SunPower Corporation (SPWR) 2016 Q3 法說會逐字稿

Good afternoon, and welcome to SunPower Corporation's third quarter 2016 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, Inez.

I'd like to welcome everyone to our third quarter 2016 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 third quarter 2016 financial results.

Tom will then discuss our updated outlook for Q4 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 2015 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 the call on the Events and Presentations page of our Investor Relations website.

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

With that, I'd 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 reviewing SunPower's solid third quarter results, provide an update on the market environment, and lay out what we believe to be the key strategic drivers for the Company.

Given difficult market conditions, earlier today we announced comprehensive cost reduction programs designed to lower both our manufacturing and operational cost structures and deleverage our balance sheet while maintaining ongoing investment in our industry-leading technology and product solutions.

In my remarks today, I will outline these cost programs, as well as update you on our partnership with Total including details on a few current strategic initiatives.

First, let me cover our strong Q3 performance.

In power plants, we achieved a number of significant development milestones and benefited from the sale of our minority interest in the Henrietta project 8point3.

On the product front, we launched our next generation Oasis power plant solution that significantly lowers cost, while improving overall system performance.

Our DG businesses also performed well for the quarter as a result of continued customer demand for our SunPower Equinox and Helix complete solutions.

We once more expanded our public sector footprint and added a number of new commercial customers.

On the operations side, our team delivered excellent performance in our IDC Fabs and our cost R&D maps remain on plan.

For P-Series, the volume ramp remains on track and costs are ahead of plan.

We continue to see positive feedback from our customers regarding the competitiveness of this new product line.

I would now like to discuss current market conditions and highlight the key drivers for SunPower's long-term success.

Please turn to slide 5.

As mentioned last quarter, we believe that long-term growth prospects remain very compelling with solar power widely expected to become the largest contributor to incremental electricity generation globally.

For example, the International Energy Agency's recently updated 25-year forecast predicts solar power to be the number one new energy generation resource over this period.

We believe that our strategy focused on developing differentiated technology and deploying it across a diversified portfolio of markets channels and applications will allow SunPower to profitably capitalize on this market opportunity.

However, in the near term, the solar industry is experiencing a market dislocation that will impact our Q4 and 2017 financial performance.

Specifically, global panel ASPs have been depressed by the current mismatch between supply and demand, with reported ASPs down approximately 25% in the third quarter as panel manufacturers liquidate excess inventory.

We do not expect price reductions to continue at this pace, but we do believe that the panel price environment will remain very challenging into 2017.

In DG, residential demand remains solid, particularly in the US where solar power is competitive with retail electricity rates in many states.

However, as we entered the fourth quarter we saw a moderation of demand growth in the US residential market versus historical rates, which will impact our Q4 residential performance.

We anticipate continued steady future growth in the US residential market and expect to gain share with our high-efficiency Equinox complete system solution.

The commercial market remains fragmented and subject to policy and permitting project dynamics that challenged our ability to deliver projects on time.

We have made adjustments in our commercial project operating systems and have increased pipeline coverage, so we expect better linearity next year.

Over 70% of our forecasted 2017 volumes have already been awarded.

Finally, in power plants, we continue to see a challenging marketplace with PPA pricing under pressure driven by aggressive, competitive bidding and increasing prevalence of auction-based procurement mechanisms.

We have decided to lower our 2017 forecast for this business and size our operating expenses commensurately.

Given the current industry disruption, we took a hard look at our business and have reaffirmed a set of key strategies that position the Company for long-term profitable growth.

Please turn to slide 6.

First, we remain committed to maintaining our upstream technology leadership and will continue to invest in next-generation solar power solutions.

Second, we will size our investment in the power plant business to focus only on markets where we can add value through project development, primarily in the Americas.

In other global power plant markets, we will sell our low-cost P-Series panel and Oasis tracker products through our growing solar solution sales network.

Third, we will reduce overall solar cell fab output to match profitable demand levels and continue to bias our product mix increasingly towards our industry-leading X-Series product platform.

