SunPower increases quarterly revenue outlook despite module reallocation from Italian utility market

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As part of its updated second-quarter and fiscal year 2011 financial outlook, SunPower boosted its expected quarterly revenues to between $550 million and $600 million, while annual sales are forecast to end up in the $2.8 billion-$2.95 billion range. Because of the new Italian policy environment, the company said it will be reallocating 85MW of product from its utility group in Italy to residential and commercial customers in Europe and elsewhere.

SunPower’s recognized megawatt output for Q2 will reach 175-200MW, a bump from the previously forecast 160-190MW for the period, with annual guidance tightening to the 875-920MW range.

The company’s gross margins (non-GAAP and GAAP) will be lower than those seen in 2010, ranging from the mid to high teens, because of the reallocation from the higher-margin utility sector to the lower-margin residential and commercial space as well as downward pressure on ASPs in the global market.  

The company also confirmed its intention to close Total's all-cash tender offer, to purchase up to approximately 60% of the outstanding shares of SunPower Class A and Class B common stock for $23.25 per share respectively, as scheduled on June 14.

In line with this, the two companies said they have waived the condition related to receipt of European Union competition law approval, as permitted by applicable European Union regulations. With the grant of this waiver, all regulatory conditions to the completion of the tender offer are satisfied. Other terms and conditions of the tender offer remain unchanged.

During the conference call, the company said that as a result of the abrupt change to the Italian policy and general uncertainty regarding utility-scale plants there, it will not start construction on any new installations and is attempting to monetize those project assets (land, acquired permits, etc.) that are not part of those sites already under construction. In some cases, SunPower could end up selling modules or systems back to the new project developers.

The reallocation of modules originally designated for those sites is going well, with 70% moving to European residential and commercial customers, a sector that saw demand double from April to May and continuing strong in early June. Much of the product will remain in Italy, where the company will benefit from the Italian policy change favoring installations of <1MW; it maintains a large network of more than 500 dealers and holds the number-two position in the rooftop market there.

The company expects its revenues to be split nearly equally between its utility and residential/commercial segments during Q2, but sees the balance shifting toward the R&C unit for the entire year, which should garner 55-60% of the revenue stream over the course of fiscal 2011.

SunPower’s revised plan includes an accelerated cost reduction roadmap, more aggressive cost management in manufacturing and operations, and getting vendors in line with the new market pricing realities.

Company head Tom Werner admitted during the question-and-answer part of the call that the “bar for capacity expansion” has become “harder to cross” since the manufacturing cost-per-watt will have to be lower to make it possible to go forward with expansion. As a result, cost reductions need to be accelerated—something that is already happening—so that management can then reevaluate the speed of those reductions and determine how quickly to add capacity.

He went on to talk about the “levers” for cost reduction along SunPower’s vertically integrated enterprise. He pointed to lower-cost silicon that will happen when the supply-demand equation rebalances, the need to get more wafers per kilogram of processed poly, and efforts to pull in the roadmap to reduce the number of production steps on their high-efficiency solar cell lines by 40% by 2014.

Werner also mentioned recent success in doubling the amount of module output per square foot of factory space, more focus on driving cost out of the module manufacturing value chain, and efforts like OASIS and other standardized balance-of-systems approaches to generate cost reductions downstream.

Overall, he stressed the importance of finding ways to “design out cost and get more efficiency out of the products.”  

Werner, SunPower’s president/CEO, made the following statements in conjunction with the outlook update

“The changes to Italian solar policy this year have had a significant impact on the global solar market. In response, we rebalanced our product allocation in Italy away from power plants and toward our European residential and commercial business where demand remains strong. The ability to reallocate our product in the face of market changes is a key feature of SunPower's vertically integrated, geographically diversified model.  

“However, systems sold through our R&C channel yield less profit per watt than systems deployed in self-developed power plant projects, as reflected in our Q2 outlook. In addition, we expect the current global pricing pressure to persist through 2011 and, as a result, we are planning full-year 2011 non-GAAP gross margins to be in the range of 17% to 19%.

“The changes in global market conditions favor SunPower as we have both the flexibility to rebalance our allocation between downstream channels as well as the technology differentiation to sustain premium pricing compared to lower efficiency systems. Italy's decision to focus market development on residential and commercial applications instead of large power plants is in line with the trend across Europe, playing to our strengths in the rooftop and carport markets.  Our world-leading, high-efficiency solar systems maximize customers' returns, especially in area-constrained applications, positioning us to increase our share in these markets,” he concluded.

“To align with the reallocation of product, we are rebalancing resources to support the growth of our residential and commercial rooftop businesses,” stated CFO Dennis Arriola. “We're taking aggressive steps to actively manage our manufacturing and operating expenses, including working with suppliers to modify contracts to reflect current market conditions.  

“In addition, our 2011 outlook incorporates the efficient management of our balance sheet through production optimization and demand-driven inventory levels. These steps, along with the $1 billion credit support agreement with Total, position SunPower to gain market share profitably.”

As a result of the changes to Italian solar policy, the company anticipates that its FY 2011 GAAP results will be impacted by certain one-time, pretax charges of $14 million to $29 million related to its reallocation strategy, including $11 million to $21 million in the second quarter. In addition, the company expects its second-quarter GAAP results to reflect $13 million to $15 million in pretax expenses related to the outstanding Total tender offer.

(SunPower is exhibiting at Intersolar Europe, Booth A1.350.)

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