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SunPower Corporation (NASDAQ: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

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’s facility in that we first bundle the projects, and then we find the best financing partner for the mix of systems. One of the most important conclusions from these efforts is that we have a very competitive market for financing systems in the United States with lots of high-quality investors looking to participate in Solar.

Now let me move to the second leg of our strategy, which is technology innovation, something that is in our DNA here at SunPower. Core of our product advantage is our high efficiency solar cell technology and our high performance solar systems. I am pleased to report that our solar cell technology roadmap is on schedule and producing excellent results. In 2008, our generation two solar cell production volume will exceed that of the first generation. First two lines in our Fab 2 are complete. The third will started ramping in late Q4. Five more will ramp this year for a total of eight in production by the end of this year. This is in addition to line four in Fab 1. We are now able to rapidly replicate generation two new lines in our Fab 2 very quickly. Additionally, we have successfully made panels with 145 micron cells and expect to start shipping in volume very soon.

On the system side, we are applying our manufacturing competencies by moving to manufacturing plan assembly of systems instead of field assembly, redesigning systems to lower the cost of the bill of material and to improve energy harvest and finally scaling manufacturing. Our approach of moving final assembly from the field to the factory worked exceptionally well at our Nellis Air Force Base project. This is where we demonstrated installation rates of over 1 megawatt per week using our innovative new T20 Tracker. We are now gearing up to deliver more than 45 megawatts of power plants in Spain during 2008 using our proprietary the tracker technology. Our redesigned T20 Tracker produces almost 10% more energy as measured in kilowatt hours, compared to single axis tracker and up to 30% more energy than a fixed tilt system.

Let me move on to the third leg of our strategy, which is cost reduction. We have initiatives across old value chain to drive our stated goal of reducing installed system cost 56% by 2012. Let's go to the elements of cost reduction starting with silicon. We expect to see cost reductions in 2008. This is the first quarter where average silicon prices will decline as we started commercial production. M. Setek has succeeded in the transition to internally produce TCS gas is making and delivering ingots with this polysilicon meeting our quality specs. We expect this TCS transition to resolve the non-linearity delivery of ingots M.Setek that limited our total cell production in Q4. M.Setek is delivering linearly this quarter.

DC Chemical has delivered its first polysilicon Woongjin Energy as of this month, and Woongjin's ingots made with this poly meet our specifications. We expect DCC to meet its schedule for volume deliveries in the next couple of months. With the success of both of these partners, we have further implemented our diversification strategy with new silicon suppliers. Last week, we announced that we will be a customer of a new polysilicon plant to be built in Saudi Arabia, through a joint venture of Norsun and two Saudi investor groups. Norsun is led by one of the founders of REC and is already under contract to supply SunPower with ingots and wafers from a facility in Norway. Incremental silicon in this contract towards the increase in our expected solar cell production volumes in 2010 to 650 megawatts or more. Combination of these agreements is in line with a long held strategy of a diverse silicon portfolio. As a final note on silicon success in the fourth quarter, we were very pleased to see our Woongjin Energy joint venture in Korea last very successfully delivering ingot volumes about twice our ramp plan, moving them into position of being one of our top ingot suppliers.

Now, let’s take stock of our competitive cost position. Let me be clear our models are cost competitive today. We believe our cost reduction road map will allow us to improve our margins faster than others in the industry. We have high-visibility of our cost reduction trajectory from our technology road maps. Let me give you some examples. We are moving to thinner wafers. We are extending our industry leading position to 6.5 grams per watt. We are moving to higher efficiency solar cells, beyond our industry-leading initial production of 20% cells from moving to 22% minimum conversion efficiency, 10% improvement. We are moving to larger solar panels with greater than 300 watts of rated power that reduce manufacturing and installation cost. And we are driving economies of scale throughout our cell and solar panel factories.

Our systems group we have the unique ability to integrate our product development teams to address cost reductions from the solar cell all the way across the value chain to the final site installation. We have built a pipeline of new systems products with a focus on reduction or elimination of redundant structure and features, factory manufacturing instead of field assembling radically reduced installation timing cost. Let me quantify some of the installed cost savings associated with these initiatives. First a 1% conversion efficiency improvement yields approximately $0.20 per watt cost-reduction of total systems cost. Now, when we first started production several years ago we had industry leading 20% conversion efficiency. We have improved that in and are implementing as we speak a full 2 percentage point improvement.

Second example a 20-micron reduction of silicon thickness yields a $0.16 to $0.20 per watt cost reduction. Third, our signed silicon contracts that will be implemented between now and 2010 reduce our cost by between $0.40 and $0.50 per watt. Fourth, 10% higher energy harvest from our T20 product yields $0.30 to $0.50 per watt cost reduction. Combining these with our other numerous cost reduction initiatives leads to our guidance of retaining our 30% gross margin, [inaudible] operating expense, 20% operating income model no later than Q1 of 2009.

Let me end by spending a few minutes talking about market growth and dynamics. First, demand is strong. Preliminary estimates we have seen indicate that market growth in 2007 was once again extremely strong with shipments up about 45% compared to 2006. We see continuing strong demand for our products and systems driven by high efficiency, superior aesthetics of our solar cells and high performance systems with rapid low cost installation. Next, SunPower is poised to respond to market dynamics. As our current markets mature and new growth markets emerge, we fully expect and are planning for both surges and softening in individual markets as they transition to various stages of growth. SunPower has demonstrated the ability in the channel options to be flexible with respect to these short term perturbations. We believe we are well positioned to address key industry policy issues such as the ITC extension in the United States as well as feed-in tariffs in both Spain and Germany.

Thirdly, it is SunPower's plan to compete with retail electric rates. Ultimately, we are driving our company to move beyond the current set of solar initiative incentive policies by reducing installed systems costs 50% by year-end 2012. This goal is embedded in the development road maps across our entire company and will allow us to be competitive with grid power and much of the developed world, as I have described with concrete examples today. SunPower is positioned to win when silicon becomes more abundant. We have been anticipating significantly increased competition in ample silicon supply for several years now, and we believe we are positioned for success in this market. In an environment of abundant upstream supply, we expect redistributed profit pulls in the solar value chain. As a result, we have been preparing for this by vertically integrating and investing into the downstream channel. We believe that core success factors in this new environment will be: talent control and brand preference, differentiated high value products and competitive cost at the installed system level. We believe that SunPower is in industry leading position for each of these three factors, and we look forward with great anticipation in its outstanding performance and execution 2008.

I'd like to turn the call over to Manny Hernandez who will report details of our 2007 Q4 and year-end results, provide guidance for our first quarter of 2008, full year 2008 and a first look at 2009. Manny?

