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Executives

Thomas H. Werner - CEO

Emmanuel T. Hernandez - CFO

Howard Wenger - Sr. VP, Global Business Units

Julie Blunden - VP of Public Policy and Corporate Communications

Peter Aschenbrenner - VP of Corporate Strategy

Analysts

Steve O'Rourke - Deutsche Bank

John Hardy - American Technology Research

Kelly Dougherty - Calyon Securities, Inc.

Pierre Maccagno - Needham and Company

Satya Kumar - Credit Suisse

David Edwards - Morgan Stanley

Al Kaschalk - Wedbush Morgan Securities, Inc.

Stuart Bush - RBC Capital Markets

Mark Bachman - Pacific Crest Securities

Colin Rusch - Broadpoint Capital

Michael Molnar - Goldman Sachs

Mark Manley - Natixis Bleichroeder

Robert Stone - Cowen &Company

Kushal Shah - Lehman Brothers

Jeff Osborne - Thomas Weisel Partners

Pavel Molchanov - Raymond James

SunPower Corporation (SPWR) Q1 FY08 Earnings Call April 17, 2008 1:30 PM ET

Operator

Good morning and welcome to SunPower's First Quarter Earnings Release Conference Call. Today' call is been 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 Mr. Tom Werner, CEO of SunPower. Sir, you may begin.

Thomas H. Werner - Chief Executive Officer

Thank you for joining us today. Today we will report on our first quarter 2008 financial results and update you on the progress of our strategy. We will provide guidance for the second quarter and update our full-year 2008 forecast.

First quarter was characterized by strong operational and financial performance. We had increasing margins, a steady supply of silicon and the expansion of our global footprint. Financially our first quarter performance once again exceeded our top and bottom-line guidance.

Our Q1, 2008 revenue was $273.7 million or 92% year-on-year with non-GAAP EPS rising at $0.39 per share. Our Systems segment represented 65% of revenue; our component segment represented 35% of revenue.

In addition as Manny will describe in detail. We are raising guidance for 2008 and confirming our outlook for 2009.

In the first quarter SunPower continued to execute it on our long-term strategy of brand, technology, cost and people which we internally use the pneumonic BTCP.

In the quarter we advanced our brand development and leveraged our vertical integration. We supported this positioning with the best technology in the world while reducing cost consistent with our plan to drive cost down by 50% by 2012. And we recruited and retained the best people in the industry.

I will elaborate on how we successfully executed on these strategies in Q1. Let me start with brand in channel. We continue to see the benefits of getting closer to our customers through downstream integration. Enabling us to drive superior customer experience. SunPower offers differentiated high performance solutions across the key market segments. Built on our proprietary technology platform.

In residential retrofit we provide the highest efficiency panels and best-in-class aesthetics. In new home construction we offer superior performance aesthetics and performance monitoring with our SunTile product.

In commercial our T10 Roof Tile system improves energy capture by 10% and installs extremely quickly with no roof penetrations. Lastly in power plants are T20 tracking system delivers up to 30% more energy than conventional fixed-tilt systems. And dramatically reduces site labor and installation time.

Combining our technology large scale systems expertise and our growing global dealer channel we can leverage the inherence scalability of our model respond to rapid changes in the market demand. Reduce risks through geographic and segment diversification and improve customer experience and build brand preference. Let me elaborate with some market and channel highlights from Q1.

In Europe we are leveraging our number one position in United States as we launched our European dealer network and achieved rapid penetration, Germany, Spain and Italy. This is big news as it clearly demonstrates the scalability of our dealer network across global markets.

We grew on 50... over on 50 dealers in three key markets by the end of the first quarter. In Italy, our Solar Solutions acquisition was completed in January and accelerated our market expansion. Where as in Germany and Spain we grew our dealer network organically. To one of these dealers, we installed our first T10 commercial roof tiles system in Europe. Which is a non-penetrating and rapid installation solar system.

North America, we continued to expand residential and commercial dealer network while gaining momentum in commercial bar [ph]. We now serve approximately 170 dealers in more than 25 states.

Turning to highlights across our other channels. New homes, we see solid progress despite a very difficult market for new home builders. In fact, according to a study performed by Ryan S [ph]. Solar is a key sales advantage for new production homes. As evidenced by solar homes selling at approximately twice sales velocity non-solar homes.

And we have just signed two new agreements, an agreement with Woodside Homes for than 1500 homes being integrated with SunTile products in Sacramento. The second being Euroland [ph] that just announced their Lennar community in Southern California with a SunTile system as a standard feature.

In power plants we had another strong quarter. In Spain we have more 45 megawatts of systems under construction, we are on schedule for commissioning in 2008, some of which is supported by our Spain T20 manufacturing facility.

In Italy, we are finding strong initial traction. In the commercial segment we continue our success with Macy's where 14 stores were financed with M&A renewable ventures and we commissioned the first of our seven Wal-Mart systems. Lastly in other solar markets we see solar is now penetrating markets beyond the top five.

We are starting to see traction in many diverse regions outside United States. We completed our first volume shipment to the Japanese market. We further penetrated the Korean market with component sales to Samsung and we are gaining attraction in other western... western European countries like France, Belgium, Czechoslovakia and Greece.

Let me now move on to technology. As you know our channel and brand strategy is built on a different shaded technology. Combination of our high proprietary high performing solar technology and enhance solar energy collection system provides us with the sustainable competitive advantage.

We are on track with our technology roadmap across our product lines. We continue to ramp our generation two solar cells which have an minimum efficiency of 22% up to 50% greater than conventional technology. And we have started the development of our second generation, automated panel manufacturing line.

We also completed our T20 manufacturing facility in Spain in support of more than 45 megawatts of power plant projects. The T20 utilizes our proprietary tracking technology to deliver 30% more energy that its traditional fixed-tilt system. And it includes several advancements from our newest design as-well-as customization for the European market.

Now let me cover our cost reduction strategy. This is a third element of our overall strategy. Our plan is to reduce installed systems cost by 50% by 2012. We expect to accomplish two-thirds of this by 2010. Our ultimate metric for success is levelized cost of energy majored in cents per kilowatt hour.

Levelized cost of energy is the total systems cost divided by the net present value of the energy produced over the life of the system. Reducing levelized cost of energy or LCOE is quick to rise market elasticity over time. So in terms of cost reduction let me first cover silicon.

Generally we expect poly to remain tight this year and potentially in 2009. At SunPower we have contracted polysilicon to support 100% of our capacity expansion plan. In 2008 we forecast SunPower polysilicon cost to decline 10% as a result of delivery under our new contracts.

M.Setek and DC Chemical production ramps are going well. And M.Setek successfully performed the required maintenance in Q1 in all of their reactors are up and operating as planned. DC Chemical will ship in according to schedule and specifications.

More than half of our 2008 poly will be supplied by M.Setek and DC chemical. Our other polysilicon partner's construction schedules are advancing as expected. Within manufacturing we are implementing a wide range of initiatives to improve installed systems cost.

For example, silicon usage improved to 6.3 grams per wide [ph] in Q1 due to higher conversion efficiency in wafers. A transition from a 165 micron wafers to 145 micron wafers is on track so that all lines will run on a 145 micron wafers by year end 2008.

In our factory we are getting economy scale as we ramp our leading Gen 2 technology, finally we are moving to a larger-format panel which is reducing both our manufacturing costs and customer installation costs.

With the out bound channel of a solar system accounting for approximately 30% to 50% of the overall installed cost, we have a significant opportunity to leverage our vertical integration to drive down costs. Examples include, within our dealer network we are building infrastructure to support scaling of their businesses. The scaling includes lead generation, logistics, warehousing, training and financing.

In our Systems business we are moving labor out of the field by developing factory assembled designs scaling our supply chain and logistics and reducing our building materials through design improvements in our T20 tracker. We have accomplished these cost reductions while delivering systems that have superior energy collection characteristics, including the worlds highest energy conversion panels with superior real world performance. And unique low-cost mounting and tracking systems where we collect up to 30% more of solar energy.

