SunPower Inc. (SPWR) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the SunPower Corporation's Second Quarter 2012 Results Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. I'd now like to turn the call over to your host, Mr. Bob Okunski, Senior Director of Investor Relations at SunPower Corporation. Sir, you may begin.

Thanks, Ed. I'd like to welcome everyone to our second quarter 2012 earnings conference call. On the call today, we will start off with an operating view by Tom Werner, our CEO, followed by Chuck Boynton, our CFO, who will review our second quarter 2012 financial results. Tom will then discuss our guidance for the year before opening up the call for questions. As a reminder, a replay of this call will be available later today on the Investor Relations page of our website. During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in our 2011 10-K, quarterly reports on Form 10-Q, as well as on today's press release. Please see those documents for additional information regarding those factors that may impact these forward-looking statements. To enhance this call, we have also posted a set of PowerPoint slides, which we will reference during this call on the Events and Presentations page of our investor relations website. In the same location, we have posted a supplemental data sheet detailing some of our historical metrics. On Slide 2 of our PowerPoint presentation, you will find our Safe Harbor statement. Our prepared remarks will run approximately 25 minutes and then we will take questions. With that, I'd like to turn the call over to Tom Werner, CEO of SunPower, who will begin on Slide 3. Tom?

Thanks, Bob, and thank you for joining us today. On today's call, we will update you on our Q2 operational highlights and strategic position, review our second quarter financials and provide our outlook for the balance of the year. I'll start by commenting on the current PV industry context and why we believe that our strategy will allow SunPower to be a long-term winner. We focus on 4 key strategies. Please turn to Slide 4. First, a unique, differentiated global go-to-market strategy. SunPower has strong downstream channels in both the rooftop and power plant segments in key global markets. This allows us to capture downstream value during the current period of abundant upstream product supply. Second, technology leadership in both panels and systems. SunPower has consistently demonstrated that our product differentiation around superior performance and reliability allows us to earn a meaningful price premium, while offering a compelling levelized cost of energy. Third, an innovation-driven, cost-reduction roadmap. By reducing the complexity of our high-efficiency panel manufacturing process, we can combine unique process cost reduction with broader industry supply chain advantage, such as lower wafer prices. We are also driving similar efforts on balance of system costs. Finally, maintaining a strong balance sheet and adequate liquidity. Access to capital has become a clear strategic factor, both for large power plant projects and residential leasing programs. Increasingly, lenders and customers want to ensure that they are dealing with a financially stable counterparty. Our strategy is well suited to the current industry environment, and we believe that the benefits of these strategy will become more evident as PV industry consolidation proceeds. Now let me provide some specific Q2 operational highlights. Please turn to Slide 5. Q2 was a solid quarter. We reported gross margin and bottom line performance above our forecast and successfully…

Thank you, Tom. Good afternoon and please turn to Slide 10. Today, I will discuss a few key themes. First, I will talk about our operational performance for the quarter and then provide additional detail surrounding the structure of our residential leasing program. As Tom mentioned, our financial operating performance in the quarter was better than our plan, as we benefited from our diversified downstream strategy and execution on our accelerated cost-reduction roadmap. Our non-GAAP revenue for Q2 is $651 million compared to $592 million in Q2 '11, an increase of 10%. We benefited from the strength in North America and Japan, but this was partially offset by a highly competitive European market, more specifically, weakness from Germany. Non-GAAP revenue in the second quarter includes approximately $178 million from a continued construction of CVSR and $110 million from our 25-megawatt McHenry solar farm for the Modesto Irrigation District. The difference between GAAP and non-GAAP revenue is a GAAP-based real estate accounting requirements, whereas non-GAAP revenue follows the IFRS convention for multiple-element arrangements. The difference between GAAP and non-GAAP in Q2 was $55 million. And for the full year, we are projecting a difference of approximately $80 million. This will reverse in 2013, when we finish the project, and approximately $110 million more in revenue would be recognized in our GAAP results. Global ASPs for the quarter were in line with our forecast, and we maintain our meaningful pricing premium. Cell production in Q2 was 257 megawatts compared to 205 megawatts in Q2 '11. For the quarter, we recognized 232 megawatts in revenue, up 22% from 190 megawatts in the comparable period last year and up 18% from Q1. Our lower-than-planned megawatt recognition in Q2 was primarily the result of weak European demand outside of Italy. Q2 fab utilization was greater…

