SunPower Corporation (NASDAQ:SPWR) Q4 2022 Earnings Call Transcript February 15, 2023
Operator: Thank you for standing by. Welcome to SunPower Corporation’s Fourth Quarter 2022 Earnings 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. As a reminder, today’s program is being recorded. And now, I’d like to introduce your host for today’s program, Mike Weinstein, Vice President of Investor Relations. Please, go ahead, sir.
Mike Weinstein: Good afternoon. I would like to welcome everyone to our fourth quarter 2022 earnings conference call. On the call today, we will begin with comments from Peter Faricy, CEO of SunPower, who’ll provide an update with fourth quarter announcements and business highlights, followed by commentary on our 2022 accomplishments and our expectations for 2023, including specifics on our customer financing and new homes operations. Following Peter’s comments, Guthrie Dundas, SunPower’s Interim CFO, will then review our financial results and guidance for 2023. 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 and our 2022 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 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 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 afternoon, everyone. At our Analyst Day last March, we rolled out a new long-term strategy, focused on residential solar with five strategic pillars and a set of financial goals for 2025. 2022 was an important and highly successful first step on that journey. I’m happy to share the progress we’ve made and our plans to execute on that vision going forward. In the fourth quarter, we continue to break records for customer growth, finishing the full year above the high end of our 2022 guidance. We reported $36 million of adjusted EBITDA this quarter, a 39% increase versus Q4 of 2021, to finish the year at $95 million. Business unit cash generation was a positive $41 million in the quarter, leaving us with $377 million cash on hand heading into 2023.
To put this in perspective, SunPower’s net debt at year-end was at the lowest level since we began issuing convertible debt after our IPO over 15 years ago. Our strong performance is due to the dedication of thousands of SunPower employees and hundreds of SunPower dealers. The SunPower team overcame unprecedented supply chain and inflationary challenges to deliver results for our customers and our shareholders. I want to acknowledge and thank everyone for their hard work and persistence last year. Looking ahead to 2023, I’m excited to share with you our plans to accelerate our investment in product, digital, and financial platforms to keep SunPower’s momentum building. These investments will ensure that we have the right tools in place to capture market share for many years to come.
We are excited to enter this year with plans to build upon our best-in-class customer experience, to create the fastest-growing residential solar company in the world. Please turn to slide number four. I’m pleased to report that customer demand continues to be strong and that we added 23,700 new customers in Q4. This is a 39% increase year-over-year that now includes the demand from Blue Raven Solar in both comparative periods. Revenue also grew at 42% year-over-year as price increases continue to offset the higher impact of product and installation costs. We continue to see strength across our sales channels with 109% year-over-year customer growth from the SunPower direct channel. Our backlog also ended the year strong with 19,000 retrofit customers and another 34,000 customers in the new homes channel.
Adjusted EBITDA per customer grew to $2,300 before platform investment, allowing us to finish the full year at $2,100, a result that’s well on track to achieve our target goal for $3,000 to $4,000 by 2025. SunVault energy storage system sales continued at a steady pace with a 17% bookings attach rate in the SunPower direct channel, unchanged versus Q3. We also continue to be growing demand for customer lease products, which increased 55% year-over-year in the quarter. Further growth for leasing is expected in 2023 and beyond because of the new tax incentives under the Inflation Reduction Act. SunPower Financial’s low-risk origination model remains customer-centric and agnostic towards lease or loan financing. We believe we are well prepared to serve ramping lease demand.
Please turn to slide number five. In 2022, we saw steady and exceptional progress in our topline growth, exceeding the top end of our original 2022 guidance with 48% growth in new customers over the full year, including our highly successful late 2021 acquisition of Blue Raven Solar. Looking forward, we are investing heavily in the people, products, and systems that will enable SunPower to continue to acquire market share in the years ahead. The bottom-line is despite higher interest rates and changing state incentive policies, the value of residential solar continues to grow. This value will be buoyed by another strong decade of federal incentives under the Inflation Reduction Act and the likelihood of rising utility bills. Please turn to slide number six.
