Complete Solaria, Inc.

Good afternoon. Welcome to SunPower Corporation's fourth quarter 2020 earnings call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. I would now like to turn the call over to Mr. Bob Okunski, Vice President of Investor Relations at SunPower Corporation. Thank you, sir. You may begin.

Thank you. I'd like to welcome everyone to our fourth quarter 2020 earnings conference call. On the call today, we will start off with a strategic summary of the quarter and 2020 performance from Tom Warner, CEO of SunPower, followed by Manu Sayal, our CFO, who will review our fourth quarter 2020 financial results before turning the call back over 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 earnings press release, our 2020 10K, and our quarterly reports on Form 10Q. Please see those documents for additional information regarding those factors that may affect these forward-looking statements. Also, we will reference certain non-GAAP metrics during today's call. Please refer to the appendix of our presentation as well as today's earnings press release for the appropriate GAAP to non-GAAP reconciliations. Finally, to enhance this call, we have 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 also posted a supplemental data sheet detailing additional historical metrics. With that, I'd like to turn the call over to Tom Warner, CEO of SunPower. Tom?

Thanks, Bob, and thank you for joining us. On this call, we will provide an overview of our fourth quarter performance, as well as a brief update on our individual business segments. 2020 was a transformational year for SunPower, as we completed a number of strategic priorities to position the company for success in 2021 and beyond. We are confident that our focus strategy following this successful Maxion split positions us for long-term profitable growth. Please turn to slide three. In Q4, we saw strong residential customer growth, adding 13,000 customers and bringing our installed base to more than 350,000. Commercial demand remained healthy, as well as megawatts rose more than 40% sequentially across both businesses. Unit economics improved as gross margin per watt rose approximately 50% quarter over quarter. Additionally, we also significantly delevered our balance sheet, achieving our net debt target ahead of our analyst day forecast, while also lowering our cost of capital. We also further strengthened our balance sheet through our successful 2021 convert tender, and reduced our net debt to EBITDA ratio to less than 2.5 times. Finally, we exceeded the top end of both our gap net income and adjusted EBITDA guidance. Consumers and businesses continue to seek cleaner, more affordable energy and more resiliency in the face of increased grid outages and shutdowns. These factors, as well as others, are driving strong industry tailwinds. Please turn to slide four. U.S. residential solar growth is set to accelerate over the next five years, driven by the recent extension of the ITC, the increasing affordability of solar, as well as a broader acceptance of solar as an integral part of combating climate change. The new homes market post the California mandate is growing rapidly. We expect our new homes growth rate to exceed 40% over the next few years given our leading market share and strong backlog. As fires and storms challenge the grid and rolling blackouts and shutoffs increase, storage demand continues to rise. We expect to see rapid adoption over the next several years in both commercial and residential markets as storage offers customers improved economics and resiliency to power outages. Finally, we see significant opportunity in the electrification of buildings and transportation. We believe our investments in storage digital solutions and our broad DG services platform will give us a distinct advantage in offering a seamless integration of future energy services, giving customers more control of their energy use and cost. In addition to the strong industry tailwinds I just discussed, we see significant opportunity to drive long-term growth through the expansion of our addressable market. Please turn to slide five. SunPower has long been a leader in the distributed generation solar and storage market, which we expect to grow to a $65 billion market over the next 30 years. As we look to 2021 and beyond, we see three key areas to expand the markets we serve. First, capitalize on increasing demand for front-of-the-meter storage solutions to the CNI segment through continued investment in our Helix storage platform. Second, we are developing new digital services that enable customers with solar and storage to monitor and take control of energy use in their homes and electric vehicles. Finally, we will use our Power of One platform to extend our industry-leading marketing, software, and financial product offerings to capture incremental business from the long tail of solar installers. I'd now like to discuss our top three priorities for this year. Please turn to slide six. First is to execute on our growth plan for 2021, which we expect to drive overall revenue growth of 35% year over year. In residential, we expect to exceed 40 percent revenue growth driven by strong momentum exiting 2020, rapid new homes growth, expansion of our TAM through our direct channel, and accelerating storage sales. In the CNI segment, we expect to deliver 20 percent revenue growth with at least a 10 percent improvement in gross margin per watt as we expand our behind-the-meter in community solar efforts. Our second priority is to improve our profitability through margin expansion. As we discussed at our analyst day last year, in addition to ramping storage in 2021, we see a full year impact of our significantly improved lease and loan financing. This strategic shift from straight cash product sales to more finance products enables more people to adopt solar at highly attractive rates and economics are improving due to our lower cost of capital. Given