SunPower Corporation (SPWR) Earnings Call Transcript & Summary

Good day, and thank you for standing by, and welcome to the SunPower Second Quarter 2023 Results. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Weinstein, Vice President of Investor Relations. Please go ahead.

Good morning. I would like to welcome everyone to our second quarter 2023 earnings conference call. On the call today, we'll begin with comments from Peter Faricy, CEO of SunPower, who will provide an update, second quarter announcements and business highlights, followed by an update on 2023 guidance, including recent sales trends, backlog, operating expense, and financing. Following Peter's comments, Beth Eby, SunPower's CFO, will then review our financial results. As a reminder, a replay of the call will be available later today on the Investor Relations page of our website. During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in the safe harbor slide of today's presentation, today's press release, our 2022 Form 10-K, and our quarterly reports on Form 10-Q. Please see those documents for additional information regarding factors that may affect these forward-looking statements. Also, we will reference certain non-GAAP metrics during today's call. Please refer to the appendix of our presentation as well as today's earnings press release for the appropriate GAAP to non-GAAP reconciliations. Finally, to enhance this call, we have posted a set of PowerPoint slides, which we will reference during the call on the Events and Presentations page of our Investor Relations website. In the same location, we posted a supplemental data sheet detailing additional historical metrics. With that, I'd like to turn the call over to Peter Faricy, CEO of SunPower. Peter?

