Q1 2023 Sunnova Energy International Inc. Earnings Call
Speaker 1: Shou chainsaw
Speaker 2: Good morning and welcome to Sonova's last quarter 2023 earnings conference call. Today's call is being recorded and we have allocated an hour for prepared remarks and question and answer. At this time, I would like to turn the conference over to Rodan McMayon, Vice President Investor Relations at Sonova. Thank you. Please go ahead. Thank you, operator. Before we begin.
Speaker 3: Please note during today's call we will make forward-looking statements that are subject to various risks and uncertainties that are described in our slide presentation, earnings press release, and our 2022 Form 10-K . Please see those documents for additional information regarding those factors that may affect these forward-looking statements. Also, we will reference certain non-GAAP measures during today's call.
Speaker 3: turn the call over to John .
Speaker 4: Good morning and thank you for joining us.
Speaker 4: The robust demand for our energy services, as described on our previous earnings calls, has persisted throughout the balance of the first quarter and into the month of April .
Speaker 4: This strong demand can be attributed to our ability to offer customers more affordable energy, higher reliability, and exceptional customer service relative to the centralized power of monopolies. All right, okay
Speaker 4: Our commitment to providing a superior energy service sets us apart as industry leaders.
Speaker 4: reliable service to our valued customers, utilizing cutting-edge technologies to efficiently manage energy supply and demand through our Synova software platform, which powers our seamless Synova Adaptive Home, Synova Adaptive Business, and Synova Adaptive Community service experiences. Thank you.
Speaker 4: to our new National Operations Command Center.
Speaker 4: We are reimagining the way energy is delivered, consumed, and serviced.
Speaker 4: Our industry-leading service capabilities give us real-time data for the solar and solar plus storage systems we manage.
Speaker 4: allowing us to monitor and optimize these systems to ensure maximum efficiency and reliability.
Speaker 4: We are also focused on bolstering our highly experienced and professionally managed service team, while improving our logistics capability to meet the robust demand for our service and repair business.
Speaker 4: Our command center is a significant step forward in our ability to deliver a better energy service at a better price.
Speaker 4: energy independence.
Speaker 4: Quarter over quarter, we continue to deliver exceptional value to our customers and shareholders while driving increased revenue, reducing loss of capital, and enhancing our brand.
Speaker 4: We have built our energy as a service business model around these objectives, and we strive to ensure that the power flows at the reliability and price point our customers expect. Our dedication to providing exceptional service to our growing customer base is a key differentiator from our peers.
Speaker 4: And we will continue to invest in our technological, operational, and logistical capabilities to improve the quality and response time of the energy service we provide.
Speaker 4: Indeed, customers who have invested in solar and battery systems for their homes are starting to question, then the necessity of staying connected to the outdated and unreliable grid.
Speaker 4: especially if monopoly utilities raise their rates nationwide.
Speaker 4: In contrast to the centralized utilities, we are proud to offer our customers even greater savings through a more resilient, reliable, and sustainable energy service.
Speaker 4: Slide 3 is a summary of our financial metrics for the first quarter.
Speaker 4: On our fourth quarter call, we noted that we expected to capture approximately 10% or $53 million of our full year 2023 adjusted eGaDop together with the principal and interest we collect on solar loans in the first quarter.
Speaker 4: We exceeded that target by $13 million through increased and over-repaired services gross margins, lower-end budgeted operating costs, and outperformance on loan repayments. Slide 4 showcases the continued growth in Sonova's customers, total solar power generation and the management, battery penetration, and expected cash inflow over the next 12 months.
Speaker 4: During the first quarter, we placed 30,100 customers into service, which brought our total customer count as of March 31, 2023 to 309,300 and brought our total solar power generation under management to 1.95 gigawatts.
Speaker 4: and Michael Wawler's undermanagement to 800-1.
Speaker 4: The first quarter customer additions represented a 97% customer growth rate compared to the same quarter last year. Included in our customer count are cash sale customers originating through our new home business and our service-only customers who have either benefited from CNUBER repair services or purchased a CNUBER Protect Plan.
Speaker 4: We expect this customer class to generate approximately $1,000 of adjusted EBITDA per customer annually over an average contract life remaining of 17 years.
Speaker 4: Our strong customer additions to start the year coupled with continued robust customer origination gives us both the confidence and visibility needed to increase our customer additions guidance for 2023 by 10,000 customers at the midpoint. Additionally,
Speaker 4: Our battery penetration rate continues to grow and reach 15.6% as of March 31, 2023, inclusive of over 2,857 battery retrofits we have performed live to date.
Speaker 4: Finally, we have updated our customer contract life and expected cash inflows. As of March 31, 2023, the weighted average contract life remaining on our customer contract equals 22.2 years and expected cash inflows from those customers over the next 12 months And now that you are satisfied by this argument that the real-life
Speaker 4: increased to $553 million, and increased at 37% from March 31, 2022. I will now hand the call over to Rob who will walk you through our financial highlights. Thank you, John . Starting on slide six, we will once again see the year-over-year improvement in our first quarter financial results. This includes a 146% increase in revenues and a 44% increase in the ingest of Yvita together with the principal and interest we can like on solo maps.
Speaker 4: Revenues for the first quarter of 2023 included $59.9 million of revenue from inventory sales.
Speaker 4: excluding that number, our revenue increase was 55%. On slide seven, you can see the steps to Nova recently took to strengthen its access to capital. The star in 2023, we added $105 million in additional tax equity funds as the tax equity market remains healthy.
Speaker 4: As we plan to continue utilizing tax equity partnerships, we are closely following IRS guidance on investment tax credit transferability as well as ITC adders. Depending on the outcome of this guidance, we believe in some instances transferring the credit may ultimately be more accreted than reading it in a tax equity partnership. We extended our warehouse capacity by $500 million.
Speaker 4: We have a long track record of successfully increasing our warehouse capacity to meet our growth. This includes expanding existing relationships and diversifying our capital partners by bringing new banks into the fold. We entered into a $50 million secured revolving credit facility to support our pivot to selling inventory to dealers. The Texas tab the Texas
Speaker 4: This facility allows us to borrow against the value of eligible inventory and eligible inventory and counts as feeable, thereby improving our working capital position.
