SunPower Corporation (NASDAQ:SPWR) Q3 2023 Earnings Call Transcript

SunPower Corporation (NASDAQ:SPWR) Q3 2023 Earnings Call Transcript November 1, 2023

SunPower Corporation misses on earnings expectations. Reported EPS is $-0.12 EPS, expectations were $-0.01.

Operator: Good morning, welcome to SunPower Corporation’s Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I’d now like to turn call over to Mr. Mike Weinstein, Vice President of Investor Relations. Please go ahead.

Mike Weinstein: Good morning. I would like to welcome everyone to our third quarter 2023 earnings conference call. On the call today, we will begin with comments from Peter Faricy, CEO of SunPower, who will provide an update third 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 the 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 10-K and our quarterly reports on Form 10-Q.

Aerial view of a large solar panel array under construction in a rural China landscape.

As we disclosed on October 24th, in a Form 8-K filing, the company plans to restate, as soon as practicable, financial statements for the 2022 10-K and the first and second quarter 10-Qs for 2023. Please see those documents for additional information regarding those factors that may affect these forward-looking statements. Also, we will reference certain non-GAP 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've also posted a set of PowerPoint slides, which we will reference during the call on the events and presentations page of the Investor Relations website. For prior periods, we have presented our best preliminary estimate of historical period financial information, tending the outcome of the affirmation restatement.

We are also delaying the reposting or the posting of our supplemental data sheet, detailing additional historical metrics, until we have completed this restatement of historical financial information. And with that, I'd like to turn the call over to Peter Faricy, CEO of SunPower. Peter?

Peter Faricy: Thanks, Mike, and good morning, everyone. Today, I will discuss our Q3 2023 results, our update to our full-year 2023 guidance based on the latest information on markets and our progress with cost reduction and our view of the important factors that could affect 2024. In the third quarter, we continued to see difficult market conditions with a contraction in customer bookings and installations that is more persistent than we had previously forecast as a result of the higher impact of higher interest rates on consumer behavior. While these trends have continued longer and deeper than we expected this year, we will highlight some of the early positive signs that our sales channels that began materializing in September.

We continue to anticipate a growing value proposition for our customers as traditional energy costs rise and we expect an improved picture for SunPower and the entire residential solar industry in 2024. We reported a negative $1 million of adjusted EBITDA this quarter from 18,800 new customer additions, slower bookings this summer, and higher installation expenses for the primary drivers of lower results this quarter. As we will discuss in more detail later, we have reduced our 2023 guidance to reflect current market conditions to new ranges of 70,000 to 80,000 new customers, $600 to $700 of adjusted EBITDA per customer before platform investment, platform investment of $70 million to $90 million, and adjusted EBITDA of negative $35 million to negative $25 million.

These new ranges reflect the impact of lower-than-expected consumer demand and the delayed revenue recognition as cycle times have increased under higher lease volumes. We expect that our actions announced today to deepen our cost reduction will result in the realization of meaningful improvement to our operating expenses in 2024 as we aim to maintain financial strength through the weaker near-term market conditions. Please turn to slide four. We added 18,800 new customers in Q3, and while we are currently facing stormy seas, we are highlighting some of the more notable pockets of strength in the business here. SunPower's new home business continues to perform above expectations with installations growing 26% in Q3 versus Q2 and a 38,000 new homes in backlog.

Sales continue to be driven in part by the growth of solar standard communities outside of California and a strong market for builders, despite higher mortgage rates. SunPower's retrofit backlog stands at 18,100 customers. While higher lease volumes have increased the average time from booking to revenue recognition, we expect to complete the installation of substantially all of our California NEM 2.0 backlog this year. Adjusted EBITDA per customer was $1,000 before platform investment, with room to improve next year as average inventory costs and installation costs are expected to continue their declines. SunVault energy storage system sales continue to show strength with a California attach rate greater than 60% and an overall attach rate of more than 25% across our sales channels.

We expect to deplete our inventory of SunVault V1 models by early 2024. Battery storage costs are declining rapidly, and this is an important part of the value proposition for customers, especially in California, where NEM 3.0 reduced the benefits of net metering with the utilities. SunPower Financial reached a 56% customer attach rate for lease and loan products in the third quarter, well on its way to achieving the 65% to 75% target that we highlighted at last year's analyst day. Lease demand continues to grow with a 217% increase in contracted volumes in Q3. As noted previously, further growth for leasing is expected in 2023 and beyond due to a 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 number five. With over 60,000 new customers so far this year, we've tightened the guidance for our full-year 2023 range to 70,000 to 80,000 customers. While it may be early to call a turnaround trend, we want to highlight that we're seeing in September as bookings appear to improve sharply versus prior months, particularly in key states such as California, Texas, Florida, and Colorado. We continue to see some of these same improvement trends in October. The bottom line is that the steep year-over-year sales contraction that we've been seeing since May has improved marketably in September and October.

