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SunPower Corporation (NASDAQ:SPWR)

Q3 FY08 Earnings Call

October 16, 2008, 1:30 PM ET

Executives

Thomas H. Werner - CEO

Emmanuel T. Hernandez - CFO

Howard Wenger - President of Global Business Units

Julie Blunden - VP of Public Policy and Corporate Communications

Peter Aschenbrenner - VP of Corporate Strategy

Analysts

Steve O'Rourke - Deutsche Bank Securities

Robert Stone - Cowen & Company

Stephen Chin - UBS

Vishal Shah - Barclays Capital

Satya Kumar - Credit Suisse

Sanjay Shrestha - Lazard Capital Markets

Mehdi Hosseini - FBR Capital Markets

Al Kaschalk - Wedbush Morgan

Mark Heller - Merrill Lynch

Michael Horwitz - Stanford Group.

Colin Rusch - American Technology Research

Mark Bachman - Pacific Crest

Jesse Pichel - Piper Jaffrey

Corey Tobin - William Blair

Michael Molnar - Goldman Sachs

Operator

Good afternoon, and welcome to SunPower's Third Quarter Earnings Release Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Your lines have been placed on a listen-only mode until and question-and-answer segment of today's conference call.

I would now like to turn the call over to Mr. Tom Werner, CEO of SunPower. Sir, you may begin.

Thomas H. Werner - Chief Executive Officer

Thank you for joining us today. Let me start by saying we had a terrific Q3 anticipated strong Q4 and that with the long-term expansion and expansion of the U.S. Investment Tax Credit. We are feeling very positive about our home field market and our global growth prospects 2009.

With our strong balance sheet, free cash flow positive position in 2009, our brand technology cost and people strategy, fully funded business plan, we believe we are the best positioned solar company that thrive the new opportunities around the globe.

Similarly, we are also the best positioned solar company to address the market risk with the opportunity, optionality we have to shift allocation and sales focus between our diversified portfolio of market segments and geographies.

Today, we will illustrate the benefits of our flexible positioning as we report on our third quarter 2008 financial results. And update you on our outlook and approach to our global markets, review the progress of our strategy, provide guidance for the fourth quarter of 2008 and update our full year 2009 guidance.

Let's start with our results from the third quarter. We delivered very strong operational and financial performance as we beat our revenue guidance, significantly improved our gross margins and beat our EPS guidance.

Our model continues to work. We are fully funded to achieve our plan and see no need to raise funds to execute on our current plan. Specifically, our Q3 2008 revenue was $378 million, up 62% year-over-year as we benefited from strong global demand and a continued success of our localized segment vertically integrated model.

Our non-GAAP EPS of $0.60 per share exceeded our guidance as we further reduced manufacturing cost and managed operating expense growth.

Our Systems segment accounted for 51% of revenue. 69% of the panels installed in the channel were SunPower panels. In Q3, we rebalanced our product allocations between the systems and components channels, after the Q2 systems business surge in Spain. This allowed us to aggressively ramp our dealer network in North America and Europe, to meet the strong demand for SunPower's industry leading products.

Our Components segment accounted for 49% of revenue, delivered very strong gross margins of 39%, up 750 basis points sequentially. This strong performance was achieved through higher conversion efficiencies, improved silicon utilization, lower polysilicon cost, steel efficiencies at higher production volumes and modestly higher average selling prices.

Our systems business continued to expand even while we shifted our geographic focused from Spain and North America, where we completed 10 megawatts of large scale commercial projects, including, systems for applied materials, Agilent, Toyota, U.S. Department of Energy as well as providing our high efficiency solar cells for building-integrated system at the new California Academy of Sciences.

Very importantly, Q3 signaled our entrance into the rapidly emerging utility scale PV market with our Florida Power & Light and PG&E announcements. Let me explain in some detail. We drove these project wins and what it means for our confidence in long-term demand. These agreements by a watershed event for the solar industry and demonstrate SunPower's ability to deliver solar power at a levelized cost of energy, it is competitive with other forms of peaking power.

SunPower achieves competitive levelized cost and energy through a combination of high solar cell conversion efficiency and low cost high capacity factor tracking technology.

LCOE is calculated by summing the net present value of total system installed cost, including LAN and the O&M costs and dividing it by the net present value of the amount of energy produced.

We are reducing total system installed cost through aggressive technology development, proved manufacturing productivity and scale as well as through our vertically integrated model, which allows us to affect cost reduction across the entire value chain.

In the LCOE denominator, we have a strong competitive advantage as we are increasing the amount of energy produced through higher efficiency cells and models and industry leading tracking technology.

Let me discuss why solar PV is well suited for large scale utility projects. With solar PV, we have the flexibility to work across a large variety of sunlight conditions, locate power plants close to transmission and distribution lines, built modular systems at any locations and add utility low growth needs, and distribution capacity constrains and leveraged fast installed times. In fact, we have installed over 1 megawatt per day at a certain projects.

The long-term investment cash credit allows utilities, access to the ITC for the first time, improving the economies, economics for utilities to own PV power plants, creating a new category of tax equity financiers.

The bottom line is that with our continued focus on cost reductions, we're further improving to now technology. We offer utilities at very competitive levelized cost of energy when compared to conventional seeking generation. That means that our available market opportunity has just expanded through a completely new sector, utility scale PV deployment which may be sold and of multi 100 megawatt increments.

Let me elaborate on why utilities choose to do business with SunPower. SunPower has the highest power density. More power per square meter which drives us through a cost effective levelized cost of energy. In fact, SunPower has the highest efficiency sales in the market, up to 50% more than conventional crystal and silicon, and two to four times more than thin films.

SunPower's tracking technology increases the capacity factor of PV systems. For example, SunPower's T20 tracking system improves the capacity factor up to 30%, compared to fixed-tilt. And tracking generates more power during peak times when utilities needed the most.

Finally, SunPower has incredible track record, having developed and installed over 500 large fuel systems, comprising over 400 megawatts on four continents.

The rapidly emerging utility fuel market contributes to our positive outlook for the global demand picture for 2009 and beyond. Global demand remains very strong across multiple geographies. And we have robust customer demand in every market we serve.

The ITC is established. The U.S. is a core global market with accelerating demand over the next few years. There is greater clarity in key markets like Spain, Germany and Korea, which improves our visibility for product allocation in 2009.

A manufacturing scale and technology advantage on which our brand is based is allowing us to improve our market share in both established markets such as Spain, Germany and the United States, as well as emerging markets such as Italy, Korea and Greece. Not only are we succeeding geographically, but our diversified; flexible market segment approach allows us to respond in new opportunities within the market as well as avoid risk by building our sales, product allocation between segments.

Spain is an excellent example of this flexibility as we have established a strong dealer network in Spain that will address the rooftop market, now that the feed-in-tariff is refocused to that segment.

A key factor in meeting this strong demand will rely on our customers' access to financing. I would like to spend some time on the potential impacts of the global, financial challenges.

