Q1 2022 Sunrun Inc Earnings Call
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Sure.
Greetings and welcome to the Sunrun, one Q Q2 earnings call.
At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I'd like to turn the conference over to your host Patrick Jobin of Investor Relations. Please go ahead.
Thank you operator 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 CEO , Tom by Nordic Power, Sunrun, CFO , and Ed Fenster, <unk> co founder and co executive Chair.
Following their prepared remarks, we will conduct a question and answer session and now let me turn the call over to Mary. Thank you Patrick Hi, It's wonderful to connect with all of you again today on what Sunrun has been up to in the last quarter. It's hard to believe it is only been about two months since our Q4 call because we have been incredibly app.
And I am pleased to say, we have a lot of positive developments to share I'm encouraged and excited about the progress, we're making as a leading provider of clean energy with climate related events, becoming more urgent daily our passion and optimism about our purpose and our ability to lead a distributed clean energy Revolution has never been stronger.
The mine is we delivered results in Q1 that beat our expectations. We added over 29000 customers in Q1, representing over 213 megawatts of solar energy capacity installed a 27% increase from last year and well above our guidance, we delivered a net subscriber margin of over <unk>.
$7100, which which was also slightly above guidance with an increase from last quarter.
I wanted to cover a few topics today before I turn the call over to Tom and Ed for their quarterly updates first customer demand remains incredibly strong and sunrun is growing at a rapid rate.
We are also achieving these growth levels at a scale that is two times, our nearest competitor well innovating and continuing to generate value from the combination of the two companies are customer orders grew 39% compared to last year outpacing our still impressed robust installation growth of 27%.
These strong demand trends resulted in expected growth in our backlog of customers.
We are working strategically and expeditiously to ramp our installation capacity, both internally and with our partners. We are seeing strong improvements in our internal installation capabilities and feel blessed to have some of the longest standing channel partner relationships in the business, which are strategic and valuable for not just the incredible reach they provide in the market, but also for them.
Meeting additional customer demand I fundamentally believe we are at a tipping point of adoption where.
Oh concept, but something customers are demanding customers see escalating energy costs and a lack of reliable power all around them and they want the security and peace of mind that comes with energy independence climate change and geopolitical issues are now affecting the daily lives of so many consumers accelerating what I've always seen.
As a looming consumer led revolution to a cleaner more decentralized energy future.
One that is customer centric and can incorporate the more reliable localized and innovative way consumers are thinking about powering their vehicles and home from the rooftops.
Second we are quickly adapting to the world around us material costs and interest rates have increased and we have taken fast and effective action to adjust to these industry wide dynamics in a way that will make us faster better and stronger we recently increased prices across most markets with flexibility granted to us by double digit utility rate inflation.
And around us.
Was pricing adjustments will lead to considerable increases in subscriber values and can help mitigate the recent cost pressures faced by our industry.
You can see in the accompanying slide deck that the customer additions to our backlog. Following this price change and other changes we have made are coming at much higher subscriber values, which we expect to realize over the coming quarters, given the size of our backlog and cycle times, which vary by market.
Third we are continuing our focus on innovation, we have now deployed over 37000 residential batteries far more than any other energy company and our networking. These batteries together to form virtual power plants in many markets. While it takes time to enter new markets and show how valuable dispatch of distributed energy resources are for the grid.
At a certain point I believe it will become self evident to traditional utility companies and grid operators that they need to partner with us and our growing customer base as utilities start to realize the resiliency and value we offer to the grid and their customers regulators will undoubtedly pushed them to do so as well there is no quicker way to.
Got to a more affordable resilient than by embracing the rapid adoption of distributed resources. Our partnership with Ford is on track and poised for exciting things in the very near future Ford launch production of the F 150 Lightning last week and Sunrun is now in the process of connecting with customers to facilitate the installation of the charge station.
Pro and the home integration system, along with providing options for solar and battery systems and participating markets over the next few months Sunrun expects to install thousands of these systems for F 150 lightning customers and we will provide an update on the realized benefits of the partnership later this summer.
During the quarter, we also invested an incremental 75 million in equity into the venture we call established with SK. The venture is making significant progress and expect to unveil powerful new technology by the end of 2022 with commercialization expected this year or early 2023.
Sunrun currently owns approximately 37% of the venture and has preferential access to the technology being deployed sunrun expects the differentiated products and services will accelerate someone's business and expand the customer value proposition considerably I am incredibly excited by the unique product offerings.
We will have for sunrun customers through this partnership.
Fourth we have a strong team and we're moving fast I am leveraging my experience transforming companies and finding ways, we can make sunrun, even faster better and stronger adding to the foundation that has been put in place over the last few months, we have collapsed several layers of management structures in various parts of the business to ensure we offer.
Right Nimbly and can share information and learnings from our branches and from our customers in the fastest most streamline way possible.
We have also taken actions to expand certain areas of the business, while reducing investments in others. For instance, we opted to transition a few of our subscale branches to a channel partner driven go to market strategy and took decisive action to walk away from aspects of markets that fundamentally worked hitting our return thresholds.
We also refined our approach to pricing at home upgrade projects and increased our investment in our customer facing teams with this change we are now achieving customer care agent answer times of 10 seconds on average when a customer calls with an issue. This is a big improvement from where we were in Q4 at about three minutes.
