Solar energy systems company Shoals (NASDAQ:SHLS) beat analysts' expectations in Q2 CY2024, with revenue down 16.7% year on year to $99.25 million. On the other hand, the company's full-year revenue guidance of $385 million at the midpoint came in 17.2% below analysts' estimates. It made a non-GAAP profit of $0.10 per share, down from its profit of $0.14 per share in the same quarter last year.
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Shoals (SHLS) Q2 CY2024 Highlights:
- Revenue: $99.25 million vs analyst estimates of $90.53 million (9.6% beat)
- EPS (non-GAAP): $0.10 vs analyst estimates of $0.08 (27.4% beat)
- The company dropped its revenue guidance for the full year from $465 million to $385 million at the midpoint, a 17.2% decrease
- EBITDA guidance for the full year is $103 million at the midpoint, below analyst estimates of $138.4 million
- Gross Margin (GAAP): 40.3%, down from 42.4% in the same quarter last year
- Adjusted EBITDA Margin: 27.9%, down from 40.4% in the same quarter last year
- Free Cash Flow of $35.84 million, up from $10.38 million in the previous quarter
- Backlog: $642.3 million at quarter end
- Market Capitalization: $930.5 million
“The second quarter was a busy one for Shoals, which included new commercial agreements, new product introductions, and the initiation of our first share repurchase program. The team executed well in the period, enabling Shoals to exceed our second quarter outlook. While we are not immune to the ongoing variability many are experiencing within our markets, we remain focused on what we can control and influence: expanding our offering, improving our operational capabilities, and taking exceptional care of our customers. The early results can be seen in backlog and awarded orders increasing by 18% year-over-year, to a record $642.3 million at the end of the quarter,” said Brandon Moss, CEO of Shoals.
Started in Huntsville, Alabama, Shoals (NASDAQ:SHLS) designs and manufactures products that make solar energy systems work more efficiently.
Renewable Energy
Renewable energy companies are buoyed by the secular trend of green energy that is upending traditional power generation. Those who innovate and evolve with this dynamic market can win share while those who continue to rely on legacy technologies can see diminishing demand, which includes headwinds from increasing regulation against “dirty” energy. Additionally, these companies are at the whim of economic cycles, as interest rates can impact the willingness to invest in renewable energy projects.
Sales Growth
A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one tends to grow for years. Luckily, Shoals's sales grew at an incredible 28% compounded annual growth rate over the last five years. This is a great starting point for our analysis because it shows Shoals's offerings resonate with customers. 
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Shoals's annualized revenue growth of 35% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.
This quarter, Shoals's revenue fell 16.7% year on year to $99.25 million but beat Wall Street's estimates by 9.6%. Looking ahead, Wall Street expects sales to grow 15.5% over the next 12 months, an acceleration from this quarter.
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Operating Margin
Shoals has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 17.9%. This result isn't surprising as its high gross margin gives it a favorable starting point.
Analyzing the trend in its profitability, Shoals's annual operating margin decreased by 7.2 percentage points over the last five years. Even though its margin is still high, shareholders will want to see Shoals become more profitable in the future.
This quarter, Shoals generated an operating profit margin of 18.7%, down 7.8 percentage points year on year. Since Shoals's operating margin decreased more than its gross margin, we can assume the company was recently less efficient because expenses such as sales, marketing, R&D, and administrative overhead increased.
EPS
We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
Shoals's EPS grew at a spectacular 15.3% compounded annual growth rate over the last five years. However, this performance was lower than its 28% annualized revenue growth, telling us the company became less profitable on a per-share basis as it expanded.
Diving into the nuances of Shoals's earnings can give us a better understanding of its performance. As we mentioned earlier, Shoals's operating margin declined by 7.2 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Shoals, its two-year annual EPS growth of 57.6% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.
In Q2, Shoals reported EPS at $0.10, down from $0.14 in the same quarter last year. Despite falling year on year, this print easily cleared analysts' estimates. Over the next 12 months, Wall Street expects Shoals to grow its earnings. Analysts are projecting its EPS of $0.49 in the last year to climb by 30.7% to $0.65.
Key Takeaways from Shoals's Q2 Results
We were impressed by how significantly Shoals blew past analysts' EPS expectations this quarter. We were also excited its revenue outperformed Wall Street's estimates. On the other hand, its full-year revenue guidance missed and its EBITDA guidance for the full year fell short of Wall Street's estimates, and this seems to be dragging shares down. Overall, this was a mediocre quarter for Shoals. The stock traded down 6.4% to $5.15 immediately after reporting.
Shoals may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.