of our 80 meg -- 86 megawatt Prieska project is ongoing.

In APAC, we made good progress on our project pipeline in Japan, and continued the expansion of our joint ventures in China, as demand in China remains robust.

We are committed to the Chinese market as a long-term driver of growth.

We have seen significant growth in our global project pipeline over the last six months.

Please turn to slide 9. Our global pipeline currently exceeds 14 gigawatts, with expansion in all major geographies.

In the Americas, our pipeline is over 4 gigawatts, and we expect this number to further increase to reflect the impact of the ITC extension.

Internationally, our work with Total continues to yield benefits, with particular focus on the Middle East and Africa.

Finally, our APAC pipeline will continue to be driven, primarily by China through our two joint ventures.

I would now like to briefly discuss our DG business.

Please turn to slide 10.

Q4 was another great quarter for our DG segment, with strong demand for our industry-leading solutions and financing options.

DG financial performance was solid, and we gained share in both the residential and commercial segments.

In our US residential business, cash buyers remain the majority, though our installed lease megawatts increased more than 60% year over year.

We saw further traction with our utility partnership initiatives, as we formally announced our program with TXU Energy to bring SunPower solutions to Texas.

This partnership built on existing programs with ConEd and Dominion, and is representative of what we believe is a major opportunity to engage with utility companies to bring clean solar power to their customers.

In the new home segment, we expanded our relationship with Meritage Homes to supply SunPower solar systems as a standard feature in all homes that it builds in the Orlando area in 2016.

Our partnership with 8 of the 10 largest new home builders in the United States positions us very well in this market.

In the commercial segment, we were pleased to announce our first drop-down project to 8point3, the 20 megawatt Kern County School District project that will be constructed in three phases during 2016.

Overall bookings remain strong, and our current pipeline now exceeds $1 billion.

We are now shipping our next-generation Helix platform, the world's first fully integrated commercial solar solution.

Designed for the rooftop, carport and commercial ground mount markets, Helix delivers significantly lower cost and improved reliability, while accelerating installation times.

We expect Helix to be a real game-changer for us in the commercial market.

I would like to take this opportunity to expand briefly on our complete solution strategy.

Please turn to slide 11.

SunPower pioneered the standardized systems approach initially in our power plant business, where we introduce the Oasis Power Block five years ago.

We continue to improve the solution, and expect to roll out our third-generation of Oasis this year.

Since then, we have applied the same design philosophy and planning discipline to our commercial business, resulting in our Helix platform.

Customer interest in Helix is strong, and we are very excited about its potential.

Most recently, we have also developed a standardized system for the residential market as part of our complete solution strategy, and you will hear more about our official residential platform launch in the near future.

These three solutions are unique in our industry, and share a common design approach, reducing costs through scale and standardization, enabling a more efficient installation and operation, and providing enhanced customer benefit, by virtue of seamless interoperability between components.

Before turning the call over to Chuck, I would like to provide a quick update on our technology and manufacturing initiatives.

Please turn to slide 12.

We achieved a number of important technology milestones during the quarter.

As we discussed at our Analyst Day in November, we are excited about the potential of our performance series product line.

We are currently starting the initial ramp of this product, and expect volumes of 60 to 80 megawatts this year.

2017 volumes are expected to be in excess of 600 megawatts.

We see extremely strong demand for our microinverters, and expect to ship up to 30% of our US residential panels this year with attached micro-inverters.

We are also regularly producing industry-leading [22%] modules off of our advanced production lines.

Our operations teams executed well, once again, achieving record yield and output at our existing fabs, and beginning the ramp of Fab 4 where we expect to produce 175 megawatts during 2016.

Finally, we reiterate that we expect to triple our panel capacity to 4 gigawatts by the end of 2019, which will enable us to capture additional market share and expand our market footprint.

In summary, Q4 was a great quarter for the Company, as we executed on our project commitments, expanded our pipeline, and progressed on our cost and technology road maps.

We see continued strong global demand, and are excited about the launch of our new products, and the growth of our global project pipeline.

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

Chuck?

Thanks, Tom.

Good afternoon.

Please turn to slide 13.