We're always innovating and finding new opportunities for improvement, but these are a few examples of the kinds of investments we are making to make the company stronger all of these changes were made with a laser focus on customers and the culture of customer obsession. We are building together I firmly believe that the more focused and deliberate we can be in our go to.
Market strategies and organizational structure, the faster, we can grow innovate and respond to the needs of our customers and the communities we serve.
Today, we're also announcing that effective may 30th.
Danny a badge in will succeed Tom Van right power as our CFO . Danny currently oversees son runs project Finance group, where he has produced significant results for the company for nearly 12 years. He is a talented driven and passionate member of the Sunrun team, who brings a wealth of experience and knowledge to the CFO role I look forward to.
Partnering with him for the next chapter in Sunrun journey as he leaves a combined project finance and corporate finance team, Tom who has been our CFO for the last two years will be leaving sunrun to pursue another opportunity at a private technology company outside of our industry I am so grateful for the partnership with Tom over the last two years.
A period, which included transformational changes with the acquisition of <unk> and solar and rapid growth while navigating the challenges of Covid, Tom will remain in a consulting capacity to ensure a smooth transition for the next four months and we wish him all the best in his future endeavors.
Last but certainly not least before I turn the call over to Tom and Ed I want to thank our team for their hard work every time I'm in a branch location or out in the field with our team I'm inspired by their passion and ingenuity and willingness to take on challenges.
My mantra is delivering on our customer obsession faster better stronger and I am proud of Sun runs team, whose embracing this opportunity to maximize our impact for our customers investors and the communities. We serve in addition to thanking our amazing employees I also want to express my sincerest gratitude to our customers.
They are the ones transforming our country's energy system and helping to solve climate change one home at a time at a very rapid pace. It is an honor to serve them over to you Tom and again. Thank you so much for your service to Sunrun and our planet.
Thanks Mary.
It's been a privilege to get to work with you and so many talented and passionate sun runners over the last two years and I look forward to following the company's continued success.
Turning to the results for the quarter and the first quarter customer additions were approximately 29500, including approximately 22000 subscriber additions.
Solar energy capacity installed was 213 megawatts in the first quarter of 2022 or 27% increase from the same quarter last year.
Which exceeded the guidance, we provided of 195 to 200 megawatts.
We saw strong customer demand for our products and services in Q1, continuing the trend we saw throughout 2021.
Or orders increased by 39% in the quarter compared to the prior year outpacing installations, leading to a growing backlog. While this sets us up for continued strong deployment growth the mismatch between sales and installation activities creates a drag on our reported financial performance as we've been highlighting.
Over the last few quarters.
We've now installed over 37000 batteries and we expect battery installations to increase by more than 50% in 2022, which is twice the growth rate of overall solar installations.
While battery availability constraints continue and supply chains remain dynamic we expect to ramp up battery installations considerably in the quarters to come as supply increases.
We ended Q1 with approximately 690000 customers and nearly 589000 subscribers representing four nine Gigawatts of network solar energy capacity, an increase of 21% compared to the prior year.
Our subscribers generate significant recurring revenue with most under 20 or 25 year contracts with the clean energy we provide at the end of Q1, our annual recurring revenue or <unk> stood at $883 million with an average contract life remaining up over 17 years.
In Q1 subscriber value was approximately $37000 in creation cost was approximately $29900 delivering a net subscriber subscriber value of over $7100.
Total value generated which was the net subscriber value multiplied by the number of subscriber additions in the period was 151 million in the first quarter.
This result was slightly above the outlook, we provided last quarter. As we noted the continued effects of COVID-19 on reduced installation capacity knock on effects for crew productivity in early Q1 and continued fast growth in orders while demand has been incredibly strong over the last few quarters and our backlog has grown we believe in our ability to scale fulfillment capabilities to serve this backlog as we move through 'twenty two.
You too.
As Mary mentioned, we adapted to changes in our underlying cost environment, both on higher material costs and capital costs by increasing prices across our markets with some markets seen double digit increases.
Underlying utility rate inflation that our customers are experiencing is in line with these pricing changes and in many cases utility rates are rising even faster.
And an opportunity for price increases without impairing the savings component of our customer value proposition as.
As you can see on slide nine this is having a significant impact on our subscriber values, we are adding to our backlog.
Increasing by over $3000 per subscriber.
Work through the backlog over the coming quarters, you'll start to see this flow through our reported subscriber value once installed offsetting many of the cost pressures the industry is facing and delivering net subscriber values of more than $10000 in the third quarter of this year.
We are strategically optimizing overall sales activities and revising our policies on pricing and product mix and certain markets. These moves are already producing positive results.
Turning now to gross and net earning assets on our balance sheet gross earning assets were $10 2 billion at the end of the first quarter gross earning assets as the measure of cash flows we expect to receive from customers over time net of distributions to tax equity partners and partnership flip structures project equity financing partners and operating and maintenance expenses discounted at a 5%.
Unlevered capital cost.
Net earning assets were $4 5 billion at the end of the first quarter, an increase of over $200 million from the prior year, but a reduction of around $150 million compared to the fourth quarter net earning assets is gross earning assets plus cash less all that the sequential decline is primarily due to the $75 million investment in the venture with SK.
Continued consumption of working capital given the strong sales activities and growing backlog and our decision to maintain strong inventory positions in the face of a dynamic supply chain environment.
