Maxeon Solar Technologies, Ltd. (NASDAQ:MAXN) Q1 2023 Earnings Call Transcript May 10, 2023

Maxeon Solar Technologies, Ltd. beats earnings expectations. Reported EPS is $0.46, expectations were $-0.47.

Operator: Good day, and thank you for standing by. Welcome to Maxeon Solar Technologies First Quarter 2023 Earnings Conference. [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. Please go ahead.

Robert Lahey: Thank you, operator. Good day, everyone, and welcome to Maxeon’s first quarter 2023 earnings conference call. With us today are Chief Executive Officer, Bill Mulligan; Chief Financial Officer, Kai Strohbecke; and Chief Strategy Officer, Peter Aschenbrenner. Let me cover a few housekeeping items before I turn the call over to Bill. As a reminder, a replay of this call will be available later today on the Investor Relations page of Maxeon’s 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, the 6-K and other SEC filings. Please see those documents for additional information regarding those factors that may affect these forward-looking statements.

To enhance this call, we have also posted a supplemental slide deck on the Events and Presentations page of Maxeon’s Investor Relations website. Also, we will reference certain non-GAAP measures during today’s call. Please refer to the appendix of our supplemental slide deck as well as today’s earnings press release, both of which are available on Maxeon’s Investor Relations website for a presentation of the most directly comparable GAAP measure as well as the relevant GAAP to non-GAAP reconciliations. With that, let me turn the call over to Maxeon’s CEO, Bill Mulligan.

Bill Mulligan: Thanks, Rob. I’m pleased to report that Maxeon had a very strong first quarter, executing well across the whole company and delivering financial performance ahead of expectations. On our last earnings call, we noted several internal and external factors that have the potential to accelerate our margin expansion. These factors helped Maxeon exceed our Q1 financial projections and reach our corporate gross margin target of at least 15%. Our first quarter 2023 non-GAAP gross profit was $54 million or 17% of revenue. We also delivered adjusted EBITDA of $31 million or 9% of revenue. While the team is pleased with these quarterly results, we are still very much in execution mode focused on hitting our full year targets and executing key projects that we believe will make Maxeon one of the most profitable companies in the solar industry.

With this context, I’ll now provide an update on our first quarter key initiatives and accomplishments through the lens of our distributed generation and utility scale businesses. Kai will then review our Q1 financial performance, refresh our 2023 outlook, and we’ll conclude with Q&A. Our DG business was led once again in volume, revenue and gross margin dollars by our European team and our unique direct-to-installer channel in that region. Our strong European footprint allowed us to maintain margins at similar levels to the previous quarter in both percentage and absolute terms despite typical Q1 seasonality trends and increased overall industry supply volumes that created a more competitive pricing environment. This is another example of how Maxeon has been able to consistently maintain significant ASP premiums through our differentiated product portfolio and unique channel strategy.

Belgium and France were bright spots, both posting year-on-year volume growth of more than 40%. Our Italy team also exceeded their volume target, in part due to growth in the commercial segment. Serving commercial rooftop demand through our existing dealers allows us to increase our mix of performance line modules and in turn frees up IBC volume for sale in higher ASP segments. Overall, European ASPs were down sequentially in line with our expectations but benefited from an AC module mix north of 20%. We expect beyond the panel sales to increase over the course of 2023 with a higher attach rate of microinverters as well as sales from storage and EV charger products. Our United States DG business also delivered strong results with higher-than-planned shipments to SunPower as well as material gross margin contribution from our new Maxeon residential channel.

While demand in some segments of the U.S. residential market has cooled, customer appetite for our premium products remain healthy, particularly in markets where the effect of rising interest rates has been offset by increased power costs and were constrained roof space plays to our product efficiency advantage. We were particularly excited to begin the ramp of our new Maxeon U.S. residential channel in Q1. By moving closer to U.S. end customers, we were able to capture the highest ASPs in the company’s history, increasing our global blended DG ASP by almost 3% in the first quarter. It will take time and considerable effort to build a leading independent presence in the U.S. DG market, but we feel good about our prospects due to the long-standing reputation that our products enjoy in this market and considering our deep channel experience in other regions.

Last year, we began assembling a core sales and marketing team of industry veterans, familiar with our product. This team is targeting premium installers incremental to the SunPower dealer network. We formally launched our multi-tier channel program in April, leveraging many parts of the structure already built for Europe. Our first preferred partner signed up almost immediately, switching a majority of their module business to Maxeon. The partner is in Massachusetts, a state where we have always loved doing business due in part to tree shading conditions favoring high-efficiency systems and also due to performance-based incentives, which elevates the importance of degradation rates and energy production over time. This partner is just one of 48 residential installers nationwide who purchased our product through Green Tech last quarter.

