Q3 2022 Sunworks Inc Earnings Call
Greetings and welcome to the Sun Works, Inc. Third 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 keypad. Please note. This conference is being recorded I will now I'll turn the conference over to you Jason <unk> CFO you may begin.
Thank you operator, I'm, Jason Barker, Chief Financial Officer up some works.
On behalf of our entire team I'd like to welcome you to our third quarter 2022 results conference call.
Leading the call with me today is our president and CEO gave them more.
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 otherwise.
Otherwise required by law, we undertake no obligation to update our forward looking statements.
Following their 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.
During the third quarter, our business benefited from a combination of strong residential solar demand strategic price actions disciplined expense management and market share gains.
Household electricity bills continue to rise order rates for new residential rooftop solar installations accelerated on a year over year basis contributing to robust organic revenue growth in the third quarter.
While customer financing costs have increased in tandem with higher interest rates originations during the quarter were at record levels as the economic case for residential solar remains highly compelling, particularly for customers who value independent reliable access to renewable energy.
To help illustrate this point, let's use a real World example.
Currently the average residential electric Bill in California, our largest market is more than $1550 annually, where nearly 50% higher than it was a decade ago.
Even as electricity prices have risen meaningfully grid reliability has declined leaving many households, and businesses to explore alternative options consumers want more control over how they source energy they want choices.
The average residential installation will typically cost between 25 to $30000, including the benefit of tax credits financed over 15 to 25 year period.
Installing solar homeowner can in most cases use their system to offset their electricity usage, 100% and habits system, which will support future consumption growth.
Over the past year the cost of solar has increased for the first time in the industry. Its existence financing rates have increased by more than 5% and low interest rate products are being limited by the loan providers inflationary pressures for the labor and key component tree have pressured the economics of solar.
Despite these headwinds many homeowners continue to see an immediate reduction in their utility bills, but the economic benefits compound over time as the cost of solar remains fixed compared to the rising costs of retail rates from traditional utilities.
Even after accounting for higher financing costs for long term economic case in favor of residential solar remains well intact.
And with inflation at the highest level since 1982, we take the view that households will continue to look for ways to walk into sustainable energy cost savings.
To that end, our total backlog increased 116% year over year to $110 million at the end of the third quarter driven by broad based origination growth across both residential and commercial end markets.
Importantly in the face of rising demand, we have been able to pass along several strategic price increases this year.
Given the anticipated impact of these recent price actions our backlog margins are the highest we've seen in several quarters, which should support improved margin capture beginning in the fourth quarter and into 2023.
Fortunately supply chain conditions improved during the third quarter versus what we experienced earlier in the year.
Given expectations of continued demand growth, we invested heavily in paneling component inventory during the third quarter to support a growing backlog of project activity.
Although easing in the supply chain conditions encouraging we.
We recognize the situation can easily reverse, particularly given the current geopolitical climate.
With this in mind, we will continue to prioritize working capital investments in critical componentry positioning us to mitigate material sourcing risks.
As we discussed on our prior calls we intend to shift an increasing proportion of our current sourcing from foreign manufacturers or third party distribution channels for U S. Based original equipment manufacturers and approach that we expect to provide improved surety of supply over time.
By the end of 'twenty 'twenty four we intend to source a significant share of our panel and component inventory from U S based producers.
Turning now to a high level overview of our third quarter results.
Total revenue increased 30% year over year to $40 7 million.
<unk> robust residential demand more than offset near term softness in commercial activity with.
Our residential solar segment total watch installed during the third quarter increased by nearly 50% on a year over year basis, driven by strong new contract origination sourced through our direct sales force.
Our direct sales force, which now includes more than 600 agents in 2014 Metro markets represented 23% of total residential solar segment revenue in the period versus less than 5% of segment revenue in the prior year period.
More importantly, I'm pleased to report that we delivered positive residential segment EBITDA in the third quarter.
At a strategic level, our business transformation continues to advance meaningfully.
Customer retention is up giving a higher volume of installation order cancellations have declined we're expanding in the direct sales channel, which reduces costs and puts us closer to the customer we're using intelligent data centric pricing strategies to optimize margin capture and we're refining our sourcing and procurement model.
To ensure uninterrupted access to high performance quality componentry across multiple markets.
Looking ahead I'm positive on the outlook for our business, even as concerns around the impending recession become the consensus view.
Today, the domestic solar industry has the technology to provide affordable reliable electricity to every home and business in America.