We ended the quarter with $863 million in total cash.
Turning now to our outlook the strong customer demand, we continue to see success, increasing our fulfillment capacity gives us confidence to revise our full year guidance to over 25% year over year growth in solar energy capacity installed.
With last quarter's guidance, the volatile interest rate environment and in California, net metering policy and proposals in Congress to extend <unk> increase the investment tax credit limit our ability to provide 2022 guidance for total value generated and cash generation.
Due to the rapid rise in interest rates, we now expect the projects we originated prior to the recent pricing changes to generate less proceeds than previously anticipated the opportunity to build a large california backlog or further changes to interest rates and the resulting timing of project finance activities could result in meaningful swings in total value generated and cash generation in either direction.
We currently forecast total value generated for the full year of 2022 will grow meaningfully faster than volumes and that net subscriber values will increase sequentially throughout the year as I mentioned earlier, we expect to deliver net subscriber values above $10000 in Q3.
For the second quarter, we expect solar energy capacity installed to be in a range of 235 to 245 megawatts, which reflects more than 12% sequential growth and more than 25% year over year growth at the midpoint well on track for our increased annual outlook now I'll turn it over to Ed.
Thanks, Tom.
I want to Echo Mary's appreciation of Tom's contributions and also to share my excitement for danny's promotion to CFO .
I have worked shoulder to shoulder with Andy for over a decade and know he is the right person for this role.
His knowledge of Sunrun and his finance capabilities are unparalleled and in his 12 years of the company. Danny is also pinch hit and several other areas for instance, and corporate planning and M&A. He.
He was instrumental to our convertible debt offering as well.
Following Danny is essential to CFO Stuart purely will lead project financing reports Danny directly ive been looking forward to Danny having this opportunity and I'm very excited to see him open. This next chapter.
Today, I'll discuss the impacts of increases in inflation and interest rates on the company summarize our recent capital market activities and provide an update on regulatory matters.
This quarter, we've been busy positioning for increasing interest rates for instance, raising prices to new customers as necessary behind the large utility price increases that are underway.
As regulated monopolies utilities are able to pass through their higher labor fuel and capital cost to customers and despite an 11% year over year increase in national electricity prices. This pass through has just begun.
In addition, our existing capital structure is well hedged through a mix of interest rate swaps and fixed coupon long dated debt securities.
As Mary noted, we have implemented meaningful price increases and expect recently originated customers when installed to generate at least $3000 an incremental net subscriber value as measured in a 5% discount rate.
This benefit will flow through in Q3 and is designed to mitigate the higher material and capital cost the industry is facing.
On slide nine you can see the sensitivities to subscriber values using various discount rates.
We currently observe our capital cost is between 5% and 6% increasing the discount rate, 25% to 75 basis points above 5% for instance would reduce pro forma subscriber values by approximately $750 to $2100.
As you may recall several years ago, we used to report the figure 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 above 5%.
In April we priced a half billion dollar asset backed security senior note. The transaction was the largest solar lease portfolio placed in the ABS market ever across all issuers in the sector.
We expect to achieve proceeds on this portfolio net of fees from all sources.
Rebates tax equity customer prepayments swap terminations in senior and subordinated debt.
Of about 95% of contracted subscriber value measured at a 5% discount rate.
We expect to achieve a weighted average cost of capital for this pool of assets of about four 5%, including benefits from interest rate swaps or about five 5% excluding swap benefits as.
As we've shared before we frequently enter into interest rate swaps to hedge capital costs on our newly installed customers.
As we tweak our financing strategy and benefit from less robust swap terminations, we expect total advance rates to settle over the moderate term between 85% and 95% of contracted subscriber values discounted at a 5% rate.
We believe a wider range is appropriate given the current volatility in the fixed income markets.
Finally as described on the last earnings call. We retired our $250 million recourse lending facility and arranged a larger $425 million facility at enhanced terms and with a longer tenor.
During the quarter, we upsize that facility to $600 million on the same terms the facility's only partly drawn.
We continue to maintain a robust project finance runway as of today closed transactions and executed term sheets provide us expected tax equity and project debt capacity to fund over 400 megawatts for subscribers beyond what was deployed through the first quarter.
The multitude of events, causing massive delays in the utility scale segment are causing several capital providers to experience unexpected shortfalls in 'twenty to 'twenty two transaction volumes, especially among tax equity investors. We expect this to provide a modest tailwind for us.
Turning now to an update on regulatory matters.
Sunrun is in a strong position to navigate a dynamic supply chain environment. Most recently compounded by the uncertainty of potential retroactive tariffs casually called by many the 80 CVD anti circumvention map.
This investigation by the Department of Commerce concern solar imports from Malaysia, Thailand, Vietnam, and Cambodia, using Chinese inputs.
To maintain high levels of components supply, particularly solar modules, we continue to increase our inventory position.
As of March 31, we held over half a billion dollars of inventory on balance sheet up $49 million during the quarter and up 273 million since the start of 2021.
We have over 100 days of supply on hand at both modules and Inverters and continuing to procure modules from a diversified base of manufacturers.
We believe the department of Commerce's investigation is misplaced and contrary to the administration's objective to encourage the transition to clean energy.
Most head scratching is that the application of tariffs against these countries would simply cause American solar developers to buy panels directly from China, which currently exports almost no product in United States.