these trends, we see adjusted EBITDA tripling in 2021 and growing at more than 40% in 2022. Our third priority is to thoughtfully deploy capital for longer-term growth. We plan to leverage innovations occurring in EV and smart home segments to offer additional services to new and existing customers, as well as further investing in our Power of One platform to extend its reach to a wider partner and customer base. Additionally, within the CNI segment, we will expand our Helix software platform to participate in the fast-growing energy as a service market and address front of the meter demand. We are also continuing to further integrate our ESG efforts into our corporate strategy. We are making significant progress on this front and expect to release our 2020 sustainability report this spring. I'll now like to shift to the performance of our individual business segments. Please turn to slide seven. Our residential and light commercial segment continued to outperform as momentum builds in this business. In addition to strong sequential megawatt growth, gross margins rose to 24%, up from 18% in Q3, and is a record since adopting cash-based accounting. Our overall mix between cash, loan, and lease sales remained relatively stable for the quarter. However, starting in Q4, we put in place a number of initiatives that are expected to shift our cash mix over time to more financed and full system sales versus cash equivalent sales. These efforts include our highly successful and expanding loan partnership with TCU, as well as our new lease financing programs, both of which can drive long-term expansion while improving economics for our customers. We are already starting to see this in Q4 as residential value creation rose to 46 cents from 30 cents per watt in the quarter. More on this in a bit. New homes also performed well as sequential megawatts grew more than 40% with strong quarterly bookings resulting in a record backlog of more than 180 megawatts. Our market share remains above 50% with significant interest in our OneRoof and SunVault products from many of our builder partners. Finally, we are very bullish about the future of our SunVault storage solution. With our high-efficiency, completely integrated storage solution, we are uniquely positioned to serve customer needs, drive revenue, and build the foundation for future services. We expect to not only benefit from the sales to new customers, but also through our 350,000 strong customer installed base. For the quarter, we continued the ramp in our dealer channel and saw consistent sales attach rates of 20%. We also saw strong interest in our larger 26 kilowatt hour SunVault solution, raising the incremental revenue per sale above 30% on average. As we highlighted at our Capital Markets Day, we expect SunVault to contribute $100 million in revenue in 2021 and remain confident our supply chain can meet this goal. On slide 8, we are providing a more detailed look at our residential unit economics, which we expect to continue to improve as we go through 2021. We look at residential value creation as margin per watt installed, which can come from storage services or improvements in our financing structures to lower our cost of capital. As we look into 2021 and beyond, we expect our mix of cash versus finance systems to continue to shift towards more finance systems which improves our residential unit economics. We expect about two-thirds of our residential systems to be financed by the end of Q4 2021, driven primarily by growing demand for our attractively priced loans offered through the TCU program and lower cost leases. We continue to invest in digital tools that result in long-term benefits for our dealer partners and customers. Over the past several years, we have built a very robust dealer platform with some of the leading digital marketing and operations solutions that have helped our dealers generate more sales at lower cost. In the future, we plan to incrementally monetize this digital platform by extending some of the elements to long-tail customers. Excluding these digital investments, our Q4 residential OPEX was 20 cents per watt. Moving on to CNI on slide nine. Our CNI solution segment also performed well, and we remain excited about our growth prospects for this business. For the quarter, we posted 8 million in adjusted EBITDA, added to our record pipeline of more than $4 billion, and positioned ourselves to deploy more than 90 megawatts of community solar over the next few years. Gross margin per watt rose to 40 cents, driven by solid execution, increased storage installs, and improved cost structure. We expect gross margin per watt to increase another 10 to 20 percent in 2021. Also, demand for helix storage remains high as Q4 attach rates were above 30 percent while installing 18 megawatt hours for the year. Long term, we believe we are well positioned to capitalize on the rapidly evolving landscape in the CNI space. Please turn to slide 10. The CNI landscape continues to evolve as more and more projects are looking to integrate storage offerings from behind as well as in front of the meter. We are well positioned to capitalize on this trend given our experience, installed base, and industry-leading solar and storage solutions. We are focused on three strategic initiatives that will enable us to significantly expand our CNI TAM. First, continue to serve the behind-the-meter market while laying the foundation for our front-of-the-meter offerings, given our strong origination and development experience. Second, further build on our $4 billion pipeline in both solar and storage by expanding our partner relationships and customer base. And third, leverage our industry-leading technology and experience to add additional functionality to our Helix platform to expand our addressable market. Overall, we remain very excited about the opportunity at CNI going forward. With that, I'd like to turn the call over to Manu Sial. CFO of SunPower.