Fourth, we will expand our market cooperation with Total, who remain deeply committed to SunPower as an increasingly core element of their business.

Fifth, we will focus the Company on cash generation and profitable growth.

We believe that the strength of our balance sheet will be a key differentiator through this period of dislocation.

Finally, we will continue to support the growth of 8point3 as both a buyer of our high-quality projects, as well as a strategic investment asset.

Using these guidelines, we have decided to institute a number of cost reduction programs to increase profitability and drive long-term market leadership.

Please turn to slide 7, where I will discuss our initiatives in greater detail.

Following the current period of demand/supply imbalance, we expect demand growth to return in 2017 or early 2018.

As this happens, we would expect supply and demand to rebalance and panel prices to stabilize.

However, with the realignment of our power plant business, our plans to increasingly leverage our P-Series products outside our core DG markets we have made the decision to reduce our IDC capacity to match the level of profitable demand in our core markets.

We will also size our operational expenses to a revenue plan that improves cash generation and profitability.

Specifically, we plan to reduce our annual 2017 operating expenses to approximately $350 million, as well as improve our gross margin profile.

In addition to the balance sheet, we will implement a number of programs to reduce current inventory levels to improve working capital, increase liquidity, and delever our balance sheet.

Given current market conditions, our focus over the next five quarters will be on maximizing cash flow.

We feel that cash flow and liquidity will be the best metric to evaluate our performance during the coming year, and expect to generate positive cash flow from operations through the end of 2017, and exiting the year with approximately $300 million in cash.

We will also accelerate our panel and BOS cost road maps over the next 18 months to lower system costs and improve profitability.

As I previously mentioned, Total remains very supportive and we are expanding our strategic cooperation in a number of areas.

Please turn to slide 8.

As announced today, we signed a four-year, up to 200-MW panel supply agreement with Total to solarize various facilities around the world.

This agreement covers the supply of 150 megawatts of E-Series panels with an option to purchase up to another 50 megawatts of P-Series panels and includes prepayment in the amount of approximately $90 million.

Additionally, the companies are currently in discussions to expand their global power plant partnership to include potential Total project ownership opportunities in such markets as Japan, South Africa, and France.

We have also enhanced a joint R&D cooperation whereby Total will take an increased role in certain programs including residential smart energy.

In short, we are seeing increased traction with Total in a number of areas consistent with the recent formation of their new gas renewals and power division and they're public commitment to better energy.

Finally, I would like to provide a short update on the recent progress of our latest generation solar cell technology.

Please turn to slide 9.

This chart shows the efficiency trend of solar cells manufactured in Fab 4 since April of this year when we began high volume ramp of this facility.

During this period, our Fab 4 team has ramped production to full capacity, a run rate of approximately 375 megawatts per year while simultaneously increasing peak and average cell performance.

As you can see, the efficiency of our best production launch are now over 25% with median cell efficiency at 24.7% and increasing steadily.

To put this into perspective, this is over 30% higher than the average industry cell efficiency.

We believe that the ability of our R&D teams to continuously innovate and commercialize new industry-leading products is the foundation of our technology differentiation and the source of sustainable competitive advantage.

Please turn to slide 10.

Before I conclude, I would like to note that Howard Wenger, our President of Business Units, has decided to leave the Company.

Howard has been a leader in the solar power industry for 30 years with the last 10 years as a key member of our executive team.

Howard will formally leave during the next six months and will continue to be an advisor to the Company in the future.

I and the Company want to thank him for his tireless dedication and commitment for helping us change the way our world was powered.

In conclusion, we continue to see tremendous long-term opportunity for solar power and are proactively adjusting our near-term focus to position the Company for success as we exit the current market dislocation.

As a reminder, in an effort to enhance transparency related to this process, we plan the host a conference call on December 7, 2016 to update our investors on our progress, discuss details of our Board-approved restructuring plan, and provide guidance for 2017.

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

Chuck?

Thanks, Tom, and good afternoon.

I will first review our third quarter results, then provide additional color on some of our key Q3 financial highlights before turning the call back to Tom for our updated 2016 guidance.

