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Executives

Robert Okunski - Senior Director of Investor Relations

Thomas H. Werner - Chief Executive Officer

Dennis V. Arriola - Senior Vice President and Chief Financial Officer

Howard Wenger - President, Global Business Units

Marty T. Neese - Chief Operating Officer

Analysts

Sanjay Shrestha - Lazard Capital

Jesse Pichel - Piper Jaffray

Timothy Arcuri - Citigroup

Satya Kumar - Credit Suisse

Vishal Shah - Barclays

Nicholas Allen - Morgan Stanley

Al Kaschalk - Wedbush Morgan

Pavel Molchanov - Raymond James

Paul Clegg - Jefferies

Rob Stone - Cowen and Company

Corey Tobin - William Blair & Company

SunPower Corp. (SPWRA) Q1 2009 Earnings Call April 24, 2009 4:30 PM ET

Operator

Good afternoon and welcome to SunPower Corporation's First Quarter 2009 Earnings Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

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

Robert Okunski

Thank you, Ed. I'd like to welcome everyone to our first quarter 2009 earnings conference call. On this call, Tom Werner, SunPower's CEO will give an overview of our Q1 performance, followed by Dennis Arriola, our CFO who will go into greater detail on our financials. Tom will then discuss our outlook for 2009. Following our prepared remarks, we will open it up for questions for the remainder of this call.

During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in our most recent 2008 10-K filed with the SEC in February of 2009 as well as today's press release with our Q1 results. Please see our 10-K and press release for those factors that may impact these forward-looking statements.

To enhance this call, we have posted a set of PowerPoint slides which we will reference during this call on the Events and Presentations page of our Investor Relations website. At the same location, we've also posted our standard supplemental datasheet related to our historical performance.

Finally, based on analyst and investor feedback, we will keep today's call to one hour including questions.

With that, I'd like to turn the call over to Tom Werner, CEO of SunPower. Tom?

Thomas H. Werner

Thanks Bob and thank you for joining us today. I'd like to start out with an overview of the first quarter, the most challenging quarter we've had since we went public in 2005. Then I will move to 2009 and 2010 to discuss how we are well positioned for long-term success despite difficult near-term conditions.

Please turn to slide three of our online presentation. On slide three, you will see that our first quarter was impacted by seasonality, the continuing effects of the credit crisis and difficult economic conditions. Despite these headwinds, we were able to deliver strong gross margins and positive non-GAAP net income and we are well positioned going into the balance of 2009 and into 2010.

Our balance sheet remains strong as we delayed capital spending and implemented a demand-driven supply chain, matching supply's demand, as we exited the quarter.

Our revenue reflected this challenging sales environment. But we see positive signs as we generated the highest number of residential leads of any quarter in our history, suggesting demand is improving.

In our Systems and utility businesses, we have seen both our backlog and pipeline for late 2009 and 2010 projects substantially expand since the beginning of the year.

As I'll highlight in a minute with some data from California, the effort we have made with investments in brand, technology, costs and people have resulted in customer preference for SunPower products, because they value our industry-leading high efficiency solar panels and systems, they trust the performance of our systems which have a decade of monitored operating performance behind them and we deliver competitively priced energy to our customers.

One of the reasons for this customer confidence is our financial position. We have a strong balance sheet. We have adjusted our capital expenditures and operating expenses to reflect market conditions. And we can not only sustain our business during the downturn, but invest to be able to flex in response to rapid growth as demand accelerates in the future.

Dennis will go into further detail on our financial results as well as our actions related to manufacturing capacity, operating expenses and capital expenditure timing.

Let me offer a few highlights. Our Q1 2009 revenue is $214 million. We generated non-GAAP gross margin of 24.3% with Components gross margin at 29.5%.

Let me emphasize. Our gross margin results reflect two important trends: our ability to maintain gross margin while industry wide ASPs drop and the strength of our dealer network.

We ended the quarter with non-GAAP EPS of $0.05 per share. Let me reiterate a theme you have heard us discuss since we went public. We have developed a vertically integrated, diversified market model to deliberately prepare for a change in the supply demand balance. The market has now changed. Supply clearly exceeded the pace of solar system deployment in the first quarter.

However, our record lead generation in the first quarter and our expanding backlog, pipeline and market share suggests that we will see revenue growth through the rest of the year.

Turning to slide four, let me address market share. Our team conducts a weekly analysis of the dataset provided by the California Public Utilities Commission on the California Solar Initiative. We encourage other markets to make their program data as easily accessible. Based on this data, for the first quarter, SunPower had the leading share of systems less than 10 kilowatts installed in the California Solar Initiative. In fact, the second share position was approximately 21% versus our approximately 38% share.

We have maintained a leading position in this segment since second quarter of 2007. Because there can be a significant amount of panel switching by dealers between the application date and the time of actual installation, we focus on installed system data rather than application data as the most useful measure of market share.

In the commercial segment, we have taken into consideration both SunPower systems with SunPower panels and third party panels when calculating share.

Let's cover how we think about pricing. As we have seen over the past several quarters, our product commands a premium average selling price. As the first quarter progressed, we closely monitored our customers buying patterns to determine whether our ASPs were appropriate to maintain market share in this environment of competing market drivers and unprecedented price pressure. With nearly 500 dealers worldwide, we have significant real-time visibility with respect to end market dynamics.

