Complete Solaria, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the SunPower Third Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Bob Okunski, Vice President, Investor Relations. Please go ahead, sir.

Thank you. I'd like to welcome everyone to our third quarter 2020 earnings conference call. On the call today, we'll start out with a strategic overview of the quarter from Tom Werner, CEO of SunPower, followed by Manu Sayal, our CFO, who will review our third quarter 2020 financial results before turning the call back to Tom for guidance. 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 the safe harbor slide of today's presentation, today's press release, our 2019 10-K, and our quarterly reports on Form 10-Q. Please see those documents for additional information regarding those factors that may affect these forward-looking statements. To enhance this call, we have also posted a set of PowerPoint slides, which we will reference during the call on the events and presentations page of our investor relations website. In the same location, we have also posted a supplemental data sheet detailing some of our other historical metrics. With that, I'd like to turn the call over to Tom Werner, CEO of SunPower. Tom?

Thanks, Bob, and thank you for joining us. On this call, we will provide an overview of our third quarter performance, as well as a brief update on the performance of our individual business segments. As detailed at our Capital Markets Day, we remain confident that we are well positioned for success going into next year given our strong competitive position, industry-leading solutions, and a strong market. Let's start with a recap of our third quarter performance. Please turn to slide three. We executed well in the third quarter as we exceeded our revenue in EBITDA guidance and completed the spinoff of Maxion to our shareholders. Given our strong Q3 bookings performance, we are raising our Q4 and fiscal year 2020 EBITDA guidance. Our residential and light commercial segment continued to outperform as we saw strong megawatt growth in our residential retrofit and new homes businesses while improving our overall gross margin for the quarter. Finally, we are seeing increased customer demand for our recently launched Sunvault residential storage solution, while working with our new home builder partners to further roll out our One Roof product, which is already being installed in approximately 20 new communities. Our CNI solution segment also performed well, as we were profitable on an adjusted EBITDA basis for the quarter. We added to our backlog with continued strong demand for our Helix storage solution, including being awarded our largest Solar Plus Storage CNI project to date during the quarter. As Manu will discuss later, our efforts to improve liquidity and strengthen our balance sheet are paying off as we increase cash by $90 million in the quarter and expect our business segments to be operating cash flow positive in Q4 and 2021. As a result, we are reviewing options related to our 2021 convert to further deliver our balance sheet. We also took a positive step in relation to our corporate social responsibility programs as we appointed leaders for our ESG and diversity and inclusion programs. We have been a leader in both areas for many years, and this will only accelerate with this new leadership. Finally, remain confident in our 2021 targets from our recent capital markets day, given our Q3 performance, along with significant SunPower tailwinds we see for the next year, including increasing demand for our SunVault and Helix storage solutions, a strong new homes market, and expanding residential gross margins. Now I would like to spend a few minutes talking about our residential and light commercial business segments, or RLC. Please turn to slide four. Our RLC business delivered a very strong quarter, primarily driven by residential retrofit and new homes, as we saw both demand and insulation activity continue to increase through the end of the quarter. Overall, our confidence remains high going into Q4 as customer demand is strong. As discussed at our investor day, our residential gross margins continue to increase as a result of cost improvements, ASP stability, and continuously improving financing. It is important to note that the margin benefit of our recently announced loan and lease financing facilities have not yet impacted our bottom line. We will see some initial impact of these improvements to margin in Q4 2020. with the full benefit being realized in 2021. New homes also perform well, with record quarterly bookings for Q3 resulting in a record backlog of more than 180 megawatts. Our market share remains above 50% with significant interest in our one-roof product from many of our builder partners. We are very positive about the future of Sunvault storage solution. And as we start to install in volume, it will both increase our revenue per customer and be the foundation for future service revenue. For the quarter, we delivered on a number of key Sunvault milestones, including achieving certification for our 13 and 26 kilowatt solutions, as well as beginning the installation ramp at many of our dealer partners. We have a distinct competitive advantage with SunVault, given our smaller footprint, faster install times, and the ability to back up higher power loads. As we highlighted at our Capital Markets Day, we expect SunVault to contribute approximately $100 million in revenue in 2021. I'd now like to highlight some of the key metrics related to how we are building sustainable, structural, competitive advantages with both our customers and our partners. Please turn to slide five. We added more than 10,000 customers during the quarter, bringing our total customer base to more than 335,000 as demand remained strong exiting the second quarter. Our installed base now totals 2.1 gigawatts, and we see significant opportunity to expand our storage and service footprint with these existing customers starting next year. We are also continuing to benefit from our strong marketing platform and virtual selling programs as more than 30% of our partner sales have come from SunPower generated leads across 200 exclusive dealers. Our appointment generation platform is an integral part of our residential platform, increasing our ties with our biggest dealers. Importantly, our rapid and successful transition to online sales is also showing results. It's 85% of all residential volume in Q3 was sold via online or through virtual sales methods. This transition has also materially lowered our overall customer acquisition costs. Finally, as I mentioned earlier, our new homes business continues to outperform. Our current backlog is now 50,000 homes, and the launch of our one roof is going quite well as it has now been deployed in approximately 20 communities in California in its first quarter of availability. We continue to expect more than 50% growth in new homes in 2021. On slide six, we detail the positive trends we are seeing in both residential revenue and gross margins. The chart on the left shows the results of our efforts as revenue trends are improving rapidly since the COVID-driven Q2 trough. Residential installations were up 33% in Q3 versus Q2 and are expected to grow at a similar rate next quarter. We head into 2021 confident that there will be continuing improvement driven by our new lease and loan products new homes, and SunDoll. The chart on the right shows our strong improvement in gross margin in both dollars and on a percentage basis. As you can see, we have achieved year-over-year improvement in gross margin every quarter this year despite the impact from COVID. This improvement is directly tied to executing on our cost reduction programs, quick transition to our successful online model, as well as a lower cost of capital. As a reminder, our gross margin improvement this year does not yet include the full benefits of our recent financings or the full rollout of our Sunvault storage solution. Please turn to slide seven, where I'll provide an update on our CNI solutions business segment. We saw solid results from our CNI solutions team in Q3 as we posted positive adjusted EBITDA for the quarter. Results were primarily driven by systematic improvement in project execution and platform cost reductions. We further added to our $3.5 billion pipeline during the quarter with currently contracted and awarded projects in excess of 275 megawatts. up from 215 megawatts in Q2. Third quarter gross margin per watt came in at more than 25 cents, up 15 cents year over year on 20 megawatts of volume. Given our third quarter performance and execution on our cost initiatives, we remain confident in our ability to meet our target of gross margin per watt of at least 27 cents for the year. Demand for our Helix storage solution remains high with attach rates of about 30 percent in our current backlog. We remain the market leader in commercial storage, and by the end of 2020, we expect to have more than 20 megawatt hours of storage across 25 sites in operation. We also expanded our footprint in the community solar market with a recent award for two projects totaling 13 megawatts. We see community solar as a growth opportunity, capitalizing on our origination capabilities and our helix storage solutions. With that, I'd like to turn the call over to Manu Sial, CFO of SunPower.

