SunPower Inc. (SPWR) Q4 2012 Earnings Report, Transcript and Summary

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

Thank you, Lisa. I would like to welcome everyone to our fourth quarter 2012 earnings conference call. On the call today, we will start off with an operating review from Tom Werner, our CEO; followed by Chuck Boynton, our CFO who will review our fourth quarter 2012 financial results. Tom will then discuss our guidance for the first quarter and provide some color on our outlook for 2013 before opening up the call to questions. As a reminder, a replay of this call will be available later today on the Investor 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, our quarterly reports on Form 10-Q, as well as 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 have a brief question-and-answer session. 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 Q4 operational highlights and strategic position, review our fourth quarter financials and provide our outlook for the balance of the year. Please turn to Slide 4. Overall, we delivered solid financial performance in Q4, despite challenging industry conditions. Our North American power plant businesses continue to be a key source of strength, contributing significant revenue and impressive margins. The highlight of the quarter was the sale of our AVSP projects to MidAmerican. The 250-megawatt CVSR project for NRG remains on track, and we expect to complete this project on schedule by the end of this year. To date, we have installed more than 185 megawatts at this site. We also executed a PPA with PG&E for the 100-megawatt Henrietta Solar Project in California. With our 100-megawatt Quinto project due to be completed in 2014 and Henrietta scheduled for 2016, we have further extended our revenue and margin visibility. In the North American Residential market, we once again saw strong demand for our leasing products. Q4 lease demand outstripped our financing capacity for the year as we fully consumed our cash grant lease program months ahead of our plan. We subsequently accelerated our efforts for securing lease financing and recently closed $100 million in financing from U.S. Bank. With greater than 14,000 lease assigned to date and additional financings in the pipeline, we're well positioned for growth in this business. In Japan, we continue to expand our footprint in Residential, with record shipments in the quarter. We also beat our panel cost per watt targets for the quarter and full year. As we have said in the past, we see substantial further panel cost reduction ahead as we continue to implement on manufacturing…

Thanks, Tom. Good afternoon, and please turn to Slide 10. Today, I will discuss our operational performance for the quarter and provide some additional color and information on our leasing business. We finished 2012 with strong results. For the year, we grew megawatt volume by 13% with revenue up 2% compared to 2011. Non-GAAP gross margins increased 20%. Non-GAAP net income increased 37% year-over-year, while operating expenses declined. Fourth quarter was solid for both earning and cash flow growth due to the acceleration of our cost reduction programs, a focus on capital and liquidity and execution of our downstream strategy in Residential and utility-scale projects. Our non-GAAP revenue for Q4 was $785 million compared to $607 million in Q3. Our North American and Japanese markets again showed strong growth, while Europe was in line with Q3. We are happy to report that we closed AVSP with MidAmerican in Q4, along with several other multi-megawatt projects. Our revenue was at the lower end of our guidance range as we recognized approximately 50% of the development revenue for AVSP in Q4. We do expect to recognize the balance of the development revenue in the first quarter. Non-GAAP revenue in the fourth quarter includes approximately $189 million from AVSP and $266 million from the continued construction of CVSR. As we've stated in the past, GAAP revenue recognition is based on real estate accounting requirements, whereas non-GAAP revenue follows the IFRS conventions for multiple element arrangements and percent complete, which we believe better represent the timing and flow of the projects and economics. For the fourth quarter, non-GAAP revenue exceeded GAAP revenue by approximately $100 million. Residential ASPs were down less than 10% and premium to standard efficiency were in line with prior quarters, as customers continue to value our highly differentiated product. For…

