Sunrun Inc. (RUN) Q2 2022 Earnings Call Transcript

Greetings. And welcome to Sunrun Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Patrick Jobin. Thank you. You may begin.

Thank you, Operator. 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 that 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; Danny Abajian, Sunrun’s CFO; Ed Fenster, Sunrun’s Co-Founder and Co-Executive Chair, is also on the call today and will be participating in the Q&A session that follows the prepared remarks. And now, let me turn the call over to Mary.

Thank you, Patrick. Well, so much to talk about since our last quarter. Frankly, I was already looking forward to speaking with all of you this week to talk about the exciting developments and how strong we are delivering on the fundamentals, and then we received the good news coming out of Washington on climate legislation. As a company providing customers with the ability to have a more affordable, innovative, resilient and recession-proof future, it truly feels like the sun is shining on our work. That said, in the spirit of, you make your own luck, the Sunrun team has been laser-focused on crushing the fundamentals and I am excited to talk about the work we have been doing and some of the luck we have created. We delivered above-guidance volumes in the quarter, growing new installations by 33% from the same period last year and have continued to see incredibly strong momentum, breaking sales records again just last month and growing customer orders 28% compared to last year. We are delivering on improving net subscriber values through continued actions to be faster, better and stronger and to see those benefits continuing to build and flow through the pipeline, which underpins our guidance of continued margin expansion into Q3. Looking beyond the quarter, I am very excited about building the future we are running to. We are a clean energy technology company and we believe the ultimate way to fuel life is through the natural abundance of the sun. We aim to put control, simplicity and possibility in the hands of every customer to connect with the cleanest energy on earth for powering their homes, their transportation and their lives. We are running to provide a more affordable, resilient and energy independent future for America. Now is the time for Americans, and the world, to embrace clean energy to help solve some of our greatest problems and to create greater socio-economic prosperity by providing more resilient and affordable clean energy to all. The crippling heat waves across the country, devastating wildfires in areas facing record-breaking droughts and geopolitical tensions highlighting the vulnerabilities of finite fossil fuel sources all underscore the need to accelerate clean, affordable, decentralized energy sources that put customers at the center and provide them what they need and want to run their lives. This summer we celebrated our 15th anniversary as a company, marking 15 years of continuous and rapid growth and putting us in the enviable position of leading the industry forward. Today, we are operating at a scale that is twice as large as our nearest competitor and we have more than 5 gigawatts of networked solar energy capacity, making us the second largest owner of solar assets in the U.S., across all segments of the industry. As the nation’s leader in deployed personal storage, we sit on the capability to deploy over 150 megawatts of clean stored energy, when called upon. Our track record sets us apart. We have navigated repeated policy uncertainties, various economic cycles and dynamic supply chains before and I am proud of the team we have in place today that is executing so well in the current environment. Sunrun is positioned incredibly well for periods of high inflation or even a recession, because fundamentally, we offer customers security, price stability, and control over a basic human necessity. My focus since assuming the CEO role has been to make Sunrun even faster, better, and stronger, building on the solid foundation that has been built over the last 15 years, to accelerate what we can accomplish for our customers and stakeholders. I am proud to share that Sunrunners are embracing the opportunity and running to the future where we are the go-to provider for whole home energy services across the country. We are making great progress against these goals. First, we are delivering rapid growth. We grew new installations by 33% this quarter. The confluence of a growing understanding about the virtues of powering your home with solar energy and storage, compounded by rapid utility rate inflation across the country, is driving record levels of demand, following on the price actions we took in late March and early April. Rapidly escalating utility rates sustained a very strong customer value proposition. As many of you know, utility rate inflation was over 13% across the country in the latest CPI data and is running even higher in many of our large markets, and is poised to remain elevated for the foreseeable future. Second, we are also continuing to innovate and expand our offerings. We are benefiting from and helping enable the transition to electric vehicles by providing our customers the ability to run their vehicles on clean, independently-generated energy. Customers who drive electric vehicles need larger systems. These solar and battery and EV resources are incredibly valuable for homeowners and the energy system alike. Our partnership with Ford has officially kicked off and is tremendously exciting. Hundreds of orders have already been placed and we have started conversations with over a thousand additional potential customers as they approach delivery of their Ford F-150 Lightning. Approximately two-thirds of customers placing orders are opting for the advanced bidirectional power flow and home backup capabilities from the Charge Station Pro along with the Home Integration System. Based on initial numbers, we are seeing over 10% uptake of bundling solar at the same time as the installation of a Home Integration System. Sunrun has already installed several systems and expects to install thousands more in the coming months. We have also just launched our new Level 2 electric vehicle charger to complement the company’s home energy management solutions. This allows customers to achieve even greater benefits, independence and stability by powering their vehicles at home, tapping into the most abundant and affordable clean energy source on the planet, the sun. The offering will be available later this month in California, New Jersey and Vermont, and will be rolled out to all Sunrun markets as an optional add-on by year-end. We are also the leader in deploying batteries with solar systems today, installing more than any other solar company. With more than 42,000 battery systems installed thus far, we can provide a critical service by discharging electricity to the grid during the times it's most needed. As more severe and frequent heat waves continue to stress our nation’s grid this summer, we strongly encourage grid operators, utilities and policymakers alike to leverage this amazing source of solar energy. Not only do our solar customers take load off the grid, our batteries export during times of peak demand, which reduces the overall stress on the grid. We expect as battery availability improves, we will see even faster adoption by customers choosing to add batteries alongside solar systems, and as electric vehicle adoption increases, we will have tremendous opportunities to innovate even further with our service offerings and grid service capabilities. Yesterday Sunrun announced an exclusive agreement with SPAN, making the company’s smart home electrical panel available to residents in Puerto Rico. The offering is available exclusively through Sunrun and Sunrun’s partners in Puerto Rico, further differentiating our offering. Still recovering from the devastating effects of Hurricane Maria, Puerto Rico’s fragile electric grid remains prone to unplanned power outages and protracted blackouts. With this partnership and state-of-the-art innovation, customers will be able to shift home solar and battery power supply to different uses throughout the home during an outage, controlling where and how backup power is used. This technology also provides Sunrun with an even more sophisticated ability to control and dispatch energy back to the grid, if called upon by grid operators. Sunrun entered Puerto Rico in 2018 and has quickly become one of the island’s largest providers of residential solar energy and battery systems. Sunrun will start offering this incredible, next innovation to customers this month. We are accomplishing all of this with a laser focus on efficiency. While tremendous growth opportunities and innovation initiatives can pressure organizations to deprioritize efficiency, we are focused on delivering growth, innovation and efficiency together. As an example of our combined focus, Sunrun delivered 16% sequential growth in new solar installations in Q2, while headcount remained materially unchanged in the organization. We are driving cost efficiency, while also remaining committed to delivering a great experience to forge enduring, decades-long relationships with our customers. Shifting gears to some external items. We were delighted that Senator Joe Manchin came back to the table on climate legislation and there seems to be a highly likely passage of a meaningful commitment to clean energy. It is clear that by providing incentives to invest in clean energy, we can actually combat inflation and provide customers what they need, clean, affordable energy, insulating them from skyrocketing utility bills. We also see tremendous opportunity in the latest legislation to build on our success of providing clean affordable energy as a path to building greater socio-economic impact through our work with multi-family housing and to first-time home buyers and those in communities most in need of energy security, stability, independence and cost savings. It has also been a busy period for trade policy. We were encouraged that the administration took steps to block the anti-circumvention tariffs for two years. However, the current bureaucratic process from the Customs and Border Patrol is causing delays to the timely release of modules currently sitting at the ports, for us and many in the industry. This results in unnecessary friction costs, such as customer system redesigns. We have called upon the Customs and Border Patrol to follow guidelines, respond to consumer demand and quickly release solar modules that are demonstrated to be in compliance with the latest requirements, and we have seen some recent progress. These delays are slowing the deployment of what Americans need and want: clean, affordable solar energy. With that, before I turn the call over to Danny, I want to share a few words of appreciation for the amazing employees at Sunrun and most of all to our customers, who we are privileged to serve. Our team is doing tremendous work to deliver on rapid growth, accelerate innovation and drive a customer-obsessed culture at Sunrun. We are running a marathon to help combat climate change and provide customers control over their energy future. We appreciate all of our customers and Sunrunners who are part of this journey with us. With that, over to you, Danny.

