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SunPower Corporation (SPWR)

Q2 2007 Earnings Call

July 19, 2007 1:30 pm ET

Executives

Tom Werner - CEO

Manny Hernandez - CFO

Howard Wenger - VP of Sales

Peter Aschenbrenner - VP of Marketing

Julie Blunden - VP of Public Policy and Corporate Communications

Mike Umstein - VP of Finance

Jay Pierre - VP and Treasurer

Analysts

Steve O'Rourke – Deutsche Bank

Michael Horwitz – Pacific Crest

Sanjay Shrestha – Lazard Capital Markets

Paul Lemming - Soleil Securities

Stuart Bush - RBC Capital Markets

Satya Kumar - Credit Suisse

Srini Pajjuri - Merrill Lynch

Rob Stone - Cowen & Company

Pearce Hamond – Simmons

Pierre Maccagno – Needham

Paul Clegg - Natexis Bleichroeder

Al Kaschalk – Wedbush Morgan

Jesse Pichel – Piper Jaffray

Pavel Molchanov – Raymond James

Alberto Basatto

Jeff Osborne – Thomas Weisel

David Smith – Longbow Capital

Thomas Rigotti

Jeff Bennett - Jefferies

Mike Stern – Western Gas and Electric Company

Paul Lemming – Soleil Securities

Tim Luke – Lakota

Presentation

Operator

Good afternoon, and welcome to SunPower Corporation's second quarter 2007 earnings release conference call. (Operator Instructions) I would now like to turn the call over to Mr. Tom Werner, CEO of SunPower Corporation. Thank you, sir, you may begin.

Tom Werner

Thank you for joining us today. Today we will report our second quarter 2007 financial and operational results. We will also report our plans to raise additional capital and our guidance for our combined company going forward.

First, our second quarter performance again beat our guidance with strong financial, operational and business development results. As a reminder, we report results by business segment, consistent with the way we run our business. Our systems business segment generally represents products and services, service solutions sold directly to the system owner. Our component Business segment represents the balance of our business, generally products and services sold to dealers and resellers. Since we have unified our brands under the SunPower name, you will hear us refer to our large scale systems business as SunPower Systems. Now let me review the financials.

Our Q1 2007 non-GAAP revenue was $174.1 million, up 22% from Q1 2007 non-GAAP revenue of $143.2 million. Breaking that down into our segments, our system segment had non-GAAP revenue of $104 million and our components non-GAAP revenue was almost $70 million.

With regards to components, you should note that SunPower panels used by PowerLight for our systems business are accounted for within the system financial segment results. In addition, both our gross margin and EPS beat our guidance and Manny will elaborate more on this later.

Moving to our sales performance, demand is strong and growing for SunPower's high efficiency solar panels and high performance solar systems. We see several trends emerging:

First, growth in power plant scale systems around the world. In Q2, we announced the following : construction of several large-scale plants in Spain; and we announced multi-site sales for Wal-Mart and Macy's; as well as a multi-megawatt contract in Korea; and lastly, a 1.5 megawatt power plant in Hawaii that will support about 30% of Lanai’s energy needs.

The second trend is that the market continues to value our high efficiency solar panels as evidenced by higher sell and panel ASPs in Q2. Examples of our strength in the quarter included that we added another 12 dealers in the U.S. as we launched our premier dealer program. We now have over 100 dealers.

We also extended our agreement with Conergy in the European Union and we completed several high-profile installations such as the Colorado Rockies stadium and the Colorado Governor's Mansion

The third trend is we see a broadening customer base. For example, the military is making investments in solar power. The largest photovoltaic solar system in North America is now in construction by SunPower at Nellis Air Force base. In New Jersey, we dedicated a solar system for the Department of Military and Veteran Affairs.

In the retail sector, we see building owners who are seeking a return on investment from their rooftops. For example, Tiffany's dedicated a system in our second quarter in addition to Wal-Mart and Macy's.

Lastly, in the new production home sector, we see that the home builders are investing in solar systems and that the result of this is that their homes sell faster. In Q2, we announced that two of our partners have reported that their solar homes using the SunPower SunTile are selling at twice the rate of homes in neighboring communities.

These trends are supported by an increasing use of power purchase agreements and the value of our technology. Most of our contracts in the U.S. are now using a PPA structure, power purchase agreement structure, whereby the customer contracts for solar electricity instead of buying the equipment directly.

We also see major voltaic bracket banks entering the market, which bodes well for the credibility of solar and for solar power purchase agreements. These trends are driving strong demand for our technology as evidenced by our customers' willingness to pay a premium.

Let's review our technology. We are currently shipping high efficiency panels that offer up to 50% more power per unit area than conventional panels and two to four times the power of thin film. Our systems technology, which maximizes energy harvest, improves delivery per watt, energy delivery per watt. These high efficiency and better energy delivery systems offer a lower balance of system and other related costs, which makes SunPower valuable to power plant owners, as well as roof top systems owners.

Now, let me move on to discuss our expansion plans. Yesterday we announced a major new contract with Hemlock for over 2 gigawatts of silicon and this is our largest contract to date. The contract is a ten-year contract starting in 2010 and this contract adds reliable supply consistent with our diversified sourcing strategy.

This additional Hemlock contract supports our aggressive expansion for our solar cell fab 3, which we are in the process of siting. Our cell fab 3 will be the largest yet. It will have an expected capacity of 500 megawatts or more from which we would begin production in late 2009.

With greater visibility in the marketplace, we have decided to scale our production in larger increments. This is one of the keys to our cost reduction road map. In addition, in combination with cells fabs 1 and 2, fab 3will allow SunPower to have a capacity of over 900 megawatts.

To support this expansion, we announced this morning that we are raising $400 million in capital, which Manny will speak about next. This expansion is a critical component to SunPower's plan to drive installed system costs by 50% by 2012 to compete with retail electric rates.

Now, let me move on to our manufacturing technology teams. Our cell fab 1 continues to benefit from cycles of learning leading to improved performance. For example, our silicon utilization improved to less than 7 grams per watt in the second quarter. Our cell fab 2 is now complete, on time and on budget. We will inaugurate this facility with President Gloria Macapagal-Arroyo of the Philippines on July 30th.

Our first lines in this building are now beginning to ramp with our second generation technology. Let me remind you, our second generation technology has a 22% conversion efficiency. That's a full 2 percentage points better than our first generation solar cell. That compares to 15% to 17% for conventional technologies. When integrated into our panel, our second generation cell technology achieves breakthrough performance, panel efficiencies of 19% to 20%. This is 50% or more better than conventional panels and two to four times the efficiency of thin film panels.

