Sunrun Inc. (RUN) Q1 2021 Earnings Call Transcript

Greetings, and welcome to the Sunrun First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Patrick Jobin, Investor Relations. Please go ahead, sir.

Thank you, Hector. Before we begin, please note that certain remarks we will make on this conference call constitute forward-looking statements. Although we believe these statements reflect our best judgment based on factors currently known to us, actual results may differ materially and adversely. Please refer to the company's filings with the SEC for a more inclusive discussion of risks and other factors that may cause our actual results to differ from projections made in any forward-looking statements. Please also note these statements are being made as of today, and we disclaim any obligation to update or revise them. On the call today are Lynn Jurich, Sunrun’s Co-Founder and CEO; Ed Fenster, Sunrun’s Co-Founder and Executive Chairman; and Tom vonReichbauer, Sunrun’s CFO. I’ll now turn the call over to Lynn.

Thanks, Patrick. We are pleased to share Sunrun’s first quarter results, our improving outlook for 2021, and our progress transitioning the country to a clean, affordable, and resilient grid. The year is on track to be the best in the company’s history. With an accelerating growth rate, operating scale, and expanding market reach, we are leading the country to a clean energy future. We ended Q1 with more than 573,000 customers, reflecting 18% year-over-year growth. We are increasing our new solar capacity installations guidance from 20% to 25% to 25% to 30% for the full year. We are innovating, accelerating growth, and integrating Vivint Solar, while maintaining strong unit margins and performing at a scale that is two times greater than our nearest competitor. Sunrun’s expanding customer value proposition and competitive advantages are delivering market share gains. We delivered all-time record Q1 volumes through our direct-to-home sales channel. Our homebuilder and channel partner businesses delivered all-time record volumes as well. We have an unmatched consumer reach through our multi-channel strategy. We focus on working with a selective group of channel partners and grew the number of partners we work with by over 20% in Q1. Given the value of our brand strength, technology platform, and financing advantages, nearly all of our new channel partners have agreed to exclusive agreements. Our new home business is starting to scale and grew by more than 50% in the first quarter compared to the prior year, pro forma for Vivint Solar. We are working with 20 of the top 30 homebuilders in California. Our pipeline of new homes spans hundreds of communities across the country. We continue to advance our lead on batteries and virtual power plants. Sunrun has installed nearly 20,000 Brightbox systems nationwide, offering homeowners the ability to power through blackouts with clean and reliable locally produced home energy. On a daily basis, these batteries optimize when power is purchased or supplied to the grid, helping manage energy constraints during peak times. Battery attachment rates increased again from last quarter and are at record levels across the business. Sunrun has already forged 12 virtual power plant opportunities, and we continue to grow the pipeline. We now have over $75 million in expected revenue from grid services opportunities that have been awarded or are in late-stage discussions. These opportunities provide incremental recurring revenue and offer an enhanced customer value proposition while further differentiating Sunrun’s offerings from competitors that lack the scale, network density, and the technical capabilities necessary to serve this market. We continue to expect more than 100% growth in battery installations this year, despite supply constraints. As more manufacturers expand battery offerings, we expect costs to improve further and supply constraints to ease, allowing us to meet pent-up demand and accelerate adoption even faster. We are actively exploring ways to help consumers and the grid manage the transition to electric vehicles. We know the country must make the switch to EVs to further reduce carbon emissions, and we believe Sunrun will be a key enabler of this transition. Homes with EVs consume approximately double the amount of electricity. Home solar and batteries are needed to meet this increased strain on the electric system, and Sunrun is well positioned to be a leading provider of these services, given our expertise managing and installing at-home energy infrastructure and our national footprint. Electric vehicles create positive flywheel effects. Homes need larger solar systems to support the increased electricity consumption. These larger systems come at a high incremental margin since the cost to increase the size is relatively low, and EVs can be integrated into a comprehensive home energy management system to maximize the economic benefits and resiliency for families. These compounding benefits will accelerate the transition to a distributed grid with home solar, batteries, and EVs even faster than most realize. Turning now to our ESG and sustainability efforts. We are proud to lead one of the fastest-growing sectors in the American economy. In Q1, we launched the Sunrun Academy, a set of initiatives and programs that expand job opportunities and enhance career advancement. By investing in our people, we can attract and retain the best workforce with the skills needed to electrify homes across the country. As part of this initiative, all Sunrun employees have access to an expanded tuition reimbursement program to develop career-building skills. The Sunrun Academy will help us develop and train our emerging leaders, focusing on critical in-demand skills like electrical work. In April, we unveiled sustainability goals in our annual Impact Report. These goals include offsetting more than 600 million metric tons of carbon emissions from the systems we will deploy over the next decade, achieving net zero carbon emissions from our operations by 2040, transitioning our vehicle fleet to one-third electric or hybrid within five years, and deploying at least 500 megawatts of solar to lower-income households by 2030. Finally, we aim to create a healthier environment for future generations by aggressively retiring fossil fuel plants with the virtual power plants powered by local solar energy. The solar systems we deployed in Q1 are expected to prevent the emission of over 3.9 million metric tons of CO2 over the next 30 years. Before I turn it over to Ed, I’d like to thank our fantastic team for another great quarter. Over to you, Ed.

