Q1 2023 Sunworks Inc Earnings Call
Operator assistance during the conference. Please press Star Zero on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to introduce to you Jason Bonefish with Chief Financial Officer. Thank you, Jason you may begin.
Thank you operator.
I'm, Jason Banca Chief Financial Officer of Sun works on behalf of our entire team I'd like to welcome you to our first quarter results of 2023 conference call leading the call today 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 include.
Including the risks described in our periodic reports filed with the SEC.
Except as otherwise 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'll turn the call over to Galen.
Yeah.
Thank you, Jason and welcome to those joining us today, the first quarter was a challenging period for some works as we manage through inclement weather conditions in many of our primary geographic markets, which impacted the timing of project completions. We also experienced disruptions created by net energy metering metering transition in California, and the tightening.
Credit market negatively impacted working capital.
For those not familiar net energy metering or NIM is utilized in California to allow consumers to participate in selling unused solar power generated from their power systems back to the grid.
This power sharing relationship is the defining incentive that has led many households to invest and rooftop solar.
In December of 2022, the California public utility Commission or CPUC issued a final decision to update its NIM policies, which adversely impacted the economic benefits of residential and commercial solar by lowering the export rate or the price at which a consumer sells their power back to the utility by <unk>.
Currently 75%.
While the reduction in the export rate is significant the cost of solar relative to current electricity bills and ongoing inflationary pressures on future utility rates are expected to continue to justify the economics of solar consistent with our long term market view.
Additionally, homeowners may augment their solar systems with batteries to ensure that excess power generated during the day offsets there power needs during the evening peak pricing period.
In advance of the well publicized net of transition cost customers, who submitted their solar applications through solar providers, including <unk> by the April 14th deadline are expected to qualify under the prior more economically beneficial to.
2.0 regulations.
This change in regulation by the CPUC resulted in a surge of applications. Prior to the mid April 14th deadline. The mid April deadline that has caused significant delays with the average utility interconnection application wait time, increasing from less than a week to the eight weeks or more we are currently experiencing.
In plain terms this backlog of applications contributed to a short term spike in new project demand, but extended interconnection application approval wait times have resulted in delays to project permitting and completion.
With these project delays in process component inventories have stayed on our books longer than is typically the case, resulting in higher working capital balances and slower cash conversion cycle times.
While our first quarter results were clearly challenged demand conditions remain strong across our end markets through April giving us optimism for improved results as we move throughout the year.
In the first quarter, our residential solar segment revenue and backlog increased 14, six and 12, 7% respectively versus the prior year period.
Order rates increased at an accelerated pace given the influx of new applications for rooftop solar installations ahead of the net and deadline.
California represented more than 50% of our new residential originations in the first quarter.
Direct sales contributed to more than 40% of new originations in the first in period versus 18% in the first quarter of 2022 contributing to a 450 basis point decline in segment, selling and marketing costs as a percentage of revenue.
As before we continue to employ a disciplined pricing strategy into a period of rising demand.
Within our commercial solar energy segment revenue and backlog increased more than 64, and 119% respectively versus the prior year period.
First quarter results included an order for a one five megawatt rooftop carport solar installation with a 2000 kilowatt hour energy storage system located in southern California, with a fortune 50 company.
The $5 million order represents an important strategic entry point with a large corporation with a nationwide footprint the.
The project, which will commence in the third quarter of 2023 and should conclude in the first quarter of 2024 is expected to provide significant long term energy savings for the customer consistent with their renewable energy objectives.
Turning to a discussion of our balance sheet and liquidity.
Following the banking crisis earlier in the year and have several other solar companies have gone out of business credit markets have tightened for rooftop solar finances.
Astoria milestone payments have been provided by lenders at various stages of the project lifecycle.
Lenders or reduce the risks by shifting payments to later stages of the project negatively impacting working capital.
