CSLM Acquisition Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 14, 2023

Key Takeaways

  • Q3 revenue was $24.6 M (down 4% sequentially) with a net loss of $9 M and negative cash flow of $8.8 M, ending the quarter with $16.6 M in cash.
  • Gross margin rose from 18% to 25% in Q3, and management is targeting 35–40% in Q4 through lower panel costs and improved installation efficiency.
  • The company achieved a record $56.4 M in new contract bookings during the quarter, demonstrating sustained demand for its systems business.
  • Sold its module business to Maxeon for $10.2 M in proceeds, exiting that segment to focus exclusively on higher‐margin systems.
  • Reduced headcount by 33% (from 415 to 285 employees), generating $7.5 M in annualized savings and moving the company toward cash flow breakeven.
AI Generated. May Contain Errors.
Earnings Conference Call
CSLM Acquisition Q3 2023
00:00 / 00:00

There are 3 speakers on the call.

Operator

Good afternoon. My name is T. J. Rogers, and we're here to present the complete Solaria 3rd quarter report. Starting at my left, I have Tanner O'Selic, who I'm going to introduce to you.

Operator

He is going to take over as CEO of the company. Brian Wuebbles, who's our CFO Will Anderson, who's the Founder and current CEO of the company, who will be remaining with the company And me, I've been with the company since 2018, including the merger of the company I joined and Complete Solaria. Okay. This is I have the front page of the report. I'm going to show you a couple of things, then some graphs, relatively short report.

Operator

Summary is Our revenue this quarter as a systems company, which we are completely now, is $24,600,000 And that's flattish down 4% from the prior quarter. We did have module sales on top of that, but given that we're getting out of that, that was It was reported as discontinued operations, not as revenue. Our gross margin was up nicely from 18% in the prior quarter to 25 We will have more progress to talk about on gross margin as we go through the pitch. We sold the module business and transferred its employees to Maxeon For our WIP and our people and our patents in that area, we got $10,200,000 The main event right now is leaning out the company using Toyota Production System terms. We've had a second RIF of 68 People with annualized savings of $7,500,000 All in all, when I get done describing the list of things we've done to reduce costs, We're knocking on the door of cash flow breakeven.

Operator

We'll show you some projections. And our bookings remain strong. We had 56,400,000 in new contracts signed and that was a record for the company. I have this little on the first page of the report, I have this little mini spreadsheet, which kind of talks about the things I get asked about all the time. So the obvious revenue gross margin op inc And then I'm talking about cash flow, cash balance.

Operator

I'll refer to the non GAAP numbers that conciliation the GAAP, These are the gap numbers that we have is included in the report. We have Q2, Q3 coming And then something we usually don't do, we have a forecast for Q4. And we thought carefully about this forecast, given that we've had a bad record of making our forecasts. Okay. So our revenue was It's 24.5.90 down from 32, but there's a discontinued operation I talked about.

Operator

Gross margin up 7 points. We're forecasting that our well, I'll come back to the forecast in a minute. We lost $9,000,000 down from 15. Our cash flow was negative $8.84 about the same as last quarter and our cash balance at the end of the quarter is 1661. Now the well, next is our forecast for the quarter.

Operator

For reasons we'll explain inside, we've decided To ramp down the fab a little bit, primarily to get it under control and install some quality systems, our gross margin due to cost reduction is going to go Our OpInc loss is going to get cut in half. We'll have modest cash flow and end up with about the same amount of cash as this quarter. Those of you out there might ask, how am I going to, after a quarter with a $9,000,000 loss and $1,000,000 starting the quarter, Maintain that balance and the answer is given here. And this the cash flow Obviously, it includes operational losses and also any funding. So there was funding in this number.

Operator

We've been Funding the company like any start up, we got $10,000,000 in a bridge to our SPAC in Q2. We got $19,500,000 in the SPAC itself in Q3. And the deal I Just talked about is banked, and we got $10,150,000 from Maxeon. Now on these forecasts, We've been deliberately conservative, as I said, to make a quarter and do it right, But I do give ranges down here. So basically, the revenue we know pretty well already and we've got a range that brackets it pretty tightly.