During the quarter, we reduced our Components ASPs by less than 10%. The Components segment is our shortest cycle business and therefore more accurately reflects current market conditions. We saw during Q1 that our share of California residential systems, CSI applications, a leading indicator for share of installations, remained within our long-term range of 20% to 25%, indicating that our products were priced competitively.

Our view is that more rapid price decrease within Q1 would not necessarily have resulted in meaningfully higher shipment volumes within the quarter. In this environment, we believe that the correct course was to maintain SunPower's premium pricing position superior margin profile.

Let me emphasize by saying that the CSI data and our margin performance in Q1 demonstrate that our brand, technology, cost and people strategy is working. We have developed a brand based on differentiated technology that offers us a leading cost position. We have invested in the people who have created our technology, built our businesses and continue to do so. And we will continue to capitalize on these strategies.

Now let me turn the presentation over to Dennis Arriola, our CFO, who will report details of our 2009 Q1 results, discuss how we are positioning ourselves financially for the balance of 2009. And after Dennis makes his comments, I will make a few more comments about our market dynamics. Dennis?

Dennis V. Arriola

Thanks Tom and good afternoon. I'd like start with slide five and begin with an overview of our financial results for the first quarter.

As Tom indicated, our first quarter results came in below our internal plan due to the prolonged winter conditions in Europe, the difficult economic and credit environment domestically and delayed purchasing decisions by many of our customers.

Revenue in the first quarter was $214 million compared to $274 million in the same quarter of 2008. Revenue from our components business was $108 million in the first quarter, up nearly 14% versus the same quarter in 2008. A long winter season in Europe this year impacted our sales in Germany. We also experienced challenging business conditions in our North American Components segment as the uncertain economic environment and tight credit conditions influenced overall demand and the timing of customers' buying decisions.

For the quarter, revenue in North American Components increased by nearly 20% over the same quarter last year. We also experienced first quarter growth in Italy as component sales made up over 28% of this segment's revenue of the quarter compared to 14.5% for the same quarter in 2008. Sales in our Systems segment were $106 million compared to $179 million in last year's first quarter.

Now recall that Spain was a big business for SunPower last year when sales in that country made up nearly 74% of our Systems segment revenue in the first quarter. By comparison, Systems sales in Spain were only 3% of revenue in first quarter 2009.

Revenue and gross margins in the quarter were impacted by average selling prices or ASPs. Our blended ASPs were down less than 10% from fourth quarter 2008. And based upon what we hear in the market, this reduction appears to be substantially less than what many of our competitors experienced in the quarter. This illustrates, as Tom pointed out again, that SunPower's products continue to command a premium in the market even during difficult economic conditions.

Gross margin on a non-GAAP basis improved to 24.3% from 24% in last year's first quarter. By segment, Components' gross margin improved 420 basis points to 29.5% in the first quarter while our Systems business gross margin was 19%.

Non-GAAP operating expenses for the quarter were $40.3 million, down over 5% from fourth quarter 2008.

Other income and expenses or OIE on a GAAP basis was a loss of $12.1 million and a loss of $7.6 million on a non-GAAP basis in the first quarter. GAAP OIE and earnings for the quarter were impacted by a new Financial Accounting Standards Board rule, FSB APB 14-1, to be a exact; that's a mouthful.

Under this new FASB rule, we are required to separate on our financial statements the value of the underlying debt from the fair value of the conversion feature of our convertible debt. This non-cash adjustment had a $4.5 million negative impact to our GAAP OIE. Both GAAP and non-GAAP OIE also included a $1.4 million expense related to foreign exchange forward options which will benefit future periods and $1.7 million in expenses for a reserve related to our remaining investments in the reserve primary money market fund and some losses on the sale of auction rate securities.

For the first quarter 2009, we reported a GAAP net loss of $4.8 million or $0.06 per share loss. Non-GAAP net income for the quarter was a positive $4.2 million or $0.05 per share gain.

The adoption of FASB rule 14-1 including the impact of taxes reduced first quarter GAAP earnings and earnings per share by $5 million and $0.06 per share respectively. Going forward, we expect the adoption of rule 14-1 to negatively impact GAAP earnings, once again on a non-cash basis, by approximately $5 million to $6 million each quarter in 2009.

Now please turn to slide six. While we were obviously not satisfied with our financial results in the first quarter, we recognize the severity of the challenging business environment and implemented several actions and strategies that will help us manage our cash flow more effectively and continue to protect our strong balance sheet.

In regards to our operating expenses, we took a systemic approach to reducing costs throughout the company. We analyzed which of our expenses could be shifted from a fixed nature to variable base and reprioritized costs that could be eliminated or delayed until the business climate and overall demand improves.

As a result, we have identified and reduced more than $50 million in costs from our internal 2009 operating expense plan included the reduction of more 60 jobs in January.

From a working capital perspective, we've implemented strategies that will help minimize the amount of cash we have invested in our business over the short term. In order to optimize our inventory levels going forward, we have adjusted our factory outputs at our fabs in the Philippines to better match the current demand environment. In essence, we now have the ability to phase in our fab lines within two weeks to replenish inventory levels or if we see signs of demand picking up quickly.

Our model, as you know, also allows us to purchase third modules if that makes the most economic sense.

In 2010, we will have the manufacturing capacity to produce approximately 600 megawatts on an annual basis. And this year, we plan to produce up to 400 megawatts.