Thanks, Lynn. Today, I will touch on some recent political developments, our evolving capital structure strategy, and recap our robust capital runway. Washington is taking note that distributed solar represents about seven in ten of all jobs in wind and solar development. The Labor Department predicts that job growth for solar installers will exceed any other category of employment through 2026. Even better, our jobs are desirable. We employ people nationwide throughout local communities rather than in desolate locations. Our jobs remain consistent year-in and year-out, rather than the feast or famine reality of project-driven jobs. The need to automate, scale, and organize our industry’s growth creates a wide range of career advancement opportunities. Over the coming years, distributed energy is uniquely positioned to add hundreds of thousands of jobs that are secure, well-paid, close to home, and don’t require a college degree, exactly the sort that are the focus of our leaders today. We are at a crossroads and believe our vision of an intelligent grid, where power is reliably produced and locally consumed, is the obvious future. Support for our vision within the media and at the state level is strong. Key editorial boards continue to see the intuitive elegance of distributed solar and storage, and to that end, we’ve seen recent compelling editorials in the most influential publications, such as the New York Times, the Los Angeles Times, and the Sacramento Bee. These papers recognize that electrifying our vehicles and our heating will require doubling the electricity needs of our communities and that the major utilities, particularly in California, have fallen decades behind maintaining the grid and are unable alone to deliver against the urgent needs of today, let alone tomorrow. State regulators by and large appreciate this as well. For instance, in South Carolina, we reached a win-win settlement with Duke Energy. When Dominion was unwilling to negotiate in good faith, the public utilities commission that regulates them entirely rejected their request. Our all-in capital costs are at or near all-time lows, despite the increase in Treasuries earlier this year. For now, Treasuries have stabilized at very attractive levels while the spreads to Treasuries we pay continue to fall. While we don’t expect materially higher interest rates in the near term, I note that Sunrun delivered excellent customer values and cash flow results in recent periods when base rates were at least twice what they are now. Today, we enjoy lower costs and more revenue sources, like batteries and virtual power plants. A modest inflationary environment, which would further drive up retail electric rates, would frankly be good for us. Meanwhile, our increased scale continues to open new financing opportunities. We expect to leverage that scale into an overall lower cost capital strategy that will increase long-term cash flows available to our common shareholders. We are evaluating a number of possibilities to achieve this vision, and we’ll share updates over the next quarter as we finalize a course of action. We continue to maintain a robust project finance runway. As of May 5, closed transactions and executed term sheets provide us expected tax equity and project debt capacity to fund over 540 megawatts for subscribers beyond what was deployed through the first quarter.

