ANNUAL REPORT 2006 Looking, Lowercostsolarpowersolutions
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WWW.SUNPOWERCORP.COM ANNUAL REPORT 2006 GERMANY BOARD OF DIRECTORS T.J. Rodgers CHAIRMAN OF THE BOARD CHIEF EXECUTIVE OFFICER CYPRESS SEMICONDUCTOR William Steve Albrecht ELEGANT SIMPLE DIRECTOR PROFESSOR & ASSOCIATE DEAN BRIGHAM YOUNG UNIVERSITY Betsy S. Atkins DIRECTOR CHIEF EXECUTIVE OFFICER BAJA VENTURES NEW YORK Thomas H. Werner DIRECTOR CHIEF EXECUTIVE OFFICER SUNPOWER CORPORATION Pat Wood III DIRECTOR EFFICIENT POWERFUL PRINCIPAL WOOD3 RESOURCES MANAGEMENT JAPAN Thomas H. Werner CHIEF EXECUTIVE OFFICER, DIRECTOR Emmanuel T. Hernandez CHIEF FINANCIAL OFFICER PM Pai CHIEF OPERATING OFFICER Dr. Richard Swanson PRESIDENT & CHIEF TECHNICAL OFFICER Thomas Dinwoodie CEO, POWERLIGHT SUBSIDIARY Howard Wenger VICE PRESIDENT, GLOBAL BUSINESS UNITS SPAIN Bruce Ledesma SunPower Corporation is a global leader in solar power. Together with our recently GENERAL COUNSEL acquired PowerLight subsidiary, we apply innovative technology across the entire value chain with the aim of delivering to our customers higher-performance, better looking, lower cost solar power solutions. SUNPOWER CORPORATION 3939 North First Street San Jose, CA 95134 USA (408) 240-5500 ©2007 SunPower Corporation. All rights reserved. Dear Stockholders, We will remember 2006 as the year that SunPower emerged as a key player within the solar power industry. For more than a decade, our company had been known within the industry for breakthrough high-efficiency solar cell technology, but it was during 2006 that we transformed this technology advantage into a major commercial presence. By the end of the year, we were among the top 10 manufacturers by production volume, and our products established a leading market position, voted the top industry brand through a global third-party survey. In November 2006 we announced the acquisition of PowerLight Corp., one of the world’s leading solar system integrators. This strategic acquisition, which we completed in January 2007, extended our reach further down the value chain and gave our company a global market footprint across all of the major application segments. As you can see from the photos inside the front cover of this annual report, we are serving all major segments of the market: residential retrofit, new production homes, commercial and power plants. We are now a leader in each of those segments in the U.S. market. Inside the back cover, you can see the breadth of our geographic reach, from Europe to Asia. On the financial front, we met or exceeded our financial, operational and growth performance goals each quarter. We also closed our $197 million follow-on offering which provided us with sufficient cash to complete several key silicon supply agreements to support our growth in 2007 and beyond. Our manufacturing and technology groups had a long list of achievements during the year: • Doubled solar cell manufacturing capacity from 50 megawatts at year-end 2005 to 108 megawatts at year-end 2006 • Tripled solar cell production from 20 megawatts in 2005 to 63 megawatts in 2006 • Launched initial production of our second-generation solar cells in the fourth quarter 2006 with a rated efficiency of 22 percent, achieving two percentage points improvement within two years of beginning production of our first generation technology A-300 solar cells, which previously held the record for the industry’s best efficiency of 20 percent • Broke ground at our second solar cell manufacturing facility in the Philippines, which will begin production in the third quarter of 2007 • Inaugurated our first solar panel manufacturing facility in the Philippines which will serve as the model for our automated solar panel manufacturing facilities around the world Throughout the year, we announced a host of new technology achievements, new product introductions, new customer wins and awards for our founder, Dr. Richard Swanson, and the SunPower technology team. For a full review of our announcements, please visit our website at www.sunpowercorp.com and click on the “Investors” link on the top menu. We are very proud of our accomplishments in 2006 and the foundation we have built for our company’s continued rapid growth. With the addition of PowerLight, which generated revenues comparable to SunPower’s in 2006, we saw a substantial increase in revenues for our company in the first quarter 2007. Figure 1 shows how our historical revenue growth will take another step forward in 2007, with our stated annual revenue guidance of $640 - $670 million as of the first quarter 2007. Figure 1: SunPower Historical Revenue and 2007 Revenue Guidance $800 $600 $400 $200 $0 2004 2005 2006 2007F During the follow-on offering roadshow, we spoke about the need to address the downsteam portion of the value chain, which accounts for 30 to 50 percent of the cost of a solar system. With PowerLight, we believe we are well-positioned to more rapidly access the $1 trillion global electricity market while achieving and maintaining our business model economics, expressed on a non-GAAP basis as 30 