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spk02: Good day, and thank you for standing by. Welcome to the SunPower Corporation third quarter 2021 results conference call. At this time, all participants are in listen-only mode. After the speaker 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. If you require any further assistance, please press star 0. I would like to hand the conference over to your speaker today, Michael Weinstein, Head of Investor Relations. Please go ahead.
spk07: I would like to welcome everyone to our third quarter 2021 earnings conference call. On the call today, we will start with comments from Peter Farrisee, CEO of SunPower, who will provide a summary of third quarter highlights, discuss our strategic growth and investment plans. Following Peter's comments, Mano Sial, SunPower's CFO, will then review our third quarter financial results as well as provide an update to our guidance. As a reminder, a replay of the call will be available later today on the investor relations page of our website. During today's call, we'll 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 2020 10-K, and our quarterly reports on Form 10-Q. Please see these documents for additional information regarding those factors that may affect these forward-looking statements. Also, we will reference certain non-GAAP metrics today on today's call. Please refer to the appendix of our presentation as well as today's earnings press release for appropriate GAAP to non-GAAP reconciliations. Finally, to enhance the call, we've also posted a set of PowerPoint slides, which we will reference during this call, on the events and presentations page of our investor relations website. In the same location, we have also posted a supplemental data sheet detailing additional historical metrics. With that, I'd like to turn the call over to Peter Farisi, CEO of SunPower. Peter?
spk03: Thanks, Mike, and good afternoon, everyone. I'd like to take a moment and welcome the newest members of the SunPower team from Blue Raven Solar, now joining us for their first public earnings call. We are very excited to have them on board as we continue to expand our presence across more states and deeper into all segments of the residential market. As I told you last month, we view the acquisition of Blue Raven as an important step towards growing the company geographically, and providing our customers with the best possible experience in the industry. As we will discuss further in a few minutes, we are building on this acquisition with four important investments across the organization through 2022. Building a world-class customer experience, number two, expanding our product offering, number three, growing our sales footprint, and four, expanding and upgrading our customer financing options. Over the past few years, you've been with us through several major restructuring events and strategic changes. I'm pleased to report we have found our footing. With a streamlined company and our healthiest balance sheet in years, we are now going on offense to grow our business across a vast, mostly untapped residential TAM. Please turn to slide number four. SunPower's third quarter financial results were in line with our October 5th update. Residential demand remained strong, with 29% customer growth in the quarter versus last year, and we remain on track for a $100 million bookings run rate for SunVault by year end. As we consider our options for the CIS business, we continue to view prospects for this business as bright for the right owner due to the robust bookings and federal policy tailwind. As expected, we have received indications of strong interest in the business from multiple outside parties. We expect to be able to update you further on our strategic decision process before the end of the year. As we've discussed before, the recent acquisition of Blue Raven Solar increased our geographic exposure beyond California to 50% of annualized sales. We continue to target further meaningful sales diversification through 2022 and beyond with a combination of organic growth initiatives that would achieve our goals and enhance shareholder value. We are also building our capabilities to offer customers new financial options, more integrated product offerings, and the best customer experience in the industry. Towards these ends, we've made three key senior leader hires More on our newest executive team members later in this presentation. We are also delighted to announce that SunPower was selected to participate in the Department of Energy's Connected Communities Demonstration Program, which we think will highlight the value of distributed solar and storage as a grid service. Finally, last month, we are proud to announce SunPower's 25 by 25 initiative to support solar to underrepresented communities. More on that in a minute. Please turn to slide number five. Our core residential business is growing fast. With 14,200 new customers added in Q3, 29% growth versus last year. We also have a quarter's worth of backlog at 117 megawatts, almost double of the Q3 2020 backlog. and robust top of the funnel activity with record lead generation and three times the number of appointments generated versus 2020. This brings the total residential install base to 390,000 customers before adding another 20,000 customers from last month's acquisition of Blue Raven Solar. We also point towards the significant contribution from the new home segment with 5,700 customers added in the quarter and with visibility towards as many as 58,000 more in the pipeline, including multifamily. We recently announced a multi-year agreement with National Luxury Home Builder Toll Brothers to be their exclusive solar provider in California, with a terrific opportunity for expansion to other states. With the industry's most experienced and respected home building division, SunPower is a preferred solar and storage partner for over 20 of the top-ranked U.S. homebuilders, with additional national and regional agreements regularly being added. Residential gross margin for the quarter was 24%, up nearly 50 basis points sequentially and more than 600 basis points year-over-year. We remain on track to exit 2021 at the residential run rate greater than 70 cents per watt. The increase continues to be driven by a lower cost of capital and the continuing conversion and mix from component sales to higher margin full system sales, which totaled approximately 55% of residential installations for the quarter. We also continue to make terrific progress with SunVault. The direct sales business saw an attached rate of 27% in the quarter, and our dealers continue to wrap up sales. We exited Q3 at a bookings run rate of $80 million, and remain on track for 100 million bookings run rate by year end. Please turn to slide number six. Among our highest priorities, we are committed to grow the sales of SunPower across more territory and market segments. We're doing this in three ways. Number one, we're hiring and investing in our dealers and direct sales channels, where we added nearly 180 new dealers this quarter. Our acquisition of Blue Raven Solar last month helped boost our sales profile across more than 14 states with minimal overlap with our existing dealer network. This increased geographic footprint outside of California to 50% of annualized sales, and we continue to investigate additional residential growth opportunities. We're also focused on new direct sales channel penetration, including