SunPower Corp. (NSDQ: SPWR) kicked off the solar earnings season with a bang Wednesday, reporting higher-than-expected income but lower-than-expected margins in the third quarter.

The company's gross margin fell to 20.4 percent, compared with a margin of 23 percent in the second quarter and an analyst expectation of 21.3 percent, according to a Thomson Financial poll.

SunPower said the drop was due to the shortage of solar-grade silicon, which raised costs for systems and components to $195.9 million from $50.2 million in the year-ago quarter. A higher portion of revenue also came from systems integration, a lower-margin part of the business compared with the sale of solar components, SunPower said.

The company's net income fell 12.5 percent to $8.4 million, or 10 cents per share, in the third quarter, compared to $9.6 million, or 13 cents per share, in the same quarter last year.

But its operating income grew to $27 million, or 33 cents per share, from $12 million, or 16 cents per share, in the year-ago quarter. And that beat Wall Street expectations of 28 cents per share, according to Thomson Financial.

SunPower's revenue also beat expectations. The company posted third-quarter revenue of $234.3 million, up 34.9 percent from second-quarter revenue of $173.8 million and more than triple the $65.3-million posting from the second quarter of 2006.

And the company said it expected things to look up next quarter. SunPower said its fourth-quarter margins would increase to between 23 and 24 percent for its systems segment and to between 25 and 26 percent for its components segment.

Shareholders were clearly bullish on the news.

After an initial drop of 4.8 percent to $85.50 per share, SunPower's share prices rose to close at $97.01 per share, almost 8 percent higher than Tuesday's closing price.

Sanjay Shrestha, management director and senior analyst at Lazard Capital Markets, called the results "pretty good."

"The stock, quite frankly, shouldn't have gone up 7 percent, but with the guidance they're giving, nobody wants to sell it right now," he said.

Shrestha said the price hike shows shareholders are willing to forgive short-term issues when they expect great things to follow.

In a conference call, SunPower said it would expand capacity and reduce the thickness of its wafers, and also said it expected to have more silicon starting next year. It also said its average selling price remains strong and should remain healthy until at least the beginning of next year, Shrestha said.

He said while the lower margins clearly reflect tight silicon supplies, he doesn't expect those margins to be reflected across the industry.

"SunPower's margins were impacted because of issues that are more SunPower-related than industry-related," he said.

Still, Travis Bradford, president of the Prometheus Institute, a Greentech Media Research partner, said he doesn't think margin compression is a good thing.

And Rob Day, a principal at venture-capital firm @Ventures and the writer of Greentech Media's Cleantech Investing blog, said the SunPower margin is another reminder the importance of access to good silicon supplies.

SunPower requires "super-high-purity" silicon, making it particularly vulnerable, Day said.

"If anybody's going to get hit as there are shortages in the market, it's going to be them," he said. "This is a confirmation of the effects of the silicon shortage that the industry is going through right now."