Combining near term cost reduction initiatives with modest ASP declines in the second half of 2008. Forecast whereby we will attain our 30-10-20 model non-GAAP by Q1 2009. Finally our team is growing to meet our growth plans we added approximately 250 people during the quarter as our team is now approaching 3700. We continue to attract top quality people to our company and I want to thank them for their hard work in the first quarter this year.

Let me end by spending a few minutes talking about market growth and dynamics. Winery [ph] went strong across movable geographies. Solar is now becoming in mainstream alternative to conventional electricity generation.

In California, Southern California Edison is seeking rate based treatment of large scale deployment of distributive roof top TV.

In Europe, we see robust demand in Germany and Spain strong growth prospects in Illinois this year. In Asia, more opportunities are opening up, as new leading regional players look to invest in solar. Around the world demand is emerging outside of established solar programs.

The policy driven markets, political fundamentals continue to favor extended or expanded support for faster solar penetration. Solar has proven to be, a reliable, renewable resource of power with little downside risk.

Earning to supply, SunPower is positively positioned when silicon becomes more abundant. We've been planning for significantly increased competition in abundant sour can supply for several years, and we are positioned for success in this new market.

Industry would be driven by increased demand, as solutions become more economic, companies that are successful in driving cost down faster than ASPs while delivering superior customer solutions will succeed.

SunPower's model is designed to achieve and maintain margins as the market evolves. So we are all... we are well positioned for long term growth. In summary we continue to execute on our strategy of BTCP which is brand, technology, cost and people.

I'd like to turn the call over to Manny Hernandez. Who will report details of our 2008 Q1 results and provide initial guidance for Q2 2008. Update our previous guidance for fiscal year 2008. And confirm our preliminary 2009 for revenue growth. Manny.

Emmanuel T. Hernandez - Chief Financial Officer

Thanks Tom. Good morning everyone and thank you for joining the SunPower earnings conference for the first quarter of 2008 which ended March 30th.

I would like to remind everyone that during the conference management made and will be making statements that are not historical in nature. Please consider to statements as forward-looking pursuant to the Private Securities Litigation Reform Act of 1995. Those statements are based on our current expectations and are subject to certain risks. Please refer to our press release and our SEC filings for a more detailed discussion of those risks. Also please note that we have posted a supplement on data sheet related to our historically performance on the events and presentations page of our Investor Relations website. So please visit there and get more information if you wish.

Let me now give you a summary of our 2008 first quarter financial results for the combined company and our segment. We had a great quarter. Total SunPower revenue for the 2008 first quarter was $273.7 million exceeding our guidance of $230 million to $250 million, that's up 22% from the prior quarter revenue of $224.3 million and up 92% form the year ago quarter of $142.3 million.

The first quarter's performance was aided by continued strength and demand in both our component and segment... system segment as well as all our channels. This was a great start for us in 2008 and also marks our first quarter at a $1 billion annual revenue run rate. Since going public 10 quarters ago.

Our component segment accounted for $94.9 million of our first quarter revenue exceeding our guidance of $75 million to $77.5 million representing a 6% decline from the prior quarter revenue of $100.4 million as we allocated more SunPower panels to our systems project.

Our system segment accounted for $178.9 million of the quarter's revenue, also exceeding our guidance of $155 million to $172.5 million representing a 44% increase from the prior quarter revenue of $123.9 million.

Our system segment represented approximately 65% of the company's total revenue in Q1 versus approximately 55% in the prior quarter. Please note that the ultimate sale of a SunPower manufactured panel which are allocated by the company to the system segment is reflected as revenue of the system segment.

In the 2000 first quarter, approximately 38% of panels installed in our systems project were SunPower manufactured solar panels. We expect this allocation to grow to approximately 50% plus for the duration of 2008.

Now let's cover our earnings. On a GAAP basis, SunPower reported operating income of $14.8 million and a diluted net income per share of $0.15. This figures include non-cash charges for amortization of purchase accounting intangibles of $4.3 million and non-cash stock based compensation expenses of $14.5 million.

Also included in our first quarter GAAP result is a $2.2 million non-cash one time asset impairment charge relating to the discontinuation of our imaging detector business and $3.3 million charge for the write off of certain solar manufacturing equipments which has been obsolete by a new process.

On the non-GAAP basis adjusted to exclude non-cash charges for amortization of intangible assets, tax based compensation asset impairment and equipment write off. SunPower reported a total operating income of $39.1 million and a diluted net income of $0.39 per share. Exceeding our guidance of $0.33 to $0.36 per share.

This compares with the prior quarter's operating income of $32.4 million and a $0.39 diluted net income per share or $0.32 per share on the tax normalized basis. The Company's overall GAAP gross margin for the first quarter was 19.5% whereas our non-GAAP gross margin was 24% which was within our guidance. And this margin was influenced by our Systems segments accounting for 65% of quarter's revenue. This compares with last quarter's non-GAAP gross margin of 25.3% which was aided by a higher mix of high margin sales from our Systems segment.

In the first quarter our system segment posted non-GAAP gross margin of 23.3% which was within our guidance of 23% to 24% while our component segment posted gross margin of 25.4% 200 basis sequential improvement from the prior quarter. But lower than our guidance.

Our component segment gross margin benefited from higher volume and modestly higher average selling prices in the quarter. The increase in component gross margin however was tampered by stable silicon cost rather than our expected slightly declining silicon cost as we secured incremental silicon supply to improve our factory linearity in the first and second quarters of the year.

I'll talk more about this later, but looking forward for the second quarter, we expect our first meaningful reduction in average silicon costs which will contribute to our estimated 510 to 610 basis points improvement in our component segments gross margin.

I'd now like to go through the balance sheet and highlight a few points. We ended the first quarter with cash including short and long term investments and restricted cash of approximately $357 million. This includes approximately 39 million of auction-rate securities, which I'll discuss more later.

Our DSO was in line actually grew slightly to 52 days, while our net inventory ended at 82 days, up 8% from the prior quarter. The growth in inventory days represent our slightly higher silicon inventory, but more notably our staging of inventory for our big Spanish large scale projects that have significant planned revenue in the second quarter.

Our total capital expenditure for the quarter was $51 million, as we continue to estimate total CapEx for the year at the same range, $250 million to $300 million as we've disclosed before. Depreciation for the quarter was $10 million, and we estimate full year's depreciation at approximately $52 million.

Now, at the last earnings call, I took some time to walk you through certain elements of our working capital, specifically those accounts that are relevant in the construction or project-based business such as cost in excess of billings or you might think of it as unbilled receivables as well as billings in excess of cost, or you may think of them as unearned revenue. You will note in our balance sheet that came with the press release that this accounts has significant changes, cost in excess of billing increased by $23 million, and billing in excess of cost decreased by $42 million.

This changes essentially represent an increase in working capital in the quarter and this primarily relates to timing of billings on our significant European project, which have significant revenue plan for the second quarter. A significant portion of this receivables have already been billed right after the quarter ended.

As I noted in the last earnings call, this accounts will be influenced by the type and size of projects that we undertake as well as the project billing milestones and added contractual terms that we enter into as well as the timing of when we end our quarters.

Further on the balance sheet, in the fourth quarter of 2007, we reclassified our $425 million of convertible debt to current liability because they hit the stock price trigger that made them convertible in the first quarter of 2008. Incidentally, none of those bonds were converted during the quarter, and given the recent trading price range of our stock, this convertible debentures are no longer convertible during the second quarter.

Today, once again been reclassified to long term debt. We will continue to make this determination every quarter and advise our bondholders accordingly. Lastly, on the balance sheet, as we have highlighted in our recently filed 10-K, SunPower has approximately $39 million of auction-rate to the loan type securities. That's out of our total cash of $357 million.

