The slow and steady performance of SunPower (NASDAQ:SPWR) continued in the fourth quarter, although results were overshadowed by their proposed yieldco with First Solar (NASDAQ:FSLR). Over the next few months, the two companies will be combining some of the project assets they've been building on their balance sheets into a publicly traded company that will act as a long-term cash flow generator for both companies and outside investors.
What remains true is that SunPower continues to report profits while stashing assets on its balance sheet. Let's get to what we learned from the fourth quarter.
SunPower's fourth-quarter non-GAAP revenue fell from $758.2 million a year ago to $609.7 million, but keep in mind that SunPower is keeping about 100 megawatts of projects on its balance sheet each quarter forgoing sales for long-term value from the yieldco mentioned above. This dynamic also affected non-GAAP net income, which fell from $72.2 million a year ago to $39.4 million, or $0.26 per share. Both revenue and earnings per share were slightly ahead of Wall Street's expectations.
Once again, the Americas were the strongest market, generating $447 million in sales and a 23.2% gross margin. The Solar Star project that's currently under construction in California is driving high margins and as that project is completed later in the year SunPower will need to execute on new projects in its backlog.
One negative came from APAC, where SunPower is completing a legacy low-margin project that was signed when the industry was struggling mightily. In the first quarter, management expects margins to return to high teens or low 20s as they've been in the past.
Beyond the numbers
More importantly than the quarterly numbers is how SunPower is transforming its business into a modern solar company. The yieldco with First Solar will allow it to keep project assets and generate long-term value, while still recognizing the value publicly that's currently hidden on the balance sheet.
The other big investment has been in distributed generation, where SunPower is a much larger player than you may realize. The company now has 115,000 residential customers, 27,000 of whom are on leases. This compares to 190,000 customers for SolarCity (NASDAQ:SCTY.DL) but keep in mind that SunPower is selling 60%-70% of its residential systems each quarter through third party loans. This is different from SolarCity, that recently launched its own loan product but has historically been signing customers up to long-term leases. As SunPower invests in infrastructure to sell residential solar more efficiently and adds adjacent services like energy storage I think it will play a larger role in this space.
SunPower also has a $1.4 billion pipeline in commercial projects, an area where it's beginning to show an edge in the market.
Utility scale solar has been a huge driver of SunPower's profits recently, just because of the immense scale each project brings to the business. But long-term, residential and commercial will be key for SunPower because it has a significant advantage over competitors due to higher efficiency modules that put out more power in constrained spaces.
Priming for future growth
SunPower's business may not be the high growth business that SolarCity is, but it's highly profitable and management is investing in growth over the next half decade. A 350 megawatt plant expansion will begin producing product later this year and 160 megawatts of capacity in South Africa. In all, production should triple between 2014-2019. This will be the driver of growth, but it has yet to hit the income statement.
This is a slow and steady solar business but one that's beginning to show its ability to generate value for shareholders. Last quarter's profit and the coming yieldco are examples of that. I'm still bullish on the stock long-term and the announcements over the last 24 hours are small steps along the path of upending the energy industry as we know it.