Please turn to slide 11.

Q3 was a good quarter for the Company as we delivered solid results.

We generated approximately $148 million in EBITDA for the quarter with megawatts recognized up 67% sequentially.

In addition, we continued to execute on our construction commitments during the quarter, as we expect to deliver more than 350 megawatts of power plant projects in Q4.

Specifically on the P&L, our non-GAAP revenue was in line with our plan as the softness in residential was more than offset by strength in both our commercial and power plant segments.

As you know, our power plant business is dependent on project timing and our Q3 performance benefited from the sale of our minority stake in the 102-MW Henrietta project to 8point3.

In our commercial segment, non-GAAP revenue rose 30% due to strong execution, as well as the early completion of certain projects.

As Tom mentioned, we continue to see strong customer interest in our Helix product.

We expect our fourth quarter commercial segment to be impacted by timing of revenue recognition, as certain booked projects are pushed into 2017.

In the aggregate, 70% of our 2017 projected commercial projects have already been awarded.

Our global residential business performed well with Europe and Japan ahead of plan.

Our non-GAAP gross margin for the quarter was 20% and ahead of plan.

Power plant margins improved significantly, as we sold our Henrietta project.

We expect power plant margins to decline in Q4 due to timing and the overall power plant market.

Commercial margins were in line with our forecasts, though down sequentially, due to mix changes.

Non-GAAP residential margin for the quarter was 20.6%, with Europe and Japan above plan.

North American cash and loan sales were 68% of our shipments, while 32% were leased.

We see a continuing trend of customers shifting from lease to cash or loans.

Cash or loan sales have a better cash flow profile, but generate less EBITDA due to NCI.

Overall, we deployed 83 megawatts of residential products globally, in line with our forecasts.

Lease bookings were 24 megawatts in Q3, with cumulative lease bookings of more than 325 megawatts in our holdco.

Net contracted payments are approximately $1.2 billion excluding the residual value.

In addition, NCI for the quarter was $15 million.

We remain confident that we will have sufficient tax equity capacity to meet our demand.

Third quarter non-GAAP OpEx was $98 million, down approximately 5% versus Q2.

We expect OpEx to be approximately $95 million for the fourth quarter.

As Tom mentioned, we plan to reduce 2017 operating expenses to approximately $350 million.

Our P-Series product is ramping on plan.

CapEx for the quarter was $56 million, primarily for the completion of Fab 4, which produces our latest technology cells for X-Series.

We expect a significant reduction in 2017 CapEx as we complete Fab 4.

As expected, we exited the quarter with more than $380 million in cash as we built projects for Q4 delivery.

We expect cash to increase in Q4 as we complete construction and selling a number of power plant projects.

Inventory declined sequentially and we expect a further reduction in 2017.

I'd now like to provide color on some of the key financial highlights for the quarter.

Please turn to slide 12.

First, we are pleased to announce the sale of our 102-MW Henrietta projects to 8point3.

Second, we took a goodwill charge which impacted our GAAP results by $147 million.

The write-off of all of our goodwill was driven by the decline in our share price.

Third, we acquired the remaining 50% of our Malaysian joint venture during the quarter.

Our closing balance sheet in Q3 reflects the transaction where the invest in the JV, which was classified as a long-term asset, is now reflected primarily in our property, plant and equipment.

Going forward, we expect to record lower equity and earnings, more than offset by lower overall product costs.

This acquisition resolves a long-running dispute between the companies and gives us full control over our best performing fab.

Fourth, as noted in the past, we have long-term polysilicon contracts that are above market and in quantities that exceed near-term consumption.

These contracts negatively impact margins, inventory, and cash flow.

We can utilize the full amount of the contracts over time, but as we have done previously, we expect to sell near-term excess poly to improve our working capital.

If we do so, it will result in a P&L charge in both GAAP and non-GAAP.

I would now like to provide an update on the assets we have in relation to our holdco strategy.

Please turn to slide 13.

Total megawatts in our holdco was essentially unchanged compared to last quarter at approximately 1.9 GW.

