Sunrun Inc. (RUN) Q2 2023 Earnings Call Transcript

Good afternoon, and welcome to Sunrun's Second Quarter 2023 Earnings Conference Call. I'll now turn the call over to Patrick Jobin, Sunrun's Senior Vice President of Investor Relations. Please go ahead.

Thank you, Kevin. Before we begin, please note that certain remarks we will make on this call constitute forward-looking statements. Although we believe these statements reflect our best judgment based on factors currently known to us, actual results may differ materially and adversely. Please refer to the company's filings with the SEC for a more inclusive discussion of risks and other factors that may cause our actual results to differ from projections made in any forward-looking statements. Please also note, these statements are being made as of today and we disclaim any obligation to update or revise them. On the call today are Mary Powell, Sunrun's CEO; and Danny Abajian, Sunrun's CFO. Paul Dickson, Sunrun's Chief Revenue Officer, is also on the call for our Q&A session. A presentation is available on Sunrun's Investor Relations website along with supplemental materials. An audio replay of today's call along with a copy of today's prepared remarks and transcript, including Q&A will be posted to Sunrun's Investor Relations website shortly after the call. And now let me turn the call over to Mary.

Thank you, Patrick. Sunrun's team delivered a strong quarter. Our disciplined margin-focused growth strategy continues to position the company well for long-term success and generating cash. This quarter, we beat our volume guidance for solar energy capacity installs by a large margin, but more importantly, we are rapidly accelerating storage adoption, growing our lead as America's clean energy company, one that delivers a superior value proposition to customers and creates multiple value streams for our shareholders. We installed more than 100-megawatt hours of storage capacity in Q2, growing 35% compared to the prior year, and we now have more than 900-megawatt hours of storage capacity installed across the country. We are accelerating our pace. Our storage offerings provide customers enhanced value and generate significantly higher margins for Sunrun today while providing a foundation for considerable monetization in the years to come. Our strong attachment rate was nearly 18% of our installations across the country in the second quarter, and we expect this percentage to continue to increase rapidly. In the second quarter, we grew our customer base to nearly 870,000 customers, which represents 6.2 gigawatts of installed solar capacity. We added approximately 40,000 customers this quarter, including 7,000 storage customers, with an improving net subscriber value of over $12,000, resulting in total value generated of nearly $400 million. Our rapidly accelerating storage attachment rate presents a powerful opportunity to grow our clean energy generation business by providing at-scale power plant capabilities across America. This quarter, we again set the all-time industry record for installed solar energy capacity. This scale combined with a rapidly increasing storage attachment rate presents a powerful utility-scale generation solution. We grew net earning assets by over $400 million and increased our total cash position by $78 million compared to the first quarter. These strong financial and operating results are possible because of our experienced, committed team who is executing on our disciplined margin-focused growth strategy. Okay. Turning to the topic I know is on everyone's mind, California. The most important news is that we are smashing our expectations for increasing the adoption of higher-margin storage offerings in California and nationally. In California, we have increased our battery attachment rate of both backup batteries and our Shift product to over 80%. All of our battery products store solar energy when it's generated and dispatch it when it's most valuable. Over one-third of our newly sold battery systems also perform home backup, a doubling since the start of the year. The remaining two-thirds of new battery customers represent our Shift product in California, which offers a strong value proposition for our savings-focused customers. Let me be perfectly clear. Both storage products, battery backup and Shift, provide superior value to Sunrun compared to solar-only customers prior to the California policy transition. Nationally, we are seeing storage attachment rates for new sales in excess of 30%. Our leading position in providing a backup storage offering to customers generates superior and expanding margins and market share gain opportunities. As this higher mix of storage sales flows through to installations over the next two quarters, we expect strong increases in net subscriber values and total value generated that will offset impacts from lower near-term California volume. Training sales representatives to sell under the new policy construct has taken time. We are seeing significant increases in sales recently as sales representatives become proficient in explaining the new product opportunities and selling a bundle with up to 80% higher customer value than before. Because of this learning process and due to our rapidly increasing mix of storage, which takes longer to permit and install, Q3 is a transition period. We are still growing at a strong pace. Q3 installations will still be up year-over-year with a more profitable mix, and our outlook for the second half is growing 9% year-over-year in volume with even higher growth in value generated. I am confident we will look back at this moment as another proof point of how we strengthen our market position by remaining customer-focused, disciplined, and methodical when the broader market is faced with a challenge. With California's market massively underpenetrated, we expect sales will accelerate further as our teams continue to optimize how they sell our offerings in the new environment and demand continues to build following the dramatic pull forward we saw earlier in the year leading up to the transition. Despite slower-than-anticipated sales in May, sales in June and July ramped at strong month-over-month rates in our direct business. We are down about one-third compared to last year in July, with our direct business performing significantly better and are seeing strong week-over-week improvements exiting the month. As consumers adjust to the new regulatory environment and understand the value proposition that we are able to offer, I am confident this trend will continue and we are on track for strong year-over-year growth in California. While California gets a lot of attention, it's important to note the benefits of running a diversified business, which operates in many markets. Sales activities outside of California have been robust, growing by 25% in Q2 compared to the prior year, and this growth rate has been maintained through June and July. The bottom line is demand remains robust outside of California. California is improving, and we are offsetting the near-term volume dip in California with a mix of much higher-margin offerings. Our growth and value creation story is on track. Shifting to an update on our other strategic priorities. Our goal is to meet customers where they are on their clean energy