Speaker 4: We announced a conditional commitment by the U.S. Department of Energy Loan Programs Office, which John will discuss in more detail later in the call. We issued a $324 million TPO securitization that priced better than market expectations and below the weighted average yield of our November loan securitization, despite TPO typically pricing higher than loans.
Speaker 4: This improvement is another indicator the cost of capital is potentially stabilizing for our industry
Speaker 4: And we completed the assignment of certain loans and commitments from these credit suites to Apollo Affiliate Atlas ST.
Speaker 4: Including our $602 million of liquidity as of March 31, 2023, our both are restricted and unrestricted cash, as well as the available collateralized liquidity we could draw upon from our tax equity and warehouse credit facilities.
Speaker 4: Given available unencumbered assets as of March 31, 2023, this available collateralized liquidity equal to $181 million.
Speaker 4: Beyond that, subject to available collateral, we had $250 million of additional capacity in our warehouses and open-time security contracts.
Speaker 4: Combined, these amounts represent over $800 million of liquidity available exclusive of any additional tax equity funds, securitization closures, including the one just priced, in-the-money interest rate hedges, or further warehouse expansions during the year. On slide 8, you will see our fully burdened on letter return on new origination increase to 10.6%
Speaker 4: who are fully burdened on levered return over the next two quarters.
Speaker 4: The implied spread to the trailing 12 month increase to above 500 basis points as our fully burdened on lever return increase law of weighted average cost of debt remained unchanged.
Speaker 4: Our current view of the capital markets continues to suggest that the implied spread today has increased back to above 500 basis points and is moving towards 600 basis points. Slide 9 reflects the strong growth we are seeing in our met-contracted customer value or in CCD. At a 6% discount rate, in CCD was $2.6 billion.
Speaker 4: an increase of 51% compared to March 31, 2022. Our March 31, 2023 MCCB at this discount rate equates to approximately $8,500 per customer and $22.68 per share.
Speaker 4: Slide 11 to 13, provide our 2023 guidance and liquidity forecast as well as our major master's growth plan. The triple double triple.
As John noted earlier, given the strong growth we've experienced to start the year and the continued demand for our services, we are increasing our customer additions guidance for 2023 by 10,000 customers at the midpoint, bringing our updated guidance range to between 125,000 to 135,000 customer additions.
There are no changes for our other 2023 times metrics. We captured 12% of our expected 2023 adjusted EBITDA together with the principal and interest to collect on solar loans in the first quarter above our 30 to 10%. As previously forecasted, we expected capturing additional 20% for $166 million of this combined financial metric in 2020.
revenue and principal interest we expect to collect on solar loans was locked in through existing customers as of that same day respectively.
I will now turn the call back over to John . Thanks, Rob. Sunova continues to innovate by finding new ways to not only provide great service to our customers, but also to fuel our growth and maintain our strong balance sheet.
Our latest advancement is the recently announced conditional commitment by the U.S. Department of Energy Loan Programs Office to provide an up to $3 billion partial loan guarantee.
which equates to a 90% guarantee of up to $3.3 billion of financing to support loans originated by Sonoma under a new Solar Loan Channel name, Project Testion. This project supported by the DOE Home Guarantee.
would provide disadvantaged individuals and communities with increased access to Sonova services by indirectly and partially guaranteeing the cash flows associated with those customers' loans. If issued, the DOE guarantee would support Sonova customers that choose to finance their energy service.
through loans that include solar, storage, or other Synova adaptive home technologies that utilize Synova's purpose-built demand response, aggregation, and grid services enabling software, Synova Sentient.
We anticipate the guarantee will support up to $4 to $5 billion in loan originations, reduce our weighted average cost of capital, and generate hundreds of millions of dollars in interest savings. We anticipate the guarantee will support up to $4 to $5 billion in interest savings.
The DOE's conditional commitment to the expected to support grid reliability, improved access to clean energy, and enhanced ratings and advanced rates on our senior bonds. Importantly, this financing would allow us to realize issuance spreads, commissar it with the expected credit uplift, and introduce new investment-grade investors to our long-term strategy.
We expect the transaction with the DOE to close in the second quarter of 2023. The first quarter of 2023 was a strong quarter.
Our execution continues to be superior as demonstrated by our continued gains in market share and increases to our total addressable market.
Our Energy as a Service business model increasingly demonstrates strong, profitable growth, not just growth at any price.
Thus, we are confident in our ability to meet or exceed our 2023 guidance targets, and we eagerly look forward to a healthy 2024. With that, operator, please open the line for questions.
Thank you. If you'd like to ask a question today, please press star 4.1 on your telephone keypad to enter the queue. From the parent-harsk question, please ensure your head says, I'm muted locally and we have participants to limit themselves to one question and while I follow up, per person to get through the queue in good time, that's star 1, to enter the queue. Thank you.
And our first question today comes from Philip Shen from Roth. Philip, your line is open. Please go ahead. Hey guys, thanks for taking my questions. First one, it looks like your cost of capital should be coming down ahead and this should serve as a tailwind for spreads to go to 600 basis points. Can you talk about how
The rapid decline of modules, storage, and other equipment pricing is benefiting your cost structure. How much has pricing come down for modules and storage? What do you expect ahead for inverter pricing ahead? What is your latest solar agen phase mix and how can that evolve? Thanks. Hey, Phil.
Yes, you know there is a general deflationary trend in our industry. We have labor is definitely becoming much more available all the way from software to installers. Technicians highly qualified like ours are still a little bit harder to get but even that has gotten a little bit more available.
The equipment side of things across the board is very much in a deflationary cycle. And if you were to just look at an example here.
go into the fourth quarter. I went to one of our major markets, pulled out an average equipment stack consisting of panels, inverters and ESS unit and it was roughly about for 8 kilowatt system about $15,100 and then if you look at the where that same equipment prices here
consumers, it already has started, and obviously help out our dealers as well. We expect
you know, what essentially amounts to equipment price war, do we expect that to continue? Absolutely, there's a lot of very high quality partners that we have and that are out there globally, and we're seeing that kind of competition intensify, not just here in the US, but also in Europe as well.