The systems are now in production with our SunPower T20 tracker. This is a next generation one-axis tracker. It is tilted to maximize energy capture and minimize capital costs. We achieve greater kilowatt per hour energy production per rated watt than our competition. In fact, we produce up to 30% more energy per rated watt than Fixed Tilt systems.

Regarding silicon, our near-term situation is on plan. We congratulate our partner, M.Setek, who has begun production in their first polysilicon plant and they started production in May. They are on schedule to deliver ingots using silicon from this plant to us during Q3. Another of our partners, DCC, a leading Korean chemical company, is on schedule to begin delivery of polysilicon to us in the first quarter of 2008. In summary, we have silicon contracts sufficient to support the following production levels : 110 megawatts in 2007; 250 megawatts or more in 2008; 400 megawatts or more in 2009.

Regarding silicon pricing, we expect prices to be slightly higher compared to 2006, approximately 10%. However, we have been able to mitigate higher silicon prices through better silicon utilization, greater scale and manufacturing process improvements.

At this point, I would like to turn the call over to Manny Hernandez, who is going to report details of our second quarter results, as well as provide guidance for Q3 and Q4, and some thoughts on 2008.

Manny Hernandez

Thanks, Tom. Good afternoon, everyone and thank you for joining our conference call for the second quarter results of 2007, which ended July 1st of this year.

I would like to remind everyone that during the conference, management made and will be making forward-looking statements, statements that are not historical in nature. Please consider those statements as forward-looking in the meaning of the Private Securities Litigation 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.

We had a great quarter and either exceeded or were on the top of the range for second quarter performance, not only for the combined company but as well as for our business segments in practically all parameters: revenue, gross margins and earnings. Let me give you a summary of the 2007 second quarter financials.

On a GAAP basis, revenue for the second quarter was $173.8 million. Gross margin was 17.1% and a net loss of $5.3 million, resulting in a fully diluted loss of $0.07 per share. These GAAP figures include non-cash purchase accounting charges of $7.6 million related to our acquisition of PowerLight, non-cash stock-based compensation charges of $13.2 million and a write-down of an intangible asset related to brand unification of $14.1 million as we focus on promoting SunPower brand for the whole company.

The next series of figures I will enumerate are our non-GAAP results, which exclude non-cash purchase accounting adjustments and revenue, as well as non-cash charges for amortization of intangible assets, purchase accounting and stock-based compensation and their related tax adjustments. So here we go.

Non-GAAP revenue for the second quarter was $174.1 million, that's a 22% increase from our prior quarter revenue of $143.2 million. Our systems business segment accounted for $104.3 million of that revenue or 60% of the total company revenue. Also a 32% increase from our prior quarter's system revenue of $79.3 million.

Our component business segment accounted for $69.7 million of the quarter's revenue, representing a 9% increase from our prior quarter's revenue of $63.9 million. Note that the eventual sale of SunPower manufactured components, which are allocated by the company to our system segment, is reflected as revenue on the system segment side.

Total company non-GAAP gross margin for the quarter was 23% versus last quarter's 29%. This quarter's gross margin was influenced largely by higher systems revenue mix. Also recall that last quarter we had a non-recurring benefit of $1.1 million, as well as a higher than typical gross margin mix in our systems business segment.

In the second quarter, our component business segment posted gross margin of 27.8% versus our guidance of 26% to 27.5%, while our systems business segment posted gross margin of 19.7% versus our guidance of 18% to 20%.

Our non-GAAP operating income for the second quarter was $22.1 million and our net income was $19.8 million, resulting in $0.25 fully diluted earnings per share. This compares with our prior quarter net income of $23.3 million or $0.29 fully diluted earnings, which benefited from the nonrecurring gain as well as higher systems gross margin.

Briefly on the balance sheet, we ended the second quarter with cash and short-term investments of approximately $176 million. Our DSO improved from 53 days to 49 and inventory days closed at approximately 68 days. Capital expenditure year-to-date now stands at $104 million. That's $56 million in Q1 and $48 million in Q2, while we estimate the 2007 capital now to be approximately $200 million.

Depreciation for the quarter was approximately $6 million and our estimated depreciation for the full year remains at $32 million.

As we have noted in prior calls, our business results will reflect quarterly mix shifts between system and components. Also, even from quarter to quarter we expect shifts within the system segment due to mix and percentage completion factors that could lead to non-sequential or marginal growth in either revenue, gross margin or earnings.

As we also noted, if we are faced with non-sequential growth in any given quarter, either for total company or any of our segments, we will give you appropriate guidance. As I enumerate the guidance following now for the rest of 2007, please note that we will expect our system segment to have very strong Q3 sales, followed by a slight decline in the fourth quarter, influenced by contracted project schedules.

So the following is now our guidance for the third quarter, the fourth quarter and for the full year fiscal 2007. Now, we normally just give you next quarter guidance and a revised estimate for the year, but since you can essentially derive the fourth quarter from all of those numbers we thought we would just make it easier for you, so I'll just define them.

For Q3 for the total company, our estimated non-GAAP results are the following: revenue of $205 million to $215 million, that's approximately an 18% to 20% sequential growth. We see gross margin at 20% to 22%, that's influenced by significantly higher systems mix. We are also ramping the factory, as we will talk about more later. Earnings per share for Q3 is estimated at $0.25 to $0.29 per share.

How that breaks out by segment for the third quarter are as follows: non-GAAP revenue of $130 million to $135 million for systems. That's a 25% to 30% growth and gross margins 18% to 20%. The component business side will have revenue of $75 million to $80 million, that's an 8% to 15% sequential growth, while gross margin is estimated at 24% to 26%. That is unfavorably influenced by slightly lower yields as we ramp new lines, lines 5 and 6, this quarter.

Now, for the fourth quarter of 2007, we estimate total company non-GAAP results as follows: revenue of $210 million to $220 million, that's a 2% to 3% sequential growth; gross margin of 24% to 25%, that is favorably influenced by higher component mix; and EPS of $0.33 to $0.37 per share for the fourth quarter.

How that breaks by segment are as follows: the systems business segment will have revenue of $105 million to $110 million. That's a 19% sequential decline from our guidance for Q3 due to the seasonality and mix of business projects scheduled for that quarter. Gross margin remains at 18% to 20% for that segment.

For the component business segment, however, we see fourth quarter revenue of $105 million to $110 million. That's a 38% sequential growth, now reflecting the ramp of the factory and gross margins improve to 28% to 30%; again, influenced by our factory's ramp.

That leads us to the total fiscal 2007. We are raising our annual total company guidance for the year as follows: revenue of $730 million to $750 million; gross margin of 23.5% to 24.5% for the year; and earnings per share of $1.13 to $1.20 per share. These earnings are all based on tax rates of 12.5% consistent with prior quarter.