During the second quarter, we took coordinated actions to enhance our liquidity and reduce our fixed overhead costs, our liquidity enhancing actions, which Jason will discuss in more detail shortly increased our available liquidity position by $8 million in may of 2023.
This cash infusion together with the nearly $3 million of cash on hand, we had as of March 31 will help too.
Further bolster our liquidity profile as we navigate the current operating environment.
Following the <unk> transition in April 2023, we anticipate CPUC application utility application rates and project completion times should normalize over the next quarter in that scenario, we expect working capital requirements to stabilize and capacity utilization to improve.
Before the market opportunity for solar remains significant across our geographic footprint positioning some works to play a leading role in the transition towards affordable clean and independent energy production.
With that I will hand, the call over to Jason for a review of our first quarter financial results.
Thanks Gail.
Beginning with our summary of our first quarter financial performance.
<unk> generated total revenue of $38 1 million in the first quarter of 2023, an increase of 22% versus the prior year period.
Reflecting growth across the company's residential and commercial markets.
As we highlighted previously weather delays in our primary markets delayed roughly $7 $8 million of revenue from being recognized.
Our residential segment.
Gross profit was $11 9 million or 31, 3% of sales compared to $13 2 million or 38, 5% in the prior year quarter.
The main drivers of the year over year reduction was primarily driven by lower labor utilization in our residential segment.
Again, an impact of the weather related challenges we experience.
Specifically, our residential gross margin declined to 37, 9% and eight.
100 basis point decrease year over year.
And in our commercial segment, a write down of inventory at a lower cost or market drove gross margin to four 5%.
This noncash impact occurring the business would have generated approximately a 17% gross margin.
Higher than the previous year quarter.
Within other income, we realized a $3 $7 million gain.
Year over year variance was primarily attributable to a $5 1 million net benefit associated with the company qualifying for the employee retention tax credit and then partially offset by a loss on sale of excess module inventory.
We reported a net loss of $6 4 million in the first quarter of 2023 or <unk> 18 loss per share.
Versus a net loss of $8 2 million in the prior year period, or <unk> 28 per basic share.
Cash from operations was negatively impacted in the first quarter of 2023 due to the weather and utility approval blades as well as tighter financing terms for residential solar installations that Galen mentioned.
As of March 31, 2023, the company had cash and cash equivalents of $3 4 million.
During April 2023, the company received proceeds.
Of approximately $1 $5 million from sales of common stock and registered at the market offerings.
And then on May five 2023, we entered into accounts receivable factoring agreement.
Based on the company's commercial customer receivables with the ability to advance up to $2 $5 million at any point in time.
And then subsequently on May 22023 of the company entered into a trade purchase agreement with regards to its <unk> receivable with proceeds netting of $5 $7 million.
The company intends to use the proceeds from these finance activities to support elevated near term working capital requirements and the continued effects of protracted utility approval timelines, which are expected to normalize over the coming months.
Operator that concludes our prepared remarks. Please open the line for questions as we begin to as we begin our question and answer section.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two if you would like to remove your question from the queue for any participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please when we poll for any questions.
And our first question comes from the line of Donovan Schafer with Northland Capital markets. Please proceed with your question.
Hey, guys.
I'm happy to see the liquidity improvements kind of proactive moves it looks like you guys have taken there after the close of the quarter.
I'd like to.
First ask about kind of the outlook for <unk> for the second quarter, we're already two thirds of the way through the quarter. So I'm. Just curious if you can at least give us a sense of you know should we expect sequential improvement in the second quarter.
If so is it we're talking like a single digit percentage growth or double digit.
Yeah, like kind of quarter over quarter, and if it's too soon to.
You know.
What if you could kind of elaborate on what's happening in this kind of last month of the quarter that causes that uncertainty whether it's.
Trying to rush and get catch ups your backlog projects.
Squeeze as much as you can in before the close of the quarter or uncertainties around customer eligibility getting them grandfathered under them to Plano just kind of what are the fact whats the Q2.