working with online energy consulting platforms, And finally, introducing more product offerings. Two weeks ago, we announced an agreement with HomeBuilder, the new home company, to include the full complement of SunPower equipment in all 72 homes within their newest community, including an Equinox solar system, SunVault storage, and a Wallbox EV charger that can be configured as a comprehensive home energy management system. The Toll Brothers agreement I mentioned earlier also includes both solar and storage options. Please turn to slide number seven. Last month, we disclosed our plan to redeploy 35 million in proceeds from the sale of our Enphase holdings back into incremental investments that will lead to higher sales growth and gross margin. Here we are previewing three of the major categories of investments. Number one, we're developing a much wider and more cost-effective array of comprehensive customer financing options originated by us directly rather than through third-party lenders for both component and system sales. Loans and leases would continue to be kept off balance sheet. Loan servicing will eventually be handled through our unified MySumPower app where we intend to reduce the friction of loan applications with a 40% reduction in click-through and a 66% reduction in payment processing time. We are also investing in new product development to capture more market share and increase TAM, such as low-cost yet high-efficiency, high-value solar panels targeted for the mass market segment. We're also planning on introducing larger battery systems that will add more features and capabilities, and finally, the use of our wall-box EV charger products as a standard offering along with battery storage. Furthermore, studies have shown that approximately 20% to 30% of EV purchasers ultimately go on to buy a home solar system as well. So in addition to the direct value generated by the equipment sales, we view EV charging as a potentially important method of solar lead generation. Finally, we're investing to improve the customer experience through best-in-class service and support. which I view as the foundation for customer trust and loyalty, and ultimately drive lower customer acquisition costs over time. We are targeting net promoter scores over 50, an indicator that belongs to the most loved consumer brands and best companies in the world. We are also funding digital and tech support for the creation of the MySunPower application that dealers will use from everything from design to sales to customer financing, removing as much friction from the process as possible. We plan to discuss more detail on all of these categories and much more at an analyst day that we are planning on holding in Q1 of 2022. Please turn to slide number eight. To make these critical innovations happen, Let me take a moment to introduce you to the newest members of our executive team. I'll start with Jason McRae, who's our new EVP for financial products and is leading the effort to create our own customer financing operation. He comes to us from Capital Group, where he was chief data officer for investment research. But before that, he's a fellow Amazon alum, where I worked with Jason when he was the general manager of the Amazon lending business and director of research science. Jason also spent seven years at Morgan Stanley as Global Co-Head of Credit Solutions. He's a world-class financial products leader. Number two, we also welcome Nate Coleman as our new Chief Product Officer. Nate comes to us with more than 20 years of experience in the solar industry. Most recently, he was Senior Director of Advanced Products at Sunrun, where he led product development, roadmap, and new product introductions for residential solar, energy storage, and electrification programs. Nate was with SunPower earlier in his career, so we are welcoming Nate back to the family. Welcome back, Nate. And finally, number three, Nuala Murphy joined our team. She leads customer care and comes to us from Wayfair and Amazon, where she headed up Amazon Web Services, Global Customer Care Services Team, and the Worldwide Vendor Support Organization teams for over seven years. She's also a Bank of America alum, where she was SPP head of customer contact. Nuala is a world-class customer care leader, and we are grateful to have her leading our teams. Overall, very fortunate to have Nuala Jason and Nate on board as we transform SunPower into the premier option for residential solar solutions. Please turn to slide number nine. Continuing with the good news, I'm very pleased to announce that SunPower has been chosen to participate in the Department of Energy's Connected Communities Grid Services Demonstration Project. We are partnering with KB Home, the University of California, Irvine, Schneider Electric, and Southern California Edison to develop two new all-electric microgrid-tiered home communities with more than 230 homes participating. Ultimately, we see the successful application of SunPower equipment bringing grid service benefits worth as much as $200 per year to each customer. Please turn to slide number 10. In September, we were very proud to announce our 25 by 25 justice, diversity, equity, and inclusion initiative to ensure that the benefits of clean energy are extended to underrepresented communities with a more diverse workforce and an equally diverse network of dealers and subcontractors. Under the initiative, one of our goals is to extend the SunPower world-class customer experience for people who live in historically underrepresented communities, targeting a buildup to 25% of our residential customer base. This includes the provision of a no-interest loan solar system to low-income customers as part of our plan to roll out more and newer low-cost financing options to everyone. Before I close my remarks, let me make a few comments about NEM and California. For decades, California has led the nation when it comes to accelerating consumer solar and battery storage adoption. We are proud of this leadership, having worked with Governors Brown, Schwarzenegger, and Newsom across our 35-year history of doing business and being headquartered in the state. Governor Newsom in particular has a long history of supporting and advocating for consumer solar, starting with the programs he established when he served as mayor of San Francisco. However, the net energy metering changes proposed by the utilities as part of the state's review process would be a major step backwards, amounting to a tax on consumers who deploy solar and battery storage on their homes and businesses. Distributed solar systems are clearly going to be a major part of the solution for California's stated carbon reduction goals and are critical to a more resilient power system. Large-scale centralized systems are only part of the solution. These centralized systems rely upon overhead electric transmission lines that increase the risk of wildfires and are subject to curtailment and underground lines that are up to six times more expensive. We must encourage electric consumers to adopt more at-home solutions, not less. Our top priority is to expand electricity bill savings and resiliency benefits of distributed solar and battery storage. We encourage and expect Governor Newsom and the California Public Utilities Commission to share that priority and to make the right decision for Californians in accordance with it. With that said, I'd like to turn the call over to Manu Seow, CFO of SunPower.
