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Executives

Kamyar Mofid - Chief Executive Officer

Anthony M. DiPaolo - Chief Financial Officer

Analysts

Philip Shen - Roth Capital Partners, LLC, Research Division

Real Goods Solar (RSOL) Q4 2012 Earnings Call April 2, 2013 11:00 AM ET

Operator

Good morning, and thank you for joining us today to discuss the Real Goods Solar's Fourth Quarter and Full Year Results ending December 31, 2012. With us today are Kam Mofid, the company's Chief Executive Officer; and Anthony DiPaolo, it's Chief Financial Officer. Following the remarks, we will open up the call for your questions, and before the conclusion of today's call, I'll provide the necessary precautions regarding forward-looking statements made by management during this call. I would like to remind everyone that this call is available for replay through April 9, 2013, starting later this evening. A webcast replay will also be available via the link provided in yesterday's press release, as available -- as well as available on the company's website at realgoodssolar.com.

I would now like to turn the call over to turn the call over to the Chief Executive Officer of Real Goods Solar, Mr. Kam Mofid. Please go ahead, sir.

Kamyar Mofid

Thank you very much, Ian. Good morning, everyone. Thank you for joining us. Today, we are going to talk about the operational progress we made during the fourth quarter, which included setting the stage for future growth, as well as advancing our position as a leader in one of the nation's fastest-growing industries.

Before we begin, I would like to introduce Tony DiPaolo, our new CFO. Angy Chin, who had been acting as our Interim CFO since August has completed her advisory role with us. I'm very thankful for Angy's support and contributions, and especially for going through a very smooth and seamless transition with Tony in the past few weeks.

I'm really pleased and glad to have Tony on board. Tony is a seasoned and a solid finance executive with a strong background in supporting companies in periods of change and rapid growth. Tony will now walk us through the financial results, after which, I will cover some of the key operational highlights from the quarter. Thank you.

Anthony M. DiPaolo

Thank you, Kam, and thank you, everyone, for joining our call today. Our net revenue in the fourth quarter of 2012 was $26.8 million, which was slightly above our top line performance of $26.4 million in the previous quarter. However, revenue decreased 33% from $40.3 million in the fourth quarter of 2011, primarily due to 2 factors. The first factor was an unusual component sourcing activity we refer to as safe harbor. In a safe harbor transaction, certain components used in a residential solar installation are provided to the customer directly by the finance company in order to take advantage of certain expiring tax incentives. As a result, the revenue we recognize from a safe harbor installation is lower than for conventional residential installations. But it's important to note that while we recognize lower revenue from safe harbor transactions, there's no material impact on our gross profit in terms of dollars.

The second factor in the decline of revenue was that the fourth quarter of 2011 reflects the one-time impact of the expiration of certain tax benefits, which occurred at the end of 2011. In some cases, our customers accelerated the construction of commercial projects into fourth quarter 2011 in order to take advantage of the expiring tax benefit. For the fourth quarter 2012, our gross profit decreased to $5.5 million, which was 20.7% of revenue compared to $9.6 million or 23.9% in the same period of last year. The decrease in both gross profit dollars and margin percentage, primarily reflects the impact of lower selling price for commercial projects in the 2012 fourth quarter compared to the same quarter for 2011.

Operating expenses were $8.9 million for the fourth quarter of the 2012 compared to $9.5 million in the same period last year. The decrease in operating expenses reflects lower compensation expense and improving productivity as a result of process improvements and the impact of the consolidation of support operations at our corporate headquarters in Colorado.

Net loss for the fourth quarter of 2012 was $3.8 million, which was $0.14 per share, compared to net income of $116,000, which is breakeven on a per share basis for the same quarter of 2011.

Now turning to the balance sheet. We ended the fourth quarter of the 2012 with $10.4 million in cash. This is a significant improvement compared with the prior quarter ended September 30, 2012. We finished that quarter with $3.8 million of cash on hand. Our improved cash position is primarily the result of our focus on working capital management, including inventory control, efforts to shorten our cash-to-cash cycle and like [ph] receivables and instilling greater overall fiscal responsibility of our fiscal management.

I'm also glad to report that in the last week of March, we renewed our $6.5 million revolving line of credit with Silicon Valley Bank. The renewal provides us an extension through September 30, 2013 and it's on substantially the same terms under which we have been operating.

In addition, working with our 2 major shareholders, we extended the due date of their related party debt of $6.85 million to beyond December 31, 2013. There are several individual notes represented in the related party debt and the maturities are now all on or about April 30, 2014.