Emmanuel T. Hernandez - Chief Financial Officer

Thanks Tom, and good morning everyone and thank you for joining SunPower's earnings conference for the fourth quarter and fiscal year 2007 which ended December 30, 2007. I'd like to remind everyone that during this call, management made and will continue to make statements that are not historical in nature. Please consider these statement as forward-looking pursuant to the Private Securities Litigation Reform Act of 1995. Those statements are based on our current expectations and are subject to certain risks. Please refer to our press release and our SEC filings for a more detailed discussion of those risks.

Now, let me give you summary of our 2007 fourth quarter financial results for the combined company in our segment. Total SunPower revenue for the 2007 fourth quarter was $224.3 million, exceeding our guidance of $210 million to $220 million, but down approximately 4% from or prior quarter revenue of $234.3 million and up 201% from our year ago fourth quarter revenue of $74.5 million. For the year, 2007 revenue was approximately $775 million or more than triple that of the 2006 revenue of $237 million and as Tom noted we had a great year. Our component segment accounted for $100.4 million of our fourth-quarter revenue exceeding our guidance of $90 million to $95 million representing a 31% increase from the prior quarter’s revenue of $76.6 million.

Our system segment accounted for $123.9 million of the quarter’s revenue within our guidance of 120 to 125 representing a 21.4% decrease from the prior quarter’s revenue of $157.7 million. Because our third quarter systems revenue included scheduled completion of certain phases of project in North America and Spain, most notably the Nellis Air Force Base project, which contributed very strong systems performance during this quarter. As noted by Tom earlier, the Nellis project was successfully completed in the fourth quarter. Our systems segment represented 55% of the company's total revenue in Q4 versus approximately 67% in Q3. Please note that the ultimate sales of SunPower manufactured panels, which are allocated by the company to the system segment, is reflected as revenue of the system segment. In the 2007 fourth quarter, approximately 30% of panels sold by our system group were SunPower manufactured solar panels. We expect this allocation to grow to approximately 50% starting in Q1 of '08 trending upwards for the duration of the year.

Now, let's cover earnings. On a GAAP basis SunPower reported operating income of $11.2 million and diluted income per share of $0.06. These figures include non-cash charges for amortization of purchase accounting intangible assets of $7.1 million and non-cash stock-based compensation expense of $14 million. Also included in our fourth-quarter GAAP results was a charge, a non-cash charge of $8.2 million for the write-off of an amortized debt issuance cost related to the issuance of SunPower's convertible debentures, which became callable in the first quarter of 2008 essentially effective December 31, 2007. Pursuant to the indentures, these convertible can now be turned in for conversion by the holders. However, as most of you are aware, there is a low probability of this happening since there is a very good market for these convertible debentures that they will most likely discontinue to be traded in the open markets and not redeemed. It is also noteworthy that these convertibles are currently trading at a value higher than their conversion value, due to the time value of the embedded options as well as the present value of the remaining coupons for this converts. However, proper accounting requires us to reclassify this convertible debt to current liabilities and we did that in Q4.

On a non-GAAP basis, adjusted to exclude non-cash charges for amortization of intangible assets, stock-based compensation, write off of the amortized issuance cost and the related tax effects, SunPower reported a total operating income of $32.4 million and diluted net income of $0.39 per share. This exceeded our guidance of $0.33, $0.37 per share for the quarter. This also compares with our prior quarters operating income of $27 million or $0.33 per diluted share. The company's overall non-GAAP gross margin for 2007 fourth quarter was 25.3% versus our guidance of 24% to 25% and compares with 20.4% in the third quarter. The fourth quarter total gross margin was influenced by our system segments revenue, which included a favorable mix of high margin sales resulting in systems segment gross margin of 26.8%, while the components segment achieved gross margin of 23.4%. As Tom noted earlier, we experienced non-linear delivery of silicon in the fourth quarter, which impacted our factory absorption. This was mostly due to M.Setek, one of our best suppliers converting to in-house TCS supply during the quarter. As a result, we procured a higher quantity of polysilicon from our suppliers resulting in a slightly higher average silicon cost in the quarter. We believe that this issue is behind us now and expect better supply linearly in Q1 of '08 as you will note later when I give you guidance for margin for that segment.

Quickly on the balance sheet, we ended the fourth quarter with cash including short-term investments and restricted cash of approximately $488 million. Our DSO was 56 days and our net inventory ended at 76 days. We ended the fiscal year 2007 with total capital expenditures of $202 million and full-year's depreciation of approximately $27 million. I would like to now to take a moment to address some questions we have received recently or more specifically negative commentary written about certain elements of our working capital. We want to reiterate that working capital efficiency and getting our company to free cash flow positives is just as important to us as delivering good operating results.

For starters, SunPower generated positive cash flow from operation this quarter despite growing receivables as our top line grows and the need to state inventory to support our large system projects. Now it is typical in the Systems business for there to be cost that are incurred, but yet to be billed. That is labeled in our reported balance sheet, if you care to look at it, as cost and estimated earnings in excess of billing; we call it CIX for short. You can think of this as unbilled receivable. Now there are several reasons like cost that we have already incurred and not yet we billed. It could purely be a contractual condition, but mostly it is a timing or awaiting a project billing milestone prescribed in our contract. To give you an idea, in the third quarter of 2007, our unbilled receivables were $79.4 million. In contrast, our unbilled receivables in fourth quarter was $39.7 million, approximately half that of the prior quarter. Now the reason Q3 was such a big number was it was largely influenced by the Nellis project. Now those receivables get billed in Q4 and all of these receivables eventually get billed in due course. Now, it’s only [inaudible] that our unbilled receivables came down this quarter. One should not extrapolate simply from these balances that Q3 was therefore bad and Q4 was great. This account alone is not an indication of the future state of our systems business.

Now let me switch gears, because there is another account that behaves the other way. It is also typical in our business for there to be billing in excess of cost that is labeled in our reported balance sheet as billings in excess of cost and estimated earnings. We call that VIX for short. You can think of this as deferred revenue for advanced billing. Now there are several reasons why we can bill a customer even before we have incurred certain costs, but this is mostly contractual in nature. The simplest example here is, when we are allowed by a contract to bill an amount upon signing of the contract. So, although this is great for working capital, we cannot recognize that billing as revenue yet, so it is reflected in our balance sheet as a liability, essentially as deferred revenue. Now to give you an idea, in the third quarter of 2007, our deferred revenue was $20 million, whereas in the fourth quarter, our differed revenue was almost $70 million, $69.9 million to be exact, almost three and a half times that of the prior quarter. Now though it is great, deferred revenue increased in Q4, again, one should not extrapolate simply from these balances or draw a conclusion that the state of the business is particularly good or bad. Again, this is simply a timing issue of when balance sheet stays relative to contractual billing schedule, particularly on our large EPC contracts.