Thanks, Chuck. I would now like to turn to our guidance for the second half of 2012. For Q3 2012, we expect to recognize approximately 225 to 275 megawatts in revenue and see non-GAAP Q3 revenues in the range of $550 million and $625 million, which will include revenue from our CVSR project and our residential lease program. Non-GAAP gross margin is projected to be in the range of 10% to 12%. Non-GAAP loss per share is projected to be a negative $0.20 to a negative $0.05. We expect the GAAP loss per share of negative $0.25 to a negative $0.10. Capital expenditures in the third quarter is expected to be in the range of $25 million to $30 million. For the fiscal year 2012, we expect non-GAAP total revenue of $2.6 billion to $2.8 billion. Volume recognized to be in the range of 900 to 1050 megawatts and capital expenditures of $115 million to $125 million. We remain committed to achieving breakeven or better non-GAAP profitability in the year end, unrestricted cash balance of more than $300 million, while investing in cost reduction initiatives. In summary, 2012 continues to be a challenging year for the industry. We will continue to benefit from a long-term strategy focused on technology superiority, demonstrated downstream value add, solid balance sheet management and continued support from Total. We'll now open the call to questions. In addition to Chuck, we also have Howard Wenger, our Regions President, ;and Bob Okunski, our Senior Director of Investor Relations. First question, please.

Our first question comes from Satya Kumar. Satya Kumar - Crédit Suisse AG, Research Division: Actually, the details on the leasing market, can you talk a little bit about pricing trend and [indiscernible] dynamic in the markes. Are the PPA rates [indiscernible] holding steady, rising or declining, are you winning share because of prices or brand or other factors?

Satya, you were cutting in and out, for me. I could try to paraphrase your question as best I can and I'll pause and you can let me know if I got it. You appreciated the detail on leasing. Your question was, are we winning share because of how are we winning share in the difficult environment that we're facing? Is that roughly the question, Satya? Satya Kumar - Crédit Suisse AG, Research Division: Yes. Also to Tom, I wanted to see if you have any comments on how lease PPA rate has escalate or holding up. Have you seen more demand? Is there pressure on pricing? Or pricing firming? Any color on that will also be useful.

Okay. Well, first, let me comment on lease. An as we said a little bit last quarter that lease -- residential lease is sort of the perfect way for SunPower to bring its product to market because we have a high-efficiency product. And again, in residential, you typically have a small roof space. So the value of efficiency is embedded in the lease economics. And for our dealers, it's a pretty straightforward sale. You get the world's best product at cash-flow positive from month 1. Now in terms of PPAs and the structure of both lease and PPAs, I'll let Chuck comment on that.

Satya, the -- in our lease program, we do have options of building an escalator and then it could be 0 or upwards of 5% and that's typically the homeowner's petition on how they would prefer to have the pricing structured.

Satya, unfortunately you're cutting in and out, so maybe you could get another line, and we'll take the next question. We can come back to you.

Next question comes from Jesse Pichel. Jesse Pichel - Jefferies & Company, Inc., Research Division: From Jefferies. I've heard that you've taken a price increase to some of your VARs in Q3. Can you confirm if that's true and how might that impact your business? And secondly, what kind of tax equity do you have on the future of solar leasing?

