Q2 2022 Sunworks Inc Earnings Call
Greetings and welcome to the Sunrun second quarter 2022 results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
Pat.
Mind you. This conference is being recorded I would now like to turn the conference over to your host Jason <unk> Chief Financial Officer of Sandler. Thank you you may begin.
Thank you operator.
I'm, Jason <unk>, Chief Financial Officer of Sun works on behalf of our entire team I'd like to welcome you to our second quarter 2022 results conference call.
Leading the call with me today is our president and CEO Galen Morris.
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 SEC.
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 Galen.
Thank you, Jason and welcome to those joining us today for our second quarter results Conference call.
Before I cover our progress on our strategic objectives and provide a Q2 financial update I wanted to highlight the importance of the likely passage of the inflation reduction Act.
The provisions of the act supported by the administration's domestic renewable resources and climate policy goals by promoting clean reliable and low cost energy to businesses and homeowners.
We view this as a significant win for the solar industry, specifically, the 10 year extension of the investment tax credit at the 30% level.
The I T. C is a proven path to rapidly growing solar adoption.
While costs in the solar industry has declined over the past decade, they have risen sharply in 2022 and this ITC extension is expected to have a meaningful impact on lowering the cost.
All were in storage and additionally, it should promote U S manufacturer.
Moving onto our business update.
During the second quarter, we demonstrated measurable progress on our business transformation strategy, while continuing to capitalize on increased demand for our integrated solar solutions net sales and gross profit each increased on a year over year basis in the second quarter driven by strong residential demand.
Both orders and backlog increased to multi year highs.
Since our last quarterly conference call them, ne demand conditions have strengthens materially across both our residential and commercial markets.
While supply chain disruptions module availability and wage inflation will remain a headwind we've enacted several consecutive price increases in 2022, the benefits of which will position us to achieve improved gross margin capture as we move into the latter months of the current calendar year, while moving us that much closer to free cash flow.
Breakeven.
In our residential solar segment, which represented nearly 90% of second quarter revenue new installation activity continued to accelerate while total watch install decreased by nearly 35% on a year over year basis as concerns around rising energy costs and grid reliability have contributed to increased customer adoption of our rooftop solar.
Solutions.
Within our commercial solar energy segment order activity accelerated meaningfully in the second quarter positioning this segment for improved performance as we look to the second half of 2022.
We secured a multi year high of nearly $24 million in new orders in the second quarter more than double our order intake in fiscal year 2021 due to strengthening demand for commercial and public works solar projects.
As discussed last quarter, we've continued to execute on a well defined slate of growth priorities designed to both capitalize on favorable demand conditions across our markets and maintained a level of margin discipline required to support sustained profitable growth.
Over the last year, we have significantly restructured our residential go to market strategy.
Just 12 months, we have grown our originations from the direct channel to 25% of our total originations a strategy that will allow us to profitably scale our business.
Second quarter of 2022, the direct sales team was responsible for nearly 15% total installation revenue versus 5% in the prior year period.
Operationally, we remain focused on reducing our velocity of installation or the time between when a contract is executed and when final installation is completed.
We believe our reduction in installation times, not only improves customer retention. It also encourages more channel partners to work with US which provides us more leverage around how we price our projects.
Following a recent pilot test during which we decentralized all design permitting and installation activities, we were able to significantly reduce our installation times.
Given the success of this pilot we are actively mapping companywide workflow to marry the benefits of scale with this decentralized approach to combination of which we believe will improve the overall customer and dealer experience, while ensuring improves conversion on signed contracts.
Further as we've highlighted on recent calls we continue to expand our sourcing and procurement relationships to ensure a cost effective high quality required modules.
While disruptions to the global supply chain and tariffs related policy concerns have both constrained module availability and contributed to higher material costs, we've taken action to expand our supplier relationships, while opportunistically, increasing prices to more than offset labor and materials inflation.
Although we have sufficient module inventories to address current demand inventory availability across the broader market remains tight.
As disclosed last quarter. The department of Commerce received a petition filed by California based solar module manufacturer auction solar in March of 2022.
The petitioner requested that the DSC reviews, so apparently imports from Chinese companies working in Cambodia, Malaysia, Thailand, and Vietnam related to anti dumping.
This action served to reduce imports panels were affected regions, resulting in reduced domestic availability of modules and a corresponding increase in module cost.
In response to the significant adverse impact this investigation could have on domestic solar industry President signed an executive order in June 2022.