Due to the current lack of liquidity of this investments, despite there being high quality, AAA, federal government backed, we recorded and then realized evaluation allowance like most companies have done, of approximately $1.4 million in the quarter and charged that to what you call other comprehensive income. That's in the equity section of our balance sheet therefore it was not a P&L impact. We will periodically assess the liquidity of the securities and make the appropriate adjustments as we go through time.

Now let me talk about guidance, but before that let me reiterate as we do every quarter that our business results may reflect orderly shift and mix within Systems and Components segment revenue. Also from quarter-to-quarter we expect shift even within the Systems segment due to size and type of projects and percent completion factors that could lead to non-sequential or marginal growth in revenue, margins or earnings. Our margin mix between segments can also be influenced by the allocation of SunPower manufacture panels that assess Systems segment.

As we progress towards 2008, these factors will continue. So following our guidance for the 2008 second quarter, revenue of approximately $330 million to $350 million comprised of Components segment revenue of $95 million to $100 million. And Systems segment revenue of $235 million to $250 million. You will note that the high end of this guidance that our Systems segment is projected to be approximately 70% of the company's revenue in the second quarter. And quite interestingly actually could register it's first $1 billion annual run rate as a segment.

Gross margin for 2008 second quarter is estimated to average 23% to 24% heavily influenced by the Systems segment mix in that quarter. Components segment gross margin we're guiding to 30.5% to 31.5%, just a 510 to 610 basis points improvement from Q1 benefiting from increased manufacturing volume, continued cost reduction and yield improvements, as well as our expected first meaningful reduction in average silicon cost.

Systems segment gross margin we're guiding to 20% to 21%, heavily influenced by large-scale type project in Europe and that also contains a continued use of third party product. Non-GAAP EPS for 2008 second quarter is estimated at $0.48 to $0.52 per share.

For the fiscal year 2008, we are raising our guidance for our non-GAAP results as follows: Revenue of approximately $1.3 billion to $1.375 billion, estimated to be comprised of Components segment revenue of $490 million to $510 million, and Systems segment revenue of $810 million to $865 million.

Total company average gross margin for the year is estimated to average 26% to 27%, comprised of Components segment gross margin of 34% to 35%, and Systems segment gross margin of 21% to 22%. Just is a couple of notes here on the Systems segment, we have demonstrated improving margins in the segment, and we expect continued improvement in 2009, and I think the most important thing to note is management is managing the mix of this segment such that we achieve our model of 30 and 20 that is 30% gross margin, no later than the first quarter of 2009.

Non-GAAP EPS for 2008 is also been increased now to $2.10 to $2.20 per share. And please note that the estimated tax rate for 2008 remains at 24% to 25% non-GAAP. Just an additional note for 2008, though we've already provided you detailed guidance for the second quarter, we would like to give you some early directional guidance that our third quarter revenue in 2008 will likely be flat without [ph] the second quarter.

You'll note that our guidance will point you to continued growth in the second half of the fiscal year, but did not want you to assume linear growth between the quarters. Now lastly, we would like to reiterate rough and early guidance for 2009. We continue to expect to grow our revenue at least 40% of the now increased 2008 guidance or at the rate higher than projected for the industry. We also expect our earnings to grow at this rate or slightly higher.

Just a last point of guidance for completeness on average selling prices, we expect stable ASPs in the second quarter of 2008. We expect low single digit declines in ASPs in the second half of this year. And as we've said before, expect low double-digit decline in ASPs in 2009.

I may now turn it over to Tom to lead us through the Q&A session.

Thomas H. Werner - Chief Executive Officer

Thank you, Manny. I will open the call to questions now. First let me introduce who is with me, we have Howard Wenger, our Senior VP of Global Business Units; Peter Aschenbrenner, our VP of Corporate Strategy; Julie Blunden, our VP of Public Policy and Corporate Communications; Mike Armsby, our VP of Finance; and Bob Okunski, our new Senior Director of Investor Relations.

So we'll proceed to questions now on... we do have quite a few people on the call, quite a few people in queued to ask questions, so if I could ask you to ask one question and a follow-up and if there is more I would ask you to re-enter the queue please.

Michelle you can take questions now.

Question And Answer

Operator

: Thank you sir. [Operator Instructions]. Mark Hiller [ph] you may ask your question and please state your company name. We'll go to the next question. Densely Patel [ph]. You may ask your question. Please state your company name

Unidentified Analyst

: Yes, good afternoon. Congratulations on the strong results of PowerLight. last quarter you wanted to sell 50% of your SunTile modules to PowerLight. Did that come up short and why?

Thomas H. Werner - Chief Executive Officer

So I'll turn it... Jessy [ph] this time Tom, I'll turn that over to Manny remember we call our Systems segment SunPower systems, if you could help us brand that?

Unidentified Analyst

Sure.

Thomas H. Werner - Chief Executive Officer

Manny?

Emmanuel T. Hernandez - Chief Financial Officer

Hi Jessy [ph]. It didn't fall short. Our stated plan for allocating products to our Systems group with characterized as about 30% in '07, increasing to 50% in '08, and eventually 70% or better in the following year. So we are essentially in transition to that mode, Jessy [ph]. For that quarter 38% of systems used SunPower product and we expect that to increase again in the second quarter as planned.

Unidentified Analyst

: And my follow up would be, you expect DCC and M.Setek to contribute roughly half of your '08 requirements, and I'd like to know what percentage did the suppliers contributed to Q1 and what are they expected to contribute as a percentage of your total for Q2?

Thomas H. Werner - Chief Executive Officer

Jessy [ph] its going to require me to do a little of digging into my work sheet here, so I'll answer, its going to take me a couple of minutes, so go to the next question and I will answer that.

Unidentified Analyst

We do... I am just trying to get a sense on how strong the ramp is? How accurate [ph] it really is?

Thomas H. Werner - Chief Executive Officer

Yes I understand that... let me... I don't have the numbers with me.

Unidentified Analyst

Okay great thank you.

Thomas H. Werner - Chief Executive Officer

Just give me a minute.

Unidentified Analyst

Question number third.

Thomas H. Werner - Chief Executive Officer

Ask please.

Unidentified Analyst

There's been some noise around the industry about some talent loss within the Systems business and could you just comment if that's true?

Thomas H. Werner - Chief Executive Officer

Yes, noise is appropriate characterization. There is no talent loss from my knowledge and in fact we've added dramatically to the Systems business in Q1. So none.

Unidentified Analyst

Great.

Thomas H. Werner - Chief Executive Officer

Next question please.

Operator

Thank you. Steve O'Rourke you may ask your question and please state your company name.

Steve O'Rourke - Deutsche Bank

Thank you Steve O'Rourke from Deutsche Bank. You kind of gave some preliminary guidance on Q3 on revenue and obviously revenue growth slows in second half '08. Can you help us understand how you see the market dynamic evolving in second half '08, what the regional drivers are?

Thomas H. Werner - Chief Executive Officer

Sure I am going to ask Howard Wenger to take that question please.

Howard Wenger - Senior Vice President, Global Business Units

The demand continues to be very strong, there are really very strong demand fundamentals throughout our business and across all of our channels and geographies. And we expect to have a very strong finish to the year in the second half of 2008.

Steve O'Rourke - Deutsche Bank

Can you comment just a little bit on what you see? What's driving the slowdown shall we say in growth in Q3? What's going on in Spain for example?

Howard Wenger - Senior Vice President, Global Business Units

So we are... from quarter-to-quarter, we have a shifting mix between our Systems business and Components business, and you might recall in last year, in Q3 we had a very strong Systems contribution to overall revenue. We are seeing that again in Q1 and projecting that for Q2, and I think you can continue to see that pattern of strikes [ph] in one channel versus other channel. For example in Q4 of this year, you'll see the Systems channel again pulling perhaps more of the loan relative to our components than this. So it's something that depends on the cycle of our projects and has nothing to do with the overall fundamentals for demand.

