Q3 2020 SunPower Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Sunpower third quarter 2020 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 asking question during the session you'll need to press star one on your telephone please be advised that today's conference maybe recorded.
Do you require any further assistance. Please press star Zero I would now like turn the conference over to your Speaker today, Bob Okunski, Vice President Investor Relations. Please go ahead Sir.
Thank you I'd like to welcome everyone to our third quarter 2020 earnings conference call on.
On the call today, we'll start out with a strategic overview of the quarter from Tom Werner CEO of Sunpower.
I'll buy mono Seo, our CFO, who will review our third quarter 2020 financial results before turning the call back to Tom for guidance.
A reminder, a replay of this 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 today's presentation. Today's press release, our 2019 10-K, and our quarterly reports on form 10-Q.
Please see those documents for additional information regarding those factors that may affect these forward looking statements.
Yes. This call. We have also posted a 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 also posted the supplemental datasheet detailing some of our other historical metrics.
With that I'd like to turn the call over to Tom Werner CEO of Sunpower Huh.
Thanks, Bob and thank you for joining us.
On this call we will provide an overview of our third quarter performance as well as a brief update on the performance of our individual business segments.
As detailed in our <unk> capital markets day, we remain confident that we are well positioned for success going into next year, given our strong competitive position industry, leading solutions in a strong market.
Let's start with a recap of our third quarter performance.
Please turn to slide three.
We executed well in the third quarter as we exceeded our revenue and EBITDA guidance and completed the spin off of maxion to our shareholders.
Given our strong Q3 bookings performance, we are raising our Q4 and fiscal year 2020 EBITDA guide.
Our residential and light commercial segment continued to outperform as we saw strong megawatt growth in our residential retrofit and new homes businesses, while improving our overall gross margin for the quarter.
Finally, we are seeing increased customer demand for our recently launched on vault residential storage solution. We are working with our new home builder partners to further rollout.
Our one route product, which has already been installed in approximately 20 new communities.
We're seeing nice solutions segment also performed well.
As we were profitable on an adjusted EBITDA basis for the quarter.
We added to our backlog with continued strong demand for our he'd like storage solution, including being awarded our largest.
Solar plus storage seen I project to date during the quarter.
As Mike will discuss later, our efforts to improve liquidity and strengthen our balance sheet are paying off as we increased cash by $90 million in the quarter and expect our business segments to be operating cash flow positive in Q4 and 2021.
As a result, we are reviewing options related to our 2021 convert.
Further de lever our balance sheet.
We also took a positive step in relation to our corporate social responsibility programs.
As we appointed leaders for our EPS, Gi and diversity and inclusion programs.
We have been a leader in both areas for many years and this will only accelerate with this new leadership.
Finally, I remain confident in our 2021 targets from our recent capital markets day, given our Q3 performance along with significant Sunpower a tailwind.
We see for the next year, including increasing demand for our son vault and he'd like storage solutions strong.
A strong new homes market and expanding residential gross margins.
Now I'd like to spend a few minutes talking about our residential and light commercial business segment.
Or our LC.
Please turn to slide four.
Our our LC business delivered a very strong quarter.
Primarily driven by residential retrofit and new homes, which we sell both demand and installation activity.
Continue to increase through the end of the quarter overall, our confidence remains high going into Q4 as customer demand is strong.
As discussed at or.
Investor day or residential gross margins continue to increase as a result, our cost improvement.
He is peace stability in continuing continuously improving financing.
It is important to note that the margin benefit of our recently announced loan and lease financing facilities.
At night.
Yet impacted our bottom line we.
We will see some initial impact these improvements to margin in Q4 2020.
With the full benefit being realized in 2021.
New home sale, new homes also performed well.
With record quarter.
Quarterly bookings for Q3, resulting in a record backlog of more than 180 megawatts.
Our market share remains above 50% with significant interest in our one route products from many of our builder partners.
We are very positive about the future of some bulk storage solution as we start to install in volume. It will both increase our revenue per customer and be the foundation for future service revenue for the quarter, we delivered on a number of key sunbelt milestones, including achieving.
Certification for 13 and 26 kilowatt.
Solutions as well as beginning the installation ramp at many of our dealer partners.
We have a distinct competitive advantage with sun vault, given our smaller footprint fast.
Faster install times.
The ability you Backout hydro power modes.
As we highlighted our capital markets day, we expect sundahl to contribute approximately 100 million in revenue and 2021.
I'd now like to highlight some of the key metrics related to how we are building sustainable structural competitive advantages with both our customers and our partners.
Please turn to slide five.
We added more than 10000 customers during the quarter, bringing our total customer base to more than 335000.
Is that demand remains strong and exiting the quarter second quarter.
