Maxeon Solar Technologies, Ltd. (NASDAQ:MAXN) Q3 2023 Earnings Call Transcript

Maxeon Solar Technologies, Ltd. (NASDAQ:MAXN) Q3 2023 Earnings Call Transcript November 15, 2023

Maxeon Solar Technologies, Ltd. misses on earnings expectations. Reported EPS is $-2.21 EPS, expectations were $-0.86.

Operator: Good day ladies and gentlemen. Welcome to Maxeon Solar Technologies’ Third Quarter 2023 earnings call. Currently all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. And now I would like to turn the call over — one moment.

Robert Lahey: Thank you, operator. Good day, everyone, and welcome to Maxeon’s Third Quarter 2023 Earnings Conference Call. With us today are Chief Executive, 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 annual 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. Maxeon experienced dramatically different trajectories in our two businesses during the third quarter. Our US utility scale revenue was up 10% versus the previous quarter and we are on track to exit the year with fully ramped manufacturing facilities a sold-out backlog at higher prices that we expect to make material margin contributions in 2024 and the achievement of important milestones with respect to our planned US factory. In our DG business, we faced significant demand challenges caused by the suspension of shipments to SunPower and the effects of a broad market dislocation in Europe. I’ll spend a few minutes now detailing these different market environments and the respective implications for Maxeon.

Kai will then review our Q3 financial performance and provide guidance for the rest of the year, and then we’ll conclude with Q&A. The US utility scale market is a key focus for us in our primary growth driver. With our existing North America utility scale supply chain reaching important operating efficiency and profitability milestones in our planned New Mexico factory entering the engineering and design stage. We believe that Maxeon is positioned to be a leader in helping reshore advanced solar cell and panel manufacturing to the United States at meaningful scale. Towards this end, we are working intensively with the US Department of Energy’s loan program office to finance a 3.5 gigawatt solar cell and panel factory in Albuquerque. This capacity represents an increase of 500 megawatts compared with our original design.

With site preconstruction work well underway, we’ve hired a general manager for the facility that secured options on adjacent parcels to allow for future capacity expansion. In order to accelerate and de-risk the ramp of our US factory, we plan to install a TOPCon pilot line in our existing Fab 3 in Malaysia and expect this line to be up and running next year well ahead of the anticipated factory ramp in Albuquerque. We expect this pilot line will provide valuable process development experience and serve as a training platform for copy and exact technology transfer to our US factory. Finally, we are advancing well in negotiations for multiple offtake agreements, which we plan to execute prior to the closing of the DOE loan. Q3 shipments in our utility scale business were at an annual run rate of over 1.3 gigawatts with 100% of this volume shipped into the United States.

Pricing increased from the first half of the year and we expect pricing to further increase in 2024 as we transition to shipments for orders booked during 2022. Note that ASPs may fluctuate from 2024 onwards as we transition to index pricing structures tied to certain cost inputs. Contracted backlog now stands at 3.3 gigawatts for delivery through 2025, plus an additional 500 megawatts of supply allocated in each of 2025, 2026 and 2027. Let’s now turn the attention to our DG business. Since June of this year, conditions have deteriorated rapidly due to an oversupply of Chinese commodity modules in Europe and SunPower falling short of their contractual purchase obligations. However, we continue to be bullish regarding the importance of this sector in the mid to long-term.

This view is supported by increasing global retail electric prices, the integration of battery storage to create smart and dispatchable systems and the avoidance of grid congestion as a potential barrier to continued renewable energy penetration. The DG sector is currently experiencing headwinds associated with high interest rates, policy disruptions as well as excess supply and inventory. None of these challenges are unique or unprecedented, but in combination, they have produced what is a very challenging industry environment. We are confident, however, that the DG sector will continue to be a vital part of the solar industry in the long run. We remain focused on our DG strategy, mainly developing, manufacturing and selling the world’s best solar panels through a differentiated direct-to-installer sales channel with increasing attachment of beyond the panel hardware and software that enables homeowners to control their energy usage.

