Q3 2021 Sunworks Inc Earnings Call
Good afternoon, and welcome to the Sun works at third quarter 2021 earnings call and webcast. At this time all participants have been placed on a listen only mode and the floor will be opened for your questions and comments following the presentation.
It is now my pleasure to turn the floor over to your host Geoff Stanley.
Sir the floor is yours.
Thank you operator, good afternoon, everyone and thank you all for joining <unk> third quarter 2021 earnings conference call participating on the call today are Galen Morris Chief Executive Officer, Jason Barton.
Worst newly appointed Chief Financial Officer, and Paul Mcdonald, who following Jason's appointment transition from interim CFO to senior Vice President of Finance and accounting before we start I would like to remind everyone that during this call managements remarks contain forward looking statements, which are subject to risks and uncertainties and management may make additional forward looking statements.
During the question and answer session.
Therefore, the company claims the protection of the Safe Harbor for forward looking statements that is contained in the private Securities Litigation Reform Act of 1995 actual results could differ materially from those contemplated by the forward looking statements because of certain factors not limited to general economic and business conditions competitive factors changes in.
Business strategy or development plans, the ability to attract and retain qualified personnel.
And changes in legal and regulatory requirements.
In addition, any projections as to the Companys future performance represent managements estimates as of today November 11 2021.
So it works assumes no obligations to update these projections in the future as market and business conditions May change I would now like to turn the call over to some work CEO Gayla Morris.
Thank you Jeff Good afternoon, everyone and thank you for joining our call. This was a productive quarter for some works as we continue to build out our team and integrate our platforms to enable us to scale profitably.
As I discussed in the last quarterly conference call as we have grown and matured as an organization we have endeavored to improve all facets of our business progress continued in the third quarter as evidenced by a stronger and more professional marketing organization as well as continued margin expansion, reflecting more accurate estimating and improved execution.
We are building an organization that can effectively scale, taking advantage of industry and regulatory tailwind.
We are encouraged by the proposed legislation to extend solar incentives for a meaningful period of time.
If passed this legislation would progress the ESG initiatives and associated mandates from C&I buyers to reduce reliance on fossil fuels as well as offer lower cost renewable power to communities across the country. We are uniquely positioned to support both of these markets.
First on the residential side of our business all new work is now being sold and performed under associates using their proven business processes.
The availability of batteries due to the supply chain challenges following the pandemic continued to inhibit growth in our storage business, though our scale is enabling us to navigate this challenge better than many.
Geographically, we are now offering residential solar and storage solutions in 17 markets in 10 states.
We have significantly expanded our presence in Texas, adding Laredo in Dallas during the third quarter. Additionally, we are assessing additional markets to enter into over the next several quarters geographic growth as a key initiative for some works, especially in the residential market because the socialist model enables us to quickly establish a presence and then Judy.
Thirdly with limited initial cost.
We continue to actively recruit new sales channel partners throughout the United States to augment our other third party sales partners.
We believe our capabilities, notably our technology platform and proven ability to scale into new markets will offer a compelling opportunity for sales channel partners seeking to expand their supply chain as well as support growth.
<unk> recently launched the select program for new and existing sales channel partners, making us even more competitive on base install rates by streamlining what is included in the base rate to our most popular offerings and shifting more specialized selections to a list of add ons.
This will help us to increase the number and locations of our sales channel partners rapidly expanding our channel revenue streams.
To support our direct and indirect sales efforts, we continue to invest in comprehensive digital marketing activities and our increasing all of our marketing and branding efforts. These investments increased costs, but they are improving our lead generation capabilities and expanding our brand equity.
Turning to our commercial and public works businesses margin improvement remains our key priority as many of you know lower margins, where a significant challenge for some works in the past and we are focused on accuracy and estimating and quality as well as enhancing our deployment execution to avoid costly project overruns. Some works is now a margin focused organization.
With compensation and evaluations based on margin not just revenue.
As a result, our estimated gross margin for public works already won and are our backlog is over 15% and for commercial is now over.
Looking to the future of margins on our quoted work now exceed 20%, but I caution that until these projects are one convert to backlog and ultimately to revenue. This is speculative. It is however, indicative of the progress we have made.