Operator

Gross margin is a little bit less well controlled. We don't think it'll be below 32 and it could be as high as 40. Will will actually explain that to you. Our OpInc is going to be a loss. Here, we've got the exact number.

Operator

There's a range. And here, I've written $1,000,000 cash flow minimum and $1,000,000 in cash minimum. And what I mean there is our company is currently fundable without extraordinary cost. And we've got an agreement with current shareholders that they're going to Keep us afloat for the next two quarters, actually to the middle of next year and just do that because the price of the stock right now is dilutive and we're interested in keeping afloat. We're not interested in raising a bunch of money at very low prices.

Operator

So, this is the picture going forward. Graph of revenue. So here I've got revenue. The green is systems revenue and then the yellow Is the modules revenue? There is no modules revenue.

Operator

We had money came in, but it wasn't called revenue last quarter. And here's our 35% plus or minus 5% really. So we are now a systems company who made that transition. This graph talks about our problem. So we call our manufacturing site or or fab.

Operator

That's, I guess, I call it that and it's taken on over there. The work in process is not in wafers, but in jobs, how many jobs are we doing. And we look at that continuously, but we get reports every work week. Complete Solaria has their own software to track the fab and it's pretty complete. We're working on it to make it better, But it is more than adequate for doing the job.

Operator

And when we tune it up some, we'll be in good shape. The little anomaly here When you pick it up, you get now. Now is work week 45. September 30 is the 30 So, the work weeks are simple, 13, 26, 30, 90, 52. So, this is going backwards in time.

Operator

I just want to let you know that. Back here, the company had exceptional customer reporting on the quality of work, And they were running the fab at a WIP level of about 2,000 jobs. And what happened was we started getting this big bunch of orders that I've talked about. It continued through last quarter. We thought we had fixed up the fab at the beginning of March, and we started just putting every order that we got into the fab.

Operator

And that turned So here you see the WIP going up. Now what that means is if you go from a WIP of, let's say, 2,000 to WIP almost double that, If you do the same amount of work, double the whip moves half as fast. And that's our problem. When things move half as fast, then they come out later. Sometimes financing expires before you can get paid, and it causes a lot of downstream problems.

Operator

When we finally got up here, I brought out the castor oil and I shut down starts. So starting here at the peak In Workweek 39 at the end of September, when I reviewed the WIP, I said we're not going to put anything in the fab for a while And this is what's happened. And it moved downward nicely as 500 jobs came out of the fab. Pre construction, this is post construction, and these are in the various phases of cash collection. And on top, we've got some whip for new houses and stuff like that that I'm not going to talk about today.

Operator

The last milestone relevant here is the purple bar, which is cash collections. So you can see where the WIP is. We needed to cut costs. It was clear to me that our P and L was going to take too long and too much integrated money to get to where we needed it to be. So, in Q2, we at the end of Q2, we had already done 1 RIF and we were down to 415 people.

Operator

By the way, that equated to about $375,000 per employee per year. So it's not a bad number. They're Really overstaffed on the metric. Dollars 1,000,000 per employee per year is exceptional, and they were at $385,000,000 We did the first RIF. I was expecting a lot of trauma.

Operator

The fact is they sucked it in and did it, and then they got almost no complaining. There was back drift, which was my fault. I wasn't watching this as much and we always had good ideas for hiring people. So here, I introduced the system that I used before. It's called a rec auction.

Operator

And basically, it holds the headcount of a company constant It only allows for a new person to come in if somebody else left. And even then, it's conditional upon giving of the rec for the replacement to the most important position needed, whichever VP that comes from. That There's no automatic replacement, very powerful system, turned that on here. Then we had another layoff. We had A lot of subcontractors, too many.

Operator

They're cheap. People tend to over hire on that. We finally got Accurate org charts for that part of the deal and we exited the module business. So there was a huge drop to 321. And then this is, I talked about the rec auction method, this drift downward as opposed to a drift upward is what happened after that.

