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4 Things I Learned From SunPower's Management

By Travis Hoium - May 21, 2018 at 11:32AM

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SunPower's future is all about residential and commercial solar markets.

As SunPower Corporation (SPWR -0.17%) tries to turn its business around after a rough few years, the company's earnings reports and conference calls can give investors insight into its strategy.  

After the company made a number of moves this year like purchasing SolarWorld Americas and announcing a next-generation solar panel, it's clear SunPower's focus is on residential and commercial solar markets (distributed generation, or DG), not utility-scale products. The strategy makes sense since DG revenues were up 12% in the first quarter to $301.2 million, commercial gross margins rose 2.7 percentage points to 6.3% and residential margins were up 3.3 percentage points to 18.6%, compared to a negative 14.1% margin for power plants. Here are a few things I learned from the recent call with investors about how SunPower plans to invest even more in its DG business long-term. (transcript quotes via Seeking Alpha)

Rooftop solar installation in Washington D.C.

Image source: SunPower.

Next-generation solar panels will be a big improvement

The next-generation technology (NGT) solar panel SunPower has been developing will begin meaningful production late in 2018 and could have a big impact on the company's financials when it fully ramps up. The solar panels won't be much more efficient at turning sunlight into electricity than the current X-Series panel's 22% to 23% efficiency, but it'll be much more cost effective. Tom Werner, SunPower's CEO, put it this way: 

NGT will enable SunPower to produce our industry-leading IBC [interdigitated back contact] solar panels with cost similar to commodity products, utilizing manufacturing equipment with around 3 times the capital efficiency of our previous generation technology.

There are two areas in which SunPower is pointing out lower costs here: capital cost and ongoing manufacturing costs. 

SunPower didn't outline exactly how much NGT equipment would cost, but the plant housing X-Series production cost about $0.65 per watt of manufacturing capacity. In other words, a $100 million investment would build 154 megawatts (MW) of capacity. If NGT manufacturing is three times as efficient, then the cost of each watt of capacity should be between $0.20 and $0.25 -- and $100 million would build about 462 MW of capacity. This would make expanding production much more cost effective for SunPower. 

Management also said that ongoing manufacturing costs would also be 40% lower with NGT manufacturing, and the NGT panels will be "highly margin accretive" to SunPower. 

If NGT is such a great product, SunPower should expand production as quickly as possible, but management is trying to balance its need to fill customer demand today with manufacturing upgrades that will improve the economics of SunPower products long-term. At analyst day later this year, the company will lay out yet-to-be-disclosed NGT production and expansion plans, but for now I learned that NGT solar panels should be very cost competitive with the rest of the solar industry and help push DG margins even higher. 

SolarWorld isn't going to break the bank

SunPower still hasn't told us how much it is paying for SolarWorld Americas, the U.S. manufacturing company SunPower agreed to buy in April. Werner said this about the purchase price, "I cannot give the specifics of the purchase price, but we do not consider the cash consideration material to our financials."

What is and isn't material to SunPower's financials is vague, but some context is that SunPower did disclose above-market silicon (raw material) contracts that are expected to cost $100 million per year. I think we can assume at the very least that SolarWorld cost less than $100 million and certainly won't break the bank. 

SunPower added 400 MW of mono-PERC solar cell (higher efficiency than commodity but not as efficient as IBC cells) capacity and 600 MW of module assembly capacity with SolarWorld. Getting that capacity for a nonmaterial amount of money could be a big win if SunPower can turn the plant into a world-class manufacturing facility with its technology. At the very least, I learned that the upfront cost of the acquisition was very low and shouldn't strain the balance sheet at all. 

Seeing an opening in storage

When discussing solar plus storage, Werner laid out the case for SunPower over the competition:

SunPower has the largest installed DG fleet in America and no one understands solar system performance across the country better than we do.

This has two benefits. First, our deep system performance understanding has allowed us to develop smarter algorithms that require less storage for the same customer benefit. And second, we can guarantee system performance to our customers with higher confidence. The next step for us is to leverage the software tools we have developed and deployed in the commercial segment in our residential systems business.

In other words, SunPower has scale on its side in distributed storage and an algorithm that management thinks is better than the competition's. Better yet, the company's leading position in commercial storage, which really started to take hold when SunPower built a $60 million pipeline late in 2017, will serve as the starting point for its storage ambitions. Today, storage is included with about 30% of commercial solar projects; later this year, SunPower says it's going to launch a residential solar product that will leverage the same foundational algorithms that drive value for commercial customers.

Scale will be key in building a network of storage systems that provides valuable services to the grid like reducing peak electricity demand while also adding value at the customer level through backup power or performing arbitrage on variable time-of-use rates. 

If SunPower can jump from commercial to residential storage later this year, it could build a competitive advantage over players like Tesla and Sunrun, which are both larger in residential solar and have a more vocal presence in energy storage. SunPower may quietly be building a power to be reckoned with in the storage industry. 

Keeping its eyes on the prize

The focus on DG isn't an accident at SunPower. Werner said the goal is to build a platform the company can build on with a suite of products for customers to choose from: 

We see increasing synergy across our DG platform, as both our residential and commercial reseller networks share channel management tools, common energy and data monitoring platform[s], as well as the internal resources such as financial product development and operations. In short, we believe that we can capture increasing synergy from the operational integration and continuing scale-up of our U.S. residential and commercial organizations.

SunPower is even going as far as saying the P-Series solar panels, which were originally intended for the utility-scale solar market, will be launched for DG customers around the world. This will increase the capacity available to DG sales teams and bring in a lower-cost product that will be more competitive with commodity solar panels. 

Residential and commercial solar are already SunPower's best business segments, but NGT, SolarWorld, and energy storage should help grow the business and expand margins long-term. If SunPower can execute, the company could be the leading distributed-generation solar and energy storage company worldwide. 

Travis Hoium owns shares of SunPower. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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