In the near term, we continue to seek a national sales leader with the goal of injecting new energy and focus into a C&I sales efforts, we anticipate identifying that person by the end of the year.
With that I will ask Paul to provide more specifics related to our financial results in the quarter.
Thank you Dylan and Hello, everyone.
For the third quarter of 2021 installation revenue was $31 2 million.
This is up significantly year over year, reflecting a $23 3 million revenue.
Contribution of sources absent from the prior year.
Sequentially consolidated revenue was down slightly compared to the second quarter.
But <unk> revenue was modestly higher.
This was the first full quarter for soldiers to be included in our consolidated numbers.
Installation revenue was negatively impacted by labor constraints permitting delays in certain markets.
Final inspection delays, where residential projects pushing in residential revenue into the fourth quarter.
In addition, lack of battery availability is negatively impacting commercial industrial and residential project timelines.
Residential installation revenue was $24 6 million or 79% of quarterly revenue.
Compared to $2 million or 21% of total revenue in the third quarter of last year.
Commercial and public works installation revenue was $6 6 million or 21% of total third quarter revenue.
Compared to $5 3 million or 79% of total revenue in the same quarter in the prior year.
Gross margin for the third quarter of 2021 was 46, 2%.
Compared to 22, 4% for the third quarter of 2020.
As Gavin said this gross margin improvement was due to operational enhancements in all areas of our business.
With a particular focus on accuracy and our estimating process and.
And on scheduled deployments.
This also reflects the positive contribution of residential revenue margins from Celsius.
Total operating expenses for the third quarter of 2021 were $20 9 million compared to $4 3 million for the third quarter of last year.
The increase in operating expenses was due primarily to the expenses related to <unk>.
Breaking this down.
Our selling and marketing expense was $10 1 million compared to $1 1 million in the year ago quarter.
This reflects the closeness residential sales model.
<unk> commissions.
As well as increased marketing efforts.
G&A expense was $7 7 million compared to $3 2 million pre.
Primarily related to the expenses for both years.
And the expansion of our senior leadership team as we invest in marketing information technology and finance functions to support scaling the platform.
Stock based compensation was $1 2 million compared to 16000 in the prior year quarter rich.
Reflecting the grants to new employees that joined us from sources and other new hires.
Depreciation and amortization was $1 9 million in the quarter compared to 82000 in the prior year quarter.
Reflecting.
Amortization of the $15 6 million of intangible assets identified as part of the <unk> acquisition.
These intangible assets are being amortized over lives from nine months for the project backlog acquired.
Up to 10 years for trademarks and trade names.
Detail of the future amortization expense is included in the notes to the condensed consolidated financial statements included in the 10-Q to be filed tomorrow.
Our net loss for the quarter was $6 5 million or <unk> 24 per share.
Compared to a net loss of $2 9 million or <unk> 17 per share for the prior year quarter.
Turning to our consolidated balance sheet, our unrestricted cash and cash equivalents balance as of September 32021 was $11 2 million.
Compared to $26 9 million as of June 30.
As Balan mentioned earlier, we made strategic investments in our operating working capital during the quarter.
Notably securing inventory of critical components to reduce supply chain risks and to ensure that we meet our customers' timelines into 2022.
Approximately $11 million has been invested in various working capital initiatives during the quarter.
With that I'd like to turn the call back to Gail and to introduce Jason bumped it our new CFO.
Thank you Paul.
I want to first thank Paul for facilitating such a smooth transition as we strengthen our finance team. After five years at some works in various finance and accounting leadership roles. Most recently as interim Chief Financial Officer, I am pleased to say that Paul will continue with some works as our senior Vice President of Finance and accounting Paul has played a.
Key role in getting Jason up to speed.
Jason bonds that joined Sun works in October from broad wind, a diversified precision manufacturer, primarily serving renewable energy markets, where he spent 13 years in leadership roles. Most recently, serving as Chief financial Officer and Treasurer.
<unk> adjacent held a progression of finance positions at Schneider National a Wisconsin based trucking and logistics company case. It is a seasoned and strategic financial executive who will undoubtedly play a key role as we scale.
So Jason is new to Sun works I asked him to join US today to provide a stringent strategic overview of his priorities going forward.
Welcome to the team.
Thank you Galen and Paul and thank you all for joining US today I look forward to meeting many of you virtually or in person in the coming weeks.