First, let me talk about the overall environment and then discuss how we are positioned to succeed. Overall, fundamentals to finance solar systems remain in place, their risk spreads has widened. However, investors are looking for safe options to invest and solar projects offer investors a reliable, predictable payment stream.

Financial terms, in the alternative minimum tax provisions in the ITC package may rebalance customer preferences, more cash deals and customer owned structures from EPS.

SunPower's history includes a long period where such structures predominated. We are comfortable that our scale and model flexibility would allow us to thrive in such a scenario. SunPower has also developing new financing partners to supplement a broad group of financiers we have worked with previously.

Project timing and industry dynamics are also very important. In Q4, we expect minimal impact as we complete commercial systems in the United States that are already funded. We expect credit conditions to moderate over time, see significant as a result of passage through the ITC, here in United States and improved policy clarity globally. In fact, we expect to see continued flight to quality where SunPower has an advantage.

In summary, our flexible model, portfolio approach, and intense focus on cost reductions will enable us to leverage our scale and experience managed through these risks. Fundamentals remain strong, and near term impact is minimal.

Turning to our internal execution, SunPower continues to deliver on a strategic focus, on brand, technology, cost and people. Let's start with brand and channel. In the third quarter, we continued to benefit from our vertical integration strategy and focus on improving the overall customer experience in all channels from our dealer network, direct sales through utility.

Our direct contact with the customer enables us to better manage our business as we can capitalize on immediate visibility, on immerging trends and exercise our flexible model. We had 25% more dealers to our global dealer network with an emphasis on European expansion.

We completed the integration of our Solar Sales Australian acquisition. Our channel and brand and strategies built on our differentiated technology as we continued to invest in our cell, module and systems technology. We are on track with our cell technology across our product lines. The ramp of our Gen 2 technology continued during the quarter, as we now have seven lines producing generation through solar cell. We also continued our transition to 145 micron lines as we now have four lines running 145 micron wafers.

Additionally, we made a strategic decision to transition to 145 micron wafers on our new line. This will further improve our industry leading silicon usage going into 2009. This initiative had a modest impact on our Q3 production, and the resulting production adjustments are included in our guidance.

Our adjusted ramp to launch lines on 145 micron wafers reduces our costs as we bring up our new lines which positions us well for lower cost manufacturing studied in 2009. We reiterate our production plant of 450 megawatts or more in 2009.

Finally, we are constantly improving our systems technology in our balance of system costs. Our T20 Tracker delivers up to 30% more energy than fixed-tilt systems. And we have made cost reductions to our major... through our design, based on the experience gained on sites implemented in 2008.

And in the residential segment, we started shipping our new wireless residential moldering solution. These technology developments directly result in cost reductions. Our plan to reduce total system installed cost by 50% by 2012 as compared to 2006 remains on track. And we are well positioned to reach two thirds of this initiative by 2010.

Reducing cost by 50% enables us to compete with retail and wholesale rates in much of the developed world on a localized cost for energy basis. By reducing system installation costs while increasing our capacity factor in conversion efficiency, we are driving the competitive retail and wholesale elective rates on $0.01 per kilowatt hour basis. We're also focusing on leveraging our scale internally to reduce cost. In this quarter, we upgraded to an Oracle ERP system as an example.

In terms of silicon cost reduction, we have improved conversion efficiencies as we add more lines of our Gen 2 minimum 22% cell technology. We've reduced silicon utilization to 6.2 grams per watt and continued to benefit from our portfolio approached polysilicon supply as we saw our poly cost compliant for the second quarter straight quarter.

We received poly deliveries two plant from MSAT and DC Chemical. And we remain confident the poly cost will decline at least 10% this year as well as in 2009.

Due to strong industry fundamentals, continued execution on our vertical integration strategy, expected gross margin and expansions and our progress on our cost reduction programs, we expect to material lead our target operating model in the fourth quarter. We are strategically well positioned for 2009. We remain on track to realize our mission, reducing installed systems cost by 50%, from 2006 to 2012.

In summary, we are executing on our strategy to focus on brand, technology, cost, and people. On that note, I would like to turn the call over to Manny, who will report details of our 2008 Q3 results and provide updated guidance for Q4 2008, and update our current 2009 guidance. Manny?

Emmanuel T. Hernandez - Chief Financial Officer

Thanks Tom and good morning everyone. And thank you for joining the SunPower's earnings conference for the third quarter of fiscal 2008 which ended September 28.

I'd like to remind everyone that during this conference, management made and will be making statements that are not historical in nature. Please consider the statements as forward-looking pursuant to the Private Securities Litigation Reform Act of 1995. Those statements are based on our current expectations, and are subject to certain risks. Please refer to our press release and our SEC filings for a more detailed discussion of those risks.

Also, please note that we have posted a supplement data sheet related to our historical performance on the events and presentations page of our Investor Relations website.

And now I'll give you a summary of our 2008 third quarter financial results for the combined company and our segments. Our total SunPower revenue for 2008 third quarter was $377.5 million, that's up approximate 1.6 times compared to our year ago third quarter revenue of $234.3 million. And exceeded specific guidance we gave on our second quarter call.

The third quarter revenue performance was aided by very strong performance in our component segment, which accounted for 49% of our revenue in the quarter versus 29% in the prior quarter.

Our Components segment accounted for a $184.2 million of our third quarter revenue, representing a 64% increase from prior quarter revenue of a $112.2 million and approximately 2.4 times of that of the year ago third quarter revenue of $76.6 million.

Our Components segment benefited from very strong demand in our wire channel, both in the U.S. and Europe, where we continued to significantly increase our dealer network footprint.

Our Systems segment accounted for a $193.3 million of the quarter's revenue, up 23% compared to the $157.7 million last year, inline with our Q3 guidance as well. Recall that the second quarter 2008 Systems segment revenue was heavily influenced by early completion of power plant scale projects in Spain.

Please note that the ultimate sale of SunPower manufactured panels, which are allocated by the company to the Systems segment is reflected as revenue of the Systems segment.

In the 2008 third quarter, approximately 69% of the panels installed in our systems project where SunPower manufactured solar panels, that's up from the 61% factor last quarter. We, expect this allocation percent to remain at or above these levels for the fourth quarter of 2008.

Now, let's cover earnings. On a GAAP basis, SunPower reported operating income of $50.2 million and diluted net income per share of $0.26. These figures include non-cash charges for amortization and purchase accounting intangible assets of $4.2 million and non-cash stock-based compensation expenses of $18.9 million.

On the non-GAAP basis, adjusted to exclude non-cash charges for amortization of intangibles, stock-based compensations and their related tax effect.

SunPower reported a total operating income of $73.3 million and a diluted net income of $0.60 per share. This compares to the prior quarter's operating income of $67.6 million and $0.61 diluted net income per share.

Just couple of more notes under $0.60 performance in Q3, that we're very excited about. I will talk about some of this later. But this result, this $0.60 performance includes higher share count from the pro-rate reflection of the Lehman shares that I'm going to talk about later. It also includes $900,000 provisions for potential loss of value in an investment, which I am going to cover later. And it also includes a higher tax rate, we guided you to a 24% to 25% tax rate and we ended up approximately 30%. In all of those factors were headwinds and we still delivered $0.60, which is better than our guidance for the quarter.