As many of you know, our recent financial performance in DG has been severely hampered by a dispute with SunPower that led us to suspend shipments from July through the end of Q3. I’m pleased to announce that we have reached a settlement with SunPower earlier this week that enables us to resume shipments. The settlement calls for the parties to transact on 85 megawatts of IBC panels through February 2024 at previously contracted prices and resolved outstanding claims and contract breaches. The parties have also agreed to and other contractual supply obligations by the end of this quarter, including purchase obligations by SunPower beyond the 85 megawatts and constraints on Maxeon product sales to SunPower installers. Offering panels directly to installers will eliminate the mark-up SunPower has historically added to our products, allowing us to deliver the world’s best panels to customers at more competitive pricing.

This will enable our plans to aggressively ramp our sales in the US market. Leveraging our recent Solaria acquisition, which nearly doubled the number of dealers actively buying our product to over 170. The Solaria transaction also accelerated the development of our channel sales and marketing infrastructure with the addition of key talent, including Vikas Desai, the former President of Solaria who is now our North America General Manager. Vikas was the original architect of SunPower’s installer channel and successfully grew that business to over $1 billion run rate in just five years. He will be focused on replicating that success here at Maxeon. While we currently expect a year-over-year decline in the US residential market demand in the first half of next year, with California being the key variable, we expect that demand will recover by the time we begin sizable shipments of our new Maxeon 7 panels starting in mid-2024.

Turning to Europe. Our shipments were down 37% sequentially due to elevated industry-wide module inventories. In most key European markets, Maxeon sells primarily directly to installers, which has allowed us to successfully maintain healthy ASPs and positive gross margins, albeit with reduced volume. Our SunPower reserve battery product is now widely available to our dealers in Belgium, France, Italy, Spain and Australia and we have received excellent customer feedback regarding product quality and ease of installation. As we mentioned in our last call, we increased our sales focus into the commercial and industrial segment and we are pleased to announce an early win as a module supplier for Italy’s Turin airport as well as a growing pipeline of similar high-profile projects in the region.

Let me now say a few words about our IBC solar panel technology. Our sixth generation panels were a big step forward compared with the second-generation products they were placed and have been a critical contributor to our DG business, particularly in the US. With near-term US DG volume expected to decrease due to the discontinuation of the SunPower offtake, we have made the decision to phase out our Maxeon 6 technology and focus on Maxeon 7 and future generations. We now plan to bring Maxeon 7 to market a full quarter earlier than previously planned, and we will reserve Fab 5 for future Maxeon 8 capacity. We will pre-manufacture sufficient Maxeon 6 volume to ensure a smooth product transition to Maxeon 7 in all of our key markets and plan to utilize the space freed up in Fab 3 to install the TOPCon pilot line mentioned previously.

We are very excited about our seventh generation IBC platform which is the first IBC technology developed and commercialized by Maxeon since the spin. Maxeon 7 delivers increased efficiency and other performance attributes that will extend our technology leadership and allow homeowners to generate even more power from their limited roof space, thereby maximizing bill offset in this era of electric vehicle adoption. Since NREL efficiently crowned Maxeon 7 as the world’s most efficient solar panel back in June, our early-stage production runs have continued to improve, with nearly half of our module output currently exceeding 24% efficiency. However, as we’d like to remind people, it’s not just about efficiency. Maxeon 7’s architecture achieves these record performance levels while simultaneously controlling hotspots and other degradation issues that are common challenges for high-performance solar technologies and which we observed with regularity in our competitors’ products.

We expect to start shipping Maxeon 7 panels from next summer which corresponds with the peak selling season in the US residential market. Finally, I want to say a few words about intellectual property. With Maxeon 7, we are taking another major step forward with respect to IBC architecture, and we are adding to our considerable IP moat in this field. As our competitors attempt to close the performance gap to our products, they are finding it increasingly difficult to navigate around the IP portfolio that we have developed over the last several decades. Earlier this year, we filed a patent infringement action against Tongwei and sent cease and desist letters to several European distributors related to our shingled cell panel technology. Yesterday, we filed a patent infringement action against Icosolar and European distributors related to our IBC solar cell architecture.

