SunPower Corporation (NASDAQ:SPWR) has been stuck in a difficult position the last few years, supplying the solar market with solar panels that were more efficient than those of competitors but also significantly more costly. Unless customers were willing to pay a premium for high-efficiency or there was a space constraint (like the roof of a home), there wasn't a great economic justification for using the company's solar panels. As a result, it began to struggle in the power plant market, where commodity solar panels dominate, and generated very low margins in commercial solar. It tried getting into project development and asset ownership, but even that strategy fell on its face. 

In the last few quarters, SunPower has committed to simplifying its business and focusing on the high-efficiency solar panels it's best at making and serving the markets where those panels are valued. The second quarter was a big step in the right direction for the company, and could show a hint of what's to come as new lower-cost technology is rolled out. 

Solar carport using SunPower solar panels.

Image source: SunPower.

What the quarter looked like

SunPower's financial results can be a bit confusing because they are dependent on when asset sales occur. That's why I think it's useful to compare results to guidance given after the first quarter.

Metric Q2 2018 Guidance for Q2 2018
GAAP Revenue $449.1 million $360-$410 million
GAAP Gross Margin (69.1%) 2.5%-4.5%
GAAP Net Income ($447.1 million) ($125-$100 million)
Non-GAAP Revenue $447.2 million $375-$425 million
Non-GAAP Gross Margin 11.7% 6%-8%
Adjusted EBITDA $58.6 million $10-$35 million

Source: SunPower Corporation. 

The GAAP results include a $355.1 million charge related to writing down legacy manufacturing assets, which is why gross margin and net income are so poor. The non-GAAP figures give a slightly better indication of how strong the quarter was for SunPower, and the fact that it's outperforming guidance is a good sign. 

Where the strength is

Not surprisingly, SunPower's best segment is residential solar, where its high-efficiency solar panels are most valuable. Non-GAAP revenue was $205.2 million and gross margin was 21.8%, compared to revenue of $133.3 million and a gross margin of 6% in commercial and $108.6 million of revenue and a (0.6%) gross margin in power plants. 

SunPower's strength is clearly in residential markets, and that's why it's investing in improving capabilities there. One step it's taking is improving costs with a new next-generation technology (NGT) solar panel; another is adding energy storage and energy management to the mix. 

Betting on a high-efficiency future

The NGT solar panels are arguably the most important technology development SunPower has in the pipeline right now. Improved processes will allow SunPower to make solar panels that are around 23% efficient, the same as the current X-Series solar panel but at a 30% to 40% lower cost. Management says they expect costs to be in-line with the costs of the standard mono-PERC technology that's quickly becoming the commodity technology in solar today. 

Production should hit scale by the end of this year, with 100 MW of NGT solar panels due to be produced in 2019. In time, management expects as much as 1,360 megawatts (MW) of NGT production since announcing it would upgrade all E-Series manufacturing facilities to NGT, which is why it had the big write-off highlighted above. The move may seem costly now, but it's expected to increase margins by 2020 and help increase production without adding manufacturing facilities.

Storage is gaining traction

The other leg of SunPower's value proposition to customers is energy storage, which has now become a key contributor to the commercial segment. Management said 35% of new contracts include energy storage, and that's likely to grow as costs come down. 

What's more exciting is the potential for storage in the residential market, where SunPower already has a strong business. Storage could be an add-on to most residential solar systems, providing services to both customers and the grid. Given SunPower's industry-leading market share in residential and commercial solar, it could have a lead in generating value from energy storage long-term. 

SunPower is getting back on its feet

As NGT upgrades continue, SunPower is transforming its business to be simpler and leaner in the competitive solar industry. It's getting out of the project development business and focusing on providing high-efficiency technology to customers willing to pay a premium for the best products in the industry. If sales and margin improvements continue, the company could be on a sustainable path to growth. But we've seen fits and starts from SunPower before, so be cautious about getting too bullish on the company's future. 

Travis Hoium owns shares of SunPower. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.