Yes. Jesse, this is Tom. I'll say a few things, and Howard, you can add on if you'd like. So first, in terms of pricing and price increase, we adjust prices on lease quarterly. So we've had -- this is -- we'll be entering our fourth quarter. And so we will have quarters where we adjust price. And I'm not going to pre-announce pricing for the next quarter. But what I would tell you, because of [indiscernible] from our dealers to get pricing first. But what I would tell you is with any pricing moves we make are within the narrow range, and I'm not changing the value proposition to the homeowner. And that is they can be cash-flow positive on month 1. But to be fair, each quarter you could ask the question, and there will be some price movement. In terms of tax equity capacity, all the capacity we're using now is tax-grant capacity. And we -- Chuck's team is working with a number of tax equity partners, and that's going really well. And we expect to have tax equity capacity coming online as well. So we look for more on the tax equity front in the next few months or perhaps the next quarter or 2. If that comes to fruition. So that's -- Jesse, hopefully, that answers your question. Jesse Pichel - Jefferies & Company, Inc., Research Division: Maybe one follow-up, and then I'll go into the queue, is what type of non-GAAP revenue impact do you think leasing will have on your business? And specifically, I assume most of your business will be operating leases.

Yes. So we intend to have non-GAAP and GAAP, virtually the same for our leasing program. So we outlined the types of leases that would be operating versus capital leases. Historically, the majority of the operating leases and we expect it to long-term to be 50/50. Jesse Pichel - Jefferies & Company, Inc., Research Division: And the impact of that to the overall income statement.

So yes -- so the impact would be 1/2 of those leases would be deferred and recognized over a 20-year period. And we -- it's good news/bad news. The good news is we'll have better visibility in the residential program, but there's a little bit of a revenue deferral. But that -- we view that as, in the long term, very favorable.

Next question will come from Vishal Shah.

Deutsche Bank. Tom, I wanted to just understand your shipment exposure to some of the emerging markets, particularly markets like Japan. Can you talk about what kind of momentum you're seeing in some of these new markets? And how should we think about the pricing environment in some of these new markets?

So you've mentioned Japan, specifically, so I'll talk about that briefly. And again, Howard, feel free to add on. The Japan market is growing quite rapidly. And of course, it's attracting a lot of competition. We fortunately had created partnership with Toshiba several years ago. And so we've had a couple of years of volume shipments together, and it's a deepening partnership. And so we have a great channel to market in Japan. It's going very effectively, and it's crossing 10% of our business. I believe it was just short of 10% of our business. So it's getting to be a meaningful part of our business in the future. It is -- I think it's going to continue to be strong for quite some time, particularly for SunPower, because our product works great in space-constrained markets. And of course, Japan is a space-constrained market. As we work to other parts of the world, our near-term, new-emerging markets have been South Africa, Israel and India, all of which have been ground-mount markets. And it would be fair to say that because I believe all 2 of those 3 are sharp-shooting in the tender environment. The pricing is following what we see in North America is very aggressive pricing. The key, Vishal, I think, is we look in emerging markets is how you market that don't exist today gets opened by virtue of the economics. And solar getting so compelling that it just makes economic sense for the country to go solar, more than structure of those markets. So actually, you could guess it. I'll say Saudi Arabia is one of those countries. I'd say the Middle East, in general. And I'd say pockets of opportunity in South America and Africa, because there's electricity consumers who would be way better off economically, if they switch to solar. And I think over the next year or 18 months, we're going to be in a great position to start announcing those, and those should have more favorable pricing, because they're more difficult-to-access markets.

Next question will come from Kelly Dougherty.

Maybe just a follow-up on that one. I know you're not giving guidance further out, but can you help us think about how you expect the megawatt mix to look like from a geographic perspective? Obviously, Europe declining. What happens with the U.S. and Asia Pacific in that case?

Let me say just a few seconds, and I'll turn it to Howard. Broadly speaking, we're doing great in America across all segments. And Japan is increasing rather dramatically for us. So you're right to point out those 2 regions. Italy also, and we think Italy has long-term sustainable economics. I think it makes sense. So broadly speaking, think of those as sort of the core, and then we need to add some emerging markets. Howard, maybe you could point to some specifics.