<unk>, the collection and anti dumping and countervailing duties of certain cells and modules exported from the main regions for 24 months.
While this situation is far from resolved and they D. O C investigation remains ongoing we believe panel producers from the affected countries will increasingly resumed shipments during the second half of 2022 helping to ease inventory availability issues.
In combination we believe our collective focus on reducing customer acquisition costs through a growing direct sales force improving the velocity of installation.
Moving the accuracy of our project bidding and pricing together with the continued expansion of our supplier.
That work will position us to drive improved performance.
With that I will hand, the call over to Jason for a review of our second quarter financial results.
Thank you Galen.
During the second quarter, our team executed ahead of plan across several key operational metrics, while driving significant growth in revenue orders and backlog.
Although we are pleased with the share gains achieved across both our residential and commercial end markets. We remain focused on leveraging recent price actions and newly implemented operating efficiencies to improve margin realization.
For the three months ended June 30th 2022, <unk> reported total revenue of $36 $4 million versus $32 $1 million in the prior year period.
The year over year growth in revenue was attributable mainly to increased contributions from the residential segment.
Which benefited from a girlfriend installation volumes and the benefit of a full quarter of Celsius revenue.
During the second quarter residential and commercial revenues represent 91% and 9% of total revenue respectively.
Total gross profit increased to $16 $9 million in the second quarter 2022.
Versus $15 $1 million in the prior year period.
Year over year variance was primarily attributable to revenue growth, partially offset by inflationary pressures in the current year.
We reported a net loss was $7 $6 million in the second quarter or <unk> 23 per basic share versus a net loss of $1 $9 million in the prior year period or seven cents per share.
The year over year variance was primarily the forgiveness of the PPP loans in the prior year and investments to support anticipated growth in each of our companies segments.
Adjusted EBITDA loss was $5 $7 million in the second quarter compared to $1 $7 million loss in the second quarter of the prior year.
Turning to a review of our residential solar segment.
Which is our associates business.
Segment revenue increased 42.5% year over year to $32 $5 million driven by growth within our direct sales platform.
Total residential what's installed increased 34% year over year in the second quarter.
Direct sales represented approximately 15% of toll revenue installed in the second quarter versus less than 5% in the prior year period.
Yeah.
The residential segment to generate an EBITDA loss of $1 $9 million driven by continued investments in our direct sales function.
Expanding our direct labor force to meet growing demand.
As well as inflationary pressures, which we expect to offset throughout the year through price actions and improved operating leverage.
Couple of residential backlog increased 26% sequentially to approximately $60 million in the second quarter driven.
Driven by growth in both direct and dealer originations.
Within our commercial segment revenue declined 19% sequentially to $3 $9 million driven by lower order intake in the preceding quarters.
Our pipeline of opportunities has increased in recent months.
Resulting in approximately $24 million of orders in the second quarter.
The commercial segment generated an EBITDA loss of $1 $9 million in the second quarter primarily.
Primarily due to volume.
Turning to our balance sheet, our unrestricted cash and cash equivalents balance as of June 32022 was $12 $1 million compared to $19 $5 million at the end of the first quarter 2022.
Operating working capital increased by $2 million sequentially as a result of continued investments in inventory.
Partially offset by payables management and improvements in other working capital measures.
Inventory at the end of the second quarter was $18 $8 million.
Compared to $10 $2 million at the end.
2021.
Given the 80 CVD issues scaling referenced earlier, we will continue to make investments in inventory from our extensive list of module suppliers and distributors.
Operator that concludes our prepared remarks. Please open the line for questions as we begin our question and answer session.
Thank you if you'd like to ask a question. Please press star one on your telephone keypad.
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Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Donovan Schafer with Northland Capital markets. Please proceed with your question.
Hi, guys congratulations on the revenue numbers.
Grocers are.
Pretty important part of kind of the story in your strategy. So that's nice and cool season, especially also I guess on the residential side.
You've been kind of more concentrated there.
So looking forward from this point, Yeah, you had a nice bumps in the backlog I'm going from 60 million to 90 90 million.
And you said I think in the prepared.
Our prepared remarks, there was a sales kind of originations or something we're double on a year over year basis.
So I'm curious if these are things that you know we can read into as leading indicators looking at kind of Q4 or Q3 Q4, I mean, I know you don't give guidance but.
With the bump in the backlog and the origination numbers would it be appropriate to extend that into some kind of a improvement in revenue performance.
Meaningful improvement in Q3, Q4 or would we be mistaken misleading ourselves by reading into that.