Now, we expect these two accounts that I have just explained to fluctuate from quarter to quarter, and will be influenced by the type and the size of the project that we undertake, as well as the contractual terms that we enter into and the timing when we end our quarters. Since more and more of our projects are likely to cross quarter boundaries, these accounts will fluctuate because our balance sheet, as you know, is just a snapshot in time. So, these artificially created boundaries are cut-off within our project schedule. Anyway, certain analysis and write-ups have been made about this account concluding that the future state of our business must be deteriorating, because certain ratios were degrading, our balances were declining. Again, I would like to emphasize that these two accounts are very essential to working capital management and we try to drive them to the best condition for cash flow. This is also largely influenced by the terms and conditions and the timing of projects that we undertake. I am sorry this took at while but we thought it is important for our investors to understand this.

Now let me head to guidance. But before that, as usual, let me reiterate as we have noted in prior calls, that our business results may reflect quarterly shift in mix within system and component segment revenues. Also from quarter-to-quarter we expect shifts even within the system segments due to the size and the type of projects and percent completion factors that could lead to non-sequential or even marginal growth in revenue gross margin or earnings. Our margin mix between segments and also the influence by the allocation of SunPower produced panels for the system segment, as well as mix of projects even within the system segment. So, as we enter 2008, I just want to remind everyone, that these factors will continue.

Now, before I give you the numbers, let me say a few words about the reaction of some investors and analysts today to our Q1 '08 guidance. First of all let me remind everyone that this is the first time we are giving guidance for Q1 of '08. We are not therefore taking our number down or any number down, it is the first time we are putting out numbers for Q1 of '08, a bunch of things to reflect on is the fact that we are actually up siding our 2008 outlook, both revenue and earnings. I think the things to note is we have a very solid first half outlook, and the Q1 guidance that we're giving you today is just part of that. I think the most important thing that you lose track of is you are looking at a very good year here, and expecting to deliver based on our guidance going forward.

And now let me give you the numbers. For the fiscal year 2008, we are raising our guidance for our non-GAAP results to a revenue of approximately $1.2 billion to $1.3 billion, and that is estimated to be comprised of component segment revenue in the range of $440 million to $460 million, and systems segment revenue of $760 million to $840 million. Gross margin for 2008 average for the whole company is estimated at 26.5% to 27.5% and that will be comprised of the component segment attaining an average gross margin of 35.5% to 36.5% for the year, and the system segment an average of 21% to 22% for the year. The non-GAAP EPS for 2008 is also being increased from $2 to $2.10 per share. Please note that the estimated tax rate for 2008 is now 24% to 25%.

Now for the first quarter of 2008, our total company estimated non-GAAP results are as follows. Total company revenue of $230 million to $250 million. Now, think about it, the high end of this range is potentially SunPower's first billion dollar annual revenue run rate, and we are very excited about that. Gross margin for the first quarter for the company is estimated at 24% to 25%, essentially flat to last quarter’s due to shift in segments gross margin which I will cover next. Earnings per share, non-GAAP, for Q1 is estimated at $0.33 to $0.36 per share. Now please note that one of the drivers to our change in EPS trend in 2008, the change in tax rate, largely due to lower NOLs and shift in North America profit. We now expect 2008 tax rate to be 24% to 25% versus 2007, which ended at approximately 11%. Just to give you an idea, if we normalize the fourth quarter numbers that we reported to you, using 2008 tax rate, the fourth quarter non-GAAP EPS would have been $0.32, almost there.

For Q1 '08 by segment, our non-GAAP estimates are as follows. Components segment revenue, $77.5 million, the decrease [inaudible] increased allocation of SunPower produced solar panels for our system segment during the quarter. The system segment revenue is now estimated at $155 million to $172.5 million for Q1. We expect the component segment gross margins to improve to 26.5% to 27.5%, benefiting form higher factory output and improved factory utilization, while the system segment gross margin is estimated at 23% to 24% influenced by a reduced mix of high margin system sales versus Q4, while at the same time, benefiting from increased allocation of SunPower panel, which is estimated at 50% of system segment installation. Now, collectively we expect total company gross margin of 24% to 25%. Now lastly, we are providing rough and early guidance for 2009. We expect to grow our revenue at least 40% to 50% from 2008 for at least the rate higher than was projected for the industry in that year.

Let me now turn it over to Tom to lead us through the Q&A session.

Thomas H. Werner - Chief Executive Officer

Thanks, Manny. I will open the call to questions in a moment. First let me note that with me, I also have Howard Wenger, our VP of Global Business Units, Peter Aschenbrenner, VP of Corporate strategy, Julie Blunden, our VP of Public Policy and Corporate Communication, lastly Mike Armsby, our VP of Finance. So they may provide answers to some of your questions. We have quite a people on the call, we’ve also made extensive remarks, so we will attempt to limit to one question and those of us here will try to answer directly and quickly so we can get as many questions possible.

Michelle, we’ll take the first question, please?

Question and Answer

Operator

Thank you. Mr. Steve O'Rourke, you may ask your question. Please state your company name.

Stephen O'Rourke - Deutsche Bank

Hi. Thank you, this Steve O'Rourke from Deutsche Bank. The question on your 2009 I guess preliminary guidance here. Can you help us understand how you came up with this 40% to 50% year-over-year growth range for revenue?

Thomas H. Werner - Chief Executive Officer

Hi, Steve this is Tom, let me comment, and Howard you may want to add color. So, when we look at it, first of all, of course, you have to have a basis to look at '09 off of, so the first thing is to get comfort on ‘08. And of course as Manny noted, not only do we get comfort when we pumped up our guidance, and that's attributed to the two channels both component and system. So to your question, we do a bottoms up revenue projection in our components business much like many of the other cell and module producers, so you can think of that that way. In terms of systems, if we look at two things, we look at size of markets in different regions of the world and our expected share, and we also do a bottoms up projection in each of those regions that we compared it to. So, that gives us a range of numbers for '09. Of course, it is our job to pick numbers, and at this point, we are comfortable giving you a reference point off of '08 to take '08 times 1.4 or 1.5 or the mid point. That gives you our first overall guidance for 2009, albeit a range. We're very focused on delivering our results in this coming quarter as well as this year, but we want to give you some sense of '09. So, that was the thinking behind what we did. I don’t know, Howard, if you want to add anything or –

Howard Wenger - Vice President, Global Business Units

We believe that the fundamentals [inaudible] 2008 and into 2009. And by fundamentals I mean the underpinning policy, our cost structure, the availability of silicon, the trajectory of the exogenous variables around climate change and so forth and oil and so forth. And we also looked at our pipeline, we have a very robust pipeline of projects that we're developing that extend beyond 2008 and into 2009 and 2010, and that gives us additional visibility and comfort. Finally, we look at industry experts and their forecast and build off of that and we do both the bottoms up and as Tom mentioned and a tops down.

