SunPower Inc.

Good morning. My name is Siobhan Hickey, VP of IR, and I would like to welcome everyone to SunPower's third quarter earnings call. I will review a few housekeeping items before turning the call over to our CEO, Dr. TJ Rogers. To begin, this call is being recorded and a replay will be available on our company's investor relations website within the events section. Please note today's presentation may contain projections and other forward-looking statements. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in our statements. Also on today's call, we may discuss certain non-GAAP financial measures. A reconciliation of any differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures are available within our press release. Lastly, we will hold a question and answer session after the end of formal remarks today. For those watching via the webcast, you may submit a written question at any time via the submission box located at the right-hand side of your screen. I will now turn the call over to T.J. Rogers, SunPower's chairman and CEO.

Thank you, Siobhan. We've got a quarterly report here. Third quarter, we've got our logo. Helios, the airplane that set a record, still standing in 2001, of taking off under the solar power of SunPower solar cells, which, by the way, took light through the bottom of the wings, which are clear plastic from both sides, bifacial, and hasn't been matched by any airplane, fighter plane, SR-71. I'm tracking down one. I can't afford this right now, but I should be able to buy one of these pretty cheap since they're now obsolete. And I want to, I'd say I want to put it in the lobby except it's 247 foot wingspan. So I got to figure out what to do with it. I tracked down an engineer. It's got one of the hanger. He actually was part of it. He gave me this picture. This is the thing actually flying in about 80,000 feet, clearly above the atmosphere, clearly 99.2% of the atmosphere up there. Okay, you've got here, Dan, can we get, you've got here the administrative officers of SunPower, all of us. Dan just joined me. I had announced that before. He's had a storied career in marketing sales. He helped me. He didn't help me. He ramrodded the Sunder acquisition we're going to talk about today. So he and I are the only two people in Sunpar above the rank of executive vice president or equivalent. Sounds weird, but the way this business works, that's what we can afford. I kind of like it because I can micromanage and not have to justify it because there's no possibility of doing anything else. This is our report that I sent out last night and our new logo. I created a commemorative postage stamp for it. Now I'm going to go into it. These are the details of the P&L. A simple P&L that is easy to read, but there's a lot in there and I'll go slowly over the lines to explain it. First of all, This is how we run the company, and that's most companies are that way. We grew in the prior quarter, bad quarter. ITC hit the quarter a little bit, and there are two reasons for that. The ITC has not gotten any worse, and people are accommodating it and actually reacting to it. And we did the Sunder acquisition and there were like four or five days of stub revenue, not consequential, but in there. And those two things are what caused the number to go up. I'll talk about the next quarter in a while. We had fall through to gross margin, good gross margin. I wanna warn you that our gross margin isn't really 48%. We're doing some deals that we bought from SunPower and they're on the books at a favorable price. And they add about four to five points on the gross margin. Also the merger with Sunder will take away another few points. So for those of you tracking the company, Please don't put that in there because then I'll have to live up to it. Put that in there for gross margin going forward is still a good number. I have two forms of OPEX here. FASB demands that OPEX include sales costs, commissions. I do an OPEX less commission so I can get that out of there and look at the company because as I've already said, keeping costs down is extremely important. So then you'd look at last quarter, 17 million in this quarter, 23 million and say, well, 6 million bucks staying lean isn't exactly an accomplishment. I'll point out that our costs this quarter are actually flat to a little bit down. And there are some reserves in here that have added up to the quarter. We had a good quarter and we were lean and we are generating good gross profit. So what I asked them to do was clean the house this quarter. So we, we had some accounts receivable that were a year old or more. We got rid of them. One of our finance companies went bankrupt. We put reserves on the questionable line items for that. So this is a very clean number and we still ended up even with that extra 5 million, 6 million bucks in there with a, operating income of $3.1 million. So that was I think a good accomplishment. We're not the four and a half percent of revenue. Our target is 10. I think that's totally achievable. And I'll explain how go forward. As I said, it's a record. Bad news is we've got we've had 10 or 11 million in cash and I I've actually enjoyed, I never had that in my life. I was a chip guys, you know, and I always had several hundred million dollars in the bank and that cashflow stuff, somebody else worried about in finance. Now I got to worry about it. And I found out I'm quite comfortable with 10 or $11 million. That's the way we've run for a year now. This quarter, we had some large payments on our convertible adventures. And I ran down, we ran down to $4 million. So I'm out raising money right now. I'll leave it there. I'm out raising money right now. Okay, to summarize, revenue increased to 70 from 67.5, the low bottom point of the quarter. Um, we made 3.12 million in profit, uh, up from 2.42, um, in the prior quarter and our cash balance I just discussed. Okay. This is a graph of operating income and by operating income, I mean the full definition of. operating income in the gap sense, but there are, let me tell you what the corrections are. If you look at our operating income, then there's a correction on gap. So this is stock compensation in amortization of intangibles, amortization and depreciation intangibles of charge of 5.4, meaning the gap profit is minus 2.3. Let me tell you what's in there. All but $1.3 million is stock compensation charges. Nobody expenses stock compensation. The