Some works remains a pioneer in the renewable energy Revolution, one well positioned to capitalize on the underserved fragmented residential and commercial solar markets, where we built a leading position.
It is an exciting time at some works. Thank you for your continued interest in and support of our business with that I will hand, the call over to Jason for a review of our third quarter results.
Thank you Gail.
During the third quarter, our team executed ahead of plan across several key operational metrics.
Driving significant growth in revenue.
Orders and backlog.
For the three months ended September 32022.
We reported total revenue of $40 $7 million versus $31 $2 million in the prior year period.
The year over year growth in revenue was attributable mainly to increased contributions from the residential solar segment.
Which bone from a girl to installation volumes and improved pricing.
Commercial solar energy revenue declined $3 $8 million compared to the prior year period.
Primarily driven by lower order intake in the preceding periods.
During the third quarter residential revenue was 92% of our quarterly revenue.
While commercial revenue represented the balance.
Total gross profit increased to $19 5 million in the third quarter 2022 versus $13 $7 million in the prior year period.
Well note that the current quarter benefited by an accounting estimate change in our residential segment of $1 $8 million related to the capitalization of costs incurred on projects that are in progress.
If I could to be completed in the coming months.
The year over year variance was primarily attributable to growth in customer acquisition and.
And operational improvements throughout the business.
Including increased focus on accuracy and estimating.
Loading and improved execution, partially offset by inflationary pressures on materials and labor.
We were part of the third quarter net loss of $5 $4 million.
Or a loss of 16 cents per basic share.
The net loss of $6 $5 million in the prior year period.
Or a loss of 24 cents per basic share.
The year over year variance was primarily attributable to lower amortization expense associated with the associates acquisition.
And lower stock compensation expense.
Partially offset by inflationary pressures on materials and labor.
As well as investments to support anticipated growth in each of the company segments.
Adjusted EBITDA was a loss of $3 $7 million in the third quarter compared to a loss of $3 $3 million in the prior year quarter.
Turning to a review of our residential solar segment, which is our Celsius business.
Segment revenue increased 57% year over year to $36 $7 million driven by growth across all sales channels.
Total residential what's installed increased 50% year over year in the third quarter.
Direct sales represented approximately 22% of toll revenue installed during the third quarter versus less than 4% in the prior year period.
The residential segment generated positive EBITDA of $1 million driven by strong end market demand recent price increases and.
And improved operating leverage.
Total residential backlog increased 18% sequentially to approximately $70 million in the third quarter.
Driven by growth in both direct and dealer originations.
Within our commercial segment revenue declined 48% year over year to $4 $1 million.
Primarily based on lower more order activity in 2021 and earlier this year.
The commercial segment generated an EBITDA loss of $2 $6 million in the third quarter, primarily due to lower volume.
Turning to our balance sheet during the third quarter, we raised $7 $3 million under our at the market equity program to support strategic growth.
At the end of the third quarter, we had no debt.
And $14 $5 million in cash to support the ongoing growth of our business.
Net working capital increased by $5 million sequentially.
As a result of investments in inventory.
Total inventory at the end of the third quarter was $26 $9 million compared to $12 $4 million in the prior year period.
As Galen mentioned earlier, we believe investments in componentry is a prudent use of capital at this time.
A combination of strong underlying customer demand.
And the global supply chain that while improving remains in flux.
In summary, we remain well capitalized to support growth.
We've made the necessary inventory investments to support our growing pipeline of customer demand.
And we have a strong backlog of higher margin project work to support us in the fourth quarter and into 2023.
Operator that concludes our prepared remarks.
These open the line for questions if you'd begin our question and answer session.
Thank you and at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
And one moment, please while we poll for question.
And our first question comes from the line of Philip Shen with Roth.
Proceed with your question.
Hey, guys. Thanks for taking my questions. The first one I have is on alone.
Financing and can you remind everybody what percentage of your residential business is financed by loans versus cash.
And my I recall, you guys don't have a lease product, but wanted to explore and get your perspective on.
With a substantial number of price increases and dealer fee increases buys alone companies.
How is that impacting you.
Our business in Q1, and two I know you highlighted that your originations for us were up 48% year over here, but as you think about you know what you've seen so far in Q4, and then what could come ahead of how how is your sales force adapting to the.
The meaningfully higher dealer fees and and the higher.
Higher rates and the removal of the lower APR products like the 0.99% at one point, 900% are you guys considering a lease at all.
I know theres a lot there thanks for.
Providing some color on that.
Thanks.
Sure I can good morning, so I can start answering that question.