Thanks, Ed. The strong momentum we saw in the fourth quarter has continued into 2021. The Sunrun team again delivered an exceptional quarter with year-over-year volume growth at strong margins. We are proud to post a solid quarter even as we meet the significant ongoing demands of integrating Vivint Solar into our operations. We are leaning in to accelerate our growth even further while enhancing our customer offering and value we bring to our partners. Turning first to volumes. In the first quarter, customer additions were approximately 23,500, including approximately 20,100 subscriber additions. Solar energy capacity installed was 168 megawatts in the first quarter of 2021, a 9% increase from the first quarter last year, pro forma to include Vivint Solar, and down approximately 2% from Q4, a much smaller decline from Q4 into Q1 than what we have historically observed given seasonality in our business. Our networked solar energy capacity was 4.1 gigawatts at the end of Q1, an increase of 18% compared to the prior year. We ended Q1 with over 573,000 customers and nearly 499,000 subscribers. Our subscribers generate significant recurring revenue, with most under 20 or 25-year contracts for the clean energy we provide. At the end of Q1, our annual recurring revenue, or ARR, stood at $683 million with an average contract life remaining of 17 years, representing over $10 billion in revenue visibility just from existing customers. In Q1, subscriber value was approximately $35,700 and creation cost was approximately $27,500, delivering a net subscriber value of approximately $8,200. Total value generated, which is the net subscriber value multiplied by the number of subscriber additions in the period, was $165 million in the first quarter. Turning now to gross and net earning assets and our balance sheet. Gross earning assets were $8.1 billion at the end of the first quarter. Gross earning assets is the measure of cash flows we expect to receive from customers over time, net of distributions to tax equity partners in partnership-flip structures, project equity financing partners, and operating and maintenance expenses, discounted at a 5% unlevered WACC. Net earnings assets were $4.2 billion at the end of the first quarter. Net earning assets is gross earning assets, plus cash, less all debt. We ended the first quarter with $813 million in total cash. Note that in Q1, we consumed approximately $43 million in cash related to the convert, capped call, and acquisition-related costs. Turning now to our outlook. Our team is executing exceptionally well, with strong sales momentum across all of our channels, even as we focus on integrating Vivint Solar. We believe our strengthening brand, investment in customer experience, and expanded sales reach have us well positioned to respond to the market opportunity in front of us. We are increasing our growth outlook for 2021. We now forecast solar energy capacity installed growth to be in a range of 25% to 30% in 2021 for the full year, an increase from the prior guidance of 20% to 25%. Total value generated is now expected to be over $750 million for the full year, up from the prior guidance of more than $700 million. We continue to estimate cost synergies derived from the acquisition of Vivint Solar to be approximately $120 million in run rate synergies exiting this year. While we are very focused on integration in the near term, we expect to see sequential quarterly growth in solar energy capacity installed in Q2 that is well above 10%. The combination of investments to accelerate growth and our progressive ramp into synergy realization will result in more front-loaded costs, resulting in lower net subscriber values in Q2 but with sequential increases throughout the second half of the year. Consumer demand for alternatives to an old, expensive, and dirty energy infrastructure continues to increase at a rapid pace, and we believe we have the products, business model, and operational capabilities to deliver against this demand in 2021 and beyond. With that, let’s open the line for questions, please.

Thank you. At this time, we will be conducting a question-and-answer session. Your first question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Hey, everyone. Thanks for taking the questions and kudos on the solid execution here and increased guidance. I guess on that topic, just wondering, understandably comps are easy for Q2, but if we assume, let's say, 50% growth in Q2, it still implies 30% average growth through Q3 and Q4 on a year-on-year basis to get to your range. Is that kind of the right cadence of how we should be thinking about the run rate here in the second half, given the skew that we’ll see in Q2? And then I had a follow-up.

Thanks, Brian. Yes, that is the right way to think about it.

Okay. And then I guess as a follow-up, just given the better demand outlook two questions here and then I'll pass it on. One on the supply chain, just anything whether panels, inverters, batteries that you're seeing tightness or potential price fluctuations that could impact the guidance for the year. And then on the second part of the question would just be around labor. We are hearing some industries are having challenges getting workers back to work with the increased volume growth outlook, it's a high-quality problem to have, but how are you guys thinking about or what sort of visibility do you have on the labor side of things? Thanks a lot.

Sure, Brian. So this is Ed. Maybe I'll just kick it off on batteries and then hand it off to Tom to keep going. In terms of battery supply, the good news is we installed more batteries in Q1 than in Q4, which represented total install growth of more than 100% year-over-year. We also still expect to grow battery installations over 100% during 2021. The bad news is we could be growing that even faster if not for the tightness in the market. One impact at the tightness at end pricing for batteries has not fallen alongside our proposed prices for those batteries. We do forecast significant increases in both supply and demand for batteries, with supply increasing a little faster than demand over the near term, which should help a little bit. Across all manufacturers, we expect to obtain enough batteries to support the growth we forecast, though it’s not full intrinsic end customer demand. We are experiencing a little bit of low inventory levels, but we've been working through that and planning around that successfully so far. Maybe I'll hand it to Tom to talk about inventory.