spk05: Manik, thanks, Peter. Please turn to slide 12, where we have provided our consolidated financial results and select metrics. Our third quarter results are in line with the update that we had provided on October 5th, with $17.5 million of adjusted EBITDA that includes $8 million of loss at the CNI solution segment, primarily from project schedule delays and higher labor and supply chain costs. We saw 100% year-on-year growth in adjusted EBITDA for consolidated sun power and 18% growth in revenue driven by a residential business with CNI solutions and light commercial business revenues behind prior year. While revenue in the CIS business is driven by project mix and timing, as mentioned in our last earnings call, we view light commercial as an important dealer service versus a core growth platform and are increasingly allocating more capital to the residential business. In our residential business, we are seeing exceptional performance in top of funnel lead generation activity and a third quarter gross margin performance of 24%, up 600 basis points improvement over prior year. While we experience some of the same modest labor challenges affecting the rest of the industry, our business model with approximately 800 dealer relationships helped insulate us from much of that effect, and along with our partners, we were able to generate high gross margins and drive sequential and year-on-year growth. We recognize 92 megawatts in residential, in line with our guidance, with a healthy bookings performance in the third quarter at 108 megawatts, up 36% from prior years. Our balance sheet is the healthiest in years, with our net recourse debt down to $154 million, at the end of third quarter, significantly lower than prior years, and we still have ability to monetize another $2.5 million of NCH shares through the next 18 months. A strong balance sheet provides us with new opportunities that were previously unavailable to us, including the ability to finance growth investments at a lower cost of capital and access to lower-cost asset-level financing for our loan and lease offerings. We expect to see the cost of capital for loans and leases continue to decline below 5.5% as we enter fourth quarter and 2022. Please turn to slide 13 for a discussion of our forward outlook. To provide additional clarity to investors, we are providing separate guidance for CIS and legacy business segments for the fourth quarter 2021. Fourth quarter gap revenue for SunPower excluding CIS and legacy business segments is $330 million to $380 million, and adjusted EBITDA is $28 million to $46 million. Separately, for the CIS and legacy business, fourth quarter revenue guidance is $31 million to $41 million, and adjusted EBITDA is negative $10 million to negative $5 million. With supply chain impact and project schedule delays, including many that are customer-driven, similarly, to that experience more broadly throughout the industry and in the third quarter. The CIS business expects to sequentially grow pipeline and is focused on generating breakeven operating cash in the fourth quarter. Fourth quarter gap net income, which includes all segments, is negative five to positive $15 million. For the full year 2021, the adjusted EBITDA for total sun power, including CIS and legacy business, is below the prior guidance of $110 million, $130 million, primarily due to CIS project schedule details. As mentioned in the October 5th update call, we are also in the process of evaluating strategic options for the CIS business and expect to provide an update in the fourth quarter 2021. SunPower's residential business continues to be strong, and we expect sequential growth in volume and margins to continue in the fourth quarter. Consistent with our prior guidance, we expect 345 to 375 megawatts recognized for the full year 2021, with 55,000 to 60,000 new residential customers and exiting 2021 at a greater than 70 cents a watt gross margin run rate. Looking further ahead, strong residential demand and federal policy tailwinds give us confidence to expect residential volume growth above 35% in 2022 compared to full year 2021. We also continue to expect full year 2022 adjusted EBITDA for SunPower excluding CIS and Legacy to be consistent with the comments we made on the October 5th update call. That is, the residential business supports our earlier color of 40% adjusted EBITDA growth above the original 2021 guidance before subtracting $30 to $35 million of product and digital investment expense. Before turning the call to Q&A, with the Build Back Better framework making its way through the legislative process this week, let me make a brief comment here on how we view its potential value to SunPower. Please turn to slide 14. For illustrative purposes, we calculate that a 10-year extension of Section 25D, Residential Investment Tax Credit, refreshed at the 30% rate to 2031, could add as much as $6 billion of value to customer purchases of SunPower's residential systems over that period, assuming modest 10% annual customer growth for illustrative purposes. Since most of our customers purchase their systems These benefits would flow directly to them, reducing effective selling prices and potentially raising sales growth. Whether to increase sales or better pricing support, we would expect to see a benefit to the company commensurate with the size of the tax credit program ultimately enacted. With that, I would like to turn the call over for questions.