So there's differences in quality, amongst all, depending on who makes what piece of gear. Some folks are better at one than the other, but overall we think this is a powerful tailwind. And then with the IRA and some of the other global incentives like in the EU, additional capacity is coming online. So we.
we feel pretty good about we're going to see a lot better equipment, better pricing out there, and I think that's really been something that folks have missed as really being helpful to the marketplace. Great, thanks John . Can you comment on the second part of my question there about...
lot better equipment, better pricing out there, and I think that's really been something that folks have missed as really being helpful to the marketplace. Great. Thanks, John . Can you comment on the second part of my question there about the mix of inverters you have these days?
and how that could change in the coming year? I prefer not to, Phil, but what I would say is is that are we seeing some strong inroads by some additional folks out there in the inverter side? The answer is yes, but we're also seeing...
you know, a mix of competitors who as they improve their storage product, you know, a battery is not a battery. I think some people feel that way, but it's not. There's a lot of differences in products. I think you've heard that from some of the equipment CEOs and friends we have talk about their product and so forth.
I mean, it's a very lucrative, especially if you look at that part of the value chain, it's pretty lucrative with the margins. We're definitely seeing some end roads being made out there, but in terms of giving out the exact breakout and percentage, I prefer not to.
Fair enough. As for my follow-up here, in terms of Puerto Rico, the governor and others have announced plans to finance up to 30% of RESI solar system installation costs. Can you talk us through what exactly is happening there? That's it, that's slowed down some originations for you guys in the region.
is very seasonal, it's very boom bust if you will, that's just the way the market works and obviously we started that market 10 years ago actually, that's our 10 year anniversary this month and in fact our board meeting I just came back from was in Puerto Rico, it was in San Juan, so greatly appreciate.
the governor and the people of Puerto Rico hosting us. We had a great time, learned a lot. And what you're referring to is there's a good bit of federal money. Obviously Project HESTIA has been, you know, prominently mentioning Puerto Rico and broadening out the credit aperture, which we expect to do when we finalize the deals expected with the Department of Energy Loan Program Office.
And what I would say is that there are some other federal funds in there, some of the DOE, some of HUD, and the near-term program is deploying capital right now is from the HUD Department from the federal government through the local HUD agency, if you will, for the territory of Puerto Rico.
That has been a complete giveaway of solar systems, but let me be very clear about this, it's for very low income customers.
So it's not applicable to middle class and certainly not upper class, and it's very limited in nature. So we had the opportunity, my board and I, to meet with the governor actually a couple of days ago, and he was very gracious. He was very focused on getting the island to have a
power system and energy system that would lead the world and as you know we feel very strongly that post-Maria and a lot of the changes that that was going to happen and indeed is happening under his leadership and watch. I care obviously a lot about the amount of economic activity Sonoma and our competitors have put into the island in solar and storage.
And we did make the point that there is a demand drop because people are waiting to see if they got something free and encouraged him to accelerate those programs and get that money out there to those very low income that need it. And he thought that was a good idea.
I'm convinced that we're going to see something here that looks pretty much better and be more effective. And I think that we can work with the Department of Energy and others in the federal government to figure out how do we have more of a private-public partnership and actually turbocharge the market.
and that's what the governor and everybody wants in the island of Puerto Rico and we're committed to making that happen. So short term a little bit of an issue but we're coming out of it pretty strongly and we expect to actually that market to really move up strongly later this year if not surge.
Great, thanks very much. I'll pass it on. Thank you. Thank you, Mark. Thank you, Mark.
Thank you. The next question comes from Mahi Fmanloy from Credit Suisse. Mahi Piala is open, please go ahead.
Hey, good morning. Thanks for taking questions and nice to see the beach here. I mean, one thing on the customer growth here, could you talk about how should we think about growth and low and heavy state stexes for the others?
There's something which the industry kind of talked about being or seeing a slowdown in those states with interest rate going up But just curious what are you saying in those states?
Yeah, it's interesting.
Well, I would say that let's take each of those that you mentioned, Florida first. The growth has been huge, 100% growth in that market and is actually over that. Year over year, we have one of the major dealers up 400%.
I mean, these are eye-popping numbers for us, I think, for anybody. The TPO, and this is true across all these markets, has just skyrocketed. It's jumped up multiples of where it was just a year ago, and really in all cases even where it was in Q4. So we've seen a decided shift to lease.
One thing that overall before I go into the other two states, before I forget, we're seeing something close to 70%, about 70% lease to loan on the last few weeks of origination here. And if you put our accessory loans in there, that works out to be about 50-50. But if you're just to look at the comparable metric across the industry, you'd look at 70-30 and it's still climbing.
And so we expect that market to continue to be very strong. It's obviously our backyard, so nobody knows it better than us. And we're quite bullish on Texas. Arizona, just phenomenal on fire. I mean, the numbers, again, are very eye-popping. So we're not seeing any slowdown. In fact, I would tell you
and states that I didn't think I'd be talking about this soon and the energy transition or transformation of the energy system and the power system. You know, in the middle part of the country, Arkansas and Tennessee and Michigan, Georgia, you know, the South East is a rough market that's where I got my...
we even have now, which is pretty broad and certainly is not heavily weighted to California whatsoever.
And as we think about rest of the year and with the DOE loan guarantee, should we expect to pick up in the loan mix here or should does that remain somewhat similar to what we saw in the last two quarters here? ??
That's a great question. I don't know until we get out there in the marketplace and then you have the ITCA adders that come into play here, which way is this market going to go? The straight answer is we don't know, but we certainly will fulfill our commitment to the Department of Energy. We don't have any...
just giving our strong growth market share and a total addressable market growth. We don't have any reservations about that at all. I would say that it certainly would probably, without the Hestia deal, would be higher when we talk about this day in 12 months in terms of the loan lease mix.
but what exactly, how much share, if you will, would take away from an ITC ad or lease, we don't know. If you put a gun to my head and said, hey, I want you to really guess, I'd say it's probably gonna be about five to 10 points difference. So if we ultimately end up where I expect an 80-20 lease loan mix.
Maybe it ends up being $75, $70, $75, and the balance being the loans with Hestia.
