SunPower (SPWR) Q3 2019 Earnings Call Transcript

SunPower (SPWR -3.09%)
Q3 2019 Earnings Call
Oct 30, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to SunPower Corporation's third quarter 2019 earnings call. [Operator instructions] I would now like to turn the call over to Mr. Bob Okunski, vice president of investor relations at SunPower Corporation. Thank you.

Sir, you may begin.

Bob Okunski -- Vice President of Investor Relations

Thank you, Kevin. I'd like to welcome everyone to our third-quarter 2019 earnings conference call. On the call today, we will start off with an operational and strategic review from Tom Werner, our CEO, followed by Manu Sial, our CFO, who will review our third quarter of 2019 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 2018 10-K and our quarterly reports on Form 10-Q. Please see those documents for additional information regarding those factors that may affect our 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 & Presentations page of our 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?

Tom Werner -- Chief Executive Officer

Thanks, Bob, and thank you for joining us. On this call, we will provide an overview of our third-quarter 2019 performance and an update on our strategic initiatives that are driving improved profitability and shareholder value. Please turn to Slide 3. SunPower executed well in Q3, meeting or exceeding our financial targets for the quarter, including our adjusted EBITDA forecast.

Volume, revenue and margin all came in on plan, driven by strong demand across our global DG business. In SPES, we are positioned well for the fourth quarter with record booking levels in both our residential and new homes businesses. Our SPT business also delivered record quarterly shipments in Q3, with particular strength in DG markets including Europe, Korea, Australia and Southeast Asia. Volume growth was enabled by capacity expansion initiatives across all fabs, including our P-Series JV.

Finally, we strengthened our balance sheet, generated cash at the business unit level and closed our safe harbor financing agreement with Hannon Armstrong. Now let me cover our segment performance in greater detail. First, SPES. Please turn to Slide 4.

Overall, both our residential and commercial businesses showed sequential revenue and megawatt growth with significant interest in our recently launched residential Equinox storage solution. In residential, demand for our A-Series panels is strong, and we are ramping production to meet this need. We continue to build on our industry-leading position in new homes where our backlog is now over 40,000 homes, with record bookings and shipments during the quarter. To give you a feeling for the current scale of this business, we saw 80 new home communities go live with SunPower solar in Q3.

The mix of cash, loan and lease across our residential business remains balanced, in line with forecasts, with particularly strong demand for our loaned products. In digital, we launched our Design Studio app nationwide and continue to see significant use of this design software by our dealers, given the ease and speed of system design. Finally, the rollout of our Equinox storage product is on plan. We are now completing beta field tests and will start shipping at scale at the end of Q1.

In C&I, we maintained our No. 1 share position with volume increasing approximately 10% sequentially. Our origination team is executing well, as we were awarded 65 megawatts of new projects during the quarter. However, our project deployment execution has been disappointing.

As a result, we are undertaking a number of initiatives in our commercial direct business that we believe will drive stronger financial performance starting in the fourth quarter. Our Helix storage solution is selling well, with the pipeline exceeding 145 megawatts and average attach rates of approximately 35% over the last 12 months. We have been awarded approximately 30 megawatts in storage projects to date. Finally, we are seeing solid demand for our P-Series product manufactured in our Oregon facility with recent deployments for both Chevron and Walmart.

In addition to the initiatives I just mentioned, we have made the strategic decision to realign our SPES business by combining our residential and small commercial dealer channels starting in Q4. Please turn to Slide 5. We are reorganizing our SPES business into an indirect channel business and a commercial direct model in order to drive scale, lower channel costs and improve our margin profile. This creates the largest residential and commercial dealer platform in the industry, with an installed base of 1.7 gigawatts over 300,000 customers in a network of more than 500 dealer partners.

This group also includes our new homes business, where our share continues to exceed 50%. We expect this structure will enable us to improve margins through increased opex efficiency, supply chain leverage and potential cross-sell opportunities with storage and services. We are making significant progress toward achieving our greater-than-10% EBITDA target in the channels business with Q3 coming in at approximately 5%. For C&I, we continue to believe in the potential for this business despite our uneven performance this year.