Sure. So just to build on what Tom said, you can think of roughly 60% of our activity is in those core markets that Tom mentioned, Italy, Japan, Korea, the U.S. and a lot of that in California and then 40% in stable, mature markets and growth markets. The emerging growth markets, not a lot of volume right now, but stable and mature markets, Germany, we're still an active player there. France, the U.K., Belgium and then in Spain and then the emerging markets, we're talking about Africa, the Middle East, India, Australia, which is growing quite rapidly. So that gives you a sense of where things are today, and we'll be shifting more megawatts in the emerging-growth area. One comment I want to make is in the core area, those areas are growing. So Italy, the U.S., Japan, those are growing markets and we have substantial share in those markets. So as those markets grow overall, our shipments will be growing as we retain growth share.

And Kelly, I would say broadly that, in a couple of years, I -- we don't know precisely. Of course, the -- 1/4 of our revenue will be the emerging markets. And what we'll be calling emerging for us would be Australia, parts of Africa and South America.

Great, that's helpful. Because, I mean, obviously the margin differential is pretty wide regionally. So can you maybe give us any kind of color on where you think the margins can go in the particular regions? Just trying to get a sense of maybe overall blended, if you have a target for the relatively near term and then a little bit longer out?

Sure. Our business is going to run in the 10 to 20, so 15, plus or minus, range for the next 2 to 6 quarters, with the goal of management team, the plan of the management team to drive to 15 plus. That requires us to improve Europe. And actually, if we improve Europe, then our average will be 15 plus. As we enter new markets, our job is to make this new markets fit the way we go-to-market or conversely, we fit that new market development. And what you see is where SunPower product works best, that being on sunlight and space-constrained and interestingly, on the other extreme ground-mount, where you're not space constrained, particularly where we can use our C7 products. Those markets are where we can deliver value proposition that allows us to command a 15% to 20% margin. And that's why I purposefully referenced the areas I did, because they fit that profile, Australia, Africa and obviously, including Middle East and South America.

One more quick one for me. Maybe Chuck, can you give us a sense as you move further ahead with the projects, how much working capital is required? So I don't know if there's a metric as a percent of sales or a cost per watt, anything that we can think of for working capital needs?

It's different for every product. CVSR is not very capital intensive. But I will use, as rule of thumb, on average, $100 million as a run rate of working capital for project development activities.

Kelly, was your question target development or lease?

Just in general, the working capital that we should assume. Obviously, I think it's going to have to expand as you began to do more and more projects. Is that fair to think of it that way?

Yes. I think project -- large-scale projects and lease being capital consumptive in all the other business is either not or minimally so. And Chuck can answer the question on projects, and lease, maybe you want just to comment briefly.

Sure. Lease today is probably about $50 million. And that will change as the program accelerates and we bring in new financing partners.

So capital consumptive on the front end on lease, as we grow the lease program by itself.

Next question will come from Sanjay Shrestha.

Lazard Capital Markets. Great, just 2 questions here. One is on the leasing rate, could you share with us some of your [indiscernible]? How large usually -- how large you think the program could become? And then how should we think about potential returns either from a lender perspective or from SunPower [indiscernible]?

Okay. Unfortunately, Sanjay, that line is not that hot. The first question was how large can lease become. Why don't we answer that? And then we'll ask you to just repeat the second piece of it. Howard, can you comment on the growth of lease and what you think the prospects are?

Sure. It's growing incredibly fast. We went from 0 4, 5 quarters ago when we initiated it. We signed over 10,000 leases to date. So if you multiply that by 5 or 6 kilowatts per lease, that gives you a sense for how fast we've grown it. We're at a rate of about 1.5 megawatts to 2 megawatts per week. So that's a substantial part of our business, and we think we're just beginning to expand this program. So it's easy for us to see in 1 year or 2 of becoming 20%, 25% of our total business.

Got it. The second question was actually on the returns which potentially one could own. But actually, If you could share any comments on what are some of the potential returns either the lender is earning on these leases or what would SunPower expect to earn [indiscernible] has now deployed its own capital and operating leases.

