SunPower Posts Another Transitional Quarter, Doubles Down On Holdco Strategy

SunPower‘s (NASDAQ:SPWR) Q2’15 earnings beat market expectations, as the company benefited from strong sales in the North American residential market, the completion of its large-scale Solar Star project and the IPO of 8point3 Energy Partners – its joint-venture yieldco with First Solar (NASDAQ:FSLR). SunPower has been transitioning its business model in recent quarters to hold a greater number of projects on its books through completion (or to drop down into its yieldco) rather than selling them outright. This has resulted in relatively inconsistent results for the company, and its overall revenues for Q2 fell by about 25% year-over-year to $381 million, while net income declined 54% to $6.5 million. ^[1] Below is a brief review of SunPower’s Q2 and what to expect going forward.

We have cut our price estimate for SunPower to $31, to account for the company’s near-term capacity issues (explained below) and our slightly higher long-term capex forecasts. Our price estimate is still roughly 20% ahead of the current market price.

See our complete analysis for SunPower

Utility Solar Business 

SunPower’s power plant revenues (non-GAAP) declined by 29% sequentially to $161 million, while gross margins also fell to about 16.5%, as the company completed construction of the 579 MW Solar Star project in the United States, while it continued to hold on to projects in line with its holdco strategy. The company also initiated construction at its Henrietta (128 MW) and Hooper (60 MW) projects in the U.S., and we expect these projects to provide some revenue stability in the near term.

Separately, SunPower acquired 1.5 GW of projects from Infigen Energy that are under development in the United States. The portfolio holds about 35 early to late stage projects of up to 100 MW each in capacity. The deal could save the firm the trouble involved with identifying, siting and garnering requisite approvals for projects while also helping to improve the visibility for the company’s projects business significantly over the next 5 years. SunPower said that the pipeline is comprised of projects that are well suited to drop down to 8point3 Energy Partners, the company’s joint venture yieldco with First Solar. The company has noted that its total project pipeline stands at 12 GW following the acquisition. ((SunPower’s (SPWR) CEO Tom Werner on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, July 2015))

Residential Solar Rides On U.S. Growth

SunPower’s residential generation business did well over the quarter, riding on strong demand in the United States and continued strength in the Japanese market. While non-GAAP revenues remained almost flat year-over-year at $152 million, margins expanded to 23.3%, driven by stronger cash sales. The U.S. residential solar market has been one of the brightest spots in the solar industry, growing by over 76% in Q1 to 437 MW, according to the Solar Energy Industries Association. SunPower is well-poised to take advantage of this growth, given its high-efficiency panel technology, high quality, and flexible financing options such as its residential leasing program. ^[2] The company expects residential sales to grow by about 50% in the second half, compared to the first half, as installations in the United States pick up further. SunPower has also formed new channel partnerships with utility companies to expand its residential business. For instance, the firm inked a deal with ConEdison to let New York State homeowners lease SunPower solar power systems. Under the deal, ConEdison will own the leased systems and collect monthly lease payments from home owners for terms up to 20 years.

Capacity Issues Persist 

Global solar installations are expected to grow by roughly 36% to 55 GW  in 2015, according GTM Research. While SunPower has been running its factories at full utilization to meet this demand, its manufacturing capacity has been expanding at a slower rate compared to the market (its capacity is expected to grow by under 15% this year), 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, and the company needs to build capacity on its own. The company says that its new Fab 4 facility, which was initially expected to come online mid-2015, will not come online until later this year, with production ramping up to about 225 MW of cells in 2016. The lack of capacity is likely to be resulting in lost opportunities for SunPower, given that installation growth in the United States could accelerate prior to the cuts in the U.S. solar investment tax credit (ITC) slated for the end of 2016. The ITC is expected to drop from 30% to 10% for commercial projects and to zero for directly owned residential projects.

 Guidance For FY’15

• GAAP revenues of $1.50 billion to $1.70 billion, compared to revenue of $3.027 billion in 2014, on account of the holdco and yieldco strategy.
• Non-GAAP revenues of between $2.4 billion to $2.6 billion.
• Adjusted EPS of between $1.50 – $1.80.
• Total megawatts deployed: 1,250 to 1,300 MW.
• Note: GAAP revenue accounting rules preclude the company from recognizing revenue on assets sold to 8point3 Energy Partners. The Non-GAAP number includes these sales. ^[3]

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1. SunPower Q2 2015 Supplementary Information [↩]
2. Fueled by Growth in Residential Solar, US Installs 1.3GW of PV in Q1 2015, Greentech Solar, June 2015 [↩]
3. SunPower  Q2 2015 Presenation [↩]