So historically.
<unk> has offered lease and loan products, depending on the economics.
At the time.
We do offer both loan and lease products today.
And there is a but that's predominantly been loan products over the past several years.
We are seeing more gravitation into two leases and into cash cash has been typically less than 5% of our business in the past we see that.
We were going to see that grow over the next year.
We are beginning to bring on more or at least providers as well to be competitive and to make sure that we're offering the best products to our channel and our customers.
Great.
Yeah and from an origination standpoint, so we're continuing to grow our our direct.
Direct sales force and we've talked a lot about that during the prepared remarks.
Joe over 600 reps today, and it's becoming a meaningful portion of our business. So we're expecting.
Continue to grow that we are seeing pressures on originations certainly throughout the year and with the with several increases coming I think that will that will put more pressure on the economics of solar.
In certain markets.
But as Galen sat there, they're the economics of solar or are still in our favor and we believe offering more lease products will likely make us more competitive in the coming months.
Great.
It makes sense and so if you were to think about Q wanted to how would you think through.
You know how how high their installations.
Or even originations might grow on a year over year basis, where are you going to sequentially. Thanks.
It's a little early but I think it's early to tell I think the best guidance that we can probably give us to say the least products morph to from 5% to 10% of our business, maybe it's a 25% mid mid next year.
Yeah, it's difficult to give a perspective on originations we are evaluating certain markets and evaluating if it makes sense for us to to remain in those markets and so we're really focused on which markets are cost effective and ones that we can grow in the future. So I think what we'll see how this develops.
In the coming quarters with the originations, obviously with recessionary fears that could impact our business, but again, we're just really.
We're paying attention to our cost structure, making sure we're prudent and making sure we're growing in the right markets.
Good.
Let me add let me add real quickly.
From a volume for me installation volume standpoint.
During the year.
Significant backlog and we've been putting a lot of energy into revamping our processes to make us faster.
And so it would be useful.
The likelihood that the contract will end up training and installation. So we're very optimistic about Q1, and Q2, because not only I mean, I've not yet seen very much pressure on originations, but we have significant backlog and install them faster.
Great. That's really helpful. Thanks scaling on the backlog.
Can you give us a split between Bosnian commercial for the 110 million I know raws. He is more of a you know turn business, but just curious.
With this you know end of Q3 snapshot in time, what that might look like.
Backlog for our commercial business was about $40 million about $110 million still.
And that's that's all significantly I think we started the year.
Beginning of the year was was closer to about $18 million. So we're starting to see some good traction there on the commercial side of the business.
Great.
And then.
Presumably residential as the rest of it.
Correct me, if I'm wrong, there and then finally you know Jason you were highlighting that you know you guys are exploring some markets that.
Could be.
B, you know shut down or.
You're you're evaluating you know the rationale given the economics.
Okay.
Yeah, if you feel comfortable sharing which regions that might be a that would be fantastic, but if you don't feel comfortable with that can.
Can you talk through maybe some of the ingredients that are resulting in.
That region or part of the world or a country that is making it less desirable so is it a.
The low retail.
Electricity price combined with poor net metering and then no surprising loan prices. So what's the kind of it's a set of characteristics that we can kind of lean on to help understand what the pattern might be.
I think that's fair I would add in what what has been happening from a from a retail rate perspective and increases that consumers youre seeing from each from traditional utilities and we're also very focused on our timelines for install and servicing our customers and we want to make sure we understand.
The various jurisdictional and the H J requirements in those different markets because some of those markets may have.
Very long lead times and you can certainly not fulfill.
Fast enough rate and it can be a cash burden to the company as well. So maybe that's one sort of new ingredients that we would that we would share with you that we havent talked about previously.
Got it thanks, and then one last one in terms of lease partners historically, who did soldiers to work with and then who who might you guys be working with on a go forward basis and you know how many partners. Ultimately do you think you'll have to do you think you'll have more than one.
The focus here at least business with just.
One partner thanks.
Certainly we can tell.
I always like to talk about the the companies that we're working with on the calls we can we can sort of take that offline.
Traditionally it's been one or two you've had one.
Lease.
Alex since I joined the company last October .
Expanding that to a second one in the <unk>.
Last few weeks and we'll be looking to add one to two more in.
In the coming months.
Great Okay.
Thanks for the questions guys and I'll pass it on.
Thank you Paul.
And our last question comes from the line of Donovan Schafer with Northern capital markets can you proceed with your question.
Hey, guys congratulations on the solid quarter.