In order to further optimize our cash flow, we've reprioritized our capital expenditure spending for the remainder of 2009. For example, the last three lines in our Fab 2 are basically complete, although we've held off on final ramp up capital and costs.

We do not plan to fully utilize these lines until we see stronger market signals that demand has picked up again. This allows us to save on depreciation expense and the working capital related to the lines. We've also rescheduled a measure portion of the build out of Fab 3 in Malaysia until 2010 and adjusted the timing of other non-critical capital expenditure.

So as a result, we now expect our 2009 capital expenditure plan to be in the range of $250 million to $300 million, a $100 million reduction from our previous range of $350 million to $400 million for the year.

We're also working closely with our vendors and suppliers to reduce the lead time required to order capital equipment and focusing on ways to reduce our working capital requirements by improving the terms and conditions of our existing contracts including repayment requirements. All of these actions will help SunPower optimize its cost structure and capital spending plans and help maximize cash flow generation.

I would like to spend a moment on the progress we have made on our cost reduction movement. As you'll recall, SunPower set forth a strategy in 2006 to reduce its overall manufacturing cost by 50% by the year 2012. We are well on our way to meeting or beating our goals and we are currently on schedule to be two-thirds of the way to our target by the end of this year.

On slide seven, I would like to give you an update on some of our recent financing activities.

In late March, we renewed and extended our working capital facilities with Wells Fargo Bank. As we reported earlier, we are funding our new Fab 3 in Malaysia with a loan package from the Malaysian government. And to date, we have drawn down approximately $104 million of the total facility. We are also pleased to announce that last Friday, we closed and funded a new three-year $30 million term loan with Union Bank of California. The proceeds from the $30 million financing do not appear on our first quarter balance sheet.

Lastly, we are making good progress on closing a $75 million financing package with the International Finance Corporation.

These new financings and renewed credit lines demonstrate SunPower's ability to raise capital even in difficult credit markets. We are committed to maintaining strong balance sheet and we recognize that customers and suppliers like FPL Group, Exelon, PG&E and Xcel, to name a few, prefer to do business with a financially strong company. As we've mentioned before, we will not use our balance sheet to permanently finance large utility scale projects.

Before I turn it back to Tom, I would like to spend a moment on the financial model we've previously discussed with you, which is a 30% gross margin, 10% operating expense and 20% operating margin.

Given the diversity of our business, both by type of geography and our continued progress and success in the larger scale utility business, we recognize that our future success will be measured more by the growth in our operating cash flow and how we efficiently utilize capital than by whether we adhere to a 30%-10%-20% month.

By being flexible and continuing to reduce our costs, we can take advantage of market opportunities, profitably build market share and generate more operating cash flow in the future and still produce operating margins of approximately 15% to 20% annually.

So as we continue to reduce our manufacturing costs, optimize our operating expenses and flex our capital spending plan based on market demand, SunPower is well positioned to maneuver through the challenging short-term economic environment and remain a leader in our sector. We'll continue to invest in research and development even in these uncertain times to ensure that we continue to produce leading technology that will deliver competitively priced cost of energy to our customers.

While we can't predict the exact timing for a market turnaround, we are confident that we are managing the company to succeed in the future and we expect to see an improvement in our performance in the second quarter.

With that, I'll turn it back to Tom.

Thomas H. Werner

Let's move to slide eight. As we look forward, we see trends emerging in a number of market segments that give us confidence that we will see substantial growth in the second half of 2009, 2010 and beyond.

These segments include rooftop, distributed power plants, utility scale projects. I would like to briefly touch on each of these trends and how we are well positioned to take advantage of these trends and provide you with some examples, systems in each category.

As you can see on slide eight, SunPower has been very successful in the rooftop market by offering our customers the best net present value or NPV of any solar company in the segment. We see this trend continuing. We are winning customers in the commercial rooftop segment as evidenced by our recent dedications at Del Monte 1.9 megawatts on two roofs and J.C. Penney of 3.5 megawatts over nine roofs. Additionally, we booked more than 60 million in North American commercial projects in the first quarter of 2009.

We will win commercial business for similar reasons as the residential market, our technology and systems expertise enables us to drive the highest power density within a given geographic region with superior temperate performance, low light performance and no light-induced degradation.

As a result of our superior technical and economic performance, SunPower products command a premium even in this challenging market.

With last year's suspension of the federal investment tax credit or ITC and continued progress in the development of guidelines for the implementation of the stimulus plan, the commercial rooftop market segment is poised to resume its growth as credit conditions improve.

Turning to slide nine. Another trend we are seeing is the increased interest in distributed power plants in the U.S., a category that we developed as core business in Europe over the last five years.

On this slide, we highlight our most recent dedication for the Inland Empire Utility Agency. 3.5 megawatts over five systems located on four sites using both roof and ground mount technologies.

Please note that when we speak about our power plants, we do so in the power industry terminology of AC rating rather than using the DC terminology comment in the solar industry for rooftop systems.

We are winning in the distributed power plant segment due to our experience and track record. We have more than 100 ground mounted tracking systems, generating more than 200 megawatts of peak power. We've been a solar engineering, procurement and construction company since 1996 and constructed the first major power plant in the U.S. with Nellis and in Europe with Solar Bavaria 1.