Thank you, Mary. Hi, everyone. I am pleased to be joining Mary and Ed today on my first quarterly call as CFO. Today I will cover our operating and financial performance in the quarter along with an update on our capital markets activities and outlook. Turning first to the results for the quarter. In the second quarter, customer additions were approximately 34,400, including more than 25,000 subscriber additions. Our subscriber additions were nearly 74% of our total customer additions in the period, up from nearly 72% in Q1. Solar energy capacity installed was over 246 megawatts in the second quarter of 2022, a 33% increase from the same quarter last year and exceeding the high end of our guidance range. We saw strong customer demand for our products and services in Q2. Customer orders increased by 28% in the quarter compared to the prior year. While we are still adding customers to our pipeline, the increased pace of installations is allowing us to gradually work down our pipeline. Our current pipeline is closer to one quarter at this point. We have now installed over 42,000 batteries. We expect battery installations to grow rapidly in the quarters ahead. Current battery supply conditions and longer install cycle times have resulted in lower battery attachment expectations in the near future, but we expect that as we introduce additional battery suppliers and work through our pipeline, attachment rates will increase meaningfully. Today we are prioritizing the allocation of batteries in key markets where they are needed the most for grid reliability concerns. We ended Q2 with approximately 724,000 customers and more than 614,000 subscribers, representing 5.1 gigawatts of networked solar energy capacity, an increase of 21% compared to the prior year. Our subscribers generate significant, recurring revenue with most under 20-year or 25-year contracts for the clean energy we provide. At the end of Q2, our annual recurring revenue or ARR stood at $917 million with an average contract life remaining of over 17 years. In Q2, subscriber value was approximately $38,700 and creation cost was approximately $30,800, delivering a net subscriber value of approximately $7,900. Total value generated, which is the net subscriber value multiplied by the number of subscriber additions in the period, was $200 million in the second quarter. The adjustments we made to pricing and home upgrade policies in late March and early April are starting to partially flow through our installations in Q2 and will be more fully reflected in Q3 deployments. We are optimizing overall sales activities and revising our policies on pricing and product mix in certain markets. These moves are already producing positive results in Q2 and we will continue to evaluate our customer offering based on incumbent utility rate trends and the capital markets environment. Turning now to gross and net earning assets and our balance sheet. Gross earning assets were $10.8 billion at the end of the second quarter. Gross earnings assets is the measure of cash flows we expect to receive from customers over time, net of operating and maintenance costs, distributions to tax equity partnership partners in partnership flip structures and distributions to project equity financing partners, discounted at a 5% unlevered capital cost. Net earnings assets were $4.6 billion at the end of the second quarter, an increase of over $130 million from the prior year and $145 million compared to the first quarter. Net earning assets is gross earning assets, plus cash, less all debt. We ended the quarter with $863 million in total cash. We continue to maintain a robust project finance runway. As of today, closed transactions and executed term sheets provide us with expected tax equity and project debt capacity to fund over 360 megawatts for subscribers beyond what was deployed through the second quarter. Turning now to our outlook. The current solar module import disruptions Mary mentioned create some uncertainty around volumes during the second half of 2022, but the strong consumer demand we see, our further improving operational efficiencies and fulfillment capacity, and the visibility of our robust pipeline gives us confidence to confirm our full year guidance of over 25% year-over-year growth in solar energy capacity installed. We now expect total value generated to be substantially greater than $900 million for the full year, confirming our prior guidance that total value generated will grow meaningfully faster than volumes. We continue to expect net subscriber value above $10,000 in Q3 and Q4. In our forecast, we do not assume any increase to the Federal investment tax credit that may result from the passage of the Inflation Reduction Act of 2022. An increase in the investment tax credit, pending California net metering policy and any impacts to volumes from supply chain disruptions could obviously result in variations in total value generated in either direction. For the third quarter, we expect solar energy capacity installed to be in a range of 250 megawatts to 260 megawatts. Since the April pricing of our $0.5 billion senior note securitization, capital availability has remained strong in both the securitization and bank markets. Apart from a brief period in June, market interest rates have remained in a narrow range. Our borrowing costs, which are indexed to long-term interest rates, have benefited from downward pressure recently as expectations for economic growth have softened. We continue to expect advance rates on our deployed portfolios to be between 85% to 95% of contracted subscriber values, which are discounted at a 5% rate. We believe the wide range is appropriate given the potential volatility in debt capital markets. As a reminder, the numerator in advance rate includes proceeds received, net of fees, from all sources, rebates, tax equity, customer prepayments, senior and subordinated debt, and swap terminations. As we have shared before, we frequently enter into interest rate swaps to hedge capital costs on our newly installed customers. Our existing capital structure is also well hedged through a mix of interest rate swaps and fixed-coupon, long-dated debt securities. We currently observe our capital costs as between 5% and 6%. As you may recall, several years ago we used to report subscriber value and gross earning assets figures using a 6% discount rate and didn’t update it to 5% until we saw capital costs below 4%. While we actively monitor capital costs, we don’t plan to update the discount rate for minor fluctuations around 5%. As mentioned, we implemented meaningful price increases earlier this year behind large electric utility price inflation and high interest rates. Since then, utility price inflation has remained persistently in the double digits, as utilities pass through their higher labor, fuel and capital costs to customers. This provides ample headroom to continue to evaluate market and pricing opportunities while still delivering customers an incredibly attractive value proposition. With that, let me turn it back to Mary.