Our installed base now totals 2.1, gigawatts and we see significant opportunity to expand or storage service footprint with these existing customers starting next year.
We are also continuing to benefit from our strong marketing platform and virtual selling programs is more than 30% of our partner sales have come from Sunpower generating the leads across 200 exclusive dealers.
Her appointment generation platform is an integral part of our residential platform.
Increasing our ties with our biggest dealers.
Importantly, our rapid and successful transition to online sales. It's also showing results. It's 85% of all residential volume in Q3, we sold the online or through your virtual sales methods. This.
This transition has also materially lowered our overall customer acquisition cost.
Finally, as I mentioned earlier, our new homes business continues to outperform.
Our current backlog is now 50000 homes in the launch of our one roof is going quite well as it has it has now been deployed in approximately 20 communities in California, and its first quarter of availability.
We continue to expect more than 50% growth in new homes in 2021.
On slide six we detailed the positive trends, we are seeing in both residential revenue and gross margin.
The chart on the left shows the results of our efforts as revenue trends are improving rapidly since the co. Good try.
Revenue in Q2 trough residential installations for up 33% in Q3 versus Q2 and are expected to grow at a similar rate next quarter.
We head into 2021 confident that there will be continuing improvement driven by our new lease and loan products new homes in southern drawl.
The chart on the right shows our strong improvement in gross margin in both dollars and on a percentage basis.
As you can see we've achieved year over year improvement gross margin every quarter. This year, despite the impact from Kroger.
This improvement is directly tied to executing on our cost reduction programs.
Quick transition to our successful online model.
As well as a lower cost of capital.
As a reminder, our gross margin margin improvement. This year does not yet include the full benefits of our recent financings.
For the full rollout of our son bulk storage solution.
Please turn to slide seven world provide an update on our seeing nice solutions business segment.
We saw solid results from our seen nice solutions team in Q3, as we posted positive adjusted EBITDA for the quarter.
Results were primarily driven by systematic improvement project execution and platform cost reductions.
Further added to our 3.5 billion dollar pipeline during the quarter were currently contracted and awarded projects in excess of 275 megawatts.
Up from 215 megawatts in Q2.
Third quarter gross margin per watt.
Came in at more than 25 cents up 15 cents year over year on 20 megawatts of volume given our third quarter performance next accretion on our cost initiatives, we remain confident in our ability to meet our target of gross margin per watt of at least 27 cents for the year.
Demand for our helix storage solution.
Remains high with attach rates of about 30% in our current backlog.
We remain the market leader in commercial storage and by the end of 2020, we expect to have more than 20 megawatt hours of storage across 25 sites in operation.
We also expanded our footprint in their community solar market with a recent award for two projects totaling 13 megawatts, we see community solar as a growth opportunity capitalizing on our origination capabilities and our helix storage solutions.
With that I'd like to turn the call over to Monica, Seattle CFO of Sunpower.
Thanks, Tom before we discuss the financial results for the quarter I wanted to remind everyone that the upholstered a D did metric sheet on our Investor Relations website that has been updated and enhanced disclosures you had made at the capital markets day on September 10.
Please turn to slide eight.
We had we have provided a consolidated financial results and select metrics related to our valuation framework that provide that have deep value related to de one customer contact and that's something that getting revenue streams.
We are pleased with our financial performance for the third quarter as we exceeded our revenue and EBITDA guidance moving onto the specifics of the quarter.
Post spin, yes, segmented the company into that's it thanks for that like emotion and CNS solutions.
We saw continued recovery in both our segments as demand remained strong throughout the quarter overall megawatts recognized approximately 20% sequentially without residential light commercial segment up 17% sequentially. The divested inching up 33%, what's the second quarter.
CNS solutions segment was also up 32% sequentially.
We expect the strong volume growth trends continue into fourth quarter.
Consolidated non-GAAP gross margin in depth goal was 35 cents per watt.
And up from 30 cents, but walk in second quarter, the residential at 46 cents, but what Youve talked Walker.
We expect a significant step up in gross margin for walking fourth quarter investigation as we benefit from improvements in our that's it actually loan and lease economics and execution on our cost Roadmaps.
We also saw sustainable improvements in project execution in CNS solutions Theyd be posted a positive EBITDA in third quarter.
As Todd mentioned demand for a sidewalk residential storage solution remains very high going into 2021, and we are pleased with the continued traction of that helix storage product, but the motion customers.
Given the traction of storage that incremental margin to the system and expected margin improvement somebody recently closed residential financing, we have increasing confidence in our ability to meet our 2021 capital markets day targets.
Non-GAAP Opex per watt was 31 cents a walk down.
Down 20% sequentially.
As we successfully executed on our cost initiatives, including building, our corporate Opex post spin.
We remain on track to reduce Opex would want to less than 30 cents next year.