How should we think about it and then if it's too soon to really say anything what are those factors.
Sure I will.
Start, let's start with the commercial business, because I think that's a little easier to walk through so we have we have continued to make improvements in the backlog in our commercial business backlog increased sequentially to.
To $35 million in as.
As we get into the summer months, Thats always a little bit stronger when we have less sort of weather related issues in the commercial business side, we're anticipating sort of a moderate growth there.
Within within residential we had a lot of challenges in Q1 that we talked about with weather.
And then I would I would say that Q2 has been almost a comparable impact on the business with regards to what's happening in California with approval timelines.
And that's we're.
We're not going to provide provide guidance there.
But I'm not expecting.
The approval rates to be coming in for permits to improve dramatically over the next four to five weeks for the quarter. So I think it's I think there is going to continue to be some some pressure in that residential business for most of the quarter.
Okay.
<unk>.
And then.
For the full year.
And the full year sort of 'twenty two 'twenty three.
In the past I know you guys have talked about having sort of yeah.
Very high level kind of an overall, 20% to 30%.
Year over year gross kind of bogie that you shoot for just just in terms of the idea of hitting scale to absorb overhead.
And at the same time I know you know at the current moment, you're driving some profitability measures.
And those can sometimes slow growth in the short term. So you know my question is are you still are you still sort of internally aiming for something on the order of <unk>.
20, 30% growth this year over last year or is that.
Do you see that as realistic in light of kind of the profitability measures.
So Gordon is going to last year.
If you look at our residential group, even even though we had a difficult quarter against our plan, we still exceeded revenue in the first quarter of last year by almost 15%.
So I think that's that that performance is indicative of our year over year ability to perform.
With.
Like I said the the challenges we've had have been against what we were anticipating and the revenue levels that we were budgeting for and working against from a from a cost basis standpoint.
They arent necessarily have been a challenge against growth year over year.
Okay.
And then I think thats, probably kind of ties in with the.
Commentary around.
You know the permit delays, but I think in the press release I saw.
You mentioned to kind of labor inefficiencies and Galen and can you kind of referred to this as like capacity utilization.
I'm.
Just curious if that kind of where we stand as of today.
Are you at that same level of kind of utilization, where there's you know whether it's electricians are there people on staff that you you don't want to let them go because you know once things pick back up again, you want to certainly be able to quickly.
Use those resources.
Are we at the similar level of kind of labor and efficiency at the moment or kind of utilization.
Or have we seen improvements just curious how that where that sits today relative to the quarter.
First quarter.
On the mostly let's say.
Oh go ahead.
I was just going to sorry, Gail and I was just going to talk about the residential business.
So go ahead and talk about the resin.
Okay.
So I would expect some modest improvements, but the pressure that we saw in gross margin was was pretty intense during the quarter end.
I think in the absence of having a very healthy backlog and the residential business.
Would have had to make made staffing.
Significant staffing reductions.
We don't feel we didn't feel comfortable with that because because of the strength of the backlog and making sure that we have skilled labor to support the growth for the rest of the year. So I think there.
That is certainly with the challenges in California. There are there going to be continued to be inefficiencies in Q2 and but.
But I think I think as we get into the second half of the year, we're expecting.
Some of these.
Some of these variables to to improve and we should be able to get gross margins improvement as well back to at least to where we were last year.
On the commercial side of the business. The staff utilization is 100% right now, it's it's it's exactly where it needs to be.
Yes.
Okay, Great and then.
I was going to ask kind of the same.
Jason you answered what I was going to ask you about gross margins. If you kind of what we should expect them to add back to so nice to hear that the.
There hasn't been any sort of a structural change that would create a new normal sort of gross margin below the mid forty's like what you had last year. So that's nice.
Same question for sales and marketing Galan you commented I think it was a 450 basis point improvement so you're getting through the direct sales channel.
And it seems like I'm guessing that's not blended you're just saying within the sales that come through the direct channel have the 450 basis point improvement. So you'd have to go you have to go to a 100% direct in order to kind of have that be 100% conversion into your.