Thanks, Danny. It is such a powerful time in our nation’s history to be working in clean energy, shoulder-to-shoulder with thousands of Sunrunners, every day working hard to deliver to Americans what they want and need: clean, affordable independent energy to power their lives and give to them a greater sense of comfort and security. We sit on the precipice of perhaps the most impactful climate and inflation reduction legislation the U.S. has ever seen. It is so exciting to think about the measures and how they could dramatically accelerate our work and maximize our impact, all while addressing rampant energy inflation, which is squeezing households across the country. That said, no matter what the world throws at us, at Sunrun we stay focused on making our own luck, growing faster, better, and stronger and delivering on our obsession with our customers, with the employees who serve them and delivering strong results for our investors. Before opening the line for questions, I want to again express my deep appreciation for the big-hearted, ambitious team of employees at Sunrun, the customers we are blessed to serve and the many partners who work with us every single day to deliver on creating a planet run by the sun. With that, Operator, let’s open the line for questions.

Thank you. Our first question comes from Julien Dumoulin-Smith with Bank of America. Please proceed with your question.

Hey, team. Good afternoon. Thank you and kudos for holding in on that 10,000 the figure that we have all been seeing fixated on here.

Thanks.

If I can, just to keep running with that. If you don’t mind, I’d love to hear a little bit more about how you think about future further rate increases, right? For example, how do your rates compare with utilities today, after the increases that you have implemented, and considering that typically the cadence of rate increases is fixated around January 1st, can we expect a further step up and expand that 10,000 going into 2023 or at least in Q1 2022 or 2023?

Hey, Julien. It’s Mary. Thanks so much for the question and for the enthusiasm for our maintaining our focus on net subscriber value. But that’s it. Yeah, your question, I will hit it first at the broad level and then see if Danny has any additional comments. But we have a lot of headroom. I mean, the bottom line is we have a lot of headroom. We basically are providing customers all across America. But particularly in some markets with really, really significant savings value proposition. We are also at the same time, Julien, we are seeing more and more customers, candidly, that are so motivated by other factors. And again, more and more customers are also going solar to power their electric vehicles. So when you also think about the opportunity to power an electric vehicle with your own independent solar versus the volatile prices at the pump, that also is a part of what we see as continuing to drive demand. So I would say, at the highest level, again, we are being very opportunistic, at the same time as we are very, very focused on making sure that we are delivering a significant value proposition to the customers we serve. And with that data, I don’t know if you want to hit anymore.

Thank you for the question, Julien. As we discussed previously and have demonstrated this period, we are progressing towards realizing the benefits of the pricing actions we have implemented. You'll notice that our guidance for Q3 and Q4 reflects increased confidence that these pricing actions will be effective. However, we are not providing any further guidance at this moment. Mary has shared our thoughts on how we view the situation, and we feel confident about our statements regarding Q3 and Q4 at this time.

And Julien, lastly, also, as you know, the other adoption that’s happening, whether it’s electric vehicles, heat pumps, and other types of electrification, it’s just then driving up the demand for larger systems as well.

Certainly. Excellent. Thank you. And just a quick follow-up here considering IRR, obviously, there’s an existing ITC, but the extent to which you could get an additional bump up on the ITC with some of these additional adders, what portion of your perspective origination could qualify for some of these additional ITC adders here or how nimble could your business be to pivot towards those kinds of higher ITC opportunities you see today?

Hi, Julien. It’s Ed. We have a fantastic opportunity here. I am a little cautious to share exact numbers, because the regulations on each of the adders will be promulgated by Treasury and haven’t been issued yet. But our preliminary analysis is, on the low-income adder, approximately a third of our existing customers that we originate would qualify based on Census Tract Data. And obviously, with our direct marketing sales team in particular, it would be possible for us to seek additional business in those geographic areas. On the American-made components, the opportunity, obviously, will depend on the percent requirements that are promulgated. But again, we think there’s probably a good opportunity there. And then on the energy communities, there’s a significant opportunity there, for instance, I suspect, like most of Houston would qualify based on the workforce. So there we have got additional work to do there. So I think we feel like there’s a significant opportunity even on the run rate business and we have a lot of flexibility in targeting to achieve higher attachment rates of those adders. And then, obviously, I should mention, again that those adders are only available under the Section 48 Tax Credit, which is the one available to lessors.

Yes. Indeed. Excellent. Thank you, guys.

Our next question is from Andrew Percoco with Morgan Stanley. Please proceed with your question.

So just my first question is just more on the cost side, totally understand you have pricing power to offset from the near-term pricing headwinds. But just curious, if you have any thoughts on when you might start seeing the actual creation costs start to drift down more towards that 5% decline per annum that we saw historically?

We have discussed the various cost pressures recently. One positive observation from the quarter is that we achieved sequential growth while maintaining a relatively stable headcount. This indicates improved efficiency within the business. While we face equipment and other cost pressures, we are continually working to enhance efficiency as we scale our volumes. Additionally, we are focusing on higher-margin products, such as battery attach, which has temporarily seen a decline in attachment rates. However, we anticipate that this will recover as supply improves, and consumer demand remains strong. Our strategy includes opportunities for margin expansion along with ongoing efforts to enhance efficiency daily to address the inflationary pressures we are experiencing.

Got it. Super helpful. And there is one more on the funding strategy for me, ABS has been a big component of your funding strategy in the past. And I think, Ed, last call, you alluded to the fact that there was a noticeable difference between the credit spreads and the ABS markets and what you are seeing it from some depository capital. Just curious maybe where your cost of capital is today and how that funding strategy might change, if at all going forward?

It’s common for us to assess the overall access we have to capital markets and to evaluate the differences in capital costs between these markets. We have successfully navigated these variations over different cycles. Currently, we believe there is a noticeable cost of capital difference between markets. We recognize that these differences can be temporary, and our approach is structured to allow us to access both markets and switch between them as necessary. At this time, we believe the commercial bank market offers better pricing compared to the ABS market. This pricing difference, while narrow, is still present, and we continue to monitor it. Regarding the cost of capital, we see our blended cost—with both senior and subordinated debt—ranging from 5% to 6%. This has fluctuated over the quarter due to changes in credit spreads and base rates, but recently, as we noted in our opening remarks, things have improved significantly. The cost of capital is currently trending positively, though it remains higher than it was late last year. We have taken extensive measures to navigate these dynamics.

Great. Thanks so much. I will leave it there.

Thank you.

Our next question is from Brian Lee with Goldman Sachs. Please proceed with your question.

Hey, everyone. Thanks for taking the questions. I had two kind of related in the model. First, on the growth guidance, you are implying 3% sequential growth for Q3 and then maybe mid-to-high single digits growth in Q4 to hit the full year target. That’s a little bit slower than what you just saw in Q2, which was robust and above the high end of the guide. So this question would be, was there any sort of pull-forward ahead of your pricing increases or maybe you can just talk us through the cadence of growth you are seeing in bookings activity versus prior quarters right now? And then if there’s been any notable shifts in customer trends you are seeing between the different offerings, PPAs, leases, loans, et cetera? And then I had a follow up.

Yeah. Thank you for the question. So on sequential growth and volumes, I think we have had, as we have discussed previously, major increase in new customer orders at the beginning part of the year, late last year, heading into this year. On the last call, we guided to a backlog or a pipeline encroaching on nearly two quarters, as the sequential growth in the business is picked up, that has reduced to closer to one quarter. And as we look at the next couple of quarters and even the next few quarters, that has also, obviously, there are some challenges on the cost side, we have talked about with a growing pipeline, but the ability to bring it in and continue to work that down on a measured pace, I think, is valuable to the business, that is a deliberate focus. As we see some of these uncertainties and the macro picture, growing the physical footprint of the business in a measured deliberate pace has been a focus and the guidance we provide, we are comfortable with. As far as the product mix, the lease versus loan, we have seen a little bit of a shift, we have seen a relative pickup of the lease product where last quarter that was 72% and this quarter that increased to 74%.

Okay. That’s awesome. And then on net subscriber value expansion, kudos on hitting the targets here and reiterating the second half. Just wondering, can you sort of bridge the $2,000 plus step up from Q2, how much of that is pricing reading out versus other drivers like mix and so forth? And then, as we think about the model longer term here, what’s the normalized target for net subscriber value? I know you had talked about kind of reaching $10,000 to $12,000 per customer in the past. Obviously, you are kind of already there. So, wondering if there’s an update to that and what some of the step-up drivers from here would be, if you can quantify? Thank you.

Yeah. Thank you. We have still room to run on the realization of the pricing increases, so those are late March, early April, coupling that with the backlog, which we said, again, encroaching upon two quarters, means about one quarter has passed and we have got a little bit more room to run here for those pricing actions to take hold through the metric. So it’s a partial realization of those through the quarter and that’s also what’s causing us to form the guidance to greater than $10,000 for the balance of the year. As we continue to deliver scale, we get some operating cost leverage as well, which we will see on the cost side and the back half of the year. We continue to see margin improvement within our creation cost; we have platform services margin. We expect some margin improvement there as well through the balance of the year, while contributing to that positive direction in the metric.

Great. Fair enough. I will pass it on. Thanks, guys.

Our next question is from James West with Evercore. Please proceed with your question.

Hey. Good afternoon, guys.

Hey.

Good afternoon.

So, Mary, you have had some back-and-forth with notable short sellers here recently or at least there’s been some agitations made against Sunrun in some of the accounting. And of course, there was a response from you and another response from them. I am curious if you wanted to comment or take this opportunity with the microphones you have right now on your conference call to respond to them?

Sure. From a high level, we went to great lengths to clarify our position and make it clear that we believe Muddy Waters is mistaken. I think it would be beneficial for Danny, our CFO, to share his insights given his experience with the company. We always appreciate open dialogue, so Danny, I’d love for you to speak on this.

Yeah. I just lay around those internally prepared remarks that we posted on our website. We are kind of at our fingertips, if you will, given the long history here. Delivering just very high quality and reputation from a due diligence standpoint over the course of 15 years, my 12 years here, with probably close to about $20 billion raised, much of which was under private situations, private deals, where investors really have the opportunity to come in, even some for like spanning multiple days to have asked us these questions and we have answered them some over a decade ago. So, we felt quite good about the response. I don’t think we planned to elaborate further here on those point-by-point responses. I think that record speaks for itself on our website. But, again, it’s a culture of awesome reputation with our investors, that comes from the transparency and humility with which we have treated a lot of the due diligence we have had to go through to raise all the capital we have raised. And I think, as far as, like, anybody you could reach in the market to ask them about our reputation in those situations, I think, they would speak very highly. They have certainly said those things to us and we definitely appreciate that level of rigor we already get from a lot of these private investors, where we do have to kind of open up the hood a bit and really get into these very specific issues, which we have done so many times, which is why, again, you saw a pretty robust response, go on our website that the team kind of very quickly prepared here and I think that that’s kind of basically it on the matter. And we are excited about all of the execution. There’s a dynamic macro environment. But we are excited about the execution of this team.

Sure.

And we are excited about the trajectory of the business.

Our next question is from Maheep Mandloi with Credit Suisse. Please proceed with your question.

Hey. Good evening. Thanks for taking the questions. First, just on the growth over here in terms of targeting kind of 275 plus megawatts in Q4, could you kind of talk about the sensitivity to that growth from California, the entry point to proceedings over there?

There is a question about the timing, and there is some uncertainty regarding it. Currently, we assume that any impact, due to its unpredictability, will likely be felt more next year. We need to see the outcomes, evaluate those impacts, and provide clearer guidance. However, at this point, we do not expect a significant impact on the volumes we have projected for Q3 and for what we have indicated for Q4 within our annual guidance.

Got you. And just two more from me, one on the IRA, does the tax credit transferability. Does that help with tax equity and for the EV chargers, who’s the OEM supply or is it related to the SK JV? Thanks.

Sure. So this is Ed. So, a couple of questions. So, first, again, on the potential for tax credit transfer in the current IRA draft. That is something again where Treasury will have to promulgate rules and I don’t want to speak in advance of those rules. I think my high-level suspicion is that sort of traditional tax equity capital will continue to be cheaper, but that will certainly expand the market and be helpful, and potentially for more off-the-run products or something like that. So we continue to monitor that and chat more about it, but I think that the traditional structure, which monetizes depreciation as well ought to give a better financial outcome most likely. As to the EV charger, that is a product that we are sourcing separately, although we are not manufacturing it ourselves. It continues to be that we expect to be or I should say that the SK with JV will be talking more about itself sometime during the calendar year.

Got you. Thanks for taking the questions.

Our next question is from Mark Strouse with JPMorgan. Please proceed with your question.

Yeah. Good afternoon. Thank you very much for taking my questions. I just had one kind of two-part question on inventory. Going back to the comments about USLPA creating some kind of delays in the market, is that having a tangible impact on your ability to meet demand here in Q3 or are you kind of leaning into your inventory during this period? And then kind of the second part of that question is, assuming the USLPA kind of gets cleared up over the next quarter or two, kind of what your strategy on inventory would be if that becomes kind of a working capital tailwind? Thank you.