So the total company's overall gross margin for the third quarter was 27.1%, whereas our non-GAAP gross margins reached 29.2%. This represents a 280 basis points improvement from last quarter's non-GAAP margins of 26.4%.

In the third quarter, our Systems segment posted a non-GAAP gross margin of 19.7%, a decrease over last quarter's margin of 24.2%, largely due to regional mix of projects, specifically a higher North America project mix during the quarter.

Our Components segment on the other hand posted gross margin of 39.2%, a 750 basis point improvements over last quarter's 31.7%, once again benefiting from lower silicon cost, higher volume, more efficient use of the silicon, and slightly higher average selling prices.

Briefly on the balance sheet; we ended the quarter with cash, including short and long term investments and restricted cash of approximately $431 million, that's up from the $336 million we had in the second quarter. This marks the first quarter that SunPower has generated constant free cash flow and effectively added $95 million to our overall cash balance in the quarter.

The significant reduction in working capital was the primary driver to our cash flow result. As Tom noted earlier, we are fully funded for our current business plan. Our DSO improved to 47 days, while our net inventory ended relatively stable at 65 days.

Our total capital expenditure for the quarter was $55 million, and we now estimate the total capital expenditure for the year to be in the $250 million to $300 million range.

Depreciation for the quarter was $14 million, while with a total year depreciation is now forecasted at approximately $50 million.

Now, before I walk you through our guidance, I'd like to take a moment to address recent developments in light of the market and credit prices that we have all witnessed. First, as a result of the Lehman bankruptcy, the 2.9 million shares that we lend to Lehman with a purpose of providing a borrow capacity for one of our convertible debenture offerings last year, is now subject to bankruptcy proceedings as far as potential recovery.

In the meantime, in accordance with GAAP rules, we had begun to share all those shares as part of our outstanding share count.

For the third quarter results, we have to show the ratable effect of those shares, which added approximately 450,000 shares to our account. Starting in the fourth quarter, we will reflect the full 2.9 million shares as outstanding. This represents a dilution of approximately 3.5%, which is now reflecting in our guidance. And as you'll notice later, it's unchanged despite this facet.

Out of the approximately $431 million of cash and cash equivalents at the end of quarter, about $26 million were invested in the primary reserve fund and reserve international fund; both long standing, safe accounts for money market type investments. As some of you might have heard or read, these funds had some liquidity issues and had some exposure to Lehman related investment.

The funds are currently locked and the SEC has gotten involved with the orderly distribution of these funds as well as establishing the potential loss of value to be shared with many investors that were in this fund.

Our third quarter result includes an approximate $900,000 of provision for loss of value for this fund, in accordance with fair value accounting guideline. We have reason to believe that we have now reflected the potential loss value and expect full recovery of the balance. But we have also taken additional steps to protect the principles and liquidity of our cash and investment portfolio, including investing more in treasury funds, diversifying across money market funds and investing only on the highest rated securities.

Now the impact of the recent credit crisis has obviously generated a lot interest from our investors, as to its impact on the solar systems business. Now, as Tom mentioned risks spreads have increased for the required internal rate of return for financing projects have risen.

We believe we're well positioned to emerge as a leading player in the market once conditions moderate, given our balance sheet, our scale, and our experience. To minimize our risks, we apply the same portfolio principles to financing project that reduce with the rest of our business.

For example, we work with a number of different financiers for systems from residential to utility scale project. The breadth of our market view allows us to evaluate current condition. And even consider taking an ownership position, either temporarily or permanently for those systems, if we will feel that would be the best option.

Also, we recognized that the current situation could be a benefit longer term, as the consolidation and restructuring of financial systems may produce companies with the capabilities to finance even larger projects in the future.

In addition to our portfolio approach to financiers, we have also accelerated some of our cost reduction programs to reduce the impact of potentially higher financing cost in our model.

On a geographic basis, we continued to see diversity, well related to financing of projects which is positive; multiple markets, multiple structures. For example, in Italy we are seeing more private equity deals. Spain, on the other hand, has been a very developer oriented with secured financing in place. So that might change due to fit-in-tariff structure, which emphasis model sub-projects now than ground amount with incidentally placed our advantage as well.

Finally in the U.S. the passage of the eight year ITC opens up a lot of doors, including utility owned and rate based projects as Florida Power & Light project. And a great variety of tax equity financiers because of the alternative minimum tax benefits in the ITC tax bills.

Now, solar project represents low risks, long-term investments with reliable returns for investors, peculiarly with extension of the ITC in the U.S. and the resolution of the fit-in-tariff in Spain. We believe that we can continue to source financing for projects that acquired albeit at potentially higher cost near term.

Let me emphasize that we have a very small portion of our fourth quarter revenue, expected to be derived from systems requiring financing.

Now, let me talk about guidance. As I begin, let me reiterate as we have noted in prior calls that our business results may reflect quarterly shift in mix within Systems and Components segment revenue. Also, from quarter-to-quarter we expect shift within the Systems segments due to size, type of projects, regional deployment and percent completion factors that could lead to non-sequential or even marginal growth in revenue margins or earnings.

Our margin mix between segments can also be influenced by the allocation of SunPower product panels through the Systems segment. These factors will continue in the fourth quarter as well as in 2009. Here are the guidance for the fourth quarter of 2008. For the company's revenue of approximately $405 million to $435 million, that's comprised of Components segment revenue of $235 million to $255 million and Systems segment revenue of $170 million to $180 million.

The segment mix for Q4 represents a strong demand for component sales, both direct and through other [ph] channel, while also reflecting a higher mix of North America systems installations for the fourth quarter.

Gross margin for Q4 is projected at 29% to 30%. That's why Tom mentioned that we will materially or maybe even get to our targeted operating model. It is influenced by higher Components segment mix than the prior quarter.

Components segment gross margin is projected at 37% to 37.5%, taking into consideration slightly lower ASPs assumed in Q4.

Systems segment gross margin is projected at 18% to 19%, reflecting the projected regional mix for the fourth quarter. That all results to a non-GAAP EPS, which is estimated at $0.73 to $0.80 largely unchanged from the last quarter's guidance despite the other headwinds that were confronting in the fourth quarter.

And now for fiscal 2008 total year, you could expect or this is what we expect as far as the financial result. Revenue of approximately $1.44 billion to $1.46 billion, estimated to be comprised of Components segment revenue of $625 million to $635 million, and Systems segment revenue of $815 million to $825 million.

The total company average gross margin for the year is now estimated at 27% to 27.5%, with a Components segment ending the year at around 35% to 35.5%, and the Systems segment at 21.5% to 22%. That all sums up to a non-GAAP EPS for 2008 that is also being increased to $2.34 to as high as $2.41 per share.

Now lastly, we are also increasing our early guidance for 2009. We expect revenue in the $2.05 billion to $2.15 billion, while EPS of at least $3.50 per share, despite the tax rate drifting up on that a little bit at 25% to 28% for that year.