In relation to powerful metrics, we continue to believe that getting revenue streams, including revenue from asset management services to residential and commercial customers and energy revenues from C.N.I. assets that we've got a keyboard.
Bob quote exiting the revenue and services pipeline grew sequentially and is approximately $575 million at the end of third quarter with God quarter reported revenue be close to $10 billion.
Net retained value from a lot of residential leases had it sounds from joint venture was $368 million and hard to forecast as mentioned earlier, we closed recently on the second residential Lisa Barton with Bank of America made we expect to generate approximately adults would walk off net present value.
Included upfront cash margin and next weekend.
We are seeing benefits from lower cost of capital and commit to tax equity capacity.
With this fun.
All in effective cost of capital, but you would ask you to actually leases is now close to 6% and believe we can flood that reduce our cost of capital in future funds.
Finally, we continue with our efforts to improve cash flow and reduce net recourse debt on our balance sheet.
We ended the third quarter with $325 billion in cash net <unk> Maxion deal expenses and also invested in working capital for the growth if I see an acceleration segment ahead of a significant fourth quarter Wendy while you Brian.
Our residential and light commercial segment was close to operating cash breakeven in the third quarter.
As mentioned in the capital markets fee, we expect our business units to generate positive operating cash stocking fourth quarter Twentytwenty.
As it is all about improving liquidity position and expected fourth quarter cash generation, we have the ability to pay out 2021 couldn't books prior to maturity. If you so chose.
If somebody third quarter with a solid quarter for the company as we see the key financial targets strengthened our balance sheet and position Sunpower for future success that I was done to call back to gone kind of guidance call.
Thanks Bonnie.
Moving on to guidance please.
Please turn to slide nine.
The company's fourth quarter and fiscal year 2020 guidance is as follows.
Fourth quarter, GAAP revenue of $330 million to $370 million GAAP net income of $11 million to $21 million and megawatts recognized in the range of 145 to 175.
For the fiscal year for fiscal year, 2020 company expects GAAP revenue of 1.12 billion to $1.16 billion.
GAAP net income of 190 million to $200 million and megawatts recognized in the range of 465 to 515.
Given our third quarter performance and strong visibility for the balance of the year.
We are raising our fourth quarter and fiscal your EBITDA guidance.
We now expect fourth.
Fourth quarter EBITDA to be in the range of 26 to 36 million in.
In 2020 EBITDA to be in the range of 30 to 40 million.
In summary, Q3 was a solid quarter for the company as we executed on our strategic initiatives completed the successful spinoff maxion.
And laid the foundation for improving our profitability.
With that I would like to turn the call over.
Four questions.
Thank you.
Ladies and gentlemen.
As a reminder to ask a question you'll need to press star 100 telephone.
A question press the pound key police.
Please standby, we compile the queuing roster.
Our first question comes from Brian Lee with Goldman Sachs. You May proceed with your question.
Hey, guys. Thanks for the for the questions you know good job on the quarter or two.
Two questions from me here, both sort of related to gross margins I guess first on Sun involved it sounds like you're not sure you know sort of the optimal gross margin targets quite yet, but when it is a it will be additive to the R.L.C. gross margins is that fair a fair.
Fair assumption here based on the comments, you're making and then when do we see that margin target hit on some involved and does this imply gross margins.
Well into the Twentys or are we even in the Thirtys just trying to gauge profit potential here on this new.
New product opportunities since it's so incremental and we've also seen some of your peers.
Talking about much higher profit margin levels in this category and then I had a follow up.
[noise] Oh, Brian Yeah, Tom Werner here. Thanks for the question and a son vault is.
By now.
Oh, My God certifications dealers are being trained and it is being installed so we are ramping.
Right and I think we will have a favorable position actually on margins compared to others. Since Oh, I, we design the product ourselves ally and I'll like to ignore him expand.
Yes, Thanks, Tom Thanks, Brent Oh, yes at the moment.
You can think about sunbelt being consistent with our overall margins, which are growing next year. It is certainly added an incremental is that we expect it to add 20 upwards of 20 to 30 cents a lot of the gross margin on the same sale.
Not only has the value.
Equal margin botanical margin is as effectively the much lower customer acquisition costs already making a sale as a customer.
And so it.
Before we expect to be a.
Margin similar to the overall business is completely incremental.
Okay understood. That's helpful. And then maybe just a follow up on the gross margins again I phone.
Based on our L.C., if I look at that chart you had up in one of the earlier slides for the past couple of years, you know been pretty seasonal I know there has been a global pandemic embedded in the midst of that bar chart, but how should we think about gross margins in our L.C. going forward from a seasonal perspective is there any reason that.
It will be a seasonal as we've seen historically and you reason I ask is that I'm trying to gauge how.