Your financials to see it for a 400 basis point improvement.
But in general I.
I guess correct me, if I'm wrong on that and how should we expect that to kind of trend.
As a percentage of revenue sales and marketing expenses kind of for this year.
So we are scaling mentioned, we had we had roughly 40% of our of our.
<unk> come through the direct channel.
Our short term goals are to get that to be.
Around 50%.
And then I think we'll be building traditional dealers and we'll be also building our direct force. So I don't I don't expect significant changes in the short term on this.
As a percent of sales that we're talking about for residential.
So.
But that's.
And thats, because sort of the investment the investment cost offsetting the benefits kind of in the near term.
There is always an investment in direct force. There is always that there. There is also a commission structure. That's in place for a direct just like other sales channels have it's just.
On a revenue basis. This is slightly lower so I think until we youre not going to see that that.
Significant reduction there until we start to see originations for direct go well above 50%.
Okay.
Okay, well I'll, let someone else ask some questions and I'll jump back in the queue. Thanks guys.
Thank you.
And the next question comes from the line of Tim Moore with E. F. Hutton. Please proceed with your question.
Thanks, and I don't have as many questions as I know.
Normally when he was asked a handful on Tuesday after the press release of the results, but maybe starting off.
Just to kind of put this in perspective.
To grasp it most of the gross margin headwind in the March quarter was primary because of bad weather and then this quarter because of Nam and the utility Italy.
I mean approvals.
Causing under absorb some too.
Do you think that you can get back on track to be at 40% plus gross margin in the September .
September quarter, if the weather and utility delays kept behind you by them.
So I think we have to look at that.
On a segment basis or commercial versus our residential business because the commercial business is growing.
Well and that has a lower margin profile.
I think really the onetime the onetime hit that we had in our commercial business was that was the write down of inventory.
Again, Thats, a one time adjustment, we would expect that to occur again.
Unless if module pricing really deteriorates, which would then help other parts of our business, but but.
But I think.
As we're thinking about the rest of the year, we are targeting that the mid <unk>.
Hi, tech or high teens and within our commercial business.
For gross margins and then we.
Our internal targets are certainly too.
To get back into the into the mid 40, <unk> and our residential business and I think that that blend or that mix of.
Revenue should support a greater than 40%, but there are caveat to that depending on the mix of the business.
No I understood that that segways into my next question because I was thinking about things that are not selling margin you know after the selling and marketing expense because you're getting such good leverage.
Out of that is your direct salesforce grows to 50% of originations for residential but just maybe on commercial and public works combined if I'm picking on them together.
You know what type of backlog do you think you need to hit a good inflection points for operating margin improvement there do you need to get the $50 million to $60 million versus $35 million lately.
Yes, we believe that getting too.
So our focus is how do we generate positive cash flow out of that business positive EBITDA, because there isn't there isn't a significant capex involved.
So we believe that the way that we're pricing these jobs and from an execution standpoint, if we can get into the into the <unk> into the <unk>.
Backlog that that backlog usually represents approximately a year's worth of revenue.
That would be supportive of us generating positive EBITDA.
Great.
I know nobody has a crystal ball on timing.
When do you think that could be anything that could be by the end of calendar next year the backlog entering.
<unk>.
Okay.
The pipeline of opportunities we have available to us.
Now if we were able to execute on them.
Supports the backlog of that size by the end of this year.
Yeah.
Alright, that's helpful clarity.
Appreciate it that's it for my questions.
Okay.
Thank you.
Okay.
Our next question is a follow up from Donovan Schafer with Northland Capital markets. Please proceed with your question.
Hey, guys I just have two more questions and then I will let.
I'll, let you go.
So the first question is.
Yeah, I was looking at the improved liquidity position.
Yeah, that's that's a pretty significant improvement with the E. R. T C advance in the factoring agreement.