At the distributed power plant scale, experience and performance tipped the scales in our favor since we offer a competitive levelized cost of energy. The drivers for continued growth in this segment include flexibility offered by solar PV to be cited anywhere at any scale delivered fast, which makes it a very attractive way to meet our peak power needs. And utilities and regulators need distributed solar as a way to efficiently fill in the grid, adding new clean, peak energy generation near load centers so they that have to wait for translation investments to be permitted and completed.

Also, state RPS legislation is being implemented at a time where we are able to offer an attractive levelized cost of energy to respond to these programs. The federal stimulus package will fund projects for some of the public customer categories where we have had substantial success in the past.

The emerging trend of utility-owned solar programs is a great market for us given our credibility that we can deliver and perform.

Let me elaborate on our utility business on slide 10. The utility business includes all segments, rooftops to distributed power plants and central power stations. We are working with utilities on all three categories.

In the distributed power plant category, we are on schedule for the construction of 25 megawatts in 2009 and 10 megawatts in 2010 for Florida Power & Light, a subsidiary of FPL Group.

Earlier today, we announced a three year 300 to 600 megawatt supply agreement with FPL Group. And we are very pleased to expand our partnership with them. FPL Group is the leading owner of solar and wind in North America. We are very excited to work with them to accelerate solar deployment across the country.

Earlier this month, we announced a 17 megawatt power plant with Xcel Energy in Colorado. And on Wednesday, we announced a eight megawatt power plant for Exelon and Chicago South Side.

We believe that our recent set of utility announcements is a function of our competitive pricing based on levelized cost of energy, our experience with more than a decade of large scale solar development and the strength of our performance track record on other large scale systems.

The main drivers for the utility segment includes: state RPS requirements, which will generate demand for 70 gigawatts of renewables by 2/25; ITC grant, which will directly benefit utility owners; stimulus plan, which includes project grant and loan guarantee programs, which will improve near-term financing options for utilities for third party owners; carbon legislation, which would require utilities to consider their aggregate carbon footprint and, perhaps most importantly, the market data showing utilities how the LCOE of SunPower's solar systems are now competitive with other resource options under consideration.

Finally, as you can see on slide 11, our long-term confidence in the utility segment is a direct result of our growing project pipeline, which has grown to more than 1.3 gigawatts on a profitability weighted basis. Our pipeline is well distributed with multiple opportunities across many years.

Moving on to guidance, given current market conditions, we are revisiting our 2009 guidance and now expect revenue to be in the range of 1.3 billion and 1.7 billion with non-GAAP EPS in a range of $1.25 and $1.75.

Based on performance continuing on the path we've seen quarter to date, we believe we will drive revenues at least 20% higher in Q2 in 2009 relative to Q1 results.

While launcher fundamentals are strong, we remain cautious in the near term and our guidance reflects this. That being said, if conditions improve over the balance of the year, we are positioned to respond rapidly to improved market conditions.

Let me conclude by saying that we have responded to a challenging Q1 by taking the steps necessary to control our costs given current market conditions while still retaining the ability to quickly respond as the environment improves.

I'll open the call to questions now. With me, I also 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; Marty Neese, our Chief Operating Officer and Bob Okunski, our Senior Director of Investor Relations so that they provide some of the answers.

To provide ample time to address all of your questions, we ask you to limit yourself to one question and follow up. We advise those of you who would then like to jump back in the queue to do so. So, operator, we'll take the first question.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions). Our first question comes from Sanjay Shrestha from Lazard Capital. Your line is open.

Sanjay Shrestha - Lazard Capital

Great. Thank you. Good afternoon guys and appreciate the guidance and the commentary on the ramp up. Just a quick question. Tom, you talked a lot about the utility landscape and seems like you guys are getting a great traction there. Can you sort of talk about what your target market share there, especially as we start to get more and more visibility on this loan guarantee program and funding under the grant program? What would you say your market share is at this point in time and what would you like that market share to be between now and over the next five years?

Thomas Werner

Okay. Thanks for the question, Sanjay. I will make few comments and then I'll turn it over to Howard. And let me first say that in terms of target market share, I'll let Howard amplify what I have to say. But our target margin share is at least as high as we have in any other segment. And the reason for that is we believe we are most competitive in the utility segment. And that's because our product produces substantially more energy in a same unit area and we have a huge balance of... system advantage while the cost of our panel is decreasing, rather significantly. So on a levelized cost of energy basis, we are very competitive. We offer other features that we think the utilities value a lot as well as our strong balance sheet and our almost 10 years of operating experience. So for all of those reasons, we see utilities as one of our strongest segments, if not our strongest segment. And therefore, our target market share is at least as big as any other segment. In terms of numbers, I'll turn it to Howard.

Sanjay Shrestha - Lazard Capital

Great. Thanks.

Howard Wenger

This is Howard. Thanks Tom. Sanjay, we are probably looking at market share on the order of 25% plus or minus for this segment for us. The utility power plant segment is much more mature in Europe and there are many more systems there versus North America. You have literally probably three systems that have been installed or under construction in this category. And we've done... we're working on two to three year or we've completed one of the three and working on the second of three. So it's pretty early in North America, but I would support what Tom said.

Sanjay Shrestha - Lazard Capital

Okay. Much appreciated guys. Thank you.

Operator

Next question comes from Jesse Pichel from Piper Jaffray. Your line is open.