Yeah, and then just one last one from me to be a non solar customer that had like around 12,600 non solar customers in this quarter. Should we expect a similar run rate here through the rest of the year or how are you thinking about that?
Yeah, we're seeing a very strong demand in our service only business, very strong. There's a lot of orphaned customers out there, two and a half million and growing. And so we're seeing quite a bit of demand growth there. We're also seeing the strategy of Energy as a Service with providing additional services such as battery upsells, load management upsells, EV charging.
from the contractor's perspective, and that's really winning a lot of shares. So the strategy's working, so we're not going to go and guide out to what exact breakout is, but we still expect strong growth there, but we're seeing, as I said, to be very clear about it, we're seeing very strong growth in solar and then inclusive of storage and the other adders.
We're seeing strong growth across the board. There's nothing to pick on and say, well, that's showing a weakness. We're not seeing any weakness whatsoever.
The next question comes from Julian DeMulling Smith from Bank of America. Julian, your line is open. Please go ahead.
Hey, guys, it's Alex very long for Julian. Maybe just following up on the last question relative to the accessory loan mix that we're seeing. Obviously a very big jump this quarter. And then to your point, John energy as a service really seems to be taking off. I'm just curious. Is there is there any sort of
You know, there's a lot of things in that bucket that you mentioned, whether it be charging or roofing or otherwise. Is there any sort of heuristic you can give us as far as like a contribution to NCCV per customer or ticket size or something of that ilk so we can think about that customer versus, say, a legacy solar customer in the mix?
Yeah, Alex, first I would say the way I look at it is I take the NCCV per customer and then just look at that ratio. And that of course has been pretty strong. And if you look at say a solar only type competitor or something, I'd invite everybody to do that calculation. You can see that.
It's not a small difference. So we're creating a lot of value no matter what. We also don't, if we upsell a battery to a customer, just to remind you and everybody else, we don't call that as a separate customer. So that's another thing in here, is that there is an increasing amount, it's becoming thousands of upsells that we don't count as a...
I would leave it with, I still think that we can, it's very clear that we're generating a value that would be commensurate with maybe a smaller solar system that is typical in some of the markets like Puerto Rico or Northern California or something like that. And at the end of the day, money's money. It's all fungible and we're making it.
Yep, that makes sense. Just curious maybe on the, the some of the gate on sales stuff. Robin, I get some commentary early in the call about, you know, some of the things you're waiting for on on direct transfer, or otherwise, just curious if you can maybe help us with moving pieces of when maybe some of the gate on sale stuff.
anticipated, uh, uh, uh, uh, tripping of our justity of a thought together with our P and I, how that's more back end weighted. And part of that's just making sure that the systems that are being originated now are sort of going into service next in the second half of the year. And that's really expect to take more of the can on sale.
The other thing, your point about the GNA, we do tend to see every time from the fourth quarter to the first quarter a slightly higher jump in our adjusted OpEx.
It's mostly related to some payroll charges not having to do with bonus accrual, but with the fact that it's sort of beginning of the year taxes and the like. That's a bit more heavily weighted in the first quarter. And as we have also put into service more customers typically in the fourth quarter than we have in any other quarter we then tend to see the service burden increases.
revenue to OPEX to start widening out again as we get into the second half of the year we do have more of that gain on sale. Hey Alex, I would add that increasingly as the service business increases that that cost is served it's obviously our technicians, the command center, staffing.
accessories and other accessories. I would expect that trend to continue, but again, it should be offset by even higher customer ads. And again, everything that Rob just said, of course, is right. So you'll start to see some more operating leverage as you move forward. But
Again, the business is growing very, very fast. In fact, our challenge is not growth, period, full stop. And hopefully our numbers start to convince folks. And we're very confident growing into even 2024 at this point because we just have really about two and a half months left at the most of growth this year and the rest of them will start booking in the next year given the way, the conservative way we count on customers. So we're seeing very, very strong growth and part of that spend is
into other areas such as commercial, international, building out the service a little bit more so we can take in more service customers or maybe building out the service a lot more. So there's a lot here that goes into growth that takes it, there's a little bit of a gap, maybe it's two quarters, maybe it's a year depending upon new initiatives but.
Clearly, the numbers are showing more and more growth is showing up. We're seeing in the customer line for sure. Thanks guys, we'll take the rest off one.
The next question comes from Joseph from Guggenheim. Joseph, your line is open. Please go ahead. Good morning, folks. And sorry, I've got a bit of a cold here. First question, just going back to the DOE LPO guarantee. I'm wondering if you have any preliminary thoughts about what that might look like when you're in the
you hit the ABS market, say, relative to the 225 spread that Mosaic saw on their recent A transaction. I know it's still speculative, but wondering if you can just maybe give us some senses to where you think that that's likely to end up. Yet we would expect that.
we'd have a larger A class bond that would be all the way from the top through what would traditionally be a triple B minus attachment point, but instead of having that trifurcated into a double A minus, A minus, triple B, we'd see that there's a single class.
that could get potentially as high as a triple A type of rating. And therefore we would expect to see the spread increase, sorry, decrease significantly even at that first attachment point, but then that spread then to be across the entire attachment point. So we could see a significant decrease in the weighted average spread.
We would also expect that that would then allow through the DSCR to have a thicker single tranche than the combination of those other three tranches combined.
We would also expect that that would then allow through the DSCR to have a thicker single tranche than the combination of those other three tranches combined.
Now, the rating indices may take a different view, but if you take a look at how it's structured, it's very similar to other government guaranteed type of paper where it's a set of cash flows that are guaranteed for the ABS investor at that attachment point.
So, we would expect to see a significant uplift there, but then that's going in part to go and hit the initiatives that the DOE and the government are trying to hit, which is to bring more solar to more people and to be able to do more aggregation.
and things that help with VPPs and the like. So does that mean then that obviously the guarantee helps? Probably we're going to see the FICO mix.
shift a little bit and I guess I would like to try and pin you down to a number. Could we see this thicker a tranche price at say less than 100 over the relevant benchmark? Do you think when all is said and done? I'm going to have you be our lead investor there. Thank you. But yes, you would expect to see lower FICO's.
go in, not materially lower FICOs, but definitely some lower FICOs, in part because we do want to make sure that we're bringing solar to more folks, but we still do have to go through an underwriting process. And at the end of the day, we still have to make sure that however we bring those in, their price to be able for us to price in some of the anticipated greater losses we could have with the lower.