How much of a starting point or baseline the 20% plus level, you're talking about for Q4 2020 years here in trying to.
Figure out where where you will trend in 21 is that a starting point and we should track higher from there or are we going to see somebody up and down sort of seasonality that we've seen over the past couple of years into next year. Thanks guys.
Okay run or we do it in reverse norm you say, a few words I'll probably add on.
Oh, Okay, Yeah, no happy to or there is some seasonality in our large and that can be expected I will tell you that that seasonality has been reducing as our cost more in line and I think frankly, I think overall ASP has been more stable. So you should expect some.
Some seasonality, but left the company or the team in the past.
And as I said at the Analyst day, we expect to hit or exceed our margin model in for the full year 2021, which is.
About 20% margins.
And Brian I think it's really important to point out that the margin picture.
Picture in our residential is fundamental meaning.
Meaning that our loan economics are fundamentally better because we service our own loans now should we don't pay somebody else to do that and do you know because our cost to capital has gone down.
With lease Weve continuously improved.
On the parameters in place and we've made the biggest step in our latest.
Lease facility both of those start really in earnest than 2021 to that we've improved our our cost of installation and I think we're a leader in customer acquisition costs. So the base easier for our LC margin a very fundamental across all four co.
Orders, even though you will still see some seasonality as you know often driven by changes in policy.
All right that's great. Thanks for the color guys I appreciate it.
Thanks, Brian.
Thank you. Our next question comes from Michael Weinstein with Credit Suisse. You May proceed with your question.
Hi, guys can you talk like Sun vault.
Yeah, we estimate that a 100 million symbol revenues in 2021, plus about 250 megawatt hours of sales in the year that attach rate of about 30% or greater is that the right math, that's the right way to think about it.
I think you're in the ballpark Oh, my God for sure and of course, we're ramping quite rapidly and of course, the attach rate will vary significantly depending on region.
Be it a touch lower than that ignore maybe you can dial it in a little.
Actually I think that's a pretty good estimate at this point I would say.
Our estimated is quite rough at this point if anything I think our view is that there is upside to those numbers based on just the the demand level for broad based demand level.
But.
Assuming the numbers that you quoted I think dressed that's pretty close on that you have to do the math in my head to confirm but I think that's about right.
Who are the suppliers you know how much capacity do you have access to.
So weve not announced the suppliers are the main pieces of the of the hardware inside but I can say that the products been designed to be vendor agnostic. So our intention long term is to be able to follow the battery and it drove the cost curves downward. So that's that's the.
<unk> from a supply standpoint.
We have plenty of supply for a ramp and is right now really the only thing constraining are ramping today is really our ability to have enough installation capacity, but both battery reasons very high volume battery supplier and in high volume inverter equipment supplier and we've designed other elements of the second ourselves.
From a supply standpoint, we're very comfortable we do want to have multiple suppliers long term for better economics.
And Michael I want to remind everybody that our solution is to buy back shares.
On the wall and if you look at other solutions, you'll see a lot more than two boxes, we've been able to consolidate some functionality into one of the two boxes of one boxes and inverter and a battery and battery is sized so that we can have a different suppliers for that change ice battery.
Hi, there aren't that many sources here she said basically six pictures in the far east and we're prepared for it either sex.
Hi, or most of those six I should say are the other boxes designed by US. It is our monitoring system, which had second source components. It's a service panel, which is a common item.
An automatic transfer switch, which is a common item and then some electronics that we design. So the common theme here is we designed it we have lots of control there. Therefore, it's very scalable.
Right.
Yeah, just one were one or two more questions. If you know how does the.
Improved EBITDA in Q4.
Bode for assumptions for 2021 that you've laid out in September I mean, just 2021 still look around greater than $100 million.
All right. So I'll take that money you can jump in if you like on.
Slide show like Q4 occasions, I'll put it this way <unk> Q4 gives us a lot of confidence with the implied guidance of the metrics we gave for 2021.
Having been in solar for a very long time World War careful about giving guy in specific guidance beyond what we had until we get into the year.
But I would say that as we sit here in Q4, our confidence level going into 2021 is as high as its been since I've been with the company.
Gotcha I know you know one more question on the 6% cost of capital I mean, do you see that I know you said the new facilities will be cheaper do.
Do you see that trending down a 100 Bips hundred 50, Bips 200, Bips next year.
I'll, let me take that.
Yes, so I think with you know getting a historically low interest rate environment I think as you think about the 6% cost of capital.
Have you know headroom.
On on all forms of capital.
Back to the capital stack, both debt and equity with a little bit more opportunity on the equity side of the house. So I think how you're thinking about it is this correctly.
In terms of the reduction do you should expect.
Okay, and I think the way we're operating as such.