Thanks, Tom. Before we discuss the financial results for the quarter, I wanted to remind everyone that we have posted a detailed metric sheet on our investor relations website that has been updated and enhanced for disclosures we had made at the Capital Markets Day on September 10th. Please turn to slide eight, where we have provided our consolidated financial results and select metrics related to our valuation framework that provide clarity to value related to day one customer contact, and that's from recurring revenue streams. We are pleased with our financial performance for the third quarter as we exceeded our revenue and EBITDA guidance. Moving on to the specifics of the quarter. Post-spin, we have segmented the company into residential and light commercial and CNI solutions. We saw continued recovery in both our segments as demand remained strong throughout the quarter. Overall, megawatts recognized rose approximately 20% sequentially, with our residential light commercial segment up 17% sequentially, with the residential up 33% versus second quarter. Our CNI solution segment was also up 32% sequentially. We expect the strong volume growth trend to continue in the fourth quarter. Consolidated non-GAAP gross margin in DEVCO was $0.35 per watt and up from $0.30 per watt in second quarter with the residential at $0.46 per watt in third quarter. We expect a significant step up in gross margin per watt in fourth quarter in residential as we benefit from improvements in our residential loan and lease economics and execution on our cost roadmaps. We also saw sustainable improvements in project execution in CNS solutions, where we posted a positive EBITDA in third quarter. As Tom mentioned, demand for our SunWalt residential storage solution remains very high going into 2021, and we are pleased with the continued traction of our Helix storage product for commercial customers. Given the traction of storage that adds incremental margin to the system and expected margin improvements, from our recently closed residential financing, we have increasing confidence in our ability to meet our 2021 capital market state targets. Non-GAAP OPEX per watt was 31 cents a watt, down 20% sequentially, as we successfully executed on our cost initiatives, including lowering our corporate OPEX post-spin. We remain on track to reduce OPEX per watt to less than 30 cents next year. In relation to PowerCore metrics, we continue to build our recurring revenue streams, including revenues from asset management services to residential and commercial customers and energy revenues from CNI assets that we currently hold. PowerCore recurring revenues and services pipeline grew sequentially and is approximately $575 million at the end of third quarter, with current quarter reported revenue being close to $10 million. Net retained value from our residential leases held in SunStrong Joint Venture was $368 million and ahead of forecast. As mentioned earlier, we closed recently on the second residential lease fund with Bank of America, where we expect to generate approximately a dollar per watt of net present value, including upfront cash margin and net retained value. We are seeing benefits from lower cost of capital and committed tax equity capacity. With this fund, our all-in effective cost of capital for new residential leases is now close to 6% and believe we can further reduce our cost of capital in future funds. Finally, we continued with our efforts to improve cash flow and reduce net recourse debt on our balance sheet. We ended the third quarter with $325 million in cash, net of matching on-deal expenses, and also invested in working capital for the growth of our CNI solution segment ahead of a significant fourth quarter 20 volume ramp. Our residential and light commercial segment was close to operating cash break even in the third quarter. As mentioned in the capital markets day, we expect our business units to generate positive operating cash starting fourth quarter 2020. As a result of our improving liquidity position and expected fourth quarter cash generation, we have the ability to pay our 2021 converts prior to maturity if we so chose. In summary, third quarter was a solid quarter for the company as we exceeded key financial targets, strengthened our balance sheet, and positioned SunPower for future success. With that, I will turn the call back to Tom for our guidance.