I think the question was what the investment returns on the project and they would be...

Correct, correct. That's right.

Yes. Say an average 10% after-tax return.

Next question comes from Ben Kallo. Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division: Robert Baird. My first question is on the C7. How do you view your capacity on the sell side as you look at deploying more C7? I know we're in early days here. And my second question is, as it relates to guidance, the stepdown, can you give us some puts and takes for Q3 in having the loss there? It looks like for it to get to the full year positive EPS, we have to have a pretty big step-up in Q4.

So first on C7. So we make a cell that is a cut out of our main production cell. In other words, it relates to cutout of existing production cell. And then it's made into a receiver, that is built into the C7 form. So when we think of capacity on C7 cell, we really think of receiver capacity. The cell itself comes off of our main production line. And as we mentioned in my comments, today, we have 1 gigawatt -- over 1 gigawatt of cell capacity. And if we put a portion of that capacity in a C7, we have over 4 gigawatts of capacity with our existing fabs. So receiver capacity for C7 would be somewhere between 50 and 100 megawatts next year, with our ability in relatively short time to increase that capacity rather dramatically. And so highly relevant question because the pipeline is building rather robustly for C7, and it tends to be very large projects. So if some of those projects turn to bookings, we'll need to ramp rather quickly. And the good news is it's an inherently rampable technology. In terms of puts and takes on Q3, the primary thing is timing the projects. There is a little bit of European, what I would call, a little more conservative forecasting of Europe. But the primary driver is timing of large-scale projects and large-scale in this context would be multi-megawatt or above. And we had several of those projects that we moved from Q3 to Q4. And when you move those from Q3 to Q4, all the income moves with it. And then you have a back-end loaded or a Q4-loaded quarter. The key, of course, for us will be the closure of these projects. And certainly, when we do our next earnings call, we'll talk in specifics about which they are -- there's less than half a dozen of those. You can imagine the company is intently focused on getting those done. And we also have a lot of experience getting projects done like that in the fourth quarter.

Next question comes from James Medvedeff.

Let's see, some of these have been answered, but I'm wondering just a follow-up on that last one, the projects that are going to move from Q3 to Q4, these are projects that you had planned to book and have not actually closed, is that what I understand?

It's a mix of projects that are complete in financing, and when they get financed, then we take the revenue recognition. And in just a couple of cases, it is completing the actual booking itself, which would be the final stages of negotiation on PPA.

Okay. Oh also, these our utility-scale, multimegawatt utility, but they're not commercial, correct?

No, the majority of these are commercial projects.

Commercial projects, okay. The other question that I have is, could you just -- we haven't had an update on capacity in some time. Could you -- and you kind of hinted at what's there in Fab 2 and -- could you just let us know maybe what the line speed is at those 16 lines and what the progress is on Fab 3?

So when you think about the -- on our data sheet, we do provide our fab-ramp capacity. Then you'll note we highlighted our fab utilization for Q2 is over 90%. Total capacity at the fab level is 1.2 gigawatts. And that is gross before AUO's share. And so that -- it would be total fab capacity and output this year. We guided megawatt revenue of 900 to 1.05 gigawatts.

So then the plan, if you're going to grow, then you have to grow capacity. And what's the plan there and what might CapEx look like for the next 2 or 3 years while you do that?

Well, that's where, as Tom mentioned, the advantage of C7 and the lift that we get for C7. So we feel that we can meet our revenue plan for the next few years -- next couple of years with our current Fab 3.

Right. And let me just add onto that. If C7 will give us more capacity, we are now seeing significant opportunities in yield and overall use of our equipment, where we are doing some de-bottlenecking. And we're going to release a significant amount of capacity in '13 and '14. And our current plan is to build the next fab capacity in the first half of '14. So we've taken a lot of the CapEx out of next year, and that CapEx we do have is to de-bottleneck and the cost reduced in our existing fabs. And the previous question about C7, to put the receiver capacity in for C7.