spk02: At this time, in order to ask a question, please put a star 1 on your touchtone phone. To remove yourself from the queue, just press the pound key. Once again, that's star one for questions. Our first question will come from the line of Ben Calo from Baird. You may begin.
spk10: Hey, guys. Thanks for putting me first, and thanks for the questions. I guess, first of all... You kind of shortened your disclosures. I was just wondering, Peter, if this is something that you think that we have to do in the industry to make it more simple or why you do that. And my second question is just around the balance sheet and, you know, where your stock price is and how you guys think about it. owning assets or continuing to sell them off? How do you think about that? Thank you.
spk03: Thanks, Ben. I'll let Manu talk a little bit about our disclosures. I think it's our intent to provide great transparency for our investors. So I don't know if there's anything more specifically you could mention there that you didn't see? We may have lost Ben on the call. No, no, no.
spk10: You know, there used to be like this supplementary metric sheet that was, you know, five different pages here. And, you know, I had to get my reading glasses out. But, you know, megawatts across all different parts of the business. And I didn't see that here.
spk05: Yeah. So, Ben, I think if you go to the investor relations website, we've put the metric sheet and the definitions there. So both those are on the metric sheet. In fact, we've added disclosure associated with the various breakouts of the megawatts and organized the sheet where you can actually see things like light commercial and new homes megawatts broken out consistent with what we've done in the past. So all of that disclosure is out there on our website. Okay.
spk02: Go ahead.
spk05: Yeah. And then your second question was what, Ben? Your line wasn't very clear.
spk10: No, just on the balance sheet and how you think about it with, you know, keeping stuff on the balance sheet, you know, where your stock is and, you know, you know, increasing that by selling stock or other ways and how you guys think about it?
spk03: Yeah, Ben, I'm not sure exactly I understand your question, but in terms of, you know, if you think about our lease and loan business, we're making no changes to how we handle that. So that risk will continue to move off our balance sheet and we'll continue to take our share of the economics right at the point of sale. In terms of the direction of the business as we go forward, You know, we mentioned we're considering strategic alternatives for the commercial business. We'll have a report back to you guys on where we come out and how we're thinking about that this quarter. So in a relatively short amount of time. But I think going forward, you could expect us to be heavily invested in the residential business. And I think the point of my remarks is many of you have been with us during these different transitions. Well, those transitions are about to be over, and we're about to focus very heavily on growing the residential business here in the U.S. So I would look for us to continue to double down on that. If it's true that we're headed towards 100 million homes that could save money by adopting solar power, and there's a little over 3 million homes that have it today, I think it's easy to agree this is a huge opportunity for a company like us. We're pivoting the company from being a company that only sold solar panels and worked with consumers one time to a company that now sells panels, storage, EV chargers, smart home panels, and wants to have a lifetime relationship with their consumer. We've got a lot of work to do, but we've got an enormous opportunity in front of us, and we're very optimistic about the future of the company.
spk10: And maybe I'll sneak one more in just with Blue Raven. Is there a channel conflict at all? Because I know you guys basically invented the dealer network. I'm just wondering how that fits in as well. Thank you.
spk03: No, it fits in. Yeah, thanks for the question, Ben. It fits in perfectly. First of all, let me back up. We have what we believe is – the best dealer network here in the United States. They've been a big part of our success and our history, and they will remain a big part of our future. So we have no changes on the dealer front. What we really did with Blue Raven is we managed to purchase a large, high customer satisfaction, high-performing company that actually complemented our existing dealer footprint. So if you take a look at Blue Raven, They basically took out the middle of the United States, under-penetrated in solar, and they went from Utah all the way across to North Carolina, where we have very few dealers and very little business. So it's all creative. It's a very strong management team, and we're very excited to welcome them to the Sunflower family. Thanks for the question.
spk02: Our next question will come from the line of Sean Morgan from Evercore. You may begin.
