SunPower Corporation (NASDAQ:SPWR) Q1 2023 Earnings Call Transcript May 3, 2023

SunPower Corporation misses on earnings expectations. Reported EPS is $-0.07 EPS, expectations were $-0.01.

Operator: Good day, and thank you for standing by. Welcome to the SunPower First Quarter 2023 Results Conference 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 would now like to hand the conference over to your speaker today, Mike Weinstein. Please go ahead.

Mike Weinstein: Good morning. I would like to welcome everyone to our first 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 with first quarter announcements and business highlights, followed by an update on progress toward 2023 guidance, including California sales, backlog and financing. Following Peter’s comments, Guthrie Dundas, 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 Form 10-K and quarterly reports on Form 10-Q.

Please see these documents for additional information regarding those 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. I’m pleased to be with all of you to discuss both our Q1 2023 results and the progress we are making on our five-pillar strategy to build SunPower into the world’s best residential solar company. In the first quarter, we continued to show strong customer installation growth, that tracked towards the high-end of our full year 2023 guidance of approximately 10% to 30% customer growth. We reported $1 million of adjusted EBITDA this quarter, with $10 million of business unit cash generation. As we highlighted on our last call, adjusted EBITDA was expected to be low this quarter impacted by higher sales and marketing expense to generate strong bookings volumes in California before the expiration of NEM 2.0 rules on April 15.

We were also affected by unfavorable California weather conditions throughout Q1 that kept cruise idle, increased costs, and delayed certain installations in the state. We expect to catch up in California over the next few quarters. Importantly, we remain confident in our plans to achieve our full year 2023 guidance of between $125 million and $155 million of adjusted EBITDA based on 90,000 to 110,000 new customers and adjusted EBITDA per customer before platform investment of between $2,450 and $2,900. Please turn to Slide #4. We added 21,000 new customers in Q1. This is a 27% increase year-over-year. Revenue also grew at 32% year-over-year, as price increases continue to offset the impact of higher product and installation costs. New order bookings grew fastest in our direct channel at 97% year-over-year.

With strong bookings growth under NEM 2.0 in California, our backlog increased to 23,000 retrofit customers, with another 39,000 in the new home channel. We expect the backlog to increase further in the coming weeks, as many of our dealers continue to enter orders into our system, after concentrating efforts solely on customer NEM 2.0 applications in March and April. Adjusted EBITDA per customer came in at $1,200 before platform investment, which reflects the special seasonal effect of California sales and marketing expense and the weather we discussed earlier. SunVault energy storage systems sales are showing early signs of strength in California under NEM 3.0 rules. In recent weeks, we are seeing this trending towards attach rates over 20% in our direct channel in the state.

Lease demand continues to grow with a 268% increase in contract volumes in Q1. As we’ve noted previously, further growth for leasing is expected in 2023 and beyond due to 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 installer is a major competitive advantage. Please turn to Slide #5. Our Q1 customer growth of 27% year-over-year positions us well to achieve our full year customer guidance of between 90,000 and 110,000 customers, a 20% growth rate at the midpoint. Revenue grew to $443 million a 32% increase that reflects higher pricing and we believe is indicative of the continued strong value proposition of solar in this inflationary environment.

Please turn to Slide #6. We know that demand and sales trends our top of mind for investors lately. I want to provide you with an update on California NEM 2.0 results, and a preliminary look at early NEM 3.0 trends as well as our refocused sales efforts back to the rest of the country, now that our successful push for NEM 2.0 customers is completed. In California, Q1 retrofit bookings to existing homes were up 135% year-over-year in our direct channels, which outpaced our peers and boosted our market share, resulting in a state backlog that exceeds six months. The pivot to NEM 3.0 began in April, with a transition period that included a late NEM 2.0 surge in the first half of the month, followed by weaker initial bookings because of the earlier pull-forward of demand.

However, with many of the dealers fully engaged on completing NEM 2.0 inter-connection applications for customers in March and April, we expect to continue registering purchase orders and bookings into our systems for several more weeks. This means we don’t have the full picture of either NEM 2.0 or NEM 3.0 impacts, until the incoming data is finalized over the next month or two. One area that’s not been affected by demand pull-forward is battery storage sales. Here we are seeing some early indications of higher attach rates in California through our direct channel. At this time, we are expecting to see the April data coalesce above a 20% attach rate with stronger battery sales expected because of higher customer return on investment under NEM 3.0. We believe these attach rates have the potential to climb higher, and that SunPower is well-positioned to deliver SunVault storage systems to customers with inventory levels entering 2023 that we believe are sufficient to meet stronger demand for the year.