Now I'll turn to the results for the full year ended December 31, 2012. Our net revenue for the full year of 2012 was $92.9 million compared to $109.3 million for 2011. That's a decrease of 15%. The decline in revenue is due primarily to the impact of safe harbor transactions that I've described earlier. In 2012, gross profit decreased by $4.8 million to $23 million or 24.8% of revenue compared to $27.9 million or 25.5% of revenue in 2011. The decrease in both gross profit dollars and margin percentages primarily reflects the impact of lower selling price for commercial projects.

The full year 2012 operating expenses were $38.7 million compared to $27.7 million last year. The increase in operating expenses represents -- reflects the cost associated with the integration of and reorganization related to our Alteris acquisition, as well as centralizing the various support functions at the company's headquarters in Colorado. These efforts, which occurred throughout 2012, began to show significant improvement in our overall cost structure in the fourth quarter of 2012, as I mentioned in my earlier comments.

Net loss in 2012 was $47.2 million or $1.77 per share compared to a loss of $1.9 million or $0.08 per share in 2011. In addition to the operating factors I've described above, the increase in the net loss was due to goodwill and other asset impairment charges of $22 million and a $9.3 million increase in our provision for income taxes that reflected the establishment of a valuation allowance for all of our net deferred tax assets. We took the charges related to those items in the third quarter of 2012, and it's important to note that they were noncash charges.

This completes my summary report of our results for the quarter and for the year. For a more detailed and complete analysis of results, please review our Form 10-K, which we filed with the SEC yesterday, April 1, and it's available at www.sec.gov, as well as on our website. I will also be happy to answer any questions during the Q&A session.

Now I'll turn the call back over to Kam.

Kamyar Mofid

Thank you, Tony. Clearly, 2012 was a challenging year for the company, but also a year in which we successfully integrated our largest ever acquisition, made significant investments in our people and processes and began to set the stage for a profitable return to our historical growth trajectory.

The U.S. solar market remains strong and continues to be one of the fastest-growing industries in the country. It is quite remarkable to note that, for instance, in 2010, which is not that long ago, total installations were about 850 megawatts. And 2 years later, in 2012, the industry ended the year with around 3.1 gigawatts in total installations. By any measure, this is truly an astounding rate of growth.

Solar is an exciting industry to be in with substantial runway, especially in the downstream part of the value chain, where opportunity to excel and the opportunity to change the game remains the greatest.

Against the above backdrop, 2012 should have been a much better year for us. The headwinds we had were not market-based, but were vastly internally induced. Lack of effective execution, particularly in the first half of the year, resulted in both top line and bottom line challenges impacting the entire year. But as you heard from Tony, we began to turn the corner in the second half and ended the year having achieved a number of major improvements and major milestones. When I joined the company in July of last year, we quickly regrouped and re-energized the organization by developing and deploying a roadmap for improvement and growth.

The overarching objectives I established for the organization was threefold: number one, improving working capital performance and cash flow in particular; two, reducing OpEx and increasing productivity; and three, increasing the sales pipeline and improving our ability to convert that pipeline to revenue all, of course, with correct margin considerations. Essentially, we established, with laser precision, very crystal clear priorities and objectives.

In Q4, we made substantial progress on all 3 fronts. As you heard from Tony, we ended the year in a much stronger cash position compared to Q3, mostly driven by key improvements in cash-to-cash cycle times and in accounts receivable collections. We also made a number of organizational and process changes to reduce OpEx, increase productivity and, at the same time, create greater ownership and accountability for results. Making these types of improvements is a never ending journey, and I'm pleased that quarter-over-quarter, we made solid progress. For instance, in Q3, OpEx was 42% of revenues, yet in Q4, the number was 33%. For the full year 2013, we expect OpEx to be significantly better than Q4.

Lastly, I'm also pleased with the progress we made in Q4, driving the top line and strengthening our 2013 pipeline. As you saw in our earnings release yesterday, we closed over 6 megawatts of new commercial projects in Q4 alone, and early this year, we also closed on an important relationship with a major production homebuilder to bring solar to new communities. Driving the topline, both in commercial and residential, will continue to be the key area of focus and something I will personally stay very close to.

I look forward to an exciting 2013 and a year in which we fully expect to see strong improvement compared to 2012, both in our topline and bottom line results. The path in front of us is not easy, but we are in a much stronger position than we were a few months ago, we have a solid team, which we will continue to strengthen and I'm also very pleased to have Tony DiPaolo as our CFO, who has already demonstrated great insights in how we can improve more and do so even faster.