Thanks, Manu. Moving on to guidance, please turn to slide nine. Company's fourth quarter and fiscal year 2020 guidance is as follows. Fourth quarter GAAP revenue of $330 to $370 million, GAAP net income of $11 to $21 million, and megawatts recognized in the range of 145 to 175. For the fiscal year, for fiscal year 2020, Company expects GAAP revenue of $1.12 billion to $1.16 billion, GAAP net income of $190 million to $200 million, and megawatts recognized in the range of 465 to 515. Given our third quarter performance and strong visibility for the balance of the year, we are raising our fourth quarter and fiscal year EBITDA guidance We now expect fourth quarter EBITDA to be in the range of 26 to 36 million and 2020 EBITDA to be in the range of 30 to 40 million. In summary, Q3 was a solid quarter for the company as we executed on our strategic initiatives, completed the successful spinoff of Maxeon, and laid the foundation for improving our profitability. With that, I would like to turn the call over for questions.

Thank you. Ladies and gentlemen, as a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Brian Lee with Goldman Sachs. You may proceed with your question.

Hey, guys. Thanks for the questions. You know, good job on the quarter. Two questions from me here, both sort of related to gross margins. I guess first on Sunvault, it sounds like you're not at your sort of optimal gross margin targets quite yet, but when it is, it will be additive to the RLC gross margins. Is that a fair assumption here based on the comments you're making? And then when do we see that margin target hit on Sunvault, and does this imply gross margins you know, well into the 20s, or are we even in the 30s? Just trying to gauge profit potential here on this new product opportunity since it's so incremental. And we've also seen some of your peers talking about much higher profit margin levels in this category. And then I had a follow-up.

Brian, Tom Werner here. Thanks for the question. And SunVault is now – I got certifications, dealers are being trained, and it is being installed, so we are ramping. And I think we'll have a favorable position, actually, on margins compared to others since we designed the product ourselves. And I'll let Norm expand.

Yeah, thanks, Tom.

Thanks, Brian.

Yeah, relative to margins, you can think about SunVault being consistent with our overall margins, which are growing next year. It is certainly additive and incremental. In fact, we expect it to add upwards of 20 to 30 cents a watt of incremental margin on the same sale. So it not only has the value of incremental margin, but that incremental margin is at effectively a much lower customer acquisition cost because we're already making that sale at the customer. And so we expect it to be margins similar to the overall business and completely incremental.

Okay, understood. That's helpful. And then maybe just a follow-up on the gross margins, again, focused on RLC. If I look at that chart you had up in one of the earlier slides, for the past couple of years have been pretty seasonal. I know there's been a global pandemic embedded in the midst of that bar chart, but how should we think about gross margins in RLC going forward from a seasonal perspective? Is there any reason that You know, it'll be as seasonal as we've seen historically. And the reason I ask is I'm trying to gauge, you know, how much of a starting point or baseline the 20% plus level you're talking about for Q4 2020 is here in trying to, you know, figure out where you'll trend in 21. Is that a starting point and we should track higher from there? Are we going to see some of the up and down sort of seasonality that we've seen over the past couple years into next year? Thanks, guys.