As Gale and indicated growing and scaling our company is a key area of focus on my priority is to make sure that we have a stable and.
And cost effective platform to support this.
The significant leverage built into our model as we grow and I'd like to speak to that today.
First we have significant organic growth opportunities the.
The most obvious this is geographic expansion.
As Gayla indicated we've expanded our presence in Texas.
And we have identified several additional markets for expansion.
And are targeting adding a significant amount of sales channel partners, both of which will enable growth in it next year.
The associates offering enables us to quickly and inexpensively ramp up a new market.
Geographic expansion is key.
Additionally, they are accessing assessing our closure rate and the residential business.
Which is reflected as a percent of time that we complete a job relative to the initial sale to the customer.
And the number of projects, we both sell and install can meaningful increase revenues.
This represents a compelling opportunity for us.
Finally, as we go up as we grow our presence and our brand awareness, we expect to expand our commercial industrial opportunities.
From an expense standpoint, our sales and marketing costs are tied to our revenues for the most part.
The commission structure on our residential sales however.
However, we have leverage opportunities related to G&A and area of focus for us, especially in associates business as G&A dollars per watt.
We have built an organization that can support significantly higher revenues.
And as we grow we expect to see our G&A decrease as a percent of revenue.
When combined with gross margin expansion this should lead to improved operating margin and ultimately sustainable profitability.
As Paul mentioned, we proactively secured critical components in Q3.
Additionally, we are assessing our supply chain strategy.
Working to identify synergies across our commercial and residential businesses.
We're actively developing plans to support.
Next year's market growth and our internal growth aspirations.
As we move forward, we will continue to assess market conditions, including supply chain lead times.
And believe our balance sheet is positioned well to take advantage of future opportunities.
Let me now turn the call back to <unk> for some closing comments.
Thank you Jason I want to conclude with a brief discussion of our new initiatives. Some works for many years. Some works and associates have helped address climate change by harnessing the power of the Sun to create clean renewable energy.
Being good stewards of the play as this core to us as being good stewards of shareholder capital.
We believe the companies that incorporate environmental and social risks and rewards into their business models are more likely to produce better risk adjusted returns over time.
As such I am excited to announce that we are embarking on a journey to build a structured environmental social and corporate governance or ESG program.
This program will be a natural complement to our company's commitment to quality products service and the highest business ethics.
As a next step some works has established an ESG Advisory committee to promote monitor and measure the company's commitment and compliance to sustainable business practices.
He is composed of members of the executive leadership as well as a diverse group Brett representing all levels of somewhat.
We look forward to providing you with updates on the progress of this important initiative with that we're now happy to answer any questions.
Ladies and gentlemen, the floor is now open for questions.
Do you have any questions or comments. Please press star one on your phone now.
He asked about what posing your question you. Please pick up your handset if a speaker phone to prevent to provide optimal sound quality. Please.
Please hold a moment wipe all for questions.
And your first question is coming from Philip Shen with Roth Capital. Your line is live.
Hi, guys. This is actually Justin Clare on for Phil today.
Hi, Justin.
Hi.
I guess first off on the backlog it looks like it moved a little bit lower here in Q3, and it sounds like it's primarily due to project timing and the commercial and industrial markets here, but was wondering if you could expand a little bit more as to.
Why you are seeing.
Well are you seeing delays in projects as a result of potentially higher costs here.
Our economics being impacted because of.
Higher higher costs.
And I know generally there tends to be some lumpiness in the business but.
Is there anything unique right now as a result of the supply chain.
With regards to the supply chain, we were able to make quite a few investments over the second and third quarter.
We arent, yet seeing significant supply chain impacts.
With regards to modules Inverters etcetera.
I think everybody is seeing some aluminum and steel impacts, but nothing thats caused us to stop work or not start work on time.
With regards to higher costs.
I'm Mary thing that we've seen moving really as labor tightly.
Tight labor markets are driving up some costs. So we are definitely evaluating that.
With regards to material price increases, even though we have bolstered our supply our supply.
We are still seeing supply chain increases with regards to modules and inverters for the most part we've been able to absorb or pass on those charges as appropriate.
But we.
We are definitely keeping our eye on what's happening in the market and trying to stay in front of any changes that are being announced as are being announced.
