Earnings Call Transcript - SPWR Q2 2025

Thurman Rodgers, CEO

Hi, this is T.J. Rodgers, CEO of SunPower, here to discuss our quarter. I'll start with the numbers. We recorded $67.5 million in revenue, which is less than we aimed for, and $2.4 million in operating profit, something we're proud of considering the revenue figure. We focused on rigorous cost-cutting to offset the decrease caused by the ITC. Our team is leaner now. We appointed a new CFO who has helped ensure our numbers are accurate. Last quarter, we achieved $82.7 million, our third consecutive quarter above $80 million, but this quarter's drop was mainly due to the ITC impacts and a last-minute issue that pushed $5 million out of the quarter. Despite a hit to profitability of $3.7 million, we found ways to target our most profitable segments, maintaining a strong gross margin. Our operational expenses saw a reduction of $4.5 million, which partially alleviated our losses. Our operating profit fell from $2.9 million last quarter to $2.4 million this quarter, both of which are good figures for our current size. I want to clarify the difference between our GAAP profit of $2.4 million and a $2.7 million loss in non-GAAP profit. This discrepancy mainly comes from stock compensation and intangible costs, which do not impact cash profit. We faced challenges related to ITC revenue, reminiscent of my hometown's harsh winter. In terms of profitability, we have reduced previous losses considerably. Our goal is to increase revenue moving forward, targeting around $70 million this quarter. In terms of organizational changes, we recently established a low-cost finance center in India to enhance efficiency, and I'm pleased to announce changes in our leadership. Dan Poley, our previous CFO, is leaving, and we've appointed Jeanne Nguyen as our interim CFO. We're also welcoming Nicolas Wenker as our Chief Legal Officer. I'm excited to introduce Dan McCranie, a Board member with significant experience, who will share his insights about the company moving forward.

John McCranie, Board Member

Thanks, T.J. Hello, everyone. First of all, T.J., I appreciate you using a 15-year-old picture. Let's get started with the slides. I've been in this role for almost three weeks, but I have been involved with SunPower for much longer. I joined the Board in December and spent about 20 hours a week attending major meetings from then until July. What I’ll share today is based on six months of observation, not just three weeks. I've come to really value the sales team. They are a diverse group including direct, virtual, dealer, and new home sales personnel. They are smart, focused, loyal to SunPower, and aggressive, which I admire. However, they are not managed tightly enough, and as a result, all that positive energy is not being fully utilized to increase bookings, which we need to boost revenue. It seems to me that the total available market for solar is virtually limitless for us. The challenge is to ensure this talented team works more effectively. Currently, the sales organization isn't held accountable for forecasting quarterly bookings, similar to issues I've observed at startup companies where sales teams were not fully engaged in the forecasting process. This can’t happen at a company of this size; we need sales input for true accountability. Additionally, sales management has been slow to respond to industry changes, which is especially detrimental in the rapidly evolving solar sector. Executive sales management must be agile in response to these shifts, and this has been lacking. Sales personnel do not have performance targets. It’s crucial to manage the entire sales funnel from lead generation to final installations. Without this comprehensive management, we risk underperformance in bookings, which was the case in Q2. Moreover, the sales executives do not effectively collaborate with other corporate departments. For instance, in forecasting and understanding changes like the recent ITC ruling, there has been little engagement with finance, HR, operations, or engineering. This lack of collaboration has led to ineffective sales strategies. Another concern is the high selling costs. In my previous experience in semiconductors, selling costs were typically low single digits as a percentage of revenue. Here, we face double-digit costs, but this also presents opportunities. Our lead generation costs are disproportionately high, and management costs may be double the industry standard. Slow funnel velocity means we lose orders we’ve worked hard to secure, and our funnel yield is not at industry standards—the performance here compares poorly to best-in-class companies in the solar industry. Now, here’s what we’re doing to address these issues. In the past three weeks, we’ve reorganized SunPower into a functional structure. This changes the dynamics so that the VP of Sales is on equal footing with top people in finance, operations, and legal, allowing for better strategic collaboration. All sales teams now report directly to the CEO, fostering cross-collaboration across all sales channels. We're in the process of recruiting a sales executive to lead the organization but, in the meantime, I'm acting in that capacity to effect necessary changes at a senior executive level to boost team performance. We’re also implementing a more detailed forecasting process. The sales team was previously uninvolved in forecasting, but now we have weekly forecasts that are monitored daily for critical parameters linked to strong bookings—leads, appointments, pitches, bookings, final designs, and installations. Sales reps will receive both weekly bonuses and forecasts, in addition to quarterly ones. We have been focusing on this for about four weeks and I’m encouraged by the early results. The final designs submitted to the factory are up nearly 30% compared to last quarter, which is a strong indication of progress. We need to establish global cost, funnel yield, and funnel velocity goals for sales, and while I don’t have all that defined fully yet, we have begun monitoring basic yield issues. Throughout the quarter, we’ll address all remaining funnel issues and drive costs down. We believe we are currently spending nearly double the effective cost per watt compared to industry standards. That’s all for now, T.J.

