SunPower: Will cutbacks, cost/W roadmap be enough?

More data from the solar arena confirms tough times are upon us. This time it’s SunPower lowering the bar, announcing cost-cuts, and promising improved cost and production profiles in 2012.

November 4, 2011 – More data from the solar arena confirms tough times are upon us. This time it’s SunPower lowering the bar, announcing cost-cuts, and promising improved cost and production profiles in 2012.

3Q11 (GAAP):
– Sales $705.4M (+19% Q/Q, +28% Y/Y)
– Gross margins: 10.8% (vs. 3.3% Q/Q, 20.4% Y/Y)
– Net loss: ($307.8M) — double 2Q11’s ($147.9M); vs. $20.1M in 3Q10. Includes $349.8M related to goodwill and intangible assets.
– EPS: ($3.77), vs. ($1.51) in 2Q11, $0.21 in 3Q10.

The company is initiating a companywide restructuring in 4Q11, aimed at reducing operating expenses by -10% in 2012. Targets include cost reduction and “overall efficiency,” reprioritizing capex and R&D projects, and optimizing cash flow.

New outlooks for 4Q11 and FY 2011 (GAAP):

– Revenue: $575M-$625M
– GMs: 7%-9%
– EPS: ($0.60) – ($0.35)

– Revenue: $2.30B-$2.35B (had been $2.80B-$2.95B)
– Gross margin: 9%-11% (had been 14%-16%)
– EPS: ($5.90) to ($5.65) (had been -$1 to -$0.50)
– Capex: $125M-$135M
– MW recognized: 790MW-815MW (had been 900-950MW)
– $65.7M pretax charges related to panel reallocation strategy, third-party inventory writedown, terminated third-party cell supply contracts
– An extra $10M related to restructuring (detailed below).

Other big news from SWPRA: CFO Dennis Arriola will leave in March 2012, and Jim Pape, president of residential/commercial biz, will leave in Nov. 2011. Other execs will rearrange duties: Howard Wenger (president/regions), Jack Peurach (EVP/products), and Marty Neese (COO “with expanded responsibilities”). The end result will be a focus on regional business, a products group with P&L responsibility, and incorporating solar cell/panel R&D into the upstream part of the company’s business.

Some pithy comments from CEO Tom Werner and CFO Dennis Arriola during the conference call Q&A:

– Capacity was fully utilized for the quarter; record cell production of 270MW, and record yields in Fab 3 (Malaysian JV with AU Optronics). “Tens of thousands of our Gen 3 cells” (23%-24% efficiency) produced in 3Q. Production output will be curbed “by up to 20% in 4Q. Fab 3 expansion is pushed out from 2012 until 2013. 2012 capacity is pegged at 1.27GW.

– Demand has picked up in European markets, especially in Germany — SWPRA’s 4Q11 shipments are projected to rise 70% — and there’s also strong demand in the US.

– Look for the pricing environment “to remain very competitive through at least next year.” … “Clearly, there’ll be less people making solar over the next 14 months, making solar panels. So it’s a combination of prices coming down perhaps more aggressively, but certainly it’s a winnowing out of competition.” “Stability and increase in prices is not what SunPower is planning on.”

– A -15% cost/W step-reduction is on track for 2012, and -40% by 2013, driven by “more efficient poly utilization: thinner wafers, diamond wires (starting 1Q12), and diversification of wafer suppliers (SWPRA currently has two large sources). Fab 2 is transitioning to 135?m wafers now; all lines will be transitioned by end of 2012.

– Year-end cost/watt goal is $1.48/W ($1.8/W efficiency-adjusted basis) on large-format panel configurations. (Aforementioned 4Q production cutbacks might add $0.04) Projected 4Q12 cost/W is <$1.25/W (<$1.20/W for large panels), or efficiency-adjusted ~$0.86/W.

– No revenue coming from projects with recent investor Total, but some Middle East projects should bear fruit “probably in the 2012 timeframe […and] perhaps rather substantially beyond that.”

Analysts’ Take

Lowered 2011 guidance was expected, but everyone’s waiting for the cost reductions to bear fruit and for end-market demand to solidify. Renegotiating polysilicon contracts in 2012 could bring another step-function cost reduction, notes Deutsche Bank’s Vishal Shah. He also points favorably to strong shipments to Germany. On the other hand, the departure of two key execs (including the CFO) is somewhat unsettling. And the underutilization and production pullback are short-term drags.

Citi’s Tim Arcuri called the exec departures “most curious” and “not a great leading indicator.” And despite the cost/W roadmap, “we are skeptical that SPWRA can remain cost competitive in the long term,” he says. (Note FSLR’s cost/W is closing on $0.70/W)

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