With over 1,600 granted patents and 360 pending patent applications across 30 countries, Maxeon has a formidable IP portfolio addressing fundamental enabling elements for creating high-performance solar cell and panel architectures. We plan to continue to defend our IP aggressively. In summary, our US utility scale business is on track to deliver increasing margins as we prepare to deploy our next major capacity increment in New Mexico. Although we and many others were surprised by the speed and magnitude of the changes in the DG industry this year, we are well positioned with our technology and channel initiatives and expect our DG margins to recover in the back half of 2024 as Maxeon 7 is introduced. 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 full year. Total shipments for the third quarter were 628 megawatts. And for the first time in Maxeon’s history, the majority of shipments went to utility-scale customers. We expect this to be our new normal for the foreseeable future, though with a continued sizable DG market share in the highest ASP geographies. Also, for the first time in Maxeon history, our utility scale shipments went entirely to customers in the United States. Total shipments were consistent with our updated guidance range and down 22% sequentially, largely due to the dispute of SunPower, which also resulted in a significant inventory build-up.

Shipments were also impacted by the industry-wide supply-demand imbalance in Europe, which caused our European volumes to decline more than 30% year-on-year. Revenues for the third quarter were $228 million and included a 10% sequential increase in US utility scale revenues attributable to higher volumes. On a blended basis, ASPs declined sequentially due to a lower mix of DG sales. Our ASP in USDG was largely flat sequentially at above $0.70 per watt with only limited shipments to SunPower early in the quarter. ASPs for our performance series in the global DG market were down 13% sequentially and partially offset by COGS reductions. Gross profit in the third quarter was $3 million or 1% of revenues. This significant sequential decline was driven by the dispute of SunPower, Europe DG oversupply conditions and inventory write-downs.

GAAP operating expenses were $67 million and included restructuring charges of $24 million, primarily in connection with the cancellation of purchase orders for the previously planned capacity expansion of Maxeon 7 at our Fab 5 in the Philippines. As announced in early October, our decision to convert existing Maxeon 3 manufacturing capacities to Maxeon 7 at our Fab 4 instead of expanding in Fab 5 is expected to result in net CapEx savings of approximately $100 million after accounting for these cancellation charges and allows us to accelerate the introduction of Maxeon 7. Non-GAAP operating expenses were $38 million in the third quarter below our guidance range of 43 million, plus or minus 2 million due to austerity measures that we put in place.

The decline does not include any impact from our announced reduction in force, which I will discuss in the context of our fourth quarter outlook. Adjusted EBITDA in the third quarter was negative $20 million, consistent with our October pre-announcement. Net loss attributable to stockholders came in at $108 million compared to 2 million in the previous quarter. The sequential decline was primarily driven by lower gross profit combined with the $24 million in restructuring charges and $37 million attributable to the remeasurement loss on our prepaid forward. Moving onto the balance sheet. We closed the third quarter with cash, cash equivalents, restricted cash and short-term investment of $277 million compared to $456 million at the end of the second quarter.

Total inventory levels increased sequentially from $349 million to $386 million due in part to suspended shipments to SunPower. Cash levels were also impacted by lower shipments and margin dollars from our global DG business, the reduction of contract liabilities related to our US utility scale business capital expenditures during the quarter, restructuring expenses and a reduction in short-term debt. Capital expenditures came in at $15 million for the third quarter below the low end of our guidance range as we took actions to execute the lower CapEx plan associated with the introduction of Maxeon 7. Going into the fourth quarter, we expect the distinct dynamics that have been unfolding our utility scale and distributed generation businesses to largely continue.

Volume shipments and ASPs in our utility scale business for the United States have been contractually locked in and are increasing over time, and manufacturing costs are tracking favorably. By comparison, the DG business outlook has more uncertainties due to the industry headwinds in Europe and elsewhere. Given the velocity of those headwinds that have developed over the course of only a few short months, we have taken decisive action to quickly pivot our manufacturing capacity while maintaining strict austerity measures to ensure a healthy liquidity and safeguard our ability to invest in our priorities. Most notably into Maxeon 7 as well as the preparations for our manufacturing project in the United States. Cash and working capital management have always been a high priority for Maxeon’s finance organization, and we are re-doubling our efforts in this area.