OK. And shifting gears, John , you've been talking about this rapid growth in TPO. We hosted a call yesterday with the Norton Rose guide. He was saying, at least in Project Land, no one's managed to pick up the domestic content adder yet in energy communities. It's still very early days. So I guess I'm trying to understand this. This TPO growth fuels...
just by the 30% or are you saying that you are actually successfully claiming some of the adders right now today? I'm just trying to understand that. Yes, to be clear, Joe, so we are not, just like everybody else, claiming any adders and there's no adders. There's a little bit of domestic on very, very small in our fully burdened and levered...
And so therefore, especially our larger dealers, you don't turn on the dime, right? So you've got to prepare for that. But the other is that the loans, because they're so much more sensitive to the interest rate increases, they've really, in many cases, zoomed over in cost to at least regardless of matter or not.
that will mean that fewer fewer people actually have the tax capacity uh... for uh... claim in the i.t.c. which means that they need to go to leaser pp a so i think there's a lot of tailwinds here uh... the numbers of the numbers right so it's it's real so yeah that gives us more confidence that will see and continued uh... greater move towards uh... the elisa pp a
as the adders come in than we anticipated, say, towards the end of last year. OK, thank you very much.
The next question comes from Mark Strauss from JP Morgan. Mark, your line is open. Please go ahead. Yeah, good morning. Thanks for taking our questions. Just a follow-up to Joe's question there. On the the DOE loan guarantee, just I know it's a bit speculative right now, but generally when we model that, should we think about that being more of a
spread expander, margin expander, or more of an addressable market expander? I think you can look at it more as a spread expander. I think that what's wonderful about this is that most of these markets we were already heading into, we already have over 40% of our fleet would be qualifying as low and moderate income.
that the reasons that we were able to be able to get to this point at this time was really because we have had such a hard focus on service. And that's really what's missing. If you're going to be going after and trying to bring solar to communities where the financial markets have yet to be able to.
uh... be able to accept it into secure decisions you need to be able to show them that in fact that is what you can bring and that it's not going to be something that they're going to take a big loss on and have a gun there face this is anecdotal but our internal research bears this out
And this is from some very large investors in our space that about 75% of non-performance of loans is due to non-performance of systems, not due to the credit quality of the underlying customer. So it all goes back to something that John has said since the day he's founded this company, which is
service matters. And it is the reason why we're able to do this with the LPO and it's why we believe they have the faith in us to be able to bring our emerging technologies to folks so that they can not only get that better price but get the better service at that better price.
Okay, thank you. Then just as a follow-up, can you just give us the latest in California, kind of where your NIMM 2 backlog stands and what you've observed over the last several weeks selling under NIMM 3?
And Mark uhh
Yeah, I'd say this that obviously California matters a lot lot less to us than it does to some of our major competitors and You know so you know did we see a move quarter over quarter if you took the same March? And it was really more in the March for us I don't about any others, but we didn't see a huge increase in Jan Feb and then was March
start to flow out, just given the huge amount of backlog out there, that if you look at the interconnection and so forth, that probably is really not going to show up in our count, probably really to the fourth quarter, would be my guess, maybe a little bit in the third, and then spill into next year. I would say that in terms of California, look, this is a very small amount of data, but I know everybody wants it. Therefore, regardless of when we do it, this is interestingly, all the data or whether it was well covered under your Figure 4 under your mate and consideration, no huge correlation, no
So what we'll talk about is essentially the last few days. We've seen, as you would expect, post the 15th, a fairly steep drop. I think the first few days there was like a down 60%, down in some cases 70% or so in customer origination. But it's been a very sharp swing up too.
So we're starting to see something like north of 60, 70% attachment rates in California. So I know some others have talked about, hey, as NIMM 3.0 goes, it's going to be great for storage, equipment sales, and obviously our service. We have at least very early days. I wouldn't extrapolate too much on this. Therefore, we're hoping that we will continue to lift some more pagelet Metal or garlic Whenever we can move these things, to allow them to be certified above of 80%, we'll continue to increase our number of parts used to heritage them, particularly for processing local materials. More uniquely with the head of the CAM channel.
very early days shows that that's proving itself out very quickly. So we do expect to see a very high attachment rate in California given the, again, early days of data that we're seeing. And we expect that market to – it might surprise the upside. We've baked in a lot of pessimism, and again, it's not a big market for us to begin with, but it's surprising, I think, to the upside from, again, for the last few days of data that we've seen. Okay. Very helpful. Thank you.
The next question comes from Kashi Harrison from Piper Sandler. Kashi, your line is open. Please go ahead. Good morning, everyone, and thanks for taking the questions. So I think, Rob, in response to an earlier question that Mark just asked, you indicated the DOE loan will primarily expand your spread. And so maybe just following up on that question.
Can you walk us through the implications to the liquidity forecast on slide 12? Could the negative 100 for 2023 become zero in terms of changes in corporate capital? And could that zero for 2024 become positive?
I'd love it certainly if that were the case. I don't believe necessarily that that is what we expect to see is higher advanced rates, generally speaking, on the HESTA program, but it won't necessarily give us high advanced rates on the TPO program. And likewise, what we would expect to see is...
is really we've had much higher growth. And I think that's one of the bigger drivers right there. We're taking this opportunity that we've been afforded and we're pushing it into higher growth. And, or at least we're not turning away the higher growth that is coming towards us. So, it feels that,
the origination that we're putting in today, is really a lot of that's going to end up showing up in 2024 as customers. So, and this program from the LPO is going to extend over several years. So it's not like this is all getting deployed this year. In fact, I think it should be said that
this next deal that we're doing in the loan AVS market is not on the Hestia program. It is on the Helios program. And we anticipate that we'll be in a position for the next transaction that we do for that to be on the Helios on the Hestia program, but it still could be on Helios.
So we want to make sure that we're working very closely with the DOE to make sure that we get everything buttoned up so we can start issuing under-hastia, but there's still, you know, some things that are left to be done. And we want to make sure that we're doing everything right, that we're doing everything that there's really no holes to be punched in it later.
if there's someone who wants to take a fight with it. So the short answer here is a lot of what's happening now is still driving the growth, is still driving customer count for next year, and our growth still remains very robust. So we're comfortable with the liquidity side as it stands. That's helpful, thank you. And then just maybe as my quick follow up.
Yeah, Cash, what I would say is that, you know, let's focus on why the Department of Energy Office chose us. As we, you know, Robin has been talking quite a bit about its service, and that was the big one, service. It's also software. So our sentient software and…
some of the other features on the carbon content of the utility power, grid power. Those are all very unique and specific to us. And then the contracted cash flows, right? To have that there and have those cash flows come in for 25 years and how many we have, which is now just south of $11 billion of contracted cash flow and climbing quickly.
Those three things gave them the confidence of why choose Sonova. And are those unique to us? Yes, they are right now, but to be clear about it. I think this is a broad win for the industry.
And we would, there's somebody else, and I know there's been some questions about that, and it gets into the can you do it with leases. You really can't with the standard way we do the tax equity. That's not something that the Department of Energy really wanted to get behind tax equity investors and so forth, but there's maybe a way to look at those down the line once the tax equity essentially is fulfilled or something of that nature. But.
We're taking a look at that, so you never say never, but I would say that this right now is primarily focused on the loan side, but it's possible. And more importantly is we are encouraged that this is a win for the industry. Can somebody else get the DOE Hestia program? I would say it is very possible. We expect the Department of Energy to hold.
them to the same high standards that they held us, which I know they will, and I will offer this up. If we can offer our service and software and other things, anything we can do to facilitate even one of our competitors, particularly one of our loan only, to be able to apply for that program and be qualified, we're certainly willing to do that. We think this is a big win for the industry.SL equilibrium.
is but, you know, for a period of time, and we're really focused on differentiating as a service provider with that software underpinning that. So we've always said financing is an enabler. We stand by that through thick and thin, and it's an enabler. It's not who we are. And we want to do what's best for the country and for the industry.
And I think it puts us on the same quality of credit almost that the utilities have. It's not like the utilities do a great job, they just have a credit wrap no matter what state you're in, including Texas, utilities socialize the losses of those folks that don't pay their bills. So this is a step to equalizing and having equal treatment behind the meter and from the meter and anything we can do to help the rest of the community.
Thank you for taking my question and congrats on the quarter.
So maybe if you could, going back to the question of how different states perform going into 2023, you guys commented that you saw very strong growth in Florida and Texas. And this is perhaps counterintuitive just looking at what the power prices have done in those places, right? aren't as high as that here in Texas, right?
So, if you could comment on how you achieved that growth or how your sales is going to be pivoted in the sales pitch and what adjustments had to be made to continue selling successfully and growing in this geography where others have struggled. So I'd be curious to hear that.
Hey, Sophie. I think first and foremost, we've never fallen in love with one type of financing or product type over another. We have the broadest set of products, the best family of products available to our dealers and to our customers, and that's hands down. There's no one close. And so that's really given us the ability to win the market and flex very quickly one way or the other in this case.
with interest rates, disadvantaging loans relative to the huge maybe advantage that they've had previously to lease in PPAs, we didn't miss a beat, right? Just click on something else. It's really that simple. It's right next to the loan product in terms of the lease and PPA product. So I think we had, you know, just our business model and the way we thought about things over the years and prepared for something like this. We were the best prepared. So I think that that's first and foremost.
I would also say and remind folks, we've seen some price declines in semi-deregulated markets like Houston here and Dallas, but other markets like Florida's gone up still and hasn't had much of a price break if any, and so it's still pretty high. And is it lower than a market that's crazy high from these utilities that are gouging prices on consumers like in California?
I mean, no, but it never has been. I don't think it will be. And so, you know, you look at places like Georgia, for instance, I mean, Vogel is going to add what, four, four and a half cents to a rate that was at one time 10, 11 cents, it's moved up. Those are big, big numbers and big moves percentage wise. But I...
from these utilities that are really monopolies and are not good at cutting price. I think the history shows that measured in decades. When you look at that and you look at what we're seeing in terms of the deflation of cost out there and looking for better cost in price points in batteries, et cetera, I think that overall you're seeing a pretty growth underpinning picture here.
as we start to register more and more states for growth. So I just think that there is probably not a good data signals here from other folks. And we're seeing the strong growth and the fundamentals underpin that growth.
for growth. So I just think that there is probably not good data signals here from other folks and we are seeing the strong growth and the fundamentals underpin that growth.
Thank you. My other questions have been answered, so thank you so much. Thank you. The next question comes from Ben Carlo from Baird. Your line is open. Please go ahead. Hey, thanks for fitting me in here. A couple of quick ones. Just on the cadence of customers, because Q1 was a big customer growth, it's easily weak.
So just how do we think about the rest of the year? Hey, Ben, it's definitely gonna go up. And do I think Q2s is on track to beat Q1? Most definitely. And then I expect to see bigger Q3 and bigger Q4. And that's been year in, year out. When you have this kind of growth rate, I mean, we're growing at 97% quarter over quarter. You should expect to see...
not only the customer count being the third and fourth quarter. So is there a potential upside to even this? Yeah. And when you look at the financials that follow it, they tend to follow because you have to spend the money ahead of time for the growth right before it shows up. I would expect to see, just as we've laid out from the beginning, including last earnings call.
that are financial metrics, both due to the growth, the dynamic, and because of seasonality, will show up more in the second, third, and fourth quarter. So I think we're well on track and everything's upwards and to the right. And everyone, a lot of people out there weren't worried about
the whole finance capital markets access for you guys, but for the dealers, and I think that you added the most absolute dealers since you've been public in a quarter. And so could you just talk about the health of dealers?
Yeah, we've seen some strains out there for certain and we've helped some folks work out their problems with other dealers that we didn't have and so forth and we'll continue to see some of our service-only business grow in that area. We've got 10 years of experience of managing dealers that may not manage their business as well as they should and so forth.
finally, finally, and being more, you know, I think responsible for investors' capital. So we're seeing that and I think, you know, look, dealers are running to the, you know, the safety of Synova and we have our own working capital.
A lot of folks borrow their working capital, which can get flipped off at a moment's notice given the dislocation in capital markets, which has happened, right? If you look at the banking system and so forth, we're not dependent on that. So we're in a very, very strong financial position and frankly, the dealers know it and contractors know it that want to become dealers.
And we see a huge amount of demand. I will say this, I am surprised at this point as we are in the peak selling season, how many dealers, sub-dealers that we have across the board and all of our channels in the queue waiting to become a dealer. It is very heavy from what I've seen in my 10 plus years of experience. So I think that folks are running to the safety.
Is that meaning there's not other areas of our industry that are not safe to go to? I'm not saying that. There are. I'm just saying that if you want to come to Synova, have the broadest product portfolio, don't worry about whether it's a loan release. Just do what's right for the customer. We now have a great program in Hestia if we can get that finalized, which we expect to and don't expect any issues. And then we have the ITC adders. So you choose what's best for the customer. We have the working capital for you.
in Germany. Would you talk about that and what that means?
Well, as always, you do your homework. Yes, yeah, we are. So if you know somebody that is a really good German sales manager, we'd be happy to talk to him or her. We're interested in that. We are preparing our systems, our people. We've had managers. After theart.
starting to move over there and we're preparing. We're gonna take it very cautiously. We obviously don't need the growth, but we see huge growth over there in other countries and we're gonna take it slow. Maybe there's an acquisition that we can do to accelerate our entry there.
But, you know, it's something we're going to be very judicious and cautious about to make sure we don't, you know, use up any necessary working capital and such that we need over here for our growth. But we are moving. The ship is moving very slowly, but we are moving in that direction for certain. And I hope to be able to talk about much more about that in the next couple of earnings calls.
All right, I'll leave it there. Thank you guys. Congrats. The next question comes from Brian Lee at Goldman Sachs. Brian , your line is open. Please go ahead.
Hey John , Rob, thanks for taking the questions. This is Grace on for Brian . Just a follow-up to one of Mark's questions, just trying to understand the potential upside to the 600 basis point spread you mentioned in the prepared remarks. I think in the last call you mentioned like all the adders together represents about 250 basis points.
No, I think 600 is about, we've said long term, we expect it to settle around the 500, maybe a touch lower. 600 is where we think we can be with this part of the energy transition or transformation of the US power industry, energy industry, and global energy industry. But look.
Even if you see this on the equipment side, you have the best equipment in the world, but there's a willingness to pay limitation. And so we have the best service in the world. We recognize that we can't push our margins to crazy levels or there's a lack of willingness to pay. So is it possible? We did see a little bit of a couple of prints there, a couple of quarters where it was above 600 for a little bit there. Yes, it's possible, but I would not have a sure...
Please go ahead. Thanks for taking the question. Let me address one of the kind of proverbial elephants in the room. Ever since Silicon Valley and Credit Suisse went under, there's been a fear that banks will simply stop lending at any point in time.
interest rate to renewables, solar included. Have you seen any evidence of a lack of appetite to lend?
renewable solar included. Have you seen any evidence of a lack of appetite to lend into the solar space?
No, we have not. And we have had a number of folks who have reached out to us about expanding existing relationships about coming into our program, about telling us that they have been approved after a couple years of work and now they want to make sure that they are in our program. It has been around for a while now and it has been like. Truly exceptional.
been very gratifying to see that strength. And again, to be clear, even for an entity such as Credit Suisse, they do now have a very strong backstop. The Silicon Valley Bank did get support from the US government. We really never saw any sort of interruption from our
within our programs and we still continue to have very strong partners there on all fronts. But as I did say in the prepared comments and as you've probably seen in some of the 8Ks, we have been increasing our warehouse capacity. So we added another half billion dollars of capacity this quarter alone.
and we anticipate the ability to add more here as well as we move on. And it's been with a more diversified group of lenders, which is underpinned by the incredible support that we're getting out of Apollo and Atlas SP. So we're very pleased with our access to capital as it stands right now.
and have noticed more demand to be able to provide capital for us, not less. Okay, let me follow up about utility pricing. Last year, double digit increases in utility rates across the board. Do you guys raise prices along with that?
Now that there is some stabilization and potentially even ticking down in some states, I assume you're going to be careful not to get ahead of your skis in overpricing your product relative to the utility, correct? That is correct.
fee or just a kilowatt-hour rate, they're really crazy high and they just want to push them higher on consumers. Consumers need choices. I would say that we actually have a bit of a diversion to that because we just see it as ridiculous with a monopoly abuse of...
as opposed to other states like Texas and so forth, even if they're the same kind of monopoly power abuse that you see out there and rate strong than it should be rates, but they're lower. So again, when you move a penny or something on a 10 cent rate or 14 cent...
Northern California, for instance. So there's a lot of room in some of these areas on the kilowatt hour rate basis, but again, as equipment pricing falls, we get back in that deflationary trend, which we solidly see, we talked about that, and you have more of a competitive markets and so forth, labor's freeing up, et cetera.
then I think that we'll see the ability to get underneath and continue to have the ability to get underneath these relatively quote-unquote low rates because you can get a lot more scale on a per customer basis. So if you're putting on a 5 kilowatt system in maybe Northern California or 6, it's not atypical to see something like 12 or 15 KW on something in Texas and Florida for instance.
So there's a little bit of economies of scale, or a lot of economies of scale that are going with you to be able to help the economics there to still hit your targets and still generate savings for consumers.
alluded to this maybe a second ago, but like just thinking about and I know California's not a big part of your business today, but just thinking about kind of the implications of the fixed charge rulemaking out in California under I guess AB 25.
it would raise maybe overall bills for everybody, but it would seem to reduce the variable portion of their bill. I was just wondering how big of a headwind do you kind of anticipate that being? Well, I don't think anybody expects to get the.
the egregious proposal that was put forth by folks. And how would you even implement it? I mean, it's just crazy. It's just nuts. And evidently people that make, I think more than 130, $150,000 are quote rich. I mean, if anybody ever been to San Francisco and see what the cost of living is there, explain to me how that's rich. But outside just the, I think just unrealistic clearly proposal that it is in so many ways.