Thanks, Mike, and good morning, everyone. Today, I will discuss our Q2 2023 results, our preannounced reduction of our full year 2023 guidance and our view of the most important factors that could affect 2024. I will also talk about our approach to platform investment intended to continue growing market share and our continued focus on our 5-pillar strategy to build SunPower into the world's best residential solar company. Before I do that, I want to welcome our new Chief Financial Officer, Beth Eby, joining us for her first earnings call. Beth came aboard 2 months ago from NeoPhotonics and a long successful career at Intel. I expect she'll play a critical role in developing and implementing the company's strategic growth plan and in leading SunPower's finance organization and activities. In the second quarter, we saw a slowdown in customer bookings and installations that frankly was steeper than we initially expected earlier this year as the impact of higher interest rates has had a significant impact on consumer behavior. We reported negative $3 million of adjusted EBITDA this quarter, which was lower than we expected, even though we've been projecting most of our EBITDA and cash generation in the second half of the year. As Beth will discuss in more detail later, slower bookings across most of the country and higher installation expenses were the primary drivers of lower results in the quarter. As we preannounced last week, we've reduced our 2023 guidance to reflect the current market conditions to new ranges of 70,000 to 90,000 new customers, $1,450 to $1,650 adjusted EBITDA per customer before platform investment and $55 million to $75 million of adjusted EBITDA. These new ranges reflect a reduction to projected operating expense this year, including a reduction in labor force and reduced platform investment as we delay some hiring in certain projects to maintain financial strength through weaker near-term market conditions. Please turn to Slide #4. We added 20,400 new customers in Q2. This is a 3% increase year-over-year. Adjusted revenue grew at 9% year-over-year as price increases continued to partially offset the impact of higher product costs, although higher installation costs were also realized in the quarter. SunPower's New Homes business secured a record $108 million in bookings in the second quarter, an 11% growth year-over-year. Record sales were driven in part by the growth of solar standard communities outside of California and an improved market for builders. July trends continued to remain strong, while SunPower has completed over 100,000 new home installations more than any other solar company. SunPower's overall retrofit backlog now stands at 20,000 retrofit customers with another 39,000 in the New Homes channel. Adjusted EBITDA per customer came in at $1,000 before platform investment, which primarily reflects higher installation expense and some modest write-down of inventory value. We also experienced a delay of some lease-related revenue and customer recognition into Q3 in California as we experienced some delayed interconnection completion from the state's utilities under a higher-than-normal caseload. SunVault energy storage system sales continue to show strength in California under the new NEM 3.0 rules at a 49% attach rate in our Direct channel in the state. We expect this number to climb as the increased value of batteries drives storage sales under NEM 3.0. Lease demand continues to grow with a 108% increase in contract volumes in Q2. As we've noted previously, further growth for leasing is expected in 2023 and beyond due to the combination of lease payment competitiveness versus higher utility bills and bonus tax incentives under the Inflation Reduction Act. SunPower remains customer-centric and agnostic towards lease or loan financing, and we believe that our current access to capital markets as a top-tier residential solar company is a major competitive advantage. Please turn to Slide #5. Our Q2 customer growth of 3% year-over-year ends the first half with 41,300 new customers more than halfway towards the new midpoint of full year guidance. Adjusted revenue grew to $461 million, a 9% increase. We also take note that our market share continues to grow as we highlighted, a 31% increase and project permitting in the first half of this year versus the overall industry at 13% permit growth as reported by Ohm Analytics. Please turn to Slide #6. We reduced our 2023 guidance last week, and I want to take a few moments to discuss why we did that and what are the actions that we are taking to offset some of the negative impact. While we are starting to see an improvement in year-over-year bookings in recent weeks, our reduced customer guidance for the year now reflects our recalibrated expectations for the full-year impact of slower top-of-funnel lead generation and bookings. In California, we've been expecting a decline in new bookings under NIM 3.0 given the strong pull forward in demand that we intentionally executed in Q1 under NIM 2.0. We are starting to see some recovery here though, with a modest improvement in net bookings for June and July. As I mentioned earlier, SunVault storage system sales in the second quarter are stronger in California under NIM 3.0, where we saw a 105% increase to a 49% attach rate in SunPower Direct channel. Looking beyond California, second quarter bookings have been weaker than our expectations earlier this year, and this is a major driver behind our decision to reduce guidance. Nevertheless, we are seeing stronger top-of-funnel lead generation and a more notable improvement in net bookings that's been in progress since the May low point boosted by stronger results in several states, including New York, Connecticut and Illinois. New Homes bookings have been tracking ahead of our projections this year with the homebuilding industry more resilient than expected in the face of higher interest rates. Bookings accelerated ahead of expectations in Q2 to set a new all-time record, boosted by NEM 2.0 sales in April. Importantly, we expect our backlog of 39,000 installations to position SunPower to benefit from customer recognition in 2024. We estimate that more than 70% of the customer recognition in the second half of this year to reach the midpoint of the new customer guidance is covered by a combination of backlog and projected new homes installations. This gives us more confidence in the new range with the final outcome dependent on how incremental bookings and component sales to dealers trend for the remainder of the year. As Beth will go over in a few minutes, guidance for 2023 EBITDA and EBITDA per customer before platform investment have been reduced to reflect lower gross margin this year as a result of customer pricing mix, sales channel mix, inventory costs, and higher direct installation costs spread over lower volumes. As I mentioned earlier, the reduced guidance also reflects some delayed platform investment and reduced operating expense as we maintain financial strength of the near-term economic and market uncertainty. Long term, we continue to see substantial tailwinds for the U.S. distributed solar market, including low market penetration, climbing utility bills, strained electric grid, and a decade of tax benefits under the Inflation Reduction Act. Platform investment is intended to continue to position SunPower to gain market share as conditions continue to develop. We plan to adjust our investment pace judiciously as conditions change. Finally, we're projecting an improvement in cash from operations during the second half of this year. We intend to manage this with plans for inventory reduction, continued expansion of customer financing capacity and liquidity in place. Please turn to Slide #7. With the summer heat waves hitting virtually everyone these days, I want to reemphasize that conventional electric utility rates are the primary competition for our industry. The U.S. Energy Information Agency reports that average U.S. retail electric rates continue to rise upward of 8% year-over-year in May, despite the moderating cost of bulk wholesale power and key fuels, such as natural gas. Price increases continue to hit the northeastern states in California with 10 states seeing increases greater than 15% year-over-year. More recent heat waves in the West Texas and other South Central states have strained electric grids and customer utility bills as well. We believe that these steep cost increases and the impact of grid instability on residential customers continue to elevate the value proposition of residential solar as one of the most powerful ways to stabilize and reduce home electric bills. Despite lower fuel prices, the Edison Electric Institute is projecting a 20% increase in the electric utility capital investment from 2022 to 2024 over the previous 3 years. As these investments are recovered through electric bills, we continue to believe that the value of customer finance rooftop solar is likely to continue rising. Please turn to Slide #8. Next, I'll share with you some of the most important progress we've made in Q2 as we move forward with the 5 pillars of our long-term strategy. For customer experience, SunPower remained the #1 ranked home solar installer last year, as indicated by our ratings and reviews on multiple platforms. For products, we launched a new larger 19.5 kilowatt hour version of our SunVault energy storage system with a possible configuration of up to 39 kilowatt hours, a nearly 50% increase in energy capacity. For growth, SunPower grew its SunVault energy storage sales by 58% year-over-year in the retrofit category. The company more than doubled its SunVault attach rate in California year-over-year as solar power battery enabled maximum savings following the NEM 3.0 implementation. During each week of July, SunVault attach rates in California were consistently above 60% in the SunPower Direct channel. For digital, SunPower released an advanced cost-saving mode for SunVault users. It provides seamless integration with the homeowner's local utility and enables the battery to discharge at peak times. And finally, SunPower Financials lost lease products in 3 new states; Texas, Pennsylvania and New Mexico. All have a significant population of single-family homes eligible for the Energy Communities Bonus Credit as defined by the Department of Treasury under the Inflation Reduction Act. Please turn to Slide #9. As we announced this morning, I'm pleased to share that we have arrived with an agreement in principle with ADT for SunPower Financial to act as the exclusive lessor for their solar customers. We are very excited to be able to expand our reach beyond the borders of SunPower to enable more Americans to benefit from home-based clean energy. We expect this program to begin contributing meaningfully to SunPower's financial results in 2024 and gross margins that are roughly in line with the existing finance business. We continue to work on agreements with financing partners that would increase our lease financing capacity. We look forward to providing you with further updates as these arrangements progress. Our lease bookings continue to grow strongly in the second quarter. Our all-in cost of capital for leasing remains below 6.5%, including tax equity with the added advantage of lower interest rate sensitivity across the full capital stack. We believe this to be equal to or better than our peers. Before I turn it over to Beth for the financials, I'd like to thank, Guthrie Dundas, for covering the role of interim CFO in addition to his regular responsibilities as Treasurer. Thank you, Guthrie. And on that note, I'll turn it over to Beth for more details on our Q2 results. Beth?