We have reduced raw material orders and are moderating our IBC manufacturing volumes in line with inventory on hand and existing orders while rightsizing our manufacturing footprint and related resources. As a result, we expect significantly reduced inventory levels as we exit the year. We have also negotiated more favorable payment terms with many of our suppliers. And as mentioned, our CapEx plan is substantially reduced by our pivot of the Maxeon 7 ramp. On the sales side, we are focusing on a narrow set of DG growth initiatives. First, expansion of our Maxeon branded US residential channel and leveraging the Solaria acquisition. Second, further penetration of the commercial and industrial segment of the DG market in Europe and the United States.

Third, scaling of our beyond the panel offerings. And finally, market introduction of Maxeon 7 in mid of next year. With this context in mind, I’ll now turn to our guidance for the fourth quarter and its implications on the full year guidance. We project fourth quarter shipments of between 610 and 650 megawatts. This includes shipments to SunPower as contractually agreed under the settlement agreement. Also, the midpoint of this guidance includes continued growth in our US utility scale volume, while Europe is projected to be relatively flat sequentially with growth in C&I, offset by a decline in residential. We project fourth quarter revenues of $220 million to $260 million. Has slight sequential increase at the midpoint, mainly due to higher shipments to SunPower.

Incremental sales resulting from our Solaria acquisition will start having a net positive impact on sequential revenue, but carry a lower ASP than our previous IBC only pricing in the United States. Non-GAAP gross loss is expected to be in the range of $5 million to $15 million, which includes certain idle charges and excess costs related to our IBC capacity pivot potential liquidated damages because of delivery delays in our utility scale as well as the risk of further inventory write-downs, adding up to approximately $25 million combined. GAAP operating expenses are expected to be $113 million, plus or minus 4 million. These include restructuring expenses totaling approximately $70 million for the write-down and accelerated depreciation of certain Maxeon 6 manufacturing assets charges for Maxeon 7 related purchase orders canceled in the beginning of the fourth quarter as well as severance costs for our previously announced reduction in force.

We originally expected that 15% of our global workforce would be affected, but with the decision to entirely phase out Maxeon 6 as well as other operational realignment we now expect that number to be approximately 22%. Non-GAAP operating expenses are expected to be $38 million plus or minus 2 million. As an increase in US sales and marketing head count is offset by austerity measures. Note that the vast majority of the reduction in force initiated during the quarter impact our manufacturing operations and therefore, will have a disproportionate impact on cost versus OpEx. Adjusted EBITDA in the fourth quarter is expected to be between negative 27 million and 37 million. The expected sequential decline is attributable to lower gross income on largely unchanged non-GAAP OpEx levels.

Fourth quarter capital expenditures are projected to be in the range of $10 million to $20 million, a majority of which is planned for our Maxeon 7 ramps and initially preparatory spending for our Albuquerque site. While this initial CapEx for the US facility may be bridged by our balance sheet, the expectation is that we will secure the majority of capital needed to build the facility in the months ahead from the DOE and customer co-investments. As implied by our 3Q results and 4Q guidance, we update our 2023 revenue guidance to $1.114 billion to $1.154 billion. Our adjusted EBITDA guidance to $4 million to $14 million and our annual CapEx guidance to $66 million to $76 million. With that, I’ll turn the call back to Bill to summarize before we go to Q&A.

Bill Mulligan: Thanks, Kai. Reducing our headcount this quarter was a painful but necessary decision in response to a suddenly increased DG demand profile. I’m pleased by the professionalism displayed by Maxeon’s leadership team and the speed of our response. Acceleration of Maxeon 7, rightsizing our IBC capacity settling our SunPower dispute and related channel expansion initiatives should get DG back on track by the second half of next year. Kai and his team are laser-focused on cash management and our operations growth continues to grind out cost reduction and yield improvements. We expect success on these fronts will get us back to adjusted EBITDA profitability within 2024, and as we work toward deploying our Albuquerque cell and module factory. We appreciate your support. Now let’s go to Q&A. Operator, please proceed.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Julian Dumoulin-Smith with Bank of America. Your line is open.

