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:
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
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
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
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