Thanks, Tom. Please turn to slide 11, where we have provided our consolidated financial results and select metrics. We are pleased with our financial performance for the fourth quarter as we exceeded our gap net income and adjusted EBITDA guidance, our business units generated cash, and we significantly reduced recourse debt. Moving on to the specifics of the quarter. We saw continued performance in both our segments, and overall megawatts recognized rose more than 40% sequentially, with our residential and light commercial segment up 35% sequentially. Our CNI solution segment was also up approximately 65% compared to the third quarter. We expect this strong volume trend to continue at least through 2022. Consolidated non-GAAP gross margin in DEFCO was 50 cents per watt and up 50% from 34 cents per watt in third quarter with residential at 64 cents per watt in fourth quarter. We benefited from improvements in our residential loan and lease economics in the fourth quarter and expect our gross margin per watt improvements in residential to accelerate in 2021 from these initiatives. Non-GAAP OPEX per watt was 27 cents per watt down 13% sequentially as we are seeing the benefit of cost initiatives and scale. If you exclude our investments in digital and products, which we see as more capital deployment than OPEX, OPEX per watt was 21 cents per watt. As Tom had mentioned, we created 46 cents per watt in residential value in fourth quarter 20 and are driving initiatives to enhance project economics and improve business mix to significantly increase residential value creation for SunPower. We have a very strong fourth quarter EBITDA run rate going into 2021. While our business is seasonal with a stronger second half performance compared to our first half, we have done significant work in 2020 to improving linearity. We expect a profitable first quarter 21 for both our businesses, though CNI will be less linear given its longer project cycle times. Our power core metrics that we laid out at Capital Markets Day are tracking well with services pipeline that include future revenues from asset management services grew sequentially and was $637 million at the end of fourth quarter, giving us confidence in achieving 2021 revenue targets. The traction and storage that Tom mentioned earlier not only adds incremental margin to the system, but along with investments in digital, sets us up well to build out recurring revenue streams. Also, in order to improve transparency for investors, we are now disclosing SunPower's share of net retained value in our residential leases. For the quarter, our net retained value was $211 million and ahead of forecast. Given increasing strength of our balance sheet, we are committed to lowering our residential cost of capital from the current 6% mentioned in the last earnings call, as well as we'll look to increase our share in project economics going forward. Finally, we ended fourth quarter with significant strength in our balance sheet, with materially reduced net debt driven by business unit cash generation and a successful tender offer for 2021 converts ahead of our capital market stay targets. We expect continued cash generation from our business units through 2021. Given our balance sheet strength and cash model, we expect to further invest in initiatives to expand our total addressable market in 2021 and beyond, build out our digital and software strategy to enable future services while expanding our platform reach to a wider partner and customer base. With that, I will turn the call back to Tom for our guidance. Tom.

Thanks, Manu. Please turn to slide 12. The company's first quarter in fiscal year 2021 guidance is as follows. First quarter gap revenue of $270 to $330 million, gap net loss of $20 to $10 million, and megawatt recognized $115 to $145. As we stated at our Capital Markets Day, we expect to be non-GAAP profitable every quarter in 2021. We see first quarter adjusted EBITDA in the range of $10 to $20 million. For fiscal year 2021, given the confidence in our business coming into the year, we expect to see a stronger performance than we forecasted at our 2020 capital markets day. The company now expects GAAP revenue growth of approximately 35%, Megawatt's recognized growth of approximately 25% and adjusted EBITDA at or better than our previous indications at our Capital Markets Day last year. Finally, given strong industry tailwinds, continued federal policy support, as well as increasing demand for its residential and commercial storage solutions, the company expects revenue and adjusted EBITDA growth of more than 40% in 2022. In summary, Q4 was a solid quarter for the company, and we remain confident that we are well positioned for success for 2021 and beyond. With that, I would like to turn the call over to questions.