percent gross margin, 10 percent operating expenses and 20 percent operating margin. We chose to acquire PowerLight because it is one of the largest, best-established providers of large-scale solar systems in the world. Also, like SunPower, PowerLight was founded as a product innovation company. For more than a decade, PowerLight has procured solar technology from a wide variety of suppliers and has developed and sold innovative, value-added solar systems to its customers. Together, we believe that we will be able to design and manufacture solar systems that address customers’ needs faster, better and at lower costs than our competitors. PowerLight was the original solar system technology innovation company, developing its flagship product, PowerGuard TM more than a decade ago. PowerLight designed PowerGuard to accept any solar panel, adding insulating material and structural elements to it to create a lightweight, non-penetrating roofing material that assembles quickly and efficiently. PowerGuard turns a building rooftop into an electric generator, and also reduces energy use through the insulation benefits of the PowerGuard system. This product opened up the grid- connected commercial solar rooftop market in the United States about a decade ago with the dual benefits of a substantially lower cost compared to other approaches as well as a radical improvement in customer acceptance. PowerLight was an early adopter of SunPower’s high-efficiency solar panels and we established a long-term solar panel supply contract in 2005. For a given roof area, the same amount of materials and fixed development and sales costs can achieve up to 50 percent more power using SunPower solar panels. That value proposition, which offers a path to lower solar system costs, was a strong motivator for PowerLight to seek a closer relationship with SunPower. Over the past two years, as solar market growth has accelerated around the world, PowerLight has been growing at or above the pace of the industry and adding to its technology portfolio. PowerLight’s PowerTiltTM technology offers 8 to 15 percent more energy production from the same solar panels on a flat roof by tilting the panels toward the sun. Additionally, this product also innovated along the supply chain by seeking to minimize construction on site and creating a product that is nearly pre-assembled when removed from the packaging onsite. This is the kind of product that we believe the combined company will excel at developing with the dual goal of improving performance for the customer while collapsing steps along the supply chain to capture further cost efficiencies through product design. A product example developed by SunPower and PowerLight before our combination yields additional insight into our thinking on the value of product innovation in opening new markets to solar. The SunTile TM is a solar roofing tile aimed at the new production home market. The SunTile directly replaces basic roofing materials and greatly improves the aesthetics of the solar system. This product achieved a substantial foothold in the California new production home market during 2006, its first year of sales. We believe that as a combined company we can leverage this kind of product innovation to open markets by addressing customer concerns and reducing solar system costs. We focus on cost reduction because solar power is a substitute for power purchased from the utility power grid. Today solar power is directly competitive without incentives with retail electric rates in the highest-cost markets around the world. In Europe, Asia and the United States, energy policy is now in place that provides financial incentives to accelerate solar adoption. Most of these programs set up declining incentives that are set at a level high enough to offer tomorrow’s installed cost of solar today. These incentives are scheduled to decline in parallel with declining production and installation costs associated with greater industry scale. Policy-makers’ motivation to establish solar incentives is driven by the inherent ability of solar systems to generate power during peak power demand periods as well as by the opportunity to diversify energy resource portfolios with clean, domestic, distributed solar power. At SunPower, we believe that we can reduce the cost of an installed solar system by approximately 50 percent within five years. When we achieve that goal, the cost of the solar electricity will compete with retail electric rates in much of the developed world and our addressable market will increase by an order of magnitude to hundreds of billions of dollars annually. Because 30 to 50 percent of the cost of an installed solar system is downstream from the solar panel, a manufacturer seeking to reduce system costs by half needs to have a strategy to address the downstream portion of the value chain: racking, inverters, monitoring and other equipment, marketing, sales, financing, installation and service. PowerLight gives us direct access to this portion of the value chain for large-scale commercial, new production homes, public sector and power plant projects.