spk09: Hi, guys. So going back to page 10, I was interested in maybe just digging in a little bit on the traditionally underrepresented communities. Are there federal or state programs either with HUD or some of the state agencies that can allow you guys to kind of penetrate that market sort of below your traditional comfort levels in terms of FICO scores? And if not, would you be looking at potentially kind of a lower margin mix on some of those underrepresented communities? Are you able to do that in an economics that's kind of consistent with your existing customer base?
spk03: Yeah, I think the – first of all, thanks for the question here. I think we're actually super excited to work with the Department of Energy on this. You probably know through the loan program office, they've talked about $3.6 billion of loan guarantees and a very large fund of money to make for loans for these low-income consumers. So in the end, you know, when you talk to consumers, people want to be – they want to be owners. They don't want to be renters. And it's particularly beneficial for low-income consumers. who frankly will benefit the most from the energy savings to be owners rather than renters. So we really view it as more of an opportunity for us to really ignite a market segment that may have not been able to participate in solar for another five years or ten years. So think of it as we think we're really going to be able to increase demand in a segment that wouldn't have been able to participate. for a while. So we're very excited. We're going to talk a lot more about the details of the program we've put together with DOE at our investor day in Q1 and look forward to walking you through it.
spk09: Okay. Thanks. And then just changing gears to the product side, with the wall box units, I guess it's sort of a newer relationship. And with the bi-directional charging, is there any, I guess, risk that the power storage attach rates might be impacted a little bit by people using their car, their electric vehicle, for energy storage? Or do you kind of see that as a separate ancillary product entirely?
spk03: Yeah, I see them as complementary. And I think in our talks with the automotive OEMs, and right now we're in discussions with almost every OEM on the planet that you can think of. I think they also view it the same way. At the end of the day, although it's a super intriguing opportunity because the batteries are so large in these vehicles to provide a whole home backup, you also don't want to power down your vehicle to zero as well. So I think the combination of vehicle battery, storage battery that we're offering with Sunvolt and renewable energy, solar power in this case, I think are going to be a way for consumers to really reduce their dependence upon the grid. And it's becoming more and more important for consumers around the nation to do that. But I think these things will end up working together. The key from my perspective is you don't see anyone out there today who has gotten the customer experience to be easy. And as you might imagine, bi-directional charger plus an EV plus your house plus solar is It's potentially complicated unless you can really build software that makes that customer experience very easy. And I feel like we've got a leg up because this is what I spent, you know, 13 years doing at Amazon is really figuring out how do you take potentially very complicated but very valuable experiences and how do you simplify them for the consumer. So we're quite excited about the opportunity with Wallbox and the OEMs. And as we may have mentioned in our comments, I think the electric vehicle opportunity here is huge. We sold 2.5 million EVs in 2020. If you believe the projection, it should be 31 million by 2030. And frankly, the grid can't support that level of electric vehicles. So it's only going to be if we can get renewable energy and battery storage working that we're going to be able to achieve those level of EV sales and really be able to achieve some of these climate goals that we have in the U.S.
spk09: Thanks, Peter. That's pretty illustrative. Much appreciated.
spk03: Thanks, Sean.
spk02: Thanks, Sean. Our next question comes from Cassie Harrison from Piper Sandler. You may begin.
spk08: Good afternoon, everyone, and thank you for taking my questions.
spk05: Hey, Cassie.
spk08: Hey, so just the first one, just a quick housekeeping question for me. How many megawatts in Q4 were associated with the Blue Raven acquisition?
spk05: I would say high single digits.
spk08: Okay, high single digits. And then, you know, in the presentation, there's a slide there, and I think, Peter, in your prepared remarks, you talked about transitioning from using third-party loan products to using your own loan products. I was wondering if you could just help us quantify the financial impact from that. And that's it for me. Thank you.
spk03: Yeah. Well, first of all, let me back up a minute and give you a little bit of context as to why financial products I think are so critical in the solar business. When you take a look at the research from consumers who consider solar but end up not purchasing solar, the number one and the number two reason are, They're worried they can't afford the down payment, and they're worried they can't get qualified for financing options. So if we expect to achieve our climate goals in the US, it's critical that we help consumers address both of those issues. We feel like we're best positioned to do that by building a world-class financial products business, and that's the reason I brought Jason McRae on board. So in terms of the economics, I guess a couple things for you. One is, as we talked about in the presentation, You know, you think of it this way, 35% of our total customers this year will finance their solar purchase using one of our financial products. The rest is either cash or it's coming from a third-party financial product. Our goal is to make sure that we move the needle on that every year until we get to 100%. We've committed to get to at least 45% in 2022. The economics in the financial products business, both for lease and loans, I'll just say are very attractive. They're as attractive as the economics and the hardware part of the business, and they end up being spread across the same customer acquisition costs that we have to acquire a new customer. So as we think about lifetime value of a consumer, we don't think of it as only being exclusively hardware. We also believe that there will be an opportunity for people who need leases and loans for us to be their financial partner, and we plan on incorporating a really great experience for loan servicing and for loan and lease origination in the MySunPower app. So a lot more to come here. I'm so excited to share a lot more with you when we get together in Q1 for our analyst day. But this is a big area of focus for us going forward.
