Sunrun Inc. (RUN) Q2 2021 Earnings Call Transcript

Greetings and welcome to the Sunrun Second 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. Please note this conference is being recorded. I will now turn the call over to your host, Patrick Jobin. Please go ahead, sir.

Thank you, Stacy. Before we begin, please note that certain remarks we will make on this 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 current CEO; Mary Powell, Sunrun’s incoming CEO and current Board Member; Ed Fenster, Sunrun’s Co-Founder and Executive Chairman; and Tom vonReichbauer, Sunrun’s CFO. Following their prepared remarks, we will conduct a question-and-answer session. We ask that you limit yourself to just one question, so we can take as many questions from participants as the scheduled time allows. And let me turn the call over to Lynn.

Thanks Patrick and good afternoon everyone. Before we turn to our results and outlook, I'd like to take a moment to discuss the leadership news we announced today. After nearly a decade as CEO of Sunrun, I have decided to make the transition to Executive Co-Chair of the Board. Following a thorough process, I'm excited that Mary Powell, a visionary leader in the energy sector and distinguished member of our Board, will be appointed CEO on August 31st. Adding Mary to the team brings more firepower to achieve our mission and climate goals and given the company's strong foundation and momentum, I believe now is the optimal and natural time to make this transition. I'm thrilled to hand the role over to Mary and confident that she is the right leader. Mary has a proven track record of driving operational excellence and innovation for customers and shareholders. Her experience running the utility Green Mountain Power for over 10 years makes her an ideal leader for Sunrun's next chapter of growth, as we help this country build a reliable and clean grid with electrified and network households. In addition, Mary has a deep understanding of Sunrun's people, business and strategy, having served as a member of our Board for the last three years. I've gotten to know Mary well and was a driving force to recruit her to Sunrun. I can personally attest to her passion for people, the planet, and for the company's success. And with that, I'll hand it over to Mary to introduce herself.

Thank you, Lynn. It is such a pleasure to have the opportunity to speak with all of you today and share why I am so excited to lead this company. I've been in the energy industry for over two decades, and I know the landscape well. Sunrun has always stood out as an innovator and the future of the electric grid. It's clear the team cares deeply about transforming the lives of customers by providing a more resilient and affordable energy experience. My appreciation for Sunrun has grown tremendously, seeing firsthand Sunrun's leadership to advance the clean energy revolution while delivering on our value creation objectives. With the increasing and devastating effects of extreme weather from climate change and an electric grid system well over 100 years old, I believe Sunrun's mission of creating a planet run by the sun is more critical today than ever before. I have enjoyed overseeing and contributing to Sunrun's strategy as a director over the last few years, and I'm eager to build out on this great work. Sunrun has an incredibly strong foundation in place and I have full confidence in our ability to capitalize on the significant opportunities ahead. As I step into the CEO role in the coming weeks, I look forward to partnering very much with Lynn, Ed, and the entire talented Sunrun team to continue to execute the company's strategic initiatives and drive long-term sustainable value for all of our stakeholders. With that, Lynn, back to you.