Since we sell products or projects since we monetize them, we have a very clear merck or what the public markets.
Well I value projects on the balance sheet for say week, but we know what the threshold is and as our balance sheet has improved radically and wells to show even more so as we go forward.
We should benefit from that and we need to compete with the cost of capital the public markets.
Our rewarding projects on the balance sheet, so that is the cash flow.
Great. Thank you very much guys.
Thanks, Michael.
Thank you. Our next question comes from Ben Kallo with Baird. You May proceed with your question.
Hey, thanks.
Thanks for taking my question Oh.
Congrats on the core expenses is going to cause us to <unk>.
The storage side.
Why go go ahead with your own product as.
As well first question versus some other people outsource.
And then just my second question is.
Well Todd.
The customer acquisition cost.
The biggest things sort of Oh, yes.
Resi space I think yeah.
What has changed there or has anything changed there.
Yes, when we look at your numbers going forward is that a driver for for them.
Being better than the forecast that you can get customer acquisition costs, though.
I guess bill.
The final plus others observes this whole debate about who's.
The whole channel partner.
Dual network or do it yourself or your own sales force and so well well.
Okay, I'm going to take a pass through.
Did you have more and more event.
No that's it.
Okay, great I'm going to take a pass at them and then norms can oh.
I'd add onto what I say, probably with more precision.
Why do we design our own it is the energy heritage of southern power.
We designed around solar cell back in.
All the way back to the Eightys, but we are prototypes that scaled at 2003 to 2010.
Hi, and created a very unique allied world's highest efficiency products or what's in our core DNA by and again. The short answer. Your question is because we have a better product on and Oh I'm sure. We've stuck the product that are I will back up more load God that.
Stalls faster and works better because it's two boxes, which.
Which is a big deal because you often see them every time you put on your garage.
And I like the second reason why we designed it first is better second is for future proofing, a as we add services on which we already have a you can imagine of course, we have to do rate arbitrage.
Hi, and of course, we have to do resiliency and micro grading on that is we add services grid interface.
I grid services, and how we monetize those it's much easier to do because our own software and we're integrating with herself thirdly, we offer one stop shopping for our customer and nor can expand on this the comfort to our dealers and our customers that they don't have to call multiple people or called one person who can.
Somebody else call somebody else right.
They called lost one stop shopping so it's our warranty it's wrapped by one company. So those are the three things I'd say about why we do it ourselves on customer acquisition cost norm can expand on.
Our marketing engine is running great.
We're generating appointments for our dealers. This is by the way of vision, we had or a strategy. We had 10 years ago by and norm and his team are executing on it now they scaled the marketing and Jim such that.
Oh, we generate a appointment differently than our peers and more cost effectively so yes, it's a point of competitive advantage and.
Lastly on channel partners actually.
Interesting strategic question, because the channels really fragmented, there's a independent energy companies to execute and generate business. There's allied sales companies that only generate leads and then sells it leads to whomever, including TPG companies then there's channel partners.
And Oh each.
Each has its own advantages and I'll, let norm expand on his thoughts on what.
What we're doing today and going forward should probably quite a bit to add ons from norm.
Oh, yeah. Thanks, Tom It was a year she covered it really well, but I have a few other people are added data points I mean on the economical reason for doing their own storage. It's simply in many ways to avoid margin stacking right instead of us paying margin somebody else.
Then to supply that George we see a great economic opportunity to make margin on the hardware, we sell and that's what's important about it's not just to new customers, which is a big deal but to over 330000 existing customers and so I.
I think economically long term, we believe that'll be meaningful bottom line impact to the company I think from a strategic standpoint, Tom alluded to this.
What's really important to us is that we control the software that our customers use and a fully integrated thoughtful approach means that the customer as a single tool, which monitors their PV their storage. They are complete solution and that is both important for us.
As far as getting customers to adopt doesn't stick with us to referenced to their to their neighbors, but it's also important as Tom said as the basis for a service model long term and I think the important theres really all that.
A store software platform, which you often don't get if you were to choose model or somebody else is providing hum somebody else's storage solution, so that kind of the strategic drivers.
Just switching to a couple of comments.
You talked about customer acquisition cost and I'm glad Tom highlighted that or employment generation engine is getting better and better I'll give you a good data point from October.
This past month, we generated 43% more front end our profile did 43% versus the same quarter last year. So we're not yet beyond cobot, we're almost 50% larger month versus month in terms of the front in the funnel on so that is becoming a bigger and bigger portion of what we bring to our dealer partners as.
Value and so that's that's been Super important and then last comment relative to the channel. It's a great question and in terms of we're seeing him a very much a mixed model. We one of the keys to low customer acquisition cost has been our dealer model. It's a lower cost model at the same time, we are seeing certain areas, where virtual selling it makes sense to do more.