spk05: Yeah, Kashi, the only thing I'd add to what Peter said is, you know, we've talked about lowering our cost of capital from the 5.5% we have right now. And us owning our financial product helps us do that. And just to mention it to you, every 50 basis points reduction in cost of capital is about $0.08 to $0.10 gross margin per water.
spk02: That's helpful. Thank you. Our next question comes from Brian Lee from Goldman Sachs. You may begin.
spk00: Hey, guys, thanks for taking the questions. And maybe I'll apologize in advance. I have a couple of sort of more mundane guidance-related ones. There's a number of moving pieces here on the EBITDA guidance for 2021. So if you guys could just maybe help us unpack it a little bit. So the prior guidance was basically $120 million at the midpoint. I assume at that point it included CIS and legacy since you hadn't announced any plans to do anything with that strategically. So now the midpoint looks like $105 million excluding CIS and legacy if I look at your disclosure. So really the midpoint apples to apples is $85 million since it looks like CIS and legacy are a $20 million EBITDA drag on the year. Is that correct? I just want to make sure we're level setting on sort of what's apples to apples on the new guide versus the old guide.
spk05: Yeah, it's closer to 90, but the delta is driven by CIS, and then the sun power excluding CIS and legacy is the 105 midpoint. Okay.
spk00: All right, that's helpful. All right, just wanted to make sure I wasn't missing something. So then if that's the generally right ballpark math, $90 million, apples to apples, can you help with the bridge? It sounds like there's some incremental P&D spend, and then you also mentioned in the disclosures an offset from Blue Raven, but how did the 120 go to 90 outside of CIS and legacy not performing as well as you might have expected originally, or is it all just CIS and legacy underperformance?
spk05: Yeah, so as we mentioned in the slide as well, all of the delta between the prior guide and the current guide is driven by CIS and legacy. The rest of the business, excluding that, is consistent with our prior guidance. What we are saying is that we have some incremental EBITDA coming from the Blue Raven acquisition in the fourth quarter, and that we are spending some OPEX and therefore the prior guidance related to the rest of the business is the same, which is 105 at the midpoint. More importantly, what that allows us to do is it allows us to grow significantly in 2022 and 2023, which is why we feel it's a good tradeoff from that perspective.
spk00: Okay, that's helpful. And last one, and I'll pass it on. Again, just one more on the guidance. So for 2022, you're saying that the original framework is intact, which is, you know, the $120 million midpoint you had prior is going to grow 40%, which would imply something like $165 to $170 million. But then you'd have the incremental $35 million of P&D spend, and so we're talking about sort of a reported increase. $130 to $135 million of EBITDA when it comes to sort of the actual metric we'll see in 2022?
spk05: Brian, you're thinking about the math correctly. Let me add a little bit of color. One, the residential business had an exceptional third quarter from a top-of-the-funnel perspective as well as a gross margin perspective. So we exited third quarter with 69 cents of what gross margin we expect to exit the year at. 70 cents of what goes on. So both the top of the funnel activity as well as the margin we are making on our existing book of business gives us confidence from a residential growth perspective in 2022. And then additional color just to remind everyone in the comments we made in the last October update call is the incremental $30 to $35 million is funded from the end phase proceeds, not from an operating cash flow. Okay.
spk00: Fair enough. Thanks a lot, guys. I'll pass it on. Thanks, Brian.
spk02: And our next question comes from the line of Maheep Mandaloy from Credit Suisse. You may begin. Maheep, your line is open. If your line is on mute, please unmute your phone. All right, our next question comes from Philip Shen from Roth Capital. You may begin.
spk06: Hi, everyone. Thanks for taking my questions. First one is on the $35 million of incremental investment. Peter, thanks for breaking out the categories there. I was wondering if you might be able to give us a little more of the $35 million. How might that be split between the three groups and then from a cadence standpoint through 2022, how does that look from a spend perspective by quarter, if you will? Thanks.
spk03: Yeah. So, Phil, we'll give you more details in Q1 at the analyst review in terms of how we're thinking about the breakout between these buckets. But I would say all three areas are investments that we're interested in making because we're going to see some return within the year And in most of these cases, we're going to see an even bigger return in the out years because we're building something that we think will scale as the business gets bigger and bigger over time. From an investment perspective, think of 2022 as a big step up in investment that does scale as the business gets larger. So if you measured it in some rate, like spending per customer, you would expect to see that spending get more and more efficient over time. And this is one of the big lessons learned for my experience of managing the Amazon marketplace from something very small to something that grew to become very large. You really have to be thinking long-term about how do you make investments in things that scale over time. So, for example, in financial products, we're going to do a lot of the software building, and we're going to do a lot of the infrastructure building in 2022. That software and that infrastructure we'll use for the next 50 years, right? And that will allow us to at some point, you know, continue to lower our cost of capital and easily roll out more and more financial products. Same thing for the hardware products. You know, we really, I think one of the interesting things to me as I joined the company is we're very well positioned for solar in the premium segment. You know, our products match up well. We have great market share, and I think customers love our products. But the growing segment right now is actually the mass market segment. And we'll share our plans with you at the Investor Day, but we plan to absolutely enter the mass market segment and become an aggressive participant in that segment, again, focused on the highest quality and best value products that are out there. So look forward to sharing more details, but we're very excited about the investments in all three of these areas.