Okay, why don't we do it in reverse. Norm, you say a few words, and I'll probably add on. Okay, yeah, no, happy to.

There is some seasonality in our margin that can be expected. I will tell you that that seasonality has been reducing as our costs have come more in line, and I think, frankly, I think overall ESPs have been more stable. So you should expect some seasonality, but less in the coming year than you've seen in the past. And as I said at the analyst day, we expect to hit or exceed our margin model for the full year 2021, which is above 20% margins.

And, Brian, I think it's really important to point out that the margin picture in residential is fundamental, meaning that our loan economics are fundamentally better because we service our own loans now, so we don't pay someone else to do that. And because our cost of capital has gone down with lease, we've continuously improved the parameters of lease and we've made the biggest step in our latest lease facility. Both of those start really in earnest in 2021. To that, we've improved our cost of installation and I think we're a leader in customer acquisition costs. So the bases of RLC margin are very fundamental across all four quarters, even though you will still see some seasonality, as you know, often driven by changes in policy.

All right.

That's great. Thanks for the call, guys. I appreciate it. Thanks, Brian. Thank you. Our next question comes from Michael Weinstein with Credit Suisse. You may proceed with your question.

Hi, guys. Can you talk about SunVault? We estimate that 100 million SunVault revenues in 2021 implies about 250 megawatt hours of sales in the year, with an attachment rate of about 30% or greater. Is that the right math? Is that the right way to think about it?

I think you're in the ballpark for sure, and of course we're ramping quite rapidly, and of course the attach rate will vary significantly depending on region. It might be a touch lower than that, nor maybe you can dial it in a little

Actually, I think that's a pretty good estimate at this point. I would say our estimate is quite rough at this point. If anything, I think our view is that there's upside to those numbers based on just the demand level, the broad-based demand level. But assuming the numbers that we've quoted, I think your estimate is pretty close. I'll actually have to do the math in my head to confirm, but I think that's about right.

Who are the suppliers? How much capacity do you have access to?

So we've not announced the suppliers of the main pieces of the hardware inside, but I can say that the product's been designed to be vendor agnostic. So our intention long term is to be able to follow the battery and inverter cost curves downward. So that's the approach. From a supply standpoint, we have plenty of supply for our ramp as is right now. Really the only thing constraining our ramping today is really our ability to have enough installation capacity. But both battery, we're using a very high volume battery supplier and a high volume inverter equipment supplier. And then we've designed other elements in the system ourselves. From a supply standpoint, we're very comfortable. We do want to have multiple suppliers long term for better economics.

And Michael, I want to remind everybody that our solution is two boxes on the wall. And if you look at other solutions, you'll see a lot more than two boxes. We've been able to consolidate some functionality into one of the two boxes. So one box is an inverter and a battery. The battery is sized so that we can have different suppliers for that same size battery. There aren't that many sources. There's basically six big sources in the Far East, and we're prepared for any of those six, or most of those six, I should say. The other box is designed by us. It is our monitoring system. which has second source components. It's a service panel, which is a common item. It's an automatic transfer switch, which is a common item. And then some electronics that we designed. So the common theme here is we designed it. We have lots of control there. Therefore it's very scalable.

Right. Oh yeah. Just one more, one or two more questions. If you know, how does the improved EBITDA on Q4,

uh bode for assumptions for 2021 that you laid out in september i mean does 2021 still look around greater than 100 million dollars um so i'll take that and minor you can jump in if you'd like um uh so uh q4 gives us i'll put it this way q4 gives us a lot of confidence with the implied guidance of the metrics we gave for 2021 Having been in solar for a very long time, we're more careful about giving specific guidance beyond what we have until we get into the year. But I would say that as we sit here in Q4, our confidence level going into 2021 is as high as it's been since I've been with the company.

Gotcha. One more question. On the 6% cost of capital, I mean, do you see that? I know you said new facilities will be cheaper. Do you see that trending down 100 BIPs, 150 BIPs, 200 BIPs next year? I'll let Manu take that.

Yeah, so I think with, you know, we are in a historically low interest rate environment. I think as we think about the 6% cost of capital, we have, you know, headroom on all forms of capital or parts of the capital stack, both debt and equity. with a little bit more opportunity on the equity side of the house. So I think how you're thinking about it is correctly in terms of the reduction we should expect.