Thurman Rodgers, CEO

We're pleased with what we've shared so far, but the key question remains: why isn't the stock price higher if everything is going well? I want to address that now and explain what we're doing to improve the situation. There are multiple areas where we can see improvement. For instance, when I mention the price-to-sales ratio, it was at $1.81, with a revenue run rate of $270 million, down from $300 million, resulting in a ratio of 0.54x. In comparison, small tech companies are maintaining a stable price-to-sales ratio of around 2.5x going into 2024. At Cypress, which I led for 34 years, our average over that period was 2.4x. Enphase, a company I admire and serve on the board of, has seen its ratio drop but remains at 5x. The solar industry has faced challenges, with Sunrun, a leader in the sector, experiencing a decline but starting to recover, currently at 1x. Our low share price is indeed a concern, but it also presents an opportunity for growth and potential price increases. Historically, our stock price peaked over $2 when we reported our first profitable quarter, and I believed we had moved past significant risks. However, shortly after our risk factors were published, we faced issues that affected our stock. I appreciate the feedback from shareholders, highlighting that our risk factors were overly conservative. For example, one noted that we might not achieve profitability, which contrasts sharply with other industry successes. While we certainly have vulnerabilities and risk factors related to profitability and cash flow, they seem exaggerated. Moving forward, T.J. will ensure that these risk factors are presented accurately. Additionally, the House ITC bill announcement negatively impacted our stock price, dropping it to just over $1.25. Despite this, we aim to achieve our third consecutive quarter of profitability by Q3 '25, which we believe could be our most profitable quarter yet. We're actively pursuing growth through acquisitions, having engaged in negotiations with three different companies in the past four months. While we haven't secured any deals to date, I am confident we will make this happen, and when we do, I will return to ask for funding and share the details. Lastly, I've raised concerns about how stock services report our company. For instance, a popular financial news site has been recycling outdated negative headlines about SunPower, which misleads potential investors. I've previously addressed this issue, and I hope they will improve their coverage because it affects investor interest. We're not on the brink of bankruptcy; we are striving to grow and improve. Thank you, and I'll now take your questions.

Operator, Operator

Thank you, T.J. Our first question today comes from Derek Soderberg from Cantor Fitzgerald.

Derek Soderberg, Analyst

So T.J., on your call recently, you were talking about the ITC being eliminated. You sort of spoke to the fact that the industry has been bloated with cheap capital, sort of propped up mismanaged companies. For the past 2 quarters here, you've already proven that you can achieve positive operating income despite some of these challenges. And while you guys are generating income, your peers are going bankrupt, some of them. How can SunPower benefit from surviving this cycle? And when might we see some of that organic growth coming from, in a sense, a less crowded industry?

Thurman Rodgers, CEO

Okay. Consider my pitch. Last quarter, we earned $2.5 million. This quarter, we expect to make $3 million, and we're a public company. You’re private, with little to no cash flow, and lack the liquidity that comes with being public. What if we collaborated? We have a solid organizational structure, allowing you to join and run your own division, while adhering to our accounting standards. You'll receive support from our capable legal team, and our accounting operations in India can help you save costs. Let’s work together. By the way, I’m 77 years old. Although I’m fully engaged and enjoying my work, I won’t be here a year from now, and you could potentially take my place. What are your thoughts? This is a compelling offer, especially as the economy becomes tougher. This is why I referenced the famous Martin Luther King quote about freedom. When we engaged with the government, I prioritized solar, enabling us to compete in the free market. This is currently true for part of the market, but not for all. My main concern is the safe harbor provision. If you incentivize poor practices by allowing companies to purchase equipment for the upcoming year and store it, it’s comparable to buying a year's worth of lettuce which won't be fresh when needed. We're not out of the woods yet, but I believe the solar industry will improve. We consistently receive support from the government, yet it costs $3 to $2.75 per watt to install solar on a home here. In Australia, it’s $1 per watt, and in Europe, $1.5. If we claim to have a free market as Americans, why are consumers being charged so much? The issue lies in the uncertainty around tariffs and other regulations. This friction in the economy needs to be resolved, prioritizing it over individual profit and loss statements. Focus on maintaining a favorable P&L even if it’s temporary, and you will succeed.