Given our No. 1 market share, $3-billion pipeline, strong repeat customer track record and innovative storage and services offerings, we are well positioned to continue to lead in the C&I market. We are taking a number of steps to improve our project deployment execution and to reduce operating expenses. We're confident that these adjustments will return the commercial business to sustainable profitability.

Finally, I am happy to announce the launch of our Equinox residential storage solution last quarter to capitalize on what we see as a significant opportunity for growth in the residential market. Please turn to Slide 6. Equinox storage is the next major evolution of our Equinox energy platform, giving homeowners more freedom from utility outages and onerous peak electric rates. With Equinox, homeowners can store energy for full or partial home backup during blackouts and reduce daily peak electricity consumption.

Most importantly, Equinox storage is the only fully integrated residential system designed, engineered and warranted by a single company, which we see as a distinct competitive advantage in this rapidly growing space. Built on the success of our Helix storage platform, Equinox storage offers residential customers an industry-leading solution with significant advantages compared to our competition, including better cycle performance, a smaller modular footprint and a superior warranty. We are currently testing beta units in the field and are taking initial orders. We expect a national rollout starting in Q1 of next year.

Now let's review our SunPower Technologies business. Please turn to Slide 7. Our manufacturing team executed well again in Q3, delivering record shipments that exceeded plan while meeting cost and yield targets. Our next-generation Maxeon 5 technology is hitting its performance goals, and we are on track to achieve full ramp of our first Maxeon 5 line pair by the end of this quarter.

Production of our P-Series technology is also going well, and we expect to ship a combined total of 1.3 gigawatts of P-Series this year from our joint venture and Oregon manufacturing facility. Our SPT international sales group posted another strong performance with record overall volume for the quarter led by our best-ever shipments into our European DG channel. We continue to drive the mix in SPT toward the higher-margin DG segment with more than 70% of our shipments in this market in Q3. SPT also continues to expand its footprint in the power plant segment with a solid backlog for 2020.

Finally, we are making good progress toward finalizing a potential investment to accelerate the scale-up of Maxeon 5 capacity and expect to be in position to announce this agreement in the fourth quarter. Now let's take a closer look at the details of SPT's strong international market growth. Please turn to Slide 8. Over the past year, SPT has roughly doubled sales volume outside of the U.S., with a primary focus on DG markets.

In EMEA, where SPT has the deepest and most mature dealer network, shipment growth in 2019 exceeded 40%. In APAC, annual shipment growth of 160% was fueled by strong core market DG demand in Australia and Korea, strong traction in several Southeast Asian markets, as well as supply to selected power plant projects in the region. Shipments to Latin America showed the highest growth, albeit from a small base, and we are increasing our sales resources in that territory. SPT currently does not sell into China, and is therefore not exposed to China market demand fluctuations.

One of the factors that enabled rapid growth in 2019 is our P-Series joint venture. I would now like to provide a little color on the JV. Please turn to Slide 9. Following the 2015 acquisition of Cogenra and its shingling technology, we engaged with our long-term partner in China, TZS, with whom we had structured a number of JVs and joint development agreements in various parts of the value chain.

Early in 2017, we signed agreements to scale up our P-Series technology within a JV located in Yixing, China, managed by TZS. TZS brought not only funding to the JV, but also its significant manufacturing expertise and deep connections with the regional low-cost supply chain. The first P-Series modules were produced by the JV at the end of 2017, and in 2018, we sold just under 300 megawatts of panels from the JV. In 2019, we expect that our sales volume of JV-produced panels will grow to almost 1.2 gigawatts, more than a fourfold increase.

We see strong demand for this technology across our customer segments, driven by superior product attributes such as higher efficiency, better reliability and enhanced energy yield. Our P-Series technology is unique and proprietary, and we have taken steps to ensure appropriately strong IP protection. We were pleased in Q3 to receive our first issued P-Series patents in China, which adds to a growing portfolio of P-Series patents in key global markets. Given the successful 2-gigawatt ramp of our P-Series JV and the strong customer demand for this product, we are currently in discussions with TZS about further capacity expansion.

Please turn to Slide 10. In summary, we are pleased with the company's performance in Q3 as we met or exceeded all of our key financial metrics. Our SPES residential and commercial channel organization is performing well, and we are highly focused on improving our commercial drug business execution. SPT continues to drive strong global sales growth, fueled by expansion of our Maxeon 5 and P-Series capacity, with a bias toward DG markets.

