SunPower Corporation's (NASDAQ: SPWR) transition from a do-it-all solar company to one focused on residential and commercial solar is in full swing, and there are both good and bad signs for the business long term. The company's high-efficiency business is doing well, but asset sales, lower-efficiency products, and tariffs have complicated both operations and analysis of the business.
To get an idea of where SunPower's business stands, we need to take a step back and look at how it's performing in each segment and how its balance sheet helps or hinders the company in the long term. Here's a breakdown of SunPower today.
Image source: SunPower.
Where SunPower is strongest
SunPower has seen the most success in solar with its high-efficiency solar panels, which are known as E-Series, X-Series, and NGT solar panels. The company sells these panels into residential and commercial solar, primarily in the U.S. and Europe, and it often includes other components like racking, inverters, and even energy storage.
In the third quarter, SunPower reported a non-GAAP 14.4% gross margin from the residential solar business and a negative 3.6% gross margin for commercial solar. These were negatively impacted by around 500 basis points by tariffs. The company also reported a negative 2.1% gross margin for commercial and power plant sales.
Management said a recent tariff exemption, which will save SunPower about $100 million per year, won't impact the business until 2019 as it works through inventory brought into the U.S. under the tariff. Next quarter, the tariff impact will be about $22 million, but early in 2019, those costs will reverse to nearly zero. Early guidance is for about 20% growth in residential and commercial solar in 2019, so this is a segment that's performing relatively well.
Helping long-term operations will be NGT solar technology, which lowers panel costs to similar to that of commodity solar panels without giving up efficiency, which should improve margins significantly. CEO Tom Werner said this about the development:
NGT technology development is ahead of plan with average solar cell efficiency of 25%. We are currently certifying our first NGT product, a 72-cell format panel rated at 450 watts, that will be delivered to initial customer sites in Q4. We are also actively pursuing a variety of partnerships and other options to enable further NGT expansion to gigawatt scale.
In 2019, investors should expect residential solar gross margins to increase to over 20%, and commercial solar to be in the teens, both helped by the tariff exemption. But with power plants still struggling, it may not be enough to bring SunPower to profitability.
China disappointing in power plant
SunPower's other product is P-Series solar panels, which are built using commodity solar cells and a process of shingling cells into a solar panel slightly more efficient than other methods. Long term, SunPower thinks this technology will allow SunPower to sell a significant volume of solar panels to power-plant developers, even if margins are relatively low compared to residential solar.
The headwind in the second half of 2018 is China cutting solar incentives, which have decimated the market and caused solar panel prices to plunge by around one-third. SunPower didn't avoid these market trends, with Werner saying this:
Sales into the power plant market were impacted by the midyear policy disruption in China with several customers bringing solar equipment purchase decisions on hold until market pricing for solar panels stabilized. This, in turn, impacted our P-19 volume and margin in Q3 and we expect this to persist in Q4 due to project timing push-outs. In Q4 to-date, however, we have experienced very strong P-19 bookings led by a 349-megawatt order for delivery throughout the first 3 quarters of 2019. We currently have over 70% of our planned 2019 power plant volume booked and under contract.
Power plants don't have much impact on earnings, for better or worse, which is why a reduction in the midpoint of expected volume by 200 MW didn't affect full-year EBITDA guidance of $100 million to $120 million.
Debt is worth watching
One big focus for SunPower is improving the balance sheet to reduce leverage and overall risk. Management pointed out that net debt was down 15% year over year to $1.25 billion, but that's only part of the story. Net debt increased versus the $1.08 billion reported a quarter ago as operating cash flow was negative $161.7 million.
Selling power plants and other assets only help cash and debt levels for so long. Eventually, SunPower needs to generate cash from operations, and it isn't at that point yet.
2019 will be big for SunPower
SunPower seems like it might be on the right path heading into 2019, with residential and commercial solar growing and demonstrating strong margins. Still, power plants continue to be a drag, and low demand and margins in the segment could be a headwind in 2019.
The macro solar environment isn't helping SunPower, either, with the U.S. and China both reducing incentives for solar developers. At the end of the day, if that doesn't turn around, the company may continue losing money for the foreseeable future, and a turnaround that's been promised for years may never arrive.
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