Stephen O'Rourke - Deutsche Bank

Okay. Can I ask one follow up to that? Is that your forecast or close to your forecast for industry growth in 2009, and if not, how big a difference is there? I mean should you be significantly out growing the industry with your branding, with your positioning, with your business model?

Thomas H. Werner - Chief Executive Officer

Yes. Peter Aschenbrenner will take the question; just let me comment on that. We have a different approach when we looked at '09 and '10. You can be projecting very significant numbers but not have the underpinnings for that. So you could sort of do an overall forecast just based on [inaudible] or percent of market; we're not doing that. We're giving you things that we are driving from business we are booking and seeing and how the [inaudible]. Clearly the market grows faster. We are going to grow share and we will grow faster would be my comment. But to nail down specifically your question, how does this compare to market growth rate, I'll turn that to Peter.

Peter Aschenbrenner - Vice President, Corporate Strategy

Yes, just quickly, we see market growth forecast from third parties for 2009 ranging from around 30% in a business as usual case to may be a little over 40% in an accelerated case. So, I think our guidance already implies that we are going to be growing faster than the market.

Stephen O'Rourke - Deutsche Bank

Fair enough. Thank you.

Thomas H. Werner - Chief Executive Officer

If you have more, if you wouldn’t mind getting back in queue.

Stephen O'Rourke - Deutsche Bank

I will, I’ll jump back in the queue. Thank you.

Operator

Thank you. Kelly Dougherty, you may ask your question and please state your company name.

Kelly Dougherty - Calyon Securities

Kelly Dougherty from Calyon Securities. I appreciate [inaudible] thank you very much. I'm hoping that maybe you can give me kind of somewhat bigger thoughts on where you think the current policy environment is going particularly here in the US, obviously as support for solar got caught up in the tax provision, the energy bill. So, I am just wondering what your thoughts are and timing of an extension or something more permanent, and when you think something needs to be done before it starts to hinder growth in the US?

Julie Blunden - Vice President of Public Policy and Corporate Communications

This is Julie Blunden. We have absolutely excellent [inaudible] policy in the US and around the world for solar and really for renewables, generally. As Howard alluded to, there is an awful lot of forces pushing renewables forward and pulling specifically solar into the market, as of our unique ability to be ubiquitous, modular and deliver at peak energy time. And so what we have seen consistently is outstanding bipartisan support at the federal level for solar. Now what we also saw unfortunately by one vote last year was a tax title that couldn't support those for the pay force that were on the other side. What we have seen very recently is both commitment from leadership in both Houses of the US Congress to move the investment tax credit forward, and we take that bipartisan leadership statement very seriously. Reality is that we don't... we aren’t at the point yet in the session where we have vehicles or calendars at hand that we can point to and say definitively, here's the vehicle and here's a set of hearing days, although we do feel confident that the support for the investment tax credit is there, our job is to ensure that we continue to put the pressure on to move that as quickly as possible. You're right to reference the fact that movement of the investment tax credit fast is good for the industry. SunPower is in a fortunate position to be able to be flexible in our market application. Not all the solar companies are as fortunate. We think it's important for industry development to move the ITC forward quickly.

Kelly Dougherty - Calyon Securities

Do you have kind of date where you think that if something doesn't happen by X months that demand in the US is going to be adversely impacted as people are kind of getting nervous that it actually won't be extended?

Thomas H. Werner - Chief Executive Officer

You don't want a specific day, just the month.

Kelly Dougherty - Calyon Securities

Day, month, whatever you've got.

Thomas H. Werner - Chief Executive Officer

All right. Let me take that. I would say that on... I'll characterize Spain, Germany and ITC in America. In Spain and Germany, there is indications of what will happen with caps and feed-in tariffs that we've built into our plans. If there were radical departure from what's been indicated that would be bad. Suffice it to say that the direction that those two governments have indicated, they have to take sort of a right turn. In the United States, I would say this year. You know, you need an ITC this year, and let me get on myself, box a little bit. I have signed it incredulous that whether you're a republican, democrat or libertarian or whatever party you are from, that you would allow renewable support to lapse in an environment like we have. So we find it extremely unlikely, but it's certainly possible.

Kelly Dougherty - Calyon Securities

Thanks very much. Congratulations on the quarter.

Thomas H. Werner - Chief Executive Officer

Thank you.

Operator

Thank you. David Edwards, you may ask your question and please state your company name.

Unidentified Analyst – Morgan Stanley

Hi. It's David Edwardson [ph], Morgan Stanley. Just wanted to ask some question on your margin guidance for '08, and help us understand a little bit of the drivers that are moving, especially the systems margin there. If you think about where you stood today, the component gross margins are clearly trending up, the mix of internal panels to the systems businesses is going up, but you are seeing system margins come down at least from Q4 numbers. Can you talk a little bit about what else is happening in there that's affecting that trend and how those things add up to the 30% in Q1 '09?

Emmanuel T. Hernandez - Chief Financial Officer

Hi, Dave, it Manny . A very good observation, I think I'll focus on the very good part of that question first, the fact that the component segment, which we've guided to 26.5, 27.5. Q1 will actually in our best estimates average 36 plus for the year. So, what's happening there is as we continue to ramp the factory, we obviously get the benefits of scale, the cost reductions that Tom enumerated during his thoughts with regard to conversion of more of our lines to thinner wafers are also helping as well as directionally correct silicon cost, as far as direct to the year. So, that eventually what’s driving the component mix or margin of the component segment to improve throughout the year. For the system side, we are estimating certainly for Q1 for the systems sales to have 50% SunPower produced modules in that number. In contrast to the just most recently ended Q4, as I noted earlier, our margin was influenced by a higher mix of high margin sales in that segment. We have not projected as much content of that high margin sales in our guidance. It could certainly happen as it happened favorably in 2007. But for the moment, Dave, we've kept it relatively low, if you will, without the benefit of those high margin spikes. So, 21 to 22 would represent mathematically about 40% to 50% allocation of SunPower modules to that segment.

Thomas H. Werner - Chief Executive Officer

This is Tom, I would like to add a comment. I want to make sure it's clear our confidence in our factory and in our technology in the component side, think of it as a superior car, superior engine that had insufficient fuel in Q4 and the fuel in Q1 is there from our silicon supplier. So, then the advantage you get obviously as you absorb cost more effectively, run more linearly, and we're also capitalizing on the transition agency who is behind us and lines are coming on much more rapidly. So, the factors we've talked about for the last four quarters, imagine when you start pumping silicon through this engine with thinner wafers, higher conversion efficiency and expanding volume, how the companies are going to improve and you're going to see that. That's what we are projecting.

Unidentified Analyst – Morgan Stanley

Okay, thanks very much.

Operator

Thank you. Stuart Bush you may ask your question and please tell your company name.