Yes. Hey, Brian. So across the rest of the supply chain, we feel comfortable that we're well insulated to the supply chain situation that some manufacturers are highlighting. As we said before, our position as the market leader puts us in a strong position with these companies, and we believe that puts us high on their priority list. Given our scale, we have strong supply contracts that, in many cases, come with penalties for non-delivery of orders. We’ve also increased our target inventory levels in response to some of the supply chain disruptions, and we have already reached those new buffered levels without difficulty. Finally, the diversified supply chain that we manage using multiple suppliers for all of our components helps further mitigate risk here, so we feel pretty good on this issue. Let me pass it over to Lynn for the labor issue.

Yes. Yes. Sure. Brian, great question. This is something we're extremely vigilant about. As we know, electrifying all the homes in the U.S. can add 25 million jobs, so that's why it has the bipartisan support it does. We do feel like we're in a solid position for the foreseeable future, but we're investing a lot here. We talked about some of the external partnerships we've launched like SkillBridge, partnerships with the Department of Defense, which gives us access to a talent pool of 75,000 people. We're launching our Sunrun Academy to develop internal talent and just always offering competitive wages and career pathing and really focusing on building that talent brand out. So short story, we feel solid right now and are continuing to invest here.

All right. Thanks, everyone, so much for the color. I appreciate it.

Your next question comes from the line of Julien Dumoulin-Smith with Bank of America. Please proceed with your question.

Hey, good afternoon, team. Thanks for the time, perhaps to get on all the updates here. So perhaps to start with that, you talked about $750 million in value generated this year, right? And I suppose this flows naturally from the added compounding customer growth up to 25 to 30. But how do you think about this trend through the course of the year? It's a little bit like the last one, given that the NEA growth for 1Q I think here was $59 million. How do you think about that trending through the course of the year? Really, again, I think the same genre of the question, how do you think about that back-end weighted presumably? And then in terms of the percent increase versus customers going from 20 to 25 to 25 to 30, I would've thought that going from $700 million is a baseline maybe might be implied a little bit more than $750 million. So both kind of trend and cadence, as well as how do you think about the customer growth relative to the value addition in terms of the uptick?

Yes, sure. Thanks, Julien. So on first, on the guidance point, we increased volume guidance at the midpoint of the range by approximately 4%, but increased total value generated by approximately 7%. So you are seeing some of that incremental leverage there as we do bump up volume guidance, if you just kind of look at the midpoint of the range on volume. Throughout the course of the year, we expect to continue tightening operating costs, continuous process improvements, reductions in our physical branch footprint as a result of the acquisition, as well as cycle time improvements, and further we reaffirmed the synergy delivery this year of $120 million in exit rate value, that obviously has a ramp throughout the year. And then with the market opportunity that we're seeing in front of us right now, the accelerating growth and investment in that opportunity and the timing of some of these sales cost recognitions does create a bit more drag in Q1 and Q2, where we're seeing a higher ratio of sales to installs. But if you look at the results here in Q1, install costs are down despite the higher battery mix and G&A costs are coming down, so you can see a lot of that beginning to materialize. At the beginning of Q1, we also had a slightly higher mix of 26% ITC eligible projects than we had in 2020. So I think you will see some of that drag here in the first half of the year, but continued ramp throughout the year as synergies are realized. And then I think on NEA and cash, we mentioned in the commentary earlier, that we had about $43 million of one-time cash expenses from the convert, the cap call, and some integration items that created a bit of a drag on NEA under the new definition, which is now inclusive of cash.

All fair points. Thank you. And then if I may, right, I want to sidestep the net energy metering conversation, but really thinking beyond the current year into 2022 onwards. How do you think about the various puts and takes on value creation levers, right, whether that's again storage deflation returns in terms of costs you've got solar panels continuing to go down, perhaps other scale advantages, et cetera? But at the end of the day, when you think about the DevCo side of the piece here, obviously, perhaps you might have a little bit of pressure from an NEM perspective. What are the offsets when you think about customer value creation sort of beyond the current year?