Finally, we continued to improve our balance sheet and delivered strong cash generation performance for the quarter. With that, I would like to turn the call over to Manu to review the financials. Manu?

Manu Sial -- Chief Financial Officer

Thanks, Tom. Now let me review the financials. Please turn to Slide 11. We were pleased with our results, as we met or exceeded our key financial commitments, including our adjusted EBITDA forecast.

Overall, our non-GAAP revenue was above our commitment as a result of strong execution and continued global DG demand. In SPES, revenue grew approximately 15% sequentially, with particular strength in our residential channel, including record bookings. For SPT, we shipped 677 megawatts, another record, and above our outlook, driven primarily by our international DG business. Our consolidated non-GAAP gross margin was 16%, in line with our outlook.

In SPES, gross margin was up sequentially, driven by an improved performance in both our residential and commercial channels. However, as Tom mentioned, while the origination engine in our commercial direct business remains strong and our backlog continues to grow, target deployment execution was below expectations. We are implementing a number of initiatives in the fourth quarter to improve the overall execution in the commercial direct part of the SPES business. We expect overall SPES margin to improve in the fourth quarter and beyond, with strength in our residential business given our strong backlog, improving cost structure, including synergies achieved by combining our residential and commercial channel businesses, and enhanced focus of the commercial team on the direct business.

In SPT, gross margin was higher than forecast on increased volumes, strong DG demand, as well as the benefit from our leased tech transaction related to our Oregon manufacturing facility. Both segments are making material progress on getting to their target models. Non-GAAP opex was $68 million for the quarter, up from $61 million in the second quarter. Excluding a one-time $8 million opex benefit in Q2 that we mentioned last quarter, opex was slightly below Q2 on a comparable basis.

We remain confident that 2019 opex will be less than $270 million. Capex for the quarter was $17 million, consistent with our NGT ramp at Fab 3, with our second line now in production. Adjusted EBITDA was $42 million, and up approximately $34 million sequentially. We expect to see significant EBITDA improvement in the fourth quarter as we benefit from a strong backlog, increased volumes of NGT and an approximate $20-million margin benefit attributable to certain legacy power plant projects.

I'd now like to discuss a few financial highlights for the quarter. Please turn to Slide 12. As previously mentioned, we met or exceeded our key financial commitments for the quarter, with revenue and margin up sequentially, primarily related to further growth in our DG volumes. For the quarter, we continue to successfully manage our working capital while generating cash on the business unit level.

Also, we closed a key financing arrangement in the quarter related to a safe harbor program. We believe that this arrangement with Hannon Armstrong provides us with a highly capital-efficient and flexible structure to maximize the economics of up to 200 megawatts of safe harbor materials. We've also positioned ourselves for margin expansion in 2020. We expect this expansion to come from further execution on our cost and technology roadmaps in our business segments, including higher NGT and storage volumes, revenue and cost synergies by combining residential and commercial channels, system cost reductions and enhanced focus of our commercial team to drive improvement in our direct business.

On the cost side, we continue to reduce corporate opex and expect it to be less than 2% of sales. Before turning the call back to Tom for our guidance, I would like to provide an update on our cash forecast for the balance of the year. Please turn to Slide 13. On the left-hand side chart, we detail our major cash flow moves for the third quarter of 2019, as well as where we see those items for the year as a whole.

We remain confident that we will achieve our goal of ending the year with more than $200 million in cash. For the quarter, we generated approximately $22 million in cash as we met our goal of being cash-flow-positive at the business unit level for the third quarter. We accomplished this while further paying down our legacy liabilities, expanding capacity and allocating resources to further fund our growth initiatives. We remain committed to generating cash at the business unit level in the fourth quarter.

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

Tom Werner -- Chief Executive Officer

Thanks, Manu. I would now like to discuss our guidance for the fourth quarter and fiscal year 2019. Please turn to Slide 14. The company's fourth quarter guidance is as follows -- on a GAAP basis, revenue of $520 million to $720 million, gross margin of 11% to 12% and a net loss of $28 million to $8 million.