Thanks, Chuck. I would now like to turn to our guidance for the first quarter, as well as provide some high-level color on where we see 2013. Please turn to Slide 14. For Q1 2013, we expect to recognize revenue on approximately 150 to 170 megawatts. We see non-GAAP Q1 revenues in the range of $475 million to $550 million, with non-GAAP gross margins projected to be in the range of 18% to 22%. On a GAAP basis, we expect revenue of $450 million to $525 million and a gross margin of 3% to 7%. Non-GAAP earnings per share are projected to be in the range of $0.05 to $0.20, with GAAP loss per share of $0.85 to $0.60. Capital expenditures in the first quarter are expected to be in the range of $30 million to $40 million. For the fiscal year 2013, we expect both GAAP and non-GAAP total revenue to be in line with 2012, with an increase in volume recognized as we ramp capacity to meet the needs of AVSP in the second half of the year. Performance for the year will be weighted more to the second half as we expect to start initial construction for the AVSP this quarter and ramp to meaningful EPC revenue and margin in Q3 of this year. Additionally, we expect that our restructuring in Europe will lead to profitability in this region in the second half. Gross margins will remain strong and operating expenses are expected to decline 10%. As a result, we see a significant increase in 2013 non-GAAP earnings per share when compared to 2012. Looking forward, we see substantial unlocked shareholder value in both our power plant and rooftop segments. With more than 1 gigawatt in contract or under PPA at identified pricing, our power plant business now provides us significant revenue, margin and cash flow visibility over multiple years. In rooftop, we see strong Residential lease growth in North America, further market share gains in Japan and the flexibility to offer global innovative financing programs. We firmly believe we have the best combination of go-to-market strategies, industry technology and bankable experience to be the leader in this segment. Our goal is that post- our Analyst Day in May, you will have a much better understanding of the strength and long-term shareholder value inherent in both businesses. We'll now open the call to questions. In addition to Chuck, we also have Howard Wenger, Region's President; and Bob Okunski, our Senior Director of Investor Relations. Operator, first question, please.

[Operator Instructions] And the first question comes from Sanjay Shrestha.

Lazard Capital Markets. Two quick question, I had, one just a clarification. So how much is, again just want to make sure I got the number right, how much is left to be recognized as revenue on CVSR? And how much of AVSP do you guys expect to recognize as revenue even though it's going to be the second half in 2013 megawatt-wise?

Okay, Sanjay. So both your questions are on -- one's on CVSR revenue and AVSP revenue for the rest of this year. So Chuck, you want to take those?

I will, Sanjay. We have just started an AVSP as you know, in Q4. So the substantial majority of AVSP is less than the previous announced range was $2 billion to $2.5 billion in total project size. As far as CVSR goes, there we have approximately, let me get you a better range, we are about 70% through the project in terms of total recognition.

Okay, okay, that's great. And one follow-up I had, guys. So when I take everything into consideration that you guys said, look at Q1 and then think about Europe getting breakeven in the second half of the year, AVSP ramping up, your cost coming down, I mean, is it fair to think about second half actually being even more profitable than the comment on Q1 here suggesting that we're actually looking at a pretty wildly profitable year compared to 2012 and '13?

Yes, you had me until you said wildly. This is Tom. The one nuance or the one detail is think of Q2 as a transition quarter. And yes, like Q2 and Q3. I have a really, really strong reason to believe they will be very strong quarters and strong quarters even relative to Q1 with Q2 being a transition quarter. So that's how I would characterize it, Sanjay.

Okay, great. Can I actually squeeze in one more, then, guys?

Sure.

Okay, great. So you guys briefly mentioned that you are exploring other financing options apart from some of the sale leaseback and Residential business transformation that's happening there, right. Are you guys kind of hinting towards a lot of talk about the REIT structure, the MLP structure, the securitization? Or what are you guys kind of talking about when you say other financing option to further enhance the growth and the capital formation and things like that?

Sure. So I -- what we're referring to is, as you know, we entered lease about 18 months ago and rapidly became a top lease player. And we're going to be aggressive and we're going to expand in North America. And by virtue of our model, where we don't own the Residential channel, we partner with independent dealers. Worldwide, we're able to offer similar structures in other regions of the world. And so what we're referring to is work that's being done in Australia and parts of Europe to offer similar solutions that we'll be able to talk substantially more about during the second half of this year. So that's specifically what we're talking about. Now with regard to MLPs and REITs, it is argued that there's a logical transition in the market. We're the first to get a deal done with [indiscernible] on a cash equity basis on a flip partnership structure -- a partnership flip structure with U.S. Bank. And as we execute more and more capacity, we think the transition to MLP and REITs is a logical outcome of lease becoming a really big part of Solar, in general. We fully expect to capitalize on that because we think our position is unique to actually capitalize on those structures. Now the timing of that is not clear to us.

Our next question comes from Shar Pourreza.

It's Shar Pourreza of Citigroup Global Markets. Let me ask you -- good traction on the cost per watt front. Is there a target of where you think you'll levelize that in 2013, '14? Or is there somewhere we can think about cost bottoming out?

