SunPower Corporation (SPWR) Earnings Call Transcript & Summary

Good afternoon, everyone. I hope you're all doing well and staying safe out there. I'm Julian Triscott, at utility sales specials, and we are delighted to be hosting SunPower's Chairman and CEO, Tom Werner; and Bob Okunski, who heads up Investor Relations. You may be asking where is the other better-looking Julien and Eric. Unfortunately, they are currently restricted in the stock due to an active transaction. If you'd like to ask a question to Tom or Bob, you can log a question through the via the Vericast system or e-mail or Bloomberg myself. Let's hop right into it.

Tom, it'd be great if you could discuss some power strategy around growing the business on a go-forward basis. For instance, how do you think about potential expansion opportunities beyond the core North American Distributed Generation segment?

Thanks, Julian, and hi, everybody. It's nice to be aware if you're out there. I can't see you, but I appreciate you joining and anxious to hear your questions. The good news is that the core North American DG market is quite good. And so there's inherent growth in the total available market. And so just maintaining share, you would grow quite rapidly. And then we have a preferential strength in new homes and I think all of us know that the new homes market is doing incredibly well. And the growth rate in new homes currently is, to some degree, is constrained by labor availability. And so the new homes business will be disproportionately growing faster than the rest of our business. And then the -- we have storage, of course, which is a completely incremental to our run rate. We'll install hundreds of SunVault this year and thousands next year, 10,000 to be precise. So that's all incremental. And then we've got more cost-effective loan and lease. And therefore, you would expect that we would do well. And the question is, is it more cost-effective than our peers, in which case we would grow faster. That all leads to -- we had a call, an Analyst Day recently, and you get to a pretty aggressive growth next year, very aggressive growth, for example, in residential, between 30% and 50%, which is the majority of our business now. As we look longer term beyond 2021, I think all of these solar companies are seeing similar things that the attach rate of storage to solar, distributed generation solar is quite high. And it would appear that, that's only going to go higher because costs are going to come down. And that is a fundamental change in our relationship with the customer because now they have solar plus storage. And if you spend the money to store solar electrons, you want to have the software that will optimize the use and give you a payback on storing those electrons. And of course, I've been saying this for quite a while now. Eventually, I'm going to be right. And I think that's happening. And so as we go out, the next driver of growth is software. And as others have said, that will lead to energy as a service or becoming more like a power company or, in our case, increasing the power counterpart of our model and having more recurring revenue. And perhaps in the questions as we go forward here, I can explain why we have a really strong competitive position by virtue of designing the hardware of SunVault. And all of the software of SunVault creates a platform that we think is uniquely capable of capitalizing on the software service opportunities.

Just regard to your new Residential home business, in light of the new angle that's coming from California's mandate, how do you accelerate this in California and elsewhere?

So on California's expansion of new homes is rather breathtaking. And I think it's over -- we showed in our Analyst Day, over 30% compound annual growth rate. And so that's plenty to focus on in the near term. And what turbocharges that, of course, is the addition of storage. And I think Norm Taffe talked today at AML Residential Storage conference recently and indicated that we already had 9 communities sign up for storage. So you get the growth rate in California of new homes. To that, you add storage and then turbocharges that growth rate. And then the fundamental question is, as you get that scale and you get cost down, and maybe we can expand on this earlier. We've innovated and created a product offering that is an integrated fast to install integrated previously called OneRoof. And that as costs come down, then we can enter other markets. And it's important to note that the country's biggest homebuilder is already doing solar in half a dozen, roughly half a dozen other states. So precedence has been set. We do a little business in these states. We can expand in those states.

Just regard to -- you talked about your expectations of megawatt growth beyond greater than 50% of your guide for '21. With this cash [indiscernible] in '22 or would it could potentially accelerate?

Your question, Julian, was little taper off at when?

In '22?