Q4 was a record quarter for the Company on many metrics, as we significantly beat our plan.

We generated $380 million in EBITDA, added to our HoldCo asset base, and executed on our projects for 8point3.

We were also pleased to recently announce our first YieldCo project drop-down.

I also want to point out that we took a $33 million charge related to the contracted sale at current market-based rates of above market priced polysilicon acquired through a long-term supply agreement.

This charge impacted both our GAAP and non-GAAP financial performance across all three segments, and was allocated based on megawatts deployed.

Excluding this charge, our results would have been significantly better.

Before getting into the specifics for the quarter, I would like to address the large difference between our non-GAAP and GAAP results for Q4 and 2015.

As most of you are probably aware, project sales and sales to 8point3 are treated differently under GAAP and IFRS accounting standards.

Under GAAP, these projects sales fall under real estate accounting rules, which generally defer revenue and margin into the future.

IFRS generally recognizes revenue and margin, once the project has been sold, and reaches commercial operation.

We follow IFRS revenue recognition for non-GAAP, and report those results to Total who consolidates our results.

Our Q4 GAAP P&L reflects the full deferral of revenue and margin for Quinto, Macy's and RPU, even though they were already sold and reached COD during Q4.

IFRS and GAAP standards will converge starting in 2017, which we expect will reduce or eliminate this difference in reporting.

We are evaluating the early adoption of this new standard in 2017.

Our strong performance was primarily driven by the completion of the projects that were sold to 8point3 as part of the IPO.

In addition, we benefited from strong execution, as a number of projects were completed in Q4 that were planned for 2016.

This resulted in a $65 million shift of EBITDA from early 2016 into Q4 of 2015.

As Tom will discuss, this was a timing issue, and we still expect our 2015 and 2016 combined EBITDA to be in the same range, or even a bit higher than we guided at Analyst Day in November.

Looking forward to 2017 and beyond, we are very encouraged by the recent ITC extension, as this should improve both volumes and margins in the US market.

Specifically on the P&L, our strong non-GAAP revenue was primarily driven by our 135 megawatt Quinto project, which accounted for approximately $900 million in total revenue.

In commercial, revenue was down slightly sequentially, but better than plan.

As you will recall, Q3 commercial results included the completion of our 16 megawatt University of California Davis project for 8point3.

Our residential business, particularly in North America remains strong, as revenues increased approximately 10% sequentially, while year-over-year lease megawatt growth exceeded 60%.

Our non-GAAP gross margin for the quarter was 28.8% and in line with our targets.

Power plant margins were up significantly at 32.9%, versus Q3, due to the Quinto project recognition I discussed earlier.

Commercial margins were in line with our forecast, but impacted by the poly charge.

We are now booking sales of a new Helix product line.

The early returns are impressive, as we are seeing an increase in sales with expanded margins, driven by the significant cost reduction.

Our residential business was solid, as we saw strong North American installations and bookings in Q4, and Q1 is off to a strong start.

Non-GAAP residential margin for the quarter was 18.7%, as the strength in North America was offset by our international business, as well as the impact of our poly charge I mentioned earlier.

North American cash and loan sales totaled 67% of our shipments, while 33% were lease.

Overall, we deployed 89 megawatts of residential products globally, in line with our forecasts.

Lease bookings were 24 megawatts in Q4, with cumulative lease bookings of 270 megawatts in our HoldCo.

Net contracted payments are over $1 billion, excluding the residual value.

In addition, NCI for the quarter was $32 million, primarily the result of strong installs in the channel, and part of the pull-in from 2016.

Fourth quarter non-GAAP OpEx was up sequentially, as we increased investment in technology, specifically our complete solutions, as well as sales and marketing to support our significant growth plans.

We expect OpEx of approximately $100 million quarterly in 2016.

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

Additionally, we are continuing the construction of Fab 4, and plan for volume production of approximately 175 megawatts this year.

CapEx for the quarter was $98 million, almost all the way to the ramp of Fab 4.

Moving to our HoldCo strategy, please turn to slide 14.

This chart summarizes our HoldCo asset portfolio for the fourth quarter.

Assets under contract now total 1.067 gigawatts, and reflect the completion of projects that were originally sold to 8point3.

