SunPower Corporation (SPWR) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the SunPower Third Quarter 2020 Results Conference Call.

(Operator Instructions) Please be advised that today's conference may be recorded.

I would now like to hand the conference over to your speaker today, Bob Okunski, Vice President, Investor Relations.

Please go ahead, sir.

Thank you.

I'd like to welcome everyone to our third quarter 2020 earnings conference call.

On the call today, we'll start out with a strategic overview of the quarter from Tom Werner, CEO of SunPower, followed by Manu Sial, our CFO, who will review our third quarter 2020 financial results before turning the call back to Tom for guidance.

As a reminder, a replay of this call will be available later today on the Investor Relations page of our website.

During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in the safe harbor slide of today's presentation, today's press release, our 2019 10-K and our quarterly reports on Form 10-Q.

Please see those documents for additional information regarding those factors that may affect these forward-looking statements.

To enhance this call, we have also posted a set of PowerPoint slides, which we will reference during the call on the Events and Presentations page of our Investor Relations website.

In the same location, we have also posted a supplemental data sheet, detailing some of our other historical metrics.

With that, I'd like to turn the call over to Tom Werner, CEO of SunPower.

Tom?

Thanks, Bob, and thank you for joining us.

On this call, we will provide an overview of our third quarter performance as well as a brief update on the performance of our individual business segments.

As detailed at our Capital Market's Day, we remain confident that we're well positioned for success going into next year, given our strong competitive position, industry-leading solutions and a strong market.

Let's start with the recap of our third quarter performance.

Please turn to Slide 3. We executed well in the third quarter as we exceeded our revenue and EBITDA guidance and completed the spin-off of Maxeon to our shareholders.

Given our strong Q3 bookings performance, we are raising our Q4 and fiscal year 2020 EBITDA guidance.

Our residential and light commercial segment continued to outperform as we saw strong megawatt growth in our residential retrofit and new homes businesses while improving our overall gross margin for the quarter.

Finally, we are seeing increased customer demand for our recently launched SunVault residential storage solution, while working with our new homebuilder partners to further roll out our OneRoof product, which is already being installed in approximately 20 new communities.

Our C&I Solutions segment also performed well as we were profitable on an adjusted EBITDA basis for the quarter.

We added to our backlog with continued strong demand for our Helix storage solutions, including being awarded our largest Solar-plus-storage C&I project to date during the quarter.

As Manu will discuss later, our efforts to improve liquidity and strengthen our balance sheet are paying off as we increased cash by $90 million in the quarter and expect our business segments to be operating cash flow positive in Q4 and 2021.

As a result, we are reviewing options related to our 2021 convert to further delever our balance sheet.

We also took a positive step in relation to our corporate social responsibility programs.

As we appointed leaders for our ESG and diversity and inclusion programs.

We have been a leader in both areas for many years, and this will only accelerate with this new leadership.

Finally, we remain confident in our 2021 targets from our recent Capital Market's Day, given our Q3 performance, along with significant SunPower tailwinds, we see for the next year, including increasing demand for our SunVault and Helix storage solutions, a strong new homes market and expanding residential gross margins.

Now I would like to spend a few minutes talking about our residential and light commercial business segment or RLC.

Please turn to Slide 4.

Our RLC business delivered a very strong quarter, primarily driven by residential retrofit and new homes, as we saw both demand and insulation activity continue to increase through the end of the quarter.

Overall, our confidence remains high going into Q4 as customer demand is strong.

As discussed at our Investor Day, our residential gross margins continue to increase as a result of cost improvements, ASP stability and continuously improving financing.

It is important to note that the margin benefit of our recently announced loan and lease financing facilities have not yet impacted our bottom line.

We will see some initial impact of these improvements to margin in Q4 2020, with the full benefit being realized in 2021.

New home sale -- new homes also performed well with record quarterly bookings for Q3, resulting in a record backlog of more than 180 megawatts.

Our market share remains above 50% with significant interest in our OneRoof product from many of our builder partners.

We are very positive about the future of SunVault storage solution.

And as we start to install in volume, it will both increase our revenue per customer and be the foundation for future service revenue.

For the quarter, we delivered on a number of key SunVault milestones, including achieving certification for our 13- and 26-kilowatt solutions as well as beginning the installation ramp at many of our dealer partners.

We have a distinct competitive advantage with SunVault, given our smaller footprint, faster install times and the ability to backup higher power loads.

As we highlighted at our Capital Market's Day, we expect SunVault to contribute approximately $100 million in revenue in 2021.

I'd now like to highlight some of the key metrics related to how we are building sustainable, structural, competitive advantages with both our customers and our partners.