Or in different areas of the country directly or with partners that Justine sales as opposed to being installed. So while we are continue to grow our independent dealer network. We are also growing our install portion of our business. It's still small are relatively small compared to the to the installing a dealer caution but it is.
On.
Got it thank you guys.
Thank you. Our next question comes from Philip Shen with Roth Capital Partners. Please.
Proceed with your question.
Hey, guys. Thanks for taking my questions.
The first one is on the loan financing fee reduction targets.
I know it's critical to your gross margin expansion story, obviously, you're leveraging the relationship with T. C. You I think in this model you guys serve as the originator of these loans rather than you know mosaic or loan pallet or something and given that situation I think what happens is the accounting.
For your installers may change, where they may only recognize the revenue on the equipment sale. So was wondering how youre installers and dealers are.
Taking that equipment that accounting change and do you expect to be able to.
So I have and have those.
To me.
What do you expect to have.
Those dealers use.
The your loan program completely or do you think you still might have to use a mosaic for example, thanks.
So I can take it this is norm just from a at the first level. We continue to use both mosaic NCCN. So I want to point out we do still have two partners, but as far as the accounting from a perspective of our dealers that has not changed we are teaching product that is still actually the same in both cases.
So they are not seeing any sort of issue from a from a dealers are having a different accounting because we've gone to the TC you approach, so really what they've been able to see now is a bigger variety of loan products.
And a suite of products and now includes low 80 or products.
Longer term and lower hbr products that have been very attractive.
And virtually all of our dealers are using a T.C. you. They still do you think the mosaiq as well, but we have already converted virtually all of our loans.
Partners to using some teasing you.
But they can be accessed both in the systems that we provide.
Great. Thanks norm.
You guys talked about good services already but was wondering if you could provide some more color on that opportunity. You know for example, when do you expect revenue to be started to start to be generating in a meaningful way and I wouldn't know when could it be meaningful and what's the timing of that and ultimately what does the revenue model is it going to be a sad.
Its model or is it.
Is it a percentage of.
Some kind of the fee that you might end up charging.
Charging to the utility for embracing the software that you guys are probably up providing so any color on that revenue model would be great. Thank you.
I think you're muted Tom if you're.
So I'll take that.
The.
The ability to have services is directly to portion proportional to the amount of storage capacity you have in the market.
And so today, we have meaningful storage capacity in the market and our commercial and so we do have some capacity or we participate in some capacity markets and we do generate some revenue in order to get meaningful service revenue you really need to get the very large numbers, perhaps even gigawatts.
Floyd.
And so oh.
<unk> commercial we're already seeing some grid services revenue of course, since we're just launching sun vault and residential allies we.
We need to scale it to get the service revenue typically as you probably know I'm sure you know how you bid on in the wholesale markets three years in advance typically and so we are bidding into wholesale markets are planning for the attach rate for Sean vault, and then leveraging that.
If you go out to a five year model that numbers get to be meaningful of course, there's peers that have given that like numbers on and do the math, it's going to work. Some early here. So commercial first for US residential second it takes a few years were already bidding and we already have.
Some revenue in the commercial business from grid services I should also point out the model those models look more like Sachin are multiyear.
Commitments and you get revenue each year now as we go on and we're going to be very precise at that grid services versus customer services. We can offer services to our customer where we optimize their bill and we do that today in commercial and that's built into the price is what they pay for solar.
System [noise].
In the future we may license that as we expand the offering its resiliency rate arbitrage and I believe in residential we call. It tier two you arbitrage that same idea.
And then of course from there you go to great services, So to answer your questions both in.
In commercial built into the price of the system and in some cases, it's recurring and therefore, it looks like size.
Great. Thanks, Tom I'll pass it on.
Thank you. Our next question comes from Colin Rusch with Oppenheimer. You May proceed with your question.
Thanks, so much guys.
Look forward and see an aggressive business.
What are you looking for in terms of needs in terms of working capital and how you plan to address some of that.
So in my comments I understand you're correct question correctly, you are asking about cash.
Why and how we think about a cash needs, but let me say a few words and all that money take it and then you can follow up if I didn't get it correct.
So the new Sunpower I guess, it's not new anymore Sunpower.
Oh I will have limited if any capex.
We expect to be manage our working capital such that we can be operating cash positive.
Right and so we expect our business to generate cash.
<unk> and his money, who said in his prepared comments in a little bit MCU in a oh, we're already in a position to pay off our first convert and so we're now looking at ways to sort of optimize our balance sheet in terms of how much recourse debt revert at versus cash.
But the ratio has improved dramatically and and.
Mine you cannot comment on that so any need for cash with it as we forecasted we'd be inorganic meeting or M&A.
Hi.