Now please turn to slide15, where we will provide a more specific view of our ROFO asset status by project.

We deployed approximately 120 megawatts in the fourth quarter, and have now completed all IPO assets for 8point3.

We expect to deploy an additional 110 megawatts of HoldCo assets in the first quarter.

As previously mentioned, we recently completed our first project drop-down to 8point3.

The 20 megawatt Kern County project is the largest school district project in the US, and will be constructed over 27 sites over three phases in 2016.

In addition, we formally offered our next project to 8point3, and expect more sales this year.

Finally, I want to mention liquidity.

We ended the quarter with a strong balance sheet, with approximately $1 billion in cash, and our revolver was undrawn.

I am pleased to announce that today, we increased our revolver capacity from $250 million to $300 million, at a very attractive rate of LIBOR plus 1.5[%] to 2[%].

This facility is not guaranteed by Total, and has 3.5 years to maturity.

We also added a $200 million LC sub limit to the revolver, which facilitates financial LCs that can be used to support international expansion, without tying up our cash.

In closing, our business fundamentals are solid, and we are well-positioned to meet our financial goals in 2016.

Tom?

Thanks, Chuck.

I would now like to discuss some of the background and highlights of our guidance for the first quarter.

As a reminder, we believe that EBITDA is the most appropriate measure of our ongoing business.

Given strong global demand and the favorable policy environment, we remain confident in achieving our long-term strategic and financial goals.

As a result of certain timing factors I will discuss shortly, we are adjusting our 2016 EBITDA guidance, compared to what we disclosed in our Analyst Day in November.

Please turn to slide 16.

Essentially, we recognized approximately $65 million of EBITDA in Q4 that we had originally expected to be recognized 2016, and therefore this EBITDA will not be recognized in 2016.

This slide shows a waterfall between the components of our previous combined FY15, FY16 EBITDA guidance of $990 million to $1.65 billion given at Analyst Day, and our current combined guidance which is unchanged.

However, due to earlier than forecasted power plant project completions such as our Hooper project, the accelerated recognition of residential leases, and earlier than anticipated benefits from 8point3 Energy Partners, that were recognized in the fourth quarter of 2015, the Company now expects 2016 EBITDA to be in the range of $450 million to $500 million, compared to previous guidance of $515 million to $565 million.

Beyond 2016, we believe that the ITC extension, and our increased investment in the US market will drive significantly higher EBITDA.

Please turn to slide 17.

For Q1, our non-GAAP guidance is as follows.

We expect revenue of $290 million to $340 million, gross margin of 12% to 13%, EBITDA of $0 million to $25 million megawatts deployed in the range of 315 to 340 megawatts.

On a GAAP basis, the Company expects revenue of $280 million to $330 million, gross margins of 11% to 12%, and GAAP net loss of $115 million to $90 million.

Please note that our Q1 2016 GAAP guidance reflects the impact of our HoldCo strategy, as well as the deferral of revenue and margin due to real estate accounting treatment.

For 2016, we expect non-GAAP revenues of $3.2 billion to $3.4 billion, gross margin of 14% to 16%, EBITDA of $450 million to $500 million, gigawatts deployed of 1.7 to 2 gigawatts.

On a GAAP basis, we see revenues of $2.2 billion to $2.4 billion, gross margin of 17% to 19%, and a net income of breakeven to $50 million.

Capital expenditures in the first quarter are expected to be in the range of $210 million to $240 million.

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

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

Questions, please?

(Operator Instructions)

Thank you.

Our first question is from Tyler Frank.

Please state your company name.

Hi; Robert Baird.

Thanks for taking the question.

Can you comment a little bit about your expectations for 2017, and how you are seeing the pipeline come in, in the US?

And then, how should we think about the value of the Infigen pipeline that you acquired, now that the ITC has been extended, versus when you purchased the pipeline?

Thanks, Tyler, for the question.

So, in terms of our 2017, we are significantly more optimistic, and that has caused us to invest more aggressively in 2016, setting the table for 2017 and beyond.

So, 2017, I think, will be a very strong year across the board, across all three segments in the United States.