Also as noted in the press release, for the fiscal year 2008 we now estimate company revenue of $1 billion to $1.2 billion and a non-GAAP EPS of approximately $1.80 to $2 per share.

Now, very briefly on the announced financing event, as you can appreciate due to certain SEC restrictions, we are limited on what we could disclose regarding this transaction. In the next several days we will market approximately $200 million of an equity offering, as well as a $200 million convertible offering. These are all inclusive of over allotments estimated at this time.

These funds will be used for general corporate purposes, including working capital and capital expenditure for the expansion of our solar cell fab and panel manufacturing facilities. We may also use a portion of these proceeds to purchase or make prepayments for raw materials, including polysilicon and we may also use a portion of these proceeds for the acquisition of or investment in complementary businesses, technologies and other assets or to invest in joint ventures.

Thank you for your patience. Let me now turn it over to Tom to lead us through the Q&A session.

Tom Werner

Thanks, Manny. In a moment, I will turn it over to questions. First, let me note that with me I have Howard Wenger, our VP of Sales; Peter Aschenbrenner, our VP of Marketing, Julie Blunden, our VP of Public Policy and Corporate Communications; [Mike Umstein], our VP of Finance and Jay Pierre, our VP and Treasurer. These folks may answer questions as well.

In order for us to manage this call to probably around an hour and 20 minutes, a little shorter than normal because some of you have complained of the length of the call, I will try to take you with one question each and ask you to get back in queue if you have more than one question.

We will all take questions now.

Question-and-Answer Session

Operator

Your first question comes from Steve O'Rourke – Deutsche Bank.

Steve O'Rourke – Deutsche Bank

Tom, you mentioned in your prepared remarks that with greater visibility you can site expansions more aggressively. What do you mean by greater visibility? Is it just silicon or is there more to it than that?

Tom Werner

Steve, what I'm referring to there is the channel strategy that we embarked on when we acquired PowerLight was to have a direct touch to the customer in the commercial and public sectors, as well as power plants. Of course, in new production homes we install turnkey, and legacy SunPower was developing a premium dealer network. So those channel strategies are starting to mature and we are better connected with direct end market demand.

We have a better sense of where we excel and the size of that demand. Because of the ability to tie what we can learn from the field directly into internal capacity, we can have greater confidence that we are not reacting to signals that perhaps would be buffered by a step in between us; again, since we touch the end customer.

The reference there was that we have better visibility into the channel because of our channel strategies that we started out on about six or nine months ago.

Steve O'Rourke – Deutsche Bank

You talk about a 30% power output boost from a tracking system. What is the cost per kilowatt hour improvement rather than the power output improvement? Because there's some cost tradeoffs there too, right?

Tom Werner

Howard, I will look to you to give me a little bit of help here. Just let me elaborate briefly. The idea, of course, is to have the panel-oriented to the sun in an optimum position and you can do that by essentially tracking the sun through as it goes from east to west.

The key, of course, is to do that economically and produce more energy; but then, of course, you have to do that without adding a lot of costs.

Howard, can you give us an estimate of the cost per kilowatt hour?

Steve O'Rourke – Deutsche Bank

Just a percent improvement if you have it.

Howard Wenger

The percent improvement depends on the climate, so the clearer the climate, the better improvement you have of tracking. So in most of our target markets where we are using our trackers, we are getting an improvement on the order up from 8% to 15%.

Operator

Your next question comes from Michael Horwitz – Pacific Crest.

Michael Horwitz – Pacific Crest

I was running through some old notes in my model. It appears to me that you are ramping lines 5 and 6 in Q3, like you said. Is S that a little bit quicker than you had expected maybe a quarter ago and are you able to do that, if I'm correct in assuming that? Are you able to do that because you have better silicon efficiency?

Tom Werner

No. I will comment briefly and then Manny can add on to it. I would say that we are either ahead or right on schedule. It's primarily that we decided to put the capacity online when we planned to get silicon and silicon came on plan or maybe slightly favorable and the execution of the operations team was excellent as well.

Note that the factory, the second factory is twice as big as first factory and to have that factory to come online on schedule and on budget is something that we are really proud of.

So it's a combination of execution by the operations team and silicon being on plan or slightly ahead of schedule. Manny, did you want to add anything?

Manny Hernandez

That's pretty much it, Michael. The only thing change here, if you will, is line 6 was originally at the beginning of the year, anyway, planned towards the beginning of Q4 and what's happened here is we pulled it into the latter part of Q3.

Michael Horwitz – Pacific Crest

That's what I saw in my model. Just quickly, these are 33 mega watt nameplate lines?

Manny Hernandez

Yes, they are.

Michael Horwitz – Pacific Crest

As was line 4?

Manny Hernandez

That is correct.

Tom Werner

And in terms of technology strategy, currently our plan is to run 20% efficiency or Gen 1 cells in our first fab and 22% Gen 2 cells in our second fab. So that's on top of the things we just mentioned.

Next question, please.

Operator

Your next question comes from Sanjay Shrestha – Lazard Capital Markets.

Sanjay Shrestha – Lazard Capital Markets

Good afternoon, guys. Good to see the capacity announcement here. With the ramp of two lines, how much is that going to impact your margins in Q3?

Manny Hernandez

Good question. If you just recall our discussion about the quarter results, the component segment in the second quarter -- so the quarter we just finished -- posted margins of 27.8%, and we're now guiding Q3 for the component business at 24% to 26%. That is largely the reason for the decline, is as we ramp this two lines, lines 5 and 6 in the third quarter, there will be some start-up yield ramifications but we benefit from that nicely going into Q4, where the same component business segment would now realize, in our estimate, margins of 28% to 30%.

Sanjay Shrestha – Lazard Capital Markets

Got it. Now I just want to clarify, that is what I thought, but I just want to clarify one thing here. You did see a sequential, somewhat of a benefit on your ASP front for the high efficiency cells and now this margin decline has nothing to do with your expectations that the dynamics will change?

Manny Hernandez

That's correct.

Operator

Thank you. Paul Lemming, you may ask your question and please state your company name.

Paul Lemming - Soleil Securities

Soleil Securites; if I could, a two-part question on the contract you announced with Hemlock yesterday. You say that covers or will be sufficient to source two giga-watts of modules down the road. Could you give us any insight into what gram per watt you assume over the life of the contract?

And then the second part, when Hemlock announced that capacity expansion in Munich, they actually talked about two tranches of capacity, one that would start up in 2010, one that would start up in 2012. Will you also be part of the purchasing consortium for the 2012 contract or is that still to be determined?