Now, before I turn it over to Tom who will lead us to the question-and-answer segment of the conference, I just had one more thing to share with you folks. This is the first quarter that the company has closed its book using a new companywide ERP system that was implemented during the quarter. So, as expected the close took a little bit longer than usual with a lot more fund than we saw it. One consequence of that however is our auditors who would ordinarily be further along in reviewing our books are still doing that or are in progress.

So let me now turn you over to Tom. Thanks.

Thomas H. Werner - Chief Executive Officer

Thank you, Manny. Before we go to questions, I would like to comment that in the quarter, the Cypress semiconductor completed the separation of SunPower. And I did want to take just a moment to thank T.J. Rodgers. It should be noted that in 2001 the company was seeking funding. There were very few people interested in funding the company and T.J. Rodgers wrote a personal cheque for $750,000. And over the course itself, several subsequent years, sent people and systems over to make us the company that we became so, we appreciate the support of T.J. And this team make no mistake. However, we are fully prepared and look forward to be in completely independent company.

I'm going to open the call up for questions. First, let me tell you that we have Howard Wenger, our President of Global Business Units; Peter Aschenbrenner, our VP of Corporate Strategy; Julie Blunden, our VP of Public Policy and Corporate Communications; Mike Armsby, our VP of Finance; and Bob Okunski, our Senior Director of Investor Relations. So they may provide some of our answers.

We'll answer questions about 45 minutes. And I'll try to limit it to one and a follow-up as we have previous calls. So, we'll turn it open to questions. Michelle?

Question And Answer

Operator

Thank you. [Operator Instructions]. Steve O'Rourke, you may ask your question. Please state your company name.

Steve O'Rourke - Deutsche Bank Securities

[Technical Difficulty]... the credit issues that we see now, are you seeing any direct impact on projects being pushed out, or even canceled looking out into 2009? And secondly when you consider a higher cost of capital, what do you forecast or what do see for system prices having to come down maybe more than you previously thought 2009 to maintain project otherwise?

Thomas H. Werner - Chief Executive Officer

Thanks Steve. And Steve is with Deutsche Bank; so... as we loss you there for a moment Steve. I'm going to answer part of that and then turn it over to Howard Wenger.

So, what we expect on the second part of your question was what do we expect in terms of accelerated returns to back that systems pricing. I think more importantly we expect to add two things, new financiers coming to market and a mix of... a change in mix of system financing or ways these systems are paid for from PPAs, cash, where the PPA... a PPA structure which stands in place; you would expect on... it's very hard to predict in terms of what percent of IRR increased and what that impact will have on systems.

But you can think of it is that something more in the lines of changing mix than reducing systems' prices. And we'll see how that goes in time. Howard, do you want to comment further?

Howard Wenger - President of Global Business Units

Sure. Thanks for the question, Steve. We, as Tom mentioned, there are lot of new players actually in the finance spectrum. Manny covered that in part of his comments. And I'll be a little more specific including utilities.

We now can avail ourselves of the tax credit. And by utilities, I mean both the regulated and unregulated affiliates of the utilities. Banks, particularly international banks and insurance companies and developers who make it their living to develop projects and own assets. And I was in San Diego over the last few days and had no less than six private meetings with entities that came forward to schedule the meetings who want finance our rooftop and our large ground systems, including the big plum the PG&E 250 megawatt project.

So, there is more... a lot more credit and liquidity out there than HPI [ph], that's number one. And number two, there is definitely an impact from the financial issues that surround us right now in terms of higher IRRs, but we're seeing that mostly from our traditional sources of credit.

Thomas H. Werner - Chief Executive Officer

So, in terms of demand visibility Steve, it would be fair to say that there is transition going and financial market affects our visibility little of course for leveraging the channel diversity that we've had and we planned it to our business flat several years. So filings have not changed from PPAs from cash deals which is also a shift between channels, but yes it is impacting it as it relates to the degree.

Steve O'Rourke - Deutsche Bank Securities

Thank you.

Operator

Thank you. Our next question comes from Mr. Rob Stone. You may go ahead and please state your company name.

Robert Stone - Cowen & Company

Cowen & Company. I wonder if you could just put a little more color on the pricing trends that you're seeing. You mentioned ASPs were slightly higher in Q3 and you expect them slightly lower in Q4. Can you give us any more color on that? And a follow on question if I may, in your guidance for 2009, what are you assuming with respect to euro-dollar movements? Thanks.

Thomas H. Werner - Chief Executive Officer

In terms of ASPs, I think it reflects the increase this quarter, reflects this basic fundamentals for solar technology worldwide and a particular demand for our product, which is really strong.

In the traditional core market as we call them in Germany, Spain, in the U.S. and now that we have the resolution with the policies in the U.S. By the way, I want to comment that it's really... it's a historic event that took place and those of us who had been in the business for 25 years trying to commercial this technology, we have for the first time in a federal overlay for eight years, and a good one, and very strong one that's actually improved on the ITC by removing the cap for residential. And I think that dynamic is going to create very, very strong, we believe very, very strong demand going into this quarter Q4 and in to '09.

So, again going back to your questions set on Rob, strong ASP, strong demand in Q3 leading to ASP increases primarily driven through demand from approximately core markets.

Robert Stone - Cowen & Company

And perhaps, can you give us any specific on the percentage change, what is slightly?

Thomas H. Werner - Chief Executive Officer

Low single digit.

Emmanuel T. Hernandez - Chief Financial Officer

Rob. Let me take the second part of your question relative to the euro from a 2009 planning. We essentially use the lower of... either the spot rate or a 20 bank forward-looking rate from a planning perspective and that's largely available. So, pretty conservative when it comes to that. Not withstanding that, we also have a hedging policy in the company which to the extent allowed by accounting rules, we do hedge accordingly.

Robert Stone - Cowen & Company

So, what do you estimate? It's going to be your distribution by currencies next year, if you can give any rough cut of that?

Howard Wenger - President of Global Business Units

Hi. This is Howard. I can give a rough cut; euros roughly 30% to 40% for '09.

Thomas H. Werner - Chief Executive Officer

Alright, thank you Rob. And Michelle next question.

Robert Stone - Cowen & Company

Thank you.

Operator

Thank you. Stephen Chin, you may go ahead and please state your company name.

Stephen Chin - UBS

It's UBS. Thank you and congratulations on good execution in the quarter. Tom, I wondered if you can give us an idea how you see that health of the borrow channel inventory levels specifically wanted to see if there is any concerns that there could be solar margin inventory building in the channel? And then the follow-up question I had was, just wanted to follow-up on the comments of the polysilicon costs will be about 10% lower next year. How confident you feel that the company will be able to keep these 30% gross margins if solar margin price were down more than 10% next year and silicon cost only down 10% or you're just seeing conservative on some of the polysilicon cost savings? Thanks.

Thomas H. Werner - Chief Executive Officer

Okay.So first on borrow channel inventory, one of the reasons why we created the borrow dealer network was if you wanted to sell directly to the end customer and that means that we don't have inventory stock in point between us and the customer.