Good morning, Jonathan It's Jason just if we take a part of the segments I think it will provide more context.
So that's on the commercial side of the business, but that wasn't really an excellent quarter for us from an order standpoint.
We are continuing to have further discussions with customers to even expand this backlog further.
The question marks that we have and we're pushing for is produced to start from acquired revenue quickly that may happen as early as Q4, but depending on.
Project timing that could that could delay out into Q1, but certainly we're planning that we see some revenue growth in Q4 in our commercial business because it has been depressed for the last few quarters.
And then okay. So is it.
Oh gosh.
And on the residential side.
<unk> is rising.
Sequentially.
We're bringing on new crews to support that growth. So we're expecting growth throughout the rest of the year based on that backlog improvement in the origination growth that we saw in really since we've seen since the beginning of the year.
Okay. So is it fair to say that most of the increase in backlog was come from commercial and industrial.
But there was still yeah. Its like you said a sequential increase in the residential backlog.
Is that right.
That's accurate.
Our backlog in our commercial business rose from about $16 million at the end of Q1 to $36 million at the end of Q2.
Balancing that got in the reservoir.
Got it Super helpful.
Okay, and then for sales and marketing you know I like the way that you guys. You know kind of report and break things out. So you can kind of.
Looking at your gross margins and isolate that as sort of you know.
How you operate as you know getting the product sourcing installing and whereas you know the customer acquisition cost as you keep it separate in selling and marketing, it's super variable and tied tightly with revenue.
But.
I think I might've been I might have been a bit premature in my own thinking in terms of how solid sales and marketing could come down as a percentage of revenue as you're shifting to more direct channel sales.
I'm wondering if we can kind of get an update there. Obviously you know it was up in the quarter because of the good revenue numbers. So of course, that's a good thing, but it's about the same as a percent of revenue from the first quarter. So I'm wondering if we should expect that to start coming down with the direct sales.
For or or maybe even as I know you launched a new website, maybe those expenses will go away. So I'm just trying to think about the selling and marketing side of things and how I should expect that to trend.
Okay.
We're expecting that sales and marketing as a percent of revenue to come down slightly throughout this year and we will look to further expand on that into 2023. There are a few levers there leverage will certainly help us because we do have salaries and benefits in sales in March.
And then what's really going to impact the numbers in the second half of the year are the price increases that we've made.
Made in our residential business to offset.
Placing any pressures in the first half of the year, so that that that those two factors will compiling each other overtime and we expect okay.
Margin to expand and at the same time sales and marketing should come down slightly.
And with this Ellison.
Jonathan This is scaling so at this point.
Yeah. It was essential side of the business the timing of our recognition of revenue is significantly later than the timing of the beginning of commission payments due.
Just the way the market the way this market is run.
So we are often as you see backlog build you will see sales and marketing costs to increase in in advance of revenue.
That makes sense that makes sense okay.
And then just a follow up on that so is it something in terms of making improvement in transitioning to you know more direct sales.
One if we can get an update on kind of what the Delta. There is on customer acquisition costs, you know how how much money can you save or what fraction of our of our external lead do you pay internally to generate the same lead and then and is there anything changing their workers.
It's gonna be a gradual decline as a percentage of revenue should we expect that to just kind of continue as a gradual decline also in 'twenty to 'twenty three or just in the future are there any kinds of sort of inflection points or something where a certain thing gets rolled out or something happens that makes a more.
A more abrupt reduction there or should it really just be a pretty gradual thing.
Yeah.
I think we can cover it more off and this is a little bit competitive we want we want to stay away.
But I think your assessment that your direct sales channel should it should have a higher margin and we do believe that and that's why we're focused on growing that channel that does allow us to select certain markets.
To be more selective in products as well so it does help us operationally as well to move more into this direct channel, but I think I wouldn't be expecting any major inflection points in our margin profile over the next six months to a year.
Okay, Okay and then.
I'll ask I'm going to ask one more question then I'll jump back in the queue, because I could always ask questions.
You know as of today is long but.
So with [noise].
The inflation reduction act moving through Congress right now it seems like it's got a pretty good chance of passing.
You could probably talk about that I'm sure. There are some commercial and maybe its public works benefits and stuff in there, but the thing that immediately really jumps.
<unk> comes to mind for me is the the.
Sort of Standalone or 30% ITC for adding a battery and storage and I know historically, there just kind of doesn't really fit as well with sort of like your demographic. What your you know the where you see a lot of your customers are and socio economic sense. You know I mean, you guys are really kind of.