price of stock is dilution. We have 83.11 million shares, ADS, 83.11. And we give our employees stock options and we think that's better for shareholders, Silicon Valley style. The other $1.3 million, this is an important thing and I'd like you to take note and make sure you keep this in your models. We are now depreciating the name SunPower. It came across to us in the acquisition of assets. And we also are depreciating our software, which we built and paid for, called Albatross. It's our main operating system. And we're depreciating that because in both cases, the name and the software, we had to buy it back, get it appraised, pay money for the appraisal, and now we're depreciating it. So these charges, and there's a footnote in there, we play it straight on GAAP. We believe in GAAP except for these foolish charges. And we've been conservative, as I said. All right. Having said that, this is a graph of operating income minus those charges, and that's how we report, and that's how we run the company. It shows since we acquired, so the acquisition came here of the assets. we lost money. That was the division that we took from Sunpar that we thought could work, didn't work. As soon as we got rid of it, we started making money. We made money ever since. We came out of the bankruptcy, the Sunpar bankruptcy with about 320 million in revenue. We got hammered about like everybody else. This is no special charts, but It's disappointing to make this a very profitable number for us and then have it go down, but we still made profit at that number because we have a very, I'll explain later, aggressive campaign to keep costs down. And then this quarter we recovered, as I said, the 70. And even with the reserves we took, we had $3.12 million in op-inc. Okay, that takes us up to Q3 25. The future is here. We've just acquired Sunder. In the first quarter, there won't be a lot of revenue from Sunder because their revenue comes from selling solar. Their revenue is the solar sale and their profit is minus their sales costs. Their sales costs are COGS for sales company. And therefore all the deals they've done up to the time we've acquired them, got sold to somebody else. Now we have to start to fill the pipe from scratch. So this quarter, we're going to put jobs, start putting, and we already have started putting jobs. We're on plan. We've got a plan for them. They're already integrated in that way. So we'll, there's a, you know, pop in revenue. That's non-trivial. And it gets us back to where we were. And we're hoping for a record, Worst case, it'll be above 80. Then I had debates all day yesterday with the executive staff on what to say about Q1. I said, if I don't tell them about Q1, they'll ask me about Q1. They need to get my off-the-cuff answer, which is almost always worse than an answer you've thought about. And It is so uncertain. I won't know until the end of this quarter what we shift and what backlog we'll have left to go into the next quarter. I won't know that. Our bookings rate right now is fine. Our bookings rate just doubled because of Sunday, literally. But that's delayed. So I have good FP&A and we gamed, meaning did simulations of what happens if this is bad, that's bad. And our worst simulation said we're gonna make at least 2 million bucks in Q1. And I mean at least, our goal is to beat that. But I wanted to tell you, and then of course, I believe Q1, which is always the weak quarter, the winter quarter, and half our states are still on the roofs. The winter quarter will be gone and we'll move into the spring quarter, which is that much better quarter, and then the fall quarter, which is always a big quarter. So that's the best I can do. I didn't do any revenue. But I know for the minimum revenue I've simulated that we're going to make $2 million. And I think we're going to do OK on revenue. I've shown this many times. The way we put together the company, starting with 3,499 people from three companies, was our plan. I didn't inherit a huge number of people and go through the screaming and wailing of layoffs. We hired what we could afford. And at that time, it was 1,225, and we've been upping the bar or lowering the bar, if you will, since that time. And that leads to this graph, which I've shown before. This is our headcount history. So 3499 was back in July. When we acquired the company, the assets, we went to 1341. And then when we started post-merger day one, so this is our very first quarter here as a company, we had it down to 1280. We got to our Well, that was all I was going to hire. So I can guarantee if you get to the plan, I told HR how much hiring we could do. And then that led to a healthy debate on who should we hire? Why should we hire them? Are they good enough? Should we leave the spot open and hire as we get into it and get an access to better people? And we did all of the above. So there's the target dropping to 980 and 820. You can see our system is called the rec auction. I've explained it before. It's a process I developed back at Cypress. It works by forcing management every week to debate how many people they have, who left, do you really need to replace them? And if you replace them, it's the best hire for the company, the person that left or somebody else. And that means you have no recs. Your VPs can hire all the time. And the VP of HR walks into the executive staff meeting and says, we lost six people. Now, this is in dollars, of course, but I can explain it in headcount easier. So you say, we lost six people last week. Out of 1,000, we can hire six people. And then the VPs together perhaps have 12 people they want to hire. And we debate among us. And this gets rid of the President versus all the VPs, all the VPs arguing why they need to be bigger. This has then the guy who wants to hire against the president and all the other VPs and the dynamic is better. And it typically goes into a merit-based discussion when the culture is there. Okay, having said all that, without a lot of hoopla, without any warnings, the government required thing, we managed our head count down. And by the way, that last number, 829, includes 19 current employees from Sunder. So think about that. 19 people left. They were declared to be less important. And we decided the new 19 people would be those from Sunder. And of course, that's transformed the company. I'll explain that later. So this is a great system. Looking at the number 829, then the next