Thomas H. Werner - Chief Executive Officer

And Steve, I would just add that realizing we have beat Q1 and raise the year so we are offering a favorable picture, and the way we guide on because we are vertically integrator we have visibility to our customer demand. We guide what I would say is consistent with what we have clear visibility to, which is relative to some other people might be conservative. And then let me answer Jessy's [ph] question, Jessy, I'll just give the number... the number is approximately 50 metric tons increase Q2 on Q1 from those new suppliers rather than work percentages. Go to next question please.

Emmanuel T. Hernandez - Chief Financial Officer

Can I just... sorry Michelle. Steve, sorry I just wanted to make sure that we characterize the half the second half correctly. Second half is actually based on our guidance projected to grow or be bigger than the first half. At the lower end of our guidance, the second half is at least 12% bigger or at the higher end of our guidance is 24% bigger. So I just want to make sure that we don't conclude that the second half is slowing down.

Steve O'Rourke - Deutsche Bank

No, I, understand full well, just the growth seems to slow a bit and it is obviously concerns in places like Spain when you think about tariff reductions. I'm wondering if you are seeing that kind of an impact that's all?

Emmanuel T. Hernandez - Chief Financial Officer

Okay, thanks.

Thomas H. Werner - Chief Executive Officer

Yes let's say, Steve to close that. We have very strong visibility and we have no... there is no signal here of caution in Spain.

Steve O'Rourke - Deutsche Bank

Thank you.

Thomas H. Werner - Chief Executive Officer

Next question please.

Operator

Thank you. And John Hardy, you may ask your question and please state your company name.

John Hardy - American Technology Research

Hey, guys thanks for taking my call. Now regarding the second half of '08 sort of out of the way. I was wondering if you could comment on the visibility into 2009 as you gave pretty strong guidance there. What percentage of that revenue guidance you have under contract now and what the geographic mix might look like?

Thomas H. Werner - Chief Executive Officer

You want ASPs as well?

John Hardy - American Technology Research

Sure why not?

Thomas H. Werner - Chief Executive Officer

Sorry John, it's top order. Let me start by just giving you an overview. So again but [ph] via our vertical integration strategy of course we touch customers and they work directly with those that are using the product. So we have a very good sense of the dynamics both for '08 and '09. And as I said sort of the macro environment is very favorable towards policy expansion. There hasn't necessarily happen definitively yet in all markets, and perhaps I'll talk about that more later throughout this call. But our customers reflect that optimism, so our engagement with their customers is readily just the guidance that we gave, which we see is very solid position that's a very solid sense of the future.

So I would give you that as a preamble and Howard I don't know if you want to add any detail?

Howard Wenger - Senior Vice President, Global Business Units

I would only add that we've been very practically building demand on a multi-year basis. Now off for sometime and that's paying off. So in addition to... the vertical integration is giving us the visibility, as Tom mentioned. And we're seeing some new emerging markets, and some new emerging sectors, such as very large-scale Systems coming into play, that's providing [ph] us increased visibility and confidence as we go into 2009 and beyond.

Thomas H. Werner - Chief Executive Officer

Okay. John just a follow on if we can keep going.

Operator

Next question comes from Kelly Dougherty you may go ahead and please state your company name.

Kelly Dougherty - Calyon Securities, Inc.

Thanks, Calyon Securities. Hey, congratulations guys, just wanted to know... we are all aware of this large utility project that was just shift announced, and I won't necessary ask you if you are a part of that but feel free to share with us. I'm wondering if that's what you see with the U.S. market going forward if that's more than norm can have huge projects with multiple suppliers or are things more on the size of not less [ph] driven smaller than that way you expect going forward?

Howard Wenger - Senior Vice President, Global Business Units

This is Howard. We see a, continued strong demand in the U.S. in all segments. As you know we're the leader in the residential segments as well as the commercial large scale segment in the U.S. and we're seeing fundamental demand across all segments as to the emerging piece of that is something that we are very well positioned for we're working on. I'm talking about the large scale... very large scale systems working with utilities and energy providers and with our technology and our tracking systems we are better well positioned to take advantage in that.

Kelly Dougherty - Calyon Securities, Inc.

I appreciate that but I guess my questions was, do you expect these orders of magnitude about your projects to be what's happening going forward that are likely going to use multiple suppliers, or do you think that most utilities are looking to do things on a much smaller scale?

Thomas H. Werner - Chief Executive Officer

Yes, this is Tom I'll just brief a comment and I'd say that the utility on... the way the utilities are going to evolve in this space is unclear and each of them have a different approach. I won't say... that there are... the significant utilities are extremely active and sure you know how they might go about deploying PV its important to note that no utilities to my knowledge has actually done EPC of PV projects nor is it their core strength so a company like SunPower is a nice compliment to whatever approach each of these take. And add more to the core of your questions the RPSs that the utilities have... are real and are driving lots of opportunities. So is your trend not yet... is or likely be a trend we think so.

Kelly Dougherty - Calyon Securities, Inc.

And do you get the impression that people or the utilities I guess are just assuming that the ITC will be expanded to cover them and then working forward kind of proactively under that assumption?

Julie Blunden - Vice President of Public Policy and Corporate Communications

This is Julie Blunden. I think we can say definitively that the utilities are actively engaged in helping to move the ITC forward. The Edison Electric Institute is definitively behind both PTC and ITC extension because of the reason Tom pointed out, is not in the utilities best interest to miss their RPS goals. In many states they get financially to do so, so is very constructive to have EI as engaged to they are right now in DC.

Kelly Dougherty - Calyon Securities, Inc.

All right thanks for the comments

Thomas H. Werner - Chief Executive Officer

You got next question Michele.

Operator

Thank you Pierre Maccagno you may ask your question and please state your company name.

Pierre Maccagno - Needham and Company

Needham and Company congratulations Tom and Manny. If you could just comment on the ASP you said the second half a low single digit and then 2009 low double digit. So from what you see in the market what do you see is the main driver here is it the lower hidden tariff is it the greater supply of silicon. What is it that you see?

Thomas H. Werner - Chief Executive Officer

So we are going to have... I am going to have Howard answer that question I mention just really quickly this is Tom by the way. I mentioned really quickly we are probably a little different than most solar companies in our prediction or preparation for single digit decline in most double digits in '09. Part of that is phrase we set run the company and that's only the paranoid survive and we think its a good position to be in that you are also prepared. Having said that is a back to Howard.

Howard Wenger - Senior Vice President, Global Business Units

Yes I think it's very difficult to predict ASPs going way out into the future. But we are preparing for more abundance of silicon. We are preparing for the need to reduce ASPs and with that we get higher demand and that's just part of our plan. We have been wrong in the past as you've seen we've been able to maintain or increase our ASPs in the last couple of quarters. So we'll keep a sharp eye on that... but this is our best deal at this time.

Thomas H. Werner - Chief Executive Officer

And I think Pierre when you look to '09, that short answer to your question is, yes, the structure of the significant incentives have declines it build into them and some of them are driven by volume and not time. So the short answer to your question is yes, it's incentive driven, is the core of our thinking.

Pierre Maccagno - Needham and Company

Okay, great, thanks.

Operator

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

Satya Kumar - Credit Suisse

Yes, thanks, from Credit Suisse. I just wanted to get a clarification. You mentioned earlier on that your '09 revenue guidance was 40% or more is more than what you think the market will grow. But if you look at the supply projections almost the growth of 80% to 100%. I guess in a sense what you disagree with more of the supply projections or do you think that your ASP should be down less than what it might for other companies?

Thomas H. Werner - Chief Executive Officer

Sure, we are going to have Peter Aschenbrenner, our Vice President of Strategy take that question.

Peter Aschenbrenner - Vice President of Corporate Strategy

I think our view is that we are confident and be able to grow faster than the market as a whole. Market growth has been little bit difficult to predict in the past and is based on demands at the end of the day not supply. So aside from the how much polysilicon supply is coming on win part of the debate. We view market growth at the long term historical rates of 40% is being a good base line for us and we're confident to be able to grow faster than that.