Thanks. Great question. We – the outlook is extremely positive. So on the top end here, you have the grid services markets opening up. For those newer to the story, grid services are markets where we're able to actually monetize the capacity out of the battery to add another source of value. If you look at the grid services programs we have in our pipeline right now, that represents about 10% of our contracts in geographies. Still, our pipeline shows about 50%. As the country moves further to intermittent renewable resources, the demands for instantly dispatching power out of the battery will become increasingly valuable, so that's one. You also have just the additional revenue from battery adoption; I think we are still in the very early innings of people feeling the resiliency pain around outages like we witnessed in California and Texas, which will continue to drive consumer interest in adding batteries. You also have the further electrification of vehicles and the home, and this is significant. By electrifying your vehicles, you will need twice the amount of power delivered to your home. This increases the potential system size, which is the most profitable segment for us, because a lot of our costs are per home, not per kW. The vision is to lead this energy transition, moving from just a solar-only company to a broader electrification company that matches the needs of homes and the grid in achieving carbon goals. The unit-level economics will evolve significantly because of these factors, and the overwhelming majority of trends support a positive outlook.

Got it. Excellent. Well, thank you.

Your next question comes from the line of Moses Sutton with Barclays. Please proceed with your question.

Thanks for taking my questions and congrats on seismically beating on what seems like every metric. Is California specifically helping drive the MTB strengths, and simply looking at average realized utility rates in California rising about 7% year-to-date? Wondering if you're capturing this in leased PPA origination pricing.

Thanks for that question. While that'll be a long-term benefit, we have not changed pricing in California, so it's not coming from that.

Great. And then thinking about which States and areas you're actually pushing deeper into. Maybe you could provide an update on high-growth markets like Texas and Florida, and really any new States you're looking at where utility rates versus the solar economics are starting to emerge that you're not at yet?

Sure. I think we are in about 23 States right now, and some of the places we're really excited about are Texas and Florida, and I think Puerto Rico is poised to deliver some growth for us as well. I would note that the current growth rate and guidance is not predicated on a lot of geographic expansion. I think you will see us return to geographic expansion this year. Particularly, the value drivers are enabling that – particularly as grid power prices are getting higher, our equipment costs are decreasing, and the appeal of batteries becomes more powerful. Last year we did not expand into a lot of new geographies, but this year we will be doing that. Again, the growth expectations are not reliant on that.

That's very helpful. And maybe one last one, I'll jump in the queue. Maybe this one is for Ed. You came to market with an ABS on legacy Vivint assets recently with great terms. It's been about 1.5 years since you came to market with RUN assets. Any update on timing? Could we expect something in the next one to two quarters?

Hi, great question. We obviously periodically access the financing markets in various formats. During the pandemic, we raised a number of delayed draw credit facilities that were designed to mitigate risk, should things look different than they ultimately did during that period. So we will continue to explore the securitization market but haven’t made any public statements at the moment as to when the next transaction will occur. We certainly have a number of funds deploying and several refinancing opportunities developing this year. For assets originated recently, there is no delineation between legacy Sunrun assets.

Great. Thanks. Very helpful.

Thank you.

Your next question comes from the line of Stephen Byrd with Morgan Stanley. Please proceed with your question.

Hi, congratulations on the great results and the excellent update on growth. I wanted to focus on the opportunity for home electrification, and Lynn, you've spoken quite a bit about this. You all have a couple of very good slides describing it. I wanted to talk about EV charging and just maybe talk a little bit more about sort of the capabilities you would need to be able to pursue this, and the time period over which this could be very meaningful. It strikes me as very logical, pretty exciting as you mentioned in terms of the additional value to customers, as well as to shareholders. But I wonder if you could just talk a little more about how this might unfold?