independence journey and provide solutions to improve their lives. Our strategy is to integrate the best and most differentiated offerings available and, as appropriate, either develop these offerings alongside our partners or build the capabilities to fulfill them directly in-house. Sunrun's leading work to aggregate residential batteries and form valuable distributed power plants continues to advance. Our exclusive partnership with PG&E, called Peak Power Rewards, is the largest residential distributed power plant of its kind in the United States. Over the last quarter, we grew that program further by adding 1,000 customers. We now have 8,500 customers participating with up to 34 megawatts available for dispatch. Starting yesterday, our participating fleet of home batteries has been supporting the grid by dispatching during critical peak times. The value of enrolling in the program, both for our customers and for Sunrun, is compelling, both on a per-customer basis and is a meaningful source of additional recurring revenue. As part of their enrollment in this program, customers receive $750, which is entirely found money, an additional and meaningful value above their initial expectations when subscribing with Sunrun. Together with our customers and PG&E, we are proving the value of our rapidly growing fleet of dispatchable energy assets. As previously announced, we secured an exclusive contract with Puerto Rico's utility company PREPA to deliver 17 megawatts of baseload daily cycling power. Separately, working through the policy and regulatory process over the last five years, we have helped develop a rapid emergency response program that will be the first of its kind in the U.S., providing localized power when blackouts are impending. Sunrun stands ready to provide our distributed power plant services from thousands of customer rooftops as soon as the program is finalized in the coming months. These programs are so important, expanding the value proposition for customers and providing incremental recurring revenue streams to Sunrun, which are largely not reflected in our metrics today. Our growing experience with grid services increases our conviction that we can realize $2,000 or more in per-customer NPV from these assets. And the need for these programs will only increase as the grid ages and climatic events further strain its capabilities. Of our nearly 870,000 customers, 65,000 have batteries today, representing 7% of our fleet. We expect to launch storage offerings for the remaining 93% of our customers in 2024 with a retrofit offering, while simultaneously increasing our attachment rate of batteries for new customers. We also plan to launch a storage-only offering to meet the demand from customers looking for resiliency, but whose homes might not be ideal for solar. Many look at Sunrun as a solar company, but we are now in a unique position to build a massive, nimble, controllable energy generation company that can also provide energy storage, advanced energy control technologies, smart panels from SPAN, EV charging, and enable mobile backup storage from electric vehicles such as our partnership with Ford. Our dedicated, experienced sales teams provide a strategic advantage for Sunrun to lead in commercializing these opportunities. Lunar Energy, the venture that we invested in alongside SK Group, unveiled details of their first product in June. We are excited to work with Lunar as a key partner to accelerate home electrification. We expect Lunar's initial storage offering to be available in the coming quarters, and their advanced grid services platform is a key differentiator for us as we build massive distributed energy plants across America. SnapNrack, the independent solar racking technology company we own, also continues to innovate with leading solutions, including fast, direct-to-deck mounting options for rooftop solar systems called TopSpeed. SnapNrack products are sold broadly to the industry and leveraged by our teams as they dramatically increased installation efficiency. We are focused on maximizing value for our shareholders by delivering strong margins, which will support meaningful cash generation. Margins are expected to expand significantly in the coming quarters from pricing, product mix, and go-to-market decisions. A continued focus on operating efficiency and tailwinds from ITC adders, hardware cost improvements, and a general easing of inflationary pressures. We continue to make meaningful advances in our operational efficiency metrics, growing installation volumes while maintaining or reducing staffing levels throughout the organization. While there are numerous initiatives underway, a few noteworthy ones include our national rollout of our shift to job site delivery of equipment, which enables job site reporting for our installation crews. We are seeing strong improvements in labor efficiency, employee satisfaction, and safety metrics from this process change. We also recently made a meaningful investment in our artificial intelligence. It's too early to quantify potential benefits, but we believe it presents a unique opportunity to drive increased cost efficiency, reduce cycle times, and improve customer experience. As an example of our efforts to prioritize margins and balance growth, we recently optimized our strategy to encourage stronger uptake of storage across the country. We also reduced our direct operations footprint in Arizona, shifting to an affiliate partner-led go-to-market approach. We are committed to driving meaningful cash generation in this business. We are targeting annual run rate recurring cash generation of $200 million to $500 million or higher in future quarters as further margin improvements are realized. Danny will expand upon this in his section. At Sunrun, we are focused on managing both margins and volumes to maximize cash generation as the ultimate and most clear value we can create for our shareholders. Importantly, we underwrite our new originations with a hurdle rate in excess of current capital costs. Sunrun has operated through a variety of cycles over its 16-year history and has proven time and again to be the prudent operator that can drive sustainable value-generating growth. Last, but certainly not least, I want to celebrate our teams across the country, in the field and offices, who are helping accelerate this customer-led revolution in energy and practicing our strong culture of doing it safely and efficiently. I am thankful for the contributions from each Sunrunner who is helping drive this transformation. This quarter, I would like to recognize outstanding performance from our Las Vegas branch, which is our top-ranking team in the country as measured by our safety, productivity, and customer satisfaction metrics. I also want to recognize our entire team for driving a world-class Net Promoter Score of 68 at the time of install, comparable to the top brands in the country. I also want to thank our California sales teams who have continued to outperform our peers, driving a higher-margin mix while providing a great customer experience. Crushing it on all of these operating fundamentals of our business is critical to driving long-term value. We are proud of your contributions and your leadership at Sunrun. With that, let me turn the call over to Danny for our financial update.