Please turn to Slide 5. We added more than 10,000 customers during the quarter, bringing our total customer base to more than 335,000 as demand remained strong, exiting the second quarter.

Our installed base now totals 2.1 gigawatts, and we see significant opportunity to expand our storage and service footprint with these existing customers starting next year.

We are also continuing to benefit from our strong marketing platform in virtual selling programs as more than 30% of our partner sales have come from SunPower generated leads across 200 exclusive dealers.

Our appointment generation platform is an integral part of our residential platform, increasing our ties with our biggest dealers.

Importantly, our rapid and successful transition to online sales is also showing results, as 85% of all residential volume in Q3 was sold via online or through virtual sales methods.

This transition has also materially lowered our overall customer acquisition cost.

Finally, as I mentioned earlier, our new homes business continues to outperform.

Our current backlog is now 50,000 homes, and the launch of our OneRoof is going quite well as it has now been deployed in approximately 20 communities in California in its first quarter of availability.

We continue to expect more than 50% growth in New Homes in 2021.

On Slide 6, we detail the positive trends we are seeing in both residential revenue and gross margin.

The chart on the left shows the results of our efforts as revenue trends are improving rapidly since the COVID-driven Q2 trough.

Residential installations were up 33% in Q3 versus Q2 and are expected to grow at a similar rate next quarter.

We head into 2021 confident that there will be continuing improvement driven by our new lease and loan products, new homes and SunVault.

The chart on the right shows our strong improvement in gross margin in both dollars and on a percentage basis.

As you can see, we have achieved year-over-year improvement in gross margin every quarter this year despite the impact from COVID.

This improvement is directly tied to executing on our cost reduction programs, quick transition to our successful online model as well as a lower cost of capital.

As a reminder, our gross margin improvement this year does not yet include the full benefits of our recent financings or the full rollout of our SunVault storage solution.

Please turn to Slide 7, where I'll provide an update on our C&I Solutions business segment.

We saw solid results from our C&I Solutions team in Q3 as we posted positive adjusted EBITDA for the quarter.

Results were primarily driven by systematic improvement in project execution and platform cost reductions.

We further added to our $3.5 billion pipeline during the quarter with currently contracted and awarded projects in excess of 275 megawatts, up from 215 megawatts in Q2.

Third quarter gross margin per watt came in at more than $0.25, up $0.15 year-over-year on 20 megawatts of volume.

Given our third quarter performance and execution on our cost initiatives, we remain confident in our ability to meet our target of gross margin per watt of at least $0.27 for the year.

Demand for our Helix storage solution remains high with attach rates of about 30% in our current backlog.

We remain the market leader in commercial storage and by the end of 2020, we expect to have more than 20-megawatt hours of storage across 25 sites in operation.

We also expanded our footprint in the community solar market with the recent award for 2 projects totaling 13 megawatts.

We see community solar as a growth opportunity, capitalizing on our origination capabilities and our Helix storage solutions.

With that, I'd like to turn the call over to Manu Sial, CFO of SunPower.

Thanks, Tom.

Before we discuss the financial results for the quarter, I wanted to remind everyone that we have posted a detailed metric sheet on our Investor Relations website that has been updated and enhanced for disclosures we had made at the Capital Market's Day on September 10.

Please turn to Slide 8, where we have provided our consolidated financial results and select metrics related to our valuation framework that provide clarity to value related to day 1 customer contact, and that's on recurring revenue streams.

We are pleased with our financial performance for the third quarter as we exceeded our revenue and EBITDA guidance.

Moving on to the specifics of the quarter.

Post-spin, we have segmented the company into residential and light commercial and C&I Solutions.

We saw continued recovery in both our segments as demand remained strong throughout the quarter.

Overall, megawatts recognized rose approximately 20% sequentially with our residential light commercial segment, up 17% sequentially, with residential up 33% versus second quarter.

Our C&I Solutions segment was also up 32% sequentially.

We expect the strong volume growth trend to continue in the fourth quarter.

Consolidated non-GAAP gross margin in DevCo was $0.35 per watt and up from $0.30 per watt in second quarter with the residential at $0.46 per watt in third quarter.

We expect a significant step-up in gross margin per watt in fourth quarter in residential as we benefit from improvements in our residential loan and lease economics and execution on our cost roadmaps.

We also saw sustainable improvements in project execution in C&I Solutions, where we posted a positive EBITDA in third quarter.

As Tom mentioned, demand for our SunVault walled residential storage solution remains very high going into 2021, and we are pleased with the continued traction of our Helix storage product for commercial customers.

Given the traction of storage that adds incremental margin to the system and expected margin improvements from a recently closed residential financing we have increasing confidence in our ability to meet our 2021 Capital Markets Day targets.

Non-GAAP OpEx per watt was $0.31 a watt, down 20% sequentially as we successfully executed on our cost initiatives, including lowering our corporate OpEx post spin.

We remain on track to reduce OpEx per watt to less than $0.30 next year.

In relation to Powerco metrics, we continue to build our recurring revenue streams, including revenues from asset management services to residential and commercial customers and energy revenues from C&I assets that we currently hold.

Powerco recurring revenues and services pipeline grew sequentially and is approximately $575 million at the end of third quarter, with current quarter reported revenue being close to $10 million.

Net retained value from our residential leases held at SunStrong joint venture was $368 million and ahead of forecast.

As mentioned earlier, we closed recently on the second residential lease fund with Bank of America, where we expect to generate approximately $1 per watt of net present value, including upfront cash margin and net retained value.

We are seeing benefits from lower cost of capital and committed tax equity capacity.

With this fund, our all-in effective cost of capital for new residential leases is now close to 6%, and believe we can further reduce our cost of capital in future funds.

Finally, we continue with our efforts to improve cash flow and reduce net recourse debt on our balance sheet.

We ended the third quarter with $325 million in cash, net of Maxeon deal expenses and also invested in working capital for the growth of our C&I Solutions segment ahead of a significant fourth quarter '20 volume ramp.

Our residential and light commercial segment was close to operating cash breakeven in the third quarter.

As mentioned in the Capital Market's Day, we expect our business units to generate positive operating cash starting fourth quarter 2020.

As a result of our improving liquidity position and expected fourth quarter cash generation we have the ability to pay our 2021 converts prior to maturity if we so chose.

In summary, third quarter was a solid quarter for the company as we exceeded key financial targets, strengthened our balance sheet and positioned SunPower for future success.

With that, I will turn the call back to Tom for our guidance.

Tom?

Thanks, Manu.

Moving on to guidance.

Please turn to Slide 9. The company's fourth quarter and fiscal year 2020 guidance is as follows: fourth quarter GAAP revenue of $330 million to $370 million, GAAP net income of $11 million to $21 million and megawatts recognized in the range of $145 million to $175 million.

For the fiscal year -- for fiscal year 2020, the company expects GAAP revenue of $1.12 billion to $1.16 billion, GAAP net income of $190 million to $200 million and megawatts recognized in the range of 465 to 515.

Given our third quarter performance, and strong visibility for the balance of the year, we are raising our fourth quarter and fiscal year EBITDA guidance.

We now expect fourth quarter EBITDA to be in the range of $26 million to $36 million and 2020 EBITDA to be in the range of $30 million to $40 million.

In summary, Q3 was a solid quarter for the company as we executed on our strategic initiatives completed with successful spin-off of Maxeon and laid the foundation for improving our profitability.

With that, I would like to turn the call over for questions.

(Operator Instructions)

Our first question comes from Brian Lee with Goldman Sachs.

Good job on the quarter.

Two questions from me here, both sort of related to gross margins.

I guess, first, on SunVault, it sounds like you're not at your sort of optimal gross margin targets quite yet, but when it is, it will be additive to the RLC gross margins.

Is that a fair assumption here, based on the comments you're making?

And then when do we see that margin target hit on SunVault?

And does this imply gross margins well into the 20s, or are we even in the 30s?

Just trying to gauge profit potential here on this new product opportunities since it's so incremental and we've also seen some of your peers talking about much higher profit margin levels in this category?

And then I had a follow-up.

Brian, yes, Tom Werner here.

Thanks for the question.

And SunVault is now got certifications, dealers are being trained, and it is being installed, so we are ramping.

And I think we'll have a favorable position actually on margins compared to others since we designed the product ourselves, and I'll let Norm expand.

Yes.

Thanks, Tom.

Thanks, Brian.

Yes, relative to margins, you can think about SunVault being consistent with our overall margins, which are growing next year.

It is certainly additive and incremental.

In fact, we expect it to add $0.20 -- upwards of $0.20 to $0.30 a [lot] of incremental margin on the same sale.

So it not only has the value of incremental margin, but that incremental margin is effectively the much lower customer acquisition cost because we're already making that sale as a customer.

And so to be -- we expect to be margin similar to the overall business and completely incremental.

Okay, understood.

That's helpful.

And then maybe just a follow-up on the gross margins.

Again, focused on RLC, if I look at that chart you had up in one of the earlier slides for the past couple of years, been pretty seasonal.

I know there's been a global pandemic embedded in the midst of that bar chart.

But how should we think about gross margins in RLC going forward from a seasonal perspective?

Is there any reason that it will be as seasonal as we've seen historically.

Again the reason I ask is I'm trying to gauge how much of a starting point or baseline, the 20%-plus level you're talking about for Q4 2020 year here and trying to figure out where you'll trend in '21.

Is that a starting point and we should track higher from there?

Are we going to see some of the up and down sort of seasonality that we've seen over the past couple of years into next year?

Okay.

Why don't we do it in reverse, Norm, you say a few words, and I'll probably add on.

Okay.

Yes -- no, happy to.

There is some seasonality in our margin that can be expected.

I will tell you that, that seasonality has been reducing as our costs have come more in line.

And I think, frankly, I think overall ASPs have been more stable.

So you should expect some seasonality but less in the coming year than you've seen in the past.

And as I said at the Analyst Day, we expect to hit or exceed our margin model for the full year 2021, which is above 20% margins.

And Brian, I think it's really important to point out that the margin picture and residential is fundamental, meaning that our loan economics are fundamentally better because we service our own loans now, so we don't pay someone else to do that.

And because our cost of capital has gone down.

With lease, we've continuously improved the parameters of lease, and we've made the biggest step in our latest lease facility, both of those start really in earnest in 2021.

To that, we've improved our cost of installation and I think we're a leader in customer acquisition cost.

So the basis of RLC margin are very fundamental across all 4 quarters, even though you will still see some seasonality, as you know, often driven by changes in policy.

Our next question comes from Michael Weinstein with Crédit Suisse.

Can you talk about SunVault?

We estimate that $100 million SunPower of revenues in 2021 implies about 250-megawatt hours of sales in the year of an attachment rate of about 38% or greater.

Is that the right math, or that's the right way to think about it?

I think you're in the ballpark, for sure, and of course, we're ramping quite rapidly.

And of course, the attach rate will vary significantly depending on region.

It might be a touch lower than that?

And Norm maybe you can dial it in a little.

Actually, I think that's a pretty good estimate at this point.

I would say our estimate is quite rough at this point.

If anything, I think our view is that there's upside to those numbers based on just the demand level, the broad-based demand level.

But assuming the numbers that we've quoted, I think the estimate is pretty close.

I'll actually have to do the math in my head to confirm, but I think, about right.

Who were the suppliers?

And how much capacity do you have access to?

So we've not announced the suppliers of the main pieces of the hardware inside, but I can say that the product has been designed to the vendor agnostic.

So our intention long-term is to be able to follow the battery and inverter cost curves downward.

So that's the approach.

From a supply standpoint, we have plenty of supply for our ramp and is right now, really, the only thing that's straining our ramping today is really our ability to have enough installation capacity.

But both battery, we're using a very high-volume battery supplier and a high-volume inverter equipment supplier, and we've designed other elements in the system ourselves.

From a supply standpoint, we're very comfortable.

We do want to have multiple suppliers long-term for better economics.

And Michael, I want to remind everybody that our solution is 2 boxes on the wall.

And if you look at other solutions, you'll see a lot more than 2 boxes.

We've been able to consolidate some functionality into 1 of the 2 boxes.

So 1 box is an inverter and a battery, the battery is sized so that we can have different suppliers for that same size battery.

There aren't that many sources.

There's basically 6 big sources in the far east, and we're prepared for any of those 6, or most of those 6, I should say.

The other box is designed by us.

It is our monitoring system, which had second source components.

It's a service panel, which is a common item.

It's an automatic transfer switch, which is a common item.

And then some electronics that we designed.

So the common theme here is we designed it.

We have lots of control there.

Therefore, it's very scalable.

Right.

Just 1 or 2 more questions.

If -- how does the improved EBITDA in Q4, bode for assumptions for 2021 that you laid out in September?

I mean, is 2021 still look around greater than $100 million of EBITDA?

So I'll take that.

And Manu, you can jump in, if you'd like.

On -- so Q4 gives us -- I'll put it this way, Q4 gives us a lot of confidence with the implied guidance of the metrics we gave for 2021.

Having been in solar for a very long time, we're more careful about giving specific guidance beyond what we have until we get into the year.

But I would say that as we sit here in Q4, our confidence level going into 2021 is the highest it's been since I've been with the company.

Got you.

One more question.

On the 6% cost of capital, I mean, do you see that -- I know you said new facilities will be cheaper.

Do you see that trending down 100 bps, 150 bps, 200 bps next year?

I'll let Manu take that.

Yes.

So I think with -- we are in a historically low interest rate environment.

I think as we think about the 6% cost of capital, we have headroom on all forms of capital -- parts of the capital stack, both debt and equity, with a little bit more opportunity on the equity side of the house.

So I think how you're thinking about it is correctly, in terms of the reduction we should expect.

And I think the way we're operating is since we sell products or projects, since we monetize them, we have a very clear marker of what the public markets value projects on the balance sheet for, so we know what the threshold is.

And as our balance sheet has improved radically, and will do so even more so as we go forward.

We should benefit from that, and we need to compete with the cost of capital, the public markets are rewarding projects on the balance sheet.

So that is the cash we're on.

Our next question comes from Ben Kallo from Baird.

Congrats on the quarter.

Just going to -- just to your -- to the storage side.

Why go ahead with your own product, maybe this is my first question, versus some other people that you're outsourcing that?

And then I guess my second question is, Tom, customer acquisition cost has been one of the biggest things to sign up the resi space, I think and what has changed there?

Or has anything changed there?

And when we look at your numbers going forward, is that a driver for them being better than you forecast that if you can get customer acquisition cost down.

And I guess the final part of that is there -- as this whole debate about who's -- is it better to have a channel partner and dealer network or to do-it-yourself with your own sales force?

And so where are we on that?

Sorry, I (inaudible)

Okay.

I'm going to take a pass.

Did you have one more, Ben?

No, that's it.

Okay.

Great.

I'm going to take a pass at them and the Norm is going to add on to what I say, probably with more precision.

Why do we design our own?

It is the heritage of SunPower.

We designed our own solar cell back in all the way back to the '80s, but we productized that and scaled it in 2003 through 2010 and created a very unique world's highest efficiency products, so it's in our core DNA.

And then the short answer to your question is because we have a better product.

And should we expect the product that will backup more load, that installs faster and looks better because it's 2 boxes, which is a big deal because you often see them every time you pull into your garage.

And the second reason why we design it first, it's better.

Second is for future proofing.

As we add services, which we already have, you can imagine, of course, that we have to do rate arbitrage.

And of course, we have to do resiliency and micro griding that as we add services of grid interface, grid services and how we monetize those.

It's much easier to do, if it's our own software, and we're integrating it ourselves.

Thirdly, we offer one-stop shopping for our customer, and Norm can expand on this, but the comfort to our dealers and our customers that they don't have to call multiple people or call 1 person who calls somebody else -- who calls somebody else.

They call us, one-stop shopping.

So it's our warranty, it's wrapped one company.

So those are 3 things I'd say about why we do it ourselves.

On customer acquisition cost, Norm can expand on, our marketing engine is running great.

We're generating appointments for our dealers.

This is, by the way, a vision we had or a strategy we had 10 years ago, (inaudible) and Norm and his team are executing on it now.

They've scaled the marketing engine such that we generate appointments differently than our peers and more cost effectively.

So yes, it's a point of competitive advantage.

And lastly, on channel partners, actually, interesting strategic question because the channel is really fragmented.

There's independent EPC companies that execute and generate business.

There's sales companies that only generate leads and then sell the leads to whomever, including the EPC companies, and then there's channel partners.

And each has its own advantages.

And I'll let Norm expand on his thoughts on what we're doing today and going forward.

So probably quite a bit to add on from Norm.

Yes.

Thanks, Tom.

That was -- you actually covered it really well, but I have a few other few added data points.

I mean on the economic reason for doing our own storage is simply in many ways to avoid margin stacking, right?

Instead of us paying margin to somebody else than to supply that storage, we see a great economic opportunity to make margin on the hardware we sell.

And that's -- what's important about it is not just to new customers, which is a big deal, but to over 330,000 existing customers.

And so I think economically, long term, we believe that will be meaningful bottom line impact for the company.

I think from a strategic standpoint, Tom alluded to this, what's really important to us is that we control the software that our customers use.

And a fully integrated software approach means that the customer has a single tool, which monitors their TV, their storage, their complete solution.

And that is both important for us as far as getting customers to adopt us, stick with us to refer us to their neighbors.

But it's also important, as Tom said, is the basis for a service model long term.

And I think the importance there is you really own that storage software platform, which you often won't get if you were to choose the model where somebody else is providing somebody else's store solution, those are kind of the strategic drivers.

Just switching to a couple of comments, you talked about customer acquisition cost.

I'm glad Tom highlighted that our appointment generation engine is getting better and better.

I'll give you a good data point from October.

This past month, we generated 43% more front-end -- our front-end funnel did 43% versus the same quarter last year.

So we're not just beyond COVID, we're almost 50% larger month versus month in terms of the [front end funnel].

So that is becoming a bigger and bigger portion of what we bring to our dealer partners as value.

And so that's been some good point.

And then last comment relative to the channel.

It's a great question in terms of we're seeing a very much a mixed model.

We -- one of the keys to low customer acquisition cost has been our dealer model.

It's a lower cost model.

At the same time, we are seeing certain areas where if you virtually sell them, it makes sense to do more in different areas of the country directly or with partners that just do sales as opposed to doing installs.

So while we are continuing to grow our independent dealer network, we are also growing our installed portion of our business.

It's still smaller -- relatively small compared to the installing dealer portion, but it is growing.

Our next question comes from Philip Shen with ROTH Capital Partners.

The first one is on the loan financing fee reduction targets.

I know it's critical to your gross margin expansion story.

Obviously, you're leveraging the relationship with TCU.

I think in this model, you guys serve as the originator of these loans, rather than a Mosaic or a Loanpal or something.

And given that situation, I think what happens is the accounting for your installers may change where they may only recognize the revenue on the equipment sale.

So I was wondering how your installers and dealers are taking that accounting change?

And do you expect to be able to have and have those -- pardon me, but you expect to have those dealers use your loan program completely?

Or do you think you still might have to use a mosaic, for example?

So I can take it.

This is Norm.

Just from a -- at the first level, we continue to use both Mosaic and TCU, so I want to point out, we do still have 2 partners.

But as far as the accounting from a perspective of our dealers, that has not changed with our TCU product, that is still actually the same in both cases.

So they are not seeing any sort of issue from our dealers having a different accounting because we've gone to the TCU approach.

So really what we've been able to see now is a bigger variety of loan products and a suite of products that now includes a low APR products, longer-term and lower APR products that have been very attractive.

And virtually all of our dealers are using TCU, and they still be using some Mosaic as well, but we've already converted virtually all of our loans -- partners to using some TCU, but they can access both in the systems that we provide.

You guys talked about grid services already, but I was wondering if you could provide some more color on that opportunity.

For example, when do you expect revenue to be -- start to be generating in a meaningful way, and when could it be meaningful, and what's the timing of that?

And ultimately, what is the revenue model?

Is it going to be a SaaS model?

Or is it a percentage of some kind of fee that you might end up charging to the utility for embracing the software that you guys are providing.

So any color on that revenue model would be great.

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

Sure, I'll take that.

The ability to have services is directly proportional to the amount of storage capacity you have in the market.

And so today, we have meaningful storage capacity in the market in commercial.

And so we do have some capacity we participate in some capacity markets, and we do generate some revenue.

In order to get meaningful service revenue, you really need to get to very large numbers, perhaps even gigawatts deployed.

And so commercial, we're already seeing some grid services revenue.

Of course, since we're just launching SunVault in residential, we need to scale it to get the service revenue.

Typically, as you probably know, I'm sure you know, you bid in these wholesale markets 3 years in advance, typically.

And so we are bidding into wholesale markets, planning for the attach rate for SunVault and then leveraging that.

If you go out to a 5-year model, the numbers get to be meaningful, of course, there's peers that have given numbers and the math is going to work similarly here.

So commercial, first for us, residential second.

It takes a few years.

We're already bidding, and we already have some revenue in the commercial business from grid services.

I should also -- oh, the model -- those models look more like SaaS, they're multiyear commitments and you get revenue each year.

Now as we go on, we're going to be very precise at that grid services versus customer services.

We can offer services to our customer where we optimize their bill.

And we do that today in commercial, and that's built into the price of what they pay for a solar system.

In the future, we may license that as we expand the offering that's resiliency, rate arbitrage, and I believe, in residential, we call it TOU arbitrage, but same idea.

And then, of course, from there, you go to grid services.

So the answer to your question, it's both in commercial built into the price of the system, and in some cases, it's recurring and therefore, looks like SaaS.

Our next question comes from Colin Rusch with Oppenheimer.

As you look forward and seeing the growth of the business, what are you looking for in terms of needs and in terms of working capital?

And how are you plan to address some of that?

So I'll comment, if I understand your correct question correctly, you're asking about cash, and how we think about cash needs.

Let me say a few words, and I'll let Manu take it and then you can follow-up if I didn't give it correct.

So the new SunPower, I guess, it's not new anymore, SunPower, will have limited, if any, CapEx.

We expect to be -- manage our working capital such that we can be operating cash positive.

And so we expect our business to generate cash.

And as Manu said in his prepared comments and a little bit in the Q&A, we're already in a position to pay off our first convert.

And so we're now looking at ways to sort of optimize our balance sheet in terms of how much recourse debt we had versus cash.

But the ratios have improved dramatically, and Manu can comment on that.

So any need for cash as we forecast it would be inorganic, meaning M&A.

And Manu, again, can expand.

So Manu?

Yes.

So as you think about cash and specifically, cash conversion from EBITDA, one, our model is a cash-based model.

So from an EBITDA to cash perspective, we have forward flow arrangements, both in the residential and the commercial business.

So a relatively low cycle from EBITDA to cash, that's one.

Second, in both our businesses, lots of initiatives in terms of improving things like inventory turns, specifically in residential, where you're getting to 10, 11 turns, from an inventory perspective.

So what I would say is both businesses generating operating cash in fourth quarter, that trend is going to continue.

From a modeling perspective, you should expect a high conversion of our EBITDA into cash, given our forward flow arrangements as well as our inventory turns.

That's super helpful.

And then just in terms of module supply, with the industry facing the prospects of a tight supply environment, how much flexibility do you have in terms of different suppliers on the module side to re-supplement your capacity and availability materials to grow?

I'll take that, Colin.

So we have 2 year exclusivity in residential and that's extendable.

We look out during the entire 2 years with Maxeon, we meet frequently with them, as you can imagine.

In commercial, it's 1 year, which is now 10 months more exclusive and then we'll usually decide whether or not to continue that exclusivity.

But commercial could use other people's modules as soon as, call it, third quarter of next year, yet to be determined.

Working closely with Maxeon, which by the way, is doing great for us as a partner, 2 months in.

And we do plan capacity upsides with Maxeon, and we're doing a product road map session with them tomorrow, actually.

So we are also looking at ways to expand the breadth of the product that we get from Maxeon.

Our next question comes from Stephen Byrd with Morgan Stanley.

I just wanted to follow-up first just on the cost of capital discussion.

In a prior question.

You talked a little bit about the ability to reduce the 6% cost of capital.

And you highlighted the equity opportunity, wonder if you could be -- if there's any way to kind of get a little more granular in terms of drivers there, the approximate magnitude, just given how critical that particular assumption is as we think about the value?

I'll say a few things, and Manu, you can jump in if you want to add on to it.

First of all, our primary sources of equity are well known.

And if you look at their sources of capital, they've done a very good job of raising very cost-effective capital.

So our partners have done a good job and we expect as they have, that we expect going forward that we'll benefit from that.

Secondly, our balance sheet has improved, which has an implied leverage, so to speak, or implied advantage with our partners.

The risk premium for SunPower has gone down dramatically and will continue to go down, and there should not be one.

And then at the extreme, you could say, as our net debt position approaches $100 million as soon as we said at Capital Market's Day or sooner, then of course, we could always say we're just not competitive enough and we'll put some of these assets on our balance sheet.

That's not our plan, but we have that option and as we improve our balance sheet.

And we are, of course, all capitalizing on historically low interest rates.

It look like they'll persist given the Fed's position.

Manu, do you want to say anything?

Yes.

I think, Tom, you covered it well.

The only thing as you think about dimension, there is a significant headroom between public markets, cost of equity and the cost of equity that is in our residential fund.

So there is opportunity and headroom to get further compression.

Yes, it all makes sense.

And then just shifting over to customer trends.

You discussed community solar, and that seems like a great area of growth.

I wonder if you could just expand on that a little bit more.

How do you think about, at a high level, the volume potential, the relative importance of community solar over time.

So SunPower has a long history in ground mount solar systems, we used to be in the solar power plant business and did 4 gigawatts of power plants around the world.

And we did a little bit of community solar in the old days.

This is different.

This is -- our community solar today is different and has evolved, and I'll let Eric expand.

Sure.

Thanks, Tom.

Yes, I think of community solar as a real way for us to leverage our existing origination and development groups.

And it comes in a couple of different flavors.

One is we can go to existing customers who maybe don't have the behind-the-meter load and provide them a policy, an incentive that allows them to actually maximize their existing asset, could be a rooftop, could be a parking lot.

So that's one flavor where we're going to kind of your traditional C&I customers.

The other flavor is maybe a little bit more consistent with what community solar has been known as in the past where it's going out, finding land positions, getting an interconnection queues and building projects there.

But even that is shifted to be more of a distributed generation type of policy so, both of those initiatives have almost doubled what we're focused on as a business unit.

So we see it as a real growth driver for us going forward.

I think we're going to take one more question.

One more group of questions.

So if you could go ahead, please.

Our next question comes from Julien Dumoulin-Smith with Bank of America.