Thanks, Mary. As Executive Co-Chair, I will closely collaborate with Ed, Mary, and the senior management team. Together, we will leverage our strengths and talents to make a significant impact. I will continue to support Sunrun's strategic initiatives with the autonomy to explore and create scalable solutions to address the climate crisis. I am more energized than ever for this next chapter. Now, regarding our quarterly results, our positive momentum has persisted into the second quarter. Customer orders are accelerating, and we achieved record installation volumes. Orders rose by over 25% quarter-over-quarter, and installations surged by over 10% from the first quarter and more than 50% from last year. We are rapidly hiring to meet the growing demand while integrating with Vivint Solar and managing a particularly dynamic supply chain environment. Despite these challenges, we are delivering strong unit margins, increasing our cash reserves, and expanding our recurring cash flow streams. We are raising our full-year growth guidance to 30% year-over-year. More importantly, during this quarter, the urgent need for our services has become even clearer. Extreme weather attributable to climate change has led to a record-setting wildfire season, increased power outages, a rising cost of utility power, and heightened pollution levels. The imperative to tackle the climate crisis is escalating, and Sunrun is well-positioned to facilitate the transition away from carbon-emitting fuels to power homes and vehicles while reducing reliance on expensive and fragile centralized infrastructure. We concluded Q2 with nearly 600,000 customers, signifying 19% year-over-year growth. Our installation volumes reached new highs in our new homes business, our channel partner business, and our direct business. We also achieved record levels of battery installations, more than doubling year-over-year in the second quarter. We continue to advance our lead in batteries and virtual power plants to deliver clean and resilient energy to more communities. Over 23,000 families are benefiting from our solar and battery systems during blackouts. Daily, these batteries optimize when power is purchased or supplied to the grid, aiding in managing energy constraints during peak times. Battery attachment rates have once again increased from last quarter and are at record levels across the business. We network these batteries to form virtual power plants, providing incremental recurring revenue and enhancing customer value. This sets Sunrun apart from companies lacking the scale, network density, and technical capabilities to serve this market. We expect over 100% growth in battery installations this year, despite navigating supply constraints. As more manufacturers expand their battery offerings, we anticipate a further reduction in costs, enabling us to satisfy pent-up demand and accelerate adoption even more. Sunrun is actively investigating methods to assist consumers and the grid during the transition to electric vehicles. It is essential for the nation to switch to EVs to further reduce carbon emissions, and we believe Sunrun will play a crucial role in this transition. Homes with EVs consume about twice the electricity, necessitating home solar and batteries to cope with this increased demand on the electric system, and Sunrun, with our expertise in managing and installing at-home energy infrastructure and our national presence, is a leading provider of these services. Electric vehicles create beneficial flywheel effects; homes require larger solar systems to accommodate the heightened electricity consumption. These larger systems yield high incremental margins since the cost to expand the system size is relatively low. Additionally, EVs can be integrated into a holistic home energy management system to maximize economic benefits and resilience for families. These cumulative benefits will expedite the shift to a distributed grid with home solar, batteries, and EVs more rapidly than most anticipate. In May, we announced our partnership with Ford to be the preferred installer for Ford's Charge Station Pro and intelligent backup power system, starting with the all-electric F-150 Lightning. Under this collaboration, we co-developed Ford's home integration system, including the bidirectional inverter, allowing the F-150 Lightning to function as a dependable backup energy source during outages. Through this partnership, customers will have the option to install a solar and battery system at their homes, enabling them to power their residences with clean, affordable energy and charge the truck using solar power. Ford annually sells one million F-150s, and they received over 100,000 reservations within the first three weeks of the announcement. We look forward to sharing more in the upcoming quarters. This year is poised to be the best in the company's history, and I am confident that Sunrun is well positioned for the future, particularly with Mary leading the way. Our comprehensive omnichannel go-to-market strategy has allowed us to reach a scale that is double that of our nearest competitors, further distinguishing and enhancing the value we provide to our partners. We have established a business that presents consumers with a compelling value proposition, addresses climate change, and generates strong financial returns. Before I hand the call over to Ed and Tom, I want to thank our employees and partners for their significant contributions to our success and for being such an integral part of my life. Over to you, Ed.

Thanks Lynn. First, I want to share my excitement that Mary is joining us full time. Her passion for our customers, her intuition for people matters, and her focus on operational efficiency has made her a driving force for years on our Board of Directors. I can't wait for Sunrun to get all her time going forward. Lynn and I have been a team for 14 years. I'm pleased she is going to be joining me as Co-Executive Chair, where her contributions to Sunrun will continue. I know I was invigorated by the opportunities provided by my transition from CEO to Executive Chairman, completed about seven years ago now And I'm sure Lynn will feel similarly. Now, moving into the details. Turning to slide eight. We have concluded our capital structure reveal. We have decided principally to pursue a strategy that will drive near-term cash generation using non-recourse debt. Under this strategy, we expect to achieve cash proceeds equal to 95% to 100% of contracted subscriber value, measured at a 5% discount rate or about $30,000 to $31,500 per subscriber based on Q2 subscriber values. Because this strategy employs debt that we can ultimately call and refinance, we'll be maintaining full ability to upsell additional products and retaining refinancing upside for our common shareholders. Upfront cash proceeds of 95% to 100% of contracted subscriber value is well in excess of our fully burdened cost. And so we do not need to execute equity or equity-linked financings to fund our strong ongoing growth. While our capital costs have been steadily falling since inception, in the last year we've seen an acceleration in these improvements, which have been most pronounced in our non-recourse subordinated debt costs. Today, this market is pricing 175 to 350 basis points below where we've placed comparable loans over the last several years. We largely credit our continued asset performance, scale, and consistently strong collections, including through COVID and the 2009 financial crisis, with discontinued capital cost decline. While our large scale affords us access to the lowest cost capital in the industry, the same large ticket sizes that afford us this advantage also make our free cash flow generation a little lumpy. We have developed a backlog of transactions to close, and we expect to be busy clearing this transaction for the balance of the year and into 2022. Over the near-term, cash flow generation may also be non-linear due to investments in working capital. However, under this financing strategy, over several quarters and especially next year, the cash flow generation of the business should be substantial. We may also selectively employ structures that grow our recurring cash flows from our asset base while pursuing this strategy of generating upfront cash. Normalized for increases in working capital, we expect to see steady quarterly gains in net earning assets. As we head into next year, we'll update the market on our cash flow target and capital allocation strategy to maximize shareholder returns. We continue to maintain a robust project finance runway. As of August 5th, closed transactions and executed term sheets provide us expected tax equity and project debt capacity to fund over 430 megawatts for subscribers beyond what was deployed through the second quarter. And with that, I'll turn the call over to Tom.

