Suntech Power (STP) Poor Results

As we mentioned yesterday, Suntech Power (STP) recent price action looked like a classic case of big investors exiting stage right and handing the bag to small retail investors, and this morning's results demonstrate that to a tee. The stock is down 20% this morning, and there were misses across the board, in revenue, earnings, in near term guidance, etc. An ugly report. Very strange in light of Yingli Green Energy (YGE) which was not "that bad" in the operations area (most of their issues were in currency and the like). Thankfully, sticking to discipline I reduced this to a sub 1% position due to the awful price action of late (breaking 200 day moving average), but more concerning is the potential implications for the solar space as a whole. If the bellweather is having serious issues, we have to rethink the whole group (ex-First Solar). I am really struck by some of the misses considering Suntech reports late in the quarter so 90 days ago they were 1/2 way through their previous quarter when giving guidance - so this means things really degraded in the last 6-7 weeks of the quarter.

I'll have to listen to the conference call before coming to final conclusions but early analysis shows:

• Revenue came in light at $398M (vs analysts $420M)
• EPS (adjusted) came in at $0.34 (vs analysts $0.36)
• Gross margins came in at 21.6% (vs Suntech guidance last quarter of 21.9-22.4%)
• General and Administrative Expenses jumped from $11.5M to $19.4M (will have to investigate why - major increase) This number was close to $15M two quarters ago so it is gyrating quite a big quarter to quarter.
• R&D spending was cut by 25% from normal levels, from traditional $4M or so of late, to $3M
  
• Q1 2008 revenue guidance is VERY light @ $370-$380M (vs analysts $455M!)
• Guiding gross margins "slightly higher" than this Q
  
• They are sticking to their full year guidance of $1.9B to $2.1B but if they are only doing $370-380M in Q1, that is going to be a very back loaded year. Meaning you have to trust them at their word. Which after today's failure is going to be hard to do.
• An important comment "Suntech expects that greater quantities of reasonably priced silicon will become increasingly available from mid-2008." This might be a hint of their refusal to be buying spot polysilicon at the outrageous rates I highlighted yesterday. But again, we do not know when spot polysilicon prices drop. It could be in 6 weeks or 6 months. Another variable.

Overall, very disappointing. The year over year growth is still very good; but the inability to forecast their business accurately is a bit troubling - the miss on the top line (revenue) is a big red flag to me. It is one thing to underestimate input costs but not being able to forecast your sales is a problem. Further this quarters revenue guidance is just awful. In a high growth area as solar you are not supposed to have "seasonality".

Technically, long term support for the stock is in the $33-$35 range so I'd expect the stock to bottom near that area in the coming days. But at this point the company needs to get back the trust of the Street, and further some of the things they missed on, after guiding in mid November are troubling. And it is very reliant on a huge surge in 2nd half 2008 sales. Will have to do more digging in the conference call, and further find out if these are company specific issues are industry issues.

Long Suntech Power in fund; no personal position