Solar Star Project, Japan DG Demand Drive SunPower’s Q3

SunPower (NASDAQ:SPWR), the second largest U.S. solar equipment manufacturer, released its Q3 2014 earnings on October 29. The results, which beat market expectations, were largely driven by demand for distributed generation (DG) in Japan and North America and strong execution in the company’s North American power plants business. SunPower’s quarterly results typically see significant volatility since a bulk of its earnings come from solar project development, which is subject to irregular revenue recognition. The company’s quarterly revenues remained relatively flat on a year-over-year basis at $662.7 million, while adjusted net income fell by around 22% to $46.4 million with gross margins falling to 16.4%. ^[1] The stock declined marginally in Wednesday’s trading, likely due to weaker than expected revenue guidance for Q4. The company expects non-GAAP revenues of $575 million to $625 million and gross margins of 19% to 21% during the fourth quarter. Here is a brief look at some of the trends that influenced the company’s earnings.

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Solar Star Project Drives The Utility Scale Projects Business: SunPower’s North American utility scale projects have been a key growth lever for the company over the past few years. The 579 MW Solar Star project that the company is constructing for MidAmerican Energy was a major driver of the company’s quarterly performance. The company said that the project’s construction was ahead of schedule, with about 309 MW of capacity already connected to the grid. SunPower now expects to complete the project by the middle of next year – about 6 months ahead of schedule. ((SunPower’s (SPWR) CEO Thomas Werner on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 2014)) However, the North American utility solar markets could be poised to slow down as many utility companies have already lined up projects to meet their current renewable energy portfolio standards (RPS) requirements.((First Solar Seeking Growth to Replace Giant Desert Plants, Bloomberg, March 2014)) SunPower has been looking to diversify its project business away from North America into markets including the Middle East, Latin America and Africa by leveraging its relationship with its parent Total S.A., which is one of Europe’s largest oil companies. SunPower said that it was close to completing the 70 MW merchant solar project that it is building in Chile for a consortium of companies including Total. The company also said that it was awarded a 41 MW supply agreement in France during Q3. The company noted that it currently has an 8 GW global pipeline of potential projects (including commercial projects) and we believe that its progress in developing these leads will be a key factor to watch going forward.

Japan And North America Drive Distributed Business: Japan continues to be SunPower’s single-largest market for distributed generation. The country accounted for about 28% of the company’s overall shipments for the quarter, aided by supply agreements with Toshiba and Sharp. There has been some apprehension that the Japanese solar markets could be poised to peak off this year, with concerns that the government could scale back on feed-in-tariffs and also due to reports that some Japanese utility companies have been suspending new grid-connections for some solar projects. However, SunPower has indicated that it was optimistic about its prospects in the Japanese market, given that it is largely exposed to the distributed generation sector (which is less likely to see a scale-back in interconnection approvals). The North American distributed solar market has also been expanding rapidly, aided by falling prices and the availability of new financing and ownership options. SunPower said that its U.S. residential solar leasing program currently has 25,000 total lease customers to date, with aggregated contracted payments standing at above $750 million.

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1. SunPower Q3 2014 Earnings Press Release [↩]