Stuart Bush - RBC Capital Markets

Yes, hi. RBC Capital Markets. I was hoping you could talk a little bit about your conviction that silicon would be much more abundant in late '08 and beyond. Is it based more on confidence of new supply coming from the incumbents and new entrance or is it more a statement about the elasticity of demand?

Thomas H. Werner - Chief Executive Officer

Hi, this is Tom, and someone else may want to comment as well, just let me know. So we say abundant silicon, I think there is two sides to that, let’s talk about supply and then let’s talk about demand. From a supply standpoint, we do a profitability-weighted expectation of supply; we take the incumbents and multiply it times the high profitability the incumbents projection, so that would be the Wackers and the Hemlocks of the world, et cetera. And then we take the new entrance and we put a lower probability weighting typically also a delay in schedule. Now that we have been at this for a few years, we have evidence that M.Setek… both of our partners, M.Setek and DC Chemical can produce new plants with sufficient quality. So, it can be done. So those probabilities are increasing and that is how we come up with a " supply prediction." We would tend to discount some of the radically high numbers for the next several years because as we’ve been to many of these new facilities, there is significant technology hurdles yet to be accomplished, and many of them, specifically that being TCS gas production. So, we think that moderated view, take an expected value, and we come up with the silicon estimate. On the demand side, we think it is really important to note that as improved economics for silicon flow through our P&L, obviously that reduces cost and then at installed level as you reduce costs there is elasticity in the end market. So, we haven't used the word over abundance or over supply, we’ve used the word silicon because we will lower cost and we will leverage that, and of course, we leverage that on top of our high-efficiency cell and high-energy harvest systems. We think we are in the best position to leverage lower silicon costs. So, the way we look at it is weighted average of supply on the demand side, lower cost moving through to the customer and ultimately stimulating increased demand. Perhaps there, as we have said in our comments, that might be uneven and might vary by market but over the intermediate term, lower cost stimulates demand.

Stuart Bush - RBC Capital Markets

Right, thanks a lot.

Operator

Thank you. Mandy Hassani [ph], you may ask your question, please state your company name.

Unidentified Analyst

Thank you. [inaudible]. Going to your revenue guidance and assuming if I take your production guidance from your press release, it implies that pricing in '08 will be down mid-to-high single digit and then down double-digit in '08 and 2009. Am I reading this correctly? Is there something that I am missing here?

Thomas H. Werner - Chief Executive Officer

So, your question, just to make sure we heard it, the sound level was kind of low, does pricing '08, '09 imply decreasing single digits in '08 and low double-digits in '09. I think the short answer to that, it sounds very close to what we are assuming. Howard, do you want anything else?

Howard Wenger - Vice President, Global Business Units

Yes, I think that is right. I will just give a little more precision to anticipate further questions. We had our ASPs go up slightly low single digits in Q4 and we anticipate ASPs to be steady/flat in Q1 and then as we get into the second half of the year, down slightly low single digit, and then as you said in 2009 timeframe we are anticipating ASPs decreasing in the 5% to 10% range.

Unidentified Analyst

Is the 5% to 10% decline, is that enough to get to that trajectory that was helped with grid parity by 2012, 2015 timeframe?

Thomas H. Werner - Chief Executive Officer

Yeah, this is Tom. And if you have more questions, if you don't mind jumping back in queue, we’d appreciate it. That sort of gets to the cost reduction profile over the time frame between now and 2012, and it is a very fair question. I think you would see that pace continue for '09, 10, 11 and 12. When you compound that, yes, you get to that 50% reduction. And in '09, we would tend towards the high end of Howard’s guidance.

Unidentified Analyst

Great, thank you.

Operator

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

Mark Bachman - Pacific Crest Securities

Sure. Mark Bachman of Pacific Crest. Tom, I just want to go back and revisit your 2009 guidance. I just want to hear pretty straight forward answer, are you assuming that the ITC gets not only extended in 2008 but also gets enhanced? In other words, so the utilities can participate in it, so you don't have the AMP penalty and also the residential goes up to the 4000 cap. I just… I want to give a sense of what you’ve actually considered in your assumptions for your 2009 revenue guidance?

Thomas H. Werner - Chief Executive Officer

Sure. No enhancement happens this year. Howard, do you want to add anything?

Howard Wenger - Vice President, Global Business Units

That was spot on.

Mark Bachman - Pacific Crest Securities

Okay. So, this is very much a base case scenario then, the extension happens, and I guess could one draw away from this then that you think that the growth could be higher than this if you actually get the enhancements as well?

Thomas H. Werner - Chief Executive Officer

You can draw that conclusion, you can draw the conclusion that that's what should get implemented, because we clearly need to change our energy mix in North America.

Mark Bachman - Pacific Crest Securities

Perfect. Thank you so much.

Operator

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

Paul Clegg - Jefferies & Co.

Hi. Paul Clegg with Jefferies. To the earlier comments, thank you for all the additional detail on the call. Given just kind of looking ongoing concerns about recession and credit access, have you seen any indication that project developers are going to have any more difficulty accessing capital on favorable turns, let’s say?

Emmanuel T. Hernandez - Chief Financial Officer

Hey, Paul. It's Manny. The answer is no; we are certainly not seeing it. And since it is likely to come up in the call anyway, let us just cover our point of view as far as this recession or talk of potential recession in the US or even potentially spilling into other regions of the world and how that might impact our company particularly or the industry. We believe that the potential recession in the US or even it's potential to spill into other markets will have a low impact on the solar industry and certainly our company. And our conclusion is premised on the following: one, you will agree the price of electricity is still increasing and certainly not getting any cheaper; two, in contrast, the cost of solar solutions or systems is continuing to improve or decline driven by companies like us who are determined to drive solar cost with parity. But there will be a continued drive for use of alternative energy sources like solar. Now the policy and government support for alternatives in general or solar in particular is largely not influenced by economic cycles. We even expect favorable policy support in the US and other regions despite this talk of potential recessions. Also if history is a good reference, the solar industry as a whole continued to grow in the last four recessionary periods in the US, on average 29% actually; this is pretty amazing. So, this is not absolute predictor of the cycle, it is comforting to know that solar continues to grow during those period. So, we believe that the recession can have some impact in certain segments of the market, for example, the new homes that we are already seen, although even in our case, we are growing in that segment, that's relative to the base, nevertheless positive. And I have one further point, one advantage that SunPower has in certain economic conditions is our ability to flex our business into different markets, regions or channels, use our delivery strategy to go downstream. So, sorry for the long answer, but we think the impact is low and for your specific question of developers having issues, the answer is no.

Thomas H. Werner - Chief Executive Officer

Just particularly for the financiers as well, they increasingly understand that SunPower system is a rock solid investments in terms of predictability of power delivery and therefore income. So, you have a predictable internal rate of return. And next question please.