Jesse Pichel - Piper Jaffray

Hello, congrats on the FPL wins and good execution. Can you discus your cost roadmap on Components? So you have I guess a higher cost structure than the commodity module because of the n-type wafer and with the back contact metallization. Are you seeing any alternative methods of patterning that could lower the CapEx and operating costs on the new fabs coming up?

Thomas Werner

Yes, Jesse, I think I'll take the question; this is Tom. And I what I would say to you if we look back over the last few quarters, perhaps even four to eight quarters and compare gross margins even taking in consideration lightweight selling prices, I think you'll find in our cost structure on the Components segment, which specifically is modules, is quite good. And so we're actually quite confident that we can compete on a cost basis, although we expect to continue to command a premium. We get the premium because we produce more energy per rated watt in each of these installations.

Now as we look forward, I think you've asked a very good question. With the architecture of our cell and the cell type that we use, do we see other technologies or others ways of getting costs out. First, the answer to your question is yes, I think most of the callers are aware that we are vertically integrated or partnered in the production of ingots and wafers. And there has been a fair amount of innovation in that space where tolic (ph) wafers actually don't command a premium in terms of costs.

And in terms of our architecture, our R&D team has done a fantastic job of advancing the conversion efficiency of our cells, while not increasing costs, so that obviously has a cost reduction impact. So there are some other technology things that we're working on with our R&D teams that we'll be talking about in the back half of this year. But I think you can expect us to have variations on our mainstream theme and not a new technology horse that we are going to ride, so to speak.

Jesse Pichel - Piper Jaffray

And for my follow-up question, you mentioned 60 megawatts I believe of commercial rooftop programs that you won in Q1. Can you discuss... give us a little more color on that 60 megawatts? Is this fully financed? Is it risk adjusted? Thank you.

Thomas Werner

Yeah. And I will just say a really quick comment and then Howard can speak to it. I appreciate your question because when we talk about the utility segment, we're talking about profitability weighted pipeline, so we wouldn't consider that business to be booked yet. A booking requires financing, permitting, a contract et cetera, et cetera. In the commercial segment, we were referring to bookings, so there is a substantial difference. And then, Howard?

Howard Wenger

Yes, this is Howard. You may have been referring to $60 million of commercial projects that we booked in the quarter Q1 in North America. So that comprises roughly about 10 different customers in retail, telecom, ag, public school sector. And these are distributed largely rooftop projects. And that would be again $60 million booked in the quarter. None of them are dependent on financing; they are 100% booked and they will be recognized in 2009.

Jesse Pichel - Piper Jaffray

Thanks so much for the color.

Howard Wenger

Thank you.

Thomas Werner

Thanks Jesse.

Operator

Next question comes from Timothy Arcuri from Citi. Your line is open.

Timothy Arcuri - Citigroup

Hi. Couple of things, first of all, can you give us the production number and the number and... sorry, the portion of systems that went to your Components business? And then as a follow up, looking at the inventory number and looking at the premium that your components are getting out there relative to the peers, it's at its highest levels that it's ever been. So I am wondering as you look at that big inventory number, how you assess the risk of having to write that down over the next two quarters as pricing has to come down and kind of close that gap? Thanks.

Thomas Werner

Sure. Let me speak to the second part of your question. This is Tom, and then I will turn it over to Dennis who can give you a specific numbers. So in terms of inventory and risk of write-down, we mentioned that we've implemented a demand-driven supply chain. And what that means is that we'll regulate for size the amount of manufacturing that we do based on the amount of inventory we have between us and installation. So by definition, we're able to manage that inventory level down by managing how much we produce. And so we fully expect to absorb that inventory pretty rapidly in the first part of Q2.

The other thing I'd say that's really relevant to this is the first part of Q2 has started out substantially better than the first part of Q1.And so the rates of installation are substantially higher than the rate of installation in Q1. So you can't use the Q1 usage rates to calculate when that inventory will go away. It's a very good question. I can assure you we are on top of this and we're moderating production build based on the amount of inventory as we install it. In terms of the specific numbers of production, I think our guys are ready. Dennis will add to that.

Dennis Arriola

Yeah, the overall production on a kilowatt basis was 93,686 for the quarter, so 94 megawatts approximately.

Thomas Werner

And Tim, I would like to let Marty Neese just speak briefly about the supply chain approach in the next quarter or two and then we will take the next question. Marty?

Marty Neese

Yes, thanks Tom. There is a couple of other additional comments to add. Part of it is, as Tom mentioned, with the vertical integration capability, what we are doing is managing the production of cells and holding that inventory to maximize our flexibility and responsiveness. Once we get demand signals or purchase orders from customers, we convert it into finished goods modules and then ship it to end destinations. Additionally, in this quarter we're launching our regional module operation in North America, which will allow us to fulfill in region and liberate a lot of working capital that is in transit of sea at the moment. But that's what we're working on this quarter, which will help out the inventory going forward.

Timothy Arcuri - Citigroup

I am sorry, so what was the portion that went to the Systems business?

Marty Neese

You guys have that number?

Unidentified Analyst

Let me look at that and...

Marty Neese

So Tim, we'll come back to that in a moment. We've got to do a little book searching here.

Timothy Arcuri - Citigroup

Okay, thanks.

Marty Neese

But we'll answer your question.

