SunPower Q1 Preview: Cost Reduction And Europe In Focus

SunPower (NASDAQ:SPWR) is expected to release its Q1 2013 results on May 2. Despite its relatively strong product differentiation strategy, the company hasn’t been immune to the weakness in the global solar power market. During Q4 2012, operating losses widened sequentially to around $112 million due to restructuring charges and continued pricing pressures although revenues grew by around 4% to $678 million. Things are expected to remain tough this quarter as well with the firm guiding revenues of between $450 million and $525 million (on a GAAP basis) compared to around $494 million a year ago. Gross margins are expected to be between 3% and 7 %, compared to around 6.8% in Q1 2012. ^[1]

Here are some of the key trends that we will be looking for when the firm releases earnings Thursday.

Americas Division Likely To Continue Its Strong Performance

SunPower’s Americas division is its most important business segment accounting for around 70% of overall sales. The division’s performance has followed the broader U.S. Solar market, which has witnessed a boom of sorts over the last few years. In Q4 2012, revenues grew by around 60% year-over-year while gross margins grew to around 15.9% from around 9.6%, thanks to a decline in panel manufacturing costs. While we expect the division to continue its strong performance, we will be watching the firm’s progress in reducing manufacturing costs and also on its progress in executing utility scale projects.

Status Of Utility Scale Projects: While standalone component and system sales still account for a bulk of the business in the Americas, the utility scale business is likely to play an increasing role going ahead. The firm is in the process of completing work on the California Valley Solar Ranch (CVSR) project, owned by NRG Energy. Work is also underway on the 579 MW Antelope Valley Solar Project in California that the firm sold to MidAmerican Energy for over $2 billion earlier this year. ^[2] Over the next four years, the firm expects revenues of at least $3.5 billion from its utility scale business, and expects the business to consume around 1 GW of the firm’s panels. ((Seeking Alpha))

Cost Reduction: SunPower’s panels compete primarily with polycrystalline panels that are sold by Chinese firms. In order to improve its competitiveness, SunPower has been focusing on cutting costs by increasing production yields and lowering raw material consumption. During the last year, manufacturing costs fell by nearly 25%, and the price of some of its lower end panels declined below the $1 mark for the first time. However, most Chinese panels sell for significantly less (around $0.70) and it is important for SunPower to bridge the price gap further in order to gain market share.

Progress In Europe Is Critical To Margins

SunPower’s business in the EMEA (Europe Middle East and Africa) region has been struggling due to subsidy cuts and a decline in utility scale projects in Europe. Quarterly revenues declined from around $248 million in Q4 2011, to around $89 million in Q4 2012 while gross margins fell from around 0.4% to around negative 53% due to lower sales coupled with the high cost of its on the firm’s installation infrastructure in Europe. ^[3] The firm is currently restructuring its operations in the region and expects the division to return to profitability sometime during the second half of this year. ^[4]

Progress In Africa And Middle East: While we expect Europe to remain challenging for SunPower during this quarter, we will be watching its progress in Africa and the Middle East. Both regions receive high levels of insolation making solar a relatively cost effective source of electricity. While increasing sales in these regions are unlikely to offset the decline in Europe in the near term, it is definitely important from a long term growth standpoint. SunPower’s parent company, Total SA, is Europe’s third largest oil company and has a significant presence in the Middle East and Africa. SunPower could leverage Total’s relationships and brand to improve.

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1. SunPower Press Release [↩]
2. Bloomberg [↩]
3. Seeking Alpha [↩]
4. SunPower Q4 Earnings Presentation [↩]