Serving I think of like the trader Joe's Yeah population, you know sophisticated people, but kind of on a budget.
And so you havent really emphasized batteries sales or battery attachment rates too much is that something that could change with the I T. C or do you think you know it's still it doesn't kind of change that equation in terms of how often or how much you try to push to get more battery cells and battery attachment.
Yeah.
I think the ITC pushes batteries in a good way and we're going to continue to emphasize selling those probably probably emphasize them more.
The ITC also pushes it makes more valuable ppas.
Which will change our market space.
And some good ways I believe also.
I would say that on the commercial side. The ITC definitely will have a significant opportunity to drive the business forward based on that.
Okay, Great Yeah, I will I'll go back into the queue.
Thank you, ladies and gentlemen, as a reminder, it is star one to ask a question, we'll pause a moment to allow for any other questions to come in.
Okay.
Once again, if you have any additional questions. Please press star one.
Yeah.
Our next questions come from the line of Donovan Schafer with Northland Capital markets. Please proceed with your questions.
Okay.
I thought.
I know.
Obviously former colleague so San I thought he may be asking a question.
I know that there's a lot of companies reporting today, there's a lot going on so.
I'll just opportunistically monopolize your time.
I think we should probably talk a bit about kind of the cash situation. It seems like you guys are in a good position you know you have.
Yeah, How's the amounts on the balance sheets, and you know since last quarter actually a decent amount of that has gone to no accounts receivable that was building inventory kind of contract assets.
And I know some of that's at least like on the inventory side, that's around our supply chain concerns.
So I'm curious from an outlook standpoint kind of looking forward from today and where you're at with the supply chain in your backlog.
Are you going to need to continue building inventory or is this are you actually are necessarily comfortable position too.
You know too.
Do you have enough cash you look like you have enough cash anyway to.
Because for quite a while.
But.
As if theres a someone.
Someone were to opt out some comfort level or something are you going to be in a position to not be building up as much inventory in this kind of proactive staying away from I mean, staying ahead of.
You know demand or are you going to actually do you think you might actually need to continue to accumulate more inventory with what's going on in the supply chain.
On balance we believe that we have the working capital in place to support the growth with with that said.
We have well documented issues at the ports with unrealistic way related to documentation of panels that are coming in from various countries and in those.
I believe that many of the module manufacturers are working through that.
Documentation that's been requested so that they can clear customers. So.
That's the environment that we're living in we.
We need to make sure we have adequate inventories to support any near term disruptions. So we may from time to time procure materials on a spot basis. If we if we feel it's the right timing and the right price and it mitigates risk. So I think that's really the one uncertainty that we have right now.
On our own and I suppose the the increased commercial backlog I suppose probably also.
Adds a little bit there, where now you know you have sort of a time horizon with respect to well we know we're gonna have to have certain modules ready but.
But the project wont be until the fourth quarter is that fair.
We're starting to plan for that and we did receive some modules for Q4 and into Q1 installations during the quarter. So that was a portion of that inventory increase.
Okay, Great and then Gail and I think you said in the opening remarks, you said something about you know where you get to positive cash flow positive operating cash flow.
Yeah.
Moving in that direction towards the end of 'twenty 'twenty three I I missed it if you actually said you thought you would hit.
Our positive operating cash flow by the close of 2023 or if that you'd be getting so close and then that's something you would expect would happen in 'twenty 'twenty four.
I'm just curious as you.
You can kind of.
Clarify that a bit more when you you think or see that that is likely to happen and maybe any any.
Any particularly big assumptions that are behind that or caveat.
That might be important to highlight.
We're making.
Every effort too.
Approach breakeven cash flow.
Number one priority for the company with regards to shareholder value.
And we recognize the importance of it.
As we close out this year, we anticipate being significantly closer to that and our intention.
Every effort is being made to reach breakeven next year.
Okay. Okay.
And my last question is.
Amazing.
So some may seem trivial, but I'm I'm quite interested in that I know you did launch the new website and that's something that you guys had been thinking about for a while.
And in this line of work I think it can be such an important especially on the retail side you know.
So you're getting slowdown your roof. It's sort of you know who is who are these people I'm working with who who is that someone knocked on my door or whatever it is okay. I'm Gonna go Google the name and pull it up.
And so I'm curious are there specific things in the web site change a relaunch that you guys. You made certain changes that you think could help increase kind of either customer leads or close rates something that kind of translates into the financials for the company.
