SunPower (NASDAQ:SPWR) published its Q2 2014 earnings on July 31, posting a set of numbers that were lower on a year-over-year basis. Although the company benefited from reasonably strong sales to Japan and stable ASPs across markets, this was more than outweighed by weaker sales of solar power systems (which likely have better margins), higher operating expenses and possibly the addition of assets to the company's Holdco strategy (explained below). Quarterly revenues fell by around 12% year-over-year to about $508 million while adjusted net income fell by around 30% to about $44 million. Although the results beat market expectations, the stock fell by nearly 4% in Thursday's trading as the company guided for Q3 revenues and adjusted profits that were below consensus estimates. Here is a look at some of the trends that influenced the company's earnings for the quarter and what to expect going ahead.
Trefis will be revisiting its $31 price estimate for SunPower to account for the earnings release.
Overview Of Results
SunPower's systems sales (Non-GAAP) fell by about 10% to around $338 million, while solar products sales remained relatively flat at around $237 million. Adjusted gross margins remained stable year-over-year at around 19.5%. This is likely due to the fact that lower sales of high-margin solar systems were offset by better manufacturing and balance of systems costs. On the utility solar projects front, the 579 MW Solar Star and the 33 MW South African projects are likely to have been key drivers of results. On the distributed generation front, Japan and the United States continued their strong run. Japan has been a particularly promising market for SunPower in recent years, accounting for 26% of Q2 shipments, owing to strong distribution partnerships and a favorable product mix. In the United States, the residential leasing business saw 10% growth in revenues while garnering an additional $55 million in nominal contract payments through new contract signings.
China Joint Venture Updates
SunPower has been making steady progress in China through the Huaxia Concentrated Photovoltaic Power Joint Venture that it formed with three Chinese firms to manufacture and deploy its solar concentrator technology in the country. The JV currently has over 115 megawatts of projects under development and construction in the Inner Mongolia region. The company also noted that it will be expanding its partnership with the TZ Group, one of the JV members, to tap into a pipeline of about 1 GW of projects in other parts of China. We see this as relatively encouraging, given that the Chinese solar market has so far eluded most large Western solar companies. China is the world's biggest solar market by volumes, and utility-scale installations alone in the country could touch 6 GW for 2014. In comparison, total U.S. installations - distributed and utility combined - are expected to come in at about 6.6 GW for this year. However, China largely remains a price-driven market and we believe that margins will be a key factor to watch, even for a technology-driven manufacturer like SunPower.
Further Capacity Expansion Planned With Fab 5
Global solar shipments are expected to grow by as much as 29% this year to around 52 GW, according to Bloomberg New Energy Finance. Although SunPower is running its factories at near full utilization, its manufacturing capacity has been expanding at a slower rate compared to the market and this is likely to be restricting its market share growth. The company has improved manufacturing capacity from around 1.1 GW in 2013 to close to 1.3 GW currently and this number should increase to around 1.8 GW by 2017 as the new Fab 4 plant, which is under construction in the Philippines, ramps up. This would increase the company's production capacity by around 40% over current levels. Given that SunPower intends to at least double its market share in the next five years, it noted that it was planning on building its next fabrication unit - dubbed Fab 5 - which would have at least 700 MW of annual panel capacity. While the company has yet to decide on a location for the plant, it could begin production from 2017 onwards.
Solar HoldCo Updates
While SunPower has typically sold its solar projects while they are under development, during Q1 the company indicated that it would be holding on to certain projects on its balance sheet through their construction and possibly into the operational stages as well, in what is known as a Holdco structure. The company notes that it has over 500 MW of projects under its Holdco asset pipeline, including its 135 MW Quinto Solar Project that it recently began building in California. While this strategy could reduce the company's revenues, earnings and liquidity in the near term, it could eventually allow for better margins and drive higher shareholder returns over the long run. For instance, if the company should choose to sell the project post-construction, it could realize better pricing compared to a project sold when it is under development, since there is less risk involved for the buyer, who would be purchasing a fully functional power plant with proven energy production capabilities. Alternatively, if the company chooses to maintain the project on its books through the operation phase, it would be able to earn money off long-term power purchase agreements, extracting maximum residual value from the project.
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