Thanks Ed. The strong momentum we saw in the first quarter has continued further into 2021. Our team again delivered an exceptional quarter with strong year-over-year and sequential volume growth. We're proud of what the team accomplished, especially as we meet the significant ongoing demands of integrating Vivint Solar into our operations and as we navigate a dynamic supply chain environment. Turning first to volumes. In the second quarter, customer additions were approximately 26,100, including approximately 21,900 subscriber additions. Solar energy capacity installed was 186 megawatts in the second quarter of 2021, an 11% increase from the first quarter of this year and a 53% increase from the second quarter of last year pro forma to include Vivint Solar. Our network solar energy capacity was 4.2 gigawatts at the end of Q2, an increase of 19% compared to the prior year. We ended Q2 with approximately 600,000 customers and nearly 521,000 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 Q2, our annual recurring revenue, or ARR stood at $747 million with an average contract life remaining of 17 years, representing well over $10 billion in revenue visibility just from existing customers. In Q2, subscriber value was approximately $34,500 and creation cost was approximately $28,900, delivering a net subscriber value of approximately $5,600. Pro forma for growth timing effects on cost recognition, it would be approximately $8,000. Total value generated, which is the net subscriber value multiplied by the number of subscriber additions in the period, was $122 million in the second quarter. On a pro forma basis for the adjustment related to accelerating growth, total value generated would be approximately $176 million. As we noted in our outlook during last quarter's call, net subscriber margins were sequentially lower in Q2, owing to our accelerating growth trends and synergy realization timing. While our subscriber values were down slightly quarter-over-quarter due to changes in the ITC mix, and our G&A and Platform Services saw solid sequential improvements, the accelerating growth in our business creates a near-term drag on installation and sales and marketing costs. Creation costs are calculated as total in-period costs, including OpEx and CapEx, divided by recognized volumes. As our growth rates accelerate, we incur more costs upfront such as sales and marketing costs, along with construction systems prior to recognizing the volume in future periods. If we were to normalize sales cost by the growth in customer orders and exclude costs associated with systems that are not complete, reported net subscriber margins would be approximately $2,400 higher or approximately $8,000 in Q2. Turning now to gross and net earning assets on our balance sheet. Gross earning assets were $8.6 billion at the end of the second 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 and partnership flip structures, project equity financing partners and operating and maintenance expenses discounted at a 5% unlevered WACC. Net earning assets were $4.5 billion at the end of the second quarter, an increase of over $233 million from the first quarter. Net earning assets is gross earning assets plus cash less all debt. We ended the first quarter with $858 million in total cash, an increase of $44 million from the prior quarter. Turning now to our outlook. The continued acceleration in sales activities, the integration of Vivint Solar, and investments in customer experience and differentiation set us up for a strong second half. We are increasing our growth outlook for 2021. We forecast solar energy capacity installed growth to be 30% for the full year, an increase from the prior guidance range of 25% to 30%. Total value generated is now expected to be in a range of $700 million to $750 million for the full year, which has been revised to include the effects of accelerating growth and to a lesser extent, the dynamic supply chain environment. This range includes the drag highlighted earlier and does not reflect the pro forma adjustment of $54 million for Q2 2021. We forecast net subscriber values will be significantly higher in the second half of the year than Q2 as the gap between sales activities and installation activities normalizes and as we realize more synergies from the Vivint Solar acquisition. 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 still very focused on integration in the near-term, we expect to see strong sequential quarterly growth in solar energy capacity installed in Q3 with growth of approximately 15% sequentially from Q2. The mandate for a modern energy infrastructure with consumers at the center continues to grow, and we believe our products and capabilities have positioned us well to respond to the opportunity in the quarters and years ahead.

Thank you. We will now be conducting a question-and-answer session. Your first question comes from Stephen Byrd with Morgan Stanley.

Hi, good afternoon. Congratulations on the management changes.

Thank you.

You have a deep bench. It's somewhat nice to see these changes. Lynn, looking forward to working with you in your new role. But I wanted to talk about the timing of the sort of growth adjustment that you're making. As you continue to grow and get larger, how should we think about what that number may look like conceptually? I've been trying to kind of think about how that will look. Given that you have an incredibly high growth rate, how might that sort of trend over time?

Yes. So, the effect of growth on margins in this quarter, we viewed as largely one-time here. We expect some level of this as we continue to grow, it will take several quarters for this to reverse out. But in any period where our sales growth and installation growth diverge as much as we saw this quarter, there's going to be more of a misalignment between costs and volumes in period. Obviously, we're still at a $700 million to $750 million range in total value generated for the full year, which at the 30% growth rate now shows strong unit margins in the second half and exiting the year, in particular, as synergies are realized fully.

Understood. You provided some insightful comments on your financing outlook. It appears that the debt markets are quite favorable towards your asset class and its value creation potential. Can you elaborate on what this opportunity might entail regarding some of your more expensive legacy debt? Specifically, what is the difference in cost between your older debt and current market rates? Additionally, could you discuss how this could influence your financing activities, particularly in terms of refinancing strategies, and your plans to take advantage of this over time?