We have entered into several supply arrangements for hundreds of megawatts of solar modules in total for manufacturers unaffected by the investigation.
We also expect to enter into additional agreements in the coming months.
Purchases from such manufacturers may be on less favorable terms than our existing suppliers and result in increased working capital investment.
Last week, the Republican Governor of Florida vetoed in Antisolar Bill that was drafted by the state's utilities and pushed through the legislature earlier this year.
The vetoed bill, which was somewhat watered down as it went through the legislature proposed certain reductions to net metering in future years and called for a regulatory proceeding to consider a fixed fee for solar customers.
While also citing inflationary pressures governor defenses Vito statement, essentially said that no one should be forced to pay a utility for power the utility never produced or sold in the first place.
Prior to the veto the largest utility in Florida was granted a double digit rate increase.
We believe the read through to California is positive and the comparison was immediately taken up by the media.
For instance, Politico opined quote the Santos is now in the position of setting a pro solar bar for his rival, California, Governor Gavin Newsom declare unquote.
In addition, the massive delays in utility scale renewable development are causing elevated blackout risks in California on <unk>.
Oral twenty-seventh Governor Newsome wrote the Commerce Department that their investigation alone threatens our ability to maintain energy reliability ahead of the retirement of 6000 megawatts, primarily generated by aging gas powered once through cooling plants.
Utility scale projects are also struggling under pressure from unforeseen capital cost increases in permanent let's.
Throttling rooftop solar and storage deployment against such a shortfall looks even less wise than it did in December .
We remain optimistic that Congress may come together to pass some sort of climate legislation, which includes an investment tax credit extension.
But we don't proclaim to have a crystal ball to predict when parties will come to the table. If they will reach an agreement or what the scope of any agreement might be.
We will remain active and urging Congress to act, but we'll manage the business assuming the status quo for the time being.
With that let me turn it back over to Mary.
Thanks, Ed I'm, so excited about <unk>, leading position in this industry I believe we are at a tipping point of adoption and starting to see a transformational change in how consumers think about energy before we open the line for questions I want to stress, how appreciative I am of our team our customers and our partners who are all helping create a planet.
Run by the Sun with that operator, let's open the line for questions.
Thank you very much at this time, we will be conducting a question and answer session.
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One moment, please while we poll for questions.
The first question comes from Brian Lee from Goldman Sachs.
Please state your question Brian .
Hey, everyone. Thanks for taking the questions.
And kudos on the nice execution here.
I guess first question I had was just on the.
The subscriber value youre going from $7000 here.
For the past couple of quarters to now 10-K, plus in Q3, I know you've talked about pricing a ton.
I know, that's a clear driver, but I would assume there's other drivers here in terms of mix and cost improvements you know more batteries. So can you kind of give us a bit of a bridge from the 7% of the 10-K.
Much is price how much is other drivers and then I know historically you've talked about.
Subscriber value targets.
Up into the 10 to 12 K range what is this sort.
Pull forward here this year to get to that $10000 range already mean for kind of the longer term targets and then I had a follow up.
Yeah, Thanks, Bryan so.
The last two quarters, we saw abnormal effects from the drag of Covid and labor productivity challenges there at the end of Q4 and early Q1.
We saw those abate throughout Q1, and certainly haven't continued here into Q2.
The pricing moves will be a large component of this.
But continuing to increase battery attach rate as well as some of the general ongoing efficiency measures, we've taken as well will show up as positive.
Moves on that subscriber value.
Offset partially by a.
Rising material costs, so as we've taken on slightly more expensive components over the last couple of quarters those.
To work their way into the installed.
Installed volume here in subsequent quarters, we view the greater than $10000 number for Q3 is an outcome that we're particularly excited about and optimistic in and you know I don't think its funds.
Fundamental change from long term views, maybe it sounds like to you.
Your point its sooner than you had expected but.
The direction, we've been pushing for quite a while I think we want to see where the pricing changes land in.
Worked through our backlog the one dynamic that we continue to work through is the incredibly strong demand we're facing that in any given period if demand outpaces that creates this this.
Reported margin drag.
Because of the timing of sales and marketing expenses.
Versus install volume so that may have some variability in there, but we're confident in the 10000 dollar number feel like the.
The majority here is moving through these pricing and product mix changes.
Alright, that's great I appreciate that and then just the second question I had and I'll pass it on was around.
Some of the comments you just made Tom about the.
The strong sales pipeline kind of not being able to keep up with the healthy backlog. So a high quality problem to have but can you kind of.
Elaborate a bit more on the sort of.
Labor or if youre seeing any challenges there.
The EPC side, if youre, having to adopt any new strategies or or thinking about that differently, just kind of how you're.
Addressing the.
A high level of backlog and trying to keep up here as you move through the year.
Yeah actually Brian It's Mary I can answer that one yes. So as I hit you know basically a lot of what youre seeing that Tom hit that's flowing through subscriber value is attached to not just the pricing, but like are really going out to go to market strategy, taking decisive action in some markets.
Where we weren't hitting the return thresholds, we wanted to and at the same time, some of the streamlining and improvement in and putting into place.
A team and an approach that can help us make significant progress on the backlog in the next couple of months. So what we have is we're in a strong position from a labor perspective, and we're growing fast we're hiring people. We're finding we're a very attractive employer, where we're really hiring high.
Quality installation crews and at the same time, we also as I was talking about are leveraging this amazing position, we're in and the market with the kind of partners. We have channel partners, we have where some also want to be build partner. So we're working very decisively with them in terms of.
Having a real approach to make sure that we're closing a lot of that backlog.
In the coming months.
Alright, Thanks, a lot I'll pass it on.
Thank you. The next question comes from Julien Dumoulin Smith from Bank of America. Please go ahead Julien.
Hey, good afternoon, thanks team.
Congrats to all of those with the new roles here.
Just to come back to the core question here on the 10-K can you talk about like the puts and takes if you will right I mean, obviously.
Cost.
Especially as you're rolling off your inventory could be a detriment there, but can you talk about the extent to that price increase being a positive sort of like a growth thing before you netted out to that 10000 versus where you're starting out today and just to go back to the prior point you know the sustainability and trajectory from here any nuances, we should be considering you know beyond three Q here.
As you roll it forward.
Yeah. So you know the.
The price increases certainly are additive obviously, there have been modest material cost increases.
As Ed noted.
Presented that subscriber value at a 5% basis I've had moments in time, where we've been well below that on capital costs. We're now in that range.
Hum.
We're still going to hold that at 5% and so the price increases are moves that more than offset material cost increases for us.
Additional moves around higher battery attach rate and some of the changes that Mary noted that we've made around product and pricing policy that will drive more profitable projects through.
The one area.
Again, we're obviously confident enough to put out the $10000 number here for Q3 the.
We've noted now for several quarters has been this backlog growth dynamic I think with the things Mary just noted and the last question, we're really confident in our ability to ramp. It is worth noting we were at massive scale and still growing installation volume quite considerably you know 27% year over year for the quarter.
Continuing to believe that we're going to increase at very fast rates.
It would appear to be share gaining rates relative to some of the external forecast and and we're doing that at scale. So we're able to add a lot of capacity both through ourselves and through partners.
There is some chance I guess in there.
Demand continues to rip and.
Again creates a drag on reported values, but.
Where are we where we are right now on what we see we feel confident in our ability to execute and get to this level and Julien said, maybe maybe just to add to that it's our expectation that the improvements that were describing are structural and not like some temporary high watermark for Q3.
Right no indeed, I am I'm, almost curious to push again and the second question here on just how far you can go with it not not if it's sustainable really but if I can't actually I mean, professor and if I can address you as such.
Want to talk a little bit more.
[laughter] have you got.
John .
Your name.
Can you talk a little bit about this yeah I hear you on the customer metric, but let's talk about levered value creation quickly and how we might think about a metric there, especially against this notion of you know.
Lower advance rates, how do you think about that metric evolving very specifically here against your 10000 target.
And and how is your financing strategy evolving more specifically I know you you laid it out and party I just want to make sure we've got that clear cut.
Sure. So maybe just to recap a few of the things. We described on the call first the transaction that we're in the process of wrapping up right now will have an experienced weighted average cost of capital of about four 5%. It is benefiting from interest rate swaps without those swaps. We think it would have been about five 5%.
In the presentation, we make the point that.
Subscriber value at five in a quarter or two five and three quarters percent discount rate as compared to five would be worth about $750 to $2100 less so we see the improvements in net subscriber value that we're describing is outpacing the increases in interest rates and.
Obviously, that's a moving target, which we're watching carefully including today.
Well you know.
But one that we are staying on top of it we see obviously as we mentioned significant and escalating increases in utility cost prices.
Which is fundamentally the our most significant competition.
In terms of the strategy for how we finance the assets.
I don't know that we're looking at any significant differences one dynamic worth mentioning is that the spreads that yes. The cost of our capital that is over treasuries right now appears to be lower in the bank market than in the ABS market.
My suspicion for the reason of that is you know there've been capital withdrawals from long term fixed income.
Based on the rapid increases in interest rates.
And obviously those.
The rapid increase in interest rates haven't caused bank deposit withdrawals, so theres still.
A significant excess liquidity in bank deposits and so we haven't seen spreads in that market move so it's possible in the future you'll see us doing more work in the commercial bank markets. If the current relative spread dynamics between those markets continues to all.
Yeah.
Got it alright fair enough.
I'm curious to see what happens to those guys.
Thanks Julien.
Thank you. The next question comes from Kashi Harris from <unk>.
Please go ahead Kashi.
Good afternoon, everyone and thank you for taking the questions.
So just first one for me are you you've obviously highlighted very strong order growth here in Q1 and 39%.
You know which is solid.
Market right now is very focused on leading edge demand trends. These days, just giving you know just a massive amount of uncertainty globally and so I was wondering if you'd maybe just give us a sense on how order growth. In April is tracking are you still seem that 39% year over year continue or are you seeing any sort of a deceleration in April .
Sure.
Yeah.
Yeah, I mean, basically again as I as I hit we feel like we're really at an incredible tipping point, that's happening from a consumer perspective. So you know overall, we see the trends of adoption continuing so that's what informed you know everything that we've reported today informed our raising guy.
<unk> on the year to now 25% or higher so yes, we're feeling.
Like there is really sustainable demand.
And in my my follow up and you you you highlighted in your prepared remarks that you're currently experiencing a tailwind in the tax equity market due to the a D. C V D issue.