John McCranie, Board Member

Can I add, Derek, a couple of things on the SunPower sales organization. As large as it is and as much as it's been around and punching, there are certain areas where it is below critical mass. And those areas happen to be the biggest positive potential future growth even with the ITC ruling. As an example, the states of California, Texas, and Florida are going to continue to be robust even during this ITC operation. SunPower does not have a very large direct presence in Florida, and it has a very poor presence in California and in Texas. My point is that we can take some of our energy and some of our personnel currently at SunPower, redirect them into those critical states and have an opportunity to attack areas with a large total available market for which we are currently doing very poor. So I think one of the ways we can pop up revenue is, if you will, reallocation of our precious sales resources into areas that have a high TAM even in this ITC environment.

Derek Soderberg, Analyst

Got it. Super helpful. I do want to touch on the business here. I think there was a mention on the call here about the backlog, up 30% from last quarter. I was wondering if that's the case. And if so, what's sort of driving backlog today, which area of the business? Can you just talk a little bit more about that backlog growth?

Thurman Rodgers, CEO

Go ahead.

John McCranie, Board Member

Yes. We now have three key divisions within SunPower: the direct business, New Homes, and the virtual business. Last quarter, the direct business significantly boosted our performance. In fact, our book-to-bill ratio in Q1 2025 was 0.8, mainly due to a 9-week delay between booking and shipping. This lag clarified our revenue outlook, explaining the disappointing revenue in Q2. However, we improved to a book-to-bill of 1.2 in Q2, showing substantial growth. This success is a result of the dedication and proactive approach of our sales team, which has seen a resurgence in the direct business, selling directly to homeowners. We also noted some recovery in New Homes, which bounced back from Q4 2024 with strong bookings. Based on the first three weeks of this month, we are maintaining a robust booking trend in both New Homes and direct sales.

Thurman Rodgers, CEO

When I'm evaluating companies, I'm focused on New Homes companies, as this is our most profitable division, generating approximately $600,000 in revenue per employee. This is the specific type of acquisition I'm interested in. Additionally, I need to address the topic of batteries. In Europe, particularly in the Netherlands, as well as in California, we have the net electricity metering system. Initially, solar power was set up so that if you imported electricity into your home, you would pay for it based on daytime tariffs. If you produced excess power, your meter would essentially run backwards, allowing you to be compensated at the market rate. However, the net electricity metering reduced this rate to $0.05, making it less profitable to export power during the day. In the Netherlands, the midday export rate is even negative, meaning they charge you for disposing of unused power. This is particularly relevant during noon when we generate excess power. Our solar capacity has now reached 4 terawatts, and it is poised to become the largest power source globally in the coming years. Therefore, storage is essential. If you're looking to sell solar, you can offer a battery solution. Customers can charge their batteries during the day when power is abundant, and then use that stored energy in the afternoon when rates spike to $0.50 per kilowatt hour. This type of setup is known as a grid-type battery, which is both cost-effective and compact—suitable enough to supply power for a single household from 4 PM to midnight. Even a 5-kilowatt hour battery is adequate for this purpose, and the savings quickly accumulate. Consequently, batteries are gaining importance, allowing us to store energy during the day for use at night. Notably, the growth of the battery market is outpacing that of the solar market, and we are making strides in this area. However, as Dan pointed out, our sales force has been slow to adapt. I previously spoke to our sales team in Scottsdale, Arizona, discussing the benefits of batteries, yet we are not achieving sufficient sales in this segment. Additionally, our deployments have primarily focused on the Midwest, relying on loan financing and lacking battery integration. We need to improve this aspect, particularly by establishing a stronger presence in California, as SunPower has historically not performed well in this region. This makes it essential for me to identify a company with a solid standing in California, which is at the top of my list for potential acquisitions. I'm staying in close contact with industry leaders, and I am eager to discuss the next steps.

