SunPower (SPWR 6.36%) reports earnings later today and First Solar (FSLR 3.00%) reports tomorrow, the beginning of earnings season for the solar industry. SolarCity (SCTY.DL) will report next Wednesday and Chinese manufacturers will follow one-by-one.
In a new and growing industry it can be difficult to decipher what is important and what isn't in earnings, so here are my key details to look for when your favorite company issues its report.
Margins matter, revenue doesn't
Many solar companies are not only module manufacturers but installers as well. In the case of SunPower and First Solar, they build billion-dollar projects that may involve preparing foundation in one quarter, installing panels in another, and connecting transmission in yet another. The revenue recognition for these projects can be choppy and make quarter-to-quarter or year-over-year comparisons meaningless.
SolarCity's leading model means revenue is generated over 20+ years, making this quarter's revenue virtually inconsequential.
Instead of looking at revenue, look at how many modules a company is producing and shipping or installing. Operating at 100% capacity but with low revenue this quarter is better than running at 70% capacity and recognizing a lot of revenue from a completed project. Over the long term, project or leasing revenue will level out. The better trends to look for are shipment trajectory and utilization.
These factors are why I look at gross margin before revenue. In most cases, this will be a better indicator of how a company is doing. Oftentimes looking at non-generally accepted accounting principles gross margin, which adjusts for project revenue recognition, is the best representation of a company's strength quarter to quarter. For SunPower and First Solar in particular that is a key number to watch.
Residential growth and margins
The residential market is a growth market in the U.S., and SolarCity has already said it expects lots of growth both this year and next. With that in mind, SunPower needs to answer how it is growing in residential solar. Is it being crushed by SolarCity or is its dealer model working well?
Both companies also need to answer questions about retained value. This is the value they put on 20+ years of cash flow for residential and commercial leases and it will drive long-term earnings for SolarCity and SunPower. SolarCity says it has $1.27 per watt installed so far, which it expects to grow in the future. Is this growing or not? In my opinion, SunPower needs to start reporting value retained per watt as well.
How is Japan doing?
The biggest earnings driver this quarter for SunPower, Canadian Solar (CSIQ 2.47%), and Trina Solar (NYSE: TSL) may be Japan. The Japanese market is high margin and installers are buying as many panels as they can before an extremely generous feed-in tariff is adjusted.
SunPower sold 28% of its panels in Japan in the last quarter and Canadian Solar 35.7%, while Trina Solar sold just 6.1% to the country. This is an opportunity for high-margin growth at Trina Solar and an opportunity for SunPower and Canadian Solar to maintain market share and margins.
Look for the bottom line
I'm expecting strong earnings across the industry on high demand in the U.S., Japan, and China. Keep an eye on shipments, margins, and bottom-line profits. Remember that at the end of the day a bottom-line profit is what will make solar industry winners and losers. If manufacturers can't translate shipments into profits they'll be running in circles.