We finished 2022 with $95 million of adjusted EBITDA, a 26% improvement year-over-year, with steadily improving levels of EBITDA per customer throughout the year. We expect to see continued year-over-year improvement in 2023 as well, driven by higher pricing power, improved attachment rates for SunPower Financial and SunVault storage and a continuous effort to reduce customer acquisition costs. Please turn to slide number seven. Next, I’d like to share some of the important progress we made in 2022 as we move forward with the five pillars of our long-term strategy. For customer experience, SunPower remain the number one ranked home solar installer last year, and we continue to make meaningful progress, raising our Net Promoter Score by 29% in 2022.
For products, we expanded and extended our contract with Maxeon for premium, high-efficiency solar modules through 2025. We have also secured additional high-quality supplies for the mainstream market, including Hanwha Q Cells from our Dalton, Georgia facility. We’ve also added multiple SunVault storage sizing options, including whole home backup and we have begun work on SunVault version 2.0. All of our products meet the well-known SunPower quality and reliability standards and carry the industry-leading SunPower complete confidence warranty to serve our residential customers across the US. For growth, we launched the Dealer Accelerator Program to partner with our best dealers to expand into new territories and sell additional products. Our network expanded 28% in 2022 to more than 850 dealerships across the entire US.
We launched an important collaboration with General Motors to be their exclusive supplier of solar systems in the coming years, and we are also their preferred EV charger installation partner. Additionally, we announced Home Solar with IKEA and an exclusive agreement with Toll Brothers in California markets, as well as a national contract extension with KB Home. For digital, we continue to improve the customer experience, along with launching a new real-time data visualization tool for dealers and the initial build of our virtual power plant and demand response software that will ultimately allow our systems to communicate with interconnected utilities. And finally, SunPower Financial finished 2022 with leasing loan net bookings increasing 81% year-over-year, with lease contract bookings ramping up significantly in the second half of the year.
We finished 2022 with a 39% financial bookings attach rate, and we are on track to meet our long-term target to achieve a 65% to 75% attach rate by 2025. Please turn to slide number eight. Conventional electric utility rates have continued to rise sharply, over 11% year-over-year in November, despite the moderating cost of key fuels such as natural gas. Nine states continue to see increases greater than 20% year-over-year. As we’ve noted, these steep rises continue to elevate the value proposition of residential solar as one of the most powerful ways to stabilize home power 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, value of customer finance rooftop solar is likely to continue rising. Please turn to slide number nine. As most of you know, California regulators are preparing to implement new net energy metering rules on April 15. Until then, customers in the state are eligible to lock into the current NEM 2.0 rules as long as they submit an interconnection application before that date. We are currently investing heavily in our California sales and marketing effort as well as the interconnection application process to ensure that as many customers as possible take advantage of the current rules before the change. I’m pleased to report that we are seeing a significant response in new bookings and backlog as a result of these efforts.
Once the new NEM 3.0 rules take effect, we expect the value of battery storage systems to increase materially in California as customers may use their solar generation across more hours of the day by storing power in their battery. Our own analysis suggests that the nominal payback period for solar-only system under NEM 3.0 is eight to 10 years, but this can be improved to seven to nine years when storage system is added. We believe 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. Please turn to slide number 10. As you may recall from our second quarter presentation, we conveyed an expected sales slowdown for the New Homes segment due to a slower economic environment affecting the broader homebuilding industry.
Despite this, the New Homes segment reported an impressive Q4, 13% year-over-year growth rate for customers recognized, boosted by our nascent but fast-growing multifamily and national sales efforts beyond California. Our 2023 customer growth and adjusted EBITDA guidance assumes a 25% decline in overall new home sales versus last year, which includes the benefits of rapidly scaling non-California and multifamily sales. Overall, this is the equivalent to the assumption of a 500 basis point reduction in year-over-year customer growth for SunPower as a whole. Longer term, there’s a widening need of nearly 6 million new homes to satisfy the growing demand for housing in the US. We continue to view the New Homes segment as an important long-term strategic asset where we intend to continue building on our already strong leadership position.