Now, there is a small amount of inventory that the dealer partners would hold that it's very small. So, in our dealer channels really important to know that there is no distributor in between. We sell directly to the dealer who is dealing with the customer. So, that's a long wended answer to your question. And it is very little channel inventory in our dealer network. And that's something we think is a strategic advantage for us in terms of the way we structured that channel. And I can assure you, we keep a really, really close eye on that.

The second question on polysilicon, in next year cost reductions and can we hope 30% gross margins, the answer is yes. The answer is yes because polysilicon costs are coming down 10% or more, but at the same time, we're improving silicon utilization and we're increasing conversion efficiencies rather dramatically as well as we're improving the scale efficiencies in our second fab that are very significant. We realizes our average utilization in our second fab, which probably on the order of several lines whereas next year it's going to be north of ten, probably close to 13. So, there is a significant scale advantage. So, I think you have to take all of those factors in the consideration and we're comfortable with 30% guidance of gross margin with the other things that you mentioned.

Stephen Chin - UBS

Okay. Thanks Tom. Congratulations again.

Thomas H. Werner - Chief Executive Officer

Thank you very much. Next question Michelle?

Operator

Thank you. Vishal Shah you may ask your question and please state your company name.

Vishal Shah - Barclays Capital

Thank you. Barclays Capital. Congratulations on a great quarter. Tom, can you just comment on the... obviously your systems and component businesses in terms of revenue growth in 2009 and perhaps you can talk about some of the dynamics in the differences in revenue growths and both these business? And then I follow up.

Thomas H. Werner - Chief Executive Officer

Okay. All right, and I'll take all comments and if Howard wants to add onto my comments there, I'll turn to him. As you look at our channel strategy and how we develop now, it's a big cheer approach to three markets, arguably two, I guess, systems we have those commercial rooftop and power plant and then the component business, which speaks of our channel.

We have the flexibility to prove between those... markets continuing on how's things change. And think about that in the last quarter.... the staying fit-in-tariff finally got released and its shifts to focus to your commercial rooftops to a degree. We've finally got investment tax credit, which creates a long-term like scalable commercial market, brings in the utilities and creates a countrywide residential market. So... as these things happen sometimes in an unpredictable manner like the ITC, we're able to capitalize, we don't have to shift focus that already exists.

So, again sort of a long ended responds to... we see North America being quite strong next year. The borrow channel is the height of residential channel, is a real intense focus of the company and is growing dramatically. We are unable to keep up with demand and we are working very aggressively to help our dealer partners continue to grow.

And in the Systems segment, we talked a little bit about the dynamics previously, shift probably to more cash deals on the commercial side. And then we'll start implementing the Florida Power & Light utility projects in 2009 and preparing for PG&E in 2010. So, that's going to biased towards large scale projects in terms of next, probably sufficient. Anything else Howard?

Howard Wenger - President of Global Business Units

Yes. I want to add some percentages and what's interesting all the answers that Manny gave this quarter to, I mean coming up for Q4 '08. We're looking at 60% of our revenue plus or minus in component to 40% systems. And then for the actual results guidance for '08 is 20% components and 50% systems. And I think you'll see is sort of quarter-to-quarter, we had been between these goal tell us plus or minus 40% one side, 60% the other plus the next quarter. And the same between international and domestic 40%, 60% going back in forces we manage our business.

Stephen Chin - UBS

Great, thank you. And just one of the follow-up, I mean if you were to quantify the potential positive impact of the ITC on the residential and commercial segment, on your revenue growth assuming you were operating in a normal financing environment what would that be?

Thomas H. Werner - Chief Executive Officer

We'll go to the person who affects policy and thinks about macro effects. Julie Blunden

Julie Blunden - Vice President of Public Policy and Corporate Communications

We think the opportunity with the ITC and the residential market is very substantial. But essentially what we've just done is taken an investment tax credits that were short-term and focused on a single market segment, the commercial segment, and we've created now a three segment long-term support mechanism that's nationwide and provide AMT relief.

So that means the residential customer, who previously had conceptual access to $2,000 of support spot was an AMT filer, didn't even get that. And now we have a situation where anywhere in the country, customers can access that 30% tax credit without the double cap and with AMT relief.

So, the residential market is now going to be supported by the nationwide program that will essentially take into considerations sun and electric rays. And we'll see penetrations move around based on those fundamentals as well as specific stakes of our program. So, it's a tremendous opportunity for the residential market.

Peter Aschenbrenner - Vice President of Corporate Strategy

Yes. Vishal, this is Peter Aschenbrenner. I'd like to just make a point with respect to the borrow dealer network. It's something, as you know we have been working on now for three years really in anticipation of this kind of opportunity. And what we feel we have now is a really fully scaled core of services including training, regeneration, logistics that we can very rapidly now scale into incremental states and we think that we're in right place at right time here with this ITC to ramp the network, decisive network, which is now over 200 dealers very, very quickly.

Stephen Chin - UBS

Thank you very much.

Thomas H. Werner - Chief Executive Officer

Michelle, next question please.

Operator

Thank you. Mr. Satya Kumar, you may ask your question. Please state your company name.

Satya Kumar - Credit Suisse

Yes, hi, Credit Suisse. Just wanted do follow-up on earlier question on the silicon cost declines and the impact from euro depreciation. You mentioned that you can maintain your 30% gross margins for a calendar '09. As you look out specifically into Q1, given the declining feed-in tariff from Germany, are you comfortable maintaining your gross and operating margin levels, 30% and 20% in Q1?

Thomas H. Werner - Chief Executive Officer

The short answer to your question is yes. However, I would say to you that Q1 is historically a seasonal quarter. Obviously, you're installing solar systems outdoors and in the key markets, that not a great time of the year to be installing system. So, there is a degree of seasonality involved. But in terms of the specific question of can you offset feed-in-tariff with cost declines, the answer is materially yes.

Satya Kumar - Credit Suisse

Okay. That's very good. In terms of the U.S. market and particularly you're talking a lot about residential market, how much are you relying on state level subsidies to support the U.S. market next year and still maintain your margin profile? If you just had the federal incentives, at what point in time do you think that you will have the cost structure to hit your margin targets and drive substantial demand in the U.S.?

Julie Blunden - Vice President of Public Policy and Corporate Communications

Hi Satya, this is Julie. As you know the opportunity with international support mechanism like the ITC is to look at the pockets of demand that are competitive today and your work your way across the country. So, the other thing to take the consideration is that the scale of the residential penetration right now in the U.S. is very modest. So, the most penetrated market in the country is PG&E with 25,000 interconnects in a market where you over 5 million customers in PG&E's territories.

So, you have long way to go before you reach anything approaching saturation in the markets that are strong today. And therefore even small state programs create a tremendous opportunities for us in the near term as electricity prices go up and solar prices come down. And we have a long run way for growing our business based on over 200 dealers that we have in over 25 states today.