And that's megawatt growth rate. So we, of course, give the data so that you can know megawatt growth. We want to focus like other industries do on revenue growth because as you add storage, it's really hard to talk about megawatt storage. It's really a megawatt hour, we can do both. And the answer to your question is, is it, of course, is do you believe the ITC will be extended. If the ITC is extended, then we would expect '22 and beyond to be faster growth because we'll be down the cross curve further, and we will have penetrated more markets with new homes. If the ITC steps down to 10% and 0, 10% commercial. Otherwise, then obviously early to guide 2022, it would moderate the growth. I think you could still see growth, and we'll have to see how things develop.

Right. Just got a question come in. Just with regard to your -- you don't break out the revenue margin for new homes separately, but how do you think about the associated new margin that drive the weighted registration margin up or down?

It does drive the margin up on. And so for the new homebuilders listening on this call, the OpEx can be higher because we're turnkey. So the drop-down to the bottom line is similar, maybe a little better, but it is OpEx intensive in some cases, but on a gross margin line, it is accretive currently.

Right. It'd be great if you could talk about the competitive advantages in the new home business, how do you have such a great lead?

So we've been in new homes. If you bear with me, Julian, of the whole storytelling. We bought PowerLight in 2007, January 2007. Seems like yesterday, it was 13 years ago now. And PowerLight was doing new homes back then and actually had a solar roof tile, interestingly. We call it SunTile and we ship that, we installed that for several years. So we know about integrated roof tiles. We know a lot about that. We built our new home business off of that. What we learned, Julian, is a huge variable in new homes is a new home, building a new home is a manufacturing environment. And in a manufacturing environment, velocity matters a lot. And so having the systems that you can be on time, execute on time in and out is as important as a differentiated product. And so one is we've got 13 years of keeping the trains on time as the new home builders like to call it. Second, we are turnkey for new homebuilders. So we've learned how to be part of the marketing and sales process for the new homebuilders. And then lastly, we're really -- the full life cycle so we do this service as well. And it's turnkey for our partners. And I should have said last thing that's 3. The fourth thing is we innovate with some of the homebuilders, and I'll give a shout out to KB Homes who have innovated with us. And in the most recent, is a leader in using OneRoof product that gets operating costs out and continue to be a really good part in terms of how to innovate. So it's really a shorter version would be being a operating partner that's seamless with the new homebuilders.

Another question just came in. You mentioned the next leg of growth as software. Can you talk about this strategically? What are the core competencies you're looking to develop for grid services or otherwise? We hear your peers discussing potential software tuck-in acquisitions developed internally versus acquire.

Yes, I can. So we've had a significant life for at least 5 years and that digital effort has focused -- you can think of it as several fold. One is how do you make the process of customer acquisition and then deliver fulfillment and then, of course, post fulfillment service, how do you make that seamless? I could talk about each element in the value chain, but we've spent most of the last 5 years working on that and improving that, particularly the customer acquisitions is, I think, really unique. From there, we have software, of course, that has impact in rolling out mySunPower as I speak. So the latest version of the app, an integrated storage and solar. And of course, it's important to note that the storage is SunPower storage called SunVault and the solar is SunPower solar. And so the app is SunPower, whereas some of our competitors when they outsource the software, they -- app actually set some other company's name. So we differentially made the investment in digital over the last 5 years. And the return on that investment is to have an integrated app that the customer sees that all say is SunPower, which then, in our view, makes us more capable of adding services. Now services are emerging. And so each of the solar CEOs can talk about their view on services. And it's mostly a forecast of the future. Even grid services is quite small as we speak. And what I would say is there's services you can offer to the dealers, things like lead gen and operation and maintenance software. And you can offer services for the homeowner that are obvious, resiliency type, time of use, rate arbitrage would be another one. And then lastly, you can offer grid services or participating in the grid. There are many now, you do it organically or inorganically. The answer for us in the near-term for sure is organically. And I think we have a unique opportunity, but of course, the last service would be is integrating services within the home, whether that's TV charging, longer storage, it's essentially demand response within the home, creating a microgrid in the home and what else can you manage as part of that microgrid. We can do that uniquely because it's all our software and it's our hardware. So creating the interface with fuel cell or genset or home automation is more straightforward for us. And just to comment on grid services is you really need to be gigawatts for grid services to really move the needle at the revenue levels that most of us are at. Now that's not to say they're bad, we will have grid services in our Powerco and of course, over time, those will grow because they're recurring. The other revenue streams and services, I think, can be even higher. And so early days, back to the organic, inorganic. We do, however, spend a lot of time with the software start-up companies and of course, we're aware of Generac's acquisition. And most of what we've seen there is your volume future potential. And of course, we need to balance that with how much can we do ourselves and we're active with that. And we know the software companies, and I would say, in the near term, more organic than inorganic.

