SunPower (NASDAQ: SPWR) stock dropped 5.5% today after the company reported second-quarter earnings that failed to wow investors. Second-quarter non-GAAP revenue fell 4.4%, to $621.1 million, and non-GAAP net income fell 30.1%, to $43.9 million, or $0.28 per share. But these results only scratch the surface of SunPower's quarter, so I'll try to peel back what really happened. 

SunPower's headquarters, lined with solar panels. Source: SunPower.

The HoldCo strategy emerges
Earlier this year, SunPower announced a HoldCo/YieldCo strategy, which basically involves building projects on its balance sheet and holding them until after they're completed. Then, it would have the option to sell them, launch a YieldCo, or hold onto them long term. Management says that the strategy can produce nearly double the profit per watt than selling projects before construction begins, because SunPower is taking on the development risk, and cash flows can be proven to acquiring investors. 

Solar home communities are a growing portion of SunPower's business. Source: SunPower.

That's great long term, but it also has the effect of dampening revenue and earnings short term. That impact was felt in a big way this quarter because, even though around 411 MW of modules were shipped, only 311 MW were recognized as revenue.

About 100 MW of projects built during the quarter -- including residential, commercial, and utility scale -- were built on the balance sheet. If we assume that the sale of these projects could be done at $3 per watt  -- a conservative figure -- there could have been another $300 million in revenue in the quarter, and probably $75 million or more in gross margin. But because SunPower is building these projects on the balance sheet, it doesn't explicitly show the value that's being created.

The numbers you need to know
There are a few other items that investors should know about when it comes to SunPower's future. First, the company's 350 MW capacity expansion is on track, and 50 MW-100 MW are expected next year. with a ramp to more than 250 MW in 2016, and full production in 2017 and beyond. When complete, production will be more than 1.8 GW annually.

The bigger news may have been hints from management about the next capacity expansion. The 350 MW expansion is really a test facility to optimize new process changes and, once those are understood, the company plans to build another expansion of at least 700 MW. I'd expect this to be completed more quickly than the current expansion, so it's possible production will jump to more than 2.5 GW by 2018 from 1.2 GW a year ago.

Carports are also an important offering to commercial customers. Source: SunPower.

Project backlog and pipeline also continue to grow. The HoldCo backlog, including what is already built, stands at 605 MW, including 184 MW of residential, 100 MW of commercial, and 322 MW of utility-scale projects. Pipeline projects, which aren't fully contracted, stand at more than 8.0 GW.

After a $400 million convertible debt offering, SunPower also has $1 billion in cash on hand, and more than $1.2 billion in liquidity. That's key, because that cash will be used to build projects held on the balance sheet as part of the HoldCo strategy, and pay for capacity expansions.

SunPower is still at the top of its game
Don't let the headline numbers fool you; SunPower is adding a lot of value to shareholders. The problem is that the HoldCo strategy hides a lot of that value on the balance sheet, and management doesn't give us a lot of information about what those projects are worth.

I think that if management gave a retained value figure it would get a lot more credit from the stock market for the value it actually added, despite the flaws in calculating retained value. Management has indicated to me that it expects between $2 and $3 per watt in retained value for projects it builds in the HoldCo, which, if correct, means at least $200 million in value was added to the balance sheet this quarter.

It's that balance-sheet value from SunPower that investors need to understand, because the goal of management is to create long-term value rather than short-term revenue or profits. But that takes a lot of effort to pull out of the earnings release, and investors are clearly looking past that positive news today.