Sunworks, Inc.
Q4 2017 Earnings Call Transcript

Published: 29 Mar 2018

[Operator:]

Greetings. And welcome to the Sunworks’ Fourth Quarter and Year End 2017 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Rob Fink of Hayden IR. Thank you, Mr. Fink. You may now begin.

[Rob Fink:]

Thank you, operator, and good morning, everyone. Thank you all for joining Sunworks’ fourth quarter and full year 2017 earnings conference call. Hosting the call today are Chuck Cargile, Sunworks’ Chief Executive Officer; Paul McDonnel, Chief Financial Officer. Before we start, I would like to remind everyone that during this call, management’s remarks contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by the forward-looking statements because of certain factors not limited to general, economic and business conditions, competitive factors, changes in business strategy or development plans, the ability to attract and retain qualified personnel, and changes in legal and regulatory requirements. In addition, any projections as to the Company’s future performance represent management’s estimates as of today, March 28, 2018. Sunworks assumes no obligations to update these projections in the future as market conditions may change. Within a last hour, the Company issued a press release with financial information and commentary in its annual report on 10-K. We encourage you to review both the augment, the information provided in this call. I would now like to turn the call over Sunworks' CEO, Chuck Cargile. Chuck, the call is yours.

[Chuck Cargile:]

Thank you, Rob. Good afternoon, everyone and thank you for joining our call. It was almost exactly one year ago that I was named CEO of Sunworks. At that time I was not familiar with the term solar coaster. It is safe to say that I am now. 2017 was a challenging year for the solar industry and for Sunworks. The industry experienced the year-over-year decline in installed photovoltaic capacity for the first time on record. And experienced supply chain disruption, exaggerated by the tariff on imported panels which was ultimately enacted in January of this year. Sunworks also experienced the decline in installation revenue. Our 2017 revenue of $77.4 million declined 10.4% versus 2016, which is less than a 30% decline in solar PV installation industry wide in 2017. During this challenging period, we made a number of changes at Sunworks which we believe position us well for 2018. I'll speak specifically about four items. Number one

[Paul McDonnel:]

Thank you, Chuck, and good morning, everyone or good afternoon everyone. Before discussing the financial results for the fourth quarter and the audited results for the full year ended December 31, 2017, I would like to remind everyone that since arriving at Sunworks 18 months ago, we have been involved in an extensive reconfiguration of the accounting and information systems, personnel and processes. This reconfiguration has identified several needs and opportunities to enhance our reporting and performance monitoring capabilities. This has been a priority throughout 2017 and will continue in 2018. Critical to this improvement process is the work of our corporate controller, Philip Radmilovic who joining Sunworks in late June of last year and has been instrumental in this effort. In late 2016, we were able to identify several procedural and informational needs and weaknesses upon which to focus in 2017. In addition 2017 operating performance revealed additional areas of need. Our pursuit of solving these issues has enhanced our ability to more accurately bid projects, monitor performance, support better decision-making and improve margins on new projects. As Chuck has mentioned earlier, 2017 was a difficult year but we have more accurate and useful information that we are using to improve future performance. For the fourth quarter of 2017, total installation revenues were $19.3 million. This is an increase of approximately 5% compared to $18.4 million reported for the fourth quarter of the prior year. The $19.3 million in revenue recognized during the quarter also includes the $2.6 million negative impact resulting from revisions in ACI construction cost estimates for 22 different jobs in process. As construction budgets are revised, the amount of revenue and gross profit to be recognized for job changes. The impact of these changes in estimates resulted in $2.6 million less revenue being recognized in the fourth quarter. And will result in lower gross profits being earned over the remaining life of each project. Our revenue increase for the quarter is the result of $4.8 million or 25% of our total revenue being provided by Public Works jobs that offset the softness we experienced in ACI and residential markets compared to the same quarter in the prior year. Residential revenues were $5.6 million or 29% of our total revenues for the quarter compared to $ 8.3 million or 45% for the same quarter in the prior year. ACI revenues were $8.9 million or 46% of total revenues, compared to $10.1million and 55% of our revenue for the prior year. Gross profit for the quarter was $1 million or 5.4% of revenue for the three months ended December 31st, 2017. This compares to $2.7 million or 14.9% of revenue for the same three months in 2016. The revisions to job estimates and costs without associated revenues are the results of the details and thorough reviews of all jobs in process and the flushing through of older jobs, as we clean up and complete older projects. Total operating expenses excluding depreciation and stock based compensation for the quarter were $3.9 million, compared to $5.8 million in the fourth quarter of 2016. This represents a 32% decrease from the same quarter in the prior year. We do seeing the overhead burden without compromising the ability to operate effectively has been and continue to be an emphasis, with additional overhead reductions having been made in the first quarter of 2018. Stock based compensation was $326,000 during the quarter, compared to $277,000 in the prior year quarter. Depreciation decreased slightly as a result of the sale of unnecessary fixed asset that's resulting in the small gain on sale. The net loss for the quarter was $3.4 million, compared to a net loss of $3.7 million in the year ago quarter. Turning to the full -year results. Total revenue for 2017 decreased by approximately $9 million or 10.4% as Chuck said to $77.4 million from total revenue of $86.4 million in 2016. The 2017 revenue mix was 68% ACI and Public Works and 32% Residential. In 2016, the revenue mix was 67% ACI and Public Works and 33% Residential. Please be aware the Public Works revenue and operations were combined with ACI until early 2017, when we began to separate the two operations. Public Works is becoming a larger portion of our revenue mix and helps to offset the lower traditional ACI revenues in 2017 but at lower margins. Gross profits for 2017 decreased $8.4 million to $13.7 million or 17.6% of revenue, compared to 2016's gross profit of $22.1 million or 25.6% of revenue. The decline in margin percentage is attributable to the changing sales mix with greater Public Works volume at lower margins, price competition, greater reliance on third parties finders fees for residential fields, which are offset by lower sales and marketing expenses below the gross profit line, and the impact of $3.9 million of project cost estimate revisions and cost overruns. Total operating expenses excluding stock-based compensation and depreciation were $18.4 million for the year. This is a decrease of $5.4 million compared to the $23.8 million for 2016. The net loss for 2017 was $7.2 million or $0.32 for basic share compared to a net loss of $9.4 million or $0.46 for basic share in 2016. Much of the 2017 loss is attributable to lower revenues, price competition and required revisions to job estimates and the project cost overruns mentioned earlier. And those can only be partially offset by the reductions in operating expenses. The EBITDA loss for 2017 was approximately $4.7 million compared to EBITDA loss of $2.0 million in 2016. Turning to our balance sheet. Our unrestricted cash and cash equivalents was $6.4 million at the end of December 2017, compared to $6.4 million at September 30th, 2017. And $11.1 million at December 31st, 2016. Cash decreased by $4.7 million for the year. Working capital decreased by $5 million primarily the results of the operating losses and principal payments for equipment and acquisition notes payable. Managing cash has a critical priority for the seasonally slow first quarter of 2018. We came into the year with abnormally high deposits for inventory and inventory on hand. The strategy of purchasing or committing to purchase solar modules prior to your end was pursued to insulate Sunworks from the uncertainty created by the impending tariff ruling on solar modules. Now as inventories are converted to cash and as we moved into more active spring and summer construction months, the strain on cash should eventually ease as we complete profitable projects. Cash and working capital management continues to be a top priority for the days, weeks and months ahead. Our outstanding debt at the end of 2017 consists of $1.8 million, the result of either acquisition or equipment financing. And a $200,000 convertible notes that bears no interest. That concludes our prepared remark. And now Chuck and I would like to call for questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Philip Shen of Roth Capital Partner. Please proceed with your question.

[Justin Clare:]

Hi, everyone. This is Justin Clare. I'm on for Phil today. Hey, how are you doing? So first I wanted to talk about margins. You indicated that you expect to deliver improved gross margins throughout the course of 2018. I was wondering if you could just talk about how you see margins trending by quarter and if you could share what your margin expectations are for Q1 and Q2, that'd be helpful.

[Chuck Cargile:]

Sure. So the consolidated gross margin is impacted obviously by a number of factors. And unfortunately a late all those factors have been dominated by the cleanup of jobs that are already in progress. And the margin dynamics are different for residential versus commercial and public works. Historically, the residential margins have been relatively consistent in the high 20s to low 30s kind of quarter in quarter out. And I don't see a big change in that. So when I talk about the margins now it's on the other two-thirds of the business that's that has had more of this big swing factors. And if you set aside the adjustments for the cleanup and just focus on 2018 gross margins, think of it in three categories of how the projects are going to roll out, and how the margins are going to be impacted. So first we have projects that are in backlog and they're scheduled to be installed this year. So that's roughly about $40 million of our targeted revenue is already in backlog, its projects that were in many cases signed on months and months or quarters ago. And all those have been trued up as we've talked about. In many cases, they still have the lower margins from a time when we were willing to take projects with lower margin hurdles. So we'll have to flush through those and of that $40 million, the average margin is about 18%, okay. Then the second area to think about is jobs that we have won in 2018 that we expect to convert to installation revenue in 2018. Those that have been put through the rigor of the greater rigor on the estimates and the proposal process, those have a little higher margin, so that's about in the low 20s maybe 21%. And then also we'll get some revenue this year from jobs that we haven't yet won but will win and it will turn to revenue this year and the best indicator of that margin is the population of proposals that we've made this year that are outstanding, so ones that will turn into revenue. Of the ones that are proposed that haven't yet been won, the average margin is 25%. So if you think of that that's how the wave of how we have to flush through these to get to what eventually would ideally be an average ACI and Public Works margin in the 23%, 24%, 25% range for two-thirds of the business and then a third of the business being residential that it would be closer to 30%. So I know that's a long-winded explanation. Does that help?

[Justin Clare:]

Yes, no, that's very helpful, thanks for all the detail there. Just to follow up on that, so it sounds like you've increased the hurdle rate for the projects that you take on in terms of the margin that is required. Do you see any impact to your potential growth as a result of the higher hurdle rate or are you lowering costs to continue to enable a high growth rate? A little more color on that would be helpful.

[Chuck Cargile:]

Sure and that's a good question. And that's one that you always worry about when you put in a higher discipline and a higher hurdle rate is it going to stump the growth. And in the near term I think the answer is no. Because as we've said a couple of times now we expect to have growth this year between 10% and 20%. Now it could be argued if we were taking projects at a lower margin could that be higher than 20%? Perhaps, but I think for the transformation that we're going through here, a growth of 20% on the top line leveraging the lower cost base and delivering predictable profitability is a much higher calling than just the pure revenue growth that may come if we were willing to take jobs at a lower margin.

[Justin Clare:]

Okay, got it. If we could then just shift to operating expenses. You did a great job in lowering OpEx for 2017. Just looking into 2018, can you share how you see OpEx trending possibly on a quarterly basis? Should we see any increase there as a result of regional expansion or can you keep it kind of where it is what we saw in Q4?

[Chuck Cargile:]

In January of this year, we had what I hope will be our last headcount reduction. So we did that in January obviously that wouldn't be reflected in the December numbers that you're looking at. So my expectation would be the operating expenses would be slightly lower again in Q1 versus Q4. Then as we go into Qs 2, 3 and 4, there may be a slight increase even if just in the variable cost that come with the higher revenue, but we're going to work really hard to keep a tight lid on the expenses. So I think you'll see a slight drop Q1 and then flat or slight up over the Qs 2, 3, 4.

[Justin Clare:]

Okay, that's helpful. And then just one more for me. I'm not sure if I miss this but can you share what your bookings were in Q4 and then what your backlog was at the end of the quarter? And then if you could share just a little bit about what the mix in your backlog is between national accounts, Public Works and Ag and residential that'd be helpful as well?

[Chuck Cargile:]

Yes. So Q4, the new sales were relatively low about $17 million and that comes -- that was about maybe at $12 million from ACI; about $5 million from residential and then maybe $3 million or so from Public Works. And I think you're going to see our new sales quarter-to-quarter be pretty lumpy particularly because of the public works group that can have such large orders. You may recall in Q3 of last year we had over $30 million in new sales because we had a single large public works project. Then Q4 there weren't any large Public Works programs and there was a lot of push outs as people wanted to wait and see what the import tariff was going to be. So it wasn't surprising that Q4 was kind of low. And then as I said in Q1, we're having a terrific start to the year. We'll be over $30 million again and that's led primarily by the large order I mentioned with the Central California School District. And that projects actually eight different locations with each one individually over a $1 million. So that's going to really support the new sales in Q1 and then also most of that's going to be installation revenue in 2018. In terms of the backlog, I mentioned that we have about $40 million that we expect to turn to revenue in 2018. And I should explain that a little bit because we have more than that in terms of total backlog. But what we're really focused on now is backlog that's scheduled and scheduled for installation. And the reason for that is a lot of times we'll have a contract that's really firm. We know we're going to have it but we know we're going to do it but the timing might be more than a year out. And that can be maybe just because of a customer's request or because the length of time it takes to get permits and approval. And so we'll keep that in our backlog but it won't be one that we quantify as much and focus on because we want to be focused on the ones that have firm installation dates. And in that backlog I'd say about two thirds of it is traditional ACI and a third of it would be Public Works maybe a little more than that in public works actually.

[Operator:]

Our next question comes from the line of Jim McIlree of Chardan & Capital. Please proceed with your question.

[Jim McIlree:]

Yes, thanks a lot and good afternoon. I just I guess if I ran my math correctly it sounds like you're expecting gross margin this year around 21%, 22%. And I know it depends on mix and timing and all that but they're just rough numbers. You are talking low 20% margin consolidated for the year, is that about right?

[Chuck Cargile:]

That's correct.

[Jim McIlree:]

Okay and then I just want to verify the answer to the prior question. So the way it plays out is that in the first half of the year, is that right the first half of the year that $40 million low margin stuff gets flushed out or is that something that's going to take all year to work its way through the project, project build?

[Chuck Cargile:]

It'll be more in the early quarters. There may be some. I'm trying to picture our backlog report. There may be some that trickle out in the fourth quarter, but I think by then most of it will be flushed. And what remains will be such a small percentage that hopefully it won't have much of an impact. So I do expect the margins to get consistently better each quarter.

[Jim McIlree:]

Right, okay. Sometimes past you guys have provided a table with backlog sales, revenues and cancellations. Is that something I just missed or is that not going to be provided any more or you're just going to do it verbally?

[Chuck Cargile:]

Well, yes, we didn't include it in the press release. We can certainly - its information that we have and we can make available and perhaps we'll put it in investor presentations that go on our website. I'll think about that but I can certainly provide it to you offline. And we'd love to add it published but I just didn't include in the press release.

[Jim McIlree:]

Okay. I just wanted to know if there was a change in policy there. So you have the $40 million in backlog from the old projects, but shouldn't there be some in backlog from let's call them new projects or new regime projects or yes what I mean that's like the $40 million is from let's call it six months ago, but you've been working on this year a while, so it should you have some in there of higher margin stuff as well.

[Chuck Cargile:]

Yes. There is and when I mentioned the $40 million, it's -- that's the backlog that we had at 12

[Jim McIlree:]

Yes, it does and thanks for the clarification because it kind of sounded like your efforts to improve margins really hasn't shown itself as a successful effort yet because of that 18% but really that 18% reflects lower margin than 18% from the old stock as well as the let's call it the new normal margins from the new stock. I think it sounds like.

[Chuck Cargile:]

Yes. We did that bifurcation I don't intend to do it because I want to stop talking about the whole policies but if we did that I think you'd find old things well below 18%. And then being brought to the 18% because of new projects that we've booked at a higher margin.

[Jim McIlree:]

Got it, got it, okay. A couple more if you don't mind. I just want to make sure I understand your confidence in your statements that you've been able to improve the margins or improve the bidding process. I know some of it's a function of just paying attention but because there are also been a change in leadership in the bidding leadership. Has there been a change in the compensation? Can you give us some comfort that the changes that you say have taken are really long term? That theirs is really some substance behind it.

[Chuck Cargile:]

Yes. That's a very fair question. And I think there is a number of ways to look at that. And I'll try not to be long winded on it because I have spent so much time thinking about it. And there is a lot that I'd be willing to talk about but first I'd say that all controls start with the tone at the top. And the mantra that we have today is different than what it was before. And that is everyone now talks about a focus on profitability and cash flow not merely top-line revenue. And for a while it was to top-line driven and that led to tremendous growth for the company. And established the company as where it is. So that was I'm not suggesting that was not the right thing for that time, but it's not the right thing for now. And as we discuss actions and tactics and business steps. We all ask each other is that going to generate the required amount of profit. And is it going to help us maximize our cash flow? So it's truly a tone from the top. Then in terms of our new people doing it, yes, we've had a couple of leaders in the organization have left and that's caused us to need to spread the work to other people. We've been as you know in a tight cost mitigation environment. So we haven't added new people but we've asked new people to do -- knowledgeable people within the organization to have greater oversight into the estimating processes and the working process that starts with the finance team with Paul. And Paul mentioned Phil, our new controller. He said up to his eyeballs and the whip reports every week, making sure that we're capturing costs appropriately and reporting them appropriately. We've asked for people in different parts of the organization, the leaders, we've asked the leader of our business in Durham that's led most of our agriculture success to be more active in looking at commercial and industrial projects. And we won't approve a bid proposal unless he signed off on that. We've asked the leader of our residential group to be more involved. So we have people that are smart about the industry looking at programs that they might our projects, that they might not have looked at in the past and that they're not necessarily responsible for. So that gives us a good check and balance in making sure that we all sign off on them. And then ultimately I look at projects now that I didn't look at for the first six months that I was here. And so I am very careful now in making sure that if we take a project at a low margin, it has a good strategic validation for that. So that's just some of the things that we've done that I think should give you some comfort that we think it's going to be sustainable.

[Jim McIlree:]

Okay and you mentioned at the beginning of that answer all of it starts with the tone at the top. Can you talk a little bit about the board changes that have taken place? I know there's been a number of things happening and then the announcement today but just trying to understand the strategy behind it or if there's any - if there's anything else that's going on that might not be apparent from an outsider's viewpoint?

[Chuck Cargile:]

Yes. I guess at the highest level we just decided that our Board had grown to a size that was really too big for a company of our size. We had eight board members when we began the reduction in December. We had three of our board -- four board members, no three resigned in December. All of them were amicable and mutually agreed upon. There was no dissension with management or amongst the board members. As I said three of them resigned that got us to the number of five which we think is the optimal size for a company like Sunworks. Then we were really fortunate to recruit Daniel Gross to join our Board, and so Daniel is replacing Shane Mace to keep the board size at five. Daniel is a private equity and infrastructure expert focused on renewable energy and clean technology. His background is explained in a press release that we put out today. He was actually introduced to us by one of our current board members Rhone Resch who's also a luminary in the solar industry. Many people remember him as the CEO of the Solar Energy Industry Association. Sunworks is really; really fortunate to have two such highly regarded solar industry experts on our Board. In addition to the board changes, we did have two executives leave as I mentioned before. Most notably Abe Emard, our former CEO resigned. Abe's departure was also amicable and mutual. Abe was instrumental in the creation of Sunworks and driving the organization through its expansion and growth. But he just decided he wanted to get a new start doing something different. Abe and I are still in communication. He's still a friend with Sunworks and despite some of the chatter to the contrary he has no interest in starting anything that competes with Sunworks. And, in fact, if he stays in solar I would expect it to be in some capacity that would be collaborative and helpful for us. And the team that Abe assimilated and leaves behind is still intact and motivated to take Sunworks to the next level. So I don't think there's been anything disruptive about Abe's departure. And I know he wishes us the best just as we wish the best for him.

[Operator:]

We have a follow-up question from the mind of Jim McIlree of Chardan & Capital. Please proceed with your follow-up.

[Jim McIlree:]

Yes, thanks again. So Chuck I know in the past you've expressed some excitement about working with ForeFront as well as getting additional partners along that line. Can you just give us an update on ForeFront and your efforts in attracting other partners like them?

[Chuck Cargile:]

Yes. We continue to be very, very close with ForeFront. And I think our success with that program in Central California that I mentioned before is I think you can -- that was with our relationship with ForeFront. And that's I think one of the best project, the best project that we've booked with ForeFront. And it's the most complex that we've done with them and the largest. So it's going to be a great, great opportunity for us this year to prove to them that we can scale to even higher levels than we have so far. It's been a great partnership already. But this will allow us to prove that we can do even more complex, larger projects in a short timeline. So that's really exciting for us. And we're already talking about the next one. So I expect our relationship with ForeFront to continue to be very, very strong. We don't do all of our projects within the Public Works group with ForeFront. We have other partners that we haven't named yet that we work with or that we're trying to work with. And then we have other PPA partners particularly on the not-for-profit side that we're cultivating. We do a lot of work with religious institutions and churches. And have a couple, well a number that we're already are doing and then some that we're trying to do and those are generally with other partners not with ForeFront. So, yes, we're continuing to expand that base but nobody's as important for us right now as ForeFront.

[Jim McIlree:]

Okay and let's call it the mid-ish point of the revenue estimate for 2018 is about $90 million. Is that assuming that the residential business is up versus 2017 at similar rates at 10% to 20% or is that assuming something unusual in residential for 2018?

[Chuck Cargile:]

Yes, good question. And it's the way Paul and I have looked at it is, we've looked at the as I mentioned before the $40 million that we expect to install, that it's already in the backlog. The more than $20 million that we've looked in Q1 that we know is scheduled for installation this year. So say that gets us to over $60 million. Let's just say ease of math $65 million. Then if you put on top of that a flat residential business $25 million, that gets you to $90 million. So rather than say it's going to be flat what the way we think about it is okay that gets you to $90 million. We've been in the business, Paul and I've been in the business a year and a year and a half that's long enough to know that things get pushed out, it's hard to predict. But we're also not counting that anything else that we're going to book this year that will convert to revenue. So I think we've got these three or four different variables that some may push out, but then we'll get new business, may be residential, residential was down 16% year-over-year industry-wide, we were flat. So that's a good thing but maybe if it's going to be down again this year, if we would experience that then hopefully we'd have more on the ACI side that we pull in. So just those are all just different factors that weigh together that get us comfort with that $90 million number that you just mentioned. And but it's too early to tell which piece will be what and if everything were to hit we could do higher than that number. And if everything were to get pushed out we'd be maybe at the low end of that range the 10% rather than 20%. So I don't think -- I know that doesn't answer your question specifically, but that's the way we're thinking about the different variables.

[Jim McIlree:]

No, that's great, that's great. So it sounds like the $90 million, again I don't want to jinx you and say that it's highly visible but you know looks like a reasonable number. The Q2 bookings will either replace some things that get pushed out or be additive to that $90 million and then the second half bookings maybe get lucky and you can install some, but if you don't then it's not the numbers and you just build it for 2019. Is that a fair way summing up?

[Chuck Cargile:]

That's a way that's a good way to think about it. And then I'll put even a finer point to it and say however much we vary from that $90 million. Let's say, Paul and I will know exactly where it was. It would be residential was down a little bit more than it being flat or that $40 million. $5 million of it got pushed out that we didn't anticipate or it's very compartmentalized. So it'll be easy for us to know.

[Operator:]

There are no further questions over the audio portion of the conference. I would now like to turn the conference back over to Mr. Chuck Cargile for closing remarks.

[Chuck Cargile:]

Thank you all for joining us today. And thank you for your interest in Sunworks. Good bye.

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.