And get money, who again cannot expand Giovanni.
Yes, so as you think about cash and specifically cash conversion from EBITDA a one.
Our model is a is a cash based Martin so from an EBITDA to cash perspective, we have forward putting screens book in the residential into commercial business, so that activity level cycle from a.
EBITDAC of cash that's one second you know both in both type businesses lots of initiatives in terms of improving things like invent duty darned.
Specifically im guessing should be your you're getting to 10 11 dawns.
From an inventory perspective, so what I would say is bought businesses generating operating cash in fourth quarter and that trend is going to continue from a modeling perspective, you should expect a high conversion of EBITDA into cash given our forward whats really in Japan as well.
Inventories guns.
That's super helpful.
And then just in terms of the module supply with M Street facing the prospect of a of a tight supply environment. How much flexibility do you have in terms of you know different suppliers on the module side to supplement your capacity and building materials to to grow.
I'll take that calling I show, we have a two year exclusivity in residential and that's expandable we'd workouts during that entire two years with maxion, we'd be frequent frequently with them as you can imagine.
Oh right in commercial it's a one year, which is now 10 months more exclusive and then we'll mutually disguise.
Decide whether or not to continue that exclusivity big commercial could use other people's modules and soon as a I'd call. It third quarter of next year, yet to be determined working closely with maxion, which by the way is doing great for us as a partner to Munch and gone and.
I Oh, we do plan capacity upsides with maxion.
And we are doing the product road map session with them Tomorrow actually on so we're also looking at ways to expand the breadth of product that we get from actually Aaron.
Great. Thanks, so much appreciate it.
Thank you. Our next question comes from Stephen Byrd with Morgan Stanley You May proceed with your question.
Hey, good afternoon, thanks for taking my questions.
I just wanted to follow up first just on the cost of capital discussion in a in a prior question you talked a little bit about the ability to deploy.
To produce a 6% cost to capping you highlighted the equity opportunity I Wonder if you could be if there's any way to kind of get a little more granular in terms of.
Drivers there the the approximate magnitude just given how critical it that particular assumption is as we think about a about the value.
I'll say, a few things and monitor you can jump in if you want to add onto it on first of all our primary sources of equity or are well known.
Hi, Andy if you.
Look at their sources of capital they've done a very good job of raising very cost effective capital.
So our partners have done a good job and we expect it to happen, we expect going forward that.
We'll benefit from that secondly, our balance sheet has improved.
Right, which has an implied.
<unk> leverage so to speak or implied advantage along with our partners on.
Oh, the risk premium for Sunpower is gone down dramatically and we will continue to go down and there should not be one.
And then if the extreme you could say.
As our net debt position approaches 100 million soon as soon as we said it kept a capital markets day or sooner then of course, we could always say, we're just not competitive enough and we'll put some of these assets on our balance sheet.
Thats not our plan, but.
Oh, we have that auction as we improve our balance sheet and.
And we are of course, all capitalizing on historically low interest rates look like they'll persist given the fed's decision by new do you want to say anything.
Yeah, I think on the coveted vetted the only thing I can think about dimension that is that is a significant headroom between public markets cost of equity and the cost of equity that is in our residential funds. So there is opportunity in headroom to get further compression.
Yeah, no. It makes sense and then just shifting over to customer trends you discuss community solar and that seems like a.
Great area of growth I Wonder if you could just expand on that a little bit more how do you think about.
You know at a high level to the volume potential the the relative importance of community solar overtime.
[noise] Oh I'm, so sunpower has a long history in the high ground mounted solar systems.
We used to be and then its solar power plant business and.
Oh did four gigawatts of power plants around the world and we did a little bit of community solar in the old days. This is different this is.
Community solar today is different and has evolved and I'll, let Eric expanse.
Thanks, Tom, Yes, I think of community solar and so a real way for us to leverage our existing origination and development groups and it comes in a couple of different flavors. One is we can go to existing customers, who maybe don't have the behind the meter load.
And provide them a.
But policy and incentive that allows them to actually maximize there.
Just seen asset could be a rooftop could be a parking lot. So that's one flavor, where we're going to kind of your traditional customers. The other flavors, maybe a little bit more consistent with what you mean do solar has been known EPS in the past where.
Its going out finding land positions getting an interconnection queues and building projects there, but even that is shifted to be more of a distributed generation type of policy. So they both of those initiatives have almost doubled what we're focused on as a business unit. So we see that's a real growth right.
For us going forward.
Okay. Thank you that's all I have.
Okay, I think we're going to take one more question Hi, one more arc group of questions. So if you could go ahead. Please.
Thank you. Our next question comes from Julien Dumoulin Smith with Bank of America. You May proceed with your question.
Hi, good afternoon, everyone. Thanks.
