Sunworks, Inc. (NASDAQ:SUNW) Q3 2023 Earnings Call Transcript

Sunworks, Inc. (NASDAQ:SUNW) Q3 2023 Earnings Call Transcript November 10, 2023

Operator: Greetings, and welcome to Sunworks Third Quarter 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Jason Bonfigt, Chief Financial Officer. Thank you. You may begin.

Jason Bonfigt: Thank you, operator. I’m Jason Bonfigt, Chief Financial Officer of Sunworks. On behalf of our entire team, I’d like to welcome you to our third quarter results of 2023 conference call. Leading the call with me today is our President and CEO, Mark Trout. Today’s discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today’s forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Following our prepared remarks, we will open the line for questions. With that, I’d like to turn the call over to Mark.

Mark Trout: Thank you, Jason, and welcome to those joining us today. As detailed in our third-quarter earnings release issued earlier today, the last several months have continued to be a challenging period for both Sunworks and the residential solar industry at large. We continue to believe in the long-term economics of residential solar and storage, particularly as the demands of a growing population weigh on our nation’s aging electricity infrastructure, which we believe will result in structurally higher utility rates for customers over time. During the third quarter, the combination of higher interest rates, less favorable residential solar economics in California following the NEM 3.0 transition, continued to weigh on us and the industry at large, resulting in lower new installation activity and reduced fixed cost absorption in the period.

During a transitional period for our residential business, we’ve maintained an opportunistic pricing strategy in accordance with current demand conditions. At the same time, we’ve taken decisive action to further rightsize our cost structure, including several rounds of reductions in force. We have retrenched and focused on markets where we believe we have volume and efficiencies to stabilize and maintain an appropriate cost structure. We continue to improve our internal processes with significant focus on customer cycle time improvement, installation crew efficiency, and cost management. We are seeing improved conditions in supply chain availability and material pricing, which we anticipate continuing into the next quarter or two. Turning now to a discussion on our commercial solar energy business.

Our commercial business had an outstanding third quarter, as revenue more than doubled on a year-over-year basis, while gross profit margin rate increased to more than 16% in the period. Customers in the commercial and industrial space, as well as the municipal markets, continue to seek out EPCs who have deep industry expertise and who have the capacity to install. This sector should continue to grow throughout 2024 and into 2025 as the economics of solar and storage in C&I space continue to improve. The growth in the EV charging sector continues to grow, and Sunworks is positioned to capitalize on that growth. This market has been a strategic focus for us at Sunworks, and we are gaining traction as a significant EPC in commercial EV charging solutions.

Looking ahead, we will remain focused on our strategic growth priorities, building regional market leading positions while implementing market-based pricing coupled with targeted cost reductions that put us closer toward achieving a positive EBITDA consistent with our long-term objectives. Given the tailwinds of the Inflation Reduction Act, as well as the increased demand in the commercial space, we anticipate being well positioned to capture the momentum in our business entering into 2024. As before, the market opportunity for solar remains significant across our geographic footprint, positioning Sunworks to play a leading role in the transition toward affordable, clean, and independent energy production. With that, I’ll hand the call over to Jason for his remarks.

A panoramic view of a concentrated solar power plant swathed in bright sunshine.

Jason Bonfigt: Thank you, Mark. Beginning with a summary of our third-quarter financial performance, Sunworks generated total revenue of $28.7 million in the third quarter of 2023, a decline of 29.5% versus the prior year period, as positive momentum within our commercial segment was more than offset, given the ongoing market challenges within our residential segment which Mark referenced earlier. While higher interest rates have increased the total cost of rooftop solar for homeowners, we continue to believe the long-term macro trends of solar to be favorable to consumers and businesses. Similar to last quarter, higher rates remain a headwind for our business. As a result, residential segment revenue was $20.3 million, a 44.5% year-over-year decline.

Within our commercial solar segment, we continue to execute on our strategy to diversify our customer base and operate at scale. Revenue increased to $8.3 million, over double the prior year. Total gross profit was $8.2 million, or 28.5% of sales, compared to $19.5 million, or 47.9%, in the prior year quarter. Several factors contributed to the reduction in gross margin. First, approximately 28% of our revenue was derived from our commercial segment, versus approximately 10% in the prior year. The commercial segment’s model is less focused on sales and marketing and, as a result, has a lower gross margin profile. Additionally, gross margin within the commercial segment improved from 1% in the prior year quarter to approximately 16% in the current year quarter due to improved operational execution and higher volume.