Where we are seeing a little bit is with commercial and utility scale, that there isn't the motivation -- the artificial motivation of the ITC cliff.

And so, we can have a more thoughtful approach to when we execute on projects, which I think is better for everybody -- so, very much an extraordinarily positive outcome in December of 2015.

In terms of Infigen, that turned out to be -- it really -- worked out really well because the assets are complementary to where we have land positions.

A lot of assets are in the south, in the middle of the country, and the southwest, where we didn't have as many land positions.

So, as we plot in America, where there is RPSs still available, where the Clean Power Plan will make the most difference -- and of course, where there is good sunlight.

And we look at the intersection of those, we think we really nailed it with the Infigen pipeline.

It's a 1.4 gigawatt pipeline.

I think, in time, we'll perfect most, if not all, of that pipeline, whereas that probably would not have been the case without the ITC -- so, very bullish outlook on all three segments in America for sure.

Thanks.

Thank you.

Thank you.

Our next question is from Pavel Molchanov.

Please state your company name.

Raymond James.

Thanks for taking the question.

At the Analyst Day in November, you talked about doubling EBITDA by 2020.

Now, that was before the ITC extension.

So, what -- directionally, what kind of impact do you think that will have to that target of doubling EBITDA by the end of the decade?

Thanks, Pavel; this is Chuck.

Yes, specifically our plan was to triple volume, double revenue, and double EBITDA over that period through 2020.

And with the ITC, I think we are more bullish.

Likely what that will mean is more investment in North America, and a higher percentage of North American projects.

We're not prepared today to update or raise guidance.

But we're -- I will put it this way, we are a lot more bullish on both volume and the economics for the North American market.

Okay.

And if I can follow up with a quick one also on the policy front?

You're in a unique position of dealing with utilities, but also competing against them in the residential part of the Business.

So, how are you navigating the net metering controversies that have been popping up from state to state?

Well, I would say that you're exactly right.

Our biggest customers are the IOUs in America.

And at the same time, we aren't completely aligned on distributed generation.

But I would say we're more aligned on most parts of the solar segments, in terms of obviously power plants, but also community solar.

And when we look, and there's commercial programs as well, when you look at SoCal Edison and their LCR program.

When we look at DG, it's, frankly, our belief that customer choice is going to be what drives the market.

And that the economics of DG have improved so dramatically, that it's more a question of how to implement, not whether it will be allowed.

So, some of the developments, I think, are round one or round two.

And I think, in the long term, we will find the right way to get DG done.

And I look at programs like SoCal Edison as maybe one of the models.

Appreciate it, guys.

Thanks, Pavel.

Our next question is from Krish Sankar.

Your line is now open.

Please state your company name.

Yes, hi, it's Bank of America Merrill Lynch.

Thanks for taking my questions.

I have two of them; let me ask them up front.

The first one: Either Chuck or Tom, can you talk a little bit about the tax equity available to you, across the different market segments, like commercial, resi, power plants in the US?

And the second question I had was: Can you give an update on how the P-Series is doing?

And looks like two-thirds of your pipeline is in APAC, Middle East, Africa.

How much of that would be targeted using P-Series?

Thank you.

Thanks, Krish.

I'll go first, and address tax equity.

So, we see a very strong tax equity market for SunPower.

Investors like to work with SunPower because of our reputation, our balance sheet, the strength.

To answer your question, in residential, we have recently closed a new fund that will provide us capacity, we think, through the year.

And so, we're very excited about this new fund, and it's sort of in line with the prior funds that we've done with similar investors.

On commercial, we finance those many different ways.

There is a lot of demand from investors.

Recently, Wells Fargo financed a couple commercial projects.

They are a great partner.

And then, finally, on utility scale, there is, we think, still a strong demand in utility for our projects.

If we sell the 8point3, then we bring in a pure cash equity, or tax equity, investor.

And if we do other structures, then it could be a different deal, but there is very strong demand for our projects.

I will take P-Series.

First of all, to remind everybody, we bought a company called Cogenra; we closed that transaction, I think, late August.

We retained everybody on the team.

We're really pleased with that.

They've really contributed great technologies -- working exactly as planned.

We produced 1 megawatt of product already.