Satya Kumar - Credit Suisse

Okay and just quick question on your Q1. I thought you guys had a quarter there with revenues coming in $35 million above the midpoint of your guidance. I recall back in January, your revenue guidance was actually below consensus back then given that you had a significant upside below 50 guidance. I was wondering what the priority on the quarter relative to your guidance that you had the upside in Q1?

Thomas H. Werner - Chief Executive Officer

All right let me see if I can paraphrase and you can tell me. If I got it right. Your question is why did you guide 230 to 250 and then come in 35 ahead what caused that?

Satya Kumar - Credit Suisse

Yes, it seems like Q1 was a bit below consensus to begin with and perhaps you had some visibility there to be in bit more aggressive or was there something to surprised you positively in the quarter?

Thomas H. Werner - Chief Executive Officer

First I... this is Tom. First I would say that thank you to the project teams and the construction management teams they are executing very well in our projects and Spain are very much on track and they are doing a great job. Secondly as we've said on previous call are consistent with previous calls we plan our silicon based on the expected value of silicon. And in another words probably weighted and in Q1 things came in favorable in terms of our probability rating and we capitalized on that.

Satya Kumar - Credit Suisse

Awesome thanks.

Operator

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

David Edwards - Morgan Stanley

Hi from Morgan Stanley. Just a quick question in fact on the sort of second half of '08 question. What you are basically doing is forecasting a fairly significant jump up in Q4. And wondering if you could walk through some of the little bit more detail or visibility you have, especially with the concerns around regulatory changes that may or may not happen towards the end of the year. You obviously got lot of confidence on what could happen at the back end of the year?

Howard Wenger - Senior Vice President, Global Business Units

This is Howard so that's right you got us spot on we are very confident about the second half of the year and our Q4. As you know the ITC runs through 2008 and so any projects that gets installed in 2008 we get benefits from that. We also have Italy coming online market. Obviously we have Spain and we have some projects there that are in the queue. And so we have quite a bit of visibility going into the second half of the year and that's what's driving it.

David Edwards - Morgan Stanley

Okay. Thanks

Operator

Thank you.

Thomas H. Werner - Chief Executive Officer

All right. Next question please.

Operator

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

Al Kaschalk - Wedbush Morgan Securities, Inc.

Wedbush Morgan. Tom just a follow up on where everyone seems to be refocusing on, is it fair to say... your numbers or even the strength of the business is not dependant on success of policy in the U.S. And then Europe, particularly a couple of market just sided, again provide significant strength. Now that we seen the order patterns and customer opportunities remain very robust. Regardless of if you take the market in whole. And the U.S. market is really just a small portion currently. I was wondering if you could comment?

Thomas H. Werner - Chief Executive Officer

Yes, I actually wanted to comment on that, I think there is some really interesting things here. If you look at SunPower's history of our regional mix of business. Which is now posted so it's to look at, on you can see that it moves around significantly. We see that as an advantage, we see our ability to... on move through markets as they grow as a significant advantage to our company is demonstrated historically as you look... look back on the regional mix... and what we talked about in our prepared comment was there are lot of new markets Italy is one that everybody knows about it there are lot of other new, markets that are becoming... and it's very important. And as you point out some of those markets could catch up with United States.

The other comment I'd want to make is, when you look at energy in general, and you think of that the probability of incentives staying positive for solar. The sort of this macro studying that fossil fuel drive power is becoming more and more unstable and obviously more expensive. So there is an obvious preference or desire to move to renewables and when you look at renewable options there are only a couple that they are promised. And we believe solar is one of those and solar is providing a lot of jobs. So, yes I think that we can offset movement of ITC in the state... in United States and feed in changes in Spain, by other countries. Although having said that we expect those changes, end up in a favorable way sometime this year.

Unidentified Company Representative

If you would.

Thomas H. Werner - Chief Executive Officer

I could I'll just have Peter add to that just little bit.

Peter Aschenbrenner - Vice President of Corporate Strategy

Just to provide a little more granularity on some of the moving parts that might not be immediately visible at the surface. With our three channels, the components that sale of solar cells and modules. Our hard network, the dealer network and then the systems business. We have different cycles for the development of those channels in the given territory. And what you see is that we are able to very quickly enter new markets with components channels test of waters establish relationships.

When things appear to be going in the right direction we move in with war and now you are seeing in Europe very rapid build out replication of what we've done here in the U.S. So we have that strong infrastructure back office, internet portal et cetera to support that. And then when we've had a really solid market which characterize usually what we consider a long-term policy support, good sound wave, high electricity rates. We can go on with the systems channel and really mind deep load, mother load which we're doing now in the Spain. And starting to do in Italy and I think you were confident in doing in North America over time as the policy environment clarifies itself.

Al Kaschalk - Wedbush Morgan Securities, Inc.

That's you did not expect drop in backlog, even though you don't talk about that in terms of what you are seeing in the U.S. Because the market many markets remain very robust.

Thomas H. Werner - Chief Executive Officer

Yes if you mean drop in backlog generally speaking rather than regionally speaking. Yes, does that answer your question we do not expect to drop in backlog.

Al Kaschalk - Wedbush Morgan Securities, Inc.

Thank you.

Operator

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

Stuart Bush - RBC Capital Markets

Yes RBC Capital Markets. Tom you mentioned that poly could code uncode potentially be tight in 2009. Which are you more concerned about the incremental supply expected or risk projected demand levels on a relative basis?

Thomas H. Werner - Chief Executive Officer

Alright and when you say incremental supply you mean for SunPower or for industry.

Stuart Bush - RBC Capital Markets

For the industry.

Thomas H. Werner - Chief Executive Officer

Its interesting that supply of silicon in an odd way no longer it takes for silicon to come online its actually an advantage for SunPower because our partners are delivering in... we have a great relationship and they doing an awesome job. So its become a competitive advantage. So to the extent that silicon is short for the longer period of time that's actually a positive... so and the demand environment also I alluded to in previous answer seems favorable of the two I'd say on I would have to pick demand again because we are paranoid. But both look good right now.

Stuart Bush - RBC Capital Markets

Okay great. And then you talk about flexibility in your business model. What if the margin offsets downstream. So can you talk little bit more in detail about how it works when panel prices decline in the market. Wouldn't the system prices come down too or how do you see that margin expansion work on the system side if... in areas where tariffs levels dictate what the IRR is on return?

Thomas H. Werner - Chief Executive Officer

So I think I'll make a couple of points and Howard or Peter may want to add on. On channel strategy whereby we have a components channel and we have the bar channels and systems channel allows us to enter markets in either one or all three of those and as Peter alluded to sometimes we enter our market with the components channel, to supply that market and understand that dynamics on more clearly on and then we can not bring in the other two channels.

Now, in terms of panel pricing goes down, within systems pricing follow. What our customers look at is a price with the end economics that they are looking at, through the economic parts of the decision, is cost per kilowatt hour or cents per kilowatt hour. And of course, as a company, we forecast what we think the pricing will do and then we drive the cents per kilowatt hour equation which obviously means cost reduction which is silicon conversion efficiency downstream channel cost. And then we drive the energy delivery up which is the T10, T20 products that we talked to in our prepared comments. And the combination of two obviously one was the cents per kilowatt hour so we drive that faster then the expected decline in modules.

So it's a long way indeed, yes. Module prices come down there is a correlation to systems pricing coming down we've obviously built that in and our driving our cost roadmap more aggressive then we expect that to happen. Having said all that let me ask Peter to just add a couple of comments.

Peter Aschenbrenner - Vice President of Corporate Strategy

I'll be quick Stuart I mean in our view the system prices are system prices are set by tariff levels or investors returns. In the absence of territory, in addition to them and some of the other structural, financial and weather issues within a territory. Module margins are really set by or the distribution margin within the value channel and has effected by demand supply balance. So, the first thought about this thing are independent, over time we would have expect system prices to be given by the overall press passes recruited [ph] for the product.

