SunPower Earnings Preview: Utility-Scale And Distributed Generation Projects In Focus

SunPower (NASDAQ:SPWR), one of North America’s largest solar companies, is expected to publish its Q3 2014 earnings on October 29, reporting on a quarter that saw healthy global solar installations and stable average selling prices. The company has guided non-GAAP revenues of between $600 million to $650 million and expects to recognize sales of between 325 megawatts (MW) and 360 MW of capacity. Adjusted gross margins are projected to come in at between 17% and 19%. ^[1] During the second quarter, revenues fell by around 12% year-over-year to about $508 million, while adjusted net income fell by around 30% to about $44 million. In this note, we take a look at some of the factors that are likely to drive the company’s earnings for the quarter.

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Trefis has a $34 price estimate for SunPower, which is about 20% ahead of the current market price.

Utility Projects Could Drive Earnings: We estimate that SunPower derives over half its revenues and most of its profits from its solar power systems business. The business has higher margins compared to the panels business, since it involves the sale and installation of panels along with balance of systems equipment, enabling the company to capture additional downstream value. Much of SunPower’s profits over the last several quarters have come from its utility-scale solar projects in the United States and the trend could continue into Q3, driven by the Solar Star project that the company is building in California. As of Q2, SunPower had completed and connected 228 MW out of the projects total 579 MW planned capacity to the grid. On the international projects front, the execution of the 70 MW merchant power plant that the company is constructing in the Atacama region of Chile could also aid results.

Solar Holdco Updates: SunPower has been looking at complementary business models to extract maximum residual value from the solar projects that it builds. For instance, the company has been 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. As of Q2, SunPower reported that it held over 500 MW of projects under its Holdco asset pipeline, including the 135 MW Quinto Solar Project that it recently began building in California.While this strategy could potentially reduce the company’s  earnings and liquidity position in the near term, we believe that it should eventually allow for better margins and drive higher shareholder returns over the long run.

Distributed Generation: The company’s distributed generation business has been reporting solid results over the last few quarters, driven by installation in Japan and the United States. During Q2, the company said that it had deployed a total of 108 MW of residential products,while indicating that demand was outstripping supply. ^[2] Financing plays a key role in driving small and medium scale solar projects; according to Bloomberg New Energy Finance, investments in small-scale renewable projects, including rooftop solar, stood at around $18.3 billion during Q3, up from around $13.9billion last year. ^[3] SunPower should benefit from stronger distributed installations, given that it is one of the leading players in the high-end residential and commercial solar systems space.

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1. Second Quarter 2014 Earnings Supplementary Slides, SunPower, June 2014 [↩]
2. SunPower’s (SPWR) CEO Thomas Werner on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, July 2014 [↩]
3. Bloomberg New Energy Finance releases Q3 renewable energy investment report, Renewable Energy Focus, October 2014 [↩]