We're optimistic that these booking trends will continue and help boost the installation and customer recognition figures in the first-half of 2024. Please turn to slide number six. We've reduced our 2023 guidance this quarter, and I will disclose the factors that led us to take this action, as well as some of the remedies as we continue to pursue, as we aim for a better outcome in 2024. As I mentioned earlier, we've tightened the customer range to 70,000 to 80,000. While September and October booking trends are indeed positive, we are nonetheless affected by the slower pace of booking this past summer that will slow our customer recognition. We continue to face some delays in the California system activation from the state's utilities although we've seen recent significant improvements from earlier this year.

New homes backlog and customer bookings have exceeded our expectations and we had our best Q3 for customer bookings for new homes in the company's history. New homes is on track to comprise 15% to 20% of our total 2023 customers. Reduced guidance for 2023 EBITDA of negative minus $35 million to negative $25 million, and EBITDA per customer before platform investment of $600 to $700 reflected the higher cost of goods sold and the amortization of installation spread across lower-than-expected volume. The increase in lease volumes, which is a positive trend that ultimately boosts sales origination fees, nonetheless results in extended cycle times for revenue recognition versus loans and cash sales. The range for platform investment of $70 million to $90 million is still well below our original plan earlier this year and now reflects primarily the higher legacy business unit costs and the restatement of prior period inventory values.

We plan to continue reducing operating expense in order to maintain financial strength of the near-term economic and market uncertainty. Long-term, we continue to expect substantial tailwinds for the U.S. distributed solar market, including low market penetration, climbing utility bills, a strained electrical grid, plus a decade of tax penance under the Inflation Reduction Act. Platform investment is intended to continue positioning some power to gain market share as market 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 2024. We intend to manage this with reductions to fixed and variable costs, continued inventory reduction, and continued expansion of customer financing capacity.

Please turn to slide number seven. 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 remain near all-time highs as of August, despite the moderating cost of bulk wholesale power and key fuels such as natural gas. Price increases continue to hit the Northeastern and mid-Atlantic states and California, with nine states seeing increases greater than 10% year-over-year. We estimate that more than 40 million potential customers reside in states with electric rates rising faster than inflation. In California, PG&E rates are set to rise 9% to 13% in January of 2024. 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 energy bills.

Despite lower fuel prices, the Edison Electric Institute is projecting a 20% increase in electric utility capital investment from 2023 to 2025, compared to the previous three years. As these investments are recovered through electric bills, we continue to believe that the value of rooftop solar is likely to continue rising. Please turn to slide number eight. Next, I'll share the most important progress we've made in Q3 as we move forward with the five pillars of our long-term strategic plan. For customer experience, SunPower remain the top-ranked U.S. home solar installer, as indicated by our ratings and reviews on multiple platforms. We've also launched a new self-help center experience within the My SunPower app and on our website to help resolve questions faster with less friction.

For products, SunVault’s attach rates reached new highs in Q3 with sales up 163% versus Q2 at our best ever sales month in September. For growth, September retrofit bookings grew 59% in September versus August, and new homes expanded outside California, with new communities signed with home builders such as CC Homes in Florida; Toll Brothers in Nevada, New York, and Massachusetts, and Meritage in Colorado. We also added 97 new dealers in Q3, the most onboarded in a single quarter. For digital, SunPower released a new sales proposal tool for new homes customers and completed the rollout of new scheduling software, which is designed to increase appointment reliability and reduce utilization costs. And finally, SunPower Financial completed the first phase of the ADT Solar's launch using SunPower Financial, enabling lease and PPA sales in seven states.

Please turn to slide number nine. SunPower Financial continues to grow its business despite the impact of slower sales on SunPower overall. In Q3, we launched as the exclusive lessor for ADP Solar customers choosing to finance with a lease or power purchase agreement. Loan financing is expected to launch in Q4, and the program has the potential to be a meaningful contributor to 2024 volume and profitability at gross margins that are roughly in line with the existing finance business. As mentioned earlier, our lease net bookings continue to grow strongly in the third quarter, and leases currently enjoy a cost-to-capital advantage, compared to loans. We continue to work on agreements with financing partners to increase our lease financing capacity and facilities are in place to access ABS funding in the future.