Tom Werner

The short answer is no and to be determined. Let me elaborate just a little bit. On poly grams per watt, we were less than 7. We’ve made great progress there and we assume that there is continued progress there, albeit at a slower rate but because of the NDA we have with Hemlock, we won’t give you a -- we can’t give you a specific number.

In terms of the next expansion beyond that, the way we think about that is we look at the size company we are going to be in terms of capacity and then we look at the portfolio of supply that we have and we look at it across duration of the contract and incumbents versus new entrants. So we’re managing the portfolio such that we have a target percentage for both of those variables.

As we assess our size in 2012, that will drive our decision, whether it’s Hemlock or other incumbent suppliers, and that’s a TBD.

Paul Lemming - Soleil Securities

Thank you very much.

Operator

Thank you. Our next question comes from Stuart Bush. You may go ahead.

Stuart Bush - RBC Capital Markets

Good afternoon. You guys have highlighted your portfolio approach to silicon sourcing in the past. Can you comment on the percent of silicon you expect to have at fixed prices versus what you expect to get on the stock market for 2008, 2009, and if your approach to the portfolio mix concept has changed?

Tom Werner

I’ll comment on the strategy and perhaps take a pass at the numbers and I’ll ask Manny to, if I’m not really close he can refine it for me.

The strategy has not changed, and that is that we have a target percentage of long and intermediate and short-term. We actually can split it into three buckets and the short-term isn’t necessarily spot. In fact, it’s not a lot of spot, certainly less than 10%. Short-term in our view is a year, maybe two years. Intermediate term is up to five years, and of course long-term then is greater than five years. We have a target percentage for those three buckets that we continue to maintain.

The Hemlock agreement is a result of aggressively expanding and actually needing another long-term agreement to keep in line with our targeted percentages. We also target for risk purposes a number of new entrants to incumbents and perhaps a bit less rigorous there because we are confident with our partners, [Emsethic] and DC Chemical. But we do have target percentages there as well.

In terms of 2008, why don’t I let Manny take that.

Manny Hernandez

The answer is actually related to what Tom said. The general ratio that we try to achieve for this portfolio approach is a third, a third, a third, so a third long, meaning longer than five years, a third intermediate, which is within five year, and a third current, not necessarily spot but I guess you could call it spot.

For 2008, given the profile of our supply, about a third of them will be negotiated every six months.

Tom Werner

The other thing I would say is that that negotiation is more about short-term pricing and delivery schedules and things of that nature. We are contracted for all the silicon we need for ’08 and ’09.

Stuart Bush - RBC Capital Markets

Right, the main issue is just with pricing.

Tom Werner

Correct.

Stuart Bush - RBC Capital Markets

Thank you very much.

Operator

Thank you. Satya Kumar, you may ask your question and please state your company name.

Satya Kumar - Credit Suisse

Tom, can you give us a sense of how much of your panel production was sold through the systems business in the quarter? Looking longer term, what’s the expectation for panel production from the current business allocated to systems in ’07 and ’08? Could we expect that most of your -- and looking at it from the systems side, I know you are ramping some agreements from Q Cells and [Dersol], but at what point in time should we think that most of your system installations are actually sourced from your component business? Could you give us some clarity on that?

Tom Werner

Sure, and again I’ll take a pass and Manny may clarify. So our internal module shipments remains consistent with our previous communications. This year it will average or ramp to about 30%. Next year the internal supply will ramp to about 50%. We can’t maintain our strategy of continuing to partner with third-party suppliers or continue to procure from them. You named [Dersol] and Q Cells are certainly two of them. We continue to ship systems with their product and will for the next three to five years, and we would expect to beyond that. Of course, as we ramp up our SunPower production and the allocation through our systems business, the amount that is third-party reduces and in ’09 and ’10, we’re moving from 50% to closer to 80%.

Satya Kumar - Credit Suisse

To be clear here, you said 50% -- that’s an average level of your component production that’s allocated to SunPower, so there will be a linear increase for the year so you could actually end the year at a higher percentage, is that right?

Manny Hernandez

Yes, that is a reasonable assumption.

Satya Kumar - Credit Suisse

And a quick follow-up on polysilicon; given that you have this portfolio approach to procuring silicon costs, is it fair to say you are paying peak prices for polysilicon for you this year? How should we think about the pricing for SunPower as we progress through the next few years? Thanks.

Tom Werner

First of all, I don’t talk about -- none of us talk about pricing from specific suppliers. Two reasons; one, we have NDAs and the second reason is our competitors tend to go to our suppliers and say they want a better price than us, so we’ll let our competitors negotiate their own deals.

When you talk about short-term pricing and are we paying peak pricing, I would just say to you that some of the pricing that you hear in the marketplace, particularly from suppliers from the far east, we don’t buy silicon at those prices -- at least, prices that I’ve heard, I’ve seen written.

Any short-term silicon that we buy, we buy from people that we’re already partnered with, so we’re not buying from a broker. We’re buying somebody that we’re partnered with. I think it would be fair to say no to that question, although it is higher clearly than long-term contracts but it is significantly less than the numbers I’m seeing for spot pricing.

Operator

Thank you. Srini Pajjuri, you may ask your question and please state your company name.

Srini Pajjuri - Merrill Lynch

Thank you. Merrill Lynch. Tom, for 2008, obviously you are giving us guidance and it looks like you are assuming pretty strong growth in your systems business. I’m just wondering how much of that is already on your books and how much do you need to show us that kind of growth?

Tom Werner

We are seeing significant growth in our systems business. Of course, you’ve seen that in Q1 and Q2 and Manny has given guidance for Q3 and Q4. We expect continued strength in that sector.

We’re not giving backlog numbers at this point. We’re still refining what metrics we give and part of the challenge with backlog is in the systems business, you are very sensitive to these large projects booking in one quarter versus another and we could have people overreacting.

Currently, they’d be overreacting favorably because we have a very strong backlog and bookings are very good. We have a rule of thumb of having at least half of the next year’s revenue booked and I would just say to you that we’ve got six months left, of course, so it’s a projection but we’re comfortable, consistent with our revenue forecast.

Srini Pajjuri - Merrill Lynch

Thank you.

Operator

Thank you. Rob Stone, you may ask your question and please state your company name.

Rob Stone - Cowen & Company

Cowen & Company. I wonder if you could just put a little more color on your comments about ASPs. You said ASP for cells and modules increased. Is that on the component side or were you also paying higher prices for modules that you bought in and can you be anymore specific? I assume you mean that they were up sequentially.

Tom Werner

Yes. We will do this with two people. I will comment broadly and then I will turn it over to Peter Aschenbrenner.