Sure. I think there are a couple of dimensions to note. One is that the increase in power needed in homes can drive larger system sizes, which again is valuable. What also accompanies this is a moment of consideration for the homeowner. One of the issues of our business is conversion; people generally want solar, but there often is not an urgency around that decision. Therefore, purchasing an electric vehicle can create a context where it becomes sensible to invest in solar, particularly if the solar company can handle the car charger installation, knowing that their electric bill will double and they want it to be powered by clean energy. We are investing in this area through business development efforts, and we believe we will see success in this market as EV growth scales up. Given our established installation footprint, it makes sense for us to manage this electrification opportunity simultaneously with solar installation.

That's great. And maybe just following up on that, I mean, the increase in electricity needs due to the EV growth creates a logical point for consumers to consider renewable energy. How critical do you consider your brand awareness at that point?

That’s absolutely fair. A follow-on effect is that resiliency becomes even more paramount. I think we are beginning to see this shift in California and Texas where outages create increased demand for solar and batteries as a means for consumers to cope efficiently. We plan to continue exploring partnerships with automakers to facilitate a smoother transition for homeowners who adopt EVs.

Yes. And I guess there is a positive overlap with auto OEMs. You're not competing with them; you can offer quite a bit of value to their customers.

Exactly.

Yes. Okay, that’s all I have.

Thank you.

Your next question comes from the line of Kashy Harrison with Simmons Energy. Please proceed with your question.

Good afternoon. Thanks for taking the questions. And congrats on the beat and raise. Your cash balance net of recourse debt has grown quite considerably over the past several years. Just wondering if there is a target level of net cash that you're looking for before you start exploring creative options with that cash, and maybe just educate us on what you might be thinking about using any excess cash for to create value for shareholders?

So that's a great question. It's one we’ve been working on this year and definitely falls into the excellent problem to have category. We’re evaluating what we think is the right future run rate to finance new asset growth, while also reassessing our existing credit arrangements to identify which are above market and should be refinanced or replaced. Once we've finalised that exercise, we can explore our capital allocation strategy, including possible return options for shareholders. Historically, we've been good capital allocators and had a share buyback program, but there are no immediate plans there. The focus now is on designing the right capital structure for the business before turning our attention to other options.

That's great. Thanks for that. And my next question surrounds the cost structure for residential solar. Looking at the external model that you provide, customer acquisition costs remain pretty high. It feels like the biggest opportunity for cost reduction given the challenges with net energy metering. Could you speak on potential areas for rapid cost reduction and a timeline for that?

Yes. Great question. One area contributing to customer acquisition costs is the customer lifetime value justifying high acquisition expenses. We know that if we didn't allocate additional dollars to acquire the next customer, we would miss out on revenue. In regions where the value proposition is weaker, we notice lower acquisition costs. We are also tightening our operating playbook, improving close rates, transitioning to virtual selling, and enhancing the online experience, which may contribute to decreasing costs over time. However, the market dynamics may delay significant reductions in the near future. The larger opportunity lies in regulatory simplification and reducing soft costs associated with permits and delays, which can add around $7,000 per customer. Streamlining bureaucracy is key, and we’re seeing attention to that in the current administration and in infrastructure proposals. We are participating in initiatives like the Solar app to create a streamlined permitting process to reduce time and expenses related to installation. Lastly, the electrification of vehicles will increase the value we deliver to customers.

That's great color. Thanks so much for that. I really appreciate it. Have a good one.

Thanks.

Your next question comes from the line of James West with Evercore ISI. Please proceed with your question.

Hi, good afternoon, everyone. Curious if there's any issues that perhaps are out of your control that have driven this recent acceleration in growth, things like housing market tightness or fear of inflation driving up electricity costs? Is there something outside pure brand recognition driving solar adoption?

I don't believe that there are any short-term factors pushing these growth rates. If anything, we're seeing sustainable and accelerating growth.

Okay. Makes sense. And then obviously, Lynn, you've emphasized how important EVs are for your business. How do you integrate that into your go-to-market strategy and sales force? Do you focus efforts in areas where EV growth is most pronounced? How are you addressing that?

Great question. Currently, we have a broad distribution strategy and are capturing significant market share with our existing business. We don't count on EVs to reach our growth targets but recognize that there are excellent cross-selling opportunities available. For example, we will engage in partnerships to synchronize solar and EV sales, capitalizing on synergies as customer interest grows. Furthermore, our nationwide reach enhances partnerships with large OEMs, making it advantageous for them to collaborate with a large-scale installer like us.