Residential operating megawatts rose sequentially and reflects our lease asset increase.

In power plants, the table reflects the sale of our Henrietta project to 8point3, offset by additional megawatts related to our portfolio of projects in Mexico.

I would now like to address some actions we are taking as we transition to a near-term cash flow driven model.

Please turn to slide 14.

As Tom mentioned, we are taking a number of proactive steps to successfully manage through this short-term industry dislocation.

We are very prudently running the Company focused on cash flow and NPV economics.

While this will likely have a short-term and intermediate-term impact reducing our EBITDA, it will create more shareholder value over the long term.

Specifically, some of these trade-offs are idling manufacturing lines to reduce inventory, shifting lease to loans or cash, shifting financial close on large commercial and utility projects from Q4 2016 to 2017.

Additionally, we may sell projects at NTP versus at COD, and not bid low PPA prices on projects if they do not meet our cash flow or NPV requirements.

These actions can have the impact of shifting of reducing EBITDA, but will improve cash flow to ensure we capture the value over the long term.

Finally, we remain focused on gross margin improvement by selling our complete solution product suite while reducing the cost of these solutions.

We see significant room for improvement given we have a great base of first-generation complete solutions.

We believe these steps position the Company appropriately to address near-term challenges while maintaining the ability to execute on our long-term strategic plan.

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

Tom?

Thanks, Chuck.

I would now like to discuss some of the highlights of our guidance for the fourth quarter and update our FY16 forecast.

Please turn to slide 15.

As Chuck covered in his remarks, there are four primary factors that we expect will impact our financial performance in Q4.

First, we have reduced our solar cell and panel production to match demand by idling additional production lines.

This will result in higher underutilization charges than previously contemplated.

Second, we are experiencing lower than anticipated growth in the US residential market which is our highest margin segment.

This will pressure our overall Q4 gross margin.

Third, we have made the decision to shift lease sales to cash and loan in some states where the lease economics do not meet our return threshold.

As Chuck mentioned, while the shift to cash and loan sales helps cash flow, we lose the benefit of incremental NCI which lowers EBITDA.

Finally, in commercial, we will be affected by non-linearity the project completion and push-out of some projects into Q1 2017.

In total, we expect these factors to impact Q4 EBITDA by more than $80 million.

On a GAAP basis, the Company now expects 2016 revenue of $2.43 billion to $2.63 billion, gross margin of 8% to 10%, and a net loss of $320 million to $295 million.

FY16 GAAP guidance includes the impact of the Company's holdco asset strategy and revenue and timing deferrals due to real estate accounting.

The Company's updated 2016 non-GAAP financial guidance is as follows: Revenue of $2.6 billion to $2.8 billion, gross margin of 9% to 11%, EBITDA of $185 million to $210 million, capital expenditures of $220 million to $240 million, and gigawatts deployed in the range of 1.325 to 1.355.

The Company's fourth quarter FY16 GAAP guidance is as follows: Revenue of $900 million to $1.1 billion, gross margin of zero to 2%, and a net loss of $125 million to $100 million.

Fourth quarter 2016 GAAP guidance includes the impact of the Company's holdco asset strategy and revenue and timing deferrals due to real estate accounting.

On a non-GAAP basis, the Company expects revenue of $1 billion to $1.2 billion, gross margin of 1% to 3%, EBITDA of zero to $25 million, and megawatts deployed in the range of 235 to 265.

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, and Bob Okunski, our Vice President of Investor Relations.

Questions, please.

Thank you.

(Operator Instructions)

Tyler Frank, and please state your company name.

Baird.

Thanks for taking the question.

Can you provide some commentary on how this over supply environment compares to the last environment a few years ago?

Are you currently seeing people dumping panels in the market for what you believe to be lower than their cost to produce the panels?

And then, can you provide additional color on the potential partnership with Total there?

Is there room for, either expanding the model supply agreement to above 200 megawatts potentially over time, and how you expect to move forward with potential projects in international markets?

Thank you.

Thanks, Tyler, Tom Werner here.