question is, so Who do you hire and where? And I've shown this graph before. Oops. And I'm going to go over it again. It's a graph of headcount. So here we see our headcount of 829. That's the number of the bridges to the last slide. Now this is a breakout. We look at five running weeks to see if you're growing or shrinking. And then we put, there's the target, 820. And we're almost there now, including the Sunder folks. And you can see here, we've already started talking about a new number. And I'm not sure I'm gonna enforce that number completely or quickly, because as I look at the company, we're at the right size right now, and I can see a few spots were threadbare, and we need more bodies. So we're talking about upgrading, getting more efficient. In particular, quality in the solar industry ain't there, not like chips. And we're working on quality programs. Hence, if you look at my quality group, it's big because it needs to be. All right. The major point here is the red is revenue per employee per year. So Blue Raven, which is our sales and fulfillment organization internal, the old Sunpar, if you will, is $293,000 per year per employee. I started griping at $300,000. I get happy at $350,000. So these guys have to either grow or shrink their headcount. And here you can see the headcount requirement for them. And they've been working on getting that. New homes is the other part of SunPower, separate division, doing a separate job, putting solar on new homes in projects, even including helping design the project. They have higher revenue per employee and they also have higher profit. Now, here's why Sundar is a good deal for shareholders. $4.2 million per employee per year. There are many software companies that don't have that. And why is that? In the solar industry, based on custom and reasonable custom, the sales forces don't work for the company, they're contractors. So you pay big bucks, you pay a commission to the sales force, and it's typically 30%, even a little bit higher And then you get your job, you own the job, and then you make your money with the revenue from the thing, minus 30% you pay to the sales company, and you make your money underneath that. So this company, if you look at its structure, what came in back when, there's their first quarter, their first day, was 20 people, 20 smart W2 employees running a sales force of almost 1,000. So they specialize in managing sales. We don't, we specialize in everything from managing sales all the way down through O&M, keeping your customers happy over the years when their system breaks and they can call a 1-800 number and get somebody that cares. Okay, so that, if you wanna ask one reason, economically anyway, there's more. Why is it a good deal? Now, if I take the weighted average of these, this number has jumped over 400,000 for the first time for the company, and I'll show you that in a minute. I want to make one more point. These are efficiency numbers from our consultants. They're for 200 high-tech companies, and they give the median and top quartile. being cheapest, lowest headcount, lowest cost for overhead. So it says, for example, IT full-time equivalent per billion dollars of revenue should be 77, and the best companies are at 62. And you have Spend for FTE, you have percentage of revenue, and you have matrices, you have matrix for each of the important parameters. That's how we do it. Based on that, you now can see the deployment of the company. I don't have a fetish about it. I just go over it twice a week in detail with a full meeting. So I already talked to you that quality is 18, and I don't cut them below that. We need, if anything, more quality people. We need to develop a quality culture in the company. We need to develop quality awareness. We need to do training. Finance. We had Targeted 22, we're down to 12. We're now subcontracting some of the accounting functions that don't really need a full expense American employee. And we're actually doing it as a fee per month. I have an IT guy from Cypress, my old company. He runs really lean. And this function is, I'm happy with it. Dan and I have 21, 19 people in admin, do all of admin. We're the top admin guys. I got six lawyers, legal department with six employees. That's Drew Wanker that we introduced last time. We're on a third lawyer. He's really good and I'm happy. Oh. My old lawyer at Cypress was Drew, and I just conflated names. We're going to compromise on that, and we're asking Nick Wanker to change his name to Drew Wanker. Anyway, when I came in, I had 57 lawyers in the company, all gone, 100%. Customer care, this is important. We've got 62 people. We're about at target. This is when you call in and something's wrong, the company proves that it cares. And we have a good star rating, but in terms of doing what we need to do, it's not as much as we need to do. And I'm asking them to do more. Okay, so I've been able to tell you about our efficiency, the bodies, the fact that our overhead is lean, that is carefully managed. and we have a process for it. And that process has gotten us profit numbers you can brag about. Okay, we talk about revenue per employee. This is our graph going back to the first quarter after the merger. We had a nice trajectory, then we got hammered. We didn't lose employees as fast as we lost revenue because we lost like 15% of revenue in one quarter. Thunder brought in revenue and that improved it. And this quarter, we're in the middle of the quarter. So I can already tell you, well, I just showed you my twice a week estimate is 425. So in the letter, I promised 400. So I've got margin and we're going to beat that. And that's the number, if you drive that number in the solar business, you will make money. I made that point in the letter. Consequently, our only effective cost control method is to control employee expenses. First step, reducing headcount to the right number of employees is done. From now on, growing revenue will be our earnings driver, hence our current focus on acquisitions. Okay, this report went up. at 4 a.m california time this morning and i took the snapshot literally as i got in the car to come here to talk to you so what does the snapshot say over a long period of time they're unsure and we bounce between if you forget the anomalies they bounce between a buck and a half and two bucks so this this is the um confined space we're in. This looks to be a breakout. What's the volume today?

37.7.