When we talked about pricing, we were specifically talking about the component segment. I will let Peter refine that a little bit. In terms of the systems business, the third party modules we buy are on, in our terminology, intermediate term contracts, being approximately five years. So that pricing is already established so we are not seeing quarter-to-quarter changes in third-party module pricing.

Peter, do you want to take it from here?

Peter Aschenbrenner

Sure. The price increase that we saw in Q2 was on the component side, that's solar cells and modules sold to immediate customers of SunPower in the components business. We saw a couple of percent increase in products, which is consistent with our expectations historically, and the kinds of sequential ASP increases that we talked about the last four or five quarters.

Rob Stone - Cowen & Company

So related to that, what is your pricing assumption in the guidance for the second half of the year?

Peter Aschenbrenner

We expect stable pricing for the second half of the year.

Rob Stone - Cowen & Company

Okay. And then a follow-on question for Manny, if I may. Are the additional shares that you are planning to offer included in your full year earnings per share guidance?

Tom Werner

Before Manny answers, let me comment. I'm not doing a very job of managing one question each and now we are up to three. I will try to do a better job. Manny, do you want to take that one?

Manny Hernandez

Thanks for the question, Rob. The guidance that we all just talked about exclude the transactions that we are about to execute here.

Operator

Your next question comes from Pearce Hamond – Simmons.

Pearce Hamond – Simmons

I wonder what is expected to happen with federal legislation in Washington; what is likely to happen, market impact, timing, et cetera.

Julie Blunden

We certainly have seen a lot of constructive conversation at the federal level on energy policy generally, and specifically on renewables. We had anticipated that it would take later into the summer and possibly into the fall before we saw actual action on any renewables tax title and that certainly appears to be the case now.

We do feel pretty good about the position based on what we have seen coming out of committees and we certainly are cautious and optimistic that we will see some movement to extend and possibly expand the investment tax credit for solar this year.

Pearce Hamond – Simmons

Do you think the utilities are going to get involved in the business based on that?

Julie Blunden

As you know, the utilities in drafts on both houses have been included in the investment tax credit. Certainly that provides political support for the investment tax credit extension that's useful in the political discussion.

Certainly in Europe we have seen a lot of activity at a large scale level. I think the dynamics changed in the U.S. a little bit if the utilities end up with ITC. In general, we would expect more demand and more sales.

Operator

Your next question comes from Michael Carboy – Signal Hill.

Michael Carboy – Signal Hill

Tom, a bigger picture question for you on the plan to consolidate the brand names. PowerLight has had a very strong franchise name. Could you elaborate a little bit on why you have chosen to consolidate everything under the SunPower name?

Tom Werner

Sure, I will say a few words and Peter, let me know if you would like to add to it. It really boils down to clarity of message and it costs money to support two brands. When we looked at the brands, there was strength in both of them, and PowerLight has done an incredibly good job of becoming North America's largest solar EPC and systems designer, having a significant footprint in Europe and Asia as well.

We felt though that we could capitalize on that by transitioning in time the strength of that name to the SunPower name, and frankly driving economics because we could support one brand. Since they are both early stage, the market is growing rapidly, we could make that transition and drive clarity of message through one name going forward.

Peter is the architect behind our branding programs. Peter, do you wand to add anything?

Michael Carboy – Signal Hill

Yes, just to make a couple of quick points. First of all, branding is something that we think about and talk about quite a bit. It's a factor that hasn't been a significant part of our business yet. We think it will be going forward. That is the industry as a whole, so we tend to focus on brand issues quite a bit.

We think that there's a very large brand opportunity that there isn't a clear brand leader in our business yet, and we would like to become that brand leader. When we looked at the way in which we feel a leading brand would be created, we felt that would typically happen more on the consumer level and translate to commercial and systems businesses by association.

It was in the commercial business where SunPower had a very strong start to building a leading brand. Those are the considerations that led to netting everything together under the SunPower brand. But so far, I think the response has been quite good.

Michael Carboy – Signal Hill

Tom, you have talked in the past about the objectives of lowering system costs over the next several years at a particular rate. I am wondering if I can get you to start putting some stakes in the ground with regard to the degree of achievement that you have already experienced with regard to balancing the system cost reduction.

Tom Werner

Let me answer that question and then comment a bit more on brand. In terms of driving costs down, let me just say that we spent a lot of time internally modeling the next five years. We have got each of the operating units -- cells, modules, systems and projects -- we are the only company that has integrated it that way, so we can project cost reduction internally for each of those areas.

Each of the operations people responsible for those four segments has given us a five-year plan and then we have put that into a levelized cost of energy level and we maintain our plan and confidence to reduce costs by 50% over five years.

In terms of balance of systems cost, it's actually where we have made the most progress. I'm not prepared to give numbers and I know there's interest in also breaking down our targets over time and we will do that, but we are not going to do that on this call.

I would say to you that the balance of system costs are coming down faster actually, than most of our other costs primarily because we have the benefit of scale. Secondly, our T20 Tracker that we just introduced is phenomenally cost effective. We had most progress there.

I would also like to comment on brand. One of the things that people should remember about SunPower is our unique distribution strategy. We have a presence in all geographies, we have a presence in all significant applications and we have a different channel approach in each of those applications. Think in residential retrofit, SunPower premium dealer program; think new production homes; SunPower Sun Tile turnkey.

And then in commercial public and power plants, think of us as the SunPower Systems company and using our Tracker technology and our Tilt technology. So it makes the company easier to understand as well and via our distribution strategy, we believe we are going to drive brand presence very effectively.

Operator

Our next question comes from Pierre Maccagno – Needham.

Pierre Maccagno – Needham

Congratulations on the quarter, Tom and Manny. Could you tell us what is the amount of megawatts used and the amount of megawatts shifted?

Manny Hernandez

Megawatts produced which is what we would normally share with you is watts, 24.5 megawatts for the quarter.

Pierre Maccagno – Needham

Remind me, what was it last quarter?

Manny Hernandez

It was 19.1 last quarter.

Pierre Maccagno – Needham

And shifts, you don't share that with us?

Manny Hernandez

We don't. As you can imagine, there's not necessarily complications but there is WIP inventory growing, there are transfers of products to the systems segment, which may not necessarily be used for revenue recognized in the same quarter and for those same reasons.

Operator

Your next question comes from Paul Clegg - Natexis Bleichroeder.

Paul Clegg - Natexis Bleichroeder

Can you comment on the type of relative pricing and momentum you are seeing in your key geographic markets and maybe the outlooks for ASPs for 2008? . I know you already addressed for 2007.