And I think the way we're operating is since we sell products or projects, since we monetize them, we have a very clear marker of what the public markets will value projects on the balance sheet for. So we We know what the threshold is, and as our balance sheet has improved radically, and will do so even more so as we go forward, we should benefit from that, and we need to compete with the cost of capital. The public markets are rewarding projects on the balance sheet, so that is the task we're on.

Great. Thank you very much, guys.

Thanks, Michael. Thank you. Our next question comes from Ben Cowell with Barak, you may proceed with your question.

Hey, thanks for taking my question. Congrats on the quote. Just going to the storage side, why go ahead with your own product, maybe, is my first question, versus some other people outsourcing that. And then I guess my second question is, you know, Tom, customer acquisition costs have been one of the biggest things that's hung up the resi space, I think. And, you know, what has changed there or has anything changed there? And, you know, when we look at your numbers going forward, is that a driver for them, you know, being better than you forecast if you can get customer acquisition costs down. And I guess, you know, the final part of that is there's this whole, you know, debate about who's better to have a channel partner and dealer network or to do it yourself with your own sales force. And so where are we on that?

Okay, I'm going to take a pass. Did you have one more, Ben?

No, that's it.

Okay, great. I'm going to take a pass at them, and then Norm's going to add on to what I say, probably with more precision. Why do we design our own? It is the heritage of SunPower. We designed our own solar cell back in all the way back to the 80s, but we productized that and scaled it in 2003 through 2010 and created a very unique world's highest efficiency product, so it's in our core DNA. And then the short answer to your question is because we have a better product. And so we spec the product that will back up more load, that installs faster and works better because it's two boxes, which is a big deal because you often see them every time you pull into your garage. And the second reason why we design it first is better. Second is for future proofing. As we add services, which we already have, you can imagine, of course, that we have to do rate arbitrage. And, of course, we have to do resiliency and micro-gridding. That is, we add services of grid interface, grid services, and how we monetize those. It's much easier to do if it's our own software. and we're integrating with ourselves. Thirdly, we offer one-stop shopping for our customer, and Norm can expand on this, but the comfort to our dealers and our customers that they don't have to call multiple people or call one person who calls somebody else who calls somebody else. They call us one-stop shopping, so it's our warranty. It's wrapped by one company. So those are three things I'd say about why we do it ourselves. On customer acquisition costs, Norm can expand on that. Our marketing engine is running great. We're generating appointments for our dealers. This is, by the way, a vision we had or a strategy we had many years ago. And Norm and his team are executing on it now. They've scaled the marketing engine such that we generate appointments differently than our peers and more cost-effectively. So, yes, it's a point of competitive advantage.

And

Lastly, on channel partners, that's an interesting strategic question because the channel is really fragmented. There's independent EPC companies that execute and generate business. There's sales companies that only generate leads and then sell the leads to whomever, including the EPC companies. Then there's channel partners, and each has its own advantages. I'll let Norm expand on his thoughts on that. uh, what we're doing today and going forward to probably quite a bit to add on from norm. Yeah.

Thanks Tom. That was, uh, you actually covered it really well, but I have a few other people, uh, added data points. I mean, on the economical reason for doing our own storage is simply in many ways to avoid margin stacking, right? Instead of us paying margins, somebody else, uh, then to supply that storage, we see a great economic opportunity to make margin on the hardware we sell. And that's what's important about it. It's not just to new customers, which is a big deal, but to over 330,000 existing customers. And so, you know, I think economically long-term, we believe that will be a meaningful bottom-line impact for the company. I think from a strategic standpoint, Tom alluded to this, what's really important to us is that we control the software that our customers use. And a fully integrated software approach means that the customer is as a single tool which monitors their PV, their storage, their complete solution. And that is both important for us as far as getting customers to adopt us, stick with us, to refer us to their neighbors, but it's also important, as Tom said, as the basis for a service model long-term. And I think the importance there is you really own that storage software platform, which you often won't get if you were to choose the model or somebody else is providing it. somebody else's storage solution. So those are kind of the strategic drivers. Just switching to a couple comments. You talked about customer acquisition costs. I'm glad Tom highlighted that our appointment generation engine is getting better and better. I'll give you a good data point from October. This past month, we generated 43% more front-end, our front-end funnel did 43% versus the same quarter last year. So we're not just beyond COVID, we're almost 50% larger month versus month in terms of the front end of the funnel. So that is becoming a bigger and bigger portion of what we bring to our dealer partners as value. And so that's been super important. And then last comment relative to the channel. It's a great question in terms of we're seeing very much a mixed model. One of the keys to low customer acquisition costs has been our dealer model. It's a lower cost model. At the same time, we are seeing certain areas where through virtual selling it makes sense to do more in different areas of the country directly or with partners that just do sales as opposed to doing installs. So while we continue to grow our independent dealer network, we are also growing our install portion of our business. It's still relatively small compared to the installing dealer portion, but it is growing.