I think the answer to your question's no, on at least not in that timeframe, which -- what we believe is unique about our cost reduction problems -- projects or approach is that our cost reductions are driven as much by innovation as they are from supply-chain efficiencies. And of course, we believe that the innovation, things like staff reduction, increased efficiency, improved yields by changing design architecture, redesigning systems to match specific applications, complete system design. Things like that, we think, have a more sustainable competitive differentiation. And we have a very robust pipeline of such projects. So I'd say we're quite confident certainly in the next couple of years and probably beyond that, that we can drive cost out of our product. And we've said -- and that's both module and system. And over the last several years, we've pointed out that our module technology is a relatively new technology and therefore, we believe, has more room to have innovative solutions applied to it. And, in fact, we're seeing that.

Right, got it. Just shifting over to Japan real quick. With the -- especially in light of this Sharp partnership, is there -- I mean, what's your current market share position down there? And assuming that your megawatts increase, is there a potential -- what market share do you think you can get down there, especially with the Sharp JV? And is there an opportunity to shift a little bit further downstream and actually do the installation and project development work?

This is Howard Wenger, I'm going to take this question. We're really pleased with our position in Japan. It's one of the fastest-growing markets in the world. They place a premium on quality and efficiency. And so our technology, obviously, lines up well there. It took us many years to establish the Toshiba relationship, and we value it highly. We have a very strong partnership with them. We believe the market share that we have together with Toshiba in Japan is approximately 8% to 10% of the market. As you know, it's one of the fastest-growing markets in the world. So we anticipate our volumes to continue to increase. With the addition of Sharp as a partner, obviously, we're going to increase volume and share. And so we do think there's more headroom there in Japan to answer your question. And we may be, in the future, going further downstream there, but that's quite a ways off. We believe our approach in partnering with very well-established Japanese companies is the way to go.

Got it, got it. And then just one last question. In the Middle East, I mean can we get a bit of a sense on what regions you particularly are focused on and what part of the stage that you're at? I mean, are we close to getting to the -- making an announcement somewhere in the region? Can we just get a little bit more clarity in the Middle East?

Sure. I'll comment, and then Howard, you can add on as well. So our approach in Middle East and Africa is to work collaboratively with Total. They've had a 75-year history in many of those countries and their footprint is 130 countries. And so in many cases, we're leading with Total, and we're the solar energy provider or the technology provider. And that gives us a great advantage. The list of countries is common to many solar players. So of course, Saudi Arabia is on that list because of their stated desire to have a scaled program, PV program, and because the economics work so well. But with Total, we don't have to target, just obvious countries like Saudi Arabia because there is such a large footprint. So we expect that throughout the continent, we're going to be able to, over the relative near-term, start to announce some project wins that are pretty broad-based. Now that's on top of what we're doing in South Africa. And we have some projects, some small scale projects we're building in the region. And I would like to point out, we're just completing a C7, a small-scale C7 project in Saudi to prove that technology in that region of the world. And we're confident that that's going to be a winner for that region.

Our next question comes from Vishal Shah.

Deutsche Bank. Tom, I wanted to just get some clarification on your comments about 2013 revenues, how should we think about the split between power plant and leasing business this year? And then you had 90 megawatts of leases last year. Can you just maybe provide some color on how the bookings momentum was through the year, and how you're looking at the years as you're looking to 2013, 2014?

Yes, so I'll answer the question with the exception of the split of revenue, and Chuck, I'll give you that easy question. So revenue '13 versus '11 is in line, meaning that they're going -- we're forecasting very similar revenue levels. Now we'll ship more panels this year, but revenue levels will be similar. Part of that is the way we recognize revenue on leases, and I'll let Chuck comment on that split and the way we recognize revenue. Now in terms of lease demand, we have a very clear value proposition in lease. And that is for the same or very similar cost per kilowatt hour, you can get the world's best solar technology. And because of that, demand outstrips the rate at which we can bring on lease capacity currently, the financing capacity. That was particularly acute in the last 4 or 5 months of 2012. Increasingly though, we believe we can fill that pipeline of lease financing capacity faster this year, so we will grow in lease rather significantly in 2013 over 2012. And momentum in North American lease is very, very strong. Chuck, do you want to comment on split between power plant lease, 2013?