Thank you for your question, Mark. I appreciate your call. Regarding the inventory balance, if you compare our financials from June 30th to December 31st, you'll see that the inventory is still up for the year, although it's down about $9 million from the previous quarter. We did utilize some of the inventory during this period. Overall, we're still up, and this is largely due to increased business volume and our effort to maintain a high supply of days. We previously indicated that we were carrying more than 100 days of supply. With the increase in volume and some of our products being delayed, this has now dipped below 100 days. However, we have planned effectively around this situation, which gives us confidence in managing through the rest of the year, although it's still a risk. We feel secure considering all the procurement activities we've implemented to closely manage the scenario.

Okay. Thank you, Danny.

Our next question is from Philip Shen with ROTH Capital. Please proceed with your question.

Hi, everybody. Thanks for taking my questions. As a follow-up on the USLPA situation. Mary, I think you referenced some of the CVP challenges. Can you provide some additional color on how the USLPA may have impacted your business? How much redesigning did you guys actually have to do was one of the module vendors that you had contracted with possibly impacted? Thanks.

At a high level, we are performing exceptionally well on the fundamentals. As we mentioned, we have made some adjustments within the organization, and we collaborate with various suppliers. It's important to note that there is always some level of adjustment necessary in our business. This highlights the risks involved and the friction that may arise, particularly regarding the redesign work required for customers if we encounter differences between vendor panels. The positive aspect is that we are in a strong position, working with reputable vendors with whom we have long-standing relationships. We have established clear standards to ensure they meet all necessary requirements. Recently, we have been collaborating directly with Customs and Border Patrol to expedite the release of products currently held at the port. As Danny mentioned, we still have a substantial amount of supply available, and our vendor relationships are solid. We take pride in ensuring compliance with requirements. Overall, I view this as something we need to monitor closely and address proactively in this quarter.

Great. Thanks Mary. As a follow-up to net subscriber value, I wanted to see if we could hit the potential view on 2023, again, specifically, would you expect the net subscriber value to be flat in 2023 as we get through the year, maybe potential for even more expansion?

Yeah. Yeah. Yeah. So far we haven’t guided to 2023. I think in the remarks, we noted some of the swinging variables around net subscriber value, total value generated, and those come into play more so in 2023 than they do for the balance of the year. That includes impacts from what happens in California, the ITC stepping up to 30%, the interest rate environment. So with enough of those uncertainties and I think our focus on closing out the year strong and having those pricing increases stick. I think we have kind of stayed away at the moment from getting deep into 2023 on the guidance.

Okay. Fair enough. Thanks very much.

Our next question is from David Peters with Wolfe Research. Please proceed with your question.

Hey. Good afternoon, everybody. Just curious with respect to the IRA, I think, in the past, you said the industry could grow anywhere from 10% to 15% annually over the next several years and you made the comment in the release about, I think, the incentives turbocharging your growth. Do you have any sense in magnitude at this point or just any thoughts about how much bigger the TAM would get from day one just in new markets that you could enter where it wasn’t quite economic enough before? Thanks.

So, this is Ed. Assuming the IRA passes, which we expect it will, I believe the total addressable market could expand in several ways. There is the base increase in the tax credit, additional credits for things like main panel electric upgrades that will make storage more affordable for many people, and the incentives we discussed earlier, particularly for lower-income Americans and other scenarios. Additionally, there is a long-term extension of the credit that is beneficial. Given these factors, along with the rapidly increasing prices of commodities and electricity, we see a significant opportunity for faster growth. We haven't quantified that yet, and we want to establish a path with the regulations they create.

Yeah. And Ed, thank you so much. And just to put a point on that. So, again, I mean, we are sitting at a place of like really strong growth, surging customer demand, right? And then with a potential passage of a bill that is going to encourage more Americans to move faster towards electrification, which means more Americans are going to also want to move faster, not just to the other kinds of electrification products we can help them with, but with the ability to generate their own energy that is way more affordable, reliable, and energy independence. So we really believe, as I said, that we are on the precipice of really some monumental and impactful climate legislation that, again, is going to be felt not just in like the TAM, not just in sort of these very practical ways, but seismic ways in terms of the drive towards electrification and the surging demand, that’s going to turbocharge around the need for solar energy.

Great. No. I appreciate those thoughts. Just one other one, just back to the net subscriber value, I guess you guys are kind of guiding to exit year around that $10,000 level. But just how quick can we see that step-up just from the higher ITC alone, again, assuming the bill passes just understanding the value of tax equity would be marked up in that calculation, right, would it flow through pretty fast or just how should we think about that?

It depends on the current form of the legislation, which is set to take effect on January 1st. This means there would be an immediate impact on future installations, as well as a potential increase in value for the systems already in service for the year. This would affect our investment funds, and when we consider the tax equity returns with the revised rates, it should result in positive financing and working capital benefits. The effects should be noticeable quickly, applying to systems throughout this year.

Great. Thank you. Appreciate it.

Our next question is from Colin Rusch with Oppenheimer. Please proceed with your question.

Thank so much. I am just curious about a couple of elements on the cycle time. So can you talk a little bit about changes in the sales cycle and then also in terms of recruiting and training new installation staff?

Yeah.

Yeah. Can you clarify what the question was regarding the sales cycle?

Yeah, regarding the direction of the situation, are you able to shorten it with some of the elements you've been working on with permitting? Are customers becoming educated enough to make decisions faster than you can install these systems?