Thomas Werner

Next question please.

Operator

Our next question comes from Satya Kumar from Credit Suisse. Your line is open.

Satya Kumar - Credit Suisse

Yeah hi, thanks. Question on inventories again. You mentioned that you are looking to double the production in the second quarter. Could you give us a sense of what type of utilization rate you're looking to run in the second quarter and will there be any under absorption charges and how to think about that for margin? And secondly, if I look at your peers and look at pricing trends for them, most folks are down obviously a lot more in Q1 for pricing and Q2 is doing another 10% or so. Is there a possibility that there is sort of a catch up quarter for pricing for you as you look out into the rest of the year? Are you comfortable in terms of maintaining that premium? Thanks.

Thomas Werner

Okay. So two parts of the question on percent utilization and/under absorption and then pricing. Howard, I will let you take pricing. I'll take under observation and utilization. So in a demand0driven supply chain, you build according to demand. And so the amount of utilization of the lines now that the market has converted to a demand-driven market will be dictated by the amount of demand obviously. We're seeing demand pick up, so the utilization of our lines obviously will pick up as we use the inventory from Q1. So we'll see anywhere from a line or two that is not used to as many as say 30 or 40% of the lines depending on how demand goes for the balance of the second quarter.

In terms of under absorption booking, I'm not a big fan of taking fixed cost hits. So we've really... the Marty's team has really managed absorption very effectively. So the fact that we're producing less volume than plan of course makes it difficult to absorb the fixed costs. But all the numbers we report will absorb the fixed costs in our reporting. We don't expect to have a separate under absorption number, although it's beneficial at the end of the quarter we could compare what it would have been had we been 100% loaded. But the way we report, we will absorb everything. Howard, you want to talk to pricing?

Howard Wenger

Could you repeat the pricing question please?

Satya Kumar - Credit Suisse

In terms of pricing, I guess is there a possibility there is a catch up quarter for pricing as you look out into the remaining quarters of the year?

Howard Wenger

What do you mean by catch up?

Satya Kumar - Credit Suisse

In the sense that basically the pricing is down a lot more for your peers and it seems like you guys did a very good job in Q1 maintaining market share without lowering prices as much as your peers did, now that your peers are dropping prices and others sort of 10 pecent-ish in the second quarter. So if there sort of pent-up price catch up that you guys have to do at some point later this year?

Howard Wenger

Right, thanks for the clarification. We intend to continue to be very competitive and do what we need to do to maintain share. We believe we will be able to maintain premium as we go forward. One point I wanted to make is that we do see a lot less volatility in our pricing compared to others in the market. And that's largely due to our approach to the market and our robust network. We do anticipate and plan for continued downward pricing pressure in the market, particularly in the components area. And so our plan is up to 20% for the balance of the year. As we get into the second half of the year, we do believe that ASPs will moderate as demand picks up.

Thomas Werner

And Satya, I'll pile on to Howard's answer and then we'll go back to Dennis to answer Tim's question earlier. The short answer to your question is no, Q2 will not be a catch up quarter on pricing. We won't have any abrupt changes to our approach as Howard indicated. However, we are prepared to change pricing as we also indicated. Dennis, do you want to answer the last question?

Dennis Arriola

Then as far as how much we've reproduced specifically for the Systems segment, we don't release that type information specifically about the segment. But I can tell you as obviously the revenues for the quarter were roughly 50:50 and we've given... we've provided you with the gross margins. The other thing to think about as obviously as we produce, so we are very flexible on what segment we can put those into so it stop. We've already allocated as far as manufacturing specifically for a specific segment.

Satya Kumar - Credit Suisse

Thanks a lot guys.

Operator

Our next question comes from Vishal Shah from Barclays. Your line is open sir.

Vishal Shah - Barclays

Yeah thanks for taking question. So you had reported in your 10-K that the rack (ph) measurable backlog with I think $450 million and you did some $60 million of bookings in Q1. There is a backlog higher now that in a view of recognized some of that or is it lower?

Thomas Werner

Yes. So, this is Tom, I'll make a quick comment on that. And as we've said in previous calls backlog is pretty difficult for us because is that residential and so is take the different market that commercial as different band. Utilities and utilities we've giving you some to the pipeline and in the commercial business as far as sense of a booking to way which we gave you the number for Q1 in residential it's more returns business. And so, for that reason we haven't found a good booking to metric report on a quarterly basis. Perhaps it's a whole market segment and we can go take. What I will tell you broadly speaking is that our pipeline and all those businesses if you took pipeline and bookings profile in terms of business, we're all pointing in the positive direction during Q2.

Vishal Shah - Barclays

Okay. So in terms of your revenue recognition, you're talking about a 20% sequential revenue growth in Q2. That would suggest that midpoint of the guidance, we took away due to something around $800 million exiting Q4 from the $200 million level. So I just wanted to get a sense of what kind of visibility you have in the back half of the year. Whether it's just your backlog that's giving you the comfort or whether it's something else that you're looking on, maybe you can help us understand that. Thank you.

Thomas Werner

Sure, absolutely. So it's a very good question. First, let me clarify, we said at least 20% for Q2. And then of course that you said Q4, but I think you mean back half of the year. In order for the math to work, you add the two together and you can come up with numbers like that for the back half of the year. And of course as we get closer to back half of the year, we have more and more data. And let me just clarify by channel utilities and commercial business, it is all identified. So we are not speculating on business to go find a customer. Now it's not all book, but we have customers for everything we're committing to. We have to finalize the bookings, but it's all identified.

