SunPower Q4: Focus On The Distributed Solar Business

SunPower (NASDAQ:SPWR) is expected to publish its Q4 2013 results on February 12, reporting on a quarter that saw strong global photovoltaic installations. During Q3 2013, the company’s quarterly revenues remained almost flat year-over-year at around $657 million, while operating income grew from around $11 million in Q3 2012 to about $49 million, excluding one-time items.  While we expect SunPower’s results to improve on a year-over-year basis, driven by its large utility scale projects in North America, we will be watching the company’s progress in the distributed generation market.

Trefis has a $28 price estimate for SunPower which is about 5% below the current market price.

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Distributed Solar Business In Focus

We believe that the distributed solar business could provide a lot of growth potential for SunPower going forward, considering the improving economics of rooftop solar, the availability of better financing options and the possibility of higher retail electricity prices which could make solar installations more compelling for customers of electric utilities (related: Why SunPower’s Residential Solar Business Remains Important Despite Utility Scale Focus). SunPower has a competitive advantage in the distributed solar market, since its monocrystalline panels have a higher conversion efficiency and a smaller size (system capacity being equal), making them ideal for rooftops and space-constrained commercial installations.

Watching Leasing Business In North America: In North America, SunPower has been banking on its leasing business to drive growth in the residential solar market. The company had signed about 20,000 residential leases to date in the United States as of Q3 2013, with cumulative bookings of over 160 megawatts (MW).  ((SunPower Q3 Supplementary Slides)) Although the company still trails market leader Solar City (NASDAQ:SCTY) in terms of installations (SunPower’s lease customer base is about one-third of Solar City’s) ^[1], we believe that the company’s panel technology and manufacturing capabilities should give it a long-term edge over Solar City. For this quarter, we will be watching the company’s progress in adding new leasing contracts as well as the total bookings in terms of megawatts.

Sales In Japan’s Rooftop Market: Japan is one of the fastest-growing solar markets in the world, driven by attractive government incentives. Installations in the country are largely geared towards distributed and rooftop solar since the utility-scale solar market faces some challenges due to a scarcity of  land. Average solar systems prices in Japan are among the highest in the world, since customers tend to choose higher efficiency panels considering the smaller areas for installations on their rooftops. SunPower has been seeing strong demand in Japan of late, and mentioned that its shipments to the country grew by about 130% year-over-year during Q3 2013. The company has panel supply agreements with Sharp (Japan’s largest solar panel vendor) and Toshiba and has also been customizing its panel designs for the Japanese market. Although SunPower does not break out the financials for its Japan business, we will be watching the company’s revenues and gross margins in the Asia-Pacific region, which are primarily influenced by its performance in Japan.

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