We're running 32,000 customers in Puerto Rico, post-Fiona, for a week without any grid power. Why couldn't we do it with the same load factor in California? And these folks that, you know, if you look at these fixed charges that were proposed, that buys a lot of batteries today, let alone how many batteries you'll buy by the end of the year or next year or the year after that or even certainly five years. So…
Look, again, there has to be some reasonableness and fairness that's put into this and the utilities just can't spend whatever other people's money and then put some matter on top of it, take it home and go pay the CEO lots of money. There needs to be a break on this and that break comes in the form of capitalism, consumer choice so that consumers can pick what's best for them. Our model is geared for this and you're going to see some things out of us as we move forward.
that are going to give us huge competitive edges in the marketplace. But we see, you know, we don't think that that's going to pass. It shouldn't pass. I don't think Governor Newsom or anybody else is going to let anything close to that pass. But if it does in the worst case scenario, we're prepared for it. And we'll take, I guess at that point, we will take a lot of market share in California.
Great, thanks. Next question comes from Sean Morgan from ethical Sean your line is open. Please go ahead.
Thanks for taking my questions. Just really quickly on the DOE program, I think that there's a – announced in the Project Hestia there's a 680 FICO cap, and you guys talked a little bit about the tranches that you see developing. Next question,
It looks like the DOE will have you guys maintaining, I mean by the, it looks like 10% versus the 3 billion that they're putting up. And of course you mentioned the 4 to 5 billion of total project capital financing information you see from this program. So questions basically, do you see the FICO scores in the program kind of clustering around that 680? Move that slide out the window just like I would have? I could have went a 8 to 5 different ways anyone could have seen this. And this was in Trollagung Bernie's ecosmics. I was actually supposed to play Super supremacyGeo Humor pepper in challenges between Money Peace and sprang soldier says maybe what happened to your stocking ability?
Because I think it's about 33% of FICO scores are sort of below that 670 level. So I'm just wondering how broadly you see the TAM expanding as a result of this program and then also how do you, where does the additional 1 to 1.3 billion of capital come in above the 3.3 that was sort of announced with your 300 million plus the 300 million said is that gonna be outside ABS or where does that capital come from? Yeah, good question. First off, just for clarification, it's not a cap. Really what they're asking for is that a certain minimum
for that partial guarantee class of investor that it's not going to mean as much or really much of anything at all. Really they're going to be looking for, make sure that we keep the systems up and running so the systems themselves are performing and that we're standing by our service guarantees.
So, that's how I would address that piece of it. As far as the rest of the market, we're still going to be able to put our other origination into that program. So, you're still going to see some very strong, very robust origination go into there.
So even for the non-guaranteed portion of the loan, if you would, a BB, perhaps, class that would go behind the A class of loan, there's still going to be an incredible amount of strength in there, we believe. And we've really never had a problem making all of our...
some root cause, maybe a specific dealer or something like that in a specific jurisdiction, a specific FICO, we'll start substituting those loans out if they end up underperforming. So the other piece of it was where does the rest of it come from? We're really sort of looking at the difference between loan balance and capital. If we can perform correctly and we get very high advance rates, then it will support a lower volume of...
is the same, then it just goes farther to lower advance rate. We are going to be gunning for the higher advance rate. I mean, that is exactly how we would be doing our business and how you would expect us to manage our liquidity. And then the balance comes in part from the dealer fee. But remember that dealer fee is there so that we are able to provide the service to the customer.
It's a full service loan where we are actually out there providing full O&M service to that customer and not just providing billing and collections. We're providing the technology as well. So it all gets wrapped up into that dealer fee. Okay. And then on the DOE, the customer ads that you increased the midpoint by $10,000, does that include the DOE benefit of increased...
up later on, say a Q3, Q4, and then those customers would be the customers we would recognize in 2024. I think largely just simplicity excludes it. Okay. All right, thanks, John and Rob. Look forward to that Strasburg analyst day that hopefully will be coming up at some point.
How should we think about it for 2Q and 3Q? I'm assuming you would have maybe some extra expense for training. We have heard it from some of your peers saying they expect to have some training period for the dealer for them to be able to sell more battery in a different business model. Do you expect that as well?
We do, and we've been doing that for a while, and we work in conjunction with our OEM or hardware partners. They provide training as well, and that may be where you pick that up. I wouldn't say that it would be but a rounding error on our expenses in terms of the training.
Okay. And then the last one, to see the EVDA guidance increase at some point this year, what do you need to see, just trying to see like where the upside could be? I think that in terms of gain on sale, that can continue to increase. You can see that in our numbers. We expect that to increase quite a bit.
We want to see, as Rob said earlier, the ITC, selling the ITC rules be very issued and be clear. And I think it's really clearly just a balance between growth spending and what you want to print on that particular quarter. So we still see the very profitable strong, strong growth and so we're likely to continue this trajectory, but that being said, we actually spent less money than we expected in Q1, as we said, and that's probably gonna be the case. We're very disciplined as far as spending from and.
So, I think that, yes, it will increase, but you shouldn't expect to see huge increases. Okay. Thank you. Thanks. The final question we have time for today comes from Andrew Pacoco from Morgan Stanley . Andrew, please go ahead. Your line is open. Thanks so much for squeezing me in. Most of mine have been answered, but just one quick one on the commercial business and the outlook there. Obviously, a lot of concern around the commercial real estate.
potential out there, bigger than we thought. And so we don't see that the financial, the adjusted EBITDA and the NCCB will show up until really probably 2024 or 2025, but that channel continues to really show a lot of growth. And so... So.
No strategy change, but frankly it was probably well time to launch that growth endeavor. Thank you.
This does conclude today's Q&A session, so I'll now hand the call back to John Berger for concluding remarks. Thank you. As you've heard today, our growth is broadening in geographies and services, and this growth is strong, profitable growth, not growth at any cost, which underlines our commitment to sustainability and a long-term view. As our strategic plans..