In the rest of the country, we continue to see booking strength in the Northeast and the mid-Atlantic, with Q1 gross bookings up over 100% in certain states, including Connecticut, Virginia and North Carolina. In one of our largest markets, Texas, gross bookings have come on strong up 38% year-over-year for the quarter. To take advantage of the California market in Q1, we focused our sales resources on that state, particularly in our direct channels. While this was a factor affecting softer results in Florida and Arizona, this was contemplated within our annual guidance. The New Home segment has been outperforming our original expectations so far this year. In April surge in California has brought year-to-date New Home’s bookings, tracking a 26% growth year-over-year, including multifamily.

With homebuilders indicating that they are selling homes more briskly than previously anticipated. We are also seeing rapid growth in the still small but important multifamily segment with Q1 2023 bookings exceeding all of that of 2022. The bottom line is that we’re off to a solid start for the year coming out of Q1 and we’re currently tracking to achieve our full year customer guidance. Please turn to Slide #7. Conventional electric utility rates are the primary competition for our industry, and they have continued to accelerate upward a 15.4% year-over-year in February, despite the moderating bulk of wholesale power, cost of wholesale power and key fuels such as natural gas. As you can see on the right, 10 states continue to see increases greater than 20% year-over-year and states such as Texas and Florida are experiences rises of 19.5% and 16.3% respectively.

As we’ve noted, we believe these steep rises continue to elevate the value proposition of residential solar as one of the most powerful ways to stabilize and reduce home energy bills. Although fuel prices have declined in recent months, the Edison Electric Institute is projecting a 20% increase in electric utility capital investment from 2022 to 2024 over the previous three years. As these investments are recovered through electric bills, we believe the value of customer finance rooftop solar is likely to continue rising. Please turn to Slide #8. Next, I’ll share some of the most important progress we’ve made in Q1, as we move forward with the five pillars of our long-term strategic plan. For customer experience, SunPower remained the number one ranked home solar installer last year, as indicated by our rankings and reviews on various platforms, including EnergySage and Google.

For products, we continue to diversify our panel supply agreements, securing enough volume to fully address our anticipated 2023 demand. For growth in April, we finalized an investment in Minnesota based Wolf River Electric through our Dealer Accelerator Program. Wolf River, the company’s newest and now third largest dealer, will sell SunPower panels, storage, EV charging equipment and financial products. With this relationship, SunPower plans to significantly expand its geographical footprint across Minnesota, Wisconsin and Iowa. In the New Home segment, we expanded beyond California to eight new states and leaned into our multifamily home business with three new deals in California. For Digital, we’ve developed a new scheduling software in the first quarter, which we believe will enable more reliable appointment times, and provide customers with real-time tracking of technicians traveling to their site.

We also updated our digital tools for dealers to make managing inventory faster, easier and more accurate. And finally, SunPower Financial’s lease business grew 268% year-over-year in the first quarter, to comprise 68% of our Q1 bookings. We expect the lease business to continue growing rapidly in 2023 and beyond, because of the favorable tax treatment under the Inflation Reduction Act. We have also announced that we’ve secured financing commitments to fund more than $1 billion of residential solar and storage loans in recent weeks, through these non-recourse vehicle, SunPower Financial will continue to provide customers with attractive loan options, for their transition to clean energy. Please turn to Slide #9. We are very excited to share with you the California launch of our virtual power plant offering to customers in partnership with OhmConnect.

The program allows participating customers to earn financial rewards, for allowing their SunVault storage system batteries to periodically utilize by local utilities, to help stabilize the grid during peak energy usage. Please turn to Slide #10. I want to emphasize the strength of our corporate and customer financing model during the recent period of banking turbulence. As previously noted, our low risk financing model is based on the off-balance sheet origination of loans and leases for customers. With similar origination fees for either loan or lease, we are agnostic and strive to act in the customer’s best interest. We recently announced, we secured non-recourse financing commitments to fund more than $1 billion of residential solar and storage loans from Hannon Armstrong, Crédit Agricole, and as of this week, KKR.

Through these transactions, SunPower Financial will continue to provide customers with attractive loan options and tenders up to 25 years for their transition to a cleaner and lower cost future. We’ve also applied for conditional loan guarantees to the U.S. Department of Energy’s loan programs office that are designed to make distributed energy resources including rooftop solar, battery storage and virtual power plant ready software available to more American homeowners. If granted, we expect these financial benefits to be available for our customers in 2024. Our lease debt bookings continue to grow robustly with our dealer network leading the way as the value of leasing solar under higher utility rates becomes an increasingly attractive option.