We are excited by the opportunities in this space, so stay tuned for more to follow. With that, I'll now turn it over to Beth for more details on our Q3 results. Beth?

Beth Eby: Thank you, Peter. Please turn to slide 11. Before I begin, I want to say a few words about our recent 8-K. We are working expeditiously to file amended financial statements for the 2022 10-K and the Q1 and Q2 2023 10-Qs. We expect to file our Q3 form 10-Q as soon as practicable. The restatement of prior microinverter cost reduces the inventory and increases the cost of revenue. It does not change our cash position. We are also working to improve SunPower's reporting procedures, particularly around the issues we've identified around inventory and cost of goods sold. Furthermore, as we previously disclosed, the company and Bank of America are currently negotiating the terms and conditions of a consent and waiver to address the effects of the restatement under our January 2023 amended credit agreement.

While we can make no assurances regarding if and when the consent and waiver will be received, we are working productively and seek a positive outcome. For the third quarter, we are reporting negative $1 million of adjusted EBITDA and $432 million of non-GAAP revenue. We have added 18,800 new customers in Q3 with reduced customer demand that continues to be driven largely by the effect of higher interest rates. However, as Peter mentioned, we are buoyed recently by stronger sales in September and October, as well as persistently strong customer interest in lease financing. Adjusted EBITDA per customer was $1,000 in the third quarter, lower year-over-year, due to delayed revenue recognition from longer cycle times, as well as higher year-over-year installation cost.

Adjusted gross margin improved in Q3 versus Q2 as a result of cost reduction, sequentially improved amortization of installation cost, as well as the absence of a Q2 inventory write-down. Platform investments is primarily products, digital, and corporate OpEx. While this increased slightly year-over-year, we continue to work toward matching our investment and OpEx levels to slower market conditions. Our aim is to maintain financial strength through this challenging period as we look to position the company for continued gains in market share under stronger future market conditions. Turning to the balance sheet, we ended the quarter with $104 million of cash and $143 million of net recourse debt. With improved management of working capital, we reduced inventory levels to $328 million at the end of the quarter and generated positive cash from operations of $48 million.

We have plans in place to bring inventory levels down further through the remainder of 2023 and 2024. We continue to value our ownership of lease renewal net retained [Technical Difficulty] SunStrong using a 6% discount rate. With growth in the portfolio, we now estimate the value of our stake at about $295 million. Please turn to slide 12. As Peter already discussed, we reduced our 2023 guidance to a new range of negative $35 million to negative $25 million of adjusted EBITDA, driven by an anticipated 70,000 to 80,000 incremental customers with adjusted EBITDA per customer before platform investment of $600 to $700. Platform investment of $70 million to $90 million this year is higher than prior guidance, due to higher legacy cost and the impact of prior period adjustments.

Although this is still significantly lower than our original guide this year. We will continue our efforts to reduce our platform investment through 2024. Before we turn the call over for Q&A, I want to turn you back over to Peter for closing comments and a review of factors we are considering as we look ahead toward 2024.

Peter Faricy: Thank you, Beth. Please turn to slide 13. This slide is largely the same one we showed you last quarter and continues to list out our view of the future as we reset and launch forward into 2024 after a difficult 2023. We typically don't provide guidance for next year until February. From a macro perspective, we continue to expect that increasing utility rates and lower equipment pricing will be tailwinds for the industry. We also anticipate a more stable interest rate environment, as well as improve clarity on the bonus tax credits available under the Inflation Reduction Act. For SunPower specifically, we expect to benefit from lower product costs. We intend to reduce our platform investment in the near-term and we expect this to benefit financial results in 2024, as we keep an eye on long-term opportunities for growth and investment.

Stronger-than-expected new homes bookings growth with a large backlog this year are expected to 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 and attachment rates with SunPower customers, and we plan to continue to seek additional opportunities for growth through partnerships like the one we announced recently with ADT. We also expect to begin seeing financial benefit from our collaboration with General Motors in 2024 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. Thank you.

See also 16 Billionaires Who Live Like Regular People and 30 Most Conservative Countries in the World and their Economic Development.

To continue reading the Q&A session, please click here.