Thank you, Mary. 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 on Slide 10. In the second quarter, customer additions were approximately 39,800, including approximately 32,400 subscriber additions. Our subscription mix represented 83% of our deployments in the period, a meaningful increase from 78% last quarter and the highest level in 2 years. Our recent sales activities and the forthcoming benefits from the tax credit adders in the Inflation Reduction Act, which are only available to the solar subscription model, indicate the mix of customer additions is likely to continue to shift more towards subscribers in the quarters ahead. Solar energy capacity installed was approximately 297 megawatts in the second quarter of 2023, a greater than 20% increase from the same quarter last year and significantly exceeding our guidance of 270 to 290 megawatts. Our installation teams executed well in the quarter, and our affiliate partner channel outperformed significantly in Q2 as the strength of our subscription model captured increased share among dealers in the industry. We have now installed over 65,000 solar and storage systems. We expect storage installations will grow rapidly in the quarters ahead and attachment rates will increase meaningfully as our recent sales are well in excess of 30% nationally for reasons Mary mentioned earlier on the call. Our backup battery offerings carry higher margins, typically by several thousand dollars per customer. We also expect our Shift offering to achieve margins that are higher than prior solar-only margins received in California under NEM 2. We ended Q2 with approximately 869,000 customers and 725,000 subscribers, representing 6.2 gigawatts of networked solar energy capacity, an increase of 21% year-over-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 Q2, our annual recurring revenue or ARR stood at over $1.1 billion, up over 25% over the same period last year. We had an average contract life remaining of nearly 18 years. Turning to Slide 12. In Q2, subscriber value was approximately 44,700 and creation cost was approximately 32,400, delivering a net subscriber value of $12,321, in line with our guidance of a sequential increase to the $12,000 figure in Q1. Our Q2 subscriber value and net subscriber value both continue to assume a 30% investment tax credit and thus exclude any margin upside associated with the tax credit adders. Although the ITC adder for energy communities will apply retroactively to January 1, 2023, we again did not reflect this value in our net subscriber value for Q2 as we work through the implementation with our system and complete all necessary steps with our capital providers, but expect to begin doing so in Q3. We currently estimate the energy community adder will apply to approximately 15% of new installations even without adjusting our geographic footprint. We are seeing easing supply chain conditions and substantial unit cost reductions across our key hardware components, which should start to flow through our reported costs over the next few quarters as we work through our higher cost inventory. On a like-for-like basis for a 7.5 kilowatt solar with backup battery system, hardware costs are expected to decline by nearly 15% or nearly $2,000 per system over the next few quarters. These beneficial trends may be obscured by an increasing mix of storage, which carries higher net margins but will increase hardware and install costs and, therefore, impact creation costs. Total value generated, which is the net subscriber value multiplied by the number of subscriber additions in the period, was $399 million in the second quarter. This represents an almost doubling compared to the prior year, even without adjusting for the less favorable discount rate used this year. Our present value-based metrics are presented using a 6% discount rate, which we last updated from 5% to 6% last quarter. As a reminder, we generally prefer not to update the discount rate frequently to enable ease of comparison across periods. Instead, we provide advanced rate ranges that reflect current interest rates, enabling investors to calculate the obtainable net cash unit margins on our deployments. In addition to providing this heuristic, this quarter for direct clarity, we have added a pro forma net subscriber value using the capital cost observed for the quarter. In Q2, our average capital cost was approximately 7.25%, which on a pro forma basis results in net subscriber value of $8,104 and thus total value generated of $262 million, which is up 31% compared to Q2 of last year, which was presented again using a 5% discount rate. As Mary mentioned, our financial underwriting already takes into account a cost of capital well in excess of 6%. Turning now to gross and net earning assets and our balance sheet on Slide 13. Gross earning assets were $12.6 billion at the end of the second quarter. Gross earning assets is the measure of cash flows we expect to receive from subscribers over time. Net of operating and maintenance costs, distributions to tax equity partners and partnership flip structures, and distributions to project equity financing partners, all discounted at a 6% unlevered capital cost. Net earning assets were over $4.4 billion at the end of the second quarter. Net earning assets is gross earning assets plus cash less all debt. Net earning assets increased by over $400 million this quarter, driven by strong net subscriber values and more favorable working capital dynamics compared to the prior period as we reduced inventory. The value creation upside from future grid services opportunities and selling additional high-value electrification products and services to our long-term customer base are not reflected in these metrics. As we've shared before, we regularly enter into interest rate swaps to hedge capital costs on our newly installed customers. We are principally exposed to interest rate fluctuations between