Offsetting this improvement is underabsorption of labor costs in our residential business, as lowered originations led to underutilized labor capacity. Throughout Q3 and into Q4, we took action to strategically reduce markets that are not operating at scale. This strategy will allow us to focus our sales and marketing in key markets with favorable economics and the ability to scale operations. Since the end of Q2, we have reduced our labor costs by approximately $6 million annually. During Q3, we identified triggering events within our residential segment, including the negative impact of rising interest rates and due to our market capitalization. As a result, we incurred a $26 million non-cash impairment charge to the goodwill associated with the Solcius acquisition.

We generated a net loss of $36.4 million in the third quarter of 2023, or $0.84 per share, versus a net loss of $5.4 million in the prior year period, or $0.16 per share. Included in the net loss in the quarter is the goodwill impairment, which represented $0.60 per share. Adjusted EBITDA was a loss of $8.5 million during the quarter. As of September 30, 2023, the company had cash and cash equivalents of $2.4 million. Operator, that concludes our prepared remarks. Please open the line for questions as we begin our question-and-answer session.

Operator: [Operator Instructions] Our first question comes from the line of Donovan Schafer with Northland Capital Markets. Please proceed with your question.

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Q&A Session

Donovan Schafer: Hi, guys. Thanks for taking the questions. So I first just want to ask if you can give us any color on what you are expecting currently for the fourth quarter. Do you think you would be, just directionally, up sequentially, down sequentially? And if you could break it out by residential versus C&I, that would be great. Thank you.

Jason Bonfigt: For Donovan, it’s Jason. Yes, I think we’re still – the backlog in our residential business has declined to about $35 million at the end of the quarter. So the business in Q4 will coincide likely with the backlog reduction year over year. Within our commercial business, we’ve been building throughout the year that the backlog and the business – the backlog did end the quarter at about $30 million. But that’s giving us nice visibility into the next several quarters. And I would say that we’re still very optimistic about the pipeline of opportunities that we’re – and the award of contracts that we’re looking to close here in the next one to two months. So we think that that business is going to be operating at a better scale in the coming quarters.

Donovan Schafer: Okay. And then as a follow-up question, if we’re talking about – I appreciate the update on the cash position. Could you talk us through, maybe in the next few quarters, how you think about managing overall working capital, like liquidity position, if you’ve got a certain goal or target around what kind of cash burn rate you might have, again, over the next few quarters, how you navigate and manage that? That would be great.

Jason Bonfigt: Well, I think we have a few levers when it comes to cash. The first positive lever is – a lot of the times and when we’re signing contracts on these large commercial contracts, those will come with deposits. That could be anywhere from 5% to 15% of the contract value. So that could be material for us. But that’s – again, those tend to be lumpy, and that would likely be over the next one to two quarters. Within our residential business, you actually have the benefit of working capital improvements or benefits as your business declines because you’re still collecting on contracts from customers that you’ve recognized revenue in previous quarters. So that’s certainly an option for us as well and one that we’re actively managing.

Donovan Schafer: Okay. And then with the – I guess for the backlog conversion rate, I mean, you talked about it coming down for residential. It does look like if I look back a year ago, you could take the prior quarter’s backlog and figure that something like 60% to 70% of that, talking about residential, would convert in the next quarter. But this quarter, it looks like it’s down to about 40% of converting the backlog. Is that kind of a new run rate that we’re at with the way the market is right now? Or is that something we should expect to rebound and head back up towards the 60%, 70%? And if so, over what time period?

Jason Bonfigt: Yes, I think there were some anomalies over the course of the next year with many of the challenges that we had in California with utilities and jurisdictional approvals post-NEM 3.0. So I think we’re still managing through that period. We’re seeing the approval queues shrink dramatically and reverting back to historical norms. So I think as you look at our backlog and the conversion, that should revert to historical norms as well.

Donovan Schafer: Okay. And if I could squeeze one more in. I just – it caught my eye, the mention of IPP customers in the C&I space. Can we just get an update and maybe some more color there in terms of what the opportunity is? How big projects are you potentially – are you in a position to potentially win there? I mean, if we’re talking about 100-megawatt-plus projects or just any color there would be great.

Mark Trout: Donovan, this is Mark. I can probably take this one, Jason. But I think when you think about it, our sweet spot is probably not quite up to 100 megawatts yet. So we’re seeing some of those come through. But as we look to expand and also diversify in some of the markets there, we’re definitely trying to stay in the flow of deals and where the EPC demands are coming from. So that’s not off the table by any means, but our sweet spot seems to be just under that.