Next question comes from Chris. And that one comes from Chris Blansett. Christopher Blansett - JP Morgan Chase & Co, Research Division: JPMorgan. Guys, I just wanted to ask about the competitive nature of this new leasing market you've entered into versus maybe the traditional rooftop market. Any difference -- is there a competitive element there? Or is this opened up so many new types of potential customers that it's really not a pricing environment yet?

So I'll say a few words first. The great thing about lease is, aside from that it fits our product well, is that it opens to market to a broader customer base. And so it's "taking" solar more and more mainstream. There is some pricing competition on lease. And interestingly, I think the competition tends to be more -- less on pricing but more on performance, more on -- in SunPower's case, of course, we can say that we are a one-stop shopping. We make the module. We guarantee the quality. We service it. We make the monitoring. So everything comes from us and so if there's any issue, one place to get it fixed. And customers really tend to say, "I want to know more about energy output," when they're thinking about the lease. And those 2 things tend to favor us. I think we'd leave it at that. Christopher Blansett - JP Morgan Chase & Co, Research Division: Yes. Just a quick follow-on, Tom, as related to your participation in the Japanese market. You're really the only U.S. company that has a good position. And I guess, how does your competitive situation compare in Japan, where you may be completing against more Japanese companies than maybe in the U.S., where it's a more diverse set of competitors?

Yes, I think it will be fair to say for a number of reasons, which you're directly on target. I think as well the Japanese market is more space-constrained and also has a greater near-term need for new sources of energy. For those 3 reasons, the department, while compared to America, is less aggressive. That's not to say that it's not competitive. It is very competitive but less so than other parts of the world today.

Our next question comes from Tim Radcliff.

I'm from Morgan Stanley. Can you please provide some color on bankability of the new C7 product? Have you seen interest among the financial institutions to finance those -- the first round of those projects?

Yes. I think that's would show important about the announcement of the new order -- the 6-megawatt order that as we build more C7, then we can send independent engineers to work on existing installed projects, and it makes it inherently bankable. It is an environment, where bringing new solar technology to market is extremely difficult because the consumer can say, "I just want a risk-free product that's been built over and over." And as we add scale to our C7 installed base, we eliminate that concern. So you're right to ask about bankability. And let me just say, the 6-megawatt order does not have a -- it is a financed project.

Yes. I would just add, this is Howard, that our vertical integration puts us in a great position to design a C7 from a clean sheet of paper and the overarching design principle was bankability. And what I mean by that is, so every element that Tom mentioned, we use our production solar cell in the C7. So there's nothing new about the solar cell technology. We use our conventional production cell technology. The receiver is made with conventional module-manufacturing approach that we have today in the company. So it's nothing new about making the receiver. The tracking approach we have -- we're the leader worldwide in tracking systems. And so we evolve our tracking systems to accommodate C7, again, from a bankability perspective. So that was a overriding and overarching principle, and we're getting really positive feedback. Tom mentioned a lot of large opportunities our pipeline that -- interest from financiers and investors, so we feel very good about our progress.

Great, and then one quick follow-up, if I may. Can you quickly mention the pricing premium or margins that you're receiving on the -- on those first C7 projects?

Let me repeat it to make sure we got it. Premium for C7 in the first order?

That's right, and margin, if you can provide that...

Yes. I'll give you some color, let me put it that way. On the premium, there is not a premium. We're competitive in C7 right out of the box. And as we scale, we think we can become 20% more cost effective. In terms of margin on the first order, we'll certainly be in line with the company. It's our plan. And depending on pricing, of course, it [indiscernible] fulfilled. We should see the ability to have favorable margins compared to the current company average, as we scale that product. So it's an incredibly important part of the company by virtue of the competitiveness of it, how it capitalizes on our core cell technology and how efficient it is in terms of use of capital. So we appreciate the various questions on C7. And I think I'm -- yes, thank you. And I thank you all very much for call -- dialing in to the call. We look forward to our call next quarter. And thank you.

At this time, that will conclude today's conference. You may disconnect. Thank you for attendance