I am very pleased with the progress we made in the last quarter in shortening the cycle time. Our focus has been on reducing the time from customer signature to installation, and we achieved significant improvements in that area. I believe we have reached a consumer tipping point, where solar is becoming more mainstream. Our sales teams are managing incredible customer demand, and this part of the process is moving slowly. Regarding training, we have robust programs for new employees. I am also impressed with how appealing Sunrun is as an employer; we are successfully recruiting and onboarding enthusiastic new staff whenever we need them. Overall, we are in a strong position regarding labor and productivity metrics as we work on the installation cycle.

Fantastic. And then the second question is, the conversion rate of the referrals you are getting from Ford. You need to speak to how many or what percentage of those referrals are actually turning into sales for you guys?

We are still in the early stages of this process. As I mentioned earlier, we are engaging with thousands of customers. Currently, about 10% of those who are scheduled for bidirectional charging have also expressed interest in going solar at the same time. This is a strong indicator for us, as there is a significant connection between electric vehicle drivers and those who are interested in solar energy. We anticipate seeing continued strong demand.

Perfect. Thanks a lot, guys.

Hi. Good afternoon, everyone. And thank you for taking the question. So I noticed that you disclosed the value generation target of greater than $900 million. I think there were some also you mentioned to it in the prepared remarks, and you indicated that is way up relative to 2021. However, corporate cash net of recourse debt is down about $250 million net of the investment from Q1. And so just wondering if you could help us think through the corporate cash trajectory as you look into the second half of the year? And I have a follow-up.

The corporate cash dynamic has shifted. We may have discussed this in the last call, but the significant growth during the first half of the year resulted in increased cash consumption related to working capital. This was due to substantial sequential increases as we expanded our installation footprint to meet demand. Additionally, we've had to carry increasing inventory balances because of supply chain issues, leading to overall working capital consumption throughout the year. However, the quarter-over-quarter movement has been less pronounced.

And this is Ed. I think the one other thing we did mention on the prior call would continue to be the case is that from a cash flow performance, the systems that we originated prior to the quick run-up in interest rates, that we have now placed in service during the period of higher interest rates don’t meet our kind of long-term desires for cash generation. But as we now transition back to the projects to installing the projects that we originated after we increased pricing, that is very helpful to the cash trajectory as well.

That’s helpful context. And then as my follow-up, as you contemplate strategies to maximize customer economics, not just in the second half of the year, but it’s really long term. I was wondering if you can maybe talk a little bit about customer acquisition costs because that is something that you have the ability to control unlike NEM and ITC, et cetera, looking at where customer acquisition costs are now relative to prior to the Vivint deal. Those numbers are up a bunch. And so just wondering, is that somewhere where with a downturn coming on the economy, you can maybe bring those down and rapidly improve customer economics, rapidly improve levered cash generation for 2023?

Yeah. Yeah. So definitely, the dynamics in the economy, particularly as the economy softens, I think that could generally be a tailwind to the business on the cost side. And I think that would apply whether you are talking about equipment, you are talking about input labor on the install side or you are talking about labor on the sales side, that could certainly be a factor that would be beneficial over time. We have also seen just the record demand for the product. I think the benefits as we see those tailwinds just from just consumer awareness, adoption, their wallets being pinched with rising utility rates and everything else, I think that those are generally favorable dynamics to customer acquisition costs. We did see the sales and marketing in our creation cost metric go up quarter-over-quarter, and that is reflecting because of the way we realize that upon the install to the dynamic Ed mentioned earlier. You are also seeing in our metric some of the sales and marketing costs get realized upon install from systems we originated in Q1 prior to those pricing changes, which should have a beneficial impact over the next period or two.

Yeah. And I would just add to that. Yeah, from a big-picture perspective, back to your fundamental question, we are 100% focused on like as we are getting faster, better, stronger in driving down the cost stack like in every area, right? And at the same time, really, again, dramatically driving up customer experience. So we are doing a lot of things around simplifying process and other activities that should continue to improve the overall profile.

Thank you.

Our next question is from Sophie Karp with KeyBanc. Please proceed with your question.

Hi. Good afternoon and thank you for the questions. It’s been a lengthy discussion. I have a few inquiries for you. First, I’m interested in the net earning assets and how that metric has performed over the past 12 months. It has been growing in low single digits, particularly on a per share basis, and is essentially flat. Do you plan to make growth in that metric one of your primary targets at some point? Or would you rather focus on customer value? What I'm trying to understand is how we should view the relationship between increasing customer value and the ultimate increase in net earning assets. Is this the correct way to assess the business economics?

Yeah. Thanks for the question. Yeah, again, going back to one of my responses to the prior questions. And again, echoing what Ed mentioned, there was that period of time where we had that major increase in volumes that major increase in interest rates, where we did write a lot of business that had impacts to their ultimate unit economics from the financing environment as well as the working capital environment, which we are still kind of working through as we raise up to the higher volume level over the course of the year. So you also see the related impacts through the metric. The metric is also burdened by the SK investment we have also talked about.

So eventually, we should see that metric to kind of recover to more about level of growth…

We have observed a slight improvement between Q1 and Q2. Recently, there has been a return to growth in the metric.

Okay. I have a follow-up. We discussed utility rate inflation and rising energy costs. My question is about the recent spike in utility rates, which is largely due to rising energy and fuel prices. If the economy slows down and energy prices decrease, will we likely see a corresponding reduction in growth rates? Is there a risk that some of your recently underwritten customers might actually experience a drop in sales compared to utility rates if that occurs?