So over time that will come down if the markets get very large very quickly when that happens. In the near term, the distribution of margin in the current value chain can change and advantage we has as a company is we can pick that up in either spot. We can pick that up in the upstream spot. Through module sales we can pick it up downstream through our systems channel.

Stuart Bush - RBC Capital Markets

Excellent very helpful, thanks.

Operator

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

Mark Bachman - Pacific Crest Securities

Pacific Crest, Tom you had commented that 2009 is said that your customers are optimistically looking-forward. I guess I want to get a sense of conviction level here... may be this is a better question for Howard. But Howard you have signed any contracts for any major projects in Spain with completion dates past the September tariff cut off. And then likewise have you signed any major contracts in the U.S. with completion dates in 2009. And if you could be specific and be answer or quantify your answer in terms of megawatts it would be really helpful?

Thomas H. Werner - Chief Executive Officer

Tom will substitute for Howard at the beginning at least. The answer to your questions is not that we've announce... obviously the nature of my comments indicate that people we do business with... don't think there's some kind of step function in the end of this year, that they are preparing for continuity of business levels and they are very aggressively pursuing continuity. Now let's have to say it, there is an assumption of what will happen if some of the ambiguous parts of the world but other than they are assuming that low workout within a certain range and so the positive indications we're getting obviously is direct interface with those customers.

Tom if you want to add anything?

Thomas H. Werner - Chief Executive Officer

So it's... we're not prepared to announce anything yet Mark.

Mark Bachman - Pacific Crest Securities

Tom, you did stress... cash flow is important in this industry. Are your customers waiting to sign those contracts until the cash flows are guaranteed or do you... if you've signed any contract, did you have to change them at all to offer opt out clauses or cancellation clauses or anything to get them to start booking into after some of these subsidies may or may not lapse?

Thomas H. Werner - Chief Executive Officer

Okay may be to the sure grant [ph] of the team in the room I will answer that question. The markets other than Spain and United States now and there is business in 2009 absolutely. And then in those two markets absolutely that is dealt with between us and the customer. What might happen with [indiscernible] or ITC, it is built into the structure the relationship, yes.

Mark Bachman - Pacific Crest Securities

Okay. And then just one question for Manny, Manny, can you explain your use of restricted cash on the balance sheet and how we should think about that in terms of using these funds or worker capital needs. I am assuming you know that these are all retired [ph], that all these restricted funds are tied to your long term poly contract. Is that correct?

Emmanuel T. Hernandez - Chief Financial Officer

Not really, it's a different class of cash altogether. The restricted cash on our books, totals a 161, that's of the end of March. 38 of that was auction-rate securities that we already talked about. So the balance really represents predominately letters of credit coverage will project that we do.

Ironically they also move around quarter-to-quarter depending on project completion, for instance, we already reduced our decrease of restricted cash by $60 million just last week. So this balance is already too high for example. But just to complete we have certain projects, Mark, where we have to close letters of credit as to guarantee completion of projects and then those, LCs get released on completion. So that's... we arc [ph] cash against those LCs, so that we don't have to pay a lot for it. And it's actually quite economical since we have the cash anyway. So those are predominately what we have in restricted cash.

Mark Bachman - Pacific Crest Securities

If I move those cash out of your available cash spend and I forecast that your balance sheet... what I think your cash flows are going to be, I actually see you needing to revisit the market here in early 2009. Do you see... do you foresee any need for you to revisit the capital markets to show of your balance sheet?

Emmanuel T. Hernandez - Chief Financial Officer

That's from our current outlook Mark, we projected... the current burn on working capital, for example, that we've seen in the second quarter also changes from quarter-to-quarter. For example, we were negative cash flow in Q1 by $65 million predominantly because of their growth in inventory and unbilled receivables. But we see that flexing to positive immediately in Q2, as we collect those money.

So our long term outlook from a free cash flow positive is actually from our modeling get a hit that as early as Q3 '08. We are going to be generating enough cash from operations to actually fund capital expenditures for that quarter. However, we again undertake large projects in Q4 like one of the questionnaire was eluding to earlier, we are going to shift capital again to fund those projects. So I think from a sustainable free cash flow positive position, we are probably looking at '09. So your question of do we need to get back to the market, we don't think so. We have enough cash from operations, and even taking into consideration the restricted cash balance, we have enough to fund our CapEx for the year.

Mark Bachman - Pacific Crest Securities

Thank you so much.

Operator

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

Unidentified Analyst

Its Pierce Hayman from Simmons [ph]. Just followed up on the product question, so Manny you are saying operating cash flow for Q1 was a minus $65 million?

Emmanuel T. Hernandez - Chief Financial Officer

That's correct, minus 65, two drivers to that increase in inventory $48 million, increase in unbilled receivables $23 million.

Unidentified Analyst

And did you were saying you expect that to reverse in Q2?

Emmanuel T. Hernandez - Chief Financial Officer

Positive $30 million to $35 million as we modeled it today.

Unidentified Analyst

Okay. And then my second question is how did SunPower preserve its competitive advantage in the downstream market in light of more midstream players integrating further in the chain? Do you pursue acquisitions or do you look to grow organically?

Thomas H. Werner - Chief Executive Officer

So, this is Tom, and I suspect Peter will want to add onto my answer to this question. On... the answer to your question is both, what acquisitions does for us is it accelerates our footprint. And I suppose its kind of obvious but to a degree we do that effectively, it really accelerates our footprint. We think we're going to be able to accomplish that in Italy as it is a really good example. The competitive advantage in the outbound channel is very much sustainable because it includes elements of design in very large scale projects as well as a strong balance sheet.

And so there is number of variables that you are able to differentiate on. You can think of many industries where the outbound channel has some very sustainable differentiation particularly when there is an engineered content involved on and the examples we've been giving on the last couple of calls are, our T10 products and our T20 products. Its important to note that the T20 product is significantly customized for Europe so it's really a substantial engineering job to take to excess tracking around the world. So the ability to do that is long term sustainable in my view and therefore we are going to continue to invest in that.

Peter, Howard anything you want to add?

Peter Aschenbrenner - Vice President of Corporate Strategy

Just like to point out that there are... we believe significant scale advantages in the downstream business that might not be immediately apparent. And so the ability to serve multiple roller markets out of a single back office for instance that has significant scale. The ability to negotiate with financing partners for financing programs etcetera. These are things that I think some of the emerging mid-tier players are not going to enjoy to the same extent.

Unidentified Analyst

: Great, thank you very much.

Operator

: Thank you. And our next question comes from Colin Rusch, you may go ahead and please state your company name.

Colin Rusch - Broadpoint Capital

Colin Rusch from Broadpoint Capital. Manny, I am wondering if you can give us a little bit of guidance on how you are using... how your foreign exchange assumptions are changing the course of 2008? And giving guidance, are you increasing your ratio of dollars to euros, and how much of that effecting your guidance?

Emmanuel T. Hernandez - Chief Financial Officer

Hi Colin. We have a hedging policy in the company we follow quite rigorously, and its essentially mass driven that why we don't have to guess and speculate. We try to cover our euro exposure in the current quarter up to 80% to 90% of the exposure, and little bit less than that for the second quarter. So although there is some benefit or little bit of hit sometime in a quarter there relatively not significant because of our hedging coverage.

Colin Rusch - Broadpoint Capital

Great so you... the increasing guidance isn't due to foreign exchange assumption changes is that the conclusion?

Emmanuel T. Hernandez - Chief Financial Officer

Right. We generally follow where the exposure is. We make our decision every quarter as to how much of that discovered. So think about it if you are at least 90% covered and your exposure the only flex is really the remaining 10% and that could go either way.