Sure. It's a great question. So definitely, you're correct. With the asset performance and collection data that we've continued to print, our capital costs continue to decline. And so the credit facilities that we would close today against newly placed in-service assets are cheaper and higher in advance than those that we historically placed. It is also the case that a good chunk of our debt when we place it is subject to lender call protection for three to five years, some transactions as much as five to seven or eight years. And so we won't be able to recap the entire balance sheet in one fell swoop over the next 12 months. But certainly, over the coming years, as we begin to refinance our existing transactions, there is a significant unlock available there as the capital becomes less expensive.

That's very clear. And then last for me, just on storage. Obviously, it sounds like customer demand continues to be strong. Could you just talk longer term about actual availability of equipment, ability to source the level of storage that you and your customers would like to have over time?

Yes, this is a significant advantage for our business because I believe this opportunity will become more apparent over the next year to 18 months. Currently, we are experiencing impressive growth, evidenced by the doubling of battery installations, but this is happening without a full sales push. There is still some cautiousness in our approach. We anticipate that several suppliers will enter the market early next year with much larger volumes. This will provide two key benefits. First, we will achieve a consistent and reliable supply that the market needs, and second, it should exert pricing pressure on batteries. Right now, while we are achieving strong margins, the cost of the batteries has not decreased alongside input costs. Therefore, we will likely see that the value proposition becomes even stronger. As we've mentioned before, the majority of customers in many markets are opting to add a battery. In the Bay Area, almost everyone is making that choice. Additionally, changes in California regarding rates will further encourage battery adoption. In Texas, following the storms, we shifted from a minority to a majority of customers adding batteries. I believe it could happen rapidly that most solar installations will be paired with batteries, and I trust that the supply chain will match this demand. It may take a few more quarters, but I am confident it will get there.

That’s really helpful. Thank you very much.

Thank you.

Next question, Brian Lee with Goldman Sachs.

Hey everyone, thanks for the questions. Congratulations, Lynn, on your transition here. It's been impressive to see how you've developed the company since the pre-IPO days. Kudos to you and your team. My first question is for clarification. Tom, you mentioned that based on the guidance, the total value generated for 2021 will be between $7,500 and $8,000 per customer for the year. This suggests a further decline in the second half. You indicated it should rise significantly from the second quarter. Are you referring to an increase from the pro forma levels, or are you saying it will exceed $8,000 per subscriber for the remainder of the second half? I want to ensure I have that metric correct.

Yes. So, the range you got to there is directionally right, as you assume something on system size and lease mix that gets you in sort of that, yes, $7,500 to $8,000 range. We're obviously around $8,200 in Q1, the $5,600 level here in Q2. This is all on a non-pro forma basis. So, not at the $8,000 level in Q2. So, I think the math you might be doing there is thinking, okay, we had $8,200 in Q1 and $8,000 in Q2. Therefore, it would be lower in the second half. If you use the non-pro forma number for Q2, it will show it trending higher sequentially throughout the year.

Okay, fair enough. So, on a reported basis, that's helpful. And then I guess just a follow-up to that on some of the cost factors here that you're talking about being pulled forward. When I look at the creation cost in the quarter, it seemed like installation, which you did talk to a bit here, the installation costs were the major driver of the cost uptick from Q1. Can you maybe break that down a bit more? Are you seeing higher supply chain costs? Is it installation labor being more expensive? I know you've talked about a pull forward, so it's a timing issue, but are you seeing kind of impacts across different parts of the installation costs? Maybe you could break that down a bit more for us? Thanks guys.

Yes. So, the main factor here that really relates to growth as you see it in installation cost is all of the costs that we begin to incur as we start building systems that aren't yet recognized and completed. And the easiest place for investors to see that is in the footnotes, looking at construction in progress. You can see that, that balance grew $72 million quarter-over-quarter. There's some level of that, that we would expect through growth. There's obviously a much larger growth in that amount relative to our installed volume growth than one would expect. And that's sort of all of these systems that we began work on but haven't yet reached the full milestone for completion. So, we take a pretty strong definition on what completes the system, solar, inverters, batteries, electrical work, everything being done. And so that's the main place where you can see that growing. So, not necessarily underlying cost changes that drove that, but really the one-time effects of accelerating growth in the period.

Okay, fair enough. Thanks a lot guys. Appreciate it.

Thanks Brian.

Next question, James West with Evercore ISI. Please go ahead.

Hey good afternoon everybody. My congratulations to Lynn and Mary as well.

Thank you.

In the release, you mentioned something that caught our attention a couple of weeks ago, which is the zero emission Home Act. This involves electrifying various parts of our home and there may be rebate opportunities. I understand that this expands your total addressable market, and we are familiar with the impact of electric vehicles on that. However, do you have an estimate of how much of an increase this initiative could bring for your team?