I want to ask just about you know the inflation reduction Act is obviously kind of something we've all been talking about a lot lately, but looking at your third quarter results is it fair to say that you know this doesn't really reflect anything there and now you've these results don't really reflect any of those sort of.
Tailwind.
But you'd probably started having some conversations maybe on the C&I side with people that are kind of factored all that in so I'm curious just if you have incremental kind of color or insights on how you see the inflation reduction act playing out kind of for your residential and your C&I business you know over the coming.
23, and kind of their thereafter.
So this is Gail I'll start.
On the C&I side, we're starting to see.
Our current strategy is to provide every proposal with a prevailing wage.
Wage cost.
So the customers can see the.
But waiting for some or all of the moves to change specifically in California with a 23.
And where we can we're demonstrating to them that there would be a cost there would be.
Sure.
Some savings, but the savings.
Okay.
So what we are discussing that.
Yeah.
Some customers on things like the new spaces.
We do expect as we get closer to the end of next year as well Escalations paradigms.
<unk>.
She in short term.
And completed sales.
And to use that.
Pressures.
Bush people longer decision, making process.
One note when Jason talks about a backlog on the promotional side that is that is contracted time negotiating contracts and what that does not include what it has been.
Mitch we're still like negotiations and listeners.
But it's been a volume.
And as well, but we don't take credit for that in some countries.
On the residential side I'll, let Jason get into what particular, but there.
We have not yet seen a tremendous amount of change basically.
But we are starting to see.
The increase in number of lease provider.
US wanting to work with us and I think that the reason is.
The additional ability for them to capture it.
Lisa.
Okay. That's helpful that makes sense and then for the direct sales channel and the sales mix from that was 24% of total revenue in the quarter.
<unk> versus I think it was my notes it looks like it was 15% last quarter. So yeah, that's a really nice improvement sequentially.
Sequentially and it looks like it's I'm I'm guessing that's kind of being reflected in the drop in sales and marketing expense as a percentage of revenue.
Hum.
Do you have a goal for how high you you'd like to get that mix. You know just something you're kind of targeting because yeah, there's probably benefits and not doing 100% direct sales either because you know you're once kind.
Kind of different levers to pull and you wanted to keep those relationships going so I'm curious if there's kind of an idealized.
Mix that you're targeting and then if you if you get to that idealized mix, you know where do you think that could send sales and marketing expenses as a percentage of total revenue.
I think it's 36, 6% this quarter so.
Anything there.
At a high level.
We don't have a we don't handle.
Targeted percentage back down to a single digit but.
How does the economics of both channels involved.
We're going to continue.
There's no intention.
If I missed a fluid number.
<unk> been giving thought to over the last few months it was probably 50% from a direct sourcing and 50% from our various channel partners, which as we grow.
<unk> growth.
Amortization.
Whoops.
So I think there's a lot of opportunity there and you're absolutely right. There's a there are certain risks.
Involved in going entirely directly it's harder to move markets you don't you can't leverage the relationships.
Other people.
And you're always competing with somebody or multiple somebody's, whereas when your channel relationships.
A lot of those things dynamics have already been handled absorbed in the sales folks in that area already understand their market. So theres a lot of good reasons to stick.
With the help of channel partners.
Sure.
Okay. That's that's helpful and then.
So the C&I segment them, you know you've got the $8 2 million in orders during the quarter and you know as Jason pointed out.
The backlog has increased quite nicely since the first quarter you know it's more than doubled so yeah 16 million in Q1 and 40.
<unk> 40 million.
So I'm curious if you can kind of remind us or or even just.
You know if you could take for example, the.
Orders this quarter.
Or you can maybe look at that backlog kind of in aggregate.
If you can give us a sense of when you you think that would start to flow through revenue and and also just if they have any changes in the types of kind of C&I projects Youre getting there in the backlog because it was kind of the traditional your traditional.
Agricultural and public works projects, mostly in California, or does like the $8 2 million you got this quarter does that reflect some additions in other markets in the east coast and stuff.
And if it's like the project sizes are changing at all if you're moving to larger C&I projects smaller C&I projects.
The thing that I would be very helpful.
There's some there's a number of parts of that question, let me just try and get through the C&I side of the business. The public works projects is a larger percentage.
Backlog.
Traditional.
And as such those are larger projects, that's that's pushing our average project size.
So that's that's actually a good thing we're excited about that because the larger projects.
That's where we really can leverage our advantages over smaller companies.
With regards to thinking about mix, we don't anticipate seeing that change.
