SunPower (NASDAQ:SPWR), a high efficiency solar panel manufacturer and project developer, released its fourth quarter earnings Thursday, February 7, posting a relatively somber set of numbers. While the firm’s revenues grew by around 4% sequentially to $678 million, its operating loss widened to $112 million due to restructuring charges and continued pricing pressures in the solar market.  However, there were several positive cues in the firms earnings release, including lower panel manufacturing costs and strong performance by the firm’s utility scale business.
Utility Scale Business Expanding Internationally
SunPower has been steadily gaining traction in the utility scale solar space. Last month, the firm announced that it had sold its 579 MW Antelope Valley Solar Projects in California to MidAmerican Energy in a deal valued between $2 billion and $2.5 billion. 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. 
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Utility scale projects are becoming increasingly attractive to solar firms since they command better margins and provide an avenue to boost modules sales. Moreover, these projects partially isolate firms from the volatility in panel prices since they typically involve providing a packaged solution rather than supplying just panels. Although SunPower still lags after industry leader First Solar (NASDAQ:FSLR) in the space (First Solar has a project pipeline approaching 3 GW), it still has a longer track record, and its monocrystalline panels offer better energy production, durability and lower performance degradation rates compared to other technologies.
While its utility scale business is still largely concentrated in the U.S., the firm has been seeking to diversify internationally. The firm is currently working on a 33 MW projects in South Africa and is leveraging its relationship with its parent firm, Total SA, to expand into emerging markets like the Middle East and Latin America. SunPower is also looking to grow in the Chinese market where it has teamed up with three Chinese companies to manufacture and deploy its solar tracking technology, which is popular in utility scale systems.
Leasing Program Shows Strong Growth
The firm is bullish about its residential solar business, expecting the market to exceed 5 gigawatts in the next five years. The firm has a strong distribution network in the U.S. and also operates a solar equipment leasing scheme to reduce the upfront cost of installing solar power systems. The leasing program showed a particularly strong performance with demand outstripping the firm’s financing capacity for the year. The firm installed around 75 MW of leased systems and currently has bookings for another 90 MW. The firm already has Citibank and Credit Suisse backing its leasing program and recently closed financing of around $100 million with a U.S. Bank. The firm also intends to extend this leasing scheme to international markets this year.
The firm saw strong momentum in the Japanese market, with sales in the region accounting for nearly 15% of Q4 revenues. Japan is one of the world’s fastest growing solar markets and is very important to SunPower since consumers in the country have a preference towards higher efficiency panels. The firm has had a longstanding panel supply agreement with Toshiba and recently signed a panel supply agreement with Sharp as well.
Manufacturing Cost Reduction
SunPower’s panels face increasing price competition from polycrystalline panels that are primarily 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. The firm reported that blended cost per watt declined by more than 25% last year, and that cost of some of its larger panels declined below the $1 mark for the first time. While these costs are still quite high compared to polycrystalline panels, SunPower’s efficiency and durability advantage should help to partially justify the higher prices.Notes: