Sunrun Inc. (RUN) Q4 2021 Earnings Call Transcript

Greetings, and welcome to the Sunrun fourth quarter 2021 earnings call. I would now like to introduce your host, Patrick Jobin, Senior Vice President of Finance and Investor Relations at Sunrun. Please proceed.

Thank you, Vikram. 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 Mary Powell, Sunrun's CEO; Tom VonReichbauer, Sunrun's CFO; and Ed Fenster, Sunrun's Co-Founder and Co-Executive Chair. Following the prepared remarks, we will conduct a question-and-answer session. And now let me turn the call to Mary.

Thank you, Patrick. It's wonderful to connect with all of you. I'm looking forward to talking about what Sunrun has been up to in the last quarter. As I close in on 6 months as CEO, I am so pleased to be able to share our financial and operating results with you. I am encouraged and excited about the progress we're making as the nation's leader in a critically important industry. With climate-related events becoming more urgent daily, never have we felt more passionate and optimistic about our purpose. The headline is that the Sunrun team delivered record volumes in 2021, having added over 110,000 customers in the year, representing 31% growth in new installations while bringing two large companies together and navigating a dynamic operating environment during COVID. We are entering 2022 with a growing deep backlog of customers who are excited to become more energy-independent and secure in their own homes. At the same time, as we drove a surge in our business, the surge in Omicron created some late Q4 and early Q1 challenges that already seem to be behind us. Along those lines, there are four key highlights I want to discuss with you before I turn the call over to Tom and Ed for their quarterly updates. First, clearly, we continue to see tremendous growth in our business. Again, we closed out 2021, adding over 110,000 customers, representing 31% growth in solar energy capacity installed, exceeding our guidance and marking the highest growth rate for Sunrun in 5 years. To put our customer additions in context, this is twice our nearest competitor. We did this all at an operating scale nearly three times larger than we were just 5 years ago. We are seeing customer demand accelerating significantly, and our talented team is capturing this interest, generating orders far in excess of installations, resulting in more than a 57% growth in our direct business backlog. I believe we fundamentally have achieved a tipping point whereby our product and services are something customers increasingly see as essential for affordable, reliable, clean energy that puts them in control, something they simply cannot get from utility power. Ed will touch on this later, but we also believe the inflationary pressure in the economy, combined with rapidly rising utility rates and climatic events, will continue to turbocharge this customer demand. Second, during 2021, we closed out significant portions of a massive transformational integration with Vivint Solar. Today, we are operating as one team. While some might see this as routine, something easily put together in a spreadsheet, this was a tremendous accomplishment. Late in the year, we also brought together large operating groups and combined the leadership teams to build the strongest, best go-forward team in the business. You may have seen some of our recent appointments, including Paul Dickson, who is our new Chief Revenue Officer; along with Chance Allred, who is our Chief Sales Officer, both experienced leaders from the Vivint Solar team. Together, along with high-powered members of the existing Sunrun team, we are leveraging the best of both organizations and accelerating the impact we will have on the market, the planet, and for our customers. I'm also proud to report today that we exceeded our acquisition-related synergy target of $120 million exiting 2021. Third, we continue to advance our strategic efforts to accelerate home electrification and transportation. We now have over 32,000 residential battery systems deployed, far more than any other energy company, and are increasingly networking these together to form valuable energy resources for the grid, something I am convinced will pay significant dividends in the years to come as grid operators continue to see they fundamentally need our growing fleet of resources. We are also making tremendous progress with our partnership with Ford, where we are the preferred installer of a bidirectional inverter nationwide that we co-developed with Ford. We expect meaningful flywheel effects from this partnership and the widespread adoption of electric vehicles. Consumers want to charge their cars with clean, affordable energy and often consider a solar and battery system when they make the switch to an EV. It also provides us the opportunity to install larger solar systems, which can carry high incremental margins and bring even more value to our customers. Our partnership with Ford is already driving increased brand awareness for Sunrun in all 50 states. Sunrun is not just a company that can provide solar systems, but a company that can deliver an electrified future. You'll hear a lot from me over the next few quarters on virtual power plants, our electrification efforts, and steps forward on providing innovative, advanced product and pricing solutions for customers. Importantly, these initiatives not only deliver increased value to customers; they prove how important distributed resources will be to the grid of the future. I believe Sunrun is positioned to lead in this new category given our growing brand strength, technical capabilities, operating scale, broad multichannel customer reach, and increasing solar and battery system network density. Fourth, as noted in my opening comment, while we did exceed our volume guidance, we experienced significant effects from the national Omicron surge on our installation organization, limiting our ability to quickly fulfill customer orders, hindering labor productivity, and requiring us to pursue higher cost fulfillment options in certain circumstances. The health and safety of our crews are paramount, and our operating procedures reflect that. Some of these capacity, productivity, and cost pressures persisted into early 2022. Tom will discuss these impacts in more detail. But the brutal fact in terms of this quarter is that our strong sales growth, combined with pressures from the Omicron surge late in the quarter, led to inbound margins that were below the target we shared with you in early November. The very good news is that the backlog growth provides us great visibility into 2022. And as we see the Omicron wave abate, this should lessen the effects on our installation team. Last but certainly not least, before I turn the call over to Tom and Ed, I want to thank our team for their hard work. Disrupting a multitrillion-dollar industry while also integrating two massive operating companies during a pandemic is a big challenge, and Sunrunners deserve a lot of credit for their dedication to our mission and these strong results in 2021. I also want to express my gratitude for our customers who are transforming our country's energy system and helping to solve climate change one home at a time at a very rapid pace.

Thanks, Mary. We are entering 2022 in a strong position with strong order momentum, record backlog, and a healthy balance sheet. We're growing faster at scale, exceeding our prior volume guidance, and continue to be excited by the consumer demand trends in our business. Turning first to volumes. In the fourth quarter, customer additions were approximately 30,000, including approximately 22,000 subscriber additions. For the full year, customer additions were over 110,000, including nearly 89,000 subscriber additions. Solar energy capacity installed was 220 megawatts in the fourth quarter of 2021, a 28% increase from the same quarter last year, pro forma to include Vivint Solar. For the full year 2021, solar energy capacity installed was 792 megawatts, representing a 31% growth compared to the prior year. This growth rate exceeded our prior guidance and represents the highest annual growth rate in new solar energy capacity installed that Sunrun has reported in 5 years and at nearly three times the operating scale. We've continued to experience strong customer demand for our products and services in Q4, continuing a trend we've seen throughout 2021. Over the course of the full year, while installs grew 31%, our backlog grew by 57% due to strong demand and sales productivity. While this sets up a strong 2022, the mismatch between sales and installation activities in 2021 creates a drag on financial performance in the year, as we first highlighted on our Q2 results call. We closed out the year installing a record number of batteries, representing over 100% year-over-year growth in 2021. While battery availability constraints continue, resulting in fewer battery projects than we initially forecast at the beginning of the year, the supply situation is improving, and we expect to ramp battery installations considerably in the quarters to come. We qualified a third battery supplier in Q3 that met our price and performance criteria and expect to introduce more battery suppliers in the next few quarters to meet the strong consumer interest. We ended Q4 with over 660,000 customers and nearly 568,000 subscribers, representing 4.7 gigawatts of networked solar energy capacity, an increase of 20% compared to the prior year. Our subscribers generate significant recurring revenue with most under 20- or 25-year contracts for the clean energy we provide. At the end of Q4, our annual recurring revenue, or ARR, stood at $851 million with an average contract life remaining of over 17 years. In Q4, subscriber value was approximately $37,000 and creation cost was approximately $29,900, delivering a net subscriber value of approximately $7,100. Total value generated, which is the net subscriber value multiplied by the number of subscriber additions in the period, was $156 million in the fourth quarter. Total value generated was $631 million for the full year. This result was lower than our guidance, driven primarily by the effects of Omicron on reduced installation capacity and knock-on effects and faster-than-anticipated growth in orders. Additionally, as crew availability in each geography moved around during the Omicron surge and battery availability remained tight in the quarter, the specific product mix that was ultimately installed from our backlog in Q4 was slightly less advantageous than anticipated. Put simply, we were caught with significant Omicron-related installation productivity and cost challenges, but we continue to execute above our expectations on customer orders. As you can see on Slide 7, we estimate these pressures impacted total value generated by approximately $107 million in 2021. The excess growth in backlog during the year resulted in stranded margin of more than $75 million, which we expect to harvest in 2022. Additionally, in Q4, the Omicron-related labor productivity impacts and resulting product mix changes delivered a $31 million headwind. If you remove these headwinds, total value generated would have been above $737 million in 2021. We believe in our ability to ultimately fulfill the strong consumer demand we're facing as we move throughout 2022 and, in Q4, made no efforts to throttle sales activities in the face of short-term operational challenges. As a result, we continued to incur the sales-related and initial project development costs as we built a large backlog of orders, pressuring our reported net subscriber margin and, therefore, total value generated. We made this decision with a long-term perspective. We want to build the largest base of high-value customers and know that trying to solve for single period reported results by throttling sales won't drive the most long-term value for the company. You can see that on an absolute basis, our product mix and pricing remained strong with the highest subscriber value of the year in Q4 and only off 1% from Q4 2020, despite flowing through a significant reduction in the ITC level. In fact, the current backdrop of rapidly escalating utility rates and inflation provides meaningful opportunities for us to increase pricing in many markets again, and we intend to execute these changes over the coming months. Turning now to gross and net earning assets on our balance sheet. Gross earning assets were $6.7 billion at the end of the fourth 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 cost of capital. Net earning assets were $4.6 billion at the end of the fourth quarter, an increase of over $55 million from the third quarter and $434 million from the prior year. Net earning assets is gross earning assets plus cash less all debt. We ended the year with $850 million in total cash. Turning now to our outlook. We are forecasting solar energy capacity installed growth of 20% or more for the full year 2022. Several factors, including California net metering, various proposals in Congress to extend and/or increase the investment tax credit and a volatile interest rate and inflation environment, limit our ability to provide precise guidance on total value generated in cash generation at this time. We believe, however, the trajectory for cash generation remains robust especially over the longer term. The opportunity to build a large California backlog or further changes to interest rates and the resulting timing of project finance activities could result in meaningful swings in these metrics in either direction. We currently believe, however, total value generated for the full year 2022 will grow faster than volumes and that margins will increase sequentially throughout the year. For the first quarter, we expect solar energy capacity installed to be in a range of 195 to 200 megawatts. As noted previously, many of the Omicron-related effects on margins and product mix continued into Q1, and we expect Q1 margins to be comparable to Q4 but increasing in subsequent quarters.

Thanks, Tom. Today, I will discuss the impacts of increases in inflation and interest rates on the company and also touch on California net metering and our new corporate credit facility. Sunrun is well positioned for increasing interest rates, especially those driven by escalating inflation as we're able to raise prices to new customers as necessary behind the large utility price increases that are underway. In addition, our existing capital structure is well hedged through a mix of interest rate swaps and fixed coupon, long-dated debt securities. Utilities, famous for ensuring customer rates escalate faster than overall inflation, are wasting no time exercising their monopoly powers to raise prices. In January, inflation in electricity services was 10.7% year-over-year. We have seen a handful of utilities in our largest markets filed for even larger increases. Pacific Gas and Electric and Con Edison have filed for rate increases of 18% and 11%, respectively, on the backs of a capital expenditure bonanza as well as higher labor, fuel, and capital costs. Just last quarter, Florida Power & Light was granted a 12% increase. In 2021, Sunrun implemented modest price increases that offset the reduction in realized ITC percentage across the year. In 2022, we have a more significant pricing opportunity which we can execute against while still expanding the wedge between incumbent utility costs and our customer offering. This will allow us to drive significant value for customers even as we pass through higher costs. Our existing portfolio is well hedged through interest rate swaps and long-term fixed-rate debt. As we deploy systems, we use interest rate swaps to programmatically fix the cost of debt for about 20 years. The vast majority of our $2.6 billion in floating rate debt is fixed as a result. Our current portfolio of long-dated amortizing interest rate swaps has an average final maturity extending nearly 16 years. Of our $3.9 billion in fixed-rate debt, including recourse debt, only 7% has a maturity or anticipated repayment date before December 31, 2025, and only 5% has an actual maturity in this period. Despite the recent increase in interest rates, we still expect to achieve an advance rate on our upcoming long-term financing in the range of 95% to 100% of contracted subscriber value at a 5% discount rate. In December, the California Public Utilities Commission published a proposal to materially reduce the value of power that residential solar customers export to the grid; to tax power, both generated and consumed on-site, through a fee; and to reduce the grandfathering period of existing customers by 5 years. As described in my statement posted to our website in December, their proposal is contrary to the state's objectives of addressing climate change and eliminating frequent blackouts as well as contrary to what Californians say they want. The proposal met with swift and significant pushback from national and international electric rate design experts, national and state politicians, community groups, environmental justice groups, environmental groups, influencers, and at least 125,000 individual petition signers. On January 10, Governor Newsom said there's work to do on the proposal. On January 21, the one major environmental group that had supported the proposal walked back its position. On February 3, the commission said it was pausing the proceeding until further notice to consider revisions. The CPUC also likely needs more time because the head of the energy division and the two commissioners most involved in the proceeding have all left the commission, causing the matter to be reassigned. The response of environmental and solar groups broadly has been that the grandfathering period should be maintained; the reduction in export prices be phased in over time to permit battery manufacturing capacity to increase; and the tax on power, both produced and consumed on-site, be eliminated. That tax alone at about $0.14 a kilowatt-hour would be higher than the full retail cost of electricity in 42 states. Despite the outpouring of concern over the proposal, it is too early to know how significant the revisions to the proposal may be or how long achieving a final outcome may take. However, we are hopeful a more even-handed policy, which also encourages solar customers to support the grid with peak period exports, will be adopted. Californians demand and deserve resiliency, control over their energy costs in the future, and faster progress against global warming. We hope to answer these needs with products that benefit all Californians, whether or not they are Sunrun customers. But we are confident that in time, we and the industry will innovate to meet this overwhelming customer desire regardless. Due to the delay in the proceeding, the size of our existing installation backlog and our expectation that we will build an even larger backlog of California systems prior to the enactment of any new policy, we may not deploy a material number of customers under a new policy until late 2022. However, 2022 financial results, especially quarterly results, are likely to be impacted by strong demand from Californians eager to sign up before rates change. We will refine our go-to-market strategy and forecast as clarity emerges from the CPUC. In January, we retired our $250 million recourse lending facility and arranged a larger $425 million facility at enhanced terms and with a longer tenor. The cost of the new facility was unchanged. While the asset borrowing base was expanded, financing terms for inventory and project backlogs were improved and the discount rate applied to existing assets was updated from 6% to 5%. These changes will support the scale, growth, and backlog of the combined company. We continue to maintain a robust project finance runway. As of today, closed transactions, and executed term sheets provide us expected tax equity and project debt capacity to fund over 375 megawatts for subscribers beyond what was deployed through the fourth quarter. And with that, I'll turn it back over to Mary.

Thanks, Ed. I am so excited about this year and what this team can accomplish. I know rapid growth distorts some of our metrics, but the underlying fundamentals are enviable. To be the nation's leader in a fast-growing space with unprecedented customer demand provides a tremendous opportunity for value creation. I'm so encouraged and excited about the work we have done, delivering record volumes in 2021. With climate change accelerating and utility rates rising around us, the time is now to fulfill our aspirations of working with customers all over the country to self-generate, store energy, electrify their homes, adopt leading EV technology, and together create a more affordable and resilient future and a planet run by the sun. With that, operator, let's open the line for questions, please.

You have the first question from James West with Evercore ISI.

Mary, I love this relationship with Ford that you guys have. I think it's a huge positive on both sides but certainly helping out your brand and the home integration system, which we've learned about recently. I think it's a very unique proposition and creates a nice moat. I'd love to hear if you've already started to see people inquiring about installing solar because they want to do that ahead of their Lightning deliveries and if there are any other OEM relationships that you're working on that may come to fruition this year.

Thank you. We couldn't agree more. We are really excited about this partnership and really optimistic that it is going to really fundamentally move the needle. As you may or may not know, the car is launching late spring, and they've already doubled production targets to 150,000. And yes, to your point, from a brand perspective, we are already seeing tremendous uplift. Again, with our announcement, and again, as I think so many of us noticed, even with the Super Bowl, right, there's so much focus on the adoption of EVs right now and so much incredible excitement around the Ford. So again, we're seeing just incredible customer demand overall. Candidly, I can't say we're tracking specifically if this customer inquiry came relative to their excitement about them bringing on their Ford. But what I can tell you is we're creating a lot of buzz in all 50 states both in terms of Ford and Sunrun. So it's really going to be a big game changer.

That's great. I'm sure it is. I have one follow-up regarding pricing. You mentioned the trends in electricity prices nationally and in California. Is it accurate to say that you want to maintain a gap between your prices and those of the utilities? Would your price increases be lower than the national average, or am I misunderstanding that?

It's a great question. I think what we're trying to underscore is we obviously want to provide the best possible product for our customers as we can. Like many businesses, we're facing some increases in our operating and capital costs. We have plans to combat that, but some of those are a reality. And I think as necessary, we feel like we have ample room to recover those from customers over time given the competing product, utility electricity, is escalating at its fastest rate in many, many, many years.

We have next question from the line of Mark Strouse with JPMorgan.

So it sounds like you might be experiencing some pull forward in California because of NEM 3.0. Just curious, in the outlook for this year, the 20%-plus volume growth that you're expecting, how significant is that pull forward that you're kind of baking into that number?

Mark, so I think in the Q4 results, if you think about the timing of that NEM decision coming out, it's very late in Q4. I think the general growth in demand there we're seeing is from underlying consumer interest in the value proposition and product that we deliver. I think as that proposal has gotten a bit more airtime, certainly, there are some customers that are thinking about, "Okay, a change in rate structures may incentivize us to buy earlier." And that's certainly a tactic that, depending upon where the exact proposal or changes in net metering land, we see as a very large opportunity. I think there's a potential if NEM lands in a very draconian state where every customer would naturally be incentivized to get an order in and an interconnection permit on file well in advance of that cutover. And so we're expecting some amount of growth in backlog certainly through the first half of the year at least. I think right now, we're in this moment where we're still waiting on real clarity on where the proposal is going to land, when will it be implemented, what's the timeline for that. And there's a lot of uncertainty around that right now. So it's a little tougher to give you a precise answer on backlog growth. I think the more than 20% installed volume growth is a range that we feel comfortable in around being able to grow our own fulfillment and external fulfillment capabilities as well as manage that backlog, but it's entirely possible that you actually grow backlog throughout the year well in excess of that if the proposal lands in a particularly bad spot.

Okay. Tom, and then just a quick follow-up maybe for you. The inventory level continues to build. How should we expect that to trend over the coming quarters? Is the supply chain improving enough where you think that can start to decline over time?

So there are spots that we definitely see it improving. I think the battery situation that was notably tight all throughout 2021 is an area that we definitely expect to alleviate here a bit over the balance of the year. The uncertainty on the ITC is another element as we think about inventory levels this year. If it continues to step down, we'd move back into a safe harboring program. If it's held flat or steps up, our dynamics there might change. And then I think on overall trade and industry demand, I think we definitely put capital to work to put ourselves in a strong position in terms of the availability of materials in 2021 and are at abnormal levels well in excess of triple-digit days. And so we'd naturally draw that down as we get more comfort with the overall picture.

We have next question from the line of Brian Lee with Goldman Sachs.

I've got two. I'll just ask them all at once. First, just clarification on the total value generation target growing above capacity installations this year, is that on a base of the $631 million as reported? Or is it versus the base of $737 million adjusted? And then second question just around labor and productivity. It sounds like clearly, you're seeing a ton of demand. Trying to keep up with the demand is an issue. How do you think about that heading into 2022? What are some of the puts and takes, mitigation strategies for having those pressures not repeat this year and being able to kind of fulfill that more closely to where backlog growth is versus what you're able to actually do on the installation side?

Yes. Thanks, Brian. So on the total value generated guide, that's on the basis of the reported $631 million level. And yes, we expect that to grow in excess of our volume growth as we get back to more normalized margins and some of the margin expansion opportunities that we get excited about. The one notable item there that can move around quite a bit, as I mentioned in one of the earlier questions, is the impact of sales expenses well in advance of installs. And so the California situation is one that we're watching very closely. On installation capability, really excited with what we did deliver this year, 31%, at three times the scale we were at 5 years ago, installing twice as many customers as our next closest competitor. And so we're working hard to fill that. But Mary, I think you have a few things to add on how we think about...

Sure, thanks for the question. The results have been significantly influenced by the situation with Omicron, but we have noticed that the surge is easing. Our teams are back at work and in good spirits. We are also focused on our overall strategy to ensure we have ample capacity to meet demand. The uncertainty lies in the developments with California's NEM and any potential surges that may arise. We are determined to leverage all the customer demand available to us. Overall, we believe we have a solid plan in place and have shared our growth expectations, keeping in mind that factors could lead to an even higher demand surge. If that happens, we will need to strategize on how to accommodate that increased demand.

We have next question from the line of Julien Dumoulin-Smith with Bank of America.

So actually, let me just pick up where you left it off actually. Let's talk a little bit more about the cadence of customer value creation through the year. You just said yourself fourth quarter was impacted. It was in fairly discrete items, right, labor, Omicron, et cetera. But you also, at the same time, described some of these factors as abating here and describing also fairly flattish per-customer metrics in the current quarter. Obviously, there's some seasonality. But how should we kind of frame that against the backdrop of growth? Is growth effectively going to continue to depress customer value creation metrics throughout the remainder of the year? Or what's the shape of that rather, if you will?

Yes. So on the Q4 effects, if you think about really the timing of the Omicron surge and where that hit us on labor productivity and capacity in really the last half of the quarter or so, and we saw that continue well into January and beginning of February again. I think we're feeling good coming out of that but a similar effect on a whole quarter basis to have a portion of Q1 that was affected by some of those. As we come out of that, we definitely expect that margins will improve over the balance of the year, potential for growth pressure on margins, especially on the sales and marketing side of things. But the operational cost elements, we expect, would turn back out. And then as we take some of the pricing actions that Ed and I have both mentioned, as supply chains continue to normalize, we expect to see benefits there on costs that will drive higher margins over the balance of the year.

I would like to add that, regarding the customer margins we achieved in Q4, those are among the highest reported in our business. We anticipate that they will increase even further as we aim to capitalize on all available growth. This reinforces our strong market position and growth potential moving forward. I wanted to emphasize the significance of the Q4 margins.

And Julien, it's Ed. Just quickly on California, we could start to receive more clarity on that in a few weeks or maybe more likely in several months. Depending on what that timeline looks like, the shape of the curve in terms of sales and installations will vary. And so I think part of the uncertainty you're hearing with us is we don't know if that process is going to come to a head next month or in June. And so it's hard to make a point production.

Right. Let me bring up a more strategic point to follow up on that. In your prepared remarks, you mentioned total value generated and that your cash generation guidance might face some obstacles in terms of margins. Can you discuss how you are thinking strategically about the stock at its current level, particularly regarding cash generation for potential share buybacks or monetizing assets to showcase the underlying value of your assets, cash guidance, or asset sales?

Julien, it's Ed. So first, I think as to the value of the assets, we have consistently been achieving just debt advance rates on the assets in excess of 95% of the contracted value. I shared on the call that the upcoming transaction, the next one that we do, we're still expecting to be in that 95% to 100% range. So hopefully, we've got quite a few data points on that in the marketplace. As to a buyback, look, obviously, at these sorts of share prices, there's a compelling argument for that. At the same time, we are in the middle of a major regulatory proceeding and do also see a number of other investment opportunities and so are sort of proceeding through this period with some caution. But it certainly is a topic that has been discussed at the Board and that we are thinking about. And as you know, in periods in the past, we have done a stock buyback before.

