SunPower Corporation (NASDAQ:SPWR) has yet again changed its plan to grow in the solar industry. The company announced during its earnings call this week that it's looking for a partner to help grow its manufacturing operations in the U.S. and Asia in hopes it can achieve the scale that larger competitors have already reached.
The move comes after SunPower sold most of its solar projects, from small residential systems to large solar-power plants, and shifted to offering fully engineered solutions for other installers. Manufacturing partnerships aren't new to SunPower, but they show where the company sees a path forward and how it plans to get there.
What has held SunPower back
The backdrop of SunPower's manufacturing challenge is that it's been saddled by debt and incurring hundreds of millions in financial losses. The chart below shows SunPower's declining debt, which took another step forward last quarter when the company ended with just $589.6 million in net debt. A vast majority of that debt is in the form of convertible debt due in 2021 and 2023, so there's ample time to fund those obligations.
When SunPower was living under these high debt loads, it was impossible to plan big capacity expansions that would have given the company much-needed manufacturing scale. And scale is exactly what the company needs right now. In 2018, the company deployed just 1.5 gigawatts (GW) of solar, well below industry leaders like First Solar, Canadian Solar, and Jinko Solar, who are all producing over 5 GW and heading toward 10 GW of capacity. Without scale to reduce costs and increase total revenue and gross margin, SunPower simply can't compete with these players, even if its technology is better.
To achieve scale, SunPower is looking for partners to fund some of its manufacturing. CEO Tom Werner said on the fourth-quarter 2018 conference call:
We're looking for strategic partners or we're in dialogue with strategic partners that we would expect to able to announce something within a few quarters, say two or three to have funding in what we're planning for by the end of the year or at least partially funded by the end of the year. If it's sooner, we would expect to accelerate NGT faster, and it will depend on the strategic source of capital.
Leveraging partnerships isn't a new strategy for SunPower. The company had a partner for the Fab 3 manufacturing plant, which produced E-Series solar cells, and it has multiple partners in China, where it's producing P-Series solar panels.
The model here would be for SunPower to be a technology hub, providing the product and equipment design to manufacturing locations and partnerships around the world. While this might be a way to build scale, it will also limit SunPower's control and upside in manufacturing going forward. We saw this recently at Fab 3, where SunPower had to buy out its partner to upgrade the plant to next-generation technology.
How SunPower plans to grow
If it can get manufacturing partners, SunPower would be able to focus more of its attention on the SunPower Energy Services (SPES) side of the business. This is the division that makes, Equinox, Helix, and Oasis solar building blocks for residential, commercial, and power-plant developers, respectively.
SPES will also include integrating energy storage and smart-home and business solutions that are being paired with solar panels. SPES was already a $334 million business with $23.5 million in EBITDA in the fourth quarter, outperforming the $276 million in revenue and $7.9 million in EBITDA from manufacturing, so you can see why this is where SunPower wants to grow its business.
Trying to leverage improving technology
SunPower is trying to build a path forward for its high-efficiency solar technology, and there's no easy answer for how to do that in a world where commodity solar prices are dropping every year. Bringing in partners may be the right path, but SunPower may also lose control of the destiny of its core competitive advantage in the process. Over the course of 2019, we'll see how management navigates these rough solar waters and builds a growth path forward.