Thank you, Peter. Please turn to Slide 11. For the second quarter, we are reporting negative $3 million of adjusted EBITDA and $461 million of non-GAAP revenue, an increase of 9% year-over-year. We added 20,400 new customers in Q2, a 3% increase year-over-year. Slower growth has been driven largely by the effect of higher interest rates on customer demand, despite stronger interest in lease financing. The drop in demand in California under NEM 3.0 was largely expected but also contributed to lower results for the quarter. Adjusted EBITDA per customer declined to $1,000 in the second quarter, primarily the result of higher costs spread over lower volume. In California, some lease customer revenue recognition was also delayed into Q3 by extended wait times for interconnection and permission to operate, resulting from higher workloads at the state utilities. This affected Q2 results by approximately $7 million of EBITDA. We still expect to recognize all NEM 2.0 retrofit backlog by year-end. Platform investment is primarily products, digital and corporate OpEx. This declined quarter-over-quarter based on actions Peter mentioned earlier, to match our investment and OpEx levels to slower market conditions. Our aim is to maintain financial strength through this challenging period as we position the company for continued gains in market share under stronger market conditions. Adjusted non-GAAP gross margin dipped to 13.7% in the quarter. While customer pricing increased in the quarter, we saw some pressure on our ability to raise prices from increased supply in the market. These price increases were more than offset by higher costs for materials and labor. Separately, we incurred an unusually high charge of $8 million and the faster amortization of pre-installed expenses due to reduced cycle times and a write-down of $5 million of inventory. Turning to the balance sheet. We ended the quarter with $114 million of cash and $164 million of net recourse debt, including $180 million of drawn revolver. We also had $424 million of inventory at the end of the quarter. We have plans in place to bring inventory levels down in line with second half 2023 demand. We continue to value our ownership of lease renewal net retained value in SunStrong using a 6% discount rate. With growth in the portfolio, we now estimate the value of our stake at about $280 million. Please turn to Slide 12. We reduced our 2023 guidance last week to a new range of $55 million to $75 million of adjusted EBITDA, driven by an anticipated 70,000 to 90,000 incremental customers with adjusted EBITDA per customer before platform investments of $1,450 to $1,650. As Peter mentioned earlier, more than 70% of the customer installations required to achieve the midpoint of customer guidance in the second half are accounted for within our retrofit backlog and projected new homes installation. Platform investment plan for the year has also been reduced to a range of $50 million to $70 million and continues to be primarily comprised of product, digital and corporate operating expense that drive our company toward larger operational scale with growing adjusted EBITDA per customer and a superior customer experience in the years to come. We plan to delay these investments as we prudently match our cash usage to market conditions. Longer term, we expect this to maintain financial strength and support stronger growth in the future as the market improves. Before we turn the call over for Q&A, I want to turn you back over to Peter to review some of the factors we are considering as we look ahead towards 2024.