John McCranie, Board Member

1050.

Thurman Rodgers, CEO

So 1 hour and 10 minutes. So eventually, I'll score because my arguments are becoming more compelling, and I'll ask you for some money to make us big.

Derek Soderberg, Analyst

No, that's helpful, T.J. And you brought up batteries. I'm curious how much that changes if you have batteries in the platform and the offering, how much does that change the economics of your average agreement? Is it 20% higher in terms of revenue potential? Any change in gross margin? Having batteries, how does that change the economics for you guys?

Thurman Rodgers, CEO

The first order will maintain the same gross margin. The key factor here is the attach rate, which currently stands at 95% in California due to the time-shifting argument I mentioned earlier. For the United States, it's nearing 50%, and we are currently at 14%. While some may view this as poor performance, there’s significant potential for improvement. It's important to note that we don’t need to expand to more sites; instead, we can effectively sell a battery alongside a solar system. Presently, we have a 1.14 multiplier on solar systems, but our goal is to quadruple that. To achieve this, I brought in the Head of the Battery division from Enphase, one of the top two battery manufacturers in the U.S., alongside Tesla. He previously managed a 300-person division focused on batteries and has strong business acumen. His name is Mehran Sedigh, and I believe batteries will significantly impact our operations. To answer your question, we aim for a multiplier of 1.3x, working towards 1.6x over time.

Derek Soderberg, Analyst

Wow, that's pretty meaningful for you guys. And then just a quick one on gross margin here. I think in the press release, you noted the company is focusing on high-margin business. And T.J., you mentioned New Homes as one of the most profitable parts of the business. I was curious if that was the case, the reason for the higher gross margins? And then just, again, wondering how sustainable gross margins are here. Can you talk about that a bit?

Thurman Rodgers, CEO

I come from the chip industry, and I constantly monitor our gross margin to determine our daily viability. I am quite focused on gross margins as a fundamental aspect of our business. Fortunately, we currently enjoy high gross margins. How do we achieve that? Well, our size allows us to purchase equipment at lower costs, and we expect to improve further. As we grow beyond $300 million, we will distribute our overhead more effectively. Additionally, having fewer employees in the arc helps enhance our gross margins, as many people traditionally impact them. This outcome is a result of our management strategies, which have proven effective, and we intend to improve further. We will be a formidable competitor in the market with our gross margin. However, I want to be clear that many of the SunPower contracts we inherited were delayed due to their bankruptcy, which provided us with some advantageous contracts. If those were renegotiated, the terms might not be as favorable. Thus, part of our focus on better gross margins was to fulfill outstanding SunPower orders, which contributed several percentage points to our gross margin. Ultimately, by 2026, we anticipate returning to what we consider 'normal gross margins,' which for me is 36%.

Operator, Operator

Thank you, Derek. We have a few coming in from the web. First one follows on to some of what you were saying. Based on comments regarding New Homes, are you able to quantify how much AR revenue you're seeking to collect that has been pushed into 3Q and the second half of the year? Or are you able to provide any amount of guidance on that impact?

Thurman Rodgers, CEO

Well, yes, I'm able to provide guidance given that I got a daily report, and I read my morning report this morning. And the answer is they got $16 million that either we're going to collect in Q3 or there are going to be some people in trouble. That's simple, and then there's more for Q4.

Operator, Operator

Thank you. The other one we have here is, can you please provide an update on the impact of the ITC macro environment on SunPower's business? And is it too soon to really know what a rational base run rate for the revenue would look like?

Thurman Rodgers, CEO

Well, I picked the frozen eyebrow picture to tell you the effect on the business right now. If you want one digital, remember that. It is cold enough, your eyes really can't freeze shut. Going forward, we have been an $80 million company. We're going to bounce back to that number. Okay. That means I got to get $13 million to get back status quo. I was planning on getting $13 million to go from $80 million to $93 million. So now starting back at $80 million again, which, by the way, will be really profitable. And when we get back there, we're going to acquire. That's what we got to do, and I went through my pitch.

Operator, Operator

Thank you. The other 2 questions appear to be redundant things you've already addressed. So that looks like that's all we have in the queue today.

Thurman Rodgers, CEO

Thank you for watching our presentation today. We appreciate your support, and we appreciate your investment.