SunPower’s Q1 Earnings Could Trend Lower on Weaker Utility-Scale Project Revenues

SunPower (NASDAQ:SPWR), the second largest U.S. solar equipment manufacturer, is expected to publish its Q1 2015 earnings on April 30, reporting on a quarter that usually witnesses seasonally weak solar installations. We see earnings declining on a sequential and year-over-year basis owing to weaker revenue recognition in the company’s utility projects business as the massive Solar Star project gradually winds down. Additionally, the retention of certain projects on the company’s balance sheet under its holdco strategy could also hurt quarterly numbers. SunPower’s has guided non-GAAP revenue of $410 million to $460 million, gross margin of 18% to 20% and net income per diluted share of $0.05 to $0.15 for this quarter ^[1] This compares to revenues of about $1.16 billion and an EPS of $0.26 in Q4 2014. Here’s a quick look at what to expect and what we will be watching when the company reports earnings.

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Utility-Scale Projects, Progress in China

The 579 MW Solar Star project, being built for MidAmerican Energy in California, is likely to be the key driver of the company’s results. However, its impact on earnings is likely to be more subdued compared to the previous quarter as the project is winding down with the company having grid-connected over 70% of capacity as of February, with plans to achieve substantial completion by the end of Q2. SunPower is also developing several other projects – including the Henrietta (128 MW) and Hooper (60 MW) – that all have executed power purchase agreements, but are not yet sold. These projects could provide some revenue stability later in 2015 and in 2016.  Separately, we will be interested in hearing of the company’s progress in China, which is the world’s largest solar market. SunPower has two joint-ventures in place in the country aimed at manufacturing and building utility-scale projects using its proprietary C7 concentrator technology. The company has a project pipeline of over 4 GW in China, with plans to install more than 250 MW of capacity in the country this year. ((SunPower’s (SPWR) CEO Thomas Werner on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, February 2015)) The company also recently announced that it would be partnering with Apple (NASDAQ:AAPL) to build two projects totaling 40 MW in the ABA Tibetan and Qiang Autonomous Prefectures. ^[2]

Japanese Shipments

Japan is the world’s second largest solar market, and installations in the country are estimated to have topped 8 GW last year. SunPower has been a big beneficiary of the Japanese solar boom since the company’s high-energy density panels are well suited for Japanese conditions.  Japan accounted for about 27% of the company’s total shipments in Q4 2014. However, there have been some concerns that the market could be peaking off. For instance, the country’s electric grid has been unable to keep pace with the rise in supply of intermittent solar energy causing some of the country’s utilities to restrict grid access of new utility-scale solar facilities. To resolve the issue, the Ministry of Economy, Trade and Industry (METI) has proposed some steps, which could be formally adopted this year, that include limits to how much renewable energy vertically-integrated utilities must accept under the FIT program. The government has also been successively reducing the feed-in-tariffs for solar power (from 42 yen per kWh in 2012 to about 32 yen per kWh in 2014). While SunPower’s Japanese business is likely geared towards the more resilient distributed solar space (commercial and residential installations), the company could nevertheless feel a pinch if the market slows down.

Updates On Capacity Expansion

Global solar installations are expected to grow from an estimated 48 GW in 2014, to about 58 GW in 2014, according to Bloomberg New Energy Finance. While SunPower has been running its factories at close to full utilization over the past few quarters to meet demand, its manufacturing capacity has been expanding at a slower rate compared to the market, and this is likely to be restricting its market share growth. Unlike Chinese players, who have had the luxury of acquiring capacity or outsourcing production to third parties, SunPower’s high-end monocrystalline solar cells require more sophisticated fabrication technologies. However, the company is taking several steps to address its capacity constraints and intends to triple its capacity by 2019. The company has been ramping up production at its upcoming 350 MW Fab 4 plant in the Philippines with plans to produce as much as 100 MW from these facilities in 2015. The next generation Fab 5 plant, which would have a manufacturing capacity of over 700 MW, is expected to start production in the second-half of 2017. For this year, SunPower has noted that it expects capacity to grow by 15% year-over-year to about 1.5 GW and we will interested to hear about the company’s progress on this front. ^[3]

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More Trefis Research

1. SunPower Q4 2014 Supplimentary Slides [↩]
2. SunPower Press Release [↩]
3. SunPower Q3 2014 Supplementary Data [↩]