On a non-GAAP basis, the company expects revenue of $520 million to $720 million, gross margin of 16% to 19%, adjusted EBITDA of $74 million to $94 million, and megawatts deployed in the range of 445 to 645. On Slide 15, the company's fiscal year 2019 GAAP and non-GAAP guidance is as follows -- revenue of $1.8 billion to $2 billion on a GAAP basis and $1.9 billion to $2.1 billion on a non-GAAP basis. Gigawatts deployed is expected to be in the range of 2.1 to 2.3, excluding approximately 200 megawatts for the company's safe harbor program, non-GAAP operational expenses of less than $270 million and capital expenditures of approximately $65 million. As a reminder, fourth quarter and 2019 guidance includes approximately $20 million in gross margin attributable to certain legacy power plant projects in the current quarter.

Finally, the company's fiscal year 2019 adjusted EBITDA is unchanged and expected to be in the range of $100 million to $120 million. In summary, Q3 was a solid quarter for the company as we executed on our strategic initiatives and positioned the company for a strong and profitable performance going into the end of the year. With that, I would like to turn the call over for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Brian Lee with Goldman Sachs.

Brian Lee -- Goldman Sachs -- Analyst

Hey, guys. Thanks for taking the questions. Maybe first off just, Manu, on the guidance. There's a pretty wide range here, low to high end, for all the metrics.

Can you walk us through some of the puts and takes of what's embedded in the range here? I.e., what gets you to the high end and what would fall out to put you at the low end? It looks like the megawatts deployed range is widest on SPT, so maybe if you could just walk us through some of the moving parts here.

Manu Sial -- Chief Financial Officer

All right. Thanks, Brian. So if you think about the overall megawatt guidance, we increased our megawatt guidance slightly versus last time. SPT business, specifically international DG, remains very strong.

And then there's a little bit of project deployment timing with our commercial business. So as you think about the two bookends of the range, there's a little bit of lumpiness in SPT associated with project shipments that go into the big power plant, utility-scale businesses out of our JV2. So that explains the wide range in SPT.

Tom Werner -- Chief Executive Officer

So Brian, this is Tom. There's no message. Basically what we did is we confirmed guidance from last quarter for the year. We moved megawatts a little bit up, but otherwise it's just confirmation of previous guidance, which, what I would lead you to, is we expect to be median, playing in the middle of that guidance.

Brian Lee -- Goldman Sachs -- Analyst

OK. Fair enough. And then maybe just two more from me and I'll pass it on. If you guys had told us at the beginning of the year that SPT gross margins would be mid-teens and highest across the business units, I think most of us would have been surprised, so can you give us some sense of why SPT has been able to get here so quickly, and how sustainable this level is into 2020? You're already at kind of that target range in the third quarter of '19.

And then conversely, I guess, on resi and commercial, what's the trajectory here to get to 20% and mid-teens respectively, which I believe were the targets heading into next year before?

Tom Werner -- Chief Executive Officer

OK. Brian, thanks. This is Tom, and then I'm going to hand it off to Jeff, and then Norm and maybe Nam, the folks who run the business units. SPT is having a very good year, and actually it is at our guidance model in Q3, the one that we gave on Analyst Day.

Jeff can talk about the factors that are driving that. What I would lead you to is, think of that plus or minus a couple of points going forward. We think of being at that or better on a reliable basis toward the back half of next year going into 2021, so there'll be some quarters where we might be close but not quite to that level. So you're right, and I'll let Jeff give you some color as to what the drivers are to get to model earlier than most would have projected.

I would like you to start thinking about our SPES business as a channels business, which is residential value-added reseller channel and commercial value-added reseller channel and new homes. All three are in extremely good position and are trending very favorably. Demand is excellent, and Norm can talk about that more. And think of getting to model there, though, I think, similarly reliably toward the back half of next year, into 2021.

Commercial is more of a work in progress. The origination engine's working; we're getting lots of awards. Our execution is uneven as we enter new states. So that's probably a little bit longer to get to model; probably 2021 is what we're -- what I would lead you to.

So Jeff, if you'd just briefly say a few words, and then Norm, and maybe Nam.

Jeff Waters -- Chief Financial Officer, Business Unit

Yes. I mean there's an underlying story on the good gross margin performance. It goes back to the products and the technology and also the global DG market. As Tom highlighted, we've seen great growth in EMEA.