Please turn to slide number 11. The Inflation Reduction Act Congress passed in 2022 includes a 10-year extension of the 30% tax credit for solar, in addition to a brand-new 30% tax credit for stand-alone battery storage. It also includes several important bonus credits that apply to systems leased to customers. SunPower stands well-positioned to monetize these benefits through a combination of stronger sales, increased pricing power, and qualification for the bonus credits. Number one, to increase the likelihood that we qualify for the 10% domestic content bonus credit, we are adding more domestically sourced PV modules to our supplies for 2023, and we expect to bring on additional domestic suppliers in 2024 and beyond. Number two, for the 10% to 20% low-income bonus credit, SunPower is building new tools for dealers, activating SunPower direct to sell lease and reconfiguring marketing operations to capture more qualifying customers.
And finally, number three, for energy community credit, we’re mapping out these communities so that this bonus can be incorporated into our sales tools and made available to our customers. Please turn to slide number 12. 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. As you can see here, our lease net bookings continued to grow robustly in the fourth quarter at a rate of 55%. We expect this trend to continue into 2023, as leases are projected to gain popularity in the coming years due to the bonus tax incentives on the IRA. To be clear, we welcome this development, and we are well prepared to competitively execute on it.
Our all-in cost of capital per leasing remains below 6.5%, including tax equity, with the added advantage of lower interest rate sensitivity across the full capital stack. We believe that this is at least equal to or better than our peers. We have ample facilities in place to finance a growing lease pool through 2023. Loan bookings also grew 35% in Q4 and were approximately 78% of the total net bookings in the quarter. We continue to benefit from more than $2 billion of low-cost, long-term private loan purchase facilities, which are now 300 to 400 basis points less expensive than the cost of capital provided through asset-backed securities market. The ABS market has been improving of late, with spreads tightening 80 to 100 bps in Q1, and we remain well positioned to tap this important source of capital in the future.
Please turn to slide 13. Before I turn it over to Guthrie for the financials, I want to share some of the most important product investment efforts we are undertaking in 2023. As I mentioned earlier, we are very pleased to have recently extended and expanded our supply agreement for high-efficiency premium solar modules from Maxeon through 2025. We’ve also begun taking steps to build up a supply of high-quality modules suitable for the mainstream market, including Hanwha Q Cells in their factory in Dalton, Georgia, that we hope to be positioned to qualify for the IRA bonus tax credit applicable to lease systems with domestic content. Number two; we’ve already begun development work with General Motors on a bi-directional vehicle-to-home EV charging system, with a limited release expected in Q4 of 2023.
As mentioned earlier, GM has made SunPower its exclusive partner for solar and storage projects, and we’re incredibly excited to be part of this important collaboration. And finally, as I mentioned earlier, we’ve begun engineering and design work on the second version of our SunVault energy storage system. This V2 will include a complete platform upgrade with multiple new features, including integration with EV chargers and generators, control over multiple load configurations, next-generation monitoring and an easier, faster installation process. We are targeting a launch for the second half of 2024. I’ll now turn it over to Guthrie for more details on our Q4 results. Guthrie?
Guthrie Dundas: Thank you, Peter. Please turn to slide 15. As Peter mentioned earlier, strong 2022 customer demand and steadily increasing EBITDA per customer, support achievement of our long-term target model for increasing market share and EBITDA per customer through 2025. For the fourth quarter, we are reporting $36 million of adjusted EBITDA and $492 million of non-GAAP revenue, an increase of 42% year-over-year. We added 23,700 new customers in Q4, a 39% increase year-over-year that now includes Blue Raven Solar in both periods. Full year 2022 customer growth was 48%. Adjusted non-GAAP gross margin continued to remain above 20% as the cost of equipment, labor, and shipping is passed along in pricing to customers. Adjusted EBITDA per customer before platform investments increased to $2,300 for the quarter and $2,100 for the full year as we benefit from a combination of higher pricing, growing origination fee volumes at SunPower Financial, and the operational leverage gained from increasing sales.