We have next question from the line of Maheep Mandloi with Credit Suisse.

Maybe you could explain the value generation a bit more. Specifically, how should we understand the different sources of growth? How much is attributed to the increase in the leasing mix this year compared to the rise in net subscriber value throughout the year?

Yes. So I think there's a few items there. One, as we've seen throughout this year, continued improvements in product mix, driving higher battery attach, larger system sizes, we expect those trends to continue throughout 2022. The Q4 effects here on labor productivity and product mix coming out of our backlog, I'd view as temporary. So you can think about those as really reversing out as we get past Q1 here in 2022. And then I think the big question, the one that we've touched on a couple of times here is this question of just how well matched sales and installed capacity are throughout the year. We definitely grew backlog at a pretty astronomical rate this past year. If you think about 31% installed growth and 57% backlog growth, that's a dynamic that we're working hard to open up incremental fulfillment capabilities and options. And we mentioned in Q4, flexing a bit more into slightly more expensive fulfillment options as well. And so we'll continue to work to get capacity well aligned, and that drag will go away. But then I think the general ongoing trends of finding ways to improve cost and improve customer experience and make the whole end-to-end journey much simpler and a much better customer value proposition will be positive for us.

Got it, got it. And then maybe just part of that customer experience, just another question on the Ford F-150 partnership. I know it's still too early, but how should we think about the attach rates or expectations for either the Charge Station Pro or for the home backup systems?

Yes. So we haven't broken out any specific items to think about there. Obviously, we are the nationwide installation partner here for the bidirectional inverter and charger, and so we'll have some customers who are just getting that set of hardware initially. And our first consultation with them or conversation with them will be the moment where maybe they consider going solar. Others, they may choose to align these two as the vehicle goes into production and they're finalizing their order and saying, "Yes, I want to get solar and my charger at the same time." And so we're working on bringing those discrete customer offers to market. And I think as we get into actual delivery and deployment here, it will be easier for us to give you a little more color on the nature of that relationship and some of the metrics therein.

We have next question from the line of Joseph Osha with Guggenheim Partners.

Two questions for you. First, following up a little bit on what Julien was saying. In the past, we have communicated about cash generation relative to the pace of new capacity additions. I understand this year is a little disruptive. But over the longer term, how should we think about the relationship between either new business generation, or value added if you prefer to talk about it that way, relative to cash generation?

Joe, it's Ed. Great question. We continue, over a longer term, even medium term, to be confident that cash generation can grow faster than megawatts deployed. Just some of the special factors and arcs of this year make the production a little bit more challenging.

Okay. That's a reasonable way to think long term. That's helpful. Regarding the PUC and its impact on existing assets, have you observed any changes in how these assets are trading, accessing debt, or entering securitization markets? Has there been any widening of spreads in response to the CPUC's proposal?

Good questions to ask. First, regarding our customers, we believe it is important to fulfill promises made to them in written agreements. We hope this will continue to be the case. However, there have been instances in our history where changes in rate structures have negatively impacted customers. This has occurred once in Nevada and once in California after the restructuring of tiered rates. In those cases, we did not observe significant changes in collections or payment performance, other than perhaps some frustrated feedback from customers. Therefore, I do not expect any financial impact on us, despite the possibility of some dissatisfied customers. As for the debt markets, we have not noticed any influence from this situation. While some individuals raise questions, which is understandable, we have not observed any significant decrease in interest. Overall, I believe that people think this will likely resolve itself sensibly. Recently, there was a securitization in our industry, and my understanding is that it was not a topic of concern among the lenders involved in that transaction. I remain hopeful that this will be worked out effectively and that there is no reason for alarm.

We have next question from the line of Tristan Richardson with Truist Securities.

I really appreciate all the overview on margins this year and all the puts and takes there. I mean I think historically, you guys have talked about all the dynamics that could really expand margins, whether it be greater battery attach rates, EV adoption dictating larger system sizes, additional services per household. I guess thinking long term, maybe just outside of 2022 guidance, does the business support some of that expansion towards net subscriber values that readers put up in the past? Potentially something with an 8 handle on it or a 9 handle on it, longer term as labor productivity issues subside and you have pricing power or pricing flexibility.

Yes. This is Mary. One hundred percent, we absolutely see it the same way. And I think again, that's why I made the point of even with some of those challenges we outlined, we delivered a really strong best reported margin, right? So when you're starting there and then you're looking to the future and you're looking at the partnership we're doing with Ford, you're looking at really us being the leader in terms of battery attachment rate, et cetera, in the country. They just become more and more opportunities to add value to customers' lives and help them transform their relationship with energy and to do it in a way that, yes, is additive from a margin perspective.

We have next question from the line of Andrew Percoco with Morgan Stanley.