Now with that, we are ready for the question-and-answer portion of the call. Tony and I will be pleased to answer the questions that you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Philip Shen with Roth Capital.

Philip Shen - Roth Capital Partners, LLC, Research Division

I just have a couple of quick questions on your installations in Q4 and then maybe the mix trending going forward. Can you discuss the mix of cash and lease installs in Q4? And then how do you see it trending in 2013, especially given the recently announced relationship with SunRun?

Kamyar Mofid

Sure. I can answer that. From a revenue standpoint in Q4, and as you know, we do not do a line of business reporting. Up to now, we do not separate the residential and commercial financials, but generally speaking, from a revenue standpoint, commercial was higher than residential in Q4. In terms of -- I think your question is on residential, cash versus finance, generally, as you know, in the past few quarters, in all the key markets, there has generated been a dramatic rise in leases and PPAs in residential versus cash purchases. But we are starting to see a trend, whereby cash purchases are coming back again. This is not overly surprising because the ASPs have been dropping significantly, primarily driven by the drop in the cost of material and in overall drop in system price and system cost. So we do expect cash sale to be relatively healthy. And net-net for 2013, our expectation is that leases and PPAs will continue to be strong and a very significant portion of total volume of transactions. We have a very good, very strong relationship with essentially the top players in residential financing, the top national players, Clean Power Finance and SunRun, and we continue to deploy their offers. And for 2013, generally, I expect the -- our relationships with CPF and SunRun so account for significant portion of our total transactions. I would say, in total, likely well over the half of our total volume will be financing transactions through CPF and SunRun.

Philip Shen - Roth Capital Partners, LLC, Research Division

Great. That's helpful. And then just one more, if I may. You guys mentioned the 1.7 megawatt school district closed in Arizona. Maybe you could give us some additional color on your school district installs. Is this something that you guys have done in the past? And then are you guys targeting school districts going forward, kind of leveraging the scale you can get out of those for commercial installs?

Kamyar Mofid

That's a very good question and, in fact, a very relevant question because as you probably know, the commercial sector of the solar space, meaning things that are not residential and are not utility. That big chunk in the middle, what we generally refer to as commercial, is also the sector with the broadest number of verticals: Schools, state governments, Federal governments, large corporate clients, a small commercial -- that is a broad spectrum of customers, that general commercial sector. And for us, specifically, the vertical related to educational institutions, universities and colleges, has been a strong sector for us. Alteris, prior to becoming part of Real Goods, had a lot of success in the educational domain and a very solid reputation, and it is really a part of that vertical strength and a part of that strategy that now that we are one company together, we are going to continue to put a special focus on education sector and education customers. But we have a good reputation there, a lot of solid track record, and it is really a part of continuing to build upon that, that we are doing things like the Arizona project that we recently announced. So that will be a continued area of focus, that particular vertical, among other few verticals.

Operator

[Operator Instructions] And this does conclude our question-and-answer session. I would now like to turn the call back over to Mr. Mofid for any closing remarks.

Kamyar Mofid

Thank you, Ian. I very much appreciate all of your interest in the company. On behalf of myself and the whole management team, we appreciate your interest in Real Goods, in trying to be part of our journey. We are very excited about the runway we have in front of us. As I mentioned, solar is one of the fastest industries in the country. And as one of the largest downstream players and as one of the true pioneers in the sector, we look forward to continue to drive our strategy, our profitable growth agenda in becoming the supplier of choice to our customers and in building value for you, our shareholders. Thank you.

Operator

Before we end today's presentation, I would like to take a moment to read the company's safe harbor statement that provides important cautions regarding forward-looking statements. The following constitutes a safe harbor statement under the Private Securities Litigation Reform Act of 1995. Except for historical information, the matters discussed in this call are forward-looking statements that involve risks and uncertainties, and a number of important factors could cause the company's actual results or performance to differ materially from those indicated in such forward-looking statements, including, but not limited to, general business conditions, integration of acquisitions, the timely development of new businesses, the impact of competition and other factors detailed under risk factors and elsewhere in the company's 10-Ks and 10-Qs, and other filings the company makes with the SEC from time to time. Copies of the company's SEC filings are available on the website at realgoodssolar.com. The company does not undertake any obligation to update forward-looking statements. I would like to remind everyone that this call will be available for replay through April 9, 2013, starting in about 2 hours. Please refer to yesterday's press release for dial-in replay instructions. A webcast replay will also be available via the company's website at realgoodssolar.com.

Thank you for joining today's presentation. This concludes the call. You may now disconnect.

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