Got it. Thank you, guys.

Thank you. Our next question comes from Philip Shen with Roth Capital Partners. Please proceed with your question.

Hey, guys. Thanks for taking my questions. The first one is on the loan financing fee reduction targets. I know it's critical to your gross margin expansion story. Obviously, you're leveraging the relationship with TCU. I think in this model, you guys serve as the originator of these loans. rather than a mosaic or a loan pal or something. And given that situation, I think what happens is the accounting for your installers may change where they may only recognize the revenue on the equipment sale. So I was wondering how your installers and dealers are taking that accounting change, and do you expect to be able to have those, pardon me, but do you expect to have those dealers use your loan program completely, or do you think you still might have to use a Mosaic, for example? Thanks.

So I can take it. This is Norm. Just from a – at the first level, we continue to use both Mosaic and TCU, so I don't want to point out we do still have two partners. But as far as the accounting from a perspective of our dealers, that has not changed with our TCU product. That is still actually – the same in both cases. So they are not seeing any sort of issue from a dealer's having a different accounting because we've gone to the TCU approach. So really what they've been able to see now is a bigger variety of loan products and a suite of products that now includes low APR products, longer term and lower APR products that have been very attractive. And virtually all of our dealers are using TCU, they may still be using some Mosaic as well, but we've already converted virtually all of our loan partners to using some TCU. But they can access both in the systems that we provide.

Great. Thanks, Norm. You guys talked about grid services already, but I was wondering if you could provide some more color on that opportunity. For example, when do you expect revenue to start to be generating in a meaningful way and When could it be meaningful and what's the timing of that? And ultimately, what is the revenue model? Is it going to be a SaaS model or is it a percentage of some kind of fee that you might end up charging to the utility for embracing the software that you guys are providing? So any color in that revenue model would be great. Thank you.

I think you're muted, Tom, if you're

Phil, I'll take that. The ability to have services is directly proportional to the amount of storage capacity you have in the market. And so today we have meaningful storage capacity in the market and commercial. And so we do have some capacity. We participate in some capacity markets and we do generate some revenue. In order to get meaningful service revenue, You really need to get the very large numbers, perhaps even gigawatts deployed. And so commercial, we're already seeing some grid services revenue. Of course, since we're just launching SunVault in residential, we need to scale it to get the service revenue. Typically, as you probably know, I'm sure you know, you bid in these wholesale markets three years in advance typically. And so we are bidding now. into wholesale markets, planning for the attach rate for SunVault and then leveraging that. If you go out to a five-year model, the numbers get to be meaningful. Of course, there's peers that have given the numbers and the math is going to work similarly here. So commercial first for us, residential second. It takes a few years. We're already bidding and we already have some revenue in the commercial business from grid services. I should also point out the model. Those models look more like SAS. They're multi-year commitments, and you get revenue each year. Now, as we go on, we're going to be very precise about grid services versus customer services. We can offer services to our customer where we optimize their bill, and we do that today in commercial, and that's built into the price of what they pay for a solar system. In the future, we may license that as we expand the offering. That's resiliency rate arbitrage, and I believe in residential we call it TOU arbitrage, but same idea. And then, of course, from there you go to grid services. So to answer your question, it's both in commercial built into the price of the system, and in some cases it's recurring and therefore looks like SaaS.

Great. Thanks, Tom. I'll pass it on.

Thank you. Our next question comes from Colin Rush with Oppenheimer. You may proceed with your question.

Thanks so much, guys. You know, as you look forward and seeing the growth of the business, you know, what are you looking for in terms of needs and in terms of working capital and how are you planning to address some of that?

So, Colin, if I understand your question correctly, you're asking about cash and how we think about cash needs. Let me say a few words, and I'll let Manu take it, and then you can follow up if I didn't get it correct. So the new SunPower, I guess it's not new anymore, SunPower, will have limited, if any, capex. We expect to manage our working capital such that we can be operating cash positive. And so we expect our business to generate cash. And as Manu said in his prepared comments and a little bit in the Q&A, We're already in a position to pay off our first convert, and so we're now looking at ways to sort of optimize our balance sheet in terms of how much recourse debt we have versus cash. But the ratios have improved dramatically, and Manu can comment on that. So any need for cash, as we forecast it, would be inorganic, meaning M&A. And Manu, again, can expand. So, Manu?