customer origination through shortly after installation. Around the time of installation, our systems are financed with project level nonrecourse debt. Nearly all of this financing is insulated from near-term interest rate fluctuations as our debt is either fixed coupon long-dated securities or floating rate loans that have been hedged with interest rate swaps. As such, we do not adjust the discount rate used in net earning assets to match current capital costs for new installations. We ended the quarter with $921 million in total cash, an increase of $78 million compared to the prior quarter. Turning briefly to our capital markets activities and outlook on Slide 16. We continue to maintain a robust project finance runway. As of today, closed transactions and executed term sheets provide us with expected tax equity capacity to fund over 330 megawatts of projects for subscribers beyond what was deployed through the second quarter. Following transactions after the quarter closed, Sunrun has $400 million in unused commitments available in its $1.8 billion nonrecourse senior revolving warehouse loan to fund approximately 150 megawatts of projects for subscribers. This strong capital runway allows us to be selective in timing our capital markets activity. Given the increased scale of our business, we plan to upsize and extend our nonrecourse warehouse loan in the coming few quarters as we have done several times before. We are also actively evaluating various options to expand routes to efficiently monetize tax credits, including the substantial amount of tax credit adders we expect by leveraging the new tax credit transferability provisions from the Inflation Reduction Act. We currently see project-level capital costs at approximately 7.25%, which is a weighted average of our nonrecourse senior and subordinated debt. Our cost of capital indications are influenced by both realized terms on our transactions as well as observable market data such as longer-term treasury yields as a proxy for our base rate and credit spreads across numerous transactions completed by us and our peers. The deep relationships we have cultivated with many capital providers in multiple markets, our recognition as a high-quality sponsor, and the strong performance trends of our customers afford us access to attractively priced capital. Demonstrating this access, last week, we closed a portfolio term out involving a private senior securitization and a subordinated loan. Together with these financings, year-to-date, we have closed almost $2 billion in project-level capital commitments. Turning now to our outlook on Slide 17. We continue to guide growth in solar energy capacity installed to be between 10% and 15% for the full year 2023, which we believe will result in market share gains. Last quarter, we noted we might be around the high end of this range, but we now feel comfortable reiterating this range as we plan for a persistently higher interest rate environment, our decision to exit certain lower-margin markets, increased install cycle times from growth in storage attachment rates, and a slower-than-expected recovery in California. We continue to believe the market is very underpenetrated and can sustain long-term growth rates of 15%. In this strong long-term demand backdrop, our priority is to generate cash by continuing to increase customer values through growing storage adoption among higher-value products and services and growing our scale and efficiency further. In Q3, we expect solar energy capacity installed to be in a range of 255 and 275 megawatts. This decrease from the second quarter's level reflects the decline in California order volumes in Q2, which will impact sales in Q3. Our success in achieving substantially higher storage attachment rates on our sales nationally also results in longer install cycle times, which creates near-term lags to the rate of installation completions as storage attach rates migrate upwards. We expect net subscriber values to be materially higher in the second half of the year compared to the first half, driven in large part by the much higher net subscriber values from backup battery systems factoring into our mix, particularly in Q4, when we expect to see the strongest net subscriber value of the year. We anticipate including the energy community ITC adder starting in Q3. While we expect the domestic content and low-income adders are most likely to benefit us starting in 2024, although their benefit could materialize sooner. Offsetting these gains will be less favorable fixed cost absorption in Q3, resulting from lower volume and potential near-term headwinds in our equipment distribution business. Recent interest rate increases, inflationary pressures, and working capital needs have prevented us from generating meaningful cash. We responded to the headwind decisively with higher pricing and operating efficiency improvements. Since the start of 2022, the increases in cost of capital reduced realizable proceeds by more than $1 billion and we faced higher input costs and a dynamic supply chain environment, which resulted in a higher inventory balance. Given our actions, we are now targeting an annual run rate recurring cash generation of $200 million to $500 million or higher in future quarters as further margin improvements are realized. As we have described in the past, because we finance our growth using tax equity and nonrecourse project debt, we measure cash generation as the change in our cash balance excluding any changes to our parent-level debt, equity, and equity-like financings as we highlight on Slide 15. Because project finance timing can be lumpy, cash generation can also be lumpy quarter-to-quarter. We expect to provide more details on cash generation, including more specific guidance on timing in the coming quarters, but we want to be clear that this is the financial outcome we plan to deliver. With that, let me turn it back to Mary.