Tom Werner

Yes, this is Tom. I will quickly turn this over to Peter. For 2008 we are still six months away from starting the year. We are actually out in front of ourselves a bit relative to what we have done the last two years in terms of forecasting the following year. So we are mostly going to talk about '08 in terms of revenue and EPS.

We certainly can talk about geographic pricing and give you a sense of what's going on in '08. Peter, can you do that, please?

Peter Aschenbrenner

For the balance of this year, as we mentioned, our forecast is for stable ASPs. There are a couple of components to what we see as our pricing leverage. The first is that we had a great product. I think if you talked to our customers, they will tell you that we have a great product and an increasingly strong brand reputation, and, of course, that translates into pricing power.

As we bring on more and more capacity each quarter, we're able to unlock the next incremental slice of demand and we tend to do that not exclusively but largely with new customers in relatively high ASP regions and high value applications.

Also we increasingly sell further down the value chain, closer to the customer which gives us a little bit of pricing power as well. So we continue to see stable pricing and strong demand for the product. For 2008, we think it's a little early as Tom said, to offer specific guidance.

Paul Clegg - Natexis Bleichroeder

Are you seeing the adoption of the PTA model having an impact on ASPs going forward?

Peter Aschenbrenner

In and of itself, no.

Tom Werner

I should have mentioned in my prepared remarks, Our PTA program is called SunPower Access and if anything, it gives the customer comfort because they are used to paying for power, and it almost insulates them a bit from our pricing, but nonetheless we call it SunPower Access and we are seeing more adoption of that model.

Operator

Your next question comes from Al Kaschalk – Wedbush Morgan.

Al Kaschalk – Wedbush Morgan

I wonder if you could add a little bit more meat to the systems business and in particular, maybe the duration of contracts, mix in terms of the customer price and related margin, given the strength you are expecting over the near term but also the variability in consolidated margins on the results?

Tom Werner

I will do a two-part like we’ve done on many of the other questions. Howard, you can follow up and make sure that you can add some specificity.

In terms of cost in the systems businesses it's driven really by the mix of modules coming from SunPower versus external. As I mentioned earlier, the third party modules are not changing in price quarter to quarter, nor do we expect them to over the course of the next years, other than what's built into the contract and that is already planned into our business.

In terms of the mix, it is moving towards larger systems and more scalable systems, so larger systems that being Nellis and Serpa; the contract in Korea; Hawaii; several contracts in Spain.

At the retail sector, which got a model that works well for the retail sector, they obviously have a lot of roof space, and the roof space tends to be similar and therefore they can work with a SunPower Access program, whereby they pay for power, a model they are used to. They are insulated from the rising cost of electricity, and that sector is growing rapidly as well.

So in terms of mix, it is biasing towards larger systems and towards scalable customers like retail and, as I mentioned, the military as well. I also mentioned that it is a very strong sector for us and we see an increasing backlog.

Howard Wenger

I think that was a great answer, Tom. I don't have anything further to add.

Al Kaschalk – Wedbush Morgan

If I may just follow up then. In terms of a retail customer, I assume you are going through corporate versus having to do with a geographic cell and therefore can negotiate?

I just wanted to make sure in terms of the procuring of the contract with the sales to the retail-type customer, for instance Wal-Mart, is this a national sale or do you have to go in specifically to either a regional manager or going through corporate.

Howard Wenger

It depends. In the case of Wal-Mart, that's a national sale. In the case of Macy's, that was also a national sale. So it just depends on the customer. With respect to on our builder new home sales, we are frequently working with both national and regional divisions of the top builder 100. So it just depends.

Operator

Your next question comes from Jesse Pichel – Piper Jaffray.

Jesse Pichel – Piper Jaffray

A question for Manny. Given the strength of the lower margin systems business, are you worried that you will not hit the 30% gross margin guidance by the end of '08 or early '09?

Part B of that, does components gross margin include sales of the higher margin PowerLight products like the Tracker or the Power Guard if sold to another systems company? Thank you.

Manny Hernandez

Hi, Jesse. Let me start with the last point. What you just described, which are the other components for our system or what we call balance of system, those sales are reported with the systems business segment revenue. So the component business segment we talked about are just the cells and modules that you used to know of the old SunPower, if you will.

As far as the goal of the company to achieve its business model or financial model of 30% gross margin, 20% operating income, our goal has not changed. We believe we could achieve that either on the fourth quarter of 2008 or early 2009. That would obviously be assisted by a higher percentage of our output being allocated to our systems segment. As noted by Tom, we are trending towards 30% of our output being allocated to the systems group this year, and that would increase to 50% next year.

One thing to understand, Jesse, is the allocation of SunPower produced products is not the only way we are going to try to get there. As noted by our cost reduction discussions, we have cost reduction initiatives in all fronts. We have the silicon costs we are expecting to come down. We are continuing to expand the efficiency of the product, which ratably takes the cost per watt down. The sale cost reductions that are occurring, the downstream system cost reduction. So among the cost reductions and allocating more products to the systems side, we believe we could still achieve the 30%.

Jesse Pichel – Piper Jaffray

With this latest Hemlock deal, do you have enough wafering assets in place in Korea to produce wafers, and might you have to ramp up your CapEx there, which could affect the gross margins down the road?

Tom Werner

Jesse, I will take that. Just on the last question, hopefully this is helpful. System sales is sales to the customer or owner; component sales is sales to a reseller or installer. So what Manny said aligns with that.

In terms of wafering capacity, as polysilicon becomes more available, we felt a year ago that you needed to have a good ingot strategy and wafering strategy, so you have seen us do the joint venture in Korea that you mentioned on ingot making and we are partnering ever stronger with SunTech as well.

Our wafering strategy is to capitalize on three things: our internal capacity, and, yes, that requires CapEx. That's built in to Manny’s CapEx estimates. Third party on wafers, people that just do wafering. We have relationships with two of those. Then our ingot suppliers that we mentioned previously, are either increasing their wafering or entering into wafering. You know that REC has announced that they will be doing wafers and perhaps in time we will buy wafers from them instead of ingots. So it's split, Jesse, between internal CapEx and partner CapEx.

Operator

Your next question comes from Pavel Molchanov – Raymond James.

Pavel Molchanov – Raymond James

Are you guys facing, any increased level of competition that you perceive from unconventional places, in particular of course [inaudible] cells, especially as it relates to your PowerLight systems segment?

Tom Werner

As we look at the way SunPower segments the markets, the answer is no in residential retrofit. In new production homes, the answer is no. In commercial and public, it's fair to say materially no. Power plants, the answer is yes, although as you can see, I think in time we are going to see the power plant market segment some. Obviously one of the ways it's going to segment is the cost of land.