We've seen great growth in Asia-PAC and even markets like Latin America. And whether it be the IBC or the Maxeon series technologies that we've had, or the P-Series technology, because of the differentiation that it has in the customer base, it allows us to drive prices premium, which leads to good margins. We would expect, as we head into 2020, that we'll be roughly in that area. I think the target model we put as 15% when -- on capital markets day.

That is a little further out, but I would say between now and then we'll be roughly around that area.

Norm Taffe -- Chief Executive Officer, Sunpower Technologies

Yes, Tom. Hey, this is Norm, Brian. As far as margins go in the channels business, we did grow margins quite well in Q3, so we added almost 5% of gross margin. And I can tell you that in Q4, that growth will continue in effect in -- for Q4.

We're going to get fairly close to our model, is our current plan. Now, that is Q4, and that's ramping very large. I think through, as Tom said, to overall hit the model consistently toward the second half of next year is likely. Now, our margin improvement's really been driven by a couple things.

One, we're getting more A-Series mix. The more A-Series we ship, the higher our margins go. And the other one is, new homes continue to be a bigger and bigger piece of our business. And as that backlog grows, our gross margins get healthier and healthier.

Nam Nguyen -- Vice President & General Manager, Commercial Solar Energy

This is Nam here with commercial direct. Just to follow up on what Tom said, origination is working great. Our Helix storage is getting a lot of adoption. We're going to focus on the execution side.

I would say year-over-year we are seeing gross margin improvement. In terms of getting to year-end targets, as Tom mentioned, 2021 is the right timeline for us, and again over the next quarter, it's the focus on execution.

Tom Werner -- Chief Executive Officer

Thanks, Brian.

Brian Lee -- Goldman Sachs -- Analyst

Great. Appreciate the color. Maybe just one housekeeping one if I could squeeze it in. Manu, on the $20 million in gross margin for legacy projects expected in the fourth quarter, can you elaborate on what that's related to and if there's any recurring contribution beyond 4Q? And was this part of the EBITDA guidance originally for 2019, or is it a new item? Thanks, guys.

Manu Sial -- Chief Financial Officer

So two questions. The gross margin related to fourth quarter legacy projects is primarily related to our remaining development project in Mexico. There's a little bit of tail next year, but small. And then it was part of our original guidance.

Brian Lee -- Goldman Sachs -- Analyst

OK. Thank you.

Operator

Our next question comes from Michael Weinstein with Credit Suisse.

Michael Weinstein -- Credit Suisse -- Analyst

Can you talk a little bit about the EBITDA targets of -- [Inaudible] 5% for EBITDA for commercial direct? And what's the timing of that? Are you actually expecting it to come in in 2021 at that point, or is it going to be a ramp-up period through that period?

Tom Werner -- Chief Executive Officer

So I'll take that, Michael. So the actual target that we gave at analyst day was 7% to 10%, and we think we can exit next year close to that rate. Our goal on each of these targets is to be sustainably at those rates, meaning that each quarter is at or above that rate. So the answer, specific for C&I, it's 7% to 10% exit rate next year, sustainably in 2021, and it's adjustments we're making to our cost structure and the way we deploy projects that would result in the improvements.

Michael Weinstein -- Credit Suisse -- Analyst

And on the 40,000-home backlog, how much of that is in California in 2020?

Tom Werner -- Chief Executive Officer

I'll go ahead and let Norm take that.

Norm Taffe -- Chief Executive Officer, Sunpower Technologies

Yes. Hi, Michael. Yes, as far as the new homes backlog, it's almost 100% California. Over 95% of that is driven by our super-strong position in California.

Michael Weinstein -- Credit Suisse -- Analyst

Got it. And one last question, just on the safe harbor plan for next year, should we expect that in fourth quarter or more like a Q1-type item?

Tom Werner -- Chief Executive Officer

Is your question -- so we -- let me answer, and then jump back in if I didn't answer your question sufficiently. We have been putting inventory in our safe harbor program, as Manu mentioned, financed by an agreement with Hannon Armstrong. We'll still be adding to that inventory throughout this quarter and maybe a little bit in Q1. That will be it for 2020.

We would expect similar for 2021 at the back -- at the end of 2020.

Michael Weinstein -- Credit Suisse -- Analyst

All right. Great. Thank you.