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Q&A Session

Alex Vrabel: Hey, guys. It’s actually Alex Vrabel on for Julian. Maybe if I may, I mean, you guys have made a lot of adjustments, I think, to kind of what your manufacturing footprint was versus what it will look like in 2024. Obviously, some onetime items causing a gross loss, which we alluded to previously. And it sounds like the adjusted EBITDA losses might continue into the first half. I’m wondering if you can kind of just help us with the cadence that you guys are putting out there. How big is this TOPCon line, for example, what’s the phase down of Maxeon 6 look like as far as revenue contributions? And when do you expect to kind of be able to get back on track from an adjusted EBITDA lens in 2024 with all these moving pieces?

Bill Mulligan: Yes. Hi, Alex. Bill Mulligan. Yes, thanks for the question. I think we had incredibly strong demand in the first half of this year. And what’s — the silver lining of this downturn has given us an opportunity to pivot quickly to our new next-generation Maxeon 7 technology. And we’re going to do so in a much more cost-effective manner than what we had previously planned. I always think it’s important to respond to an industry downturn like this very aggressively. Our outlook for Europe for next year is fairly sober. So we decided to bring the capacity down to what we view as a more balanced structure looking forward. All of these actions together, we’re doing a good job of keeping inventory in line, absent the SunPower dislocation, we actually would have reduced our inventory this quarter.

So we’re ahead of this. We’re trying to get out in front of it. It’s going to take a little time to recover. But I think by the next half of — the second half of next year, we should be in returning to profitability.

Kai Strohbecke: Yes. I would maybe — this is Kai, Alex. I would maybe add for the inventories, you’ve seen kind of a record high number here at the end of the third quarter that, as Bill mentioned, was mostly because of the build-up of inventories for SunPower and also some other DG markets, but mostly SunPower really because we suspended shipments. Now as you have seen, we’ve come to a settlement with SunPower, we’re going to ship them 85 megawatts through February time frame. And frankly, all that stuff is in inventory as we speak. So there’s also from a cash standpoint, not much more cash that we need to put into working capital is all going to come out and turn into cash. So that’s kind of where we are turning that part of the machine around.

And in terms of the MAX 6 phase out that we alluded to. We are running at about half capacity right now. We are using up the remaining materials, putting those into inventory and think that we’re going to have enough Maxeon 6 inventory to bridge the transition to Maxeon 7 then from the mid of next year.

Alex Vrabel: Got it. And maybe just a follow-up. As you guys think about sort of looking at your exposures as the way I’ll frame it on MAX 7 into mid-’24, I think, is when you sort of talked about unveiling that product to the market. What I mean with the breakage with SunPower, what’s sort of your sales strategy going forward. Obviously, you guys have the Solaria channel, which seems like one opportunity, the Green Tech channel has already existed. But how are you thinking about sort of bringing that into market relative to kind of what your brand has been associated in the past versus what it will be going forward? Thanks

Bill Mulligan: Yes. Yes, thanks. Well, our IBC products are still absolutely the best panel on the market. And MAX 7 just really helps take that to a next level. And there’s a large base of folks in the United States that know that and believe that and want that product. And so there’s latent demand for this product out there. I think this transition from SunPower allows us to control our own destiny. As we mentioned in the prepared remarks, having Vikas Desai and the Solaria team is a big plus for us. It’s really jump-starting our build-out of our own channel here. So we’re really optimistic about that, bringing in a great product with a rebuilt team to a market that knows this product and appreciates this product and has historically very strong ASPs. So we feel good about it. It’s going to take a little while to rebuild. And — but like I said, by the back half of next year, we should be in much stronger positions.

Alex Vrabel: Awesome. Just a quick clarification, if I may. Just on the SunPower megawatts, is there any sort of cadence commentary you can give us? Otherwise, we’ll take the rest offline.

Kai Strohbecke: I would say out of the 85, the majority, the 85, I think we have disclosed is going to run through February. The majority is going to be in this current fourth quarter.

Alex Vrabel: Awesome. Thanks, guys. We’ll take the rest offline.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Brian Lee with Goldman Sachs and Company. Your line is open.