Colin Rusch - Broadpoint Capital

Alright. And then one quick question on pricing in California. I am thinking of some anecdotal data points, but module sales are actually prices are coming down about 5% in modules around the market for down kind of mid single digits. Are you guys seeing that at all in your pricing scheme?

Howard Wenger - Senior Vice President, Global Business Units

This is Howard we are not seeing that for us and that's partly attributed to the strength of our dealer network and the differentiation of our product in the market.

Colin Rusch - Broadpoint Capital

If I can squeeze one quick final one in. As you guys enter non-subsidized RVCD [ph] markets. Just talk a little bit about that process. I mean will you go in likely with an instillation scheme or strategy or are you looking to produce modules and in turn geographies, some more to Ingles [ph] I am just... the Brazilian market or some of the module system sales that we are seeing in India?

Thomas H. Werner - Chief Executive Officer

Yes we got... this is Tom. And that was four question Colin so I am going to give you a really quick one we got to move on. Quick answer that. Our channel strategy allows us to enter new markets as you alluded to with our.. probably recall our Components Group, where we would shelf as the title implies components to dealers. And then as we understand the market, we would perhaps bring in other channels. Terms of module manufacturing continues to be our strategy to automate module manufacturing into eventually do that in region and of course that would be driven by the size of the market.

We should go to the next question, I will tell the people that our in queue, we'll do our best to get your questions, we are going to stay here until close to 12, I apologize for those who you don't want us to [ph] and we'll do the best we can here.

Operator

Thank you. Our next question comes from Michael Molnar and please state your company name.

Michael Molnar - Goldman Sachs

Hello Goldman Sachs. Hello everyone.

Thomas H. Werner - Chief Executive Officer

Hello.

Emmanuel T. Hernandez - Chief Financial Officer

Hi.

Michael Molnar - Goldman Sachs

Just a quick question, a question on the margins and the Systems business the guidance for 2Q I believe is around 20%, 21% and the 30% target for 1Q '09 consolidated implies that these margins will be expanding dramatically. Is that the right way to think about the margins in this segment. And if so can you give some additional details on how this will be achieved?

Emmanuel T. Hernandez - Chief Financial Officer

Hi Michael this is Many. To the first question of Q1 '09 achieving 30% for the company, what profiles should a system margin be, you are correct that 20% to 21% current projection for Q2 will improve to more like mid 20s by then. How we get to 30% as a company however is the component segment will exceed 30% by then and that's how we are managing the companies to get to model as we have committed or targeted?

Michael Molnar - Goldman Sachs

Okay can you give some color on how you are going to expand it, it's just the nature of some of the projects that are in the Systems business?

Emmanuel T. Hernandez - Chief Financial Officer

Sure, sorry. Second piece how do we expand it? Two things one much like the component and factory fees, where we have cost reduction initiatives that too is being done on the systems side. As you heard them talk, we have different products there, T10s, T20s, those are all opportunities for cost reduction as well, but one of the movers of the margin needle is the allocation of more SunPower product to the system's group, which is really the power of what we call margin stacking. And that's what drives most of the margin improvement. But I am not minimizing the cost reduction that our folks doing on the system's product itself.

Michael Molnar - Goldman Sachs

Okay, thank you.

Operator

Mark Manley, you may ask your question and please state your company name.

Mark Manley - Natixis Bleichroeder

Hi with Natixis. Just want to do thoughtful on a production; how many lines are fully ramped on it?

Julie Blunden - Vice President of Public Policy and Corporate Communications

Currently we seven lines that have been ramped and as you will see on the datasheet, that's now available on our website, we have a little chart that conveniently answers the questions we get every quarter. So we'll be ramping line 8 in Q2, two more lines in Q3 and the final two lines of the year in Q4.

Mark Manley - Natixis Bleichroeder

So that indicates fully ramping in that little table?

Julie Blunden - Vice President of Public Policy and Corporate Communications

Those are... thanks for looking at the table. Those are... when they do ramp and generally it takes about quarter to ramp. We identify name plates, so when they began ramp, it's conceivable during the course of the quarter they will start earlier or later. So you have to be careful in assuming a reasonable estimate for average utilization during the quarter.

Mark Manley - Natixis Bleichroeder

And Tom, was commenting earlier was to Satya's question, it sounded like that silicon supply was a limiting constraint on production. Did I get the right or--?

Thomas H. Werner - Chief Executive Officer

So, it's a little complicated, not much there I believe. We try to match equipment capacity to our expected silicon and as I mentioned earlier, we have... our expected silicon is probability weighted in that. So to the extent that supplies exceed what we have expected and we no longer silicon constrained for short periods of time, our operations team have show a great ability to grapple and find new ways to get capacity on line. So we are in a period of time, where there are ebbs and flows, sometimes it's the equipment capacity and sometimes it's silicon.

Mark Manley - Natixis Bleichroeder

And are you are at above name plate paying on some bonds?

Thomas H. Werner - Chief Executive Officer

Probably name plate I will put on... first is the 40 megawatt let's say on a new lines. I would say to you that as we go to in a way for it's higher conversion efficiency, you do get on... the median efficiency of a line may run better and therefore if you try to replicate that across the lines, it's probably early that across line is probably early to indicate that... well it is your indicate that and that are we able to exceed any name plate capacities. Have we done that on a spot basis on one mine for a short period of time? The answer is yes.

Mark Manley - Natixis Bleichroeder

Okay. Thanks very much.

Operator

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

Robert Stone - Cowen &Company

Cowen &Company. Two part question. One, if you can just comment on your production internally in Q1, how many megawatts and a range on it for Q2. And then based on the stock price, there seems to be great concern about the flattish nature of Q3. Could you comment on, how the mix of internal transfer of panels from components to systems might also be influenced in what looks like a flattish total revenue? Thanks.

Emmanuel T. Hernandez - Chief Financial Officer

Let me take the first question. Production capacity for the first quarter of '08 was 38.5 megawatts. That's 20% growth from the prior quarter. We do not disclose our production for the second... for the next quarter. You could assume pretty much significant growth again.

Thomas H. Werner - Chief Executive Officer

And then in terms of what, flattish Q3, we almost want to as a company start guiding for half of year because that's in fact the projects business runs. In fact, one could argue that in three quarters of the year, projects span multiple quarters. So if you overreact to one quarter versus another, it doesn't really give you any fundamental signal into the core business. You almost have to take the average of the two and you see very positive signals in terms of the average of the two.

Now let me comment on margin, because I think you may've alluded to that. The bottom line is, the company we are guiding to attain model, the entire company 30-10-20 by Q1 of 2009. That's the bottom line. As you break that down you have to be careful of overreacting... breaking that down, because you have margins that vary by size of project, by region, by degree of third party utilization of third party and sometimes by which product we chose to use in the field. And that is offset obviously we are looking at a complete set of products and regions and not one at a time. So the bottom line is Q1 '09 model, and you are going to see variation between quarters and we would actually not to overreact to that. It's a multi-quarter business we have.

Robert Stone - Cowen &Company

I agree with you completely. I think the market is that is going off top notch [ph]. My question about the mix was so much about margin, but the fact that when you transfer more panels internally to SunPower system that causes the total revenue to be less than the systems you integrate with third party panels. But it actually has a beneficial margin stacking effect. So I was just wondering if the increasing mix of internally supplied panels is also influencing the Q3 total revenue?

Thomas H. Werner - Chief Executive Officer

Yes, I see. The answer to your question is it's kind of a combination of quarters, that already make a fine switch Q2 to Q3. But broadly speaking across those quarters, the answer is clearly yes and that's... exactly as you said in allocation of some power product, so, yes.

Robert Stone - Cowen &Company

Thanks very much.

Operator

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

Kushal Shah - Lehman Brothers

Yeah thanks. Lehman Brothers. Firstly on margins, I think the guidance for full year 2008, component margins 34% to 35%, I think there is some confusion. I think in last quarter you had mentioned 36.5% gross margins. So the reduction would it be just because of the first quarter lower margins or would it be more than that?