Operator

So we glided down 10 positions where we would rather have the savings of the person who left than replace the person, And the person's boss said it was okay. They'll live without that person. And we just had a second RIF. We're not on the headcount of 285. So if you go from 415 to 285, we've lost 33% of our people.

Operator

For those of you that have been involved in RIFs, 5% is traumatic, 10% is draconian. And this company's Been through some tough times induced by management, the Chairman, and I have to commend them for having gone through this period and never once making an excuse we can't do this or that because of the layoff. Okay. We have a new CEO. His name is Tanner Selic, and Founder, Will Anderson, will report to him.

Operator

And they will work as a team to run the company. I took a Five page resume and picked out the stuff I thought you would like to know about. He's Turkish. When he went to university, As in many countries, India, for example, you take a test, a standardized test, and you get ranked. And the top people get to go to college and the rest of them don't.

Operator

So he was number 82 among 650,000 college entry students. One, it's extraordinary. It's the top 0.013 percent. And 2, the only other guy I know that ranked that high, you may know His name is Badri Kothandaraman. He's the President of Enphase.

Operator

And he was number 156. And of course, in India, there's another digit on the population. Translation, real smart guy. Bronze medal at the World Mathematics Olympiad and another American medal, point is, high IQ, smart guy, practical, does patents, Has papers, knows about money, MBA from Wharton. First big he had I Picked out the big jobs that are relevant to us.

Operator

First big job was at Sony. They wanted to build a semiconductor unit. He built it, Started it at 0 and grew it to 200,000,000. Then he went to NVIDIA, and I've done reference checks at these companies. He was there for a decade.

Operator

His last job was 7 years, so he tends to stay a long time where And he founded the automotive semiconductor unit for NVIDIA, and he grew it from 0 to 600,000,000. The big NVIDIA chip is called Tegra. It's an artificial intelligence supercomputer chip. The end of the line After their start with gaming chips and it's designed to do autonomous driving, although once you have the chip and know how to use it, You can use it in a lot of applications and some cars have 4, 5 copies of it in various functions. He designed he ran the division, so he was also in marketing, and he designed it into 126 cars at 23 companies.

Operator

And it got the car of the year award, Tesla Model S and Audi A3. So if you wonder what it takes to have a car drive So, and not screw up, and you read all the stuff in the newspaper, you realize that the technology and the intelligence of the group behind it, NVIDIA in particular, It's pretty special. He left NVIDIA and went on to On Semi. He got an offer to run a division that was called SmartSensor. It had 800 employees, 13 companies, $250,000,000 budget $250,000,000 budget, excuse me.

Operator

So we had a chance to run-in something in bigger scope in an adjacent technology area. He inherited it at $590,000,000 and grew it to $850,000,000 Actually, at a run rate, I didn't put it in here, but he put it in parenthesis, the run rate got to 1,000,000,000 in his last quarter there. And I also put in this one, maybe it was a little shot at me, he fixed the distress which was the Cypress Imaging division. And I fessed up here, I had an imaging division in Belgium. I really didn't like it a lot.

Operator

I got rid of it. I was distressed to be associated with it and he fixed it up and on. So, okay, we've got a new president. We're going to make things move. And also, during the search for the President, I met another guy, Chris Lundell, And I've asked him to join the board and he's accepted.

Operator

These are both done deals. His first day is next Monday. He's already on board. Brigham Young, MBA in Finance and Economics. He worked at Novell for 13 years and had Promo's up the ladder leading to VP of Marketing.

Operator

Then he went to Vivint Solder, and he was there from 2013 to 2016, And he's the Chief Marketing Officer at Vivint in 2013 at their IPO. So he's got that connection to solar. He now runs his own company called CMO Grow. It's a national consulting company that creates scalable growth plans. That's one reason On the sales and marketing side, he was attractive.

Operator

The other one is he lives in Salt Lake and 2 thirds or more of our employees are in Salt Lake. And Salt Lake, I don't know if you know it or not, but many of the solar companies are there, 6, 7, 8 of them, And it's kind of like a Solar Valley, and he's well connected. He already has his own health club, and he's got the who's who of Solar Valley in his health club. So as we try to build the company and our primary our fab and our primary residences in Salt Lake, Chris, will help us a lot. So we built the team big time this quarter.

Operator

Okay. Let me turn it over to Will. He'll do the CEO report for you.

Speaker 1

Thank you, TJ. So to begin, I just want to provide just a little bit more context Around the shift in our business strategy, at the end of Q3, we announced and hopefully most on this call I have been able to see those announcements that we had decided to shed our modules business. Now it had only been about a year ago that we acquired Solaria to become complete Solaria And established 2 business units, modules and systems. The systems business is the business that I started And ran for 13 years. And that's the business that we are shifting back to.

Speaker 1

And The reason why we made that decision is we, quite frankly, simply did not raise enough money when we went public to be able to execute on A very ambitious business plan. So considering the existing environment Where the entire solar industry is under a lot of pressure, we made the decision to preserve cash, Generate cash out of the sale of the Solaria assets and ensure our viability and ongoing opportunity for success. And so I'm very encouraged moving into the Q4 at the progress that we've made, and we have a chance To start the next chapter in the history of this business. So starting from the divestiture of that modules business, We are now a systems focused business. And as I said, this is the business that I founded 13 years ago On 2 core concepts.

Speaker 1

The first is we make selling easy. We use software, We use systems, we use sales support and we aggregate financing and other systems in order to be able to make it easy for our sales partners out in the field To attract customers and sell solar systems to them. Secondly, we deliver a fast world class customer experience. Now as we've talked about, we've been able to be successful, including recently where many others have really struggled in generating new contracts. And as TJ explained, this actually created a problem in terms of our ability to deliver on that second Promise, which is a fast world class customer experience.

Speaker 1

And as a result, our revenue stayed flat And our customers started experiencing longer cycle times as our WIP levels increased. So we made the hard decision to bring our to start limiting our orders in order to bring our WIP levels down In order to focus on our customers, because that is ultimately the strength and the heart of this business is delivering a superior customer experience. And we know if we get that part right, we will be able to increase our orders again and generate demand that we've always been successful at achieving. So in order to bring that whip down and improve our activities, We've taken a few actions. As we've mentioned, we've already started to limit the flow of new orders into the line to reduce the number of projects that we're working on and Speed up the line.

Speaker 1

Secondly, we've hired a very experienced VP of Quality, and she is Leading a task force to remove defects, catch them before they happen and eliminate reworks. We've also hired a new VP of IT, and his responsibility is to help improve the scalability of our data systems, the software that runs at The heart of our business and allows us to deliver that world class customer experience. And finally, we've continued with existing engagements of world class Manufacturing experts that have long backgrounds at Cypress Semiconductor, at Enphase and others. TJ has discussed in our quarterly report our North Star plan, which is really just our plan to ensure that we can achieve profitability and cash flow breakeven rapidly. Yes.

Speaker 1

It's 3 components. 1st, lowering our OpEx. We've done that through headcount reductions. We've also done that through significant cost reductions. And in Q4, our target is to achieve $5,900,000 of OpEx, which is more than A 50% reduction from Q2.

Speaker 1

We're also making great efforts to improve our gross margins, And I'll go into a little bit more detail on that momentarily. But as we've shifted from the modules plus Systems business and really focused on systems. This is going to enable us to achieve much higher gross margins and have much greater control over our P and And finally, we're in the process of lowering our commission rates through selective activities with our various sales partners in order to ensure that the orders that we do get in are going to be more profitable and better for our cash flows. So let me take a minute to talk about our gross margins. So first off, we can see Q2 and Q3 actuals And 3 major components of our COGS being broken out into equipment.

Speaker 1

This is all of the solar panels, inverters, the racking things that are actually installed on the site, plus our installation labor, plus internal allocation, which is really just our Costs of delivering the product, the people that are involved in our production facility in Salt Lake, our operating leases for our warehouses, etcetera. So from Q2 To Q3 on the systems only business, we advanced from 21% to 25%. And again, this is systems only, so our reported 18% was a combined modules plus systems. So systems only 21% to 25%. This was aided by an improvement in module cost in Q3, and that improvement is going to be seen much more dramatically in Q4 As we've secured pricing arrangements with our vendors that are now in Q4 delivering a much lower cost of goods.

Speaker 1

Additionally, we have an opportunity to significantly lower our Costs in Q3, you actually see that our installed labor went up. And this is as we were hiring new installation crews to operate as internally employed crews who will install our projects. So we will now operate on a hybrid model That includes internal installation crews as well as third party labor. And the key to bringing down this Cost is increasing the percentage of projects performed by installation crews that are internal to us and maintaining them at Full capacity utilization while utilizing our 3rd party partners as overflow. That's a significant cost reduction.

Speaker 1

And then finally, the cost reduction from the various headcount reductions that we already highlighted resulted in a significant decrease To our internal allocation from Q2 to Q3 and for Q4, we're only assuming Keeping that flat, although there are further opportunities for improvement there. So all told, this creates a 40% Target for our COGS sorry, for our gross margin, We're forecasting 35%. That's what we're committing to you, and that is our expectation, But there's room to exceed that, and this is our plan to do so. 13 years as CEO of this business, And it's been a wonderfully Enriching and exciting part of my career. And I'm excited to take the next steps Welcoming Tanner as our new CEO.

Speaker 1

We've been able to accomplish a lot of things over that 13 year period. I've seen hundreds of solar companies come and go in the time that we've been building our business. At the end of the day, We've built a really strong business that is positioned to do very well moving into the future, even as There is a certain amount of uncertainty for the broader industry. We've taken the necessary steps to ensure that we're going to be successful. These include focusing refocusing back solely on our systems business, managing our new orders to make Reducing that whip and speeding up our systems and finally, bringing on a new CEO who has managed very large organizations and who's going to help us scale?

Speaker 1

I'm very much looking forward to working with Tanner and continuing to build this Business into what it's capable of becoming. And so with that, I would like to give him an opportunity to introduce himself And say a few words. Tanner?

Speaker 2

All right. Thank you, Will. That Oswald and I agree with everything you said. You guys have built an amazing business in my opinion. And thank you, T.

Speaker 2

J, as well, earlier introduction for earlier introduction. I'm Incredibly excited to be part of complete Solaria. This nascent industry, I call it nascent because The penetration rate in the U. S. And residential is only, I think, 4% less than 5% today.

Speaker 2

And I'm thrilled to be working with you, TJ, as you guys know, is one of the founders of the semiconductor industry. And this industry, semiconductor industry is One that has progressed, I think, further and faster than any other industry on the planet in the last 50 years. Anything and everything in tech today runs on semiconductors. $1,000,000,000,000 companies are either running on semiconductors or building them like NVIDIA has been doing in the last few years. Now solar is based on semiconductors, and that's important.

Speaker 2

But more importantly, Semiconductor industry, I think, is also one of those industries that has had the most rigor and the discipline. And that's also one of the main reasons that the industry has Propelled so fast and so far in addition to the Moore's Law as you know. Now I've been in the industry for 3 decades, nearly 30 years as Overviewed. I'm here to bring that rigor and discipline and help Solaria become a scalable company, as Will mentioned. It was also I mean, reflecting back in the career, awesome for me to work with the companies that T.

Speaker 2

J. Mentioned, particularly With Jensen Huang at NVIDIA where I built 2 businesses, both of them multi $100,000,000 businesses, one of them reached over 1,000,000,000 the automotive business and has become the de facto one of the top processor companies in the world today. I've also, in addition to that, done a couple of transformations, and the most notable one was at Onsemi, where we basically took down a business that had about $600,000,000 in revenue, shrunk it down to $200,000,000 almost overnight because we got rid of 1 of the troubled businesses and then grew it back to $1,000,000,000 run rate. Now it's running at about $1,400,000,000 Margins, 50% approximately growth rate, all based on a lot of the design wins that we had done before I left the company. Now I want to say and I think that will be important in complete Solaria as well because that rigor and discipline that I mentioned is mainly in quality and And I think I'll be able to bring that and help the company both through the So 0 to 1 business growth I mentioned and as well as the cultural transformation and the business transformation experiences that I've had.

Speaker 2

Now I want to say one final word about renewable energy. I'm new to this obviously, but I think we can all agree that renewable energy is here to stay. Solar is here to stay, and it will grow much further worldwide. And I believe that we're essentially at the beginning of that journey. Now Complete, the way I think about it is like this.

Speaker 2

Complete Solaria is a systems company, as Will mentioned, as you know, the personal computing systems introduced in the 1980s Basically revolutionized how we work for the next 50 years, and it still is doing the same. It still is going. In my opinion, Solar industry is doing exactly the same for energy. It's effectively distributing the energy To the consumers, to the homes and to the businesses directly, just like personal computers did it from the mainframes to the consumers and the homes. Now I believe, like Will said in closing, Complete Solaria has done incredibly well, 13 years, $100,000,000 in revenues is about to breakeven.

Speaker 2

It's very hard to reach those milestones Irrespective of the industry that you're in. In fact, the first $100,000,000 is the hardest $100,000,000 you will ever do, and I've done it four times, so I know. So I am nothing but an incredibly and I would say super thrilled to be part of the complete Solaria team. I'm honored to be working with TJ, who's one of the great leaders of our time, and the Board and the employees and the customers, And I can't wait to see what we will all accomplish together. So thank you.

Operator

Okay. We're going to open it up to Okay. Let me go back to The slide that's got data on that.

Speaker 1

TJ, while you pull that up, I'm going to repeat the question for the audience. So the question was, Can you walk us through cash flow and liquidity? And is there a bridge to breakeven?

Operator

Okay. I see. I can't get rid of that bar. How do I get rid of that bar? So another way you can read this is you guys always end the quarter with a little bit of cash.

Operator

And the way you do it is you fund, and your funding has been $10,000,000 a quarter, dollars 10,000,000 to $20,000,000 So That implies then, if you look at our last quarter, you got $1,600,000 you're burning 9.2 OpInc, so take that as a proxy for cash burn, you've got like 16% of a quarter before you run out of money. Now the fact is our burn rate is going down next quarter. What I haven't shown on here is that burn rate will be cut approximately in half quarter on quarter for the next two quarters. For example, I showed you at the very end of the graph a big layoff, And that just started to be effective. So, this burning rate number, if you look to the middle of next year.

Operator

I'm going to give you an indicative number so you can understand my thinking. I don't know that burn rate well enough. I'm in a chaotic world and we have immature systems in the company, but that burn rate up through the middle of next year is something on the order of $5,000,000 More. And the answer is, I don't have to worry about going out and raising money. Raising money right now with this P and L, That number combined with that number says it's going to be hard to raise money.

Operator

And if you don't believe me, just ask Will, who gave 100 pitches to raise And then that's really what's kept us afloat. These are all these raises here were pitches that Will gave to investors. Now we got it under control. If you look at the investors in the company, they can easily afford to take our current estimate of cash flow to the middle of next year. For example, this quarter, we already have all the cash we need.

Operator

It's done. The Maxeon deal is funded this quarter. And going forward, it's an affordable number. We also I'm Not going to talk about details today, but we also had a forward purchase agreement that will kick in somewhere on January 10 at our option. And that will raise money for us more than what I just said we need till the middle of next year.

Operator

The reason it's not written down here is that anybody who says he tells you in the solar business how much money he needs till the middle of next year is fooling himself. But the company, the cash burn is down. We can handle it ourselves. We're not going to go out and raise a bunch of The last thing I want to do is sell 10,000,000 shares at $1 each to raise some money. So We have the capability of raising the money, and the numbers will continue to look like this.

Operator

Whatever number is required there in terms of cash flow to keep enough safe balance there so you can have $1,000,000 whoopsie at the end of the quarter and not have to worry about liquidity. So we now feel like we're captains of our fate in this business and we haven't felt that way ever. We've been fighting during this recession with solar headwinds to try to get that way. We're that way now and we did it the hard way. We changed the company.

Operator

We lowered the number of people employed and we Let me have Will answer the question about WIP reduction. Let me I'll bring up the WIP reduction graph for you.

Speaker 1

So what are our specific strategies for wood production, particularly post construction? So the strategy for preconstruction and you can see The drop in preconstruction was to start limiting the orders. Now the next Step to get the rest of those bars down is we have to operate at a much faster pace. And the way that we're doing that is by transferring resources from those that would otherwise be doing preconstruction to doing more postconstruction activities. We have a very effective group in Salt Lake who operate Our the various steps of our production queue, and we've reassigned resources there To focus specifically on completing final inspections, collecting all of the financing documents, getting projects Through the utility review process faster, so that everything that is in our control, we've been able to address.

Speaker 1

In doing so, we will be able to collect money faster as well, and that will improve our cash flow. Ultimately, Turning customers over very quickly generates happy customers, which also then promotes stronger sales, But it also improves the cash cycle much faster. And so that's another one of the ways that we can Be in control of our own destiny. So this backlog graph that you see here, many customers report as being a good thing, but there can be too much of a good thing, and we intend to turn that backlog into cash and shrink these bars.

Operator

Let me comment on that. When I came into the company, I came into a company that was as mature as my company, Cypress, was when I came in. They don't we didn't have quality systems. And when the Japanese literally in 1986 almost put Cypress conductor out of business by making static ramps and selling them for $2 I got the religion about quality and I didn't know a thing about it. I went to great schools, I had good grades and I had a PhD and I didn't know Jack about quality because nobody ever taught me about it.

Operator

So I latched on to some of the best consultants I could find in the industry and companies that were noted for quality and semiconductors, by the way, automobiles and semiconductors, and I'll point out Tanner has 2 automobile jobs. Those are jobs where your customers, if you have more than 2 defects per million, will throw you out. You learn about quality in semiconductors selling to car guys. That's it. So, I came to a company with Immature to non existent quality business processes.

Operator

Obviously, everybody wants to do a good job. But let me give you an example of something that really does happen. You go out and sign a contract. Then you start launching it and you start buying the panels. Meanwhile, you go to a finance person because you have to give these guys finance and you get a finance deal done.

Operator

So they give you a finance deal and then the clock starts for 120 days. And 120 days after that finance The finance disappears and you have to start over again. Meanwhile, back in the marketplace, you find out there's a run where Joe Biden has raised the actually make it Donald Trump has raised tariffs back and forth, and all of a sudden, you can't get the panels you need in your You have a 90 day wait or something like that. So then, you're waiting for the panels when your financing expires. I can tell dozens of stories like that.

Operator

There are over 1,000 things you have to do And what needs to happen is we need the quality program that prevents stories like I just said and A multiple of them from ever happening. So, we brought in one of the best quality people I've ever worked with. She is tough And one of the reasons you saw it go backward is I spend a third of my time in at Cypress on quality. I thought it was extremely important. And the first thing I did was shut it down and start reducing the WIP.

Operator

She is now putting in Quality improvement points in the line that are very detailed. And she now controls entry into the line. You can't, Wow, we'll make the quarter. Get that in there and get it out. You can't do that anymore.

Operator

You have to go in, you have to go through a quality control point and a quality person has to allow That thing into the line. So right now, we're suffering because there's several 100 runs that are waiting for quality approval to move ahead. That will all happen shortly, but the troops are now getting the fact that you don't Move a lot unless you have the quality perfect, and that's not part of their culture. So when that The system, those systems take off, then the fab will start to run more efficiently and that will really be the end of it. Then we'll work on things like step elimination.