Look for more updates regarding our U.S. channel development in future quarters. Overall, we are pleased with how our DG channel is positioned in terms of margins, growth and diversification. We have over 17 years of presence in both the European and the U.S. market, a portfolio of highly differentiated solar panel offers and increasing traction in our beyond the panel products. And outside these core markets, we are pursuing growth opportunities in Latin America, Japan, Australia and in specialty applications. On a combined basis, these growth segments accounted for around 13% of DG revenues last quarter. Maintaining technology leadership is a key focus area for our management team, particularly in our DG business with Maxeon 7 close to commercialization.

In order to ensure the current and future projects meet our high expectations, we’ve added the position of Chief Technology Officer to our executive team and hired Matt Dawson, one of the world’s leading experts in IDC architecture. Matt and I worked together at two previous companies, including SunPower, where he led the R&D team for several years. I am thrilled to welcome Matt and look forward to working closely with him and his R&D team to continue driving technology innovation and maintaining industry leadership. Now let’s turn to our utility scale business. We booked several new projects in the first quarter, all with repeat customers. Our North America supply chain is sold out through the end of 2025 with over 1 gigawatt of capacity allocated for 2026 and 2027 based on options supported by deposits.

The U.S. utility scale market is dynamic continues to be influenced by various regulatory and policy factors. We believe that Maxeon is very well positioned in terms of our ability to supply this market with our 1.8 gigawatt North American manufacturing facility nearing full ramp. Given the opportunity in the U.S. utility scale market and the strong demand signals from our customers, we are also evaluating a variety of expansion opportunities, including, but not limited to, a U.S. solar cell and module manufacturing facility. Since our application with the Department of Energy Loan Program Office progressed to the due-diligence phase last quarter, we have expanded our negotiations with potential customers for product delivery through 2030. We regularly hear from utility scale customers that they appreciate our industry-leading ESG profile.

This is something that has been a core part of our culture dating back to our legacy SunPower days, and it is one of the reasons why our technology has a remarkably prominent presence among high-profile corporate campuses and government buildings for sustainability requirements are paramount. We recently received two new important ESG recognitions. First, we saw our MSCI ESG rating increased from A to AA, the second highest rating achievable for a company and at the top of our industry. Second, our IBC manufacturing facilities increased their cradle-to-cradle certification from bronze to silver, the highest status achieved in the solar industry and a meaningful competitive advantage for any project attempting to optimize a lead rating. The energy level among Maxeon employees today is high.

Our people are energized by the company’s recent progress, but still laser-focused on the execution work ahead, achieving the remaining elements of our annual targets and realizing our future expansion opportunities. With that, I’ll turn it over to Kai.

Kai Strohbecke: Thank you, Bill. I will discuss the drivers and details of last quarter’s performance and then provide guidance for the current quarter as well as updated guidance for the full year. Total shipments for the first quarter were 774 megawatts, up 6% sequentially and nearly 60% year-on-year. We exceeded our guidance range of 730 to 770 megawatts due largely to the accelerated ramp of our new U.S. utility scale capacity. Revenues for the first quarter were $318 million, near the midpoint of our guidance range of $305 million to $345 million. In DG, we saw ASP expansion in the U.S., which offset expected price declines in Europe. Blended global DG ASPs were slightly down sequentially due to a higher mix of specialty application solar cell sales.

These carry an exceptionally strong margin percentage, but at a lower price per watt compared with module sales. Non-GAAP gross profit in the first quarter was $54 million, up from $21 million in the previous quarter. This represents a 17% non-GAAP gross profit margin and is the highest ever for Maxeon as a stand-alone company. While we forecasted strong gross margin expansion, the result exceeded the expectations embedded in our $30 million to $40 million guidance range. The largest contributor was a favorable $12 million net utilization of provisions related to our U.S. utility scale business based on lower of cost or market accounting rules. Excluding this impact, our results still would have come in above the high end of our guidance range.

The European team maintained a strong price premium and the expected market price declines were offset by lower input costs, including poly and freight. And in the U.S., we expanded margins sequentially as a result of our new SunPower contract and additional high margin revenue from our new U.S. residential channel. Production volumes at our facilities in Malaysia and Mexico for our performance line panels have been increasing and a reduction in Q1, COGS combined with higher prices, drove margin improvement in our U.S. utility scale business. Non-GAAP operating expenses were $38 million in the first quarter, compared to our guidance of $37 million plus or minus $2 million. Adjusted EBITDA in the first quarter was $31 million, significantly better than our guidance of $10 million to $20 million based on the previously mentioned favorable developments that impacted our gross margin.