As we highlighted at the Analyst Day last year, platform investment of $18 million for the quarter and $76 million for the full year is primarily product, digital, and corporate OpEx. Our balance sheet is now the healthiest it’s been in years, exiting 2022 with $377 million of cash on hand and only $48 million of net recourse debt. In January, we sold our last remaining 0.5 million shares of Enphase equity for approximately $120 million and paid down our entire $425 million convertible debt using $100 million from our term loan we arranged last year and cash on hand. We begin 2023 with ample liquidity to fund ongoing operations and continue investing in the business, including a $200 million revolver. 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 $260 million. Please turn to slide 16. As Peter mentioned earlier, we are initiating 2023 guidance today. We are guiding to $125 million to $155 million of adjusted EBITDA, driven by 90,000 to 110,000 incremental customers with adjusted EBITDA per customer before platform investments of $2,450 to $2,900. Platform investment continues to be primarily comprised of product, digital, and corporate operating expense that are preparing the company for future growth and the expansion of EBITDA per customer. On a per customer basis, platform investment is projected to peak in 2023 as we reinvest a portion of the significantly higher-than-expected proceeds from the sale of Enphase shares over the past year.
We are making good progress towards achieving our Analyst Day target model, which includes growing our market share versus peers, while also growing adjusted EBITDA per customer to a range of $3,000 to $4,000. While we expect platform investment continue increasing in future years, we expect us to grow below the rate of customer growth, so the rate per customer declines over time. As Peter noted earlier, our 2023 EBITDA guidance includes several important assumptions. These include one, platform investment that is approximately $55 million above the Analyst Day target model; two, the impact of an approximate 500 basis point reduction to SunPower’s overall customer growth from new homes; three, the impact of an additional approximate 500 basis point reduction in year-over-year SunPower customer growth from the transition to NEM 3.0 in California, which includes the impact of installations resulting from NEM 2.0 orders in Q1; and four, the continued growth for SunPower Financial and battery storage attach rates.
Looking beyond 2023, we see several very positive trends that are expected to help propel our business. These include: one, financial recovery for the New Homes segment, but nevertheless assumes continued pressure on the homebuilder industry from higher mortgage rates; two, the IRA significantly improving solar value, potentially accelerating demand and EBITDA per customer; three, continued growth for SunPower Financial and battery storage attach rates; four, platform investments that improve the customer experience, help reduce customer acquisition costs and capture growing market share. We entered 2023 executing our strategy and on track towards the achievement of our long-term target model goals. With a strong balance sheet and a philosophy of continuous improvement, we are building a platform of assets that will continue to enhance our world-class number one ranked total customer experience.
With that, operator, I would like to turn the call over for questions.
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Q&A Session
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Operator: Certainly. We’d like to ask that you limit yourself to one question and one follow-up. You may get back in the queue as time allows. Our first question comes from the line of Sean Morgan from Evercore ISI. Your question, please.
Sean Morgan: Yes. Thanks, Peter and team. So one of the things I’ve been wondering about recently is, how domestic content is going to work in light of the fact that we’re starting from heavily, heavily offshore sourced supply base of materials for resi. And so, also, is it going to be a situation where the domestic content adder for the ITC is based on the full value of the system? Or do you think the government is going to allow, like, certain components of a system to qualify and you could basically do piecemeal credits for, like, say, items where maybe in some cases, there are no vendors that are really US-based, so that you would get credit for domestic content where available.
Peter Faricy: Yes. Hey, Sean. We’re super excited about the benefits of the IRA and in particular, the domestic content benefit you talked about. And the partnership we have with Hanwha for Q Cells, we’re cautiously optimistic that those panels will be examples of the kinds of products that would benefit from the IRA. It’s our — the final guidance hasn’t come out yet on this, but it’s our expectation that it will be the total system cost of the equipment and it will have to be above a certain threshold. I think the rumors I’ve heard are 40% domestic content for the total system hardware cost. And then if you qualify, it provides the benefit across the entire system cost, including installation and labor. So that’s the current way we’re modeling it and thinking about it, but we’re waiting for the final guidance.