Satya Kumar - Credit Suisse

Understood. But I presume that your competitors are also looking at the similar sort of incentive at a state level. What it was trying to get at from your perspective when does your cost structure get to point that, I understand that in the next maybe year you have all these finished. But if you just have the federal incentives at what point the SunPower's cost structure become good enough to drive demand at your current margin profile? Be it at residential or commercial, is that some point end of next year or is that some point early 2010, just wanted to... think about that?

Thomas H. Werner - Chief Executive Officer

Yes. I think such is on very state specific. So as we reduce installed cost by 50% between 2006 and 2012 there is more and more states where this economics work. And we expect two thirds of that cost reduction by 2010. So, broadly speaking I think the answer to your question you're going to see quite few more states becoming economically viable in the 2010 timeframe and of course many more by 2012.

Satya Kumar - Credit Suisse

Perfect, this will help. Thanks.

Thomas H. Werner - Chief Executive Officer

Next question please.

Operator

Thank you. Sanjay Shrestha, you may ask your question and please state your company name.

Sanjay Shrestha - Lazard Capital Markets

It's Lazard Capital Markets. Quick point of clarification guys, did you guys say that you expect the overall system pricing to be down less than 10% during 2009?

Howard Wenger - President of Global Business Units

This is Howard. We've haven't given specific guidance on system's pricing. But we've given overall guidance of 10% to 15% ASP declines for 2009.

Sanjay Shrestha - Lazard Capital Markets

Got it, okay. So, with the passes of ITC here and given... going on I guess in the financial market, am I hearing you guys right that there is a more and more financial players maybe not the traditional type but, different type of the financial guys that are coming into the market. And therefore, now with the passes ITC, you don't see it being a negative impact of what's going on in the financial market and yet, you could see a pretty substantial growth in the U.S. market. Can you talk about that some more? Am I reading that right or is that what you guys are seeing or talk about that a bit more?

Thomas H. Werner - Chief Executive Officer

Yes. Things are changing rapidly. So, the pace of different variables is not entirely predictable for sure. But, essentially what you're seeing is capitals and works and as incumbent financiers raises... and total rates of return, there is new entrance who have been sort of waiting in the wings, who say solar powers proving over the last five years be very predictable payment return payments stream.

And so, if you look at risk profiles or so to the flight to quality and I think solar power systems in general and SunPower specifically have a low risk profile in terms of their systems. So, we have that in our favor. Of course, there is tightening of money supply and it's difficult for everybody. So, I think I wouldn't go to the extreme of saying we see no impact. And what next year is clear. On the other hand, I would say to you that we believe we can work our way through this.

Sanjay Shrestha - Lazard Capital Markets

That is great. And I would relate it to that term. So, with the utility to be being able to take advantage of ITC, do you see then even wanting to participate more on the residential application now and not just the large scale utility application and does that actually end up helping expedite the growth of the U.S. market?

Thomas H. Werner - Chief Executive Officer

I would say to you that utilities in general fit the profile of new financiers, whether it's retail, commercial or large scale power plants. And you'll see leaders like PG&E and Florida Power & Light be aggressive for sure. And... how that mix also lands out at the end of doing residential or commercial, it's hard to predict that they will be definitely... indications are definitely more accurate, yes.

Sanjay Shrestha - Lazard Capital Markets

Great. And congratulations on the good quarter guess.

Thomas H. Werner - Chief Executive Officer

Thank you very much. Michelle?

Operator

Thank you. Mehdi Hosseini you may ask your question and please state your company name.

Mehdi Hosseini - FBR Capital Markets

Sure. It's Mehdi Hosseini from FBR Capital Markets. Tom, I understand your commentary regarding supply and how you view the end market demand and I respect that. But one think that I'm still not sure and struggling with is the fact that when I talk to regulators, like in case of California, if you would see, I get a feeling that some of these PPA may actually be send back, as they try to keep the rate at a reasonable. So I want to get your commentary or your opinion as to how regulators are looking into this, not so much of what you see or hear from utilities/ And I have a follow-up question.

Julie Blunden - Vice President of Public Policy and Corporate Communications

Sorry, Mehdi. This is Julie Blunden. Our PPA with PG&E is already into the PUC and the... we have had no negative comments on those applications. So, we are in excellent position there. And Florida Power & Light commissions already approved that contract with FPL.

So, I think what you are finding is that when you look at renewable opportunities in general, there is differentiation by the regulators about more confident technology and less confident technology. Now, the beautiful thing about notable tax is that it's a highly confident technology with decades of experience behind it, which is one of the reasons that the utilities like it, as the same reason that regulators like it.

Mehdi Hosseini - FBR Capital Markets

Sure. And the follow-up, going back to that PPA, you finally stake correctly that it's going be turned on in 2010 assuming six months, a lead time for installations. That means that you have to get the financier or yourself being involved into ownership over the next six months. So, again help us understand what are the key milestones, and what it would take so you to have a ownership given the current capital markets, would you have to go and actually strengthen your balance sheet?

Howard Wenger - President of Global Business Units

This is Howard Wenger. I'll answer your question. First of all this is for clarity, the plan for the PG&E project is a three phase build out; so 25 megawatts in 2010; 75, 2011; 150, 2012. So we are able to as you know as delivered and installed in the first part of this year and 50 megawatts in one region in Spain. So 0.5 megawatt we can do very candidly. So we have more runway than just six months to get the project finance and just wanted to provide some color on that. And I'll let Tom way in on this question well.

Thomas H. Werner - Chief Executive Officer

Yes. The second part of question is we do not plan on owning very large scale systems like PG&E.

Mehdi Hosseini - FBR Capital Markets

Thank you, guys.

Thomas H. Werner - Chief Executive Officer

Thank you very much. Next question Michelle?

Operator

Thank you. Al Kaschalk you may ask your question and please state your company name.

Al Kaschalk - Wedbush Morgan

Wedbush Morgan. Tom, just to change the subject a little bit from ASPs and things, can you talk a little bit about operations in capacity build given what you know is at the pretty dynamic Board calendar that you have?

Thomas H. Werner - Chief Executive Officer

You'respeaking specifically of our fab.

Al Kaschalk - Wedbush Morgan

Yes. I just... I mean you have what as I believe scheduled megawatts of what 574 for '09. So I don't... you are fully funded for the business model, which we anticipate to continue. But whether to see if we had any update on outlook given what seems to be a very strong building calendar out there, '09 and 2010, 2011.

Thomas H. Werner - Chief Executive Officer

Clear.Absolutely, there is only... I'll speak broadly on our second fab is very effectively coming online. I will complete that next year and as you point out, fully funded and are going to explain that. We are a little mentioning that we've broken ground on the third fab and we are proceeding on that fab as well for production in 2010 and that is built into our guidance as well. So, broadly speaking all systems go in both fabs, all three fabs obviously. Did you have follow-up Al?

Al Kaschalk - Wedbush Morgan

No follow-up here. I'll let others take the three part question.

Thomas H. Werner - Chief Executive Officer

Alright.We'll go next question then.

Operator

Thank you. Mark Heller, you may go ahead. Please state your company name.