We fielded 700 megawatts; we'll have 1 megawatt in the field in the next week.

We've got 500 megawatts of equipment on order that will be installed this year that will prepare us; we're producing approximately 600 megawatts next year.

And then, to your point, this product will be targeted towards Asia-Pacific and Africa, because it has a lower upfront cost.

Recall that the product is positioned as a relative high efficiency, certainly relative to the mainstream product in the market.

It will be higher efficiency, but similar cost or better.

And so, it is particularly well suited for those non-OECD markets.

And I want to say as well that in a place like Africa, where Total has a meaningful share of the energy market, and has a great footprint, that's where -- that channel that they have in Africa is something that we expect to leverage, and we expect to leverage it with the P-Series product.

Thank you.

Thanks, Tom.

Thanks, Chuck.

Thank you.

Our next question is from Patrick Jobin.

Your line is now open.

Please state your company name.

Hi; Credit Suisse.

Thanks for taking the question.

I have a question about power plant timing.

Some are talking about the ability to push some projects out to 2017, to take advantage of that cost reduction.

When you look at your projects for 2016, is that an opportunity for you at all to push out, given you're capacity constrained, and allocate that volume elsewhere?

And then, I have one quick follow-up.

Thanks.

Yes, Patrick, that is the case.

So, with the ITC extension, we no longer have to bring all the projects into 2016.

So, we are definitely considering the timing of our projects.

And in fact, in Q4, we accelerated a project called Hooper that helped improve our results in Q4.

So, to answer your question, yes, we have flexibility around timing now.

And that, I think, is a real benefit to both 2016 and 2017.

Got it.

And then just a question on Q1's gross margin guidance of 12% to 13% -- just help us bridge the sequential change there.

Granted, you're confident in the full year; I just want to understand what's driving some of that pressure in Q1 -- if it's mix or what?

Thanks.

Certainly.

The margin guidance in Q1 is really just mix, because effectively we had a very strong Q4.

And if you look at the megawatts deployed, we have a really strong Q1 for megawatts deployed between 315 and 340 megawatts for Q1, up from Q4 of 280.

But megawatts recognized comes down.

So, when the volume recognized is lower, then margins will come down a little bit because of just absorption.

But we look at megawatts deployed, and it's a very, very strong quarter.

Thank you.

Thank you.

Our next question is from Vishal Shah.

Your line is now open.

Please state your company name.

Deutsche Bank.

Thanks for taking my question.

I wanted to ask you a question about the residential market.

Last quarter you were talking about an ABS deal in the works.

Can you maybe just provide an update on where we are with that transaction?

And also, some of the other residential companies are talking about a slightly worse than normal seasonality in Q1.

Are you seeing something similar to that in Q1, and how do you think about the outlook for the rest of the year?

Thank you.

Sure.

Vishal, on the ABS side, yes, our plans would still be to do an ABS transaction.

As you will recall, when we did the 8point3 IPO, we sold a number of leases in our first portfolio to 8point3.

So, that delayed the timing of our first ABS transaction.

We have worked on and have closed a warehouse facility that would lead to ABS take-out.

The timing of that is likely early 2017.

And so, we're making great progress, and are looking forward to doing our first deal, but it will be in approximately a year.

Hi, Vishal, this is Howard.

We are seeing our Business really picking up steam in North America, both residential and commercial.

We ended the year in 2015, really strong in Q4, more than 60% growth year on year for residential business.

So, we are proud of that, and proud of the team.

And going into Q1 and into 2016, we are already in the middle of Q1, and we are off to a really good start.

And so, we anticipate continued growth, faster than the market.

So, we will be picking up market share.

We picked up market share in 2015, and we anticipate picking up share in 2016.

And Q1, we are going to have quarter-on-quarter growth -- sorry, year-on-year growth for Q1 2016 relative to Q1 2015 of probably more than 45%, 50%.

So, we actually see Q1 being very strong in residential.

That's helpful.

Thank you.

Thank you.

Our next question is from Brian Lee.

Your line is now open.

Please state your company name.

Goldman Sachs.

Thanks guys for taking the questions.

First one I had was just around the ROFO projects.

It seems like some of the project build timelines are moving ahead of schedule.