For residential, it's a turns business and so in that business, we look at it from several different angles. We look at size of market for the rest of the year and share we expect to gain or garner and we look at conversion of leads because we generate a substantial number of leads for our dealer partners. And we look at the lead generation rates and obviously, we work with our dealer partners to see their view of the next eight months. So the dynamics are different in each part of the business. So in residential, when we did those things, we believe it supports our guidance range. But frankly, that's why... how wide the range is than in the Systems and utility business, all the customers are identified.

Vishal Shah - Barclays

Thank you very much.

Thomas Werner

Yes. Okay, let's go to the next question.

Operator

Next question comes from Nick Allen from Morgan Stanley. Your line is open sir.

Nicholas Allen - Morgan Stanley

Hi, thanks for taking my question. Can you just give a little bit more clarity on pricing. When you just said that you were expecting possibly a 20% down from here, is that the assumption that you're using in your guidance?

Thomas Werner

Yes.

Nicholas Allen - Morgan Stanley

So you expect another 20% decline in pricing over the course of the year?

Thomas Werner

Yes. The way you should think of it from our perspective is that we are prepared for... or we've tested into our models up to 20% more price decline this year.

Nicholas Allen - Morgan Stanley

Okay. Thank you.

Thomas Werner

You bet.

Operator

Next question comes from Al Kaschalk from Wedbush Morgan. Your line is open.

Al Kaschalk - Wedbush Morgan

Good afternoon. Tom, I'm trying to balance the outlook guidance and the manufacturing, production starting in Q2 here. And maybe you could just shed a little bit of color. Not necessarily asking you to call bottom, but are you comfortable as you roll out Q2 that you can remain pretty steady state on the manufacturing side and not necessarily building inventory further? Or do you need a few more things to open up in the visibility channel to make that statement?

Thomas Werner

No. We are comfortable that we can lower inventory consistent with our manufacturing plan, yes.

Al Kaschalk - Wedbush Morgan

But does that mean production could be at least 20% above what you produced in Q1 of 93, 94 megawatts?

Thomas Werner

Yeah, let me be clear. We've already adjusted our manufacturing to lower the amount of inventory that we carry from Q1 and satisfy what we expect our business to be in Q2. And what we will do is moderate the amount of manufacturing we do based on inventory levels, which is driven by demand. So, hopefully, that's helpful. I answer to your question is, yes, we will lower inventory levels consistent with our expected build plan.

Al Kaschalk - Wedbush Morgan

Okay. And then can you give any color on revenues for either the full year or the forward-looking period?

Thomas Werner

Yeah. If you're meaning the confidence level on revenues...

Al Kaschalk - Wedbush Morgan

I'm sorry, I think revenue split, Tom, in the quarter was 56. I am just trying to get a sense how we can think about the Q2 and as move out. I'm asking for specifics, but how do we think about the 50:50, 60:40 type thing for the full year?

Howard Wenger

This is Howard. I'll answer that question. 60:40 is something that we talk about when we talk about quarterly and even on an annual basis to account for variability quarter-to-quarter. But 50:50 for the full year in terms of a revenue split is a good working assumption.

Al Kaschalk - Wedbush Morgan

And what is the first... what's the 60:40, what's the 60 of the component? Thanks.

Howard Wenger

Just how the revenue split can fluctuate quarter-to-quarter. So you can be 60% Systems one quarter and then it can go to 40 the next quarter.

Al Kaschalk - Wedbush Morgan

Thank you.

Thomas Werner

Alright. And we are going to go to the pseudo lighting round, which means we have five or six minutes left. So next question please?

Operator

Next question comes from Pavel Molchanov from Raymond James. Your line is open.

Pavel Molchanov - Raymond James

Target for a 50% all-in cost reduction by 2012. Given that poly pricing had collapsed much faster than pretty much anyone would have expected, do you see any upside to that target?

Howard Wenger

Thanks Pavel for the question. Tom, I'll take this to keep us moving quickly. We also guided that two-thirds of that cost reduction which happened by 2010 or sooner. And yes, we are seeing some opportunity for that to accelerate. And of course you have to compare to the rate of ASP decline as well. And I know you understand that, but I wanted to point that out. I will also comment on silicon price as well. I'm not sure I would use the word collapse; it's come down substantially, but at $80 or $100 per kilogram, they are still higher than they should be. And we expect them to continue to come down. So, yes, I think it's a short answer.

Pavel Molchanov - Raymond James

Thanks.

Operator

Next question comes from Paul Clegg from Jefferies. Your line is open.

Paul Clegg - Jefferies

Hey guys thanks. Dennis talked about the flexibility of the business model by third party models when that makes sense. I wanted to dig into that comment for a second, just try to understand how you about that trade off. What's the point where market ASPs come down by relative to your own, where you just say let's buy competitor models when you'd originally planned to use your own for an installation? How do you think about that point of inflection?