Thank you, Beth. Please turn to Slide 13. While we typically don't provide guidance for the next year at this point, I want to leave you with some factors that we are analyzing as we look forward to 2024. From a macro perspective, we expect increasing utility rates and lower equipment pricing will be tailwinds for the industry. We also look forward to a more stable interest rate environment as well as improved clarity on the bonus tax credits available under the Inflation Reduction Act. For SunPower specifically, we see us benefiting from lower-cost products. We intend to hold our platform investment at reduced levels for the near term, and we expect this to benefit financial results in 2024 as we keep an eye on long-term opportunities for growth investment. Stronger than expected new homes bookings growth with a large backlog this year should add to customer recognition in 2024, with additional lease financing capacity expected to close this year, we expect sales to benefit in 2024 from the growing popularity of lease financing and bonus tax credits from the Inflation Reduction Act. SunPower Financial continues to grow its financing origination attach rates with SunPower customers, and we will continue to seek additional opportunities for growth through partnerships like the one we announced today with ADT. And finally, we expect to begin seeing financial benefit from our collaboration with General Motors in late 2023 as we start selling EV charger and solar equipment to Silverado customers. With that, operator, I'd like to turn the call over for questions.

[Operator Instructions] Our first question comes from the line of Sean Morgan of Evercore.

I was just wondering, as you kind of work through some of your inventory, do you expect -- when do you expect to start to see some of the benefit of some of this cost deflation we're seeing on the equipment side?

Yes, thanks for the question. We expect to work through our inventory as we go through Q3 and Q4. And I would expect that on the improvement in equipment prices that's something we'll reflect in our guidance for 2024 primarily.

Okay. And then on the VPP availability of the customers, is that going to be limited by which grid the customers are sort of connected to? Or will that be something that anybody that has the home energy management digital system to be able to sort of access, like how does that work functionally?

Yes. Yes, great question. So in the short term, you're right, it is limited to which utilities have a program that we can participate in with our customers. And so think of it as we have programs where we work with individual utilities directly. And then we also have this partnership with OhmConnect where we take advantage of both battery storage and reduction of usage as sort of a two-pronged approach to VPP programs. Our goal is that we can directly connect to the energy markets and become more independent of individual utilities over time. And so our vision is that all of our customers have an opportunity to contribute their battery storage, in particular, back to the grid as we go out in time. Think of that as something that we're working on and would love to launch in the future years.

Your next question comes from the line of Tristan Richardson of Scotiabank.