So, is it fair to assume that dropdowns could also be more accelerated versus the original expectations for projects like Henrietta and Stanford?

And then, what's driving that strategic decision here?

And then lastly, given that, what are your latest thoughts around updating the ROFO project list in coming quarters?

And then I had a follow-up.

Okay, Brian.

So, I guess, our plan was that the ITC would've expired.

And so, we're working by accelerating the US projects, and so that really pulled forward projects like Hooper and Henrietta.

Now, I think, with the ITC extension, we will revisit the exact timing of COD.

But I don't think that that will ultimately change when we will sell those to 8point3.

So, we've offered our second project to 8point3 officially, and we will likely do more in the first quarter and second quarter.

The bulk of those projects though would happen in Q3.

Okay, that's helpful.

And regarding -- would we add more to the ROFO?

I guess, we will take that question on the 8point3 earnings call.

And when might we update the ROFO.

Yes, we will talk more about that on the 8point3 call.

Okay.

Fair enough.

Just a second question -- I might've missed this, so, apologize.

But on the 2016 guidance update, if you could just help reconcile one thing, Chuck?

It looks like megawatts deployed and megawatts recognized are not changing at all versus what you had at the Analyst Day in November.

But revenue and EBITDA are down; gross margin is up.

So, just wondering what's driving that?

And are you changing the way you account for 8point3 dropdowns on the P&L at all?

Any clarification -- that would be great.

Thank you.

Yes, thanks, Brian.

No change to how we account for 8point3 sales.

And the megawatts deployed and recognized is a fairly wide range.

And so, we felt that we don't need to change the ranges.

Our megawatt deployed guidance is 1.7 to 2 gigawatts, and megawatts recognized at 1.6 to 1.9 gigawatts.

And those ranges are fairly wide.

We didn't feel like we needed to change the ranges.

Revenue?

In terms of revenue and EBITDA, Brian, that's almost entirely a function of timing, of 2015 versus 2016.

So, if you looked at, from Analyst Day through the end of 2016, they would be identical numbers.

Thanks, guys.

Thanks, Brian.

Thank you.

Our next question is from Jeff Osborne.

Your line is now open.

Please state your company name.

Yes, from Cowen and Company.

I was wondering if you could just touch on the $100 million in OpEx that you mentioned, Chuck, per quarter.

What was that assumption at Analyst Day before the ITC extension, and then what areas internally are you putting some of that investment in?

I will take this for a little bit, and then Chuck can cover some numbers with you.

The investment will be -- I think what Chuck is going to tell you -- is pretty materially similar in OpEx, but it will be shifting from other parts of the world to America, partially.

We are actually bumping up our spending on our module technology a little bit.

We're bumping up our spending on smart energy we call it, which is a combination of batteries and energy management.

And then, we are ramping up our marketing spend.

We started that in Q4, and we'll continue that throughout the year.

So, those are the three big initiatives, and it would be geographic shifting as well.

And then for guidance at Analyst Day, we guided a total OpEx of $430 million to $480 million.

We've tightened that range a bit, with our updated guidance of $430 million to $455 million.

In terms of the quarterly cadence of that, I mentioned in the prepared remarks that it would be approximately $100 million quarterly.

It will be a little bit higher in Q1, but it should be on average a little north of $100 million.

Got it.

And then, congratulations on getting the attractive financing done.

Is there any pockets of weakness that you are seeing in financing, just with the broader concerns investors have with the energy complex?

Is that trickling down to any other parts of the financing stack, non-recourse debt, et cetera?

You addressed tax equity, but maybe just some of the other areas of capital needs would be helpful?

Yes, we -- it's been -- I'd say the financing markets have been very strong for SunPower.

I think as the -- as our projects perform, and investors see the stability of the long-term earnings, we have seen great demand, and just, quite frankly, terrific partners on the financing side.

So, the banks that we work with are strong supporters, and are -- I think have done a really good job working with SunPower.

Excellent.

Congratulations on the strong results.

Thank you.

We have time for two more quick ones.

Thank you.

Our next question is from Julien Dumoulin-Smith.

Your line is now open.

Please state your company name.

Good afternoon; UBS.