As a reminder, to ask a question, you will 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 the line of Brian Lee from Goldman Sachs. Your line is now open.

Hey, guys. Thanks for taking the questions, and kudos on a solid quarter and year end. Maybe first on the guidance, I wanted to just try to square something up. I know you guys are raising the revenue view versus the capital market stay. Gross margins sound like they're doing better as well. But on slide six, it says you're going to do three times the EBITDA in 21 versus 2020. I guess that implies something like $120 million. But you had talked about a greater than 10% EBITDA margin in 21 at the capital markets day. I would assume that's still intact, if not even going higher, given the gross margin view and revenue view here. So can you kind of square that up? Why the adjusted EBITDA? Margin growth wouldn't be better than that, given the 10% view, or is it something changing on the margin target there?

So I'll say a few words, and then I'll let Manu comment. It should square up, so we appreciate the question. As you know, really late in the year, we got the investment tax credit extension And so we got the sort of positive impact of the step down in 2021. I'm sorry, 2020. But then it was extended. So there's the impact of the extension is not favorable to both revenue and earnings in 2021. But it's a sign of the strength of our business. We're actually thinking it would be the same or better. And that gave us confidence to give color on 2022. In terms of the comparison of margin and EBIT as a percentage of sales, Manu, do you want to comment?

Yeah, I think, Brian, the way to think about it is both our megawatt growth and revenue growth is better than our implied guidance at the capital markets day. Our gross margin is also stronger, specifically in the residential business. So the gross margin rate should be better than what was previously you know, what you derive at from the capital market stay metrics, and that should translate into a stronger EBITDA performance. We can clean up the specifics in the callback.

Yeah, Brian, I would only add that there is some level of incremental OPEX investment for 2022 because we do have the ITC extension, so there's a little bit of incremental investment in some of our marketing for the RLC channel and the community solar effort going into 2022. So there's a little bit of impact from that.

Okay, fair enough. I'll take that offline just to kind of square up the numbers. And then just a second question, I'll pass it on after this. The new homes opportunity in California, you guys have obviously been very pioneering in terms of leading that vertical. Can you talk... a bit more about sort of the visibility here for 21 in the midst of kind of the ongoing pandemic. Has that impacted that opportunity at all? And then with respect to the Sunova-Lennar announcement today, just wondering, you know, were you working with Lennar at all? And do you have anything exclusive in your home builder relationships? Or could you see a similar arrangement with any of your partners in that channel? In the future, have you contemplated something to that effect at any point? Thanks, guys.

I'll start the answer to this question, then I'm going to hand it over to Norm and just say a few things. First, visibility is great. It's inherent to the channel. And we have such long-term relationships with 18 of the top 20 builders that we benefit from that in terms of visibility. But I'll let Norm give any specifics there. Hats off to Sunova and Monar for their transaction. We do not do business with them. We did at inception like 10 or 15 years ago, but there is no business today, so there is no business lost. And in terms of exclusivity with 18 of the top 20 builders, I'm going to turn to Norm for any specifics and comments on visibility. Okay.

Yeah, thanks, Tom. Yeah, I mean, just to echo what Tom said, you know, as Tom mentioned, we have 18 of the top 20 builders. Well, one of the two that's not in the 18, of course, has been Lenar. So we have not done business. We don't expect this to impact our business at all. In fact, our new homes business is growing at a terrific clip. We indicated we have record backlog. And interestingly, right now we're on pace in Q1 to set a bookings record, which is very unusual for what is usually a seasonally weaker quarter in new homes. We actually expect this quarter to end up at a bookings record. So that business is accelerating with us. We don't have exclusive arrangements with our dealers. I think our strength in that business, frankly, has been 10-year relationships with the top builders who are absolutely confident that SunPower is going to deliver on time and execute. This is very much an execution installation as well as a sales and product business. And so we've always been very successful because we've built up those relationships They also love the fact we have very high efficiency panels, so we need less panels per roof. And now they're quite interested in adopting SunVault for storage and solar. So we remain very, very bullish in the new homes business, have excellent visibility to it, and expect it to outgrow our overall business in 2021. All right. Thanks, guys. Thanks, Brian.

Thanks, Brian.

Thank you. Our next question comes from the line of Michael Weinstein from Credit Suisse. Your line is now open. Michael Weinstein from Credit Suisse, your line is now open. Please check your new line.

Sorry about that. I was on mute, yes. Sorry about that. Hey, and your profits or your EBITDA growth for 2022, What are you assuming in SunStrong's cost of capital assumptions regarding discount rate for a lease value profit per watt?

Okay. Manu may need a little more clarity there. Manu, you want to go straight to it?

Yeah, sure. So, Michael, as we communicated in the last session, earnings call, our residential cost of capital is 6% for our leases, and then we have a favorable cost of capital for our loans as well. Specifically answering your question regarding SunStrong, slight improvement in our cost of capital going in from 21 to 22. I think you will see that improving cost of capital across our financing products for both leases and loans, and that should bear well for margin and also impact favorably the mix of between equipment sales and finance products. As you think about the modeling assumptions between 21 and 22, that gives us confidence on increasing EBITDA greater than 40% going into 2022.

Michael, let me add on. Your pause on mute froze my brain, but it unfroze. The improved cost of capital is not a significant variable going into 2022 and is not necessarily driven by what we've set rates to do, but it's by the actual performance of our leases and loans and further working with our partners to pull out redundancies and costs, some friction that still exists. But it's not a significant variable.

And, you know, just are you seeing any kind of module constraints on the 180 megawatts of new home demand, the backlog demand? I guess it's more of a Maxion question, but I'm just curious if there are any constraints on that, especially given the China labor issues that are out there.

Yeah, I'll make quick, quick answers now. And that's one of the advantages of the relationship we have in I remember that most of our modules are made, the solar cells are made in either Philippines or Malaysia and assembled in Mexico. And we're in good shape.

Right, but you're not seeing, I guess, a growing demand for non-Western China modules, right?

Ah, I see. There is an element of that. but that's minimal impact on us. And so you'll probably get more cover on that when you talk to the Maxion folks. Gotcha. Okay, thanks, Josh.

Thank you.

Thank you. Our next question comes from the line of Ben Carlo from Baird. Your line is now open.

Hey, thanks for taking my question. Good evening, guys. Good afternoon. So just on the digital and product investment, I see it stretching back into last year and then throughout this year. Is this something that we should view as recurring? I apologize if you said this. How much of an investment should we think about on that line? Then I have a follow-up on a bigger issue.

Ben, I'll give a little color. I think Norm and Manu may want to say something as well in terms of the amount of spend. Yes, it's recurring, but we expect it to become more efficient, so a lower percentage of revenue. And it's an investment we made when we think of digital, think of customer tools, obviously, that's monitoring in the app that they have, and then think of extensive dealer tools as well, and, of course, commissioning, commissioning of the solar system and of the storage system, just to give some color. And that investment goes back probably more like four or five years, as we've evolved. Maybe, Norm, you could take it from here and give some sense of scale and whatever else you want to cover.

Yeah, I think that, you know, as you said, I think we can see a consistent investment going forward in there, which will be, as we grow, the percentage basis go down. And the digital tools, we think, are core to what makes us different, as well as our product solutions. So, you know, obviously, SunVault and the complete solutions, but also the The digital tools, it's important to emphasize a lot of those enable our loan and lease products, not just offer tools that our dealers and our customers can use. But they're one of the key things that really allows us to provide complete solutions to our dealer channel and to the broader marketplace overall.

Great. My follow-up question, Manu, I think I heard you say that you guys will possibly, because of your balance sheet, and maybe because of your stock price, and maybe tell us if that matters, that you're going to take more of the economics of the lease and loan going forward. Could you just maybe expound upon that a little bit? Thank you, guys. Thanks, Ben.

Yeah, so I think maybe the best way to talk through that is, you know, if you look at our slide eight that talks about the residential value creation, I think what you'll see is with the improving economics in our leases and loans, we are seeing improving profitability through the years. You can see that on the page. And if you compare that to the value creation coming from our cash products, I think the inherent mix between the two allows for – creating greater customer value but also creating greater value for SunPower, and that will impact our mix between just equipment sales and more finance systems. Norm, would you like to add anything?

No, I think the main driver is just the only thing I would say is the main driver of the improvement is the fact that we have much better both lease and loan economics that really just impacted Q4 in 2020 compared really for a full year as our cost of capital is coming down. And that really is driving our, it's still cash-based economics, but it is getting better and better for lease and loan because the foundation is much better from a cost perspective.

So it's not about keeping some of the assets on your balance sheet versus not keeping them on your balance sheet per se?

Let me take that norm, right? So I think with a... Ben, I think our interest is twofold. One is to provide the maximum value to the customer and keep customer control. And second is improve our share in the project economics. And I think what a strong balance sheet does is it allows us to play in different structures that allows us greater flexibility in doing both of the things I described while reducing our cost of capital. That's what a good balance sheet does for us.

Great. Thank you for that clarification. Thanks, Pat.

Thank you. Our next question comes from the line of Julian Dumoulin-Smith from Bank of America. Your line is now open.

Hey, good afternoon. Thanks, guys. I appreciate the opportunity. Listen, I'd love to hear more about the storage ramp here. You guys talked about it several times through the prepared remarks, but really, Emphasis on availability and just being able to execute given the constraints in the inventory channels, et cetera. I would love to hear a little bit more on that and also the front-of-meter comment you guys made as well on Helix.

Okay, Julian. Tom Warner here. I'll say a few words and then turn to Norm, and then I'll come back on front-of-meter. We do have Eric Potts, so he may say a few words as well. There's various elements. Demand is great on outstripping supply. Second, supply, we're good. I'll let Norm go into detail. Third is installation labor. We're ramping, we're training, and we're able to hire sufficiently. That's sort of a broad overview. Norm, why don't you take it from there?

Yeah, happy to. We are still in the upfront ramp phase, but as Tom said, demand is very, very strong. We are managing the supply chain stuff very closely and watching it closely. Right now, we don't see that limiting our ability to hit our plans this year and the $100 million of incremental revenue that we talked about on the call. So we still think we did that, although most of that demand is, of course, at the back half of the year as far as the growth plan goes. So we are watching that closely right now. Everything looks okay, but it's got the attention certainly of our supply chain organization. Right now, our demand has strictly been California as far as we're installing. We've just opened up sales outside of California, so we expect that to be another driver of growth. And then importantly, later in starting in second quarter, we'll actually release the ability to sell SunVault to our install base. Right now, it's only sold with new installations, be it either new homes or retrofit customers. But starting in Q2, we'll actually also be able to attack our installed base with SunVault. So, so far, so good. The feedback from the dealers and the customers is excellent. We're still at the early part of the ramp, but the product itself is being extremely well received.

And just quickly on front-of-the-meter storage, I'll say really short few words and turn it to Eric Potts. We started Helix Storage three years ago. Our software is working great, and we have a strong, now strong, behind-the-meter business that gives us synergies with front-of-the-meter, and I'll let Eric to mention it a little bit.

Sure. Thanks, Tom. Yeah, our origination and development platform really allows us, with our Helix technology, to be able to attack the front-of-the-meter market, which, as you saw on the TAM slide, is sizable. We have about 25 megawatt hours under contract right now, which we plan on building in 2021. And active and growing pipeline is over 400 megawatt hours. So it's an area where we feel like our personnel and our software enable us to enter that market quite competitively.

Right. Excellent. Just a quick clarification, guys, on the last couple here. The drive to 65% you guys have talked about, How exactly do you do that in terms of your go-to-market strategy? Just elaborate on this 12-month target.

Sure. So, Norm, the question is, is there a shift in mix to loan and lease? And the one thing I'd say, and then I'm going to turn to Norm, is we're actually riding with the current 70-plus percent of the market is cash and loan. and loan economics have improved dramatically. I'm going to turn it to Norm now to expand on that a little bit.

Yeah, you hit the biggest thing there is we continue to see, even with the ITC extension, even more momentum moving toward loan. And then we've introduced some very attractive loan offerings in the past. I'll give you a hint. There will be more of those coming very, very soon, more announcements in that area. Low APR loans that really give the customer tremendous economics versus, any other alternative. So that's certainly shifting our volume. We are also working to expand our capabilities of our platform and to push and to essentially make it more economical for our dealer channel to use our lease and loan products going forward. Those are becoming more and more attractive. We still get better economics, but we're also making sure it's more attractive for our dealer partners to to finance the whole solution through us, and that's a concerted effort that we've really started mid-last year as our economics got so much better for our finance products. And we expect that trend to continue. It also reflects the growth of things like new homes where you have a big portion of the market being kind of the full-stack market with lease already, and so that also contributes to the growth in the finance portion of our business.

Awesome. Thanks, guys. Best of luck.

Thanks, Julian. Thanks, Julian. Thanks, Julian.

Thank you. Our next question comes from the line of Jeff Osborne from Cowan & Company. Your line is now open.

Yeah, thanks much. I just had one follow-up on the in front of the meter. Who actually owns those? Is it the corporate customers, or are you retaining those on balance sheet and submitting them into different ISO programs? Can you just flesh out what the business model is there?

Sure, Eric, can you take that?

Yeah, I'd say we're still assessing the business model. Our pipeline has a mix of approaches, primarily the ones that are the ones we have under contract right now. It's not SunPower owned, it's a customer owned facility.

Got it. And then, Tom, can you just touch on the CNI visibility for the guidance for the year? Is that fully booked at this point, or it looked like you were getting off to a slow start in Q1, but I wasn't sure after the strong Q4 how to think about the momentum through the year.

Yeah, yeah, I appreciate that. So we actually had a really strong bookings year in 2020 and ended the year with our best booking quarter of the year and probably our best booking quarter in quite a while. I don't remember the exact percentage going into the year, so I'm going to turn to Eric for that. Since this is a projects business, it's more timing of projects, and we've seen this profile the last few years. So it's mostly a profile we're comfortable with, and I think it's important that the economics of the business are sustained, even though we've got this sort of ramp throughout the year. Eric, percent back on?

Roughly three-quarters. 75% in backlog, and the remaining 25% have been awarded, and it's now a matter of signing and then constructing those projects.

Got it. Thank you. That's all I have.

Thanks, Jeff.

Thank you. Our next question comes from the line of Philip Shen from Roth Capital. Your line is now open.

Hi, everyone. Thanks for taking my questions. Had some follow-ups on the loan product. You know, Sunlight and LoanPal have been out there for a while, and I know you guys launched this about six months ago, and you're having some success. Can you talk about what percentage of your dealer base is using your loan product and how to expect that to trend going forward? You know, some of our dealer checks suggest, you know, the dealers are comfortable sticking with LoanPal and Sunlight. Okay. You know, the economics with your loan offering relative to theirs from our conversation sounds like it's similar. And then there's possibly some challenges with a new launch and so forth. So just curious, how do you guys win the business and get a greater mix of the dealer base onto the loan product?

Norm, why don't you go ahead and take that directly? Okay.

Yeah, for sure. Well, more than half of our dealers use our loan product in some level, and so there is opportunity to get more of that, but we have very, very good penetration in our dealer channel already with our loan. And part of that is really, one, having a good product offering, and with the addition of TCU, we've broadened our offering significantly with low APR loan, et cetera, which has really helped. and part of it will be continuing to improve that to take more and more of that share. But also part of it is being able to provide that entire service in a unified platform, and that's a lot of where the digital investment goes. Giving our dealer channel the opportunity to offer customers, whether it be cash, loan, or lease in the same environment, to be able to do a single credit check to address and choose which of those options make the best sense for them. The more we can provide them an easy path to solving the customer's problem and providing the customer the options they want, the better off we are. And so that's a huge effort for us is to continue to focus on the digital, making it easier and easier to do business with us, and offering more and more products in both lease and loan to increase our share of that financing business. But it's already significant. We are already a significant supplier of loans to our customer base.

Great. That's really helpful, Norm. Thanks. Can you help us understand, if you're in over half of the dealers, what percentage of your loan originations or of the dealer loan originations is the TCU SunPower product? And back at the capital market today, you guys talked about a $0.25 per watt improvement in your target by the end of 2021. It sounds like you guys might be making good progress to that. Help us understand if you're still on track for that and perhaps where you are with the goal of hitting 25 cents per watt.

Let me take the second part first. We're well along the way. I would say we're ahead of our plan on delivering that incremental margin per watt. I will tell you that the TCU percentage of our business has exceeded our our expectations. And so as far as delivering on that incremental, we're very, very well along, and I think we will probably hit that earlier than we anticipated next year. On your first one, honestly, I would have to go get that number. I don't know off the top of my head what the percentage of what I guess you would say is the loan TAM in our dealer base that is using our loan. I just don't have that off. I just know kind of the raw number of dealers using it. But we can follow up and get that data. I just don't want to make something up. I don't know the number off the top of my head.