Yes, I will. The -- our historical guidance has been regional. And so our general splits are, Americas will be approximately 60% of the total volume. And Americas is going to be 3/4 power plant. The balance of APAC and EMEA is primarily Residential and light Commercial. And we've disclosed previously, it was about 50-plus megawatts internationally that we expect to close this year.

That's great, that's very helpful. Just one other question. On the discussion on REITs, what is your take on the likelihood of something getting done, especially given that it's a private ruling? And can you maybe talk about how that impacts your leasing business and some of the other businesses that you are looking at, whether that improves your profitability or allows you to, like you said, get more financing for your leasing? Can you just maybe talk a little bit about that?

Sure. I think you'll see REITs more common on Commercial projects and larger scale projects because of the tax structures. As it relates to Residential, likely we'll see asset-backed securitization transactions precede REITs. But we think that it's a real advantage for SunPower because of our bankability, and that we'll be in the forefront of these emerging new structures.

And it gives you the ability to increase capacity because, of course, you can, so to speak, recycle cash to your lease offering as you capitalize on those structures.

Our next question comes from Satya Kumar. Satya Kumar - Crédit Suisse AG, Research Division: Credit Suisse. I was wondering -- you mentioned, Tom, that your demand exceed the supply of capacity you have for the leasing business. I was wondering if that's allowing you any flexibility in terms of being a bit more aggressive on the pricing side. Just broadly if you could talk a bit about the pricing side of the leasing business?

Sure. So pricing and leasing business for us -- or I mean for leasing, in general, is competing on cost per kilowatt hour. And of course, you're comparing that conventional energy. And the solar industry and SunPower is at a point where we can offer competitive cents per kilowatt hour. And it's particularly strong for SunPower because it embeds the advantages of our product that I talked about in my prepared remarks. Those are built-in. And so, we no longer have to keep explaining in efficiency-adjusted cost. It's built into the lease. Now as you have limited capacity, you can price your energy higher and what that does is it forces you to a different customer set. It forces you to higher energy users, typically. And so it causes you to move to different customer segments. So there's some ability to do that. Our goal and our plan, though, is to have a broad-based program where we're attacking the market and increasing share. But sure, in the near-term, when the lease financing capacity isn't significant enough, yes, you can affect for pricing. You can do that by which segment you sell to. Satya Kumar - Crédit Suisse AG, Research Division: Okay. And then on the -- just if I look out sort of longer-term, how did the mix of volumes evolve for SunPower? I mean, I guess like this year, you'll be consuming some of your backlogs or AVSP. Do you expect that you would be able to finish that backlog over the last deal pipeline? Or you expect that as time goes on, the mix for you guys would shift to more rooftop-oriented, Sharp-like, motivation-type market sectors?

Yes. The answer to your question is a great news, is we have like 3, 4 years. We've got booked pipeline in our projects business that allows us to have it at least 1/3 and closer to 50% of our business and in a very predictable, stable manner. So that power plant on volume is going to be at least half for the next several years. But because we can expand our lease offering in America and then take that experience to other parts of the world, lease will rapidly grow for us. And as we've mentioned in this call, in previous calls, we've got a joint venture in China as well where we think we can have some volume increase in power plant projects there. The good news is that's driven by C7, so it allows us to grow without adding fab capacity. So as a rule of thumb, I think the power plant business in the near-term being more than 50%, perhaps 60% or 70% volume but that's shifting to more like 50-50 because of the strength of -- by our lease product, not only in America but around the world.

Our next question comes from Chris Kovacs. Christopher M. Kovacs - Robert W. Baird & Co. Incorporated, Research Division: Baird. Actually, I have 2. The first is, as you guys look to push new financing models in Europe, for example, with leasing as one, do you think you can get the same type of margins you get in your leasing business here, given some of the pressures there? Or would that -- is there a target margin you have on the leasing side?

Yes, it is -- I'll just comment really quickly. As Chuck said, the lease accounting can be different, I'll say, and hopefully on -- and it was helpful to hear Chuck's comments on the geography where the margin shows up on American lease. The structure in Europe is likely to be different. However, the regions that we're targeting, we think that the net income generated by these structures will be similar or better. And what's really interesting in those parts of the world is it's very close, or if not, already there, competing incentive-wise to these offerings will be competing straight up against conventional energy, and we think delivering that income similar, at least similar, to what we can do in North America.

