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The rough quarter for solar manufacturers continued when SunPower (Nasdaq: SPWRA ) (Nasdaq: SPWRB ) released earnings after the close last night. The leader in efficiency reported revenue of $705.4 million in the third quarter and a net loss of $370.8 million, or $3.77 per share.
The loss looks gaudy but it includes non-cash charges of $349.8 million to impair goodwill and other intangible assets, something companies often do to clean up their balance sheets when times are bad.
Gross margin, the number I focus on most closely in solar, fell slightly on a non-GAAP basis to 11.4%. That doesn't come close to First Solar's (Nasdaq: FSLR ) 37.7% gross margin in the third quarter, but it will likely outpace many Chinese competitors.
Staying ahead of the game
We knew this quarter was going to be bad for most solar companies, but what separates SunPower from the rest of the industry is the velocity at which it's lowering costs. In 2010, module cost per watt fell to $1.78 from $1.97 a year earlier, a 10% reduction. This year, fourth-quarter cost per watt is expected to be between $1.42 and $1.58, a 12% reduction at the high end and a whopping 20% reduction at the low end. For 2012, SunPower is expecting to reach $1.25 per watt, a number that would be equivalent to $0.86 per watt for a standard module.
To put those numbers in perspective, Trina Solar (NYSE: TSL ) , one of China's leading solar manufacturers, made modules for $1.16 per watt last quarter, $0.06 higher than its costs a year ago. And non-silicon costs have remained flat over that time. Costs will likely fall for manufacturers like Trina, Yingli Green Energy (NYSE: YGE ) , and JA Solar (Nasdaq: JASO ) , but falling polysilicon prices will be the driver, not non-silicon costs.
Over the last year, SunPower has been playing catch-up to Chinese competitors, but if the cost trends highlighted above continue, it should begin overtaking competitors, even in China.
I am keeping an eye on a shakeup in management, with CFO Dennis Arriola stepping down in March, VP Jim Pape leaving the company, and a reorganization of the business under way immediately. CFOs have notoriously short tenures so this isn't a red flag on the surface, but when First Solar's management began to leave, the company's stock started moving backward. So it's something to keep an eye on.
Foolish bottom line
In the fourth quarter, a possible spike in demand in Germany could soften the blow and help keep plants running at full speed. I'm not expecting a blowout, but with costs falling rapidly, SunPower just needs to get through the next year or two to get to the point where costs are low enough to be a no-brainer.
I still have SunPower as my top pick in solar, and with a line of new products and falling costs I am comfortable in that position. As other companies fall like dominoes around it over the next year or two, SunPower should emerge as one of the winners in the solar industry.