Just at a high level. It's always good to have you know better website brand marketing or whatever so I'm just wondering if there's anything kind of more concrete built in there.
Or you know and or you know, even if not if you're sort of tracking metrics to try and understand how often does someone come to your website and then are you able to link that to a phone call. You know an inbound phone call things like that I'm, just kind of curious what what's been built since the new website.
That can kind of help from getting.
Getting to the bottom line in some ways.
Sure.
Good question. Thank you.
We.
We did a number of outreach to customers over the first half of this year, both on the residential and commercial side to find out what they thought of the company, what where they're driving motivators when they were making decisions.
What resonated with them.
And then we took that feedback.
And filter that through our market lens, where we looked at.
What others in the marketplace are doing and what makes sense from a.
A growing and evolving marketplace standpoint.
And build all of that into what we think is a much more modern and accessible website.
That takes into account the changes in search algorithms by the major search engine providers.
Those were all critical inputs to that process. So we what we have here in this commercial focused website. The residential focused website will be released later this year refresh will be released later this year.
<unk> is a web site that we think speaks to the potential customer and gives them not only reasons for going solar had reasons for going solar with with some works.
On the residential side, when we do that associates them and we're excited about that being a increaser in our lead generation.
Lower costs lead generation I think it's going to benefit the business trailing.
Okay, and then I know I said that was going to be my last question, but one just occurred to me so I'm going to sneak another one and yeah I noticed so I think one of the things you know it was an analyst you know is.
And then.
Buy rate it on your stock since I initiated I think there's a lot of interesting opportunity here with associates acquisition and how you know a lot of that that was driven in a lot of ways by kind of the crazy run up in the stock price is part of the mean gamestop and the mean.
Docs and everything that gave me the opportunity to sell shares at a very you know I think $15 a share or something for pretty.
No reasons, we all recognize and understand as an anomaly, but you guys are able to and.
Savvy intelligent way take advantage of that at the time.
But then from you know from that same perspective, I think there are.
As an analyst I also had the thought in the back of my mind of well Gee Whiz I I hope they don't.
<unk> tried to sell a bunch of shares that are very very low share price and so I'm pleased to see that in the second quarter. You know that the share price is fairly low obviously, there were a lot of political headwinds and you really didn't yeah. There's a small amount of share issuance I think but it was really quite tiny.
Yeah.
And so that's great and reassuring them that you kind of weren't selling selling shares down and it's $2 a share and that you really have that view and conviction that as a company you're you know you're worse meaningfully more than that so I'm curious.
If going forward.
If you have.
Maybe what your if you have an internal evaluation approach or something or how you kind of try to make those judgment calls.
And and or if maybe you just feel very comfortable with where you are from a cash standpoint, where you have pretty much no intention to really issue shares.
You know in the near term.
As it is is just any clarification or kind of color around that would be great.
But from a high level standpoint.
We look at our value when we decide whether or not we're going to sell shares and raise that could raise capital.
We look at our share value as well.
Against the competitive marketplace.
And evaluate whether or not.
So the value in our shares is above at or below where we think it should be with regards to the market.
And <unk>.
I will say that right now if we were to execute on shares the goal would be to grow the business we.
Our only add mechanism or a primary mechanism for raising that for raising capital is the ability to sell shares and if we do that we're doing that with the intention of increasing our ability to grow the business.
And okay.
In a volatile marketplace, where any number of different geopolitical and <unk>, our supply chain type issues or combination of the two could occur.
Theres always be off the <unk>.
The outlook of Derisking the situation.
Being able to have cash reserves, a greater cash reserves are always de risks the situations.
Sure Okay right. So there's still even in there there's kind of a conceptual.
Either arbitrage or sort of a retreat of aspect, where you could kind of value with the associated risk is.
That you're trying to offset and so you know maybe it makes sense in some ways to issue shares at a relatively low share price, but it's because of what you're able to do with that somehow it seems to have a better sort of economic trade offs.
Okay.
Okay, well that's great. Thank you guys very helpful and congratulations on the quarter.
Thank you. Thank you.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Morris for any final comments.
So once again to everybody on the call. Thank you for joining.
Should you have any questions. Please feel free to contact us at IR at some works USA Dot com and a member of our team will follow up with you. This concludes our call. Today you are now free to disconnect.
Yeah.
Thank you ladies and gentlemen. This concludes the conference call you may now disconnect your lines.