First, on panels, I have a 14-year perspective, or going on 14 years.

And actually, with Howard, we've been through a few of these downturns, and what we've found, though, is they don't last as long as one would think when you are in the middle of it.

So we'll see.

This downturn is faster, though, then what we previously experienced, as we said, in our call -- prepared remarks -- 25% price reduction within the quarter.

We have not seen that previously.

On ES, we see competitors selling prices below even what we believe to be cash costs, and we spend a fair amount of time modeling cash costs for all of our competition.

We are not doing that, and in fact, have chosen on a go-forward basis to size our capacity to profitable demand and change basically to break-even point in the Company.

So we take a different, a decidedly different approach, and I think, an aggressive and proactive approach for 2017.

In terms of partnering with Total, actions speak louder than words, and there is real action here.

The agreement for up to 200 megawatts a panel with a $90 million upfront payment is clearly Total showing that, not only are they supporting SunPower, but or working with SunPower, but also that they are committed to solar energy by using it on their facilities.

In terms of is there upside, I would say that tentatively I'd be cautious on that.

I don't think in the near-term, there'll be a lot of gas stations and sites that will be converted to solar, and we need to digest that together.

They do have a lot of land positions, though, that could be upside, and certainly upside in terms of co-development, or developing together.

And then the last part of your question of what -- where might we develop or can we accelerate development.

The answer is decidedly, yes.

The CEO of Total, Patrick Pouyanne, has talked about his ambitions and his footprint, which is complementary to the SunPower footprint.

And so as we alluded to in my remarks, we are at the early stages of working together on at least France, Japan and South Africa.

But I would use the word, at least, I think there is more to come there.

But we will let time tell on that, as well.

Thank you for the question.

Brian Lee.

Hey, guys.

Thanks for taking the questions.

I have a couple, maybe could start off on DG.

A lot of the original 2017 EBITDA guidance, I think, seems to rely on the growth in margins in that segment, both commercial and residential.

So curious if that's the biggest delta here in you guys stepping away from providing the guidance for 2017?

And then, related to that, just how are you thinking about regulation change in Arizona for your residential solar business?

How much exposure do you have there?

And then I have a follow-up.

Okay, I will comment on EBITDA and then turn to Howard for any further comment on EBITDA, DG EBITDA and Arizona.

So what we're choosing to do, Brian, is size to a reasonable, or realistic revenue level that we can make money at in 2017.

So we'll be less aggressive and that's across the board, that would be DG and power plants.

So, yes, an impact in the amount of EBITDA, we expect.

We haven't re-guided 2017.

We will talk about that on our call on December 7. So certainly expect more color on that.

But it is, as you know, the industry analysts forecast have 2017, at best, in line year and probably less demand year.

So we're going into it realistically and, of course, as I mentioned on the previous call, sizing our break-even point lower, consistent with that.

Howard, do you want to add anything and then Arizona?

Sure.

I will say that we had, when you look at the residential and commercial business in the US combined, we had a strong megawatt deployment quarter, 15% increase quarter-on-quarter for the Company there.

And the business remains solid, particularly in the US, and we're expanding our volume in Europe, as well.

Good quarters by the international team in DG.

As for Arizona, it is not a material part of our DG business.

We don't do a lot of commercial there, if much at all.

And it's a small fraction of our residential business.

So I think it's more, what's more impactful there is just the precedent of policy there in the changes that are potentially being proposed there, it's not 100% yet because there are new commissioners that are being elected, even as we speak.

So for us, what we're seeing in our core states, our core DG states, the policy at the state level is very solid.

I'm talking about California, New Jersey, New York, Massachusetts, these are in really good shape.

So we don't think Arizona's going to be material.

Okay, that's great color.

Maybe if I could just squeeze in a follow-up.

Can you guys comment a bit on the loan mix growing across the industry for residential solar?

I know you guys have been there, a lot ahead of your peers, but a lot of them are getting aggressive here.

How do you think that changes the competitive landscape for you?