Yes, absolutely. I'm really excited about these additional opportunities and eager to help the company progress more aggressively. We need to accelerate our efforts on climate, and I believe the government is starting to recognize this, which is reflected in the more proactive programs being introduced. For those unfamiliar with what James mentioned, it refers to rebates for customers to transition to electric appliances, such as upgrading their electric panels and HVAC systems. If you consider the increased electricity requirements to fully convert key home appliances like HVAC, cooking devices, and washers and dryers, we would see a notable increase in system size benefits. While it's not as substantial as the rise associated with electric vehicles, research suggests that energy usage could increase by approximately 30 percent with these conversions. However, the critical point here is that everyone wants our products because they save money and offer better service. The question is often about timing—there's a sense of urgency now to act. This urgency is driving our business forward, as customers recognize the need for battery resilience and the availability of rebates for these devices alongside upcoming EV mandates. This presents a significant opportunity for our business. Notably, about 40 percent of EV owners are currently installing solar, indicating that technological advancements and cost reductions are changing the landscape. Ultimately, this urgency is what I believe will add substantial value.

That's great information, Lynn. I have a follow-up question about the Solar app. I know your team was an early supporter of the app, and it has been deployed in certain areas. Are we finished with the development and testing phases? Is this now a live app that will help reduce some of these soft costs?

Yes, it is a live app, and we're in the process of adding storage to it. This gives a more complete picture. We are encouraged by the Department of Energy's focus on this initiative. There is $20 million in funding in California to help motivate authorities having jurisdiction to transition to the solar app. This will require a grassroots approach from each authority while also having some top-down support. We believe this will have a significant impact, but there will be a learning curve. By the end of this year, only a small percentage of authorities will be using the app. However, we think it can gain momentum as confidence builds and neighboring cities adopt it, especially with financial incentives. It presents a simple way to unlock value for our business. We estimate it can save thousands of dollars per project. I also look forward to advancing some of these programs in my new role.

All right. Thanks Lynn.

Thanks.

Next question, Joseph Osha with JMP Securities.

Hi there. Congratulations, Lynn. It's Guggenheim now, by the way. And Lynn, I know you're really going to miss doing non-deal road shows with sell-side analysts. We'll miss you.

I always enjoy being with you for sure.

That was a contentious negotiating point.

Well, I'm sure Mary, you don't know what you're in for. But anyway, congratulations.

Thank you, duly noted.

Two questions. Ed, just on page eight, looking at this upfront cash realization, we've seen this dynamic where pre- and post-flip assets tend to price pretty differently. Do you think that is going to continue to be the case so we're going to get kind of deal one and then post-flip refi? Or does that maybe evolve over time?

Great question, Joe. For now, we're going to continue to see that effect play out. The key difference in the marketplace today between post-flip assets and pre-flip assets is actually less about being post-flip and more about the fact that they've been aged out for five or six years. The ratings agencies still assume extreme scenarios where they predict mass defaults every five years, renegotiations of contracts, and other issues that haven't occurred in 14 years of operating data. Once you've passed that first five-year period, the senior debt advance rate increases significantly because the stress scenarios predicted by the ratings agency didn't happen. Therefore, I believe we will continue to observe these post-flip transactions where subordinated debt is effectively replaced with cheaper senior debt, reducing capital costs and increasing the proceeds from financing.

Yes, that makes sense. Thank you. As for the second question, there's been quite a bit of discussion regarding tax equity investors, internal rates of return, and whether they are excessively high in the current environment. I'm curious, as you consider your tax equity partners and reflect on your discussions with them, what are your thoughts on the cost of tax equity and its potential future changes?

I think all the capital we face is inappropriately expensive.

Really?

No, but to seriously answer your question. Tax equity has this unusual dynamic, where the tax equity investor really needs to realize an inflationary pretax rate of return to fit into the Safe Harbors for the IRS Safe Harbors for the structure. And so their pretax returns are commonly in the 1% to 2% range because of the depreciation benefit that can cause the after-tax returns to be like 8% to 10%, which does feel extremely high. But it's really a regulatory construct that drives that. And the pretax capital cost still is similarly priced or maybe a little cheaper than senior debt. So, as we and our common shareholders experience it, it's actually still quite cheap capital.

Your next question, Mark Strouse with JPMorgan.

Yes, thanks for taking our questions and I'll add my congrats to Lynn and Mary as well. Just in light of President Biden's targets that he laid out yesterday regarding electric vehicles this decade, you've touched on the partnership with Ford. Can you just remind us, I mean is that exclusive to the lightning F-150? Are there potential to expand within Ford? And can you just talk about any discussions that you might be having with other auto OEMs to expand this in the future?

Thanks. We're really excited about the mandate and our partnership with Ford. Currently, the partnership is focused on the F-150 Lightning, but we are well-equipped to handle the complexities of electric service upgrades when customers adopt the vehicle, making it easier for them. We are particularly thrilled about co-developing the bidirectional inverter, which allows the truck to serve as a backup power source for homes. This is an area where we are eager to contribute and provide value. We plan to actively pursue this segment, and Ford is our first partner, which is exciting. Additionally, this partnership opens up opportunities to enhance the e-commerce experience, as it will facilitate a seamless buying process for customers who want to reserve the car, upgrade their charger, or include the bidirectional inverter and solar options. We believe that as we develop these capabilities, we'll be ideally positioned to partner with all auto manufacturers.