So just to pick up a little bit on where we left it off here on the growth side of the equation here.

How do you think about beyond the exclusive here on Maxeon and expanding those options?

What that does to the trajectory, especially the commercial opportunity, as you think about expanding beyond resi here and having greater options?

And then if I can throw in the second related question here, how do you think about leveraging the storage opportunity?

I presume this is strictly being sold through the existing dealer channels.

Is this something that you would think about perhaps marketing a little bit more broadly or through other channels?

Okay.

Thanks for the questions.

Norm, I'll give you the second one.

And operator, I'm sorry, we will take one more set of questions after this.

So in terms of options on the panel, we were -- as you can imagine, extremely closely since we used to be one company before August 26 with Maxeon.

And they really want us to be successful.

They want us to be a healthy partner and, of course, us likewise with them.

And so we have detailed conversations about their product road map and the breadth of their road map, how well it fits with lease loan and cash sales, how it fits with ground mount, carport, rooftop, residential retrofit in new homes.

And there are areas where, over the course of the next half of the year or through a year, we're deciding on does it make the most sense for Maxeon to add products or not, and if the answer is not, then we'll work on a mutually productive way to SunPower could source elsewhere.

So we have not made any -- we're not prepared to discuss any decisions, but we have a very, I'd say, a realistic dialogue with Maxeon, and they want us to grow and succeed and have share and be healthy.

So more to come on that front, Julien.

And then Norm, can you take the second part on storage and channels?

Sure, happy to.

I would say, Julien, the way we think about this is, first, our first priority is supporting our existing channels and new sales with storage.

And as we talked earlier, and it's generally in the market, there's extraordinary demand.

And so that's kind of the first priority.

Our second priority is really going to be addressing our existing customer base, one of the things that's important about the way we did storage is it is AC-coupled.

And as it's AC-coupled, it makes it a lot easier to apply it to existing systems even if they're lease or certainly cash.

So we really see a great opportunity just within our own base to grow significantly.

And certainly, any of our expectations for 2021 are supported just by those 2 things, supporting our new cash sale and is just starting to penetrate our existing customer base.

I will say we've discussed the third step, which would be -- do we go beyond our dealer channel.

And really, I think we'll judge that based on just the level of acceptance we see for the product, the opportunity to extend it.

I could certainly see it someday become a storage first model as well as it gets more and more popular.

But I would say that's a little further out there.

We can more than exceed our growth expectations from our existing dealer channels with new solar and our existing customer base for the next year.

If I can quickly clarify that super quick, on the ability to go back to existing customers, would that have to be at a certain point in time?

Or can you literally go back given the financing and all that to your customers you've just recently sold, practically.

We can go back to them right away.

The issue right now is just choosing the priorities about where we -- because we're building up installation capacity and really kind of ramping the product.

But for a big portion of our customer base, we could address that market right away.

We are prioritizing the new sales for -- to maximizing revenue per customer, but the product is able to be installed at a big portion of our customer base kind of really right out of the box.

Our next question comes from Pavel Molchanov with Raymond James.

Two quick ones, both in relation to the ITC.

First one, if you have any predictions on whether anything will happen with the ITC legislatively in the lame-duck session?

And second, back when you gave guidance for '21, obviously, there was no visibility at all on whether ITC might make it into a stimulus.

There's perhaps a little better clarity on that today.

Would there be any guidance change for '21, if there were to be an extension announced in the lame-duck?

So I think you probably know more than me about the lame-duck possibilities that which I do know.

I would say that it's low-odds, but not no-odds.

And we're engaged, though.

And I think if you go beyond lame-duck, it's very much on the table.

In terms of impact on 2021, I think it would have some impact more than offset, of course, by the multiyear improvement in our plan and our ability to scale and get cost down faster and be more aggressive.

But Norm, do you want to say anything?

And then after Norm you're done, I'm going to wrap it up.

I don't know if I can add too much other than, I mean, I think that there could be a small impact in the second half of the year as far as kind of the increase in cash that might be generated based on a significant roll off.

But obviously, more than made up for the long-term benefit this would have.

And we're obviously very, very big supporters when extension of the ITC.

And Pavel, I would add that the new homes business is largely insulated from that dynamic, and storage is a little bit more insulated from that.

So there's some things that would smooth out changes.

So Pavel, I think we're all set, right?

Thank you.

Okay, thanks, Pavel.

Thank you, everybody, for joining our call.

We look very much forward to our next call with you where we'll nail down 2021, and we'll have a good insight into the new year.

And of course, the outcome of the election.

So thanks, everybody, very much.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.