Operator

We'll work on computers to get more data. We'll look at forward data to try to predict what's going to happen and preempt Problems from happening, the standard stuff you do. Quality is number 1 and quality is a learnable task. I learned it, Saved my company and I'm good to teach it. I've already given my first quality lecture in Salt Lake And we've got world class quality person.

Operator

So that to me is the main event. What's our relationship with Maxeon post sale? I'll start out with my relationship with them. Maxeon is the ex manufacturing of SunPower. Was the Chairman of SunPower when it public in 2004, 2005.

Operator

And I know the Maxeon people well because they used to work for me. SunPower was a division of Cypress. Then when we took it public, it was a subsidiary, and then we spun it out to shareholders. That was a big day It was like $1,600,000,000 stock dividend. So I know Bill Mulligan, who runs it, he was VP of R and D.

Operator

He's the guy whose team went from wonderful Silicon Valley and lived in a walled compound in Manila, to take the factory and turn on an So we have very deep relationships with the company. And they, of course, wanted to crack Salesforce's sales modules because they got a lot of modules that are really high quality and they want into the American market, and they had a ready made think there. Going forward, I'll turn that one over to Will.

Speaker 1

Thank you. So Going forward, we have a supply agreement with Maxeon. They're perfectly situated to be able to really maximize the value of our Solaria Modules and the IP there. And so, they're going to manufacture. They're going to do a great job, and we'll continue to be able to purchase our equipment that we've always relied upon and loved from them.

Operator

Although Our foray into Solaria combining with complete solar is now Dissolved. Fact is, there's some residual DNA that makes a lot of difference. For example, Solaria Worked on world class panels, that's what they did. They had the SunPower pitch. Our panels are all black.

Operator

You get more watts From our panel and anybody else's, then we have got great reliability. And we're now getting access to those SunPower panels, the 7th generation of them, With a relationship with normally we couldn't get those panels typically go into utility in very large volume. So that's one, we get high quality panels. That means we'll have 2 offerings. The standard We'll take the standard power panel at the lowest possible cost and put it on your house.

Operator

And then there will be the Asterisk offering, which We'll have some percent upgrade and they will be able to get at the it's called integrated back contact, IBC cells coming and panels coming from Axione, the best in the world. So we and Axione have a friendly relationship and we'll continue to have it.

Speaker 1

Yes. Speak to the financing. This is the customer financing For going solar and what's our mix of product? So there's been a lot of discussion about this with a lot of companies. And the 2 most popular ways to go solar are with a loan.

Speaker 1

And there are various solar lending companies, and we have Strong relationships with many of them. And then there are leases or PPAs. 3rd party owned is the category that that's called. And these are finance products that allow a homeowner to go solar And only pay for the power that the system produces while the PPA owner, which is one of our finance partners, owns the system. And so as interest rates have gone up, we've seen a shift for those who have access to good PPA and lease products shifting the products that they're selling to the customers to use More of the leases and PPAs.

Speaker 1

And that certainly has happened for us. In the Q3, we increased our Proportion of 3rd party owned systems, up to 56% of total systems installed. And for our bookings, it was even higher than that. And so, we've seen that increase steadily over the last four quarters. Which utilities have the most upward pressure on utility rates on electricity rates.

Speaker 1

We are seeing utility rates go up Kind of across the board. That's something that you can always rely on. The cost of electricity is going to go up. In California, we've seen a lot of rate changes that have resulted in A tiered time of use system where the high end time periods are actually increasing very fast. So I would say in California, we've seen that a lot.

Speaker 1

And I should mention that even with changes to the regulatory environment as it relates to solar, which For a lot of companies, it's been a challenge. We've continued to grow in California, and a big part of that is electricity rates are going So we're confident in the customer value proposition for solar and solar plus storage, And we see the market across the U. S. Continuing to grow. We've seen very fast declining equipment costs over the last several months in particular.

Speaker 1

I think that will slow down eventually, probably in the 1st part of 20 But there's still a little bit of room for costs to continue to come down.

Operator

Okay. We have any more questions. Thank you very much for tuning in.

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