SunPower Corporation (NASDAQ:SPWR) Q2 2023 Earnings Call Transcript

SunPower Corporation (NASDAQ:SPWR) Q2 2023 Earnings Call Transcript August 1, 2023

SunPower Corporation misses on earnings expectations. Reported EPS is $ EPS, expectations were $-0.04.

Operator: Good day, and thank you for standing by, and welcome to the SunPower Second Quarter 2023 Results. 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 would now like to hand the conference over to your speaker today, Mike Weinstein, Vice President of Investor Relations. Please go ahead.

Mike Weinstein: Good morning. I would like to welcome everyone to our second 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 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 Interim 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 [2023] (ph) Form 10-K and 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 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 our Investor Relations website. In the same location, we have 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?

Peter Faricy: 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 five 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 two months ago from NeoPhotonics and a long successful carrier 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 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 number four. 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, a 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 continue 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. Sunbelt energy storage systems 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 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 remained customer centric and agnostic towards lease or loan financing and we believe that our current access to capital markets of the top tier residential solar company is a major competitive advantage. Please turn to slide number five. Our Q2 customer growth of 3% year-over-year ended 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 and 9% increase. We also take note that our market share continues to grow as we highlight a 31% increase in project permitting in the first-half of this year versus the overall industry value of 13% permit growth as reported by Ohm Analytics. Please turn to slide number six. 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 NEM 3.0, given the strong pull forward in demand that we intentionally executed in Q1 under NEM 2.0. We’re starting to see some recovery here though with a modest improvement in net bookings for June and July. As I mentioned earlier, Sunbelt storage system sales in the second quarter are stronger in California under NEM 3.0, where we saw 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 cost, 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, a 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 number seven. 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 the 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 and the electric utility capital investment from 2022 to 2024 over the previous three 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 number eight. Next, I’ll share with you some of the most important progress we’ve made in Q2 as we move forward with the five pillars of our long-term strategy. For customer experience, SunPower remained the number one 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 an 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 in SunVault Energy storage sales by 58% year-over-year in the retrofit category. The company more than doubled its SunVault pass 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 homeowners’ local utility and enables the battery to discharge at peak times. And finally, SunPower Financials launched leased products in three new states: Texas, Pennsylvania and New Mexico, all have a significant population of single family homes eligible for the energy community’s bonus credit as defined by the Department of Treasury under the Inflation Reduction Act. Please turn to slide number nine. As we announced this morning, I’m pleased to share that we have been 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 continued 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?

Beth Eby: 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 cost for materials and labor.

Separately, we incurred an unusually high charge of $8 million in the faster amortization of preinstall 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 investment 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 to 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 toward 2024.

Peter Faricy: 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 that 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 and 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.

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Q&A Session

Operator: Thank you so much presenters. [Operator Instructions] Our first question comes from the line of Sean Morgan of Evercore. Please ask your question.

Sean Morgan: I was just wondering as you kind of work through some of your existing 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?

Peter Faricy: Yes, good morning, Sean. 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 something will reflect in our guide for 2024 primarily.

Sean Morgan: Okay, thanks. And then on the VPP availability to 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?

Peter Faricy: 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 on in time. Think of that as something that we’re working on and would love to launch in the future years.

Sean Morgan: Okay, thanks. And welcome to Beth.

Beth Eby: Thank you.

Operator: Thank you so much. Your next question comes from the line of Tristan Richardson of Scotiabank. Please go ahead.

Tristan Richardson: Guys. Appreciate the comments and the update on the macro. Maybe just curious on the leasing side, you noted 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?

Peter Faricy: Yes. Good morning, Tristan. 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 of 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 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.