I just wanted to touch base here.

There's a lot of talk about 2017, but isn't the procurement cycle really oriented towards 2018 and 2019, given the structure of the ITC?

And to what end are you seeing that cycle kick-start here, even irrespective of the stay of CPP?

Yes, I think it would be fair to say that for utility scale projects, that it's probably materially 2018 and 2019.

The conversation around utility projects, is where your economics likely to be, and is there significant change in that time frame?

And if there isn't, then there isn't a lot of incentive to wait.

There is a little bit of dynamic around that, but it would be fair to say 2018 and 2019.

Where we do see nearer-term, significant activity is with commercial customers.

And there are 800 direct access commercial customers that can buy ground-mount systems, and get the energy over our transmission lines.

And it is quite active, and certainly we would expect good activity in that segment in 2017.

And then, of course, the normal commercial business and the residential business.

But to your point, large-scale power plant, traditional power plant as we know it, is mostly an 2018/2019 conversation.

What does that mean for margin composition, to be clear (multiple speakers) commercial versus utility?

Of course, that depends on how fast you want to get -- how fast you can get costs down.

It is -- I'd say that the most aggressive challenges for margins are in the power plant sector.

It is intensely competitive everywhere, but mostly in the power plant sector.

Our team has proven, with the Oasis platform, to be able to take costs out.

We are working on Oasis 3.0.

And by the way, that was enhanced with some of the technology we got from Cogenra.

We expect everything we ship from 2017 and beyond to be Oasis 3.0 based, and that takes a significant amount of cost out.

So, I think, compared to legacy PPAs, the margins will be down a little bit.

But what we've talked about at Analyst Day is certainly what we expect to continue to do.

And the distributed generation business, the team has done a great job with what we call complete solutions, or an entire solar installation in a kit that is pre-configured, much like Oasis.

We call that Helix in commercial.

That has a significant cost reduction, and that will be shipping during this quarter, and we will announce the residential version of that very soon.

So, my color would be: challenging in power plants, consistent with what we said on Analyst Day; and we are optimistic, if not bullish, in the DG segment.

Thank you.

Thanks, Julien.

Thank you.

Our final question is from the line of Colin Rusch.

Please state your company name.

Your line is now open.

Thanks so much.

Can you talk a little bit about the gating factors in the emerging markets?

Obviously, with the cost of financing going up pretty dramatically for lower rated credits, I want to hear a little bit about what you're seeing in terms of the demand profile for that P-Series?

And what do you think the real sticking points are going to be, in terms of turning those sales into reality?

And then I have a follow-up.

Well, what we see is that you can produce solar energy for -- it's cost competitive with almost any alternative technology.

And in fact, the majority of new generation in the last year was solar.

So, in new and emerging economies are, of course, thirsty for energy, and economic energy.

So, the pull is there.

And as you point out though, there is challenges with the cost of capital and, of course, FX, in predicting what the FX rates will be.

That, I think, requires local presence, and it requires a longer-term view.

So, the traditional -- two groups of the emerging markets, maybe not so emerging like South Africa and Chile, and then Africa in general.

And, of course, I guess you would put India and China in the prior group.

Africa, in general, we're optimistic about.

We are seeing a lot of activity there, largely because we can partner with Total, and they've had a presence in the region for a long time.

And we can capitalize on that because, of course, they know the financing markets really well, as well.

So, I would say great activity that you know well about in India and China and South Africa.

Chile and Africa is emerging favorably -- think a couple years, not next few quarters.

And then, the follow-up is really on return on capital.

As you guys are making some pretty significant investments in terms of capacity, how are you thinking about the return profile going forward, and returning that cash to equity holders here?

Sure.

So, the return [stuff], obviously, it depends on each geography.

And in North America, we've seen a compression.

And it's been, I think, a very strong market.

And certainly, the emerging markets that Tom was talking about, there is still a relatively high cost of capital.

And so, I think the returns are commensurate with the risk in those locations.

So, with that, we will wrap it up.

Thank you all for attending the call, and look forward to talking to you next quarter.

Thanks, everyone.

Thank you.

This concludes today's conference.

Thank you for joining, and you may now disconnect.