Can you give us an update on where you see the cash cost of tax equity today and you know maybe talk about how that's evolved.
Just given the fluctuation in the interest rate market. Thank you.
Sure. So good question. So as you mentioned so first one when I discussed the delays in the utility scale segment I think it's much more profound than the Commerce Department investigation, you know my suspicion is that the changes in capital costs and equipment prices.
Probably drive underwater a third of utility scale projects, even if the commerce Department.
Investigation was resolved with no further tariffs.
So I think that generally speaking among capital providers, who are focused on renewable projects.
A lot of slippage and some people are looking for.
Additional.
Additional 2022 product in the tax equity market is even more of a calendar year market than most markets that youre seeing that.
That said you know the cash cost of tax equity continues to be you know up and down in the 15 13 years I've been doing this.
Really very very close to 2% on a pre tax basis like thats really about what it costs.
Usually.
When when you see them.
You know excess supply flushed through the market.
Usually you know, whether it's just bigger funds or more flexible terms on certain other things, but you know we don't typically see very significant variation in the actual like pre tax IRR on those transactions.
Thank you.
Okay.
Thank you next question comes from the heap, namely from Credit Suisse. Please go ahead.
Hey, good evening and thanks for taking the questions and congratulations on the culture and the guidance increase yeah.
Maybe just one question for me on the price increases or potentially higher value kind of like fee for the.
For the customers going forward.
Are you just seeing.
Pricing just because of higher electric bills from the utilities or is that something youre kind of expecting later this year or next as we.
Usually these get into there.
<unk>.
Great.
Thanks.
Sure. So this is Ed says so as I mentioned, obviously, the the three major costs that utilities are all increasing fuel labor and capital. These are reflected.
In different speeds in retail rates.
Capital certainly in rate cases fuel sometime most quickly.
Labor in the middle.
And what we're describing as the cleared CPI data for National Electric energy is up 11% and to your point a lot of those cost dynamics haven't yet.
Jane approved or measured or you know or even filed for so that's what gives me the confidence that the 11%, which we've seen so far is only the tip of the iceberg, yeah, and just to pile onto that Ed.
From my perspective, and in the utility business you know one of the things I saw many years ago and I've only seen it accelerate as we have to remember that with all of the investment you are seeing so all of the investment in transmission distribution.
All of that is creating long term systemic rate pressure, so really on top of the sort of shorter term you know are items that that and hit that are absolutely going to cause pressure. You ask you also just have systemically these significant drivers of.
Of rate increase.
Pressures writing on a recent call I described the Bonanza and utility.
Capital expenditures, which are running multi.
Multiples ahead of depreciation, which programmatically causes increased rate base and rates.
Okay.
Got it got it thanks for the color and just a last one from me.
And I'll jump back in the queue is around.
Partnership with Ford.
You talked about more than two at thousands of reservations, but could you just talk about like how should we think about side or EBITDA contribution from that segment for this year, though going forward. Thanks.
Yes.
We're relatively early in the ramp as Mary noted production and the launch just began will reach out to those early customers.
Think about a couple of different components of the business.
Theres, a theres, our EV charger sale and installation business.
It extends to include the.
The home integration system with a bidirectional inverter, enabling whole home backup from the vehicle.
That portion of the business on its own and you're going to give us a solid hardware and services distribution business, where we're selling hardware at reasonable margins.
And providing our installation services and then I think the.
That'll that'll ramp as vehicle production ramps.
And what will be a nice business in its own right I think the larger unlock years when those offerings, then get coupled with a solar installed where I think those customers are more likely to have a larger system potentially a home battery.
It might have lower customer acquisition cost because of the efficiency of coming through the <unk> channel.
That will have a much more meaningful impact on subscriber values, but given the shape of the ramp in vehicle deliveries you can expect more of that to probably materializing in 2023 and beyond although there is definitely positive benefits. This year right and this is sort of underscore the customer unlock.
You're a foreign customer wanting the bidirectional feature for example, you can pay thousands of dollars to get a bidirectional charger installed right or you can get solar installed with at all in which case now it has a negative cost saving money from the solar system and you've got the home backup so it's like a very compelling customer value proposition.
Got you and it looks like they have to buy the backup generator from Europe will serve as a backup.
Charger for me right.
Yes, we're there and solution provider of choice and they would go to.
Co developed Oh progression system.
Got you alright, thanks for taking the questions.
Yeah.
Okay. The next question comes from Joseph Osha from Guggenheim Partners. Please go ahead Sir.
Thanks, very much professor I do now stuck with that nickname for all time by the way.
Got it.
The.
You I think you commented during your prepared comments a little bit about <unk>.
Hedging out.
Cost of capital exposure as it relates to your pricing can you help me understand that a little more I'm thinking about the backlog and how.
How is that backlog continues to grow how you managed to to to hedge out your your.
Your cost of capital exposure and then I have another question.
Sure. So so typically how that works Joe.
Is that you know as we install our system, we're locking in the interest rate prevailing at the time of installation.
And installation could occur nine or 12 months before term out.
So in the transaction that we just completed obviously you see the treasury rate embedded in the coupon you know at the time.
We issued a security, but really economically we locked in the treasury rate at the time of installation. So all of the assets that we have developed in that are sitting in a warehouse facilities are hedged with the interest rates that were in effect.