Thomas Werner

Yeah. That's a really good question. Of course that's evolutionary because market's changing rather rapidly. On we still have a huge bias toward using our world sized efficiency panels. Our sales guys, we continue to have the challenge (ph) with our sales guys if they are always selling the highest watt rated panel because it makes the economics test and all of their projects. So that leads us to a preference towards significant utilization of internal product. And what Marty and his team have been able to do is reduce the lead time to turn on capacity so that we can actually flex capacity internally a lot better than we ever could previously. And they're very optimistic they can continue to reduce that lead time. So if anything, I see us using more internal production.

Now, having said that, there are some key partners and third party supply who are working with us on the way they price the product and also the evolution of their product so that we'll always have a third party component. In terms of a trigger point where we would use a lot more third party, the thing Paul that we would want to look at is that pricing long-term sustainable. What we wouldn't want to do is accept pricing that could go away six months later. We want to make sure we're part of a model that's going to make sense in the long-term. And I would say that there is a fair amount of room before we hit that point.

Paul Clegg - Jefferies

Do you say who that partner or partners are?

Thomas Werner

Well, I think we've said previously that we've done business with people like yourselves as a primary partner. And historically SANYO has been a partner among others, SunTech as well. So I would include that list plus a couple of others.

Paul Clegg - Jefferies

Okay, great, thanks.

Thomas Werner

You bet. Next question please?

Operator

Next question comes from Rob Stone from Cowen. Your line is open sir.

Rob Stone - Cowen and Company

Hi Tom. I wonder if you could just comment on a couple of things that affect the cost so I didn't help you maintain your margins. One is can you give us some of the operating matrix how much grams per watt you are using wafer fitness that sort of thing? And then where do you see the trend of your wafer and silicon cost for the rest of the year? Thanks.

Thomas Werner

Sure. Okay, let me talk about trends and then Dennis and his guys will give you grams per watt and thickness of wafer and they will give that to you in a sense of what percentage of line we have converted to our thinnest wafers. I think you hit some of the important ones, grams per watt, thickness of wafer. I would include average conversion efficiency, which we're seeing two really good trends there. We're seeing almost all of our lines on the minimum 22% cell. And all of our lines, even on the cell configuration they are running are improving the conversion efficiency based on manufacturing improvements.

The other thing I would point to you is there is still a fair amount of room for yield improvement. And we've got a great deal of focus there because that's money that goes straight in the bottom line. And I think on the next call, we'll be able to quantify the amount of yield progress we're making.

Now back to the original question though in terms of grams per watt, we'll turn that to Marty.

Marty Neese

Yes, just to comment on the lines, we're running 100%, 145 micron cells at this point in time and with a range of 5.6 to 5.7 grams per watt.

Rob Stone - Cowen and Company

And Tom, a comment on the purchasing cost of wafers and silicon. If prices are going to go down anther 20%, what's going to happen to your cost inputs?

Thomas Werner

Yeah. So we had... I'll do that quickly, I will take one more question and then I will make a wrap up comment and we will end the call reasonably close on... within the schedule that Bob conveyed. So we had contracts for all of the silicon we needed this year. Some of those contracts we characterize as short term in nature. And some of those are rolling off here out the year. So we do have an opportunity to capitalize, but obviously not 100% of our supply. So it's a weighted average. And if you said 20%, it would certainly be south of 10% that we could capitalize on. But it's a non-zero amount, then we will capitalize on.

It's also important to note that our most important partners are the partners that are expanding are the biggest copper (ph) silicon providers in the world. So we're pretty comfortable that we've partnered with the right people and that they are going to drive the cost curve most aggressively. So the answer to your question is probably half of that, 10% or less. Let's take one more question please and then I'll wrap up.

Operator

Next question comes from Corey Tobin from William Blair & Company. Your line is open sir.

Corey Tobin - William Blair & Company

Hi, good afternoon. On the balance sheet, any other significant adjustments to the balance sheet aside from the 30 million you mentioned either on the asset or liability side? And then what do you expect operating cash flow to be in 09'? Thanks.

Dennis Arriola

On the balance sheet, I mean there has been no other subsequent event since the end of the quarter. So other than 30 million, that was the only thing. And as far as cash flow for the year, I mean we have not provided say a forecast. What I can tell you is we had shifted out our CapEx so we've been able to reduce our overall... the overall need for cash flow until 2010. And I can tell you that we are still using more cash than we are generating.

Thomas Werner

Okay. Let me end now with a wrap up comment and I appreciate everybody's time. There are some people left in the queue. Over the next few days, we'll certainly try to make sure we answer your questions. We're sorry we didn't get to you.

I would like to make a comment above the agreement we have with FBL Group. We are very, very excited about our relationship with the FBL Group. I think one of the things that people need to realize is that these existing solar PV plants get built by us in conjunction with FBL. They will be the second largest solar PV state. And by their work with the Governor of Florida, they hope to expand that with the balance of the utilities in Florida to an even bigger market. The Governor of Florida has been a real leader and so we expect Florida to continue to be a great market. And the FBL Group, I should point out, has a great development team, a great land position countrywide and a strong balance sheet where they can provide financing of projects. And this is a team that's proven their mettle as a world leader in the wind industry. So we're really excited about that relationship as we go forward throughout this year.

So we appreciate everybody's time during this interesting first quarter. We look forward to our next earnings call and we'll have a limited amount of call backs, but we will try to connect with some of you. Thank you.

Operator

At this time, that will conclude today's conference. You may disconnect and thank you for your attendance.

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Source: SunPower Q1 2009 Earnings Call Transcript
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