SunPower Corp. Q4 2007 Earnings Call Transcript

SunPower Corporation (SPWR)

Q4 FY07 Earnings Call

January 24, 2008, 01:30 PM ET

Executives

Thomas H. Werner - CEO

Emmanuel T. Hernandez - CFO

Howard Wenger - VP, Global Business Units

Peter Aschenbrenner - VP, Corporate Strategy

Julie Blunden - VP of Public Policy and Corporate Communications

Michael Armsby - VP of Finance

Analysts

Stephen O'Rourke - Deutsche Bank

Kelly Dougherty - Calyon Securities

Stuart Bush - RBC Capital Markets

Mark Bachman - Pacific Crest Securities

Paul Clegg - Jefferies & Co.

Robert Stone - Cowen And Company

Sanjay Shrestha - Lazard Capital Markets

Colin Rusch - Broadpoint Capital

Michael Molnar - Goldman Sachs

Christopher Blansett - JP Morgan

Pierre Maccagno - Needham & Company

Corey Tobin - William Blair & Company, L.L.C.

Al Kaschalk - Wedbush Morgan Securities Inc.

Michael Carboy - Signal Hill Group LLC

Vishal Shah - Lehman Brothers

Michael Horwitz - Pacific Growth Equities

Presentation

Operator

Good morning and welcome to SunPower Fourth Quarter 2007 Earnings Release Conference Call. Today's conference is being recorded, if you have any objections, you may disconnect at this time. Your lines have been placed on a listen-only mode until the question-and-answer segment of today's conference call. I would now like to turn the call over to Tom Werner, CEO of SunPower. Sir, you may begin.

Thomas H. Werner - Chief Executive Officer

Thank you for joining us today. We will report on our fourth quarter and full year 2007 financial results, providing some color on our strategies of investments and channel, technology and cost reduction initiatives. Then we will provide guidance for the first quarter and full year 2008.

Our fourth quarter performance once again exceeded our top and bottom line guidance. Q4 2007 revenue was $224 million, up 201% from our Q4 2006. Systems revenue accounted for 55% and components revenue accounted for 45%. In addition, Manny will describe in detail more on our financial results, including the EPS guidance, our updated raised guidance for 2008 and our outlook for 2009. Overall, 2007 was another exceptional year for SunPower. We more than tripled our top line revenue for the second consecutive year, while growing pro forma operating income 273%. This rate of profitable growth is a testament to the contribution of the SunPower team. So, I'd like to take this opportunity to thank them for their hard work over the past 12 months.

SunPower continues to execute on the key elements of our long-term strategies. Specifically, we will build a robust downstream channel and deliver brand preference. We will innovate technically to create unique high-value products and we will reduce cost across the value chain to compete with retail electric rates. Lastly, we will hire the best people in the industry. These strategies lead us confidence in our guidance to achieve our model of 30% gross margin, 10% operating expense, 20% operating margin no later than Q1 of 2009.

I'll elaborate on the first three of these strategies briefly. Let me start with channel and brand. We had been working hard on this front for over three years, both organically via our North American dealer network and through the acquisition of PowerLight, more recently the acquisition of Solar Solutions in Italy. We have deliberately invested in channels to reach all four major market segments and these are residential retrofit, new home construction, commercial and power plants. SunPower now has robust channels to market all four of these applications. We are actively expanding our channel footprint to new markets such as Southern Europe, both through acquisitions as well as organic growth. This portfolio of market opportunities and delivery channels give SunPower a unique ability to rapidly capitalize on new opportunities, adjust rapidly to specific incentive risk, and leverage products between geographies and market segments.

We believe the control over the downstream channel will, over time, build more predictable demand and superior margins, because we increasingly control our destiny through our own channel strategy. For example, in Q4 of 2007, approximately 70% of our revenue was derived through our downstream systems and VAR channels. We are convinced that brand preference will play an increasingly important role in the solar industry as product supply and technology choice increase. In 2007, SunPower was named as Number One Solar Panel Brand by an independent market research firm. We recently hired a new Chief Marketing Officer with extensive retail industry experience to helps us make SunPower a global powerhouse brand, ensure that our products are the clear first choice for customers in our key markets.

Let me elaborate with some channel highlights from Q4. In Europe, we closed the acquisition of Solar Solutions in Italy providing us with immediate expansion into one of the fastest growing markets in the world. In residential retrofit, we expanded our North American dealer network to approximately 150 dealers in more than 25 states. In new homes, we had a record-breaking quarter. We preformed above plan and extended our relationships to new builders. On our power plants, we had an outstanding quarter. We signed 60 megawatts of projects in Spain. We dedicated the greater than 14 megawatt in Nellis Air Force base, our power plant outside of Las Vegas, and we announced a system in Korea called Jeonju.

In commercial systems we accomplished a wide range of major milestones, hit important early goals in the construction schedule from Macy's and Wal-Mart. Combined, this represents 35 facilities. When fully... they will be fully built out by year-end 2008. We also expanded SunPower Access PPAs, Power Purchase Agreements in US commercial systems by signing two key financing agreements that provide visibility on how we can reduce the cost of delivering systems to our customers.

First was Morgan Stanley project finance facility. This is a $200 million facility, 95% funded by Morgan Stanley, 5% by SunPower. It has built-in standard terms and conditions. What this allows us to do is leverage a pre-arranged pool of financing, which we can apply new business to. We use this facility at our option and we can use other vehicles if they were better for our customers. Second was GE Financing of eight megawatt systems for five customers. These customers were HP, Toyota, Agilent, and two public agencies. This is different than Morgan Stanley