Okay, Great. That's really helpful. And then maybe just on the residential segment.
Are you seeing the backlogs there.
Evolve here are you seeing a.
A meaningful increase here and then and then how does that affect your.
View on the outlook for Q4 and into 2022 in terms of the growth that you could see in that in that residential segment.
Yes, so the residential backlog is definitely improving.
The number of sales channel partners that we've added as well as <unk>.
Implementation of a direct sales channel, where we're actually have associates some works employees selling directly to residential residences.
It has contributed to us seeing a re.
Run rate going into 2022 that should be stronger than we're leaving.
Have had throughout the rest of 2021 with regards to residential so weird.
We are definitely looking at and anticipating and planning for growth for 2022 and residential.
Okay.
That's great.
And then on battery storage, you know you've talked about tightness in the supply chain. There was wondering if you could share what your attach rate for storage was in Q3 and potentially how much that supply chain tightness of inhibiting that attach rate like what could it have been.
If you had all the supply available that you that you need it.
Yeah.
So the attach rate is not anywhere near as high as we would like for it to be primarily because we sell through our sales channel partners and those sales channel partners don't want to part sales.
They don't want us to sell solar system and battery system, and then come back later and install a battery system. So the uncertainty in the supply chain.
By the way neither do our finance partners want us to sell that because they want to close deals and pay us and move and start to collect payments as quickly as possible as much as anybody else does so well.
We are experiencing is not so much a.
Customer, who is not willing to or one doesn't want batteries and certainly not a associated somewhere she doesn't want to sell batteries, but a sales channel partner in our finance partner who's concerned that if we sell.
With batteries that the batteries not available that the whole <unk>.
Payment schedule and when the job can be quote unquote closed is.
Impacted so what we're what we're really seeing the real challenge we're having is.
The comfort level of the folks who are on the front lines to sell batteries given the supply chain concerns.
If we were had it implemented supply of batteries and we were able to demonstrate to our.
Our supply chain partners.
Our sales channel partners primarily.
That we could see attach rates between 10% to 15%, but we're not seeing anywhere near that much at this point.
Okay, Okay got it.
Are you seeing things ease up a little bit on the supply chain for stores than others.
So new entrants here with.
With storage that are expected to be ramping capacity either.
This quarter or maybe early into 2022 are you seeing any.
Potential.
Added storage supply here.
I can't say that we're starting to receive or have received more tesla batteries in the last three months than we received in the first six so that's wonderful.
With regards to other suppliers.
We tend to.
To sell systems that are optimized for our customers and to do that we mix and match where necessary componentry. So when you have those customers those vendors who are supplying.
The end solution for Pan optimize years, all the way through to batteries, we typically arent moving those type of systems. It just doesn't fit our model at this time, so I'd say that to say some of those suppliers actually have had some better storage availability than some of the ones that we've been working with and then there's been issues with a few major suppliers, having recalls that have.
Also caused us some.
Concerned and challenges because we were prepared to offer those solutions right up until the point, where the market availability decreased.
Okay great.
And then just wanted to understand the outlook for gross margins here.
It sounds like in the backlog you have projects for public works with margins over 15% and then for commercial margins over 20%.
Does that well.
Will that enable you to increase your margin into Q4, and then potentially further into 2022 is that is that the expectation.
The.
Hope for sure is that we will see improved gross margin.
The all of the indicators that we have projects that we're quoting work that we've been committed to or has been committed to us all of those things point towards increased gross margin.
Where I say hope instead of expect is we are not always able to pass onto our customers changes in supply chain costs. So there are places, where we could actually see margin erosion. If we're unable to pass the cost of those spike increases onto our customers.
So I would like to say and I think I can say that we expect to see margin improvement, but with the caveat that we also arent certain exactly what the effects of the supply chain will be in 2022 on our margins.
Okay got it alright that does it for me so I will pass it on thank you.
Once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone now.
We have no questions from the phone lines at this time I would now like to turn the floor back to Sunwest management for closing remarks.
Yeah.
Thank you all for joining our call and for your continued interest and support please don't hesitate to reach out to Jason or myself or Rob Fink and the F. N K IR team at any time, if you have further questions.
Thank you.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect at this time and have a wonderful day. Thank you for your participation.
Thank you.