I have a question about battery availability. Could you discuss the timeline for when you might introduce a fourth supplier and your expectations for the growth of your battery business this year?

Yes, we expect significant growth in battery attachment in 2022. The overall supply situation looks better than it did in 2021, particularly in the second half of the year. We achieved over 100% year-over-year growth in batteries last year and anticipate that trend to continue. We qualified a third supplier at the end of Q3. Although we faced some supply chain challenges in Q4, we expect those issues to improve in early 2022. We're consistently evaluating new products entering the market, considering performance, pricing, and customer needs, while also addressing availability and potential partnerships. We are open to the idea of adding suppliers more quickly than slowly, but we don't have anything definitive to announce today.

Great. That's super helpful. And just one other question from me. Mary, I think you talked about some additional potential product offerings. Any timeline on that or maybe a sneak preview as to what that might look like?

We don't have a preview to share, but we are definitely working on several initiatives. One important aspect we've discussed before is the aggregation of numerous distributed devices, particularly the solar battery network we're developing. Looking at it from a longer-term perspective, there is significant potential for the owner and operator of those assets to gain value from the grid.

We have next question from the line of Ameet Thakkar with BMO Capital Markets.

Just real quick on the $80 million kind of headwind on product mix. I'm sorry if I missed it, but was that really kind of reflective of perhaps like less battery sales? Or is that kind of the mix between subscribers and kind of cash purchases? I have one quick follow-up.

Yes. Battery is the primary item there. So as you think about what transpired for us in Q4 in the quarter, we're generating new business. We enter in with a chunk of backlog. And just given Omicron-related impacts on crew and labor availability in given markets, the resulting portion of that backlog that was installed was a little different than we had anticipated at the start of the quarter. So just a different subset of our customer base that was installed and slightly less advantageous, but on the battery front, that being one of the primary items there.

I mean if you recall, our installations are done in crews of perhaps 5 people. Not everyone is battery-qualified. And managing through the absenteeism was a challenge and required heavier staffing on jobs and different sorts of jobs in those part of what you saw in the quarter.

Great. And then just thinking back to the third-quarter call, I think Mary had talked about potentially kind of radical collaboration kind of being needed with the utility industry. And I think it's fair to say that kind of the NEM proceedings have been fairly acrimonious. And then we kind of look to Florida and the state's kind of incumbent utility has kind of, I guess, supported some legislation that is again kind of a little bit less favorable for residential solar. Mary, I was just wondering if you could give any kind of thoughts to kind of expand on kind of how you see that radical collaboration maybe kind of starting to take shape or form?

I think it's a great question. I'm still very optimistic about radical collaboration, just as I was last fall and the year before. It's crucial for the long-term health of our energy grid and our ability to build a future energy system that is cost-effective and resilient. While we have developments in California and Florida, there's also notable progress in Hawaii that exemplifies radical collaboration. The journey toward radical collaboration often stems from the challenges of traditional approaches. We see this here as we navigate the difficulties of conventional thinking versus a progressive vision for creating value for society, customers, the planet, and the grid itself. I'm encouraged by the recent achievements in Hawaii, where we played an integral role alongside HECO, and I'm impressed with what we've accomplished together. My drive, optimism, and energy for advancing this further remain strong.

We have next question from the line of Biju Perincheril with Susquehanna.

Can you discuss when you expect to start receiving deliveries from the third battery supplier? Additionally, could you talk about the potential to boost supplies from your two existing vendors? Will you need to adjust your pricing criteria to secure more supplies from them?

Certainly. I'll address the second part of your question regarding general availability. Over the past couple of years, we have experienced a significant increase in consumer demand that has outstripped our manufacturing capacity. Many suppliers in the industry, including those we collaborate with, have been making considerable efforts to enhance their production capabilities. Consequently, securing additional batteries from our current suppliers has primarily involved close collaboration with them as they expand their supply chains. We are optimistic about the availability outlook provided by our current and potential suppliers for the upcoming year, and we do not anticipate needing to make concessions to access these products. Our position as the leading player in the industry grants us an advantageous position to secure preferred access to supply under mutually beneficial terms. We are pleased with this development. Regarding the third supplier, we have started to receive products, and we are in the process of ramping up. We will continue to explore opportunities to engage additional suppliers as we progress through 2022.

Biju, this is Ed. I might just add, if we take the protections from the manufacturers at face value, you'd actually be very encouraged as to the battery being available in '22. Obviously, we do have a recent history of occasional negative surprises in the supply chain upstream of our manufacturers that have reduced deliveries. So we're taking a little bit of a hedge to that as we think through what we'll be able to accomplish. But at least the good news is the mood at the manufacturers is upbeat.

Okay. A follow-up to that. It seems like the attach rate is around mid-teens in fourth quarter. As you sort of proceed through the year with the additional supplies, what do you think you can get to, say, by the end of the year? Any thoughts around that?