Operator

Our next question comes from Colin Rusch with Oppenheimer.

Colin Rusch -- Oppenheimer and Company -- Analyst

Thanks so much, guys. Can you give us some perspective on the current capacity you have for energy storage and the cadence for growth in that capacity?

Tom Werner -- Chief Executive Officer

Yes. I'll say a few words, and then Norm for residential and Nam for commercial. I would say we're modestly supply constrained in commercial now, but mostly we're able to supply. We've been able to add other suppliers on.

And then on residential, the product has alpha'd in the last quarter; it's beta'd this quarter. We'll take initial orders toward the end of this quarter, with volume ramp at the end of Q1. Norm can give you a sense, though, of what we're planning for in terms of attach rates and ability to supply.

Norm Taffe -- Chief Executive Officer, Sunpower Technologies

Yes. Hi, Colin. So yes, relative to storage, obviously we're, not surprisingly, seeing extraordinary demand. We think it's going to be a huge part of our business going through the back half of next year, but we're brand new in it.

We're just starting to take orders. I would say that our expectations have been kind of revising upwards to where we're now expecting 20%-plus attach rates overall, and more than that in California. And so that will be something that affects, really, most of the second half of next year, because we aren't going to start full shipments till February and March.

Nam Nguyen -- Vice President & General Manager, Commercial Solar Energy

And . . .

Colin Rusch -- Oppenheimer and Company -- Analyst

Go ahead.

Nam Nguyen -- Vice President & General Manager, Commercial Solar Energy

I was going to say, on the commercial storage side, we have about 30 megawatts, as Tom mentioned, already in award. We have another 10 that's in the process of being constructed. And we are managing a couple of very strategic partnerships and do think that we could manage the supply chain. But the backlog is strong.

Colin Rusch -- Oppenheimer and Company -- Analyst

OK. And then just thinking about the middle of next year on the module business in the U.S., and seeing competitors like LG and Panasonic bring increasingly compelling products to market, what are you seeing at this point in terms of pricing dynamics, ability to book out business that far, and if you could put that in context of your thoughts around this JV for new capacity?

Tom Werner -- Chief Executive Officer

Yes. I'll say a few things, and Jeff, if you want to add on, you can. So the -- what we see in America is that we still have a highly differentiated lead. Some of the products you mentioned aren't available in America at scale.

So our A-Series is clearly the highest efficiency and highest power ratings. Our X-Series is as well. I guess that would be Max 5 and Max 4. And so our booking ability, as witnessed by the residential channel selling incredibly well this quarter, is unchanged.

We have improvements of our own planned for the year, so I'd say we remain largely -- have the same view on the demand for next year as we've had previously.

Jeff Waters -- Chief Financial Officer, Business Unit

Yes, this is Jeff Waters. Just speaking globally of, say, a similar picture, and especially when you look at NGT or the A-Series product ramping -- we're already introducing that overseas -- and at the cost structure of that product, especially as we build out more capacity, it'll allow us to compete and compete very profitably even as competition comes, as we always expect it will.

Colin Rusch -- Oppenheimer and Company -- Analyst

Thank you, guys.

Operator

[Operator instructions] Our next question comes from Julien Dumoulin-Smith of Bank of America.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Perhaps [Inaudible] summarize a little bit of what we're hearing out there, or rather, some of the last questions around there. Can you comment a little bit about the drivers of the non-GAAP EBITDA year-over-year [Inaudible] into '20, especially after some of the trends that we're seeing for the year-to-date, and then third quarter? Can you comment on maybe piecing them out, if you will, in terms of margin improvement versus A-Series versus the Helix solution, et cetera?

Tom Werner -- Chief Executive Officer

Sure. I'll take a pass at that and Manu can add from that. So in the SPT business, what we've seen is a better job of managing the less profitable SKUs and reorienting that business. We actually modified the form factor of some of our longer or older technologies to be suitable for the DG market.

So our switch to DG has paid off well. Our focus on DG and SPT has paid off well. And as you mentioned, A-Series, we highlighted the joint venture because last year that was low or no margin; this year it's maybe quite good margin, so that's another factor that's caused SPT to perform better. In the channels business, we have better economics on lease by virtue of a new lease fund, and then we have better performance in our business because of A-Series as a big driver.