Emmanuel T. Hernandez - Chief Financial Officer

Hi Kushal, it's Manny. It is essentially that. So if you just model based on Q1 actual the profile for the rest of the year, it shouldn't have really changed dramatically for the component group. You will still exit as very nice margin in Q4.

Kushal Shah - Lehman Brothers

Great, thank you. And secondly in terms of your growth rate for 2009, you've mentioned 40% plus. Can you just comment on what kind of growth that you expect for your revenues from the U.S. and Spanish markets combined?

Howard Wenger - Senior Vice President, Global Business Units

Well, this is Howard. The way we look at, yes I will comment to that. We have in our plan, both a favorable or rational resolution of the season tariff in Spain. We also have in our plan, we do expect the ITC to pass. However, we've run a scenario analysis. We have built in auctions into our plan and if either of those don't go the way everybody wants to, we are strong in our guidance and nothing is going to change. We have options. So the specific split depends on what happens, and so we're prepared to move business on and then this... everything came out positively really obviously, then you have our capacity challenge.

Kushal Shah - Lehman Brothers

Great. Thank you very much.

Howard Wenger - Senior Vice President, Global Business Units

I should tell everyone that we have less than 8 minutes left. We will honor that time. I apologize for those questioners we don't get to. We at some point do follow up calls all day, today and tomorrow. So most of have you in queue, we are going to be talking to you on the phone. So, if you don't get to you, I apologize. Next question.

Operator

: Thank you. Jeff Osborne you may go ahead and please state your company name.

Jeff Osborne - Thomas Weisel Partners

Yeah, just wanted to follow up on Howard's response to previous question about visibility over multiyear with your strategy, and I think in the annual report last year you talked about visibility, a backlog of $521 million in the systems business. Can you just talk about how much backlog have you built for 2009? How much visibility after that 40% growth, because I think at that time only about $10 million or $11 million was flowing in 2009?

Howard Wenger - Senior Vice President, Global Business Units

We don't speak for backlog on a quarterly basis, annual basis. I will tell you though that the demand fundamentals and the number of opportunities to strain and we are working 24/7 on the emerging markets that are coming online on the existing markets and in growing our core business as well as the emerging business.

Jeff Osborne - Thomas Weisel Partners

Okay. If you can answer that one can you just give us an update on Italy? What are your expectations there are for megawatts for the country as a whole for this year? You seem to be pretty excited about the back half of the year?

Thomas H. Werner - Chief Executive Officer

Yeah. This is Tom. Let me just characterize this. We are actually resource constrained on kind of dealing with our sales funnel for both '08 and '09. We can add resources fast enough to deal with the incoming opportunities and Italy is... it's early days yet. We only closed the acquisition 60 days ago, but it was a very solid Q1 in terms of how would I think characterize Italy is having the growth potential more than Spain. So hopefully that helps you calibrate some. We are perhaps a year or two behind Spain.

Jeff Osborne - Thomas Weisel Partners

Okay. Thank you.

Operator

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

Unidentified Analyst

Signal Hill Group. Good morning ladies and gentlemen Tom or Howard, if you're going to address this question, how late do you think the ITC can actually be finally resolved here in the U.S before we start to see any adverse influences on the large deal pipeline that require tax equity that's going to look for certainty on the ITC existence?

Thomas H. Werner - Chief Executive Officer

I will just broadly say something and then Howard or Julianne may want to add on. We operate under one of those laws of server dynamics and since its necessity is the mother of invention. So that the lead time it takes for the project, is getting shorter. And normally or I shouldn't say normally, traditionally we would have say six months lead time. I think we are able because it happens faster, so you can obviously do the math and it get you to mid summer. It's already as in earlier question asked, it's already part of the dialogue with customers those who already in the timeframe it's relevant.

Unidentified Analyst

Thanks.

Thomas H. Werner - Chief Executive Officer

And only thing I would add, this is Howard, is that that lead time and that overview Tom just gave is applicable to a portion of business. If the ITC goes away for example, we do not see or anticipate an appreciable reduction in our residential business, which is very strong and on the... we have what we call CVARs, commercial value-added resellers that sell components into the commercial sector for smaller commercial testers. That has actually a shorter lead time from booking to billing to installation.

Unidentified Analyst

Great, thank you.

Operator

Randy Grossman [ph] you may ask your question and please state your company name.

Unidentified Analyst

Hi Randy Grossman, Bearn Capital [ph]. Good afternoon guys. Could you talk a little bit more about the LCOE that you brought up earlier in the call time Tom? How are you competitive on the LCOE basis versus your other silicon and gallium competitors and how does that relate to some of the larger RPs that sort of come out that have been in the news? Thanks.

Thomas H. Werner - Chief Executive Officer

Yes, we weren't competitive on LCOEs, and it would be our duty to diversify technologically and find another technology that allows us to be competitive on LCOE and that is not our strategy. So our conclusion is that we can be the leader on a levelized cost of energy. Now as you work from the large projects, utility power plants towards commercial and residential. LCOE becomes either the predominant or a significant driver of the large projects, in the utility and power plant businesses and less so as you work your way towards residential where power density and aesthetics and the customer experience becomes significant drivers. So it varies by end market but in the end people are buying power, and you have to be cost competitive on that and we are currently and our plans keep us that way or improve it.

Unidentified Analyst

So basically, I mean even though people talk a lot about cost per installs what... it really comes down to the net present value of the electricity cost, and you are basically saying that because of the technology you have, as well as the balance of system technology and cost advantage that you guys are at least as competitive as been Tom expected to be so, over the next few years?

Thomas H. Werner - Chief Executive Officer

Yes.

Unidentified Analyst

Thanks.

Thomas H. Werner - Chief Executive Officer

I think we'll take our last question and then we'll wrap up and we will follow up with the balance of you after this meeting.

Operator

: Thank you. Pavel Molchanov, you may go ahead. Please go ahead and please state your company name.

Pavel Molchanov - Raymond James

Raymond James. Thanks guys. When the utility makes a purchase decision, can you just talk about what their decision process is between solar-thermal which is of course is mainly a utility skill technology in PV?

Thomas H. Werner - Chief Executive Officer

Okay, so your question... last question is utility makes a decision between solar thermal PV, just they make --

Pavel Molchanov - Raymond James

Pros and cons.

Thomas H. Werner - Chief Executive Officer

Yes. Okay we will do... Howard will do really a short version of that. Then will wrap up the call.

Howard Wenger - Senior Vice President, Global Business Units

So obviously the cost of electricity is first and foremost. In fact there are other factors as well and by the way, we believe we are competitive with Solar thermal at a vary large scale, and in the timeframes that solar thermal is anticipated being installed. Other factors include transmission access, land use and I just want to do my final comment, which is a PV can be installed at smaller scale or smaller chunks, 10, 20 megawatts, its modular. We can install it faster, we don't require water. So there are other factors in permitting transmission access, land use that come into play.

Thomas H. Werner - Chief Executive Officer

So the way we would, the strengths that we would lead with is you can rapidly deploy PV. It's proven, we have done very many large projects. You can generate power as you build and you don't need utilities on your side.

Julie Blunden - Vice President of Public Policy and Corporate Communications

And obviously you don't need direct solar, the way that you do first the DSP, if you're speaking specifically about PV versus DSP.

Thomas H. Werner - Chief Executive Officer

You don't need normal sunlight.

Pavel Molchanov - Raymond James

Okay, broader geographic range that you can deploy PV. Alright, because you people won't answer that question but --.

Thomas H. Werner - Chief Executive Officer

So we thank you very much. We had a solid first quarter. We appreciate your time on the call today. We have a very positive outlook on ensuing quarters and we look forward to our next call.

Howard Wenger - Senior Vice President, Global Business Units

Thank you.

Emmanuel T. Hernandez - Chief Financial Officer

Thank you.

Operator

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

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Source: SunPower Corp. Q1 2008 Earnings Call Transcript
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