If anything we expect to see more of.
Those larger projects come through and right now almost almost nothing.
Simpson.
Yes.
Okay, Oh, well, it's just the time I guess the timing of.
I kind of go one year lag yeah.
Yeah right now we're in we're deep in the budgeting process and I would say that most of the backlog is going to convert into revenue.
Yeah.
And we will continue to build the backlog.
With me.
Yeah.
Okay, I think you'll see us I think you'll see it Donovan I think you'll see a steady build.
And the revenue, but it's not like there will be sort of one quarter. That's just the stuck step level change.
But I was going to build throughout the next several quarters.
Okay, Okay, Hum and then.
The other thing I wanted to ask about.
Is kind of EV charging in batteries I think I can't remember I know I think I kind of.
I I confused and second guess myself on this did you guys, sometimes but I think.
If I recall correctly, you've sort of been considering or looking at doing you know doing EV charging charger installations, I think both Reza and CNI haven't done a lot of that yet and I think you do battery, but not a lot.
I'm curious if that's kind of been changing if you've if theres any updates on them moving towards higher attachment rates.
And you know further kind of efforts or initiatives or anything around that.
Bring in EV charging them to kind of dovetail with solar installations.
On the residential side, we are currently selling in the charges on batteries the attach rate.
I'd like it to be but it is growing.
And would primarily windows.
In particular, the manufacturer and they are.
Pardon.
System.
<unk> buys and everything else the same.
On the commercial side of the business. We just recently brought on board a resource for business development.
Transmission business.
Awesome originate projects.
Towards the origination insistence commercial some commercial would be Georgia.
Right now we offer an installed commercial EV Chargers and many of those projects, but it's.
The reason, we're talking about customer and the reason is because of this.
We'd like to see moving forward is also originate.
Mhm charger, specifically will be charged off.
We do see a lot of money going into them.
The market for them.
And we.
Do you think that there's an awful lot of opportunity there for us.
And to expand its.
Its efforts into it sales and marketing.
That puts them into commercial.
EV charging solutions.
On the battery side, we also offer batteries with pretty much every project that we did when the customer asks for them in Milwaukee.
Proposition.
Battery systems, and we have installed several but.
We're also going to be working with.
And how we can move from a solar origination company to think so.
All right.
Information.
Sure.
Okay, great. Thanks, very helpful. And then just my last question I was going to ask him because this Berkeley labs came out with a study they they do these sort of periodic studies to show the demographics for people, who got rooftop solar installed.
And the most recent one I think it came out last week and the trend keeps moving down to lower kind of lower and lower income the the medium. The the median household income.
It is now at 110000, so yeah, I mean, that's a medium that could definitely be you know to income earners in the household them.
It was 130 K a year ago, or maybe that was a pre pandemic number but either way the trend seems to really be favoring the type of like pitch installations that you guys tried to do with this fast velocity installation to try and do two a day and it's a.
[noise] predetermined kind of inverter panel package.
So I'm just curious like are you seeing.
Is this panning out and what you guys are seeing on the ground in terms of like maybe and maybe you're comparing notes with I don't know if you compare notes as competitors are things things faster growth and these kind of smaller I think of it as a kind of like the trader Joe's customer like installation, where it's it's a it's a quality product.
A lot more affordable youre not doing kind of mcmansions are like luxury homes.
Are you seeing more growth in that end of things versus the luxury stuff.
I'm just curious if that's kind of panning out for you guys as people, whose he's talked to kind of boots on the ground.
Yeah. So we can probably installed 600 houses 550 houses per month.
Every system size has increased slightly.
It's increased up to over seven kilowatts, seven kilowatts, a still reasonable moved system became a more sizable.
Japan.
We have certainly close them so much larger projects and some that are even a commercial sized.
Residential.
So if you know but for the most part I would say that the house.
Mhm gross area in our industry will continue to be people see the value in solar as a way to offset their utility costs.
Persons you know, bringing.
Bringing badger that shows there.
Political or social.
Engines.
Okay, Great. That's helpful. I will I'll take the rest of my questions offline. So I appreciate you taking my questions and congratulations on the quarter guys.
Thank you.
Yeah.
And we have reached the end of the question and answer session I'll now turn the call back over to David Morris for closing remarks.
So thank you everybody for joining us today, if theres any questions or concerns we will follow up actions.
Feel free to reach out to us.
So most of them.
She loves it.
Awesome.
Yes.
And this concludes today's conference and you may disconnect your lines at this time.
You for your participation.
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