Mark Heller - Merrill Lynch

Thank you and Merrill Lynch. Manny, I had a question on the systems revenue for Q3 and Q4. So, Q3 looks like it was inline, but it looks like the guidance was taken down for Q4. I think previously you guided for 195 to 215. And now you're looking for 170 to 180. So, I was just wondering what the change was there?

Emmanuel T. Hernandez - Chief Financial Officer

Yes.Thanks Mark. It's largely just reacting to opportunities, the fact that you've seen the first significant increase on component segment mix. That's Howard pointed out with the shift from quarter-to-quarter. The opportunity partly because of demand and the borrow and residential channels being so strong as to allocate more product to that segment in the fourth quarter. And that's really all just the power, the flexibility of the business model being able to shift between segments.

Mark Heller - Merrill Lynch

And on the gross margins, so it went down to about to 19.7 in Q3 and between 18 and 19 in Q4. What's the long-term outlook for the margin of this business and I guess when are we going to see the margins stacking benefit here?

Emmanuel T. Hernandez - Chief Financial Officer

Yes, very good point. First off to just put some color on white is going to stay at 19% for a couple of quarters. It's largely because of regional mix, most notably higher North America type system deployment contrast that for example in Q2 where we were very heavy Spain in this segment had a very good gross margin. So, that's part of the answer. Yes, we got to get the regional mix that more feeding of blending of margins of different regions. As you guys know, the European deployment typically command better margins.

Also, as we achieve more allocations of SunPower modules for this segment and that's going to be approaching 80% to hit the model, that would also help us get this segment to a better margin profile. So, more SunPower allocations in a regional mix that plays out for the average.

Thomas H. Werner - Chief Executive Officer

And Mark, I would just add the experience of this year with many North American systems being implemented by SunPower would enable a build cost reductions into our systems design that we expect margins to improve, even out of mixed spaces in North America. So, do you have a follow-up Mark or we move on?

Mark Heller - Merrill Lynch

No, thank you.

Thomas H. Werner - Chief Executive Officer

Okay, thank you. Next question Michelle?

Operator

Thank you. Michael Horwitz, you may go ahead and please state your company name.

Michael Horwitz - Stanford Group.

The Stanford Group. Congratulations, great quarter. How do you anticipate, perhaps your business mix systems and components over the next few years and how does that change in a more robust residential demand and maybe well how that plays out margins? And then I'll just ask my follow-up, to the point of balances of the systems, what benefits do you see with declining material's prices currently and probably going forward into next year? Thanks.

Thomas H. Werner - Chief Executive Officer

Sure. As you look forward in terms of business mix and then sort of margin profiles associated with that, our fundamental promises is very hard for us to predict over say five year horizon. Component mix is going to move from residential to commercial and to our power plants. That's why we really emphasize the excitement we have over the investment tax credit because there is positive attributes for each of those markets.

As we look near term, clearly the utility business is going to be a big driver, perhaps over the next few years. And we have every reason to believe that the residential segments are going to be quite strong. So, frankly the best we can do is as you say, we model a third to third out of sort of the intermediate term.

Margins vary a little bit less from channel-to-channel and a bit more as Manny pointed out, within the systems business in that region. So, that's best I can do Michael on that question.

In terms of balance of systems, we have not been... we are in a position to capitalize on declining commodity prices that our systems' builds. I'd like to say we predicted the decline in various balance of systems costs and to degree, we did make a decision to not go along. And then we're going to capitalize on that. So, I think that you'll see us capitalized on that directly, European out of the next few years assuming that trend continues. And of course we're designing less of those commodities into our systems as well. Thank you for the question.

Michael Horwitz - Stanford Group.

Okay.Thank you.

Thomas H. Werner - Chief Executive Officer

Alright. Michelle?

Operator

Thank you. Colin Rusch, you may ask you question. Please state your company name.

Colin Rusch - American Technology Research

Hello. This is Colin Rusch from American Technology Research. I guess I wanted to get into the circuitry of the cell improvement that you're making. So, can you talk about any initiatives you're working on to improve the transmission of electricity within the cell circuitry and particularly related to the metal evasion process?

Thomas H. Werner - Chief Executive Officer

It's a very specific question. Let me talk about land C2i [ph] out satellite broadband and let me see if you want to ask follow on. We have a, I don't know 25% to 35% of our R&D is on cell technology. And yes, we're working at every aspect of the cell.

In the last quarter, we announced that we had our Gen 3 cell. We had done prototypes, small scale prototype and of course with advancements been on the Gen 3 technology that obviously increases it and flourish and say obviously to reiterate that increases the conversion efficiency of our cell we believe by another percentage point. And that has a lot to do with geometries on the backside itself, essentially thinking more as a lot on the back side of the cell. Specifically, whether that includes metallization changes I believe that is a positive surprise down the road.

Colin Rusch - American Technology Research

Excellent. And then just the quick follow-up, can you talk about spreads between high efficiency and lower efficiency model reducing seeing a few increases about the spreads and ASPs increase between high efficiency and low efficiency models or what are you expecting in the fourth quarter next year?

Thomas H. Werner - Chief Executive Officer

This is Howard. We've seen spreads increase Q3. We expect that same trend in Q4 and into next year.

Colin Rusch - American Technology Research

Fantastic and then congratulations to you guys.

Thomas H. Werner - Chief Executive Officer

Thanks very much. Michelle?

Operator

Thank you. Mark Bachman, you may ask your question. Please state your company name.

Mark Bachman - Pacific Crest

Pacific Crest. Tom, I'm curious... looking at your 2009 guidance, I know you took it up a little bit, but I thought you would have raised it more substantially. Following the passes to ITC, you actually did a pretty substantial interview with Reuters and you would discuss immediately hiring people. And I think that one could assume that this hiring to be a direct like reflection of kind of to the growth opportunities, but I didn't see it come through in the guidance. Can you kind of explain that?

Thomas H. Werner - Chief Executive Officer

Sure. I think your intuitions are right. We're positive about United States in 2009. But sort of found the credit markets and the financial markets to be the very unpredictable over the last month. So, I'm not trying be eager or anything it's sort of combination of two very positive about investment tax credit very positive about all three segments in the United States and in '09 and beyond.

But we have to be realistic about the overall financial markets and the changes going on there. I don't think anybody is able to predict what's happening in those markets. So, it's a combination of those two things because it does to... I would characterize it as a realistic year of 2009.

Mark Bachman - Pacific Crest

Maybe the hiring might not be as immediate but maybe towards the back half of the year as you get more visibility?

Howard Wenger - President of Global Business Units

No. We still plan and growing from $1.4 billion to over $2 billion. So we are hiring immediately and I also want to indicate that we plan to be offensive and at this difficult time, we think we're in great position as the company we're going to exploit that. So we are... I did mean to say we are hiring immediately and that's consistent with the growth that we we've guided.

Mark Bachman - Pacific Crest

Okay. And then just a question for either you Tom or Howard or Peter; can one of you explain that the relative strength in your component business here. I conducted several checks with SunPower dealer, keep one your dealer network and found that the residential inflation actually are slowing considerably in Q4.