Demand is quite strong and in that channel, the CVAR channel, it's similar to that. And then in commercial, Helix storage has actually been a winner for us, offsetting some of the implementation challenges that we've had. Equinox will be similarly so in 2020. So we've been able to sort of cap the leakages and then harness some of the R&D investments we made in products and solutions the last few years.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. And then [Inaudible] comment . . .

Manu Sial -- Chief Financial Officer

Go ahead, Julien.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Sorry, were you going to add something?

Manu Sial -- Chief Financial Officer

No, no. Go ahead, go ahead.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

No. I was going to just jump, if you don't mind, to the balance sheet side of the equation. Can you comment a little bit on where you stand with respect to revolver capacities or other liquidity sources? Just as we think about cumulative availability.

Tom Werner -- Chief Executive Officer

Yes. So I'm going to have Manu take that, and I might add on a few comments after he's done.

Manu Sial -- Chief Financial Officer

Yes. So just from a revolver perspective, we're going to right-size the revolver to about $55 million just because, with the cash generation in the business unit, both in terms of 3Q and expected fourth quarter performance, plus improvement in the model at SPES with a working-capital-like model and working capital improvements in SPT, we believe we need a lower revolver, also driven by the -- driven also by the fact that we are effectively out of the utility scale-up business from a power plant perspective. So I think from a cash point of view, what I'll say, and a balance sheet perspective, I think our balance sheet got stronger in 3Q with cash generation. We expect the business units to continue to generate cash in fourth quarter, and we've further paid down our legacy liability.

Tom Werner -- Chief Executive Officer

Yes. Julien, as you look forward, of course, we have a convertible that goes current at the middle of next year. And as we've said on previous calls, the combination of the BU cash generation, improvements in working capital management, particularly in lease, and our ownership in end phase, we have -- we call them operational ways of paying off that convert. I do want to note as well that we did file a shelf registration a few weeks ago, maybe a month ago, and the point of doing that, of course, like all companies, is to have flexibility.

If conditions were favorable, we would potentially look to raise capital in capital markets, even potentially in the near term.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

And debt and equity?

Tom Werner -- Chief Executive Officer

I'm sorry, Julien, can you ask again?

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Sorry. That would include debt and/or equity, right?

Tom Werner -- Chief Executive Officer

Yes, we're evaluating. So we don't -- if we were to do something, of course, we'll consider both.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Excellent. Thank you, guys, very much.

Operator

Our last question comes from David Katter with Baird.

David Katter -- Robert W. Baird -- Analyst

Hi, guys. Thank you for taking the question. Just wanted to quickly touch on the SPT partnership. Is there any update there? And how's discussions progressing?

Tom Werner -- Chief Executive Officer

Yes. Thanks, David. I think I'll end with this. So we've made great progress toward finalizing a potential investment.

That investment, of course, is to accelerate the conversion of Max 3 to Max 5, which is a great return on investment. We're in a position to announce that this quarter. We are making great progress; we've narrowed it down to one party. Of course, we maintain options.

It is possible, depending on how those discussions go, that we could have an agreement to announce in the very near term. So things are progressing quite constructively with one party, is what I would say. So thank you very much for -- unless you have a follow-up, David.

David Katter -- Robert W. Baird -- Analyst

I'm all set. Thank you, guys.

Tom Werner -- Chief Executive Officer

OK. Thanks. I appreciate the questions very much. Appreciate your time.

I think we'll have some things to talk about soon, so we look forward to talking to you again soon, and certainly at our next earnings call.

Operator

[Operator signoff]

Duration: 40 minutes

Call participants:

Bob Okunski -- Vice President of Investor Relations

Tom Werner -- Chief Executive Officer

Manu Sial -- Chief Financial Officer

Brian Lee -- Goldman Sachs -- Analyst

Jeff Waters -- Chief Financial Officer, Business Unit

Norm Taffe -- Chief Executive Officer, Sunpower Technologies

Nam Nguyen -- Vice President & General Manager, Commercial Solar Energy

Michael Weinstein -- Credit Suisse -- Analyst

Colin Rusch -- Oppenheimer and Company -- Analyst

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

David Katter -- Robert W. Baird -- Analyst

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