At the time those projects were installed so certainly as Tom pointed out there are systems that we sold late last year that haven't yet been constructed that we're now constructing.
The proceeds will receive on those systems are going to be less than we forecast, but the systems that were installed prior to the large run up in rates, we were able to lock in the rates on those systems and obviously the more recent systems, which are being sold at higher rates.
The rates are insulated from capital costs in that regard. So we do have this sort of like middle zone that we need to work through.
Other than that I feel like were pretty well matched.
But again that that just amplify on the question that does sound like you have the way. This works for now still some sort of open cost of capital exposure between the time when you sell the system and when you install it is that what you're saying.
Correct.
Okay and is there any way to mitigate that or is that exactly was kind of you know it is worth it.
I mean, you could you could buy options to mitigate it and therefore likely pay the expected value price of it.
So if you took a strong position you thought interest rates were going to rise faster than everyone, who trades you know.
Interest Securities like you could do that but I think that our general approach. Instead is just to drive the cycle times down that is a better customer experience, it's a more natural process for us.
And that's the way we've been handling it.
Okay, Great got it and then second much more simple question given how all of this is Washington through your business model.
How do you feel not just this year, but on a sort of a go forward basis to about how cash generation business looks relative to to grow.
I think over the long term, we continue to sell a product that is an excellently high demand right. It is a lower and more certain energy cost it has better reliability.
It is environmentally clean.
And the tailwind there is significant like certainly in.
The.
$13 15 years, we've been doing this I've never seen a demand environment like this.
And and so certainly.
That's helpful. If you're experiencing increased costs, whether that's operational or capital.
No.
We're doing our best and I think meeting with some success getting efficiency up and costs down and all the things that you'd want to do in any business anyway.
But also have the ability to pass through pricing because our our competitor the electric utility turns out also capital cost is in them putting their business.
And so I have still very good.
You know I'm still very optimistic about the long term cash flow.
The capabilities of the business for that reason right. It's not like we're the only energy company that capital costs as an input to so capital cost may go up that can push us put a press as everybody up so everyone else prices up we price up and Lo and behold everyone's don't make money.
Oh, okay. Okay. Thank you.
Thank you. The next question comes from Mark Strouse from JP Morgan. Please go ahead Marc.
Yes, good afternoon, and thank you very much for taking our questions I just want to go back to the anti searches.
Mentioned the inventory you have you mentioned the <unk>.
The existing agreements and the potential future agreements that you have or what kind of non tariff supplies.
Can you just kind of directly address how does that give you enough visibility to meet this this greater than 25% growth return for the year.
And then kind of a hypothetical follow up to that as you in the event that you supply does become limited I mean, what would be the strategy do you use your buying for China with a known tariff do you do you keep buying from South East Asia with kind of an unknown tariffs what would be the hypothetical there. Thank you.
Okay.
Oh, Yes, you start Tom so on the general or the first question as it relates to inventory levels and outlook, we feel very well positioned and as you can see on the balance sheet. We increased the absolute dollar of inventory that we were carrying a quarter over quarter again now.
Now north of $550 million.
Triple digit days of supply on the vast majority of the things we need.
And continue to have.
Strong and steady flow of products, even as we're ramping our installation.
Volume here over the quarter and throughout this quarter.
So I think the general view is we felt really confident moving up to the 25% plus year over year growth and should be able to meet that even as things moderate.
You've got at least a quarter that's fully covered here and.
And then.
As we look at the the general supply picture is as Ed noted.
The way to look at new sources of supply from from.
From different portions of the world.
Looking at our.
Other options here to get access to product to the extent, there's a large contraction in the available supply in the market you know that obviously creates some pressure on terms that may be available for those products, but one where I think thus far we feel reasonably well protected.
I already mentioned like you know there are avenues to take to get there.
Panels that are not from effective manufacturers those could be international manufacturers not in southeast Asia could be American manufacturers.
And to your point Commerce I'd, just very recently made clear they wouldnt see tariffs from southeast Asia exceeding tariffs from China. So you know if you did end up with tariffs.
Chinese manufacturer is cheaper so you'd probably end up buying from China as compared to South East Asia.
But there's no reason to do that preemptively.
And I think just stepping back like everyone. In government has made really clear how frustrated they are by this petitioner and by this petition.
And the Commerce Department has used language like our hands are tied in terms of opening the investigation.
I think the chance of a negative investigation here a negative result.
Is.
It is very very low, but we are very confident we can meet demand from the.
Module side.
Irrespective of what direction it goes.
A question of.
Around the edges, what's the module cost like what are the days payable on it but we'll find the we're very comfortable that we'll meet our customer interest.
Okay very helpful. Thank you.
Thank you next question comes from Andrew Coker.
Please go ahead Andrew.
Great. Thank you for the time. So just one quick one for me you know we talk a lot about or heard a lot today about utility price increases across the U S has that opened up any new markets for you guys that you don't currently operate in today and if so what's what would be the potential go to market strategy there.
I mean, we're always monitoring what is going on across the country for sure and evaluating.
Strategic moves as it relates to new territories as you know now where we're operating in 22 states and Puerto Rico, and Hawaii, and you know, where we're feeling very comfortable in the markets that we're in but we're always continuing to evaluate that to your point. So yes, I do foresee that in.
In the years to come they're going to be other markets that again.