Our all-in cost of capital for leasing remained 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 or better than our competitors. We believe that we will have ample facilities in place to finance a growing lease pool through 2023, and we are in late stage discussions, that aim to close additional funding arrangements for further growth. Before I turn it over to Guthrie for the financials, I want to share some exciting news. This week, SunPower is bringing on important senior leadership talent as we welcome [Pat Figatel] (ph) as our Senior Vice President of Sales. With over 20 years of experience, Pat, is a highly accomplished leader with improving track record, spanning operations, sales and business development, marketing and brand management for both emerging and large scale organizations.

We are also proud to announce that Jennifer Johnston will join the company as Executive Vice President and Chief Operating Officer, effective May 8. Jennifer is an accomplished executive with over two decades of experience, leading teams and operations, manufacturing, logistics and finance. She joins the company from a leading-edge robotic technology company that specializes in automating e-commerce order fulfillment where she served as a Chief Operating Officer and Chief Financial Officer. Prior to this, Miss Johnston spent 10 years at Amazon in North America and Europe where she held finance and business leadership positions across Amazon Fulfillment, Amazon Logistics, Amazon Go and AWS, driving operational and financial scalability across each of the businesses.

And on that note, I’ll turn it over to Guthrie for more details on our Q1 results. Guthrie?

Guthrie Dundas: Thank you, Peter. Please turn to Slide 12. For the first quarter, we are reporting $1 million of adjusted EBITDA and $443 million of non-GAAP revenue, an increase of a 32% year-over-year. We added 21,000 new customers in Q1, a 27% increase year-over-year that is tracking above the midpoint of our full year guidance of 90,000 to 110,000 customers. Adjusted non-GAAP gross margin dips 17.1% for the quarter largely the results of challenging weather that resulted in delayed install in our SunPower Direct channel. Adjusted EBITDA per customer before platform investment also declined to $1,200 largely as a result of NEM 2.0 sales and marketing expense, weather and the effect of typically lower seasonal installation volumes earlier in the year.

We continue to expect to benefit from a combination of higher pricing growing origination fees, origination volumes at SunPower Financial and the operational leverage gained from increasing sales. As we highlighted at the Analyst Day last year, platform investment of $24 million for the quarter is primarily products, digital and corporate OpEx. Our balance sheet remains lean after the January retirement of convertible debt with $116 million of cash on hand and $77 million of net recourse debt. As a reminder, we completed the sale of our last remaining 0.5 million shares of end stage stock holdings in January, at prices averaging approximately $250 per share. To 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 $270 million. Please turn to Slide 13. As Peter, mentioned earlier, we are reiterating our 2023 guidance today for a $125 million to a $155 million of adjusted EBITDA, driven by an anticipated 90,000 to 110,000 incremental customers with adjusted EBITDA per customer before platform investment of $2,450 to $2,900. Platform investment continues to be primarily comprised of products, digital, corporate operating expense that drive our company towards larger operational scale, growing adjusted EBITDA per customer and a superior customer experience in the years to come. On a per customer basis, platform investment is projected to peak in 2023 as we expect this to grow below the rate of customer growth, so the rate per customer declines over time.

With California NEM 2.0 now in the rearview mirror, we are refocusing our efforts across the country and on the execution of our long-term strategy. Looking forward beyond 2023, we continue to see several positive trends that are expected to help propel our business, including the value added by the Inflation Reduction Act, higher attachment rates for storage and financing and a potential recovery of New Homes in time. We continue to build a first class platform of assets that we believe delivers the world’s best customer experience in the industry. With that, operator, I’d like to turn the call over for questions.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Kashy Harrison with Piper Sandler. Your line is now open.

Operator: Your next question comes from the line of Sean Morgan with Evercore. Your line is now open.

Operator: Your next question comes from the line of Julien Dumoulin-Smith with Bank of America. Your line is now open.

Operator: Your next question comes from the line of Ben Kallo with Baird. Your line is now open.

Operator: Your next question comes from the line of Tristan Richardson with Scotiabank. Your line is now open.

Operator: Your next question comes from the line of Philip Shen with Roth MKM. Your line is now open.

Operator: Your next question comes from the line of Andrew Percoco with Morgan Stanley. Your line is now open.

Operator: Your next question comes from the line of Biju Perincheril with Susquehanna Financial Group. Your line is now open.

Operator: And your last question comes from the line of Brian Lee with Goldman Sachs. Your line is now open.

Peter Faricy: Perfect. I want to thank all of you for the great questions in the call we had this morning, and I want to give a big shout out to our dealers and our field operations teams and our sales teams, who just did an incredible job of helping thousands of California consumers qualify for NEM 2.0. It was really inspiring to see all the great work and the effort. Big welcome to Pat and Jennifer, and look forward to talking to all of you next quarter. Thank you.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect. Have a good day.