I appreciate the comments and the update on the macro. Maybe just curious on the leasing side. You noted a 100% growth in bookings for SunPower Financial. But maybe can you give us a sense of where do you see sort of the overall customer additions in the '23 guide in terms of lease versus more traditional lease -- or loan/cash just as you think about lease just really taking share in the overall market?

Yes. So as you know, our business has traditionally been 20% cash, 80% financed. Of the financed, a year ago at this time, we would have said that was 80% loan, 20% leased. We haven't quite flipped completely on the other side with loan and lease, but that's the direction we're headed. So think of it right now as maybe 60-40 lease, and we're headed towards probably a run rate by Q4 of 80-20 lease. I think forward-looking, we still -- as we mentioned at almost every call we're on, we really take a very customer-centric approach. We offer our customers the opportunity for lease, cash and loan. And we think that's really important because we really want to do what's best for them and what meets their financial needs. What's interesting is that in this economic environment, leases have become a little bit of better value than loans and I think that's reflected in the fact that we're selling a lot more leases. But it's important from our perspective to be able to offer both vehicles because that will change in time. And if interest rates drop, we'll be prepared to see an acceleration in our loan business. But right now, we're quite pleased with our lease capacity. We're quite pleased with the growth of the lease business. And as you saw with our announcement with ADT, we have a lot of opportunity to grow our lease business both within the SunPower footprint that you know today and outside of that footprint as we go forward.

Appreciate it, Peter. And then maybe just on the platform investment. Can you talk about what you view as is critical and key product digital and corporate investments versus those that might be more discretionary and are subject to, like you said, resumption out into '24 and '25?

Absolutely. So in these economic times, when things slow down, you do have to do more with less and you have to prioritize. So the 2 areas we're prioritizing are; number one, the customer experience, and number two, profitable growth. And so those are the areas that you would say are everlasting and you would want to sustain those. The areas we're slowing down are some of the new projects we wanted to do this year on hardware and software innovation. Those are things that we can get to in time. Those are things that make more sense to invest in as the market recovers. So we're taking a very rational approach, but our goal is to never compromise the customer experience and to continue to support the market share growth we've had over the last 4 to 5 quarters.

And your next question comes from the line of Pavel Molchanov of Raymond James.

Historically, we would think of $0.15 per kilowatt hour as kind of a useful rule of thumb for states where residential solar makes economic sense. Given everything that's changed in the past 3 years, is that still the right number to kind of give a sense of where it is or is not viable?

I think if you were just taking a look, Pavel, at PV, in particular, and you were doing an economic comparison, I think those numbers still hold water. I think what's changed a little bit is that an increasing number of our sales are really system sales that include additional components like batteries, EV chargers. And so I think the economic difference will be a mix of how much can you save but also how important is it for you to have resiliency with your power and reliability with your power and how important is it for you to be able to connect more and more of the other parts of your life, in this case, your electric vehicles to that same source of clean and expensive energy. But I think in some of the states where we've struggled this year, like we've struggled in Arizona, the economics there are more challenging to save customers' money and really that's a call to action for us to develop lower-cost solutions that meet customer needs there because clean energy is as important in Arizona as it is in any other state. The fact that the utility costs are a little lower there, it just means we need to work harder at providing more cost-effective solutions for consumers.

And in that context, the fact that module prices finally are that kind of downward trajectory, in fact, at an all-time low, will you be passing that on to the end user through lower system prices?

So we take an approach where we take a look state by state, utility by utility, and we measure 3 things; one, how much value are we providing to the consumer; two, what's the opportunity for our dealers to make a fair return on their business; and then obviously, we want to make a fair return on our business as well. So those are the factors we consider. But certainly, if we have lower-cost products as we move forward, it will permit us an opportunity to pass that along to consumers. And I do think, in addition to the disruption from interest rates and the low consumer confidence, certainly, one way to address that is to lower the prices to the consumer. And so as we get lower product prices, I would say, in the short term, in particular, absolutely, you could count on us passing along some percent of that to the consumer and stimulating growth again.

Your next question comes from the line of Philip Shen of ROTH MKM.

