After a big quarter from First Solar (FSLR -2.09%) last week, expectations for solar's high-efficiency manufacturer SunPower Corporation (SPWR -2.17%) have gone up in the market. Depending on how you look at it, SunPower either met those higher expectations or fell short, but the uncertainty is not exactly what the market was expecting.
As usual, SunPower's results are complicated, so I'll go through the big picture for each part of the business.
Image source: SunPower.
The numbers
First, let's look at the important financial numbers for the quarter and compare them to guidance.
| Metric | Q2 2017 Actual | Q2 2017 Guidance |
| GAAP Revenue | $337.4 million | $275-$325 million |
| GAAP Gross Margin | 4.5% | (3%)-(1%) |
| GAAP Net Income (Loss) | ($93.8 million) | ($135)-($110) million |
| Non-GAAP Revenue | $341.5 million | $275-$325 million |
| Non-GAAP Gross Margin | 12.2% | 2%-4% |
| Adjusted EBITDA | $13.5 million | ($25 million)-breakeven |
Source: SunPower earnings releases.
You can see that results beat guidance across the board. But some investors are looking at full-year guidance and seeing a little bleaker picture. Non-GAAP revenue guidance was tightened from a range of $2.1 billion to $2.6 billion to a new range of $2.1 billion to $2.3 billion. And deployments were also tightened from 1.3 GW to 1.6 GW to a new range of 1.3 GW to 1.45 GW. That seems like a reduction in expectations, but I'll explain below why they're more about timing than anything else.
Project sales are... complicated
The biggest driver of First Solar's earnings beat was the fact that projects it is selling are being sold for more than the company expected. And most of the assets being sold were already under contract with a buyer, so management could feel confident raising guidance for the year.
In SunPower's case, the projects it is selling will likely be available to the market in the fourth quarter of 2017 or early 2018. And there aren't many that will result in a windfall profit as First Solar saw. So, First Solar's upbeat guidance didn't trickle over to SunPower.
Weaker than expected guidance was bad short-term, but with both companies transitioning to a component sales business long-term, it doesn't really fundamentally change their plans.
The short-term windfall from rising module prices
Another factor in First Solar's earnings beat was the fact that it delayed shutting down some module production to take advantage of strong solar demand and high module prices. SunPower didn't have the same flexibility, in large part because it tries to sell out production months in advance. For example, essentially all of the company's module production for 2017 is allocated already, so if module prices rise in the back half of the year SunPower wouldn't be able to take advantage. But if prices fall it has reduced downside risk. In effect, First Solar got a short-term boost, which wasn't really available to SunPower right now.
Image source: SunPower.
Distributed solar is the star for SunPower
The point of strength for SunPower continues to be distributed solar, or residential and commercial projects. Residential deployments were 74 MW for $155.8 million in revenue and gross margin of 20.3% on a non-GAAP basis. Commercial installations were 66 MW and revenue of $105.8 million, although gross margin was just 7.1%. These compare to power plant deployments of 86 MW, $79.9 million in revenue, and 3.2% gross margin, which was negatively impacted by the lack of system sales in the quarter.
SunPower's strength going forward should be the distributed solar business, so look for there to be steadily rising deployments and improving margins over the next year as well.
Mexico is the big guidance headache
SunPower is building a little over 500 MW of solar projects in Mexico that hit some road bumps last quarter. A permitting delay from local input on the projects has put them behind schedule, meaning SunPower won't recognize revenue for the projects in 2017. The delay doesn't impact the 2018 start date of the projects or the long-term sale of either project, but it'll push revenue and deployments into 2018 rather than being recognized in 2017. When you see the disappointing guidance numbers above, this is the main driver, so take the "disappointment" with a grain of salt because there's no fundamental change in demand.
There could be big cash infusions later in 2017
I think the most notable announcement from SunPower on Tuesday was that it is pursuing a sale of its entire stake in 8point3 Energy Partners (CAFD), whether both SunPower and First Solar's positions are acquired or the whole company is bought. This indicates that there's strong demand for the yieldco and both companies are expecting a nice premium to where shares are trading. Otherwise, SunPower would consider holding its stake.
SunPower owns 28.883 million shares of 8point3 Energy Partners and a buyout could infuse $450 million in cash, or more, onto the company's balance sheet. If completed, management has already said it will use the money to pay off its 2018 convertible notes, reducing financial risk. If the 2018 notes are paid off, SunPower would only have non-recourse project debt and convertible notes due in 2021 ($400 million) and 2023 ($425 million).
It has also looked at monetizing residential assets currently on the balance sheet. There are currently 400 MW of residential assets on the balance sheet that could be financed with contracted payments, potentially adding hundreds of millions more in cash.
SunPower already says it's going to have $300 million in cash on the balance sheet due to expected project sales and operations at the end of 2017. That's without residential solar financing or the sale of 8point3 Energy Partners. By the end of the year, the company could be sitting on nearly $1 billion in cash with a plethora of growth opportunities to invest in for future growth.
New products are coming in 2018
The high-efficiency X-Series module SunPower makes is currently the star of the business and management said they'll be launching a next generation solar module in 2018, which means we should expect an announcement of a new manufacturing plant later this year. The new module is supposed to be slightly more efficient than the 25% efficient cells coming off the Fab 4 X-Series lines today but will be much lower cost.
If true, residential and commercial margins should expand significantly for SunPower and sales in both markets will rise as well. I view residential and commercial solar as the rocks SunPower is building on, so a new production line could be big news long-term.
SunPower keeps chugging along
First Solar was able to benefit in the second quarter from the rising module and project demand in the solar industry, something SunPower didn't benefit from in the same way. But long-term SunPower is slowly executing on its plan and building out a strong position in distributed solar and an intriguing position in utility scale solar.
If momentum for the company's distributed product continues, including expanding margins as sale prices rise and costs come down, the company will be on a much more solid footing. And if the solutions business that's selling modules and racking systems in for utility projects in dozens of countries around the world works out as planned there could be a new phase of growth for SunPower starting in 2018. Remember, this is a company with its sights set on growing module production from 1.3 GW to 1.45 GW in 2017 to over 6 GW, and maybe more, by 2021. The fact that SunPower didn't benefit from the same short-term windfalls as First Solar shouldn't be mistaken for a sign of long-term weakness. SunPower is performing about as well as can be expected right now, and there's upside if production increases and demand starts to improve in the near future. Expect to hear a lot from this company later in 2017.