Okay, great. I'll take the rest offline. Thank you, Lynn.

Next question, Moses Sutton with Barclays.

Congrats on the leadership change and thanks for taking my questions. First on the cash generation, the capitalization strategy, it's quite clear, sort of back to basics. Are ABS issuances still going to play the leading crucial role? Or are you looking at other debt strategies to new forms of subordinate debt financing and so on?

Great question. I expect we will be a significant issuer of ABS debt. We have always remained involved in various markets. Pricing can fluctuate over time, and there are new markets emerging. Even those now interested in unitranche financing will approach the senior and subordinated debt at a blended cost of capital. So, what we are observing is a substantial deepening of the market from multiple perspectives. However, I do believe we will play a key role as an ABS issuer as part of our overall strategy.

Got it. Got it. And are we going to start seeing the ABS issuances measured against a 5% calculated ADS AB? It's interesting that you're saying 95% to 100% off 5% discounted, not 6%. That seems to be an incremental positive. How do you get there?

Yes, I mean just as the capital cost gets lower, what used to be interest expense becomes principal amortization and so the advance rate goes up, and people are increasingly more confident as we always have been about the performance of the assets over a long period of time and the collection performance as well. We obviously don't set the ratings agency cases. You could still benchmark it against the 6% capital cost, and you might start seeing things like advanced rates over 100. So, it's kind of a theoretical construct. But definitely, the capital cost on a weighted average basis for our assets, particularly on the contracted side, are now well below 5%. So, we continue to think that's the correct number.

That's very helpful. Regarding the sales and installation growth, is there an increase in customer installation lead times? Does this push visibility further out, or is that not the right way to look at it? Is California playing a significant role in this growth, or is it more widespread across different regions?

Great question. Regarding California, it’s quite broad-based so I wouldn’t attribute it to any specific geography. Was your first question about cycle times? Yes. It does give us more visibility certainly into the third and fourth quarters, and I believe we're making good progress. You can see that our quarter-over-quarter guidance for installations is at 15%, compared to 11% this quarter, indicating acceleration. We think they are still in a healthy position and we will finish the year strong; this gives us more confidence about the latter half of the year.

Great. Great. And last one, have you started using any other battery vendor other than Tesla and LG or still not yet?

I think no, those are our primary vendors. We're constantly evaluating new ones, and I know you guys all know how to find that data, ultimately.

Great. We'll take this offline. Thank you.

Next question, Julien Smith, Bank of America. Please go ahead.

Hey good afternoon everyone. Congratulations, Mary, excited to work with you and see where you take the business. Lynn likewise, excited. And finally, Ed even too, congrats on way we grow here. So, all around, a lot of developments on your side here.

Congratulations on your engagement Julien.

Thank you. Maybe just to kick it off here. I mean what's your expectation on when and what exactly you're going to provide in terms of the cash flow update? Obviously, your peer here provided a multiyear view on so-called corporate cash. What's your sense as far as what you guys would come up with in terms of sort of additional disclosure?

Great question, Julien. I think what we're hoping to roll out on this call was a view of the proceeds side. That's the $30,000 to $31,500 per unit, which as we term our contracts out in the financial markets, we expect we can realize. I think over the course of the coming quarters, as we start talking about next year, we'll be in a good position to roll out more information about cash flow generation, what we'll do with the cash. We don't want to steal Mary's thunder. So, stay tuned and hopefully, this is a good interim update, and we can get more prescriptive on it shortly.

Great. You may have answered part of my next question already. My point is that looking at the increase from 95% to 100% in the model indicates a significant increase in available cash, if we can leverage that at the project level. Can you provide any sort of estimate on how to interpret that? The models clearly show what that would yield, which is considerable. The key question is how we should think about the intended use of this cash. Setting aside repurchases, strategically, what differences do you plan to make? If that's a fair question.

Yes, that's a great question. To acknowledge your comment, you're correct. When you compare the amount of upfront proceeds to our fully burdened cost, we do see a significant cash flow result at our scale. We also have working capital investments, such as those in CIP that we made this quarter. In the near term, we may have some inventory as well, and often to achieve these advance rates, we need to package things, which might keep them on our balance sheet for nine months. By working through all of this and creating the plan for next year with our new and larger team, I believe we will be in a better position to provide that additional critical layer in the coming quarters.

Got it. So, if I'm hearing you right, it sounds like it may be somewhat lumpy. But clearly, nonetheless, the underlying trend is substantively greater cash flow than previously anticipated at the corporate level?

Well, I leave anticipation to you, but we do think it's significant. We're excited about it.

Got it. Excellent. Well, best of luck to you all.

Thanks Julien.

Thanks Julien.

Next question, Maheep Mandloi with Credit Suisse.

Hey good afternoon and congratulations, Lynn and Mary. Look forward to working with you guys.

