Factors That Will Drive SunPower’s Earnings

SunPower Inc. (NASDAQ:SPWR) will release its third quarter earnings on Thursday, November 1, reporting on a quarter that has seen solar firms curtail expansion plans and focus on improving operational efficiency. In the second quarter, the company’s evinced signs of a recovery with GAAP revenues growing by 20% sequentially to $595.9 million and gross margins rising sequentially to 12.3%.

However, the company’s outlook for Q3 remains tepid with guidance for GAAP revenues pegged at between $545 million and $620 million, which are sequentially lower. Gross margins are also expected to be lower between 8% and 10%.

US Rooftop Market Growth Will Continue

SunPower continues its push into the US rooftop market, leveraging its strong retail channel. The US rooftop market is less subsidy intensive compared to other developed markets like Europe, making solar energy more sustainable and less dependent on government regulations.

SunPower’s  panels are manufactured using mono-crystalline technology that offers higher conversion efficiency compared to thin-film and polysilicon based panels and allows for a smaller footprint and better suitability for space constrained areas like rooftops. In order to reduce upfront installation costs for residential users, the company has been emphasizing a solar system leasing program. The program is being funded through an agreement with Citibank and Credit Suisse. The leasing plan has found several takers with the numbers of leases signed in Q2 almost doubling over Q1.

International Markets

As conditions remain challenging in Europe, SunPower is looking toward other international markets for growth. One country that is particularly attractive to SunPower is Japan, which currently contributes to about 10% of SunPower’s revenues. Solar power is likely to play an increasing role in Japan’s power generation mix as the government has planned to phase out its nuclear power plants by 2030. ^[1] SunPower’s high efficiency product line is a good fit for the Japanese market, which requires better conversion efficiency given the lower availability of real estate. In September, the company signed a multi-year contract with Toshiba to supply 100 MW of solar panels in Japan.

Earlier this month, SunPower announced that it has picked up a 42% stake in Diamond Energy, an alternative energy project developer based in Australia. The strategic investment will give SunPower access to the fledgling Australian utility scale market. The company is also leveraging its relationship with France’s Total Energy, which is its major shareholder, to make inroads into the African and Middle Eastern markets.

Manufacturing Restructuring

Stiff price competition from Chinese firms has resulted in chronically low gross margins over the last few quarters, prompting the company to restructure its manufacturing operations and downsize its workforce. The company recently announced that it will temporarily idle half of its cell manufacturing  and 20% of its module manufacturing  in the Philippines. It will also cut around 900 jobs in the region.

Since solar cell manufacturing has relatively high fixed costs, capacity rationalization will help to lower the company’s cost base and improve manufacturing utilization. The company is targeting a cost per watt of around $ 1 for its lowest costs panels by the end of this year.

We will revisit our$5 price estimate for SunPower following the earnings release.

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1. Japan aims to abandon nuclear power by 2030s, Reuters [↩]