It might not look attractive today, but we will quickly be looking attractive because of utility rate cost pressures.
Yeah.
Great. The rest of my questions have been answered so I'll just leave it there. Thank you.
Okay.
Thank you. The next question comes from Philip Shen from Roth Capital. Please go ahead.
Everyone. Thanks for taking my questions.
I think he just filed a mixed shelf along with.
<unk> today and in your Q. It looks like maybe you have a 107 million Undrawn can you walk us through your liquidity situation and what is your view on tapping into the equity markets near term.
That's simply a corporate hygiene move.
We periodically do.
And as I mentioned, we have ample liquidity and we just increased the size of the company's revolver, which is fully drawn.
We feel very comfortable in our current position.
Thanks, Ed.
And then as it relates I'm married to your comment that.
You've collapsed several layers of management structures can you talk about how many people left in that part of the organization and then how many more do you expect as you right size or the layoffs over and would you expect that there. Thanks.
So I mean overall you know the company is we're growing fast and so overall from like a overall head count perspective, we are in a growth mode.
You know that is you know that.
That's the position we're in but yes, no you're absolutely right. We did you know really collapsed layers and look at again, making sure. It's a really streamlined flat as possible close to the customer organization and where we're hiring we're bringing in a lot of new employees in terms of.
Getting into specifics specific numbers.
No that's not really I don't think a place I want to go but but I will tell you overall, we are growing organization and again, we're hiring fast to keep up with the demand.
Great I appreciate the color thanks Mary.
Yeah.
Thank you. The next question comes from Amit <unk> from BMO capital markets keep going he doesn't leak.
Hey, good afternoon. Thanks for squeezing me in you guys have talked a lot about you know potential headwinds from higher interest rates or financing costs, but I was just wondering on kind of the other side.
Are you guys seeing a pickup in customers kind of opting for all kind of third party ownership models versus loans and it seemed like loans had been a little bit more popular.
Last year I was just wondering if you're getting a bit of a tailwind from that.
Yeah, Hi, this is Ed.
It's an interesting dynamic mostly speaking.
Really the sales reps that drive.
Interest in loans versus leases, where sales reps, who are looking for a simple sale with a better feature set but what kind of willing to accept the controls that we put on something because we care about production and things like that prefer to sell lease.
And those that prefer the later controls that tended to sell loans, there's an interesting dynamic in the market right now which is that the capital cost for solar loans have gone up almost two 5% and for the most part.
No we haven't seen any change in solar loan pricing like I doubt actually the United States Treasury could make money buying solar loans from us at the moment.
So it'll be interesting to see.
How the dynamics play out in that in that market, but certainly right now.
You know that is an attractive customer value proposition.
Great. Thanks, and just one more real quick one.
Battery growth, 50% I mean, that's that's a pretty good off of a low base I guess.
Some of that driven by people coming back in and retrofitting their systems or is this all kind of just more availability.
Higher attach rates.
There's a little bit of that but you know again.
And again I wouldn't say, it's on a small base I mean, just to remind you. We have 37000 residential batteries deployed I think one of the highest numbers in the country. So yes, we're seeing.
Thing just greater interest.
In the context of providing a lot more to customers than just are the benefits of going solar. So it is you know we're rapidly moving into this customer obsessed obsessed plays are providing customers a lot more as they think about improving their lives in their homes and what they draw.
<unk>. So yes, we continue to see that attach rate go up in the future.
Thank you.
Thank you. The next question comes from David <unk> from Wolfe Research. Please go ahead David.
Yeah, Hey, good afternoon. A question I had is just on the mix of subscribers versus purchase customers.
This quarter it dipped even a little lower than Q4, which I understand has a bit of a seasonal component to it being at the end of the year, but just going forward should we expect this level to stay in the low to mid Seventy's or would you expect that to ramp back up.
Yes, no as you know and noted in some of the short term dynamics that are in play there but.
What we saw in Q4 and Q1 here simply the mix of what was coming out of our backlog, we've seen with some of the pricing and product changes that we've made of late seen.
And upfront all sales mix begin to move back.
More in the direction of a PPO or third party owned.
And so I think we'll come off the current levels and the.
At the points that I had mentioned there.
No impact maybe a little bit how long loan remains as attractive as it is at the moment, but.
Would expect to see.
A return to something higher than where we were in Q1.
Great.
Then just switching gears so the additional investment in the S K adventure.
Only $5 million I think you highlighted could you maybe give a little kind of a preview of some of the initiatives you're working on through that and when you do expect to commercialize some of these products and services would would you expect to see these flow into your internet subscriber value metrics in other words be additive to the 10-K that you pointed to later this year.
I mean make no mistake everything we do is about how it can be additive from a customer perspective, clearly an investor perspective, and a community perspective. So yes, we're very excited about the technology.
That this that this venture is working on but we're not in a position to give any more specifics about it at this time.
Okay.
Okay. Thank you.
I think that's all the time, we have for questions I appreciate it.
Yeah.
Yes, it is ladies and gentlemen.
A question and answer session. This does conclude today's conference you may disconnect. Your lines at this time and thank you very much for participating.
Everyone else has left to come.
It looks like no one else is going to join this call.
Goodbye.
Yeah.
Yeah.
Okay.
Uh huh.
Yeah.
Yes.
Yeah.