Yeah. So, as you think about cash and specifically cash conversion from EBITDA, one, you know, our model is a cash-based model. So, from an EBITDA to cash perspective, we have forward flow arrangements both in the residential and the commercial business. So, a relatively low cycle from EBITDA to cash. That's one. Second, you know, in both our businesses, lots of initiatives in terms of improving things like inventory turns, specifically in residential where you're getting to 10, 11 turns from an inventory perspective. So what I would say is both businesses generating operating cash in fourth quarter, that trend is going to continue. From a modeling perspective, you should expect a high conversion of our EBITDA into cash given our forward flow arrangements as well as our inventory terms.

That's super helpful. And then just in terms of module supply, you know, with the industry facing the prospect of a tight supply environment, how much flexibility do you have in terms of, you know, different suppliers on the module side to supplement your capacity and availability of materials to grow?

I'll take that, Colin. So we have a two-year exclusivity in residential, and that's extendable. We look out during that entire two years with Maxion. We meet frequently with them, as you can imagine. In commercial, it's one year, which is now 10 months more exclusive, and then we'll mutually decide whether or not to continue that exclusivity. But commercial could use other people's modules as soon as, call it, third quarter of next year, yet to be determined, working closely with Maxion, which, by the way, is doing great for us as a partner two months in. And we do plan capacity upsides with Maxion, and we're doing a product roadmap session with them tomorrow, actually. So we're also looking at ways to expand the product that we get from Maxion.

Right. Thanks so much. Appreciate it.

Thank you. Our next question comes from Steven Bird with Morgan Stanley. You may proceed with your question.

Hey, good afternoon. Thanks for taking my questions. I just wanted to follow up first just on the cost of capital discussion. In a prior question, you talked a little bit about the ability to reduce the 6% cost of capital, and you highlighted the equity opportunity. I wondered if there's any way to kind of get a little more granular in terms of drivers there, the approximate magnitude, just given how critical that particular assumption is as we think about the values.

I'll say a few things, and Manu, you can jump in if you want to add on to it. First of all, our primary sources of equity are well-known, and if you look at their sources of capital, they've done a very good job of raising very cost-effective capital. So our partners have done a good job, and we expect, as they have, that we expect going forward that the will benefit from that. Secondly, our balance sheet has improved, which has an implied leverage, so to speak, or implied advantage with our partners. The risk premium for SunPower has gone down dramatically and will continue to go down, and there should not be one. And then at the extreme, you could say, as our net debt position approaches, $100 million as soon as we set a capital market state or sooner, then, of course, we could always say we're just not competitive enough and we'll put some of these assets on our balance sheet. That's not our plan, but we have that option as we improve our balance sheet. And we are, of course, all capitalizing on historically low interest rates that look like they'll persist given the Fed's position. Manu, do you want to say anything?

Yeah, I think Amit covered it well. The only thing, as you think about dimension, there is a significant headroom between public markets, cost of equity, and the cost of equity that is in our residential fund. So there is opportunity and headroom to get further compression.

Yep, all makes sense. And then just shifting over to customer trends, you discussed community solar, and that seems like a a great area of growth. I wonder if you could just expand on that a little bit more. How do you think about, at a high level, the volume potential, the relative importance of community solar over time?

So SunPower has a long history in ground-mount solar systems. We used to be in the solar power plant business and did four gigawatts of power plants around the world. And we did a little bit of community solar in the old days. This is different. This is our community solar today is different and has evolved, and I'll let Eric expand.

Eric Miller Thanks, Tom. Yeah, I think of community solar as a real way for us to leverage our existing origination and development groups. And it comes in a couple of different flavors. One is we can go to existing customers who maybe don't have the behind-the-meter load. and provide them a policy and incentive that allows them to actually maximize their existing asset. It could be a rooftop. It could be a parking lot. So that's one flavor where we're going to kind of your traditional CNI customers. The other flavor is maybe a little bit more consistent with what Community Solar has been known as in the past, where it's going out, finding land positions, getting an interconnection cues, and building projects there. even that is shifted to be more of a distributed generation type of policy. So both of those initiatives have almost doubled what we're focused on as a business unit. So we see it as a real growth driver for us going forward.

Great.

Thank you. That's all I have.

Okay.

I think we're going to take one more question, one more group of questions. So if you could go ahead, please.

Thank you. Our next question comes from Julian Dumoulin-Smith with Bank of America. You may proceed with your question.