Another question. How do you think about diversifying your customer channels? And what are the key hurdles to further accelerate that growth as a tack on?

So it actually is a relatively complex question because the residential -- first commercial large commercial is all direct. So we will maintain that small commercial results through dealers and most likely almost for sure, that won't change. So it's really about residential and residential retrofit. And residential retrofit, the outbound channel has various options. There are EPC firms that generate business and work with companies like SunPower to give the overall software wrap and to execute the whole project and they do the EPC. There are dealers who are sales-only and generate sales and then sell the lead and is fulfilled by somebody like SunPower or maybe one of the EPC companies. And then of course, there's digital lead generation and then there's door-knocking, of which there's 2 varieties there: You can be your employees' or you could have, so-called, $10.99 or contracted employee. Now with that as a backdrop and whoever asked the question, can you follow-up if they have an aspect of but I think maybe I didn't get on and entirely is a significant majority of our customer interface is now online. We generate between 30% and 50% of the appointments for our dealers. So a point of differentiation for us is our digital investment in virtual sales, which obviously has a lower customer acquisition cost. And the -- we started that prior to the pandemic. And when I say started that it's called SunPower Design Studio. And we can put Google Earth behind here, I would have a green screen, I could put your address in, your home would come up and we can design the system together. And you can see right behind what it looks like. And so our digital sales capability is a competitive advantage and is a material part of our residential retrofit sales as much as half, depending on the quarter, and it's growing. Most of the balance is sold through our dealers, although the contract salespeople in the EPC, our business model, we're very aware of and think have the potential for future growth. So those would be, I'd say, emerging growth areas for SunPower. So you have digital and the dealers, which are doing great, and then we're doing some early work on the others to see if we can grow even faster.

Great. What are your thoughts around the usage of non-Maxeon solar panels in resi and commercial post exclusivity? Any other technology angles you would highlight through your offering on a forward basis?

Sure. I would say that those of you -- many of you have known us for a long time. We've been a vertically integrated innovator and innovating on a lot of things, balance of system. At one-time we enter micro and further capability. And of course, with residential, the storage system. However, in our commercial business, we had previously innovated in Helix mounting system. We've now gone to third party. And increasingly, in commercial, we are a value-added integrator with the exception of storage where we write our own energy management software, which would be the grid services and rate arbitrage and demand charge management. So commercial, we're already with the exception of panel integrating best-in-class solutions. Commercial has a 1-year exclusivity with Maxeon. And there's parts of commercial where the Maxeon advantage works great, carport would be an example where every watt is used, the balance of system is way more costly than ground mount and rooftop. And so that we would like to keep that advantage for a long time. There are other parts of the market where at that year point, and we're in discussions with Maxeon on how do we serve the ground mount market. And there are some great options private Maxeon. And by the way, we're [ at 1.3 years ], so we're talking 9 months from now. So more to come on the commercial front, but we're in active evaluation of do we have a both Maxeon and someone else option. In residential, our intention that's a 2-year exclusivity. Our intention would be to extend that exclusivity at month 3 I'd forecast. And we work very closely. We have a monthly alignment. We had one last night with Maxeon where we road-mapped, what products we need for the next few years. And as they execute, I would expect that exclusivity to extend. Now they know what our needs are, and we meet monthly. So we're calibrated if they start to depart from our needs, then we have that option to go elsewhere. And I would say in residential, we're more vertically integrated. We still have our mounting system that we designed, but it's outsourced manufacturing. We designed our SunVault hardware and the software, but as you saw with micro-inverters, if there is a time where there's scale advantage, and we can innovate elsewhere, we're not righted to being vertically integrated forever. But -- and of course, we've shown that with commercial. So that's how I think about our vertical integration and the potential to use other best-in-class options for other parts of the value chain.