First one is on ADT. Congrats on getting that locked in. Can you help us understand when you expect that to be finalized? And then how much volume could that contribute in '23, and then what else could you guys do with that partnership?

Thanks, Phil. Yes, we're quite excited. I mean, for those who know the history of ADT, they're a leader in safety and security. They're one of the oldest companies in the United States. They've got a great brand. We're looking forward to working with their team. They're new to solar, and we have this opportunity with leases to start with to really help them grow their business. And particularly with the popularity right now of leases, I think we're in a good position to really help them grow their business starting this year and for many years to come, we would hope. I would expect that deal to have not really a material impact this year. If it does, it will be a small impact. And really, I think the opportunity for us to go bigger together is in 2024. We'd love to be able to be their partner on the loan side. And so we're working through that. And I would expect the deal to be finalized within the next few weeks, no more than the next month or 2. But we're -- both parties are excited and interested to work together. I think this is just the beginning of different ways we can partner together and look forward to sharing more news as it comes about soon.

Great. Second question here on liquidity balance sheet. You started the year with $314 million cash. I think you're currently at $114 million. Can you talk about your runway quarterly burn? Your long-term debt increased meaningfully as well. Can you talk about covenants at all? Is there any risk of tripping anything there?

Sure. Well, as I mentioned in our revised 2023 guidance, we do expect cash from operations to improve in the second half of the year. Beth, do you want to talk a little bit about our plans there?

Sure. So to address where we started the year, one of the big things that happened early in the year was the repayment of the -- a large convert, and we drew down on a revolver and sold some Enphase shares to cover part of that. So that's one of the big reasons for the drop in the overall balance. From a plans going forward standpoint, we absolutely have a plan to improve our cash flow by reducing inventory and improving our receivables practices. We've got sufficient liquidity in place and do not need further debt.

Your next question comes from the line of Kashy Harrison of Piper Sandler.

So Peter, maybe the first one for me. It sounds like you're implying that you don't expect the reduced platform investments to have an adverse impact on customer growth during 2024. Is my inference is correct? And if so, can you just help us understand what the expected return from prior platform investments was supposed to be? I'm just trying to understand what return you expect when platform investments rise and how I should be thinking about ramifications from less platform investments. And I have a follow-up.

Sure. So on the platform investments, to tackle your second question first. At Analyst Day, we laid out 2 ways that we thought the platform investments would help improve our performance and make us a more valuable company over time. First of all, we expected the platform investments to be able to help us grow at what we said was twice the industry growth rate, that were -- you remember at the time, there's a lot of different varying forecasts as to how fast the industry would grow. And so what we said is we'll peg our goal is by 2025 to grow at twice that rate, or said another way, continue to gain market share. We actually began to gain market share 5 quarters ago, and that has continued. And you can't predict the future, but I would say we feel pretty good about our position to continue to grow our market share as we look forward over the next 2 years. The second half of the platform investments is to build the growth and innovation that will allow us to not only attract new customers but to be able to give more EBITDA per customer. And you might remember, we're using EBITDA per customer as kind of a proxy for our lifetime value of our relationship together with them. We don't see our relationship as one and done when they buy solar panels. We really see this as an ongoing relationship over the lifetime of their homeownership, and we would love to be able to serve them on panels and batteries and EV chargers and BPP services and beyond. So it's really helping us achieve that $3,000 to $4,000 of adjusted EBITDA per customer. That's the second part of the platform investment.

Got it. That's helpful. And then maybe for my follow-up question for Beth, congrats on the new role. You indicated that you intend to reduce inventory levels to somewhere consistent with second half 2023 demand, and inventory is currently north of $400 million. Can you give us a sense of your perception of what the appropriate level of inventory would be in the current environment on a dollar basis?

I don't necessarily define it in terms of dollars. I define it in terms of days of inventory, and we're working with the operations team to define what that is for various segments because different segments will have different levels of risk of supply. So we will define those for the individual segments, but somewhere in the neighborhood of 60 days is about normal.

Your next question comes from the line of Michael Blum, Wells Fargo.