And maybe if you can also comment on how your offering is priced competitively versus some of the more [keezer] rates that you are seeing out there, some (inaudible) low and even flat?

Thanks.

Okay, Brian, thanks for the question.

Tom, again, and then Howard will talk on pricing.

What we've done is allowed customer choice and we've always had a high cash loan to lease mix because people want to own SunPower systems because they believe, and they are getting the world's best solar.

They believe it will last longer and produce more energy per rated kilowatt, or peak kilowatt.

So when our sales team or our dealer sales team is selling to the customer, the customer, if they have, if they can qualify for a loan or cash have a preference generally for a SunPower system for ownership.

And so you're right, that's been the history, and what we found this year is there's been a general market shift, we think, because of the idea of owning a solar system has become more mainstream and the risk that people would attribute to owning a solar system has decreased over time.

Howard, can you take the pricing?

Yes, so, our pricing has been steady in the US DG business, both residential and commercial.

In fact, it has gone up a little bit effectively on that revenue per watt basis because we're moving increasingly to complete solutions.

So with our Equinox residential, Helix for commercial, we're offering the full solution and, therefore, more value and more revenue, and that's generating actually more revenue per watt.

But in terms of pricing to the end consumer, it is steady for us.

We do see and we plan for some reduction as we head into 2017.

But it's in the low-single-digit percentage.

But it's holding.

Okay.

Thanks, guys.

Vishal Shah.

Deutsche Bank, thank you.

Tom, can you comment on the three different product competitiveness in the current pricing environment?

Are you able to generate positive gross margins for your E-Series, X-Series and P-Series products at the current pricing environment?

And then, can you also maybe talk about how you see the perceived risk of ITC given the recent elections in the US?

Yes, so, thank you, Vishal, for the question.

On P, E, and X let me give you color.

X, the answer is unequivocally, yes, it's the world's highest efficiency.

We had a chart in our deck.

The capacity that we make seems about right.

And since it is the world's best, it is the highest efficiency.

It also has a number of other attributes in terms of lower degradation and longer life.

That commands a premium and it can compete.

The P-Series uses mainstream front contact cells without the front contact, but mainstream contact cells, and we are benefiting from the reduction in the oversupply.

And so that product, the value proposition is proving to be true, which is you get more efficiency for the same, or roughly equivalent price.

So the P-Series is working great, and is also doing really well in manufacturing.

That leaves us with E-Series, and we've been asked previously, can you have three product lines.

And I think what we are concluding is, yes, we can, but not at the scale that we have, so we will be right sizing our E-Series capacity.

It still is the second highest efficiency module on the market, so it's still an outstanding product.

But that would be an area where we are likely to right size our capacity, and, of course, we will give specifics on that on December 7. In terms of the ITC and the risk associated with that.

Let me do a little homework with my team here and come, circle back to that later in the call.

I would, though, comment generally about the election and say that still there is incredible customer pull for solar; 88% of Trump supporters, according to Pew research, supports solar.

The cost of solar has come down dramatically, it creates jobs.

So I think we have a common goal here for growth in the economy in America, and so I think there is common ground that solar will do well.

And so that probably will influence ITC.

But let me do a little homework during the call and then I'll comment on that later.

Thank you.

Krish Sankar.

Hi, it is Bank of America Merrill Lynch.

I had a couple of them.

First one, Tom, on the 2016 guidance, cut roughly $100 million less in EBITDA, and about 200 or so megawatts less, is it all primarily coming from the residential side?

Krish, this is Chuck.

There is a part of the megawatt reduction is actually a shift out into 2017.

And then there is a reduction based on the overall market reduction for the DG side.

But I would say the primary reduction is a shift out.

And in terms of overall EBITDA, it is a combination of shifting from lease to cash sales, and then some under utilization charges for the fabs as we reduce inventories to improve cash flow.

Got it.

Got it.

And the lease to cash sales, that momentum has been going on for a while, and I'm kind of curious, because three months ago you guys were, dialed back the power plant business, but still seemed very optimistic on residential.

Today, three months later, like you are down-ticking on the residential too.