spk06: Great. Thanks, Peter. Just as a follow-up on that thread, You mentioned near-term return as well as longer-term return on investment. Can you quantify that in any way? What metrics or how are you quantifying it, I guess, internally that you might be able to share externally? And then in terms of the mass market products, with all the challenges happening in the marketplace with WROs and new potential ADCVDs and things like that. How are you thinking about that business in a way that might perhaps help insulate yourselves from those types of challenges and risks ahead? Thank you.
spk03: Yeah, I'll take the second one first. So our vision on the product side is to continue to be the leader in the highest quality products, but at a great value. So as we enter the mass market segment, we're not going to enter the low-quality, low-price segment. We're going to enter into the high-quality, high-value part of the segment, which is how we're positioned today in the premium segment. I think the SunPower brand and SunPower customers expect the world's best products, and they expect to get them at a great value. So our perspective there won't change. And from a sourcing perspective, we're not really interested in taking any risk on the sourcing front. So as you think about the areas of China that... are tied to forced labor, we have no interest in changing, you know, our sourcing over to those types of regions. You know, our panels today are made in Malaysia and Singapore, final assembled in Mexico, batteries final assembled here in the U.S. and Alabama and Minnesota. So we'll have a global footprint, but we'll choose places that we think are economically stable and advantageous for our customers. And then from an efficiency point of view, we'll share more metrics as we get together for our investor day. But just as an example, I think software, which is a relatively new topic in the solar industry, is an example of something that scales very, very well as your business gets larger and larger. So in other words, you make an investment in software, you utilize that software for decades and decades to come. So We'll give you some examples of investments we make and how we think they'll scale over time. And we're looking forward to getting together with you and sharing that in Q1. Thanks for the question. Great.
spk06: Thanks, Peter. One more, if I may. As it relates to acquisitions, you guys made a splash with Blue Raven. Looking ahead, do you think we could see something along similar lines in the near term, maybe in the next two to four months or maybe within the year? And then as it relates to dealers, you guys had a nice dealer ad number there of 180 in the quarter. Curious if you expect that to sustain, maybe give us a little more color on those dealers, how you won them, and importantly also, how many did you lose? So on a net basis, what was the ad to the total count? Thanks.
spk03: Yeah. So on the residential market here in the U.S., you know, as we talked about the numbers, It's a, I would describe it as kind of a land grab opportunity. I mean, just to round up, there's 100 million consumers who could save money and do something that would make a positive difference to the planet, and there's a government tailwind. I haven't seen personally in my career those three factors ever come together. So our strategy is going to reflect the fact that in a land grab, you don't sit back in your heels. You lean forward, and we did lean forward with the acquisition of Blue Raven. We have a number of opportunities that I think are attractive in front of us. Acquisitions are only one of those opportunities. Obviously, we have a number of opportunities that we can also fund ourselves, like the ones we were describing with financial products and hardware products and customer experience. So it'll be a combination of both organic and acquisition opportunities, but there's no question that we're going to be a lean-forward company here in the residential space and growing very fast. Our dealer population has grown by a large positive margin so far this year. I think one of the pieces I feel very connected on is when I get a chance to talk to our dealers, there's a connection between us because the business I ran at Amazon, the marketplace business, we built software for those small businesses and entrepreneurs to help them do what they do best and really grow their business fast and make a lot of money. That's exactly what we're going to do for our installing dealers here in the U.S. We're going to build software that allows them to really focus on what they do best, which is really work directly with residential customers and give them a world-class solar installation experience that nobody else can match. So I'm really looking forward to growing our installed dealer base and and being able to aggressively grow our presence here in the U.S.
spk06: Great. Thanks, Peter. We're looking forward to learning more about everything at the MSA as well. Thanks.
spk03: Sounds great. We have time for two more questions, please.
spk02: Our next question comes from Mahid Mandeloy from Credit Suisse. You may begin.
spk04: Hey, does this work now? Yes, Mahid. Perfect. Thanks a lot. And hopefully the analyst is in person so we don't have to deal with IT challenges. But I look forward to that as well.
spk03: Yeah, count on that because we don't want to have to do it over the phone or wearing a mask. So let's hope we're in person and things have moved along in the pandemic for sure. Sorry, go ahead. Yeah. Yeah.