Operator

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

Robert Stone - Cowen And Company

Cowen And Company. So, given the AFP trends that you outlined, it sounds like you are factoring in the impact of the lower rates that are expected in Spain and Germany. Can you commend on whether you are getting a sense from those markets that there will be demand absorption as you run up to the end of the current rate and then a fall off in volume or do you expect continued volume growth just at lower prices?

Howard Wenger - Vice President, Global Business Units

This is Howard. With respect to Spain and Germany, we believe that the demand will continue to be very strong there, and we believe the resolution of the new feed-in-tariff will happen in the Q2 time frame and let’s just talk about Spain for a second, an important market. And what we are seeing is that the more established players are in fact continuing to make security deposits, if you will, of 500,000 euro per megawatt to get inline for the new feed-in-tariff in advance of that happening. So, we expect favorable resolution of the feed-in-tariff. They‘ve already nearly quadrupling the cap, the 1.2 gigawatts does not solidify yet, but there is every indication that that’s going to happen, that the new feed-in-tariff will be financible in Spain. And Spain is behind in their renewable targets and so there is a lot of industrial support, there is a lot of land there, and we think that's going to have a good outcome. Germany has a very solid program, it’s uncapped. The market is keen to grow although more slowly than it has in the past. And the upside for our company is that we have very little penetration into the German market. That has been a choice in the past. We now are going there with our value added reseller program this last quarter and we expect that market to be important to us going forward.

Thomas H. Werner - Chief Executive Officer

This is Tom. Let me really briefly comment. If you combine the last two questions about financing and then continuity of market due to changes in incentives, that ties together with my comments about structuring the company, so that we own our channel, control our own destiny. So, we are in a position to react to and manage the way we sell based on those input variables and we have no buffer between us and the finance or us and the change in feed-in-tariff or us and the other variables. So, we have, we believe the best ability to structure our company and to deliver revenue even with those uncertainties. Next question please.

Operator

Our next question comes from Sanjay Shrestha. You may go ahead.

Sanjay Shrestha - Lazard Capital Markets

Thanks guys. Just a quick question. Can you guys actually talk about how do you see this growth opportunity materialize in Italy? How do you see that playing out in '08, '09?

Peter Aschenbrenner - Vice President, Corporate Strategy

This is Peter. I will take that. Having spent quite a bit of time over the last few months, we are extremely bullish on the Italian market. We believe that in terms of absolute size that it could rival the Spanish market in a few years. It is obviously at an earlier stage of maturity and that's why we are particularly excited about getting in at this stage with an ongoing company there that’s one of the top five suppliers in the market already. So, Italy figures prominently in our resource allocation and bandwidth allocation. We are spending a lot of time there and we have got high hopes for it.

Sanjay Shrestha - Lazard Capital Markets

Fair enough. Can I just have a quick follow up here then, guys. Given there is lot of noise in the market about this broader supply, demand dynamics, Tom, can you talk about your channel strategy and how in fact actually even in a scenario, let's say, in '09 or '10, there is an oversupply you actually stand to benefit from that? Can you actually go into some of the details?

Thomas H. Werner - Chief Executive Officer

Yes, I can. First, let's think about oversupply… not oversupply, sorry. [inaudible] is more abundant silicon. If you look back at our transcripts over the last, probably eight earnings calls, we’ve been saying that we expect capitalism to work and for lots of silicon to come online, and apparently a lot of people agree with us now. We have structured our sourcing strategy around that, so, we’ve talked a diversified approach to sourcing silicon. We are in a position to capitalize on that because we will be able to buy silicon in that abundant silicon environment convert it, that’s the way we structured our agreements. I also mentioned that the contracts that we have signed get us to a cost reduction of $0.40 to $0.50 per watt installed. So, that’s sort of the supply side. On the demand side, what we can do is, essentially, accurately forward price systems because we know we're vertically integrated. We have operating people that own silicon conversion cost, conversion costs of modules, system cost, system installation costs, sales tax, financing costs, there are names on each of those. So, we are in a position to forward cost and did business with great deal of confidence in a closed loop system, because we have direct control over those costs. So, we think we're in a position to be more swift or more flexible where demand is and to line up with customers in a way that makes them comfortable because we control our investing.

Sanjay Shrestha - Lazard Capital Markets

Thanks a lot.

Operator

Colin Rusch, you may ask your question and please state your company name.

Colin Rusch - Broadpoint Capital

It is Colin Rusch from Broadpoint Capital. Actually wanted to get into a good more detail of the US utility market, where you are seeing develop? I know it is really days yet, but how big are the systems in the bid that you guys are looking at right now, and give me a range on how big those systems or those contracts would be and the current average rate as well?

Thomas H. Werner - Chief Executive Officer

I will let Howard take that just [inaudible]. Renewable portfolio standards are real in that in California we have the utilities that are leading edge and are forward leaning in terms of implementing various renewable energy sources and do have bids out. I’ll let Howard drill down a bit more on precisely the range of those systems and that sort of thing.

Howard Wenger - Vice President, Global Business Units

It actually has been a… this is Howard… somewhat surprising development for us in terms of the speed that that fuel segment is developing. We are seeing opportunities that are in the tens of megawatts to the hundreds… low hundreds of megawatts. So, that will give you a… that is the range.

Colin Rusch - Broadpoint Capital

And average, what are you looking at?

Thomas H. Werner - Chief Executive Officer

They are all over the map. So, I’d be wild guessing, but it is certainly on a part greater than the systems that we have announced Nellis in the Spanish system, substantially greater tens of megawatts.

Colin Rusch - Broadpoint Capital

And just a quick clarification. What is the time line on those contracts getting finalized. What are you looking at? Are you thinking contracts getting closed this year, and probably just get done this year, or are you're looking at ‘09 for project completion?

Thomas H. Werner - Chief Executive Officer

I think it is a little hard to say, because to close a contract, you have to get the land, you get the permits, access rights, et cetera, et cetera. So, there is a number of variables that you are multiplying together. It is possible this year and certainly within the next… within the time frame that you see, certainly within ‘09. One of the advantages we have with our technology is the implementation time is almost immediate. So, the time between closing the contracts and power being delivered from one of our systems is almost immediate, certainly be it through the alternatives. The other advantage is that as we build out the system, you get more and more power as you go. So, it is not all at once implementation. And we believe utilities are seeing those advantages.

Colin Rusch - Broadpoint Capital

Great, thank you so much.

Operator

Thank you. Michael Molnar, your may ask your question and please state your company name.

Michael Molnar - Goldman Sachs

Sure. Goldman Sachs. Good afternoon everyone. I will keep it pretty quick since we’ve gone long. Just one question but two parts on the systems business. Let’s us say there is material oversupply at some point in the future and ASPs fall by some very large numbers, 20%, 30%. Would you anticipate margins falling or flat in the component segment but rising in the systems business as you procure cheaper modules or is that too simpleminded?