I just would add onto what Tom said, which is that we are not counting on a lot of revenue and margin from our lease operations outside the United States in 2013, although we do plan on having some. And that said, it is, we believe, significantly better than our current business in that region and that channel. So we do expect a significant margin improvement as we export it. Christopher M. Kovacs - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then can you just elaborate a little bit on the Chinese JV? When we talk about how big you think that could really be in maybe 2014, in 2015 in terms of megawatts and what your individual partners really brings to the table?

Yes. So we have 3 partners. There is, of course, SunPower and then a partner that is a supplier to SunPower currently, and they have a solar division. The acronym is TZ and the solar division is, of course, TZS. It's a very large company that makes high purity silicon. And they make wafers for semiconductors and they make wafers for us as well. They're proven to be a great supply and a great partner. In addition, and importantly, the third partner is the Inner Mongolia Power Company. And they are a world leader in integrating renewables onto their grid. They've done close to 10 gigawatts of wind, which proves the scale that they can operate at. But that has, obviously, advantages in terms of access to transmission in potential sites. And then the fourth partner is a city called Hohhot City, and that's a Mongolian city. And they are important because we will be building facilities to manufacture the product. And also, that they will be offering -- we will be citing a lot of our first power plant projects in their city. In terms of scale, you all can cite the statistics on China. The growth of energy consumption is rather breathtaking. And the preference for renewable energy is transitioning very rapidly. So the total available market is, as you know, multiple gigawatts, with what we could get done with this joint venture starts this year modestly with tens of megawatts and going into the next few years where we get to hundreds of megawatts. And of course, it's very hard to predict. It's going to be execution-dependent. And as we execute, it's at least that with the significant upside.

And our last question comes from Rob Stone.

Cowen and Company. Tom, a little bit of color on the cost roadmap, if you can. What was it that allows you to exceed your goals for 2012? And how are you thinking about progress this year?

So the big drivers in 2012 was a metric that you'll remember well, Rob. We're using a lot less polysilicon per watt. We've had some great success in our manufacturing engineering group on that front, which is a combination of thinner wafers, higher efficiency and better yields. So we've been able to innovate quite successfully. We're starting to ramp our Gen 3 technology, and that is a more effective, cost-effective technology. So that's a driver as well. Fab 3, our joint venture with AUO, is performing excellently. And they've driven a number of our operating metrics really favorably. So that has had a big impact. We've also been able to innovate in our module designs. We've designed some new custom materials in our module that allow us to get more energy output that are unique to SunPower. And we've done -- been able to do that, while reducing the cost. So those are the primary drivers. We have benefited as well, however, from a more cost-effective supply chain, that being the drivers, of course, glass, aluminum, silicon, where we have long-term partners. And they see, they appreciate when they see something like AVSP booked because then they know they've got a really stable partner to work with. And so working together, we've been able to wring out costs of our supply-chain. So those would be the primary things I'd point to, Rob. As I look to 2013, we're equally aggressive this year. We have -- we're expanding our Gen 3 technology. We have some step reduction programs that will continue to fan out through our fabs, and that's one of the things that I forgot to mention. In our Fab 2, we completed the first significant step reduction program across all of our lines. So as we look to 2013, it's further improvement on a lot of the things I talked about, including step reduction. So as I said earlier, I think our innovation pipeline to get cost out is as strong as it's ever been as we look to '13 and '14.

A follow-up if I may, you mentioned supply-chain. Given how tough industry conditions have been over the last year, do you have any concerns or big picture thoughts about how we should think about the supply chain this year, health of vendors and so forth?

Yes. Broadly speaking, the big guys or the big suppliers are stable. They're navigating through their market. They've had to make some rather dramatic changes in terms of capacity expansion and thinning sites just like SunPower has. As you know, there's at least one important inverter manufacturer that's no longer with us. And so, we've really spent a lot of time as a company making sure we future-proofed our supply base. And we are working with -- on some of the significant commodities, the who's who, and we have been for several years. So our confidence that we're insulated from a significant or disruption in the supply chain is high. Will there be disruption in the supply chain? Yes, absolutely. The challenges of the market over the last few years clearly move throughout the upstream part of the value chain. Thank you all for joining us today. We really appreciate it. We look forward to our Q1 call, and then we'll follow that up with an Analyst Meeting in May. Thank you.