Sure. As a question that came in as a follow-up, how do you win and scale the commercial segment?

So the commercial segment in terms of scale and growth is a unique beast. It has unique features. One is it's spread out all of our America and each state is unique. And so you can't have a generic growth plan in commercial, and that is one of the changes we made from 2019 going forward, is we were trying to do too many things in too many places. And of course, we've turned the business from EBITDA negative to EBITDA positive this year, partially because of that. But one answer to your question is to offer more geographies for your customer. And we will offer more geographies, but more selectively than we did in 2019 and previously. Second thing is, is it community solar is included in commercial, both externally and internally. And Community solar is becoming a significant part of commercial and it's actually where most of the growth is. So we have expertise. We've done 4 gigawatts of solar power plants in our heritage. We know how to do development. We know how to do the analog and we're doing community solar as we speak. So more regions in community solar and then more storage would be the third area. And then, of course, as you do more storage, then you can integrate other services. And that's where, I think, first, you see the opportunity to be energy as a service in the Powerco part of the commercial business to grow preferentially. So in short, I'd say community solar storage and software, storage and services in commercial.

Great. It'd be great, Tom, if you can discuss the value proposition to SunPower dealers. How do you think about the dealers unexclusivity versus otherwise and the volume split there?

So we have about 35 master dealers, and I see that terminology is being used by other companies now. Master dealer for SunPower is 100% SunPower. And that's brand, that's training, that supply chain that lead -- not 100% lead gen, but a substantial amount of the appointment setting is done by SunPower. So it's a highly integrated long-term program and it represents some quarters, they purchase 50% of our volume. And then the other dealers have usually very high percentage in SunPower, but not 100%. Where we're unique is we offer the whole value chain management to our dealers. And they have "one-stop shopping". So when they call us and they say, "hey, when I'm going to get my storage and hey, I'd like this feature in the app" or, "hey, we're permitting" and we're getting interconnection, and we need this to know this detail," that's all under SunPower or warranty, would be all under SunPower. We call that the power of One. So what dealers get with us is one-stop shopping in an integrated solution and one person to talk to to get improvements made. And that warranty wrap is a big deal. So you're not having to call multiple companies, and of course, rarely do those companies agree that they don't tend to say, I want to own that warranty. Whereas at SunPower, when you work with us, there is no allocation of warranty. We own it. And that one-stop shopping for our dealers is a big deal. And of course, we started dealer network in 2005. And that longevity of working with dealer partners means that like new homebuilding, we've made it more and more seamless. And that legacy of we get it otherwise known as I suppose, brand is another advantage. So the dealers, I'd give you an example. We've been doing field training for dealers for -- since 2005, 15 years. We've been doing financing for over a decade for our dealers, more on that in a minute. All that is part of the power of that one-stop shopping. And we only -- we will only invest more to make that advantage ever greater as it -- as we capitalize on our exclusivity with Maxeon panel and then have preferential, sustainable differentiation in other areas like SunVault.

Just sort of follow-up. How do you think about adding more dealers to your platform as your peer Nova has done?

I think that's a great idea. The -- we've really radically transformed SunPower, and I think everybody on this discussion is aware of that. So August 26 of this year, we became a North American DG pure play. And as that has many great features like radically de-levering our balance sheet, cash flow positive, profitable, growing rapidly, to name a few. And with that comes options. And -- sorry, the other thing that we've been focused on in the background is improving the lease and loan economics. And as -- and we brought lease -- material amount of lease into our business with our partnership with TCU. We still do work with some of the other third parties, but we vertically integrated -- I'm sorry, I said, lease and [ net ] loan. And on -- as we add those features, then you open up options where you could do loan for -- on a broader basis, the so-called longer tail. And really, there's no reason why we can't service the longer tail. And as a pure play, we can start to focus on that. So more to come, nothing imminent. I think the question here was press-in. There's no -- I think the barrier to entry is not very high, and it's an area that could increase our growth.