Kind of curious, has anything changed in the last three months for your specific business, or has the trend been going on for a while?

And then I also had a follow-up after that.

Yes, I think, if you do the math as we hear other people announce, what we're seeing is a slowing in the growth of the US residential market, and you will actually see that our performance was pretty good in terms of our share and the growth that we had in Q3, or at least the performance that we had in Q3.

It is, when we add our DG residential and commercial business, it would be fair to say that the commercial business out performed and the residential business did fine but not as well as we planned, and that's the general market slowing of growth.

Now you can get into a lot of specifics of what's driving that.

Broadly, I'd say there's been some state activity that took Nevada off-line, there's been a utility in California that's come off-line in terms of their region.

There's been a conversion from NiMH 1.0 to NiMH 2.0 that has caused the timing of the market.

But we believe the fundamentals are still there that the US residential market will still be quite strong and we'll be growing.

So, yes, you're right, though, three months ago we thought we would do more megawatts than we did.

I would also note that when you look at Q4, which you can easily conclude what it is from our annual guidance, Q4 returns to pretty substantial growth.

Got it.

Got it.

That's helpful, Tom.

And then another question I had on the P-Series modules, when you look at it relative to the Chinese incumbent modules, can you quantify how much the ASP for P-Series is about the income in Chinese today and how much would you say the cost is relative to the incumbent?

Okay.

Of course, it's a point in time because the pricing environment changed 25% in the quarter.

We see that stabilizing, and what I would say, is we do command a premium with P-Series, so we get a little higher pricing.

And I would say, call it 10%, plus or minus.

In terms of cost, we're ramping the products, and if we took the cost today, it is still a little bit higher but we hit meaningful production in the first half of 2017.

And we think we cross to at least cost equilibrium.

And that's, of course, based on what we're forecasting.

And since I'm answering that question I'm going to comment further on ITC.

I think, you all know this, but if the ITC were to be modified it would have to go through Congress.

And there is -- we can all sort of forecast the likelihood of that.

We're very involved and believe that there's bipartisan support for solar.

Therefore, we would be optimistic, or I would say cautiously optimistic, and as I mentioned earlier, because of customer pull, the price of solar, the way pricing has happened and the jobs we create, I think we have facts on our side, but we will see how things play out.

Thanks, Tom, very helpful.

Thank you.

Colin Rusch.

Yes, as you look at what the potential risks are with FERC and new FERC appointees, have you guys taken a real hard assessment of what might happen with net metering?

As we go forward, it seems to me that given what we've seen in terms of potential appointees there's a potential real fight that's going to come up on that metering.

This is Howard, I'll take that, Colin.

Well, the FERC, their job, their jurisdiction is really on the transmission system, and net metering plays out at the more local level, at the distribution level, which is dictated at the state, and even within the state level depending on if it's a regulated utility or not.

So we don't think for DG that, at least historically, the purview of FERC has not reached that far down.

But I think it's a valid question.

We don't expect that to happen.

And as Tom referenced, solar is a way to energy independence, which is something that both sides of the aisle have historically wanted and we think is going to continue.

So if anything, there's going to be a, potentially even tailwinds for that, a push for that.

And we do want to mention that Pat Wood, who serves on our Board is a former FERC chairman, and has been with the Company as a Board member for many years, and so we benefit from his experience and guidance in this area.

Okay.

And then just a follow-up on a couple of products.

Just looking at C7 and C12, the JVs in China, can you just give us a quick update there, as well, as what you are seeing in terms of demand for AC modules at this point?

So, yes, in China we've also introduced our tracking systems.

We have a mix of C7 and the tracking system, and in the last year or so, that mix is favored towards the tracking system.

As we look forward, our JV partners are working with us to reduce the cost of our concentrated product, or the product that we've made together.

And as those costs come down, their plan is to increase the mix of C7 product, we'll have to see how that goes, but that would be part of our joint venture in China.

And on AC modules, this is Howard, a real success story.

We sell that through our Equinox complete solution for residential in the US, and we went from 0% at the beginning of this year and we are now above 65% in our attach rate.