spk04: I think just going into 2022 with the CIS sale and with the next round of end-phase share sales, how should we think about that capital deployment in the near term? What's your priority either on the balance sheet or M&A or anything else over here?
spk03: Well, I'll start, and then I'll let Manu add some more color. But this is the healthiest our balance sheet has either been ever in our history or in a long, long time. So that's before the end phase shares. And then we'll see what direction we choose to take with the commercial business. But you're right. If the strategic direction that we choose would result in a sale, that certainly will add even more cash and capital to the balance sheet. So The great news is that there are a large list of very exciting investments to make in this business. When you think about the opportunity to help consumers save money and manage their energy in a way that prevents outages and builds resiliency, we've got a huge opportunity in front of us. So again, I would say stay tuned for more specifics because that's not something we talk about in advance, but we certainly are not going to be sitting on the cash wondering what to do. We've got a list right now of things that we're ready to pursue the moment that it's right to go pursue them. And Manu, any other color you want to add?
spk05: A couple of things. One, I think from a balance sheet perspective, we have our debt to EBITDA ratios getting to kind of investment grade ratios. So I'll just echo to what Peter said from a balance sheet point of view or a balance sheet strength perspective. And then I think we've got a lot of opportunities, both in terms of investing organically, some of which Peter talked about. And I think our balance sheet firepower also gives us the ability to get more flexible from a financing perspective and further drive down our cost of capital from the 5.5% I referred to in my prepared remarks. And that is great both from a volume perspective, but also from a margin accretion point of
spk04: Just a quick follow-up on the hardware strategy here. I think mostly you're technology agnostic, except for the battery side. We're kind of making it in-house, or at least via your own subcontractors. So A, on the battery, is that something you want to continue or move to the EV charger kind of a framework module, just outsource it to others? And any other hardware which is kind of interesting for you over here?
spk03: Yeah. Well, a couple things. I think the part that we're committed to own forever is the software layer and the customer experience. So regardless of the choice of hardware technology, sometimes it will be our own and sometimes it will be through a third party. We will always control the software layer and the customer experience. And I think if you were to look forward in this business, you know, some of these hardware properties are becoming more mature and there's less differentiation. I think the differentiation you're going to see going forward is really going to be in the software layer. So we want to make sure that we control and we own the customer experience end-to-end. I think that's also consistent with this idea that we want to have a lifetime value and a lifetime relationship with our consumers. In terms of the hardware piece, we leave ourselves open for decisions there. Probably the most important part for us is the vision I named earlier. We only want to sell the highest quality, best value products that exist. I think if we're able to pull that off, whether it's one partner or many partners, I think in the end we're going to create the customer experience that's going to win in this category. So that's kind of our criteria. Whether we do it ourselves or whether we work with a third party will depend in part on how, you know, where can the customer get the best product at the best value. We've got time for one more question before we close. Thanks.
spk02: And our next question will be from the line of Colin Rush from Oppenheimer. You may begin.
spk01: Hey, guys. It's Joe on for Colin. Thanks for taking our questions. Hi, John. Can you speak to incremental efforts you all are making on a recruiting perspective, both with regards to installation teams as well as technology development and how effective those efforts have been, what you're seeing in the market for talent?
spk03: Yeah. Well, it's a terrific question. As we've all read, it is a very challenging market to recruit positions like software engineers, electricians, and installers. I think we've been having good success so far, And I think one of the reasons we're having good success is that we're able to tie the role into this mission. And one of the most powerful parts about working at this company is the positive sentiment people feel about making a big difference in the world. So for most people at SunPower, this is not just a job. This is really kind of a life calling. It's a mission. And being able to appeal to a mission that during what's been kind of a unique time in work history, where a lot of people are stepping back and kind of saying, what do I want to do? And does my work have meaning and purpose? I think that's allowed us to actually have some really good success. So the three executive hires that I spoke about, we recruited against the Amazons and the Goldman Sachs and a lot of other amazing, wonderful companies out there. So how did we land these three executives? It's because at the end of the day, they're as passionate about the mission as everybody else here at SunPower. So I think from a recruiting standpoint, we've got another 12, 15 months of hard work ahead of us, but I think we're pleased with some of the initial results we're seeing so far. Big thanks for your question. Critical topic. That's great. A big thanks to all of you for your questions today. We can't wait to... have our fourth quarter earnings call in February of next year, and then we'll send out more details about our in-person investor day. I'm really looking forward to finally getting a chance to see all of you guys in person. That will be wonderful. And most importantly, I can't wait to have you meet the leaders on our team and get into a lot more details about our future. I can tell you this from my perspective. This is now month number seven for me. And my excitement continues to grow. We've got a very bright future. We've found our footing, and we're ready to go. Thanks again for your time.
spk02: And this concludes today's conference call. Thank you for participating.
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