You know that we use two to four times less land to get the same amount of power and therefore there isn't much land or it's expensive; then you are not going to see competition from those other technologies.

Where land is abundant, then, yes, definitely we see competition from those new technologies.

Howard, did you want to add anything?

Howard Wenger

I think you covered it, Tom. Clearly, even in the power plants, we don't see material competition right now, and in the very near term from unconventional technologies.

Peter Aschenbrenner

Let me just add one note there. In the power plant business, which largely in Europe an Korea has been practicing this, a piece of open land onto which you build a power plant, there's really two ways to go to achieve the objective of lowest cost kilowatt hours over the life of the system.

One way is with a relatively low efficiency panel, low cost per watt and very low cost structure.

The other way is with a high efficiency panel like we have got and a tracking collector which is marginally more expensive than the low-cost fixed tilt structure that generates, as we said previously, about 30% more kilowatt hours than a fixed tilt system in many cases

We believe the approach that we are installing and are having a lot of success with is highly competitive in terms of achieving the end goal, which is lowest cost per kilowatt hour.

Howard Wenger

One of the key things for power plant and in the PTA environment is to provide a reliable and proven power and energy output over ten to 20 years. The banks and the financing entities are quite conservative, understandably, and they have a lot of experience with other technologies and renewables; they are very attuned to the track record of the technology and the company behind the technology. I believe that's one of the fundamental elemental drivers of our advantage going forward.

Operator

Your next question comes from Alberto[Basatto].

Alberto Basatto

Good morning, gentlemen. Tom, can you share with us what the ASPs for modules in the second quarter were?

Tom Werner

The short, Alberto is no, sorry. The reason is we materially only have one cell customer and if we separate pricing, then we have given our pricing to that cell customer. We have a confidentiality agreement that we won't do that. So we do give you pricing, however, for the combined and I think from knowing that you can get materially to your number.

Alberto Basatto

I think that based on the high efficiency of your model you are able to charge a premium on ASP without talking about specific dollar amounts. I would like to see you comment on this. We are seeing coming into the U.S., in particular from China, modules with efficiency around 16%, 16.5% or even below. I think on a couple of projects with different sizes, [inaudible] for ASPs.

With this assumption, and I guess I am right, that you are able to charge a premium. Can you explain how and based on what that premium is based on and how you can sustain that going forward?

Tom Werner

There are times that you will see low pricing on modules. And our premium is against the average of the pricing of all competitors that have efficiencies in the range that you spoke of. We, of course, don't chase the lowest bids. There's no reason to do that. Our product is particularly well suited to where balance of systems costs are an important part of equation and where there's space constraints and where you count the space in the case of power plant, land is an important part of the balance of the systems cost. We focus primarily on those markets. We get a premium, because you need between one-third and as few as 30% less space to get the same amount of power.

You can look at it in two ways. In the same space, you can make substantially higher rated energy, solar systems, or you can use a lot less space and that typically is in residential, both retrofit and new production homes as well as the public sector buildings.

So space is a big driver and people will pay a premium because balanced system costs are important and systems rating is also very important.

Operator

Your next question comes from Jeff Osborne – Thomas Weisel.

Jeff Osborne – Thomas Weisel

A couple of quick questions for Manny and one for Tom. Can you discuss the tax rate for '08? Are you assuming 12.5% or 20% in the guidance? Also, can you break out the stock compensation expense?

Manny Hernandez

The tax rate for the rest of this year and for all of 2007 we are using 12.5% and consistent with how we guided last time, we are staying with a 20% to 25% for '08, Jeff.

As far as stock-based compensation, there should be a whole table there at the end of the release. I believe it's about $13 million this quarter.

Jeff Osborne – Thomas Weisel

I didn’t see the R&D versus SG&A breakout of that.

Manny Hernandez

I think that is actually on the table as well.

Jeff Osborne – Thomas Weisel

Okay. I will find it later. That's fine. And just for Tom, TJ mentioned on the prior call that the book-to-bill was 1.15% for SunPower. Can you just talk about what that was last quarter, if you are not going to give a backlog?

Tom Werner

So your question was, what was it for Q2?

Jeff Osborne – Thomas Weisel

It was 1.15% this quarter, according to TJ, but what was it for Q1?

Tom Werner

Let me get my quarters straight. TJ said 1.15% for Q2 and your question is, what was it for Q1? I think TJ has given a weighted average number and we haven't given book-to-bill ratios. We are not quite settled on how we are going to report that. Remember, our distribution strategy is to have a strong presence in all channels and bookings look differently in residential retrofit than they do in a systems business.

When you think of book-to-bill, it's very relevant to the systems business or we are more and more thinking that's an important metric and less relevant in a premium dealer network, in the residential retrofit market. So we don't think it is a good idea to talk about an overall book-to-bill ratio.

I will tell you that when you look at the systems business, the number was materially similar in both quarters and is actually north of the number that TJ spoke to.

Operator

Your next question comes from David Smith – Longbow Capital.

David Smith – Longbow Capital

Manny, going forward between now and 2011, what kind of non-GAAP adjustments do we see beyond this year?

Manny Hernandez

If I could give you a little bit of color. The stock-based compensation will obviously be with us for a while, and that was $13 million this quarter; $8million of that was related to the PowerLight acquisition where there's some reinvesting of certain shares. That would only last for a couple of years. You could assume that from a stock-based comp, it's about $13 million for the next three years and then it will drop to around $5 million per quarter after that.

With regard to the other amortization of intangibles from the acquisition of PowerLight, that's totaled about $7 million a quarter as well. I will give that about another four years David, because most of the intangibles are right around that life.

David Smith – Longbow Capital

Okay. So that's the total of the two. If I look at the guidance you gave on the GAAP basis for next year, I don’t have the release right in front of me, but should I be able to come to the number just by adding back with what you just said?

Manny Hernandez

Yes, sir, with the exception of one thing. The only thing special in this particular quarter was the $14 million impairment charge for the unification of the brand; otherwise you should be able to get to it. If not, please give us a call.

Tom Werner

Let's move on. We have seven more questions, if we do them quickly, we will get through this in five or six minutes. Let's take the next one, please.

Operator

Your next question comes from Thomas Rigotti.

Thomas Rigotti

In the new home market, has the sub prime market affected any of your sales?

Tom Werner

It has affected the rate of growth. The growth rate is excellent. We have 3,000 homes in queue in terms of backlog. We have excellent product. And it would be even bigger, growing even faster. So yes, it has affected it but it is a matter of the slope of the line up and to the right.

Operator

Your next question comes from Jeff Bennett - Jefferies.