So just.
A little bit on where we left it off here.
On the growth side of the equation your how do you think about.
Beyond the exclusive here on that in an expanding those options and what that does to the trajectory, especially the commercial opportunity. You think about you know a expanded beyond Randy here and having greater options and then.
The second related question, how do you think about leveraging the storage opportunity I presume. This is strictly being sold through need this or existing dealer channels is it something that you would think about past marketing a little bit more broadly or through other channels.
Okay. Thanks for the questions are ignoring me I'll give you the second line and I know <unk>, operator, I'm, sorry, we will take one more call. It set of questions. After this on so in terms of options on the panel. We were as you can imagine extremely closely since we used to be one company and go on before August 26.
Hi, with maxion, and they really want us to be successful they want us to be a healthy partner and of course likewise with them.
And so we have detailed conversations at that.
Their product road map and the breadth of their roadmap, how well it fits with lease loan and cash sales, how it fits with ground Mount carport.
Rooftops.
Residential retrofit and new homes and Oh there.
There are areas where over the course is in the next half a year or two a year.
We're deciding and on does it make the most sense for maxion to add products or not.
Hi, anything answer it's not that we're working on a mutually productive way to like Sunpower could source elsewhere God.
So we have not made any.
Or we're not prepared to discuss any decisions NOI, but we have a very I'd say realistic dialogue with maxion lie.
And they want us to grow.
<unk> and succeed and have share and be healthy.
So more to come on that front Joanne you know and then norm can you take the second part on storage and channels.
Sure happy to I would say Julian that the way, we think about that first.
Our first priority is supporting our existing channels and new sales with storage and and as we talked earlier and is generally the market. This extraordinary demand and so that's kind of the first priority. Our second priority is really going to be addressing our existing customer base. One of the things that's important about the way. We did storage is it is AC coupled.
And as its AC coupled it makes it a lot easier to apply it to existing systems, even if their lease or certainly cash. So we really see a great opportunity just within our own base to grow significantly certainly any of our expectations for 2021 are supported just by those two things party on these cash sale and then just stop.
Turning to penetrate our existing customer base I will say, we have discussed or is it the third step which would be do we go beyond our dealer channel and it really I think we'll judge that based on.
Just the level of acceptance, we see the product the opportunity to extend it I could certainly see it someday become a storage first model as well as it gets more and more popular but.
But I would say that's that's a little further out there weaken.
We can more than exceed our growth expectations from our existing.
Dealer channels with new solar in our existing customer base over the next year.
If I can quickly clarify that super quick on the the ability to go back to your existing customers would that have to be at a certain point in time or can you literally go back there given the financing and all that Q.
You do your customers you just recently so.
Practically.
We we can go back to them right away. The issue right. Now is just choosing the priorities about where we are because of we're building up installation capacity and really kind of ramping the product.
But for a big portion of our customer base, we could address that market right away.
We we are prioritizing the new sales for to maximizing revenue per customer, but the product is able to be installed at a big portion of our customer base.
Kinda really right out of the box.
Thanks, guys.
Thanks Shirley.
Thank you. Our next question comes from Pablo Mulgan off with Raymond James You May proceed with your question.
Thanks for taking the question two quick ones both in relation to the ITC.
First one if you have any predictions on whether anything will happen with the ITC legislatively in the lame duck session and second back.
Back when you gave guidance for 21.
Obviously, there was no visibility at all on whether ITC might make it into a stimulus there is perhaps a little better clarity on that today.
Would there be any guidance change for 21, Yes that award to be an extension announced in a lame duck.
[noise] on so I think you probably know more than me about the the allied lame duck possibilities on that which I do know by I would.
Okay that its low odds that no no no large andy.
Hi, we're engaged though and I think if you go beyond lame duck.
It's very much on the table ROI in terms of impact on 2021, I think it would have some in fact gone more than offset of course by allied the multiyear improvement in our plan and our ability to scale and get costs down faster and be more aggressive.
Nor do you want to say anything and then after norm you're done I'm going to wrap it up.
Oh.
I don't know if I'd add too much other than I mean, I think that there.
There could be a small impact on the second half of the year as far as kind of the.
The increase in cash the maybe generated based on a significant rollout, but obviously more than made up for the long term benefit this would have.
Obviously very very big supporters of an extension.
Of the ITC.
And Thats, all I would add that the new homes business is largely insulated from that dynamic and storage is like a little bit more insulated from that so there's some things that would smooth it out to change its so but I think we're all set right.
Thank you.
Okay. Thanks, Phil Thank you everybody for joining our call today, we look very much forward to our next call with you.
[laughter] wearable.
All down 2021, and we'll have a good insight into the new year and of course, the outcome of the election. So thanks, everybody very much.
Thank you ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.
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