Thanks, Danny. I am so appreciative of our hard-working team whose incredible passion for the work we do and commitment to our purpose helped deliver another strong quarter of results. Our team is laser-focused on accelerating the strong momentum, embracing this massive shift and extending our lead as America's clean energy company, driving continued efficiencies across the business and generating more value for our shareholders, our partners, and our customers. Operator, let's open the line for questions.

Our first question is from James West from Evercore ISI.

Congratulations on the significant increase in battery attachment rate, it’s very impressive. I have two questions regarding that. First, regarding margins, you mentioned earlier that the batteries come in at higher margins which are offsetting some lower volumes. Is it merely an offset, or is it actually compensating for the somewhat temporary lower volumes?

Yes. I mean, again, like we are, as I said, so thrilled as well with the work of our team and the appetite of our customers. I mean the reality is our customers want storage, and we're the company to deliver it. So we're really excited by that, and we're excited about the momentum we see going forward. And yes, they produce much higher value every customer because in essence, we're selling two very significantly priced products now instead of one, making every customer worth a lot more. But make no mistake, again, we see that the momentum is building on the sales side, and we expect to hit our target for the year to hit our target range.

Okay. Got it. And then on grid services, which looks like a huge, huge opportunity for you guys, how do you see the evolution here? I guess, one, is that accurate? And two, how do you see the evolution of that playing out? I know you have PG&E working with you now? Do you think other utilities will be working with you soon?

Yes, about 100%. As I mentioned before, having been a utility CEO for a long time, we are building significant power plant capabilities across America just as the grid is experiencing real stress from increased heat and various climatic events. Therefore, we absolutely expect to see an uptick. This is why we are targeting a minimum of $2,000 NPV per customer from a grid services perspective, but we see even more potential as we look ahead.

Next question today is coming from Brian Lee from Goldman Sachs.

Maybe first one, just a follow-up on James' question about the high battery attach rate and the margin accretion potential there. I think in the past, you all have talked about maybe a couple of thousand dollars of incremental subscriber value for a battery plus solar customer as opposed to just a solar-only. Not sure if that math still holds true, but can you maybe give us a sense of what the incremental subscriber value accretion is? And then maybe is it different between a backup battery customer versus a Shift battery customer? And then I have a follow-up.

Yes. Brian, this is Danny speaking. Yes, it could be a few thousand dollars per customer and as we blend to the mix. So we said on the call, greater than 30% backup, and that's not just in California, that's a national event occurring. So as we get that through our pipeline and deliver to install, as we've noted, like battery installations do take a little while longer. So over the coming couple of quarters, we could see a few thousand dollars per customer magnitude of pickup is what we're planning for.

Okay. That's great. And obviously, that would feed into that substantially higher subscriber value as you're sort of guiding to here in the second half. Fair enough. Second question I had was around the $200 million to $500 million run rate annual recurring cash generation. It's a fairly wide range. I know it's lumpy, as you said. But can you maybe just give us a sense of what's driving that wide range? How it impacts your financing strategy, if at all? And I just feel like we've seen this metric introduced in the past, but it's been tougher to get a sense of how consistent and maybe even the practical implications of what this metric is going to mean for you going forward? And I know in the past or recent past, it's gone kind of in a negative direction. So I'm just trying to get a sense for how you're thinking about this implications-wise as well as how consistently you think you can maintain the cash generation going forward.

Yes. Thank you for the question. I would start by saying strategically, that is the target. That's what we're driving towards. That's where we're working towards. And in part of the commentary, we did also highlight the interest rate increases and some of the events over the last year that took us off that path, frankly. And it wasn't just the magnitude of the interest rate increases, but it was the speed with which it happened. And then coupling that with the dramatic rise, we had in inventory balance managing to supply chain, those were prohibitive to cash generation, although we have been increasing pricing and margins and cost efficiency in the business. So as we chart out our future, kind of where we are now, and some of the assumptions we'll make on volume, backup battery mix, ITC adders, and the general environment around cost of capital where again, as Mary said and I reiterated, we do plan the business now for our current cost of capital. So we have recuperated the effective interest rate increases. And as that has kind of maintained in a range, we look at that and a few other factors like what's happening in the external environment on equipment cost. And as we put all that together, from a micro level, $200 million to $500 million becomes the target. And from a macro level, as we think about kind of the overall full cost stack annualized spend of the company and relate that on a percentage basis, like even net of working capital, we think that's a reasonable range for us to target and an expectation, frankly, that we have on ourselves.

Your next question today is coming from Julien Dumoulin-Smith from Bank of America.

Following up on that last question on the $200 million to $500 million range here of cash over time. I mean, can you talk a little bit more specifically about how lumpy that could be? I know you disclaimed in the remarks here that you're not reflecting anything better than the 30% tax credit. Transferability and monetization remains in flux. But how much of a step function change could we see next year as domestic content and especially attached with a higher attach rate on storage really starts to impact numbers? When you say over the next few quarters, is this really just waiting to get that clarity on the tax credits to pivot to that kind of cash?

Yes. So I think I highlighted some of the factors like backup battery mix, we observed in our sales and that's a matter of putting that through a timing model and seeing the ramp on installs. So that is not, I would say, in the basket of things that would cause lumpiness. ITC adders are obviously, as we mentioned, energy communities are about to be up and running formally in the system, if you will, and we'll talk more about that as we get that starting to get realized in the margins. And then low-income domestic content, those will phase in over time. We think low income will be a single event and domestic content would phase in over time and we do have a little bit of uncertainty on the exact timing but as we get more and more clarity, we will share it. The lumpiness comment is more around the fact that we do have several term out events into the capital markets a year as we scale up deals, have them ready with fully installed pools of assets and turn them out into the capital markets. And sometimes you might have a transaction that could be in November, December or January and you might get the cash event hitting in a slightly different period. So that's not a quarterly target, that's an annualized target. That's why we're speaking on an annual number, but I think the point was more to remind folks that we should look at it over many quarters as opposed to any one individual quarter.

Your next question is coming from Andrew Percoco from Morgan Stanley.

Just wanted to circle in on the net subscriber value guidance for the back half of the year. Is there any way you can provide some kind of bookends in terms of how we should be thinking about it? Looking back to this time last year, you did see a pretty noticeable uptick in Q3. Should we think about order of magnitude relatively similar to what we've seen in Q3 of 2022? And maybe slightly differently, how should we think about growth in total value generated in the back half of the year when you combine it with your customer growth?

Yes. I mean what you're seeing is, as we described, a really different customer profile moving forward. So we are selling to much higher-margin customers. So a big part of how we see value creation is in the context of the product mix that we're selling and that increasing storage attachment rate. And again, what we're seeing from just a sales perspective, funnel perspective, we're feeling really strong about the whole second half of the year and consistent with our guidance. Danny, do you want to hit the more specific question on.

Yes. I can provide some insights here, which I believe will be beneficial regarding the increase in value creation per subscriber and the changes in the discount rate during that period. In Q2 2022, the figure you mentioned was $7,910 per customer. As we discussed, if we adjust our PV6 metric to a PV7 for that quarter, we arrive at $8,100, which is a few hundred dollars higher than the previous year, even with significant increases in interest rates during that time. Additionally, when examining the total value generated and making comparable adjustments for the discount rate year-over-year, that figure has risen by 31%. This indicates a substantial year-over-year increase. Looking ahead, I want to emphasize the potential impact of the battery attachment lift, which could add a few thousand dollars per customer. As we gain more clarity on the additional factors, we'll be sure to share more information about that as well.

Your next question is coming from Joseph Osha from Guggenheim Partners.

I have 2 completely unrelated questions. The first, can I read into your comments that barring extraordinary circumstances, you are not going to be raising recourse capital or equity to fund growth? Is that kind of what I'm hearing is the corollary to this commitment to generate cash?

Yes. That's what you're hearing.

Great. Very unequivocal. And the second question related to Lunar. Just so that I understand, is it the case that at least in some installations, you can use the inverter there to drive a panel string? I'm trying to understand what exactly that product is.

Yes, of course. So we're really excited about the Lunar product. The install efficiencies of pairing the inverter with the battery create a lot of opportunity for us to speed up our installations and actually deploy full battery backup in more consumer situations. So we're excited about the operational efficiency as well as the ability to apply it in more situations.

Our next question today is coming from Kashy Harrison from Piper Sandler.

I would like to ask about customer acquisition costs in California. You've mentioned that sales are down about one-third year-over-year, and that you're outperforming smaller installers after that decline. I'm curious if this presents an opportunity for the industry to improve economics by lowering customer acquisition costs, considering the current cycle and economic situation in California. Or is it possible that there are still enough alternative sales opportunities available that would prevent commission dollars from decreasing?

Yes. I think we continue to see people recognizing the value of selling at Sunrun. We've seen a 5.5%, 6% decrease in CAC over the last six quarters. So sequentially, CAC has fallen every quarter, the last six trailing quarters as our net subscriber value is increasing. So you're seeing that kind of translation take place actively historically, and we forecast that taking place going forward as well.

I just wanted to follow up on something. I might have missed this in the initial prepared remarks, but looking at the guidance, it seems to suggest a significant sequential increase to just over 310 megawatts by the fourth quarter. Can you explain what gives you confidence in that improvement? Additionally, how much of the outlook is currently secured by signed agreements?

Yes. So outside of California, we've been seeing 25% growth year-over-year in sales activity. And so we're seeing really strong growth outside of California. Speaking specifically inside California, we saw strong outpacing of growth quarter-over-quarter throughout the period, and entering into the latter weeks of the end of the quarter and this first few days of this quarter, we're seeing what I would categorize as explosive sales activity from our teams there, bolstering our confidence in the number.

Next question today is coming from Colin Rusch from Oppenheimer.

Within the sales process, can you talk a little bit about the trends on the conversion rates that you're getting in terms of lead to converting into actual sales? And then also on system size, particularly in California, as you transition into NEM 3.0.

Yes. A lot of competitors inside California are downsizing systems because they don't have a Shift solution. So the way to preserve customer savings, given the time of use rate situation, is to size down on systems. Our portfolio has not experienced that as we are deploying nearly a little in excess of 80% of the systems we're deploying have either a Shift or full battery backup. So we're not as susceptible to that decreased system size dynamic. Conversion rate is something we watch continuing and are very focused on and driving up conversions and customer experience is a constant focus for us.

And then as you look at monetizing the virtual power plant in those assets, I guess, it's still relatively nascent. Can you talk a little bit about the pricing dynamics and the potential to increase the functionality of the portfolio and monetize those assets at a higher level on a go-forward basis?

Well, as we said, right now, we look at it as a value of $2,000 NPV per customer with the opportunity to just grow that going forward, to your point. So again, anything that's new takes time in the energy generation space. And I feel very heartened by the fact that you now have one of the largest utilities in America partnering on a substantive project that is very high profile. It is leading to many other conversations. So again, we see it as nothing but continued upside, not just for Sunrun and our shareholders, but for customers. Again, back to that California program that I talked about with PG&E, customers who went ahead and went with us for solar and storage for all sorts of financial and resiliency reasons, for basically a few months access to their storage, they have $750 of found money, which dramatically impacts the value proposition and the way customers see it. So again, I see this as a really strong growing opportunity for Sunrun and our customers and our shareholders.

The next question is coming from Tristan Richardson from Scotiabank.

Maybe just kind of curious, you talked about prioritizing some markets and the strength you're seeing in the direct channel business and obviously the long-term strategy to grow the direct channel business. Maybe if you could touch on the partner channel and just kind of what you're seeing there, just what we've heard from big box retailers, et cetera, foot traffic. Just maybe curious about outside the direct channel.

Yes, we experienced strong performance from our affiliate partners in our business this last quarter. We continue to observe high demand to join our platform, but we have consistently focused on scaling rather than attracting smaller players. We place significant emphasis on customer experience and installation quality. While demand persists, especially with the transition of the IRA adders leading to increased interest from dealers to join our platform, we maintain standards that regulate volume and ensure we uphold the installation quality and customer experience we prioritize.

