SunPower at loss over Europe: Ramping ‘Gen 3’ cell technology

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Challenging competitive market conditions in Europe are forcing SunPower to re-evaluate its business strategy in the region after sales shrank and its European operations were loss-making in the third quarter of 2012. 
SunPower reported non-GAAP revenue of US$607 million in Q3 2012, compared to US$651 million in Q2 2012. A significant US$231 million of revenue came from the continued build-out of the massive CVSR PV power plant. 
GAAP revenue in Q3 was US$649 million, up from US$595 million in Q2. However, the company reported a GAAP net loss of US$48.5 million, down from US$84.2 million in Q2. Losses for the first six-months of 2012 stood at US$207.2 million, though significantly down from the same period a year ago. Cost control measures were said to be a contributing factor in the decline in quarterly losses.

Regional sales divergence 

A key change in SunPower’s regional sales performance in the quarter was the strength of its US operations both for the residential market and utility-scale market. 
Non-GAAP North American sales were US$460 million, accounting for 76% of total revenue. 
SunPower also reported sales in Asia-Pacific had increased 20% q-on-q to US$58 million, primarily from strong sales in Japan, via its sales partner, Toshiba. Japan accounted for over 10% of  total revenue in the quarter, according to the company. APAC non-GAAP gross margin was 21.4% in Q3. Shipments to Japan in Q3 increased 30% sequentially.
In contrast, non-GAAP revenue in EMEA was only US$89 million, down significantly from the prior quarter. SunPower said that its two main European markets, Germany and Italy, declined to 6% of total revenue, compared to 11% in Q2, 2012.
Management blamed the reduction in sales in Europe on weak demand and a decline in ASPs. Non-GAAP gross margin in Europe was a negative 23%, which management said in a conference call included inventory and production charges of US$21 million. Excluding the charges, SunPower said margins would have been ‘slightly positive.’
Tom Werner, SunPower president and CEO, said in the conference call: “We are committed to the EU market and firmly believe that our technology advantages offer us a strong economic value proposition in Germany, Italy and France.”
Werner added:“Our goal is to regain profitability in this region and we are implementing a number of strategic initiatives that will enable us to achieve this goal next year.”
Werner noted that the company planned to ‘customise’ its business offerings in key European markets of Germany, Italy and France, which included better module pricing. He claimed this was possible due to production cost reductions running ahead of schedule. 
However, despite claiming to have a dealer network four times larger than its equivalent in the US, pricing competition, especially in Germany remains tough. Rival high-performance module suppliers such as Panasonic have also seen demand wane in Europe in the third-quarter. 
Werner inferred in the call that pricing alone would not be enough to enable it to compete in its core European markets as the company was looking seriously at introducing financial products, similar to its third-party leasing business model that has proved to be popular in the US, especially in high-irradiance states such as California.
The company claimed in the call that its leases accounted for around 40% of all residential PV lease applications in California in Q3.
“So you can anticipate that we're going to be looking at financial products and delivering more of a solution to the end customer through our dealer network there that we can leverage,” noted Werner during the Q&A session of the conference call. 

Manufacturing update

Having already pre-announced its latest manufacturing restructuring plans, management reiterated the unspecified temporary idling of 6 of 12 production lines at Fab 2 and a reduction in its overall capacity utilization rate to around 60% in Q4.
The company is meeting PV project module delivery schedules via support from its high inventory levels, which are also helping to support a 10% inventory reduction in Q3. 
SunPower reported cell production of 227MW, down around 10% from the prior quarter. 

Cost reduction update

Management said that it remained on target to have achieved a 25% reduction in its blended cost per watt at year-end. The company said this would be achieved by a combination of ‘higher yields, improved overall equipment effectiveness and lower raw material cost.’
Management highlighted that its silicon utilisation in Q3 2012 reached 4.8 grams per watt, the first time the figure had gone below 5 grams per watt. 
With respect to its continuing step reduction program, SunPower noted that production lines at Fab 2 had been retrofitted to run the new process, which claims to reduce line process steps by 15%. The program was said to be a full quarter ahead of schedule. Conversion of Fab 3 to the process reduction plan would be undertaken in 2013. 

Gen 3 technology ramp

The company also noted in the conference call that it was ramping production of its next-generation ‘Gen 3’ technology, which has a cell efficiency of up to 24%. Installation of new equipment was ongoing, having started in Q3. 
As a direct result, capital expenditure for the full-year has remained relatively unchanged at between US$115 million and US$125 million. Capital expenditures in the fourth quarter is expected to be in the range of US$30 million – US$40 million. 
SunPower said that production of Gen 3 technology would reach near to 100MW by the end of 2013. 

Financial guidance 

The company said that it expected revenue recognition of between 200MW – 250MW in Q4 2012. A non-GAAP revenue expectation in the range of US$700 million to US$900 million was given, with a non-GAAP gross margin of 14% -16%. On a GAAP basis, revenue of US$650 million – US$850 million was guided with a gross margin of 2% to 4%. 

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