That's very clear. Thanks, Lynn.

Thank you.

Your next question comes from the line of Mark Strouse with J.P. Morgan. Please proceed with your question.

Good afternoon. Thank you for taking our question. You mentioned record volume across your channels in Q1. When you look out to your guidance, is that increase broad-based, or are you particularly seeing strength in one particular channel? Also, to follow up, are you noticing any acceleration in smaller installers looking to partner with larger installers like Sunrun due to supply constraints?

Great questions, Mark. We are seeing growth across our various channels, including our direct-to-home business, online business, retail partnerships, new homes business, low-income initiatives, and channel partner businesses. We delivered strong results across the board. The growth in our partner business has been quite notable, with record volumes achieved during Q1, despite Q1 typically being the seasonally lowest quarter due to weather.

All right. Makes sense. Thank you very much.

Thank you.

Your next question comes from the line of Michael Weinstein with Credit Suisse. Please proceed with your question.

Hey, this is Maheep on behalf of Mike. Thanks for taking the questions. First one, just on the NPV per customer, I know Tom, you spoke about potential decline in Q2 given the higher cost upfront. But just want to understand how should we think about it in the second half? Just looking at the annual guidance seems to suggest in the $7,000 customer range, but I just wanted to confirm that number.

Yes, great question. In Q1, we were just shy of $8,200 per customer. If you take the guidance here of $750 million and the midpoint of the range, you get to a full-year number that's closer to $8,300. I suspect you're not adjusting for some amount of cash and loan mix in the volumes, which is now calculated under a new definition inclusive of cash.

Yes, that would make sense. And then maybe just on the channel strategy, could you talk about the split of the in-house and channel business? I think the press release mentioned channel business growing year-over-year, so how should we think about that mix going later this year or into next year?

Great question. We manage our approach based on geography, directing our pathways to market in the most effective manner possible, rather than targeting specific splits between Sunrun sales and channel partner sales. Therefore, while we can share specifics on the outcomes of each quarter, we do not guide to or disclose a specific mix.

All right. And then just last one from me. I'll jump back in the queue. Just on the potential impact of any higher costs in the supply chain so far for this year, you have said it's manageable and you have enough inventory to handle the higher costs of modules or other components. But to the extent they increase later this year or next year, who absorbs that cost? Does it pass down to the end customer or does the acquisition cost absorb those higher hardware costs?

Yes. As we mentioned, we feel well-positioned given supply contracts, orders, and inventory levels that we've secured. If costs do increase, we believe our robust pricing strategy, paired with the strengthening utility rates, will help us maintain a small buffer there to offset any necessary increases if needed.

Got you. All right, thanks for taking the question.

Your next question comes from the line of Philip Shen with ROTH Capital Partners. Please proceed with your question.

Hi, everyone. Thanks for taking my questions. The first one is on the channel partners, the new ones that you've added for those dealers. You highlighted some exclusivity. I was wondering if you could provide some color on that. How many new exclusives did you add? Maybe some color on the structure would be helpful. How are those payments structured, how large are those payments, and when you think about your net subscriber value, with the exclusive payments, do you expect the incremental megawatts from those dealers to be in line, lower, or higher relative to net subscriber value?

Thanks for the excellent question. We have maintained a somewhat exclusive focus on our channel partner business, utilizing an 80/20 strategy to target larger regional players with competitive avenues into their communities. As we mentioned, we grew those numbers by 20% this quarter, while ensuring we focus on generating high-quality customer experiences. As for structure, we are committed to maintaining consistency across our various routes to market, meaning that any unit-level economics changes in the future shouldn’t be materially different anytime soon.

Okay, thanks, Lynn. And then I know we've talked about the EV opportunity for a while now, but just to be very clear, it sounds like near-term, there's an opportunity to strike a deal with either a utility or an auto company, or a combination to perhaps drive volumes for both solar and EV chargers at the point of sale. Am I characterizing that correctly? And then can you share any color on that?

Yes, that's a good characterization. We're pursuing a two-pronged approach in our go-to-market strategy; one is direct-to-customer initiatives where we offer superior service with affordable clean electricity. We aim to strengthen our customer value proposition by simultaneously pursuing relationships with utilities to tap into renewable markets and diversify the benefits for all parties involved. We want to build these offerings while progressing towards securing grid services programs that we have on our roadmap.