And then you know I think it was nice to see that that's pretty unique.
As a result of that it looks like you're really only tapped the ATM to pretty minimal extent at the low share prices. So yeah that was also nice to see.
My question is you know.
I'm curious if you could talk more about how you see yourself like pulling these kind of using these different levers if you.
I expect to lean more on the factoring or ATM.
Or if you feel like you know between these things and the working capital reversal, you'll be in good standing there and maybe any.
It's around when you think you could get to like a cash flow positive situation.
Yes, we should have we already have US Yeah go ahead Jason.
Alright keely.
I was just going to note the impact of the changes in milestone payments just to put a number on that is significant and significant for all the Pcs.
Moving from with some lenders, 30% to 50% last year, receiving at at sort of the time of sale.
To moving that more towards construction and PTO that has that has resulted in a $5 million to $7 million depending on the volume in a given time is about 5% to $7 million. So it's a fairly significant impact for us.
This this E RTC benefit certainly washes that out I think as we said.
So we have a lot of tools I think at our disposal. We of course have the ATM, we don't want to continue to dilute our shareholders. It is but it is an option to us.
If necessary and we're also we also have other assets that are unencumbered across the company, including.
Mostly inventory, which is roughly $20 million at the end of the quarter. So we will be exploring other solutions that could help us raise additional liquidity and that could make us an even stronger financial position. So I think there is there is more that we're working through there.
So I'll hand, it over to Galen.
I was just going to say that the rest of the considerable residential backlog is something that could be very quickly converted into cash if the utility approval situation improves as it eventually ask.
So there's basically a large bag of money sitting just outside of our reach.
And it's it's close and the liquidity situation of the efforts that we've made over the last two months have all been around.
Supporting the business and giving us the opportunity to continue to execute to attain that.
And then what about getting to cash flow positive you know some kind of a horizon.
Sensor on that.
It's going to be so dependent on the utility approval timelines, we had forecasted at the much earlier than that and it will probably be based on those utility timelines haven't been so pushed out it's hard to it's hard to peg that I would say that wants to.
Once we understand where the tail of that that comes into place it would be a lot easier for us to estimate.
For the next two to three quarters cash flow positions.
Okay. Great. That's helpful. And then just my last question I know you guys brought in someone to focus on EV charging kind of in the commercial segment. Yeah. I think you were inter solar kind of talking about that.
Back in January or February whenever that was.
So I'm just curious has there been kind of any updates there because I think of you guys. As you know historically with public works and.
Commercial projects, a lot more sort of solar heavy solar focused.
I'm, putting a lot of panels up on roofs, and government buildings and things like that but have you has the easy business. The charging is a lot of that just adding EV chargers onto that are you doing some.
Dedicated public works sort of.
<unk> charging installations, we're just rolling out a bunch of Chargers.
Any kind of color or updates on how is that.
Initiative is guy.
Yeah, I'm very happy with that initiative, we have a bogey on that for several million dollars in sales this year.
And I think that we're going to get very close to that we are not only salaries.
You'd be Chargers as a upsell if you will with regards to our existing customer base, who ever worked we would usually bid, but we're also starting to sell solar I'm, sorry, EV charger only projects, allowing EV Chargers to lead the business conversation versus solar which is exciting for us I think that the EV.
Larger market.
<unk> is going to grow exponentially over the next several years and our goal is to be you know to be able to be a part of that growth that growth curve and so more to follow with regards to actual individual wins.
That our EV charger specific or EV charger led but they're in the pipeline and theres some that are close.
Okay Fantastic alright, well thanks, guys.
I'll take the rest of my questions offline.
Thank you Don.
There are no further questions at this time I would like to turn the floor back over to Gayla Morris for any closing comments.
Oh, sorry, I was on mute once again, thank you for joining our call should you have any questions. Please feel free to contact us at IR at Sun works USA and a member of our team will follow up with you. This concludes our call today you may now disconnect. Thank you.