Thank you.

Maybe just one question on the higher costs in Q2. I just maybe wanted to understand how much of that is related to in-house costs versus your investments in your channel partners? And maybe a follow-up to that, just how do we think about competition for channel partners over here, especially given all these labor shortages we're seeing out there in the market?

Yes. Regarding the Q2 margins, as Lynn mentioned earlier, we experienced record growth in several areas of our business. We had significant growth in both channel and direct sales. There are factors in the CIP growth that impact both segments. It's important to note that part of the increase in sales and marketing expenses reflects our direct business, as channel partner payments are accounted for in installation. However, we observed growth in both areas.

Yes. On the channel partner side, I think we believe we're continuing to take share there. And as we mentioned, record growth. I think people see that we're differentiated around our brand, the financial products we bring people, the sales and platform experience, the operational experience to help take care of the customers. And so that business is thriving and growing and we feel very well positioned there.

Got it. And maybe just a second question here from me. And the EV opportunity with Ford or potentially other OEMs out there in a way is also kind of adding another channel partner for you guys. But apart from that, like how should we think about the immediate revenue opportunity like either selling the EV chargers or bidirectional inverters or anything else upfront to these Ford customers over the next few years?

Yes, I believe Ford is still developing their specific launch plans, and we will keep in touch about that in future quarters. However, we expect it will be quite beneficial to our margins, especially in relation to the solar projects since these involve larger systems and represent a bigger investment. We are enthusiastic about the potential impact this can have on our customer value.

All right. That’s it for me. Thank you.

Thanks.

Next question, Kashy Harrison with Piper Sandler.

Good afternoon. Thank you for taking my questions, and congratulations to both Lynn and Mary. My first question is about guidance. Tom, your 15% quarter-over-quarter growth rate into Q3 suggests 213 megawatts. The full-year guidance is 30%, which implies around 217 going into Q4. Is that a conservative estimate on your part, or is there another reason for the growth potentially flattening in Q4? Additionally, could you discuss the long-term implications of the hirings on the growth rate as we enter 2022, especially in relation to the historical 15% medium-term growth rate you've mentioned before? That's all from me.

Yes. So, first, we were excited to increase our outlook for the year up to 30% for the full year, reflecting the growth we've seen more recently. Q3, Q4 often have a level of seasonality in there. As we get deeper in the year, we're dealing with things like weather and sitting crews and having to navigate a few of those. So, right now, the view that we're confident in is the 30% increase, which, yes, your numbers you backed into there are spot on. Often, we'll see some shift between those quarters. I also think the dynamic supply chain environment and just keeping our eye on that, it's been an area we've had to manage very closely over the last couple of quarters. Want to make sure that we continue to have good visibility there. And so happy with the full year outlook. I think as we head into next year, our goal is going to be to continue to gain share and grow it at above market rates and cement our leadership position. And so as Ed mentioned earlier, in subsequent calls, we'll get a little deeper on some of the operational elements of the outlook for that period of time. But we definitely expect to use our brand, our technology, our omnichannel presence to reach more customers and take share over the medium term.

Our next question comes from Tristan Richardson with Truist.

Good evening. I have a quick question regarding the new home business. You mentioned some interesting statistics about market share and growth. As this business is scaling up, can you explain if and how it impacts the mix, particularly concerning creation costs? I'm curious about potential efficiencies in master planning and how the average system size may differ. As this segment continues to grow faster than the overall business, what effect might it have on the mix?

Yes, it has grown really nicely, and we've gone from a pretty limited share there because we weren't focused on it to a pretty significant share very quickly, which I think again underscores our reputation. It's still a small enough business unit that it's not going to move the needle on any of the overall numbers. I think last I looked, the market size of that was something around 100 megawatts or something sort of annually. And so again, you look at the scale we're sort of operating in the overall business, even sort of even a healthy market share there isn't going to completely move the needle or make a big difference in sort of the unit level economics. So, the thing we're really excited about around that mandate is what it does is more of this creates comfort with solar, more normalization that you get a house, you put solar on it. That's where I think consumers will be very quickly. So, we feel like that's the bigger strategic benefit from that mandate versus what it does from a financial performance as part of the overall picture.

Appreciate it. Thank you guys very much.

Next question, Colin Rusch with Oppenheimer.

Thanks so much. Can you talk a little bit about the progress you've made in terms of upselling the existing customer base into energy storage or EV charging and how that's impacting your overall cycle-time with the sales process?

Yes, we really haven't even scratched the surface around that. So that's all forward opportunity for us. Given the supply shortage in batteries and the fact that it's much more economical for people to pair solar and storage at the same time with current technology and hardware, we have been focusing on that market. The next cycle of batteries that is coming out will be very appealing for retrofitting opportunities. This will be another advantage for us moving forward. However, at this moment, we have not seen significant contributions from upselling or additional sales to our existing customers, but I am confident that this will definitely happen.