Okay, thanks, Lynn. Congrats on the results and guidance.

Thanks Phil. Great, thank you.

Your next question comes from the line of Tristan Richardson with Truist Securities. Please proceed with your question.

Hi, good afternoon, guys. Appreciate all the comments today. Just one on my end on storage adoption. Certainly, there's a big and obvious value proposition for the customers. I guess we've heard one anecdotal incident where an installer is instituting a mandatory bundling of solar plus storage as a one product. That seems a bit one-off in nature, but do you see the installer market moving that direction at all?

Great question. In the long run, I do believe that over time, all solar will be paired with storage because battery prices will continue to fall, proving that aggregating these batteries is the most efficient way to provide renewable energy sources. I do think that is where the market is heading. However, the reality today is that not every customer necessarily requires a battery. In places where the grid is resilient and transitioning might not be so urgent, the necessity for a battery could fluctuate. We've differentiated ourselves by managing these unique needs through the processes we've built.

That makes a lot of sense. Thank you very much.

Thank you.

Your next question comes from the line of Colin Rusch with Oppenheimer. Please proceed with your question.

Thanks so much, guys. Could you speak to what the key gating factors on growth right now are? It seems like there's an awful lot of opportunity and you're building out capacity, so I'm wondering what's slowing you down at this point?

While we believe we're moving fairly quickly, we remind everyone that this is a physical business. We can grow through our own established sales force while simultaneously increasing our partner business’s contribution. Several years ago, we indicated that our industry can sustain a compounded growth rate of 10% for a decade without reaching reasonable penetration rates. Many of the current market trends will support even greater growth; electrification discussions and an increased energy share will drive sales, but achieving sustainable growth must occur within the capacity constraints of the physical realities of our operations.

Yes, understood. And thanks for the color on the utility scale partners. Can you also speak to internal targets around ROE and how that's evolving as you consider opportunities to partner with utilities pursuing dynamic solutions for distributed assets?

So our returns on those types of programs are what you're asking?

No, no. Just whether it changes the way you think about your targeted ROE as you explore new incremental programs over the next few years.

Well, as Ed mentioned, we currently have a very high ROE as we’re recovering cash from these ROIs. We aim to leverage our assets efficiently as we grow. Expanding into partnerships and grid services will reinforce our financial strength.

All right. I'll take it offline, guys. Thanks so much.

Okay.

Your next question comes from the line of Sophie Karp with KeyBanc. Please proceed with your question.

Hi, good afternoon. Congrats on the quarter and thank you for squeezing me in here. Just a question on cash flows, if I may. You guys highlighted the recurring revenue metric. Would it make sense to bridge that to the current cash flows moving forward? If you could elaborate on how you think about the capital structure with the rapid scale growth and Vivint’s recent addition?

Hey, Sophie, it's Ed. That's a great question. One of the reasons Tom has been emphasizing recurring revenue is that it provides a cleaner growth metric that doesn’t have significant variance each quarter. Many of our credit facilities are designed to be refinanced or have a duration that aligns with the customer contract lifespan. Therefore, cash flow projections will vary depending on the timing and nature of our market transactions, but we anticipate significant cash flows from existing assets, alongside distributions and proceeds from refinancing. We will likely communicate multi-year cash flow metrics rather than a clean quarterly expectation.

Yes, that's super helpful color. Thank you! One last thing, if you might. Do you anticipate this virtual power plant business will grow large enough to warrant a separate line item on the P&L, or a potential segment in the future?

Great question. I would say not anytime soon. We currently estimate that our contracts related to grid services projects total approximately $75 million. As we scale these initiatives, it will take time for the segments to mature into meaningful revenue lines. The potential beyond revenue is that enhancing the differentiation of our overall business model can lead to a winner-takes-most scenario in markets that prefer technical capabilities and established partnerships.

Perfect. Thank you so much. Appreciate the comments.

Thanks, Sophie.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And this does conclude today's conference. You may disconnect your lines at this time. Thank you all for your participation.

Thank you. A very robust discussion. Appreciate it.