Thomas H. Werner - Chief Executive Officer

No, that’s exactly the idea.

Michael Molnar - Goldman Sachs

Okay. And then in the systems business –

Thomas H. Werner - Chief Executive Officer

-- internal module would lower in cost as well and that by delivering a superior solution to the customer, we would command margin in the outbound channel, which is exactly the situation we expect.

Michael Molnar - Goldman Sachs

Okay. And then just one last part of that, how do you feel competitive advantage in the systems business? You mentioned some of them. Is the main advantage over a key advantage being if you grow big enough, you will be able to procure cheaper modules, do you see that as a big advantage?

Thomas H. Werner - Chief Executive Officer

This ties together with Satya’s question earlier, that I didn’t elaborate on, we are going to build a channel that we will partner with other module producers as we do today. And we believe in the time frames of ‘09 and ’10, that people who take modules will see as a great channel. So, we do expect to use third-party modules in our systems going forward. Howard, do you want to take? Peter?

Peter Aschenbrenner - Vice President, Corporate Strategy

I’ll give a little color. I think the advantage in our systems business is there are many. Some of the advantages I would say relate to our experience and the fact that we’ve been doing it for 10 years and have the expertise, the personnel, the procedures. We understand how to do that and arguably at a larger scale worldwide in terms of our systems delivery capability. The other half of the advantages relates to the, as Tom mentioned, the kind of close loop development process where when we look at next generation products, we look across the value chain. So, we're not developing a piece of it, and then handling it off to an arm’s length customer for them to develop the next piece of it. We are optimizing the total solution from wafer to rooftop.

Thomas H. Werner - Chief Executive Officer

I want to make a couple more comments, I came from... five years ago, I came from essentially the data communications network industry, and of course predecessor to that was PCs and mainframes and that sort of thing, and there was this phrase that you never get fired for buying IBM. That was perhaps 20 years ago, but the idea is that you go with a blue-chip supplier, because it's an important purchase, you just want it to work. So, that's a big part of what we're. We are a blue-chip supplier, we’ve a 10-year… we know how to manage all the moving parts and we offer a superior solution. We offer more energy delivery. So, there is also this overall… part of your preceding question was that, as you more SunPower modules in your margins would increase, and that’s absolutely accurate, particularly as we leveraged thinner wafers, higher efficiency, lower silicon cost, et cetera. You should note, however, that one of the things Manny tried to make clear is if you could track that quarter-to-quarter, it is almost ridiculous. So, you think about a 20 megawatt system in Spain, that's the implementation of that can take six to nine months. So, if you measure that within a quarter, that is not going to give an indication of are they on track or not. The systems business is very much a six to nine month kind of business, so you really ought to be looking at performance of the system channel on more of a rolling six or rolling nine months interval. We are going long, we're going to take a few more questions and we apologize if we missed a few people. Next question, Michelle?

Operator

Thank you. Our next question comes from Chris Blansett. You may go ahead and please state your company name.

Christopher Blansett - JP Morgan

: JP Morgan. When looking at your calendar '09 financial metrics, you’ve kind of talked about this a little bit about the subsidy environments, I kind of want to get just a clarity on what that means, constant subsidies in the US, and are you using the proposed subsidies in Germany and Spain as your reference?

Howard Wenger - Vice President, Global Business Units

This is Howard. The answer is yes. We were certainly making plans for any kind of contingency if for some reason the ITC didn't pass in the US. We are not going to be flat footed. And one of the things that Tom has mentioned in this call is our ability to shift gears quickly and emphasize other markets through our vertical integration. So, we believe that in the 2009 timeframe that Spain is going to be solid, that Italy is going to be a very important market, it’s got a 1.2 gigawatt cap for Spain right now. You’ve got Greece which is coming on, is behind the other European countries, we will probably be paving the road for 2009 there. France is growing especially for building integrated products where our particular cell technology plays very well. There is a 55 euro-cent per kilowatt hour feed-in-tariff in France for building integrated technology, and we have the highest efficiency, best looking product, we are building integrated. So, we expect that to be a very interesting market in 2009. And we have other countries Canada that's coming on and other interesting countries such as even Belgium and Australia. So there is a pipeline of countries that are going to be coming online and that we are factoring into our plans.

Christopher Blansett - JP Morgan

All right. Then one last quick one, on the estimated price declines in '08 and '09, were those on a system level or a module level?

Thomas H. Werner - Chief Executive Officer

That's at a module level, and Peter Aschenbrenner was going to just add one more comment.

Peter Aschenbrenner - Vice President, Corporate Strategy

Sorry. I wanted to say we are doing a fair amount of scenario planning now as a way of looking forward both at the individual country level and then as a roll-up of the aggregated demand, and we are using that with kind of backward looking time sensors to chart our next moves.

Christopher Blansett - JP Morgan

Thank you.

Operator

Thank you. Our next question comes from Pierre Maccagno. You may go ahead and please state your company name.

Pierre Maccagno - Needham & Company

Needham. Congratulations, and Manny, could you tell us what was the total installed megawatts that you had and as well the total production? And can you tell us about ASPs also?

Thomas H. Werner - Chief Executive Officer

Yes, I’ll let Manny take that. Let me just comment on the last few questions first, and then he will answer your question. By the way, it's very important that people talk about installed cost for systems, and even better yet cost per kilowatt hour, because that’s what the customer pays for, and we are seeing some things printed opining about sell cost or module cost. And there articles would negate the impact of high efficiency. There would be no point making high efficiency module if you just sold a module, reselling it, and then install the system, and they get the advantage of a high efficiency panel, because you use less balancing system. So, I want to make it clear that we are using as our reference point over and over again installed cost. That however is not to say that we are not cost competitive at the module level, we are. Manny, can you answer the question?

Emmanuel T. Hernandez - Chief Financial Officer

Hi, Pierre. For the production question in terms of megawatt produced, our factory produced 32.1 MW of products in the fourth quarter of 07, and that’s up 33% from the prior quarter.

Thomas H. Werner - Chief Executive Officer

Okay. We have about five to ten more minutes and we have 16 people on queue. So, we are not going to get to all of you, but let’s go. Michelle?

Operator

Thank you. Bertel [ph] you may ask your question and please state your company name.

Unidentified Analyst

[inaudible]. How are you all?

Thomas H. Werner - Chief Executive Officer

Good.

Unidentified Analyst

Okay. Following on Rob’s question on Spain, if you do actually see a negative change in the feed-in-tariff, are there any geographic markets that could make up or soften demand coming out of Spain? And as a matter of fact, there been pretty significant realized differences in ASPs between certain geographies for many reasons. Are there foreseeable geographic… do you guys see any diversions in 2008 within specific regions of the world?