The reason for that is the customers are just waiting for the new 30% investment tax incentive that starts from January 1st. And some of the installers I talk to couldn't stomach the cash flows in Q4 because the sales were going to be completed until Q1. So, I'm just wondering how does the guidance that you gave for this component segment take into consideration, what I found in the U.S market is some of that what you're experiencing or is it just explained the way by the 25% increase in the dealer network over in Europe?

Howard Wenger - President of Global Business Units

This is Howard. As I mentioned before San Diego, we held a dealer conference there. So we had a many of our dealer over 300 people attend our dealer conference. These are premier and half price dealers. And it was incredibly energizing the dealer with them. And they are really the reason why we have the leading market share in the U.S, in the residential sector.

And I didn't hear the same thing that you heard. I talk to over 30 of the dealers, either on one on one or small group basis and find the meanings. And to a dealer, they're increasing their growth projections, from say 40% or 50% to more than double that for 2009. And they are projecting very strong demand in Q4 as well. Manny, has some color on that.

Emmanuel T. Hernandez - Chief Financial Officer

Yes, hi Mark. I'm actually glad you ask question. Because there is a bit of a misunderstanding of a two core pause on residential partly because of this new ITC. It is absolutely true that if you are residential customer, you might be better off waiting in '09, so you're getting the uncapped benefits of the ITC.

However, while some of the dealers are doing because of how good the demand is continuing to take on business. And make sure that they turn on the system in 2009, which is really what you have to meet to be entitled to the higher credit. So, from a supplier's standpoint SunPower, we continue or plan to continue despite of these dealers, have be able to recognize revenues and that's what's we do with our dealers. We recognize revenue upon sale. We don't necessarily harming a customer by just ensuring that they turn the system on. But time, where they entitled to the higher credit. So, I think it's good for everyone.

Mark Bachman - Pacific Crest

Okay. Dow we need to be concerned about, Manny about those dealers? Would you show higher receivables then if some of these dealers don't pay you until Q1 and I'm not sure if the credit returns that you've extend to them, but is there anything going on there where maybe receivables are higher in Q1 for you? I'm sorry at the end of Q4 and then you collect the cash in Q1?

Thomas H. Werner - Chief Executive Officer

Sure. Manny, if you can answer that. And then we've... Mark thank you for the questions. We'll need to move on after that.

Emmanuel T. Hernandez - Chief Financial Officer

Yes. We don't expect that to be an issue Mark. The product is very much in demand that's why because of the advantages of using them product on those projects.

Mark Bachman - Pacific Crest

Thank you so much guys.

Thomas H. Werner - Chief Executive Officer

You bet.

Operator

Thank you. Jesse Pichel, you may go ahead and please state your company name.

Jesse Pichel - Piper Jaffrey

Piper Jaffrey. Congratulations on the strong results and more importantly on your leadership in working behind the scenes to get the ITC passed. Can you quantify how much of the components upside in the quarter was due to opening 50 new wire channels? And secondly, why is it some of these dealers are charging about $2 more per watt on a residential installed versus Germany? Is there any fundamental reason why and what can you help do to bring down that cost? Thank you.

Thomas H. Werner - Chief Executive Officer

Yes. Jesse, thank you for the comments on ITC and thank you for your support driving that and I will obviously help sure with that development. Howard, do you want to answer the question please?

Howard Wenger - President of Global Business Units

Sure.Like you see I'll go to the ASP question. Quite frankly, the U.S. market is still probably a few years behind the German market, largest market in the world, Germany. And that market has a lot of the cost has been driven out in the delivery side of the business were smaller systems in Germany.

And so, I believe that the higher ASPs are coming as a reflection of that's what the dealers can charge. They are going to try to maximize ASP and it also reflect in I think the lesser maturity on the fulfillment side in the U.S.

Thomas H. Werner - Chief Executive Officer

Okay. Jesse, thank you thank you very much for your question. We're going into the incredibly brief lightening round of two questions, consistent with the timeframe we committed. And so let everybody move on with their busy days. So we'll take two more questions and I apologize to those who didn't get the answer to your questions. We will make sure next time you're moved up in the queue. And we will certainly call back this afternoon and tomorrow. So next question, please.

Operator

Thank you. Corey Tobin, you may go ahead and please state your company name.

Corey Tobin - William Blair

Hi. Good afternoon everyone. Corey Tobin from William Blair. Quick question and CapEx, looks like you brought the guidance down little bit here for 2008. But still implies a pretty big ramp in Q4 versus really suffer first three quarters. So one of you can just confirm that that's correct and second a little bit of commentary what's going on there and if there any preliminary thoughts to 2009 CapEx? Thanks.

Emmanuel T. Hernandez - Chief Financial Officer

Any Thanks Corey, it's Manny. Thank you for observing that we have in fact taken the range potentially down, rather than just flat out 300, potentially 250 to 300 that a deliberate action on our part as far as part of our cash conservations. Initiatives to see if we could push out so these expenditures without impacting the output, which as you can see we did in our change. So, we haven't really given our guidance for 2009, but I think it's safe to assume its likely going to be in the same range of 2008.

Thomas H. Werner - Chief Executive Officer

Okay. Thank you very much Corey. And our last question.

Operator

Yes, sir. Our last question comes from Mr. Michael Molnar. Please state your company name, sir.

Michael Molnar - Goldman Sachs

Sure. Goldman Sachs. Good afternoon everyone.

Thomas H. Werner - Chief Executive Officer

Good afternoon, Michael.

Michael Molnar - Goldman Sachs

Hi. Just a quick one, I just wanted to make sure I understand the views on discretionary demand in the U.S. over let's say the next 12 months say for distributed residential or commercial. On one hand I definitely hear the arguments on the ITC, it was a great pass; the cap removal is a terrific thing. On the other hand given the current economy, some people might say how many residential, how many people are actually going to pump down $20,000, $30,000 on a residential install if unemployment goes up and disposable income is down. Is what I'm hearing correctly that there is so much pent up demand and there is such a low penetration that it... the economy really will be way, out way by the ITC for discretionary demand in the U.S.?

Thomas H. Werner - Chief Executive Officer

Thank you for answering the question so eloquently. That's exactly what's happening. As Julie mentioned, the PG&E which had the highest penetration in United States residential and small commercial hookups, 25,000 out of 4 million customers debate. And that's the highest level penetration. So, given the growth rate of our company and the industry at large, there is a tremendous room for growth. And giving through point about disposal income, we see really unprecedented demand in the U.S. sector right now.

Unidentified Company Representative

Just briefly, Michael I think there is an increasing desire by our customers take control of their energy costs, so combined that with the very still early stage penetration and you get things... that you get a market situation that is not intuitive if there is deeper penetration.

Michael Molnar - Goldman Sachs

Got it already. Guys, thank you very much.

Thomas H. Werner - Chief Executive Officer

Thank you, Michael. And thank you all very much for joining our call today. We will be making call back this afternoon and tomorrow. We very much appreciate support of our shareholders. And we look forward to positive Q4 earnings call in January. Have a nice day.

Operator

Thank you. This does conclude today's SunPower conference call. Have a nice day. You may disconnect at this time.

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