And once we achieve that final guidance, we’ll act accordingly. I think the interesting thing to me is that, you’re going to see a growth in US Clean Energy jobs out of this. There’s no question about it. We have had a number of high-quality panel manufacturers interested in either expanding their US operations or adding new US operations. So, I think, its stay tuned here. I think there’ll be more opportunities for us to grow our domestic content, particularly on PV.
Sean Morgan: Okay. I mean, Hanwha Q Cells is maybe a good example or I’m guessing probably maybe not SunVault. But the Hanwha, if I’m understanding their process correctly, a lot of their materials — or their supply chain starts kind of abroad and then the assembly is — and correct me if I’m wrong, is kind of completed in Dalton, Georgia. So, I guess maybe with some creative transfer pricing they could come up with a system where they’re attributing most of the cost to the labor assembly here in the US and then it would qualify. But how do you think the government is going to sort of treat material costs relative to, say, I guess, a finished product?
Peter Faricy: Yes, I think you’re thinking, Sean, is in line with our belief is how this will play out. I think if you want to create jobs here in the US, there’s probably some process that maybe evolves over time. But certainly, given the way the supply chains are positioned today, it would make sense, in my opinion — in our opinion, to qualify, I’ll call it, value-added assembly, which is what Hanwha was doing in Dalton, Georgia. And I certainly think that, that makes sense. That certainly is US jobs and they have an opportunity with the big announcement they made recently about their expansion to grow US jobs. So, it’s our expectation that those types of products have a good opportunity to qualify under the IRA.
Sean Morgan: Great. Thanks Peter.
Operator: Thank you. And our next question comes from the line of Philip Shen from ROTH. Your question please.
Philip Shen: Hi everyone. Thanks for taking my questions. Peter, thanks for sharing all that detail around the lease mix and that shift as we went through 2022, ending Q4 with 55%. As you look through 2023, do you think we’ve capped out at that 55%? Do you think that can grow meaningfully higher? And then historically, years ago, I used to think and you guys used to talk about your business as being one-third cash, one-third lease, one-third loan, clearly, with the low cost of money over the past few years that changed. Do you think — or can you share where you expect maybe the loan mix to be in 2023? And then what do you think cash might be? And then finally, Blue Raven historically, my guess was mostly loans have they had in that group had success shifting the financing to be leased as well? Thanks.
Peter Faricy: Yes. Thanks Phil. On the — on your first question about lease, where do we think lease will come out in 2023. It’s our expectation that as the IRA benefits get defined, all of those adders that we talked about in our opening comments are tied to lease. So, it’s our expectation that, that will make lease even more attractive as we go. And so I would expect that 55% to accelerate at some point as we go throughout the year. In terms of our mix, for color, I think we’ve sort of said it’s roughly 20% cash, 80% financing. And last year, it was the beginning of the year, 80/20 loan, let’s call it. I would anticipate that at some point as the IRA benefits are clear and we’re at full scale that it will be probably closer to 50/50, and that may even happen this year.
And that’s why we feel like we’re particularly well-positioned is that we’re really agnostic. We want to do for each individual customer what’s best for them. And we’re the only residential solar company with the philosophy of really looking out what’s in the best long-term interest for the customer and offering them the right financing package for them if they choose to finance the product. And then so you are correct to point out that Blue Raven has been historically — they’ve had a little bit of cash, but they’re mostly loan. And I’m happy to report that we anticipated the need to move over to do more lease business in time, and we’re working behind the scenes to help the Blue Raven team be ready to sell lease products and I anticipate us launching that at some point this year.
So we’ll share more details on that as we get closer. But, I think, it certainly makes sense, given the part of the United States that they’re serving, I think, there’s going to be a great opportunity to grow our footprint in those states by having a lease offering as well.