Peter Aschenbrenner - Vice President, Corporate Strategy

I will answer the complex multiple question. This is Peter Aschenbrenner. I will try to be brief. So, we do see differences. I think the history of this industry is that we see fairly pronounced differences in regional pricing. We’ve tended to be what we think is relatively strategic in terms of our choice of our market as opposed to chasing the highest ASPs that quarter. So, we are not going to change our footprint build out plans on the basis of near-term ASPs due to sort of local supply demand imbalances. I guess the second part of the question is that our plans for 2008 and 2009 are based on our best guess of where these feed-in-tariff levels are going to land, and I think that particularly in Europe there has been a lot of transparency at the government level in forecasting that.

Thomas H. Werner - Chief Executive Officer

Though in Spain they've indicated a reduction in the feed-in-tariff. We’ve built that into our plans. In the Italian market, we will pick up… we will grow… it’s not clear to use it will grow in lock step to offset reductions in Spain. It clearly has the potential there. It has a better solar profile and it has an uncapped feed-in-tariff. The implementations does have a little bit of friction, but it's going to be a great market, probably sufficient to… it will be sufficiently large and similar to the other large Southern European markets.

Unidentified Analyst

Thanks.

Thomas H. Werner - Chief Executive Officer

Next question please.

Operator

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

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

Hi. Corey Tobin from William Blair. Just one quick one if I may. Can you give us some feeling if you would the amount of contracted business or backlog that you have scheduled to meet the target for 2008 and for 2009?

Thomas H. Werner - Chief Executive Officer

Hi, this is Tom. We don't quote backlog. We will tell you first half of 2008 is booked in the systems business. I'll talk primarily about that. As we talked on previous calls, the way the residential retrofit channel works is it there are dealer partners and unless you say the forecast, they are working with us on are essentially booked for the first half of the year. So, think of the first half of the year for practical purposes as booked. Back half of the year, I would guide you to at least half, north of half, and of course, dropping percentages in the out years, but not dropping to nothing. And those booking, when you think of bookings, our bookings are with the people buying the power, the ultimate customer. There isn’t a buffer between us and so that in my view means the quality of booking is different and sticky. So, perhaps we can do some follow-up in the other calls, but our bookings in projects are just like the implementation. It is not great to measure them quarterly, so that is why we are being cautious about quoting bookings numbers as you can imagine.

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

Just to follow-up on that, is it safe to assume [inaudible] looking to not '08 but '09 that your amount of business that you’ve booked today for the out year is higher than any other year sort of going into that year?

Thomas H. Werner - Chief Executive Officer

Yes.

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

Great. Thank you.

Operator

Thank you. Al Kaschalk, go ahead and please state your company name.

Al Kaschalk - Wedbush Morgan Securities Inc.

Al Kaschalk with Wedbush Morgan. Tom, the Italy market is a very key market as you indicated. The acquisitions of Solar Solutions looks true, I was wondering if you could add some other color on that acquisition, particularly any book of business that you may have acquired?

Thomas H. Werner - Chief Executive Officer

Sure. Peter Aschenbrenner is the architect of that transaction and speak Italian as well. So, Peter can speak to that please.

Peter Aschenbrenner - Vice President, Corporate Strategy

I will answer the question in English, if that’s okay. So, we bought the business that was focused mainly on the channel that we would characterize as the VAR channel, or the dealer channel here in North America that is selling standardized systems including panels, inverters, racking, services, et cetera through a network of dealers to residential and small commercial customers. We are now in the process of injecting capability for larger systems. One of the great near term potential we see in Italy is for systems in the megawatts scale range, and so we are using our capability out of our Geneva and Spanish operations and quickly upgrading the capability in Spain and Italy to farm off that. I’d say in terms of leverage, there one of our customers, he represented something in the neighborhood of 20% of their business in terms of panels supply going in. So, we have the ability to ramp that up as well.

Thomas H. Werner - Chief Executive Officer

And it is early days, so lots more on SunPower Italia as we give investor conferences over the next month or two as well as the next earnings call. Next question. We will take a couple more and then we are going to wrap up.

Operator

Thank you. Michael Carboy, you may go ahead and ask. Please state your company name.

Michael Carboy - Signal Hill Group LLC

Hello, good morning. Michael Carboy of Signal Hill. Manny, I’d like you to elaborate a little bit on the under absorbed start-up costs that you bore in Q4 and how do we think about start up costs for spending on the ensuing lines and Fab 2 here during the '08 time period?

Emmanuel T. Hernandez - Chief Financial Officer

Hi, Michael. So, two parts. For the under absorption comment for the fourth quarter just ended, recall that we guided the component segment to margins of 25, 26% and we came in three… almost 200 basis points less than that. You could pretty much deduce from our results that two thirds of that delta was due to the underutilization. So, very similar to last quarter’s ratio. As far as the pre-operating cost, you hardly hear us talk about it, because we consider it just part of cost of sales of a growing company. So, all the margins you’ve heard from us from the time we went public has always included pre-operating cost and we make no excuses about it.

Thomas H. Werner - Chief Executive Officer

So you would guide… we will follow up Michael in terms of quantifying that most of that unabsorbed pre-op is behind us.

Michael Carboy - Signal Hill Group LLC

Alright, great. Thanks guys. Congratulations.

Thomas H. Werner - Chief Executive Officer

Thank you. A few more and we are going to close. I apologize to everybody.

Operator

Thank you. Vishal Shah, you may go ahead and ask your question. Please state your company name.

Vishal Shah - Lehman Brothers

Yeah, thanks. Lehman Brothers. Tom, when you achieve your 30% gross margin targets, what percentage of your silicon cost reduction do you expect to achieve at that time frame?

Thomas H. Werner - Chief Executive Officer

The short answer is I don't have that number in front of me. I’ll give you a rough estimate that $0.40 to $0.50 per watt sold over now and 2010 is substantially in '09 and '10 actually. And I can dig through my papers and find it, but it is more backend loaded actually which obviously implies we are prepared for price reductions after the early part of '09.

Vishal Shah - Lehman Brothers

Great, thank you.

Operator

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

Michael Horwitz - Pacific Growth Equities

Pacific Growth. Actually, it was all good, so thanks for all the transparency. I will talk to you later.

Thomas H. Werner - Chief Executive Officer

Okay fine. So, we do have Satya, Adam Hinckley, Mark Manley [inaudible] and we apologize to you. We need to close the call. We will follow-up. We have gone quite long. Thank you all very much for the excellent questions. We appreciate you joining us. We had an outstanding 2007. We are very confident about another strong execution and outstanding 2008. We look forward to our next earnings call with you. Michelle, we are all set.

Operator

Thank you. That does conclude today's conference call. Have a nice day.

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