So it's going really well.

Thanks for the questions.

Julien Dumoulin-Smith.

Yes, hi, thank you.

UBS.

First, on the policy side, can you comment specifically with respect to the ITC around fair market value definitions of the IRS?

And, secondly, any considerations around continuance construction?

And then on the business side, if you can comment quickly in terms of cash flow metrics relative to EBITDA?

Why does a shift towards cash flow necessarily reduce EBITDA and how should we be thinking about the transition going into next year?

I know that's getting ahead of 2017 a little bit, but can you just give us at least a sense for what the new approach on the BG business, specifically residential, means for EBITDA?

Chuck will take the question of the impact of lease percentage going down and cash going up impact on EBITDA, and then I'll take the second part, or the first part.

So, Julien, when we book a lease transaction much of the cash flow comes over 20 years.

The tax credit comes through the NCI line as a real benefit when we receive the cash on the ITC.

And so, if we consciously shift to lease or cash, then effectively, we have better cash flow but lower EBITDA.

And so doing so is a conscious move on our part to improve cash flow, and so that's a transition that you'll see happening this quarter and all through 2017.

I'll comment briefly on FMV.

I don't have color on continuance construction, so we will take that as a homework assignment.

And then on FMV, I'll just say a couple of things and maybe Chuck will want to say something.

We don't see anything changing in terms of the dynamic with Treasury.

Although I will say, that we're seeing some of -- over the years there have been lawsuits with Treasury, and I think some of those, at least one of those, is being dispositioned and I think that affects the thinking here a little bit.

And FMV has become, as PPA pricing goes down in America, FMV dynamic changes a little bit in terms of tax equity financing.

And so I would leave it at that, and say that we're preferentially not doing business in the near term that doesn't make sense economically.

Yes, and I just say, Julien, on the fair market value, we have a robust cash business, as well, so we have a really good proxy for what fair market values are.

And so, whether it's a lease, a loan, or a cash, we have really good data on our side and we believe that we've got a really strong track record here.

And so we see that as a real strength of our solution and our business model.

But, Chuck, just --.

Let's do a follow-up and one more question, but go ahead.

Yes, Chuck, just to quantify that a little bit more of the NCI line item, et cetera, just the margin that you would see for cash versus the lease approach?

Sure, the margin profile is probably not radically different.

They are both, I would call in the mid-20% margins.

The difference being, though, you get a real benefit on the tax equity through NCI, whereas on the lease you get the margin paid over 20 years.

So, whereas, if you sell a cash system you don't get the tax benefits, the consumer gets those.

But we get a really nice cash margin and it generates a really strong cash flow profile for us.

Thanks, guys.

Okay, last question, please.

Pavel Molchanov.

Raymond James.

I hate to do another election one, but one of the trends we've seen is that utilities have been deploying or contracting systems in anticipation of the clean power plant being implemented.

Given that that's going to be off the table in the next administration, do you think that risks a potential slowdown of utility scale solar bookings in the US market?

I think the short answer is, yes, and the question is how much.

And what I would say is potentially not that much because the utilities -- and we interface with the utilities a lot -- are very impressed with, A) the risk premiums of solar, which is no longer a premium, so the risk is very minimal.

So they're very happy with the performance of the systems they have deployed.

And, of course, they are very aware of the cost and if you look at the cost of solar it is hitting a point where it is competitive with almost any other energy choice.

And lastly, of course, you don't have fuel risk.

So there's reasons that this will be a meaningful part of the utilities.

I think it may change timing, Pavel, and it's a matter of degree.

But it would be fair to say that they will have some impact.

We believe that 2018 will still be a pivot year and there will still be a lot of American power plant, solar power plants being built, and, of course, we're going to position ourselves to -- continue to position ourselves to do well.

Appreciate it.

And what is your follow-up, Pavel?

That's it.

Okay, thank you very much.

Thank you all for your time calling in, we will look forward to talking to all of you on December 7. Thank you.

This concludes today's conference.

Thank you for joining and you may now disconnect.