Thanks so much. And then the follow-up is really maybe early on this, but are there discussions around being able to capture any value for avoided cost of infrastructure or additional capacity that utilities would have to build out or grid operators would have to build out to service some of these communities? I'm not sure that's something you guys can actually monetize other than through the services market or directly with customers.

That's a great question. There's a lot of value we can provide in this area. Depending on the market and the partner, there are various methods and counterparties we can work with. One of our goals in the virtual power panel business over the next few years is to show that we are a low-cost provider for these solutions. It is much cheaper to install storage than to extend power lines to remote areas. Creating a reliable grid is so costly that we cannot continue to rely on inefficient solutions. While it may take some time, I am optimistic that we will play a significant role in this space.

And I would just offer, this is one of the reasons why we're so confident Mary is the leader for the next phase of the company. I mean she pioneered the first virtual power plant in her utility, in 2015. And so she brings real credibility around, and she lowered her bills for her customer. So, she brings real credibility around. This is not a rooftop versus utility scale. This is, hey, we need way more clean power on the system and distribute it as the fastest and most efficient way to do it. So, let's take advantage of it.

Great. Thanks so much you guys.

Thanks.

Next question, Philip Shen with ROTH Capital Partners.

Hi everyone. Thanks for taking my questions. As it relates to your channel partners in Q1, you grew them by 20%. I think Q2, you're up 15% over Q1. What kind of pace do you expect in Q3? And how long do you think this pace of share gain and with the network partners can continue?

Yes, we are really pleased with the growth, but we also don’t forecast channel by channel. What we focus on is how to gain market share in different geographies and identify the best pathways to reach consumers. This can vary between direct and channel approaches. As I always say, not all channel partners are equal regarding quality and reputation, and we are very satisfied with our share gains. We believe we will continue to capture overall market share, and I think we are the most appealing partner for high-quality channel partners.

Great. Thanks Lynn. And then in terms of your financing strategy, Ed, you gave us some perspective there, and it seems like you're focused on non-recourse debt. One of your peers is out there with a green bond. So, was wondering if you might be able to comment on your views of recourse debt options and green bonds specifically, would you ever tap into them? If so, what kind of timing could we see?

Good question, Phil. Every bond we issue is considered a green bond due to the nature of our business. This has been recognized by the financial markets for many years. Our focus is on providing the lowest overall capital cost for our common shareholders. Based on the work we completed this year, we believe that the best approach to achieve this goal in the foreseeable future is through non-recourse financing. This doesn't mean we won't explore a variety of financing structures or consider other options over time. There could be advantages to being a rated credit in the long run. However, our general strategy is established, and once we define it as our core strategy, we tend to commit strongly to it.

Great. Okay. Thank you, both. I'll pass it on.

Next question is Sophie Karp with KeyBanc.

Hi, good afternoon. Thank you for squeezing me in. Congratulations to Mary and Lynn on the transition. Exciting stuff right there. So, a lot has been discussed, so I will keep it short. Maybe if you guys could give us some update on the grid service opportunities in terms of dollar amounts and what you're seeing there? I know you guys talked about something like $75 million in expected revenue from opportunities awarded or in late stage last time. And so, has this number changed? Are you using any acceleration of those opportunities?

Yes, we definitely see continued interest in the 12 programs we've announced, which cover about 10% of our geographies. However, we believe our pipeline could represent more like 50%. It's important to note that the counterparties involved in these discussions tend to move slowly. We've been engaged in conversations for the past two to three years, which is typical for these processes. This is why our assets are crucial; we are addressing the climate crisis promptly. We're not being overly aggressive with immediate programs due to the battery supply challenge, but we expect that situation to improve, making us stand out even more. Currently, we do not anticipate breaking out a revenue line associated with this in the near future. We believe it could contribute around $2,000 in extra margin for our customers, but at this immature stage, only a small percentage of our projects will benefit from that.

Got it. Thanks. Conceptually, as you continue with various initiatives like the chargers and the partnership with Ford, along with selling batteries and solar, does it make sense for you to move more toward the energy storage systems space and try to capture a larger share of the customer wallet concerning these services?

That's core to our strategy. I think we are the dominant market share leader in, yes, in residential ESS, and I see no reason why we wouldn't sustain that position and really accelerate the whole growth of it. So, absolutely core to us and something we believe will be a competitive advantage.

Any particular products that could be added to the suite that worth mentioning or is it too early to say it now?

Yes, we believe that energy is responsible for 90% of emissions, with 42% of those occurring in homes. There are significant appliances in households that contribute to these carbon emissions, including heating and ventilation systems, water heaters, and cooking devices. As a society, we need to replace these fossil-fuel burning appliances with electric ones powered by renewable energy. We see it as our responsibility in the industry to facilitate this transition for households, ensuring it is easy for people to switch to electric and connect these appliances to the grid as assets. This vision excites me and motivates my support for the company. Mary has been a pioneer in this vision, and I expect it to be a crucial aspect of the company's future.

Thank you. That’s all for me. I'll pass it on.

Great.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.