Over the past three months, it's become fully apparent that the solar industry is going to go through a very rough patch for the next 12-18 months. Solar panel prices, after a year or two of relative stability, plunged 25% in the third quarter and are now below the cash cost of many manufacturers.
SunPower (SPWR +0.00%) is reacting with swift action to adjust its manufacturing and operating costs, but the next year is going to be rough. Management is trying to lay out a path forward, but there's a lot of uncertainty as every one in the solar industry reaches panic mode. Here's what we learned from the third-quarter earnings results.
Image source: SunPower.
The numbers
On a GAAP basis, third-quarter revenue was $729.3 million, gross margin was 17.7%, and net loss was $40.5 million, or $0.29 per share. Non-GAAP results, which adjust for the timing of project sales, showed revenue of $770.1 million, net income of $97.0 million, and earnings of $0.67 per share.
Guidance for the fourth quarter was GAAP revenue of $900 million to $1 billion with a net loss of $100 million to $125 million. For the full year, the net loss is expected to be $295 million to $320 million.
As for the cash balance, which will be increasingly important over the next year, it stood at $383.9 million at the end of the quarter, and management said it will have $300 million in cash at the end of 2017. Management said the company will enter a phase of running the business for cash generation, so the cash level will be important to watch.
A tale of two solar industries
We've learned in the last six months, confirmed by First Solar's (FSLR +1.55%) recent earnings, that utility-scale solar is in for an extremely rough 2017. That bears out in SunPower's numbers, showing 841 MW of contracted utility backlog, just 182 MW of which is in 2017. 2018 backlog jumps to 517 MW, but the next year will be really bad for the segment.
We didn't see any real signs of the utility market opening up, either. Like First Solar, SunPower's management said they were staying out of hyper-competitive bidding that wouldn't lead to profitable sales. Other competitors are clearly taking a more aggressive approach.
Image source: SunPower.
The other side of the coin is that commercial and residential solar look like they're doing fairly well. Residential sales were $170.3 million in the quarter, and gross margin was 18.5%. Commercial sales were $140.0 million and gross margin was 5.2%, so margins aren't strong yet, but demand has more than doubled in the last two quarters.
Like competitors have reported, residential demand for the fourth quarter isn't growing as fast as SunPower had hoped because of short-term disruptions in southern California and Nevada. But shipments of solar were still 70 MW to residential customers, essentially flat with the last 12 months, and management expects that to grow into 2017.
On the commercial side, 70% of capacity allocated for 2017 is already awarded, so demand is strong. Commercial customers are finally starting to come into the fold as financing becomes more available and corporate customers push toward renewable energy targets.
The solar industry is really a tale of two markets right now, with residential and commercial demand steady to growing slightly, but utility demand falling off a cliff next year. That's the market reality, and SunPower's goal is to get over the hurdle and get through to 2018.
Total stepping up
When I dove into SunPower's balance sheet and risk of going out of business earlier this year, I pointed out that oil giant Total (TOT +0.00%) is still the majority owner of the company's stock. For SunPower to go bankrupt, Total would have to let it happen. And we're getting signs that it's already stepping in to prevent the worst.
Total signed an agreement to put up to 200 MW of solar on Total facilities around the world over the next four years and made a $90 million prepayment to SunPower for those panels. This bolsters the balance sheet and assures some demand for SunPower's panels. And with demand uncertain, that's a great sign for the survival of the business.
A year of transition
What's uncertain for investors right now is how long the trough in demand lasts, and how much growth the industry will show in 2018 and beyond. More and more countries are opening competitive bidding on solar projects for completion from 2018 to 2020, but SunPower hasn't won any major contracts in the past six months. That's partly out of design, not wanting to lose money on highly competitive bids, but it's also concerning that demand may not return as quickly as hoped.
For now, the residential and commercial solar markets will have to pick up the slack in demand for SunPower, and the hope is that they can generate enough cash to keep the business afloat. But that's about all investors can hope for at the moment.