Yes, Sophie, it's Mary. My brief answer is no. With my 20 years of experience as a utility executive, the key factors behind utility rate changes are clear. Fuel costs have significantly influenced the recent increases, but there are also billions of dollars in infrastructure investments that need to be factored into rates. In major markets like California, we're witnessing the impact of climate change, including wildfires and droughts, driving unprecedented utility expenditures on both distribution and transmission. Labor costs are also rising. These fundamental issues take years to resolve; even if conditions change, the effects won't be immediate. While fluctuations in fuel prices can impact utility rates more rapidly through mechanisms like power adjusters in certain regions, these changes can be jarring for customers and affect their perception of price stability. Our customers prioritize stability just as much as savings; they want to be confident about the costs of essential services over time. There are many dynamics at play here. Ed, do you have anything to add?

There are a few things I wanted to add. As Mary mentioned, there is significant capital expenditure happening. Utilities across the country are spending 2.5 times more on capital projects than they are in depreciation. For example, in Arizona, over the past decade, even before the recent rise in energy costs, wholesale power costs dropped by half while retail prices doubled. Additionally, retail power costs tend to rise as efficiency improves because, even if there are savings on fuel, capital expenditures often fill the gap. Many operating cost increases that utilities have already faced have not been passed on to consumers yet, as they require approval in rate cases. Therefore, increases in operating costs, capital costs, and long-term fuel procurement have not yet reflected in rate increases. Over the last six months, the only changes you’ve seen are related to the small portion of energy utilities purchase on the spot market. There is still a substantial amount of price increases that need to be accounted for. Moreover, there is a significant capital expenditure trend. I believe the best projections for retail rate increases will show that they will continue to rise at double-digit rates or close to that for years, even if wholesale prices stabilize or decrease.

And it’s one of the many reasons why we have talked a lot, and this company has done so much work on radical collaboration around really having our assets become a valuable part of how we operate the grid going forward. Because fundamentally, the work we do and the work we are doing around, particularly like with Ford with the bidirectional charger with solar with storage, we are, in essence, creating an opportunity for utilities to have access to smart, controllable load. So as we electrify more of devices and transportation around the country, we could play a really, really critical role in helping utilities and grid operators operate the grid much more cost-effectively.

And Operator, I think we are going to try to squeeze in two more quick questions if we can and maybe we have folks just do one question and I think we are out of time.

Our next question comes from David Niewood with Curator Fund. Please proceed with your question.

Hi everyone. Thank you for taking my question. I have a quick query. The value proposition for customers has quickly evolved from just solar to include solar with storage, backup power, electric vehicle support, and whole home energy storage applications. Given your large customer base, have you considered how we might approach upselling existing customers on this expanded offering? What implications might this have for customer acquisition costs and the potential for renewing contracts in a way that captures previously unclear renewal value? I hope that makes sense.

Yeah. Thank you. It’s a great question and actually one we are very focused on because, again, you are right. We are really well positioned. We are already for many customers acting as their clean energy company that can help them with the transformation of their electric vehicle as well. And 100%, I mean, we have actually already seen that in some cases, right, where a customer already needs to make their system larger. We definitely see increased opportunity around system sizes. We absolutely see opportunity to bring two existing customers, new products and technologies that we are bringing to the market. So again, we see not just rapid growth in the number of customers that we serve, but also the opportunity to continue to deepen and enrich our relationship with our existing customers. And it’s also interesting to think about the fact that a lot of customers stay in their home, what, on average, 7 years. So in many cases, we are already seeing cases where we have picked up a new customer because they bought the home of an existing customer then becomes a new customer again with their new homes. So it’s really the expansion opportunities of the relationship in our endless. They are limitless in our minds. And again, that’s why I talk a lot about customer obsession and being that beloved, trusted partner for customers all across America in helping them get to that more affordable, clean, independent smarter energy future.

I would like to add that we have tested the interest in retrofit storage, and it is significant. While we support our customers in this area, we have not yet marketed it due to constraints in battery supply. However, as these constraints ease, we plan to promote it, as we see a substantial opportunity there.

100%.

Our final question comes from Joseph Osha with Guggenheim. Please proceed with your question.

Hi, this is actually Hilary on for Joe. And thanks for squeezing me in here at the end. I just wanted to touch real quickly on storage. And if you could just give us a better sense for where kind of attach rates are and particularly as you work through bringing down those install cycle times, kind of what has to happen and how quickly we might see that stronger adoption rate.

Thank you for the question. When we examine the demand for storage, it significantly exceeds our current battery supply. The volume growth rate among our storage customers has been strong, considerably surpassing the overall business growth. While I don’t have the exact number for the attach rate, it’s in the teens. Additionally, our installation volumes are increasing at a robust pace compared to the available battery supply. This situation has been putting downward pressure on the attach rate, but both the physical units and the number of customers are experiencing substantial growth.

Yeah. As we said, we have 42,000 customers with storage and again, one of the largest providers. I think actually the largest provider in the country. No doubt in my mind that, again, there are so many customers that want to go with storage, as Ed highlighted already, there’s just incredible opportunity to go back to customers, existing customers with storage capabilities as we, again, see the tightening that’s happened in the market sort of loosen up and free up. So tremendous upside opportunity for us.

This concludes today’s Q&A session and also this concludes our conference. You may disconnect your lines at this time and we thank you for your participation.