Should we consider the $2,000 NPV on the battery side as a general figure that reflects some of the cost savings you've mentioned in your hypothetical example, or is there potential for that $2,000 to increase over the medium term?

Yes, on the backup, I think it's a weighted impact of a few thousand dollars per customer as we increase the attach rate overall in the business. However, if you are transitioning one system from solar only to backup, the impact could be a bit more significant than that.

Your next question is coming from Philip Shen from ROTH MKM.

Want to explore the guidance cadence a bit more. So over the past 5 years, your Q3 installations are typically up, on average, 18% quarter-over-quarter but you're guiding Q3 installs to be down 11% quarter-over-quarter. And then for Q4, historically, over the past 5 years, the cadence is down 10% quarter-over-quarter, but then the implied Q4 installers are now up 18%. I know you talked about it a little bit already, but I was wondering if you could talk bigger picture about that cadence, what's driving the weaker Q3 guide on a historical basis and then the reacceleration for Q4?

Yes. Just to be clear, for Q3, we're going to be up year-over-year is what we're guiding to and up year-over-year for the entire year, obviously as well. That said, I think we hit pretty clearly like what we're seeing is that we had this dip, and it happened at the same time that we're selling much higher value, multiple product systems to customers. So that also impacts sort of the installation and cycle timing. So that's why, as I hit, we see Q3 as solid but really a transition quarter as we're moving into, again, multiple products for a very strong percentage of our overall customers.

Great. Shifting to 2024 and California, I understand you won’t provide guidance, and I'm not asking for that. However, our analysis indicates that your performance in California with NEM 3 originations appears strong, as discussed today. It seems possible that you could achieve flat year-over-year growth in originations, potentially in Q3 or Q4. Could you share your thoughts on this? If you do maintain flat year-over-year growth in Q3 and Q4, which were strong periods, that might indicate what 2024 could look like. Currently, you have projected 10% to 15% growth for this year. Do you see an opportunity to accelerate growth in 2024, or does this 10% to 15% growth rate feel appropriate for you?

Yes. As I mentioned, when we examine California and its surroundings, we've seen substantial growth outside the state. In California, we are witnessing an increase in volume, and it remains significantly underpenetrated, especially considering the potential to offer multiple products to customers there. We remain confident in our guidance of 10% to 15% growth for this year and have no reason to doubt this outlook. Consumer interest in our offerings is strong, and we foresee considerable opportunities in California and across the rest of the country moving forward.

Your next question is coming from Jordan Levy from Truist Securities.

You start to kind of strength in the affiliate channel and that...

Pardon me, Jordan, I cannot hear you. Would you mind raising your volume? Speaking through the microphone?

Can you hear me?

Yes.

Just wanted to get your thoughts. You pointed out the affiliate channel as kind of a key outperformer for install and you also mentioned the changes you made in Arizona. I just wanted to get your updated thoughts as to any further opportunities there to lean more heavily on the affiliate channel and some of the trends you're seeing in that market?

Yes, I think we see a lot of opportunities for the affiliate business. We've got phenomenal partners that create and generate 25% to 30% of our business. And as I stated earlier, we see strong demand for partners to join our platform and are constantly working on adding partners to that platform who meet our criteria around customer experience and installation quality. But it's a piece of our business that we have long since held and are very excited about continuing to focus on and grow.

And was that kind of one of the key drivers behind the sequential decrease in sales and marketing per customer?

Yes. So in our affiliate business, the sales cost is recognized outside of CAC as far as the installation cost, but neutralize for that kind of a one-time event, which caused the steeper decline this quarter. As previously referenced, we've seen six sequential quarters of CAC over subscriber value declining.

Your next question is coming from Ameet Thakkar from BMO Capital Markets.

Just coming back to the $200 million to $500 million kind of cash generation, appreciating that it will come in kind of different times in forms and fashion. But is all of that cash going to be available to you kind of unencumbered? Or will there be kind of cash traps associated with that, et cetera?

Yes. We view that as the kind of the non-restricted amount of cash, so we do have a growing restricted balance as we reserve in our project finance deals. But we weren't thinking about that cash, really the non-restricted as you called it, the unencumbered amount.

Okay. And then just real quick. You guys have mentioned a couple of times about other states and regions that have kind of accelerated in terms of your sales through there. I was wondering if you could kind of share which states have kind of been most impactful relative to prior periods?

Yes. So outside of California, we've seen that 25% blended growth. Our Northeastern states are weeding out, pulling those averages up. So we have really robust activities in Massachusetts and Illinois specifically.