Nothing concrete that we'd say yet. I think as we noted a few times, there's another area where the California NEM decision will have a material impact. The initial proposal would dramatically incentivize the adoption of batteries and for customers to store surplus power on-site and not export to the grid. And so that would be a meaningful mover. And I think we need to see exactly where that lands. But the multiyear trend that we've seen, I think, is continuing and accelerating in many respects given where utility reliability has trended over the last few years. And customers want more affordable, more reliable power, and this is one of the best ways for them to get it.

Yes, 100%. This is Mary. I would just add that we are definitely seeing increased customer demand. To Tom's point, with the rise in climatic events, particularly in California where utilities are initiating outages due to fire risks, we anticipate that the attach rate will really increase as supply becomes more available in the market.

We have next question from the line of Philip Shen with ROTH Capital Partners.

I just had a follow-up on the subscriber value. I was wondering if you could give a sense for where you expect net subscriber value to trend in Q1 and 2 versus the $7,000 from Q4?

Yes. So as we noted, many of the labor-related effects of Omicron continued in early Q1. And then as a result, we expect Q1 net subscriber value to look comparable to Q4. And as we move throughout the year, obviously, we expect that to improve from there quite meaningfully, full year total value generated growth exceeding our growth rate and volumes as we expand margins and get back to more normalized levels as some of these events subside.

Tom, also, in terms of Q4, the mix of customers purchasing systems looks like it increased to 26% versus the historical average of about 15%. What's driving that? Do you expect that to sustain as we get through '22? What's your latest thinking on solar loans? Would you ever consider putting loans on balance sheet?

Yes. So a few things there. Normally, you do see a mix of higher loans in Q4 as customers look to push for a tax credit for their annual tax filings. We've made some improvements in our loan offering as well. As you think about overall product mix that was installed in the quarter, as I mentioned earlier, this is one of the spots where the specific shakeout of what came out of our backlog given managing crews and availability in different regions at different moments in time shifted a little further from the historical trend. I'd say leases remain our core service offering, and most customers continue to favor that due to the strong value proposition there and no upfront costs, no impact on personal credit and balance sheets, the general alignment of interest around performance guarantees and ongoing service. So we continue to be really bullish and optimistic on the lease but also continue to provide a suite of financial services available to customers.

To address your last question, Phil, this is Ed. We maintain the view that the return on equity from holding loans on the balance sheet, especially in a rising interest rate environment, doesn't meet our corporate return expectations. Therefore, while we are happy to sell a cash system or a loan to any interested customer, our current business philosophy leans towards disposing of those loans to a third party.

I want to emphasize that from the customer's viewpoint, the lease product is extremely powerful. Recent data indicates that there is a trend back towards this product in our current offerings.

I'm sorry to interrupt. Sir, you may come back in the question queue. We have next question from the line of Sophie Karp with KeyBanc.

A lot has been discussed already. I was wondering if you could maybe give us your read on the current situation with the Build Back Better plan that obviously appears to be dead for now, but any chance for environmental-only legislation or anything that's coming out of D.C. that could be incrementally positive for you guys?

Sophie, it's Ed. I believe the climate provisions from Build Back Better have considerable support and a fair chance of passing. There are likely two opportunities for this: one in March after the New Mexico senator returns from being out sick, and the other as part of tax extenders at the end of the year. I think there is a possibility that the climate provisions could pass as they are or may be slightly modified. However, I do see interest, including bipartisan interest, in getting something accomplished in this area when possible.

Got it. You mentioned several factors that make it difficult to quantify value creation this year, California being one of them. You also mentioned interest rates and other elements. How significant is the impact of California compared to the various other macroeconomic factors? If you were able to finalize the situation in California within two months, would you then be in a position to more confidently quantify your value creation potential for 2022 and beyond and provide us with that guidance? Or would other factors still cloud the situation at that time?

Yes. I'd say on the total value generated guidance, it's disproportionately California. Things like the ITC or things that would have an impact on safe harboring and cash consumption, interest rate environment might have an impact on timing of project finance deals, which would hit the cash generation side of it. But on total value generated, California is the disproportionate effect.

We have last question from the line of Colin Rusch with Oppenheimer & Co.

Can you talk about how many markets you're being into now in the ancillary services side of things? And then I just have a question around how much growth you're seeing outside of California, what the growth rate looks like embedded in the guidance.

I'm sorry. Can you just confirm? Was the second question the growth rate outside of California for 2022? We didn't hear you.

Yes. That's correct.

Yes, we haven't detailed our results state by state, but we have several markets that are continuing to grow quite well outside of California. Even more established markets like Hawaii are also seeing significant growth. We're currently active in 22 states and Puerto Rico and are pleased with our presence. There remains considerable untapped market potential in those areas.

Yes. We are currently operating in 22 states. Regarding your question about ancillary services, our partnership with Ford spans all 50 states, providing us access to an additional 28 states for these services.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines. Thank you for your participation.