Jeff Bennett – Jefferies

I just wanted to know, in terms of your silicon suppliers, can you break down the percentage from what you would call new suppliers, versus existing suppliers now? How would that change between now and 2010?

Tom Werner

I can give you just a sense of that. And again, we target more specifically short, long term and intermediate term contracts. It is the primary thing we are managing, but we are also managing incumbents versus new entrants, and that does vary a bit over time. Let me have Manny give you a better sense.

Manny Hernandez

It's really a definition that some of our vendors might not accept themselves as being referred to as the new entrants. So excluding them from the top five of the world. Let’s say, there's a significance portion of our '08 supply that will be from the new entrants that will include DC Chemical, and that would be in the 60% range. It's going to come from those guys.

Tom Werner

And over time that will drop off some.

Jeff Bennett – Jefferies

With that, can you talk about relative price versus incumbents versus new suppliers? Also on the Hemlock contract, is that a fixed price and is there a deflator built into that? Just a little more color on that contract.

Tom Werner

I can give you color on a lot of other things, except those two questions. I would just say that the nature of the deals or the agreements with the new entrants are different. The amount of money up front, the length of the agreement, how we work together, and so you have to look at it in composite. We previously said those are very competitive agreements.

In terms of Hemlock, we definitely can't talk about does it go up or down but we obviously did it because we thought it made sense and they are a great partner.

Jeff Bennett – Jefferies

Finally, last question, can you just talk about the different regions? Was there a particular ASP strength in certain regions; down in Germany and up in Spain, and overall demand in the different regions?

Tom Werner

Peter can you do a quick version of that?

Peter Aschenbrenner

Yes, the short answer is no. There were no significant price movements regionally for us in Q2.

Jeff Bennett – Jefferies

I don't think that got to the question. Were there price differences between different regions?

Peter Aschenbrenner

I'm sorry. I thought you meant within the regions. Yes, we have historically seen in terms of hierarchy, highest pricing currently, at least for our products in some of the very rapid growth markets, including southern Europe and Korea. Those are also markets where the predominant application today is in the power plant sectors. In many cases, using tracking collectors and that's one of the applications where a very high efficiency product we offer has outstanding value. We tend to see very good ASPs there.

The German market has tended to be below that in terms of ASP, but still a little bit higher than what the prevailing prices are in North America.

Tom Werner

Okay. We are going to have to move on so we can wrap this up.

Operator

Your next question comes from Mike Stern – Western Gas and Electric Company.

Mike Stern – Western Gas and Electric Company

My one question goes back to your projection of 30% gross margin in 2008. I was wondering if you could give a little more detail on the source of your confidence in that number, given increasing capabilities of competitors on both module and systems business.

Tom Werner

What we do is, of course, project pricing and we have now got two years of experience with the price we get relative to our peer group. And then we project costs by cell module, system and projects. The operations people that own each of those give us a cost projection over time and, of course, we compare the two.

We drive our operation internally to very aggressive cost reduction targets. We feel confident that the next six quarters our operations team has a solid plan that drives this model.

The other thing, of course, we have mix in our favor. We could do nothing other than increase our mix and internal models and our margins would improve. So we have that compounding factor.

Operator

Your next question comes from Paul Lemming – Soleil Securities.

Paul Lemming – Soleil Securities

A question for Julie. I wonder if I could get you to take a stab at looking out to 2010, and hazard a guess as to how many separate countries in the world will be at or about 2 gigawatts of consumption of solar installations at that point? What would you peg those countries as being today?

Julie Blunden

I'm a little adverse to try to do forecasting, it is not our business to provide external forecasts. We do keep obviously, substantial detail on internal forecasts. However, to provide some lamination, what is useful to recognize is that we think about those forecasts in scenario terms. So we are looking at scenarios where you have accelerated activity at the policy level in response to carbon issues, et cetera. Other scenarios where you have strengths in one geography versus others. You can clearly come up with cases where you have multiple countries over 2 gigawatts in 2010, and obviously ones that are the furthest along now are the best candidates to be in that position then.

Tom Werner

If we could move on. We have three in queue and we will do this quickly and wrap this up.

Operator

Michael Carboy, your line is open.

Michael Carboy – Signal Hill

A quick follow-up, Tom. You talked about the degree of cost savings coming from larger plants. Can you give us an idea of the magnitude of that margin improvement that you get from going to large equipment?

Tom Werner

I'm not prepared to do that here. I will give you an element of that and then we'll work on it. We will take that as a homework assignment. We're seeing balance of system costs go down high single-digits and sometimes within the quarter.

Operator

Your next question comes from Rob Stone.

Rob Stone – Cowen & Co.

Just a quick follow-up on silicon. You said that your blended cost of silicon should be up about 10% this year. What do you assume for 2008?

Tom Werner

Our blended costs of silicon in 2008 will be down year on year, and Rob, with the team here we will take that as a homework assignment and provide greater clarity. I would say that it's materially down.

Operator

Our last question comes from Tim Luke - Lakota.

Tim Luke – Lakota

Clarification from Manny on the '08 implied revenue, when you say the midpoint of 1.1, given the ramp in the systems business, if you could give us a sense of a range of the expectation is in terms of percentage contributions from systems versus components in that revenue that you are outlining?

The question really would be just on how do you see the competitive dynamics develop, Tom, in the different segments in that it seems that there are a lot more larger systems versus residential in any of the other key arenas.

Manny Hernandez

We have purposely not guided the segment mix for '08. As you can imagine, we are six months away from beginning that year. However, I think from our current guidance of '07, I will take the mean of $740 million to now the mean guidance of '08 of 1.1, that's almost 50% growth for the whole company.

We like the flexibility to be able to manage that between the segments depending on where the opportunities are. We will give you more clarity as we get closer. Sorry, but we can't be more definitive at this time.

Tom Werner

Tim, on segmentation and strength in the segments we purposefully sell into all four segments, the way we segment the market. We do see movement between those segments. Policy still drives a lot of end markets, particularly the power plant market.

On where we are strongest and then you can infer from that, that we are most comfortable with our business model is where it is space constrained, and that tends to be the new production home, residential retrofit and a number of power plant locations.

In terms of the competitive pricing, that's all relative, right, and so outside of those markets they would tend to be more competitive from our vantage point. We will be able to follow up with you as well.

I am going to wrap up the call now. Thank you all for joining us. We had a solid quarter once again. We beat our expectations and have given you guidance for Q3 and Q4 as well 2008. We are really confident in our strategy that is to have a differentiated approach to distribution, to have market-leading technology, and to drive 50% cost reductions over the next five years.

We look forward to our next earnings call with you. Thank you very much.

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Source: SunPower Q2 2007 Earnings Call Transcript
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