Okay. Thanks, Norm. Just as another follow-up here, as it relates to the lease offering, you guys gave that $0.40 per watt goal back at the Capital Markets Day. How are you guys there? Are you making healthy progress on that goal? And can we have a quick update on that as well? Thanks.

Yeah, I think Norm will take that, and he's going to say probably very similar. Go ahead, Norm.

Yeah, yeah, for sure. We're making great progress. Similar thing, you know, the lease, once you improve your lease economics, it takes a little longer to flow through the pipeline because lease has a longer cycle time. But we already in Q4 started to see the impact of much better lease economics. And, again, I would say we were a little bit on the conservative side there relative to what we're able to garner from Our lease economics have been the most dramatic improvement of all three of our platforms over the last year as far as versus where they were, which, of course, is what we were forecasting. And we're well along delivering that improvement that was forecast.

Great. All right. Thank you all for the detail. Thanks, all. Okay.

Appreciate it. We're going to take two more questions, questioners, and we're going to try to do it pseudo-whitening round. So we hit time frame for everybody. So next question, please.

Thank you. Our next question comes from the line of Kashi Harrison from Simmons Energy. Your line is now open.

Good afternoon. Thanks for taking the questions. I'll keep it quick. First one on operating cash flow, Manu. During Q4, you generated a CFO of, you know, call it $15 million relative to adjusted EBITDA of $39 million, giving us a ratio of just under 40%. Just wondering how we should think about the ratio between operating cash flow and EBITDA guidance for 2021.

Yeah, so I think as you think about our fourth quarter operating cash, I think one of the numbers I'd point you to is our two operating businesses, the residential business and the CNI business, generated about $35 million of operating cash. that is a much higher percentage of the EBITDA that these two businesses generated in the fourth quarter. So what I would do is I would take that ratio and both businesses should be seeing improving cash performance from EBITDA to cash translation. And I would use that as a way to get to working capital metrics for 2021 or operating cash conversion from EBITDA.

Got it. That's helpful. And then my second question, so it looked like Q4 megawatts recognized were a smidge under the midpoint of guidance. I was just wondering if you could talk about maybe the gap between actuals and expectations. And then looking towards Q1, I was hoping you could help us break up the megawatts into residential, light commercial, and CNI. Just try to think about that split between the three business lines in Q1.

Sure. The comment I'd make on the megawatt number for fourth quarter is our commercial business has a mix of projects, so some of that megawatt variance is to the midpoint was driven off that. I would point out that both the businesses did extremely well from a gross margin and EBITDA perspective. That resulted in above-guidance EBITDA. Then in terms of our megawatt for our first quarter, the breakup between residential light commercial and CNI is about 85-15. And I would say the light commercial part of the residential business is between 25 and 30%. In line with how we got it.

Okay, thank you. All right, last questioner, please.

Thank you. Our next question is from the line of Pavel. One channel from Raymond James. Your line is now open.

Thanks for taking the question. First, just quick housekeeping. Net retained value was barely up during 2020. Any reason for that?

Manu? So, yeah, I can help answer that. I think as you disaggregated the numbers between fourth quarter 19 and first quarter 20, we realized some cash out of the portfolio. for SunPower, and that reduced the retained value. That number went up from first quarter 20 to the end of fourth quarter. So you can see that increase from start of the year to the end of the year. So the year-on-year variance was driven by us extracting cash from the portfolio in first quarter 20. As you look forward to next year, we should be in the $250 million range in line with what we have committed at the capital market. Okay.

Slightly broader question. You alluded to the lack of demand pull-in this year because of the ITC extension. Do you anticipate demand pull-in re-emerging in 22?

So, of course, that happens at the end of the year, so at the end of this year. And I would say, frankly, I'm optimistic that the ITC would be further extended at 26%. And I think there's early discussions of that being part of an infrastructure bill later this year. And there's also already been proposals that give us something to focus on. So as we look to 2022, no, we didn't build that in. Thank you very much. All right, thank you so much. We appreciate everybody calling in. Thank you for the questions, and we look forward to our next call with you. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thanks for participating. You may now disconnect.