Hey, good afternoon, everyone. Thanks for squeezing us in, Tom. So just to pick up a little bit on where we left it off here on the growth side of the equation here, how do you think about, you know, beyond the exclusives here on MACD and expanding those options and what that does to the trajectory, especially the commercial opportunities you think about, you know, expanding beyond resi here and having greater options. And then if I can throw in a second related question here, how do you think about leveraging the storage opportunity? I presume this is strictly being sold through the existing dealer channels. Is this something that you would think about perhaps marketing a little bit more broadly or through other channels?

Okay, thanks for the questions, Norm. I'll give you the second one. And operator, I'm sorry, we will take one more set of questions after this. So in terms of options on the panel, we work, as you can imagine, extremely closely since we used to be one company before August 26th with Maxion. And they really want us to be successful. They want us to be a healthy partner and, of course, us likewise with them. And so we have detailed conversations about that. their product roadmap and the breadth of their roadmap, how well it fits with lease, loan, and cash sales, how it fits with ground-mount, carport, rooftop, residential retrofit, and new homes. And there are areas where over the course of the next half a year to a year, we're deciding on does it make the most sense for Maxion to add products or not. And if the answer is not, then we'll work on a mutually productive way to some power could source elsewhere. So we have not made any, we're not prepared to discuss any decisions, but we have a very, I'd say, realistic dialogue with Magsion, and they want us to grow and succeed and have share and be healthy. So more to come on that front, Julian. And then, Norm, can you take the second part on storage and channels? Sure. Sure, happy to.

I would say, Julian, that the way we think about this is first, our first priority is supporting our existing channels and new sales with storage. And as we talked to you earlier, and as generally in the market, there's extraordinary demand. And so that's kind of a first priority. Our second priority is really going to be addressing our existing customer base. One of the things that's important about the way we did storage is It is AC coupled, and as it's AC coupled, it makes it a lot easier to apply it to existing systems, even if they're lease or certainly cash. So we really see a great opportunity just within our own base to grow significantly. And certainly any of our expectations for 2021 are supported just by those two things, supporting our new cash sales, and it's just starting to penetrate our existing customer base. I will say we've discussed the third step, which would be do we go beyond our dealer channel? And really I think we'll judge that based on just the level of acceptance we see for the product, the opportunity to extend it. I could certainly see it someday become a storage-first model as well as it gets more and more popular. But I would say that's a little further out there. We can more than exceed our growth expectations from our existing customers dealer channels with New Solar and our existing customer base for the next year.

If I can quickly clarify that super quick, on the ability to go back to existing customers, would that have to be at a certain point in time, or can you literally go back, given the financing and all that, to your customers you've just recently sold, practically?

We can go back to them right away. The issue right now is just choosing the priorities about where we because we're building up installation capacity and really kind of ramping the product. But for a big portion of our customer base, we could address that market right away. We are prioritizing the new sales to maximize revenue per customer, but the product is able to be installed at a big portion of our customer base kind of really right out of the box.

Thanks, guys.

Thanks, Julie.

Thank you. Our next question comes from Pablo Molganoff with Raymond James. You may proceed with your question.

Thanks for taking the question. Two quick ones, both in relation to the ITC. First one, if you have any predictions on whether anything will happen with the ITC legislatively in the laying back session. And second, back when you gave guidance for 21, Obviously, there was no visibility at all on whether ITC might make it into a stimulus. There's perhaps a little better clarity on that today. Would there be any guidance change for 21 if there were to be an extension announced in the lame duck?

So, I think you probably know more than me about the lame duck possibilities that which I do know I would say that it's low odds but not no odds and we're engaged though and I think if you go beyond lame duck it's very much on the table in terms of impact on 2021 I think it would have some impact on more than offset, of course, by the multi-year improvement in our plan and our ability to scale and get costs down faster and be more aggressive. But, Norm, do you want to say anything? And then after, Norm, you're done, I'm going to wrap it up.

I don't know if I'd add too much other than, I mean, I think that there could be a small impact in the second half of the year as far as kind of the the increase in cash that might be generated based on a significant roll-off, but obviously more than made up for the long-term benefit this would have, and we're obviously very, very big supporters of an extension of the ITC.

And, Patel, I would add that the new homes business is largely insulated from that dynamic, and storage is – a little bit more insulated from that. So there's some things that would smooth out changes. So, Pavel, I think we're all set, right? Thank you. Okay, thanks, Pavel. Thank you, everybody, for joining our call. We look very much forward to our next call with you where we'll nail down 2021 and we'll have a good insight into the new year and, of course, the outcome of the election. So thanks, everybody, very much.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.