GAAP net income attributable to stockholders came in at $20 million compared to a loss of $76 million in the previous quarter, driven primarily by a $35 million sequential improvement in adjusted EBITDA and a $42 million quarter-on-quarter swing in the mark-to-market valuation of our prepaid forward. Moving on to the balance sheet, we closed the first quarter with cash, cash equivalents, restricted cash and short-term investments of $304 million compared to $344 million at the end of the fourth quarter. Capital expenditures in the first quarter were $16.5 million, which was within our guidance range. The majority of the, spend was for our Malaysia and Mexico performance line capacity. We are very pleased to have started 2023 with a strong financial performance, posting gross margins ahead of our target model.

While we recognize that our first quarter results benefited from roughly 4 percentage points of gross profit margin due to the previously mentioned one-time material effect. Our teams are now highly focused on achieving gross margins of at least 15% based solely on consistent run rate contribution. We indicated previously that we expect to reach this milestone late in 2023, once our Malaysia and Mexico facilities are fully ramped, and we have transitioned to higher-priced utility-scale contracts. We also anticipate improved costs from our performance line products for DG, offset in part by expected price decreases in Europe and in our rest of world markets. These catalysts are all still relevant, and we expect them to play out across the next two quarters in a fashion that allows the company to maintain gross profit margins within striking distance of our 15% target, give or take a couple of percentage point.

Heading into Q4, we expect to see further modest improvement in gross margins based on incremental enhancement of our U.S. utility scale business as well as usual seasonality in DG. With this context in mind, I’ll now turn to our guidance for the second quarter of 2023 and an update for the full year. We project second quarter shipments of between 860 and 900 megawatts – the midpoint of this guidance represents 14% sequential growth and nearly 70% growth year-over-year, reflecting the continued ramp of our U.S. utility scale capacity. We project second quarter revenues of $360 million to $400 million, a nearly 20% sequential improvement at the midpoint driven in part by growth in U.S. DG mix with higher ASPs, more than offsetting lower pricing associated with our growing utility scale mix.

Non-GAAP gross profit is expected to be in the range of $50 million to $60 million. This projection is roughly flat sequentially, but based entirely on what we consider sustainable run rate metrics and driven primarily by the higher mix of U.S. DG volume at ASPs above our global average as higher DG volumes overall. Non-GAAP operating expenses are expected to be $42 million plus or minus $2 million. This includes a slight increase in our spend for beyond the panel and the U.S. residential channel, both of which are expected to enable incremental top and bottom line growth. Adjusted EBITDA is expected to be between $24 million and $34 million, driven largely by the improved run rate metrics impacting our gross profit. Second quarter capital expenditures are projected to be in the range of $20 million to $26 million.

And for the year, our expectations are unchanged at $100 million to $120 million for the completion of manufacturing capacity for performance line channels to be sold into the U.S. market, completion of manufacturing capacity for our Maxeon 6 product 18.55 platform, further development of Maxeon 7 technology and the pilot line preparation for scale-up of Maxum 7 technology as well as various corporate initiatives. As a reminder, this annual CapEx guidance excludes spending for any U.S. manufacturing, which we plan to finance primarily with the U.S. Department of Energy loans and customer co-investments. Last quarter, we introduced 2023 annual guidance of $1.35 billion to $1.55 billion in revenue and $80 million to $100 million in adjusted EBITDA.

While our 2023 year-end exit expectations are largely unchanged, we exceeded our expectations for the first quarter, and thus, our projections for the year are now also increased. We estimate 2023 revenues will be in the range of $1.4 billion to $1.6 billion, and adjusted EBITDA will be in the range of $95 million to $120 million. Our confidence in these projections is bolstered by the fact that roughly half of the revenue on fixed commercial terms for both volume and price. With that, I’ll turn the call back to Bill to summarize before we go to Q&A.

Bill Mulligan: Thanks Kai. As I mentioned last quarter, my goal is to help make Maxeon one of the most profitable companies in the solar industry by driving aggressive manufacturing cost reduction and operational excellence while extending our panel technology leadership and leveraging our unique global channels to market. I’m pleased with our results this quarter and look forward to continuing to demonstrate the strength of Maxeon’s business model over the coming quarters. Now let’s go to Q&A. Operator, please proceed.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Julien Dumoulin-Smith of BofA. Go forward with your questions.

Operator: [Operator Instructions] Our next question comes from Brian Lee of Goldman Sachs. Please move forward with your question.

Operator: Thank you. [Operator Instructions] Our next question comes from Philip Shen of ROTH MKM. You proceed with your question.

Operator: [Operator Instructions] Our next question comes from Graham Price of Raymond James. You may move forward to your question.

Operator: [Operator Instructions] Our next question comes from Andrew Percoco of Morgan Stanley. You may proceed with your question.

Operator: [Operator Instructions] Our next question comes from Donovan Schafer of Northland Capital Markets. You may proceed with your question.

Operator: [Operator Instructions] There appears to be no further questions. Thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect.