Q1 2023 Sunrun Inc Earnings Call
Speaker 2: Good afternoon and welcome to Sunrun's first quarter, 2023 earnings conference call. Welcome to Sunrun's first quarter, 2020.
Speaker 2: All participants have been placed on mute.
Speaker 2: Please note that this call is being recorded and that one hour has been allocated for the call, including the Q&A session.
Speaker 2: To join the Q&A session after the prepared remarks, please press star 1 at any time.
Speaker 2: We ask participants to limit themselves to one question and one follow-up question.
Speaker 2: I will now turn the call over to Patrick Jobin, Sunrun's Senior Vice President, Investor Relations. Go ahead.
Speaker 3: 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.
Speaker 3: Abhayani Abadjan, Sunrun CFO .
Speaker 3: A presentation is available on Sunrun's Investor Relations website, along with supplemental materials. An audio replay of today's call, along with a copy of today's prepared remarks and transcript, including Q&A, will be posted to Sunrun's Investor Relations website shortly after the call. And now let me turn the call over to Mary. Thanks, Patrick. Hmm, okay.
Speaker 4: Hi all. We have a lot to catch up on today, so let's get going. Faster, better, stronger, and doing it right were the themes of our first quarter as we laser focused on crushing it on the fundamentals and delivering value for our customers, shareholders, and the planet. Frankly, we pleasantly surprised ourselves with the momentum that our culture of high performance created.
Speaker 4: 12% higher than the first quarter of the prior year and significantly above our guidance range.
Speaker 4: Even with challenging weather conditions, including atmospheric rivers in many parts of California, our teams worked to safely install solar systems on rooftops. We did so with a higher than expected net subscriber value and most importantly, positive trends in customer satisfaction metrics.
Speaker 4: We are powering a customer-led revolution to clean affordable and locally generated energy and doing it at massive scale and unprecedented pace. Our network solar energy capacity now stands at 5.9 gigawatts and we are on track to add well over one million tons of energy to our solar energy capacity.
Speaker 4: gigawatt of clean power capacity this year alone. To put that in context, the capacity we are adding this year is equivalent to an average nuclear power plant, which takes decades to build. Most utility scale solar projects are generally 5 megawatts or smaller.
Speaker 4: and take 6 to 12 months to bring online. We do well over 20 megawatts per week. Think about that. Just think about that.
Speaker 4: As a former utility CEO who knows full well the amount of time in capital it takes to build projects of scale. Sunrun is scaling at a gigawatt pace with low risk fast development times.
Speaker 4: The modern energy system we are developing is built efficiently on existing housing infrastructure, avoiding the intense environmental impacts that come from the massive land use tied to utility scale renewables, which would require use of 5,000 to 10,000 acres of land to produce similar scale.
Speaker 4: and would certainly take years, not quarters, to build. Most important of all is that our offerings provide what customers really want. Clean, affordable, and predictably priced energy to power their homes, their lives, and with increasing frequency, their transportation.
Speaker 4: Based on what we are seeing in our business and across the industry, I could not be more pleased with Sunrun's competitive position and market leadership. Failed activities were up over 30% in the first quarter compared to the prior year, with much faster growth in California.
Speaker 4: Sales in California increased by more than 80% year over year in Q1, as we successfully helped customers lock in value from the existing rate structure. Even excluding California, total sales activities increased by double digits, with about half of the states we operated and growing more than 20%.
Speaker 4: Part of this outcome, of course, was the expected acceleration ahead of the changes in California. But the results are also indicative of the loss of confidence in the utility grid in infrastructure, rapidly rising utility rates, and growing consumer awareness of the energy independence afforded by our products and services.
Speaker 4: Our strong traction is also a result of our ability to attract the best sales talent in the industry. Eager to work with the nation's leading residential clean energy provider, especially one that leads on storage and innovation.
Speaker 4: Sunrun is the clear leader providing clean energy as a subscription service with over 60% share of new subscriptions across the residential solar industry.
Speaker 4: Recent trends in financing costs for loans, the growing need for advanced systems to storage, awareness of the value of service and performance guarantees, along with the uncertain economic climate, have all increased the advantages of our subscription offering. We are seeing a significant shift in preference towards the subscription offering.
Speaker 4: With the mix of new subscribers increasing nearly seven percentage points from last quarter to 78% of our installations in Q1.
Speaker 4: Storage solutions are not only a significant competitive advantage for sunrun and differentiator in the eyes of customers and salespeople. They are meaningfully accretive to our margins.
Speaker 4: We have now installed more than 58,000 residential solar and storage systems across the country.
Speaker 4: While storage supply was a constraint to growth as recently as last year, supply chain conditions have improved considerably for us given our strong vendor relationships and we are well positioned to dramatically increase the attachment rate.
Speaker 4: Our wherewithal to tackle the increasing capital intensity required for a rapid transition to high battery attachment rates positions us well to continue to lead the charge on battery adoption.
Speaker 4: Sunrun will continue to lead with the best product offerings for customers and deliver them in the most cost effective way possible. Always prioritizing the customer experience and serving them with love, grit and ingenuity. At Sunrun, we are building the beloved trusted brand that will help Americans achieve their clean energy.
Speaker 4: factor in our ability to adapt to market changes with rapid speed and decisiveness.
Speaker 4: Our team not only stood up the infrastructure to process a wave of orders and qualify customers under California's prior rate structure in a way that maximized values for our customers and Sunrun, but we also started selling under the new rate structure with a compelling subscription offering faster than others in the industry.
Speaker 4: I have always espoused that culture eats strategy for breakfast, lunch, and dinner. And our team culture is all about the kind of high-performance collaboration that drives strong execution and growth.
Speaker 4: We're starting to see the progress on these elements with improved field efficiency, improving customer satisfaction rankings, and continued innovations.
Speaker 4: An example of our focus on operating efficiency is the work we are doing to streamline field operations.
Speaker 4: We move to jobsite delivery of equipment in many geographies.
Speaker 4: allowing crews to spend more time at customer locations instead of branches. Increasing productivity, employee engagement, and customer satisfaction.
Speaker 4: As an anecdote, we improved installation crew efficiency by approximately 17% in March compared to the prior year.
Speaker 4: Driving the best financial outcome is critical to our success as we focus on growth and scale.
Speaker 4: and is directly linked to how we increase the accessibility of solar energy across the country and make the largest impact on our communities and the environment. Last month, we published our sixth annual impact report. This is an inside view into what drives us as a company and how we operate the business.
Speaker 4: our purpose, our mission, and our people-first approach. I'm so proud to share the many amazing initiatives at Sunrun and the positive impact our important work is making on the planet. In summary, the Sunrun team is driving meaningful, long-term value by focusing on sustainable, profitable growth.
Speaker 4: crushing it on the fundamentals and accelerating the customer-led revolution in clean, independent energy lifestyles. This is the company that is focused on producing strong unit margins which can enable strong, recurring, cash generation. I will now turn the call over to Paul Dixon.
Speaker 4: Hollis Sunrun's chief revenue officer and is a tremendous asset on our executive team, overseeing our go-to-market strategy, sales channels, product strategy, and technology development. He was one of the early leaders at Vivint Solar and a pioneer in the industry, building tremendously successful, impactful, and mission-oriented organizations.
Speaker 3: Over to you, Paul. Thank you, Mary. I'm thrilled to share updates on Sunderon's market position and how we are poised to accelerate our market share in quarters ahead, as well as the exciting innovation, innovative offering we just launched in California.
Speaker 3: Our subscription offering which makes going solar easy is extremely well positioned in the marketplace and the advantages of a diversified multi-channel go-to-market strategy paired with a vertically integrated business is beginning to really demonstrate its strength and ability to adjust to market conditions and drive responsible growth and improving margins.
Speaker 3: SunRan goes to market through multiple channels. Our Director Home Salesforce, which is comprised of regional teams who sell direct to customers, are filled cells organization which leverages leads through our presence in retail stores, such as Costco and Home Depot, our National Inside Cells organization, which helps customers from our digital channels go solar.
Speaker 3: through a virtual process, our business to business routes, which include woe income, multi-family and new homes, and last but not least our affiliate partner program, which we use to refer to as channel partners, where a partner to round out our go-to-market strategy with the sharpest and most innovative large regional operators.
Speaker 3: Our multi-channel go-to-market approach delivers meaningful advantages at different moments in time. For instance, our direct-to-home organization is particularly well-situated to find customers and create density in targeted locations due to the mobile and nimble nature of the organization.
Speaker 3: This is especially helpful to address the location specific investment tax credit that it matters for low income and energy communities.
Speaker 3: Additionally, our Director Home Channel often reaches customers who have not already understood the value of solar and storage.
Speaker 3: Our National Insights Cells organization can flex resources in areas where needed and serve customers desiring to be met through virtual engagement.
Speaker 3: Our Filptel's organization helps customers who wish to shop through companies they're already familiar with as they meet our associates working in big box stores. Lastly, our affiliate partners allow us to expand our reach, share best practices, and benefit from deep local knowledge.
Speaker 3: Having the solar industry's largest internal sales force many times over and deep integration with our key affiliate partners enables us to meet customers most effectively and move quicker to meet market conditions.
Speaker 3: Weeding up to the transition of NEM2 to the new rate regime called Net Billing Tariff or NBT, we saw tremendous growth in new orders, with Q1 cells growing over 80% year-to-year in California.
Speaker 3: We were able to build a pipeline of over 20,000 customers representing 150 megawatts. This pipeline will be installed over the next couple of quarters. The vertically integrated nature of our business enabled us to align quickly with cells, design, technology, supply chain, operations, and customer service.
Speaker 3: Not only to ensure that NEM2 projects were submitted properly and on time, but also to watch a product to address the needs of customers under NBT.
Speaker 3: I'm extremely excited about the new offering we launched in California called Sunrun Shift.
Speaker 3: This is the innovative offering we alluded to on the last earnings call. It incorporates storage to optimize the economics of energy produced by the SOAR system.
Speaker 3: It does this by charging up the shift device with daytime solar production rather than exporting at low value rates and by enabling self-consumption in the evening during peak utility rates. This system delivers far better customer offering than solar alone and will be easier and quicker to install than full battery backup.
Speaker 3: This new offering delivers a strong value proposition for our customers and a strong net subscriber value for Sunrun.
Speaker 3: Another benefit is that shift customers are able to participate in grid service opportunities, providing enhanced value over time to these customers, sunrun and the grid.
Speaker 3: Because of our leading position on innovation and investments in advanced product development, we were able to launch a solution that meets utility needs and provides incredibly strong savings for most customers in a range of approximately 10 to 30 plus percent. At these robust savings levels, we are seeing over 85 percent of customers select shift or battery backup since watch.
Speaker 3: Bottom line, at Sunrun, California is open for business. As expected, immediately following the transition in early April , we sighed decline in sales activities.
Speaker 3: Part of this was driven by the self-team spending more of their time advancing a larger than normal pipeline which was created by the policy change.
Speaker 3: Well, simultaneously, refining the explanation of the new shift offering. We have seen a strong rebound in sales activities, increasing 25% week on week, and we're already back to approximately two-thirds of the level from one year ago. We expect this rebound to continue. With shift preserving strong customer savings,
Speaker 3: Cells activity rebounding nicely, and the strong cells driven pipeline we built prior to the policy transition, we expect to deliver year-over-year growth in quarters ahead in California.
Speaker 3: I'm extremely proud of the way the team came together to leverage our diverse routes to market and our innovation to deliver strong growth and attractive unit economics. The resiliency, flexibility, and ingenuity of our sales leadership demonstrated was amazing. With that, I will turn the call over to Danny for the financial update.
Speaker 5: Thank you, Paul. Today I will cover our operating and financial performance in the quarter, along with an update on our capital markets activities and outlook. Turning first to results for the quarter. In the first quarter, customer additions were approximately 32,400, including approximately 25,200 subscriber additions.
Speaker 5: Our subscriber additions were 78% of our total customer additions in the period, a meaningful increase from 72% last quarter. Our recent sales activities and the forthcoming benefits from the tax credit adders in the Inflation Reduction Act, which are only available to the Solar Subscription Model, indicate the mix of customer additions is likely to continue to shift more towards the
Speaker 5: installed over 58,000 solar and storage systems.
Speaker 5: We expect storage installations will grow rapidly in the quarters ahead and Attachment rates will increase meaningfully particularly in California due to the transition to NBT Which will drive customers toward our shift and home backup offerings Our backup power storage offerings not only provide customers increased value
Speaker 5: from energy-rate optimization and backup power capabilities, but they carry higher margins, typically by several thousand dollars per customer. We expect our shift offering will achieve margins that are similar to prior solar-only margins, realizing California under NEM2. Our ability to satisfy demand for storage installations with superior operational fulfillment
Speaker 5: is a clear differentiator for Sunrun in the marketplace. We ended Q1 with approximately 830,000 customers and 692,000 subscribers representing 5.9 gigawatts of network solar energy capacity, an increase of 20% year over year. Our subscribers generate significant recurring revenue with most under 20 or 25 year contracts
Speaker 5: for the clean energy we provide. At the end of Q1, our annual recurring revenue or ARR stood at $1.1 billion, up over 23% over the same period last year. We had an average contract life remaining of over 17 years. As we noted on the last call, commencing with Q1 reporting, our present value would come up at $10 billion. Thank you.
Speaker 5: reflects realizable outcomes based on current market conditions.
Speaker 5: In Q1, subscriber value was approximately $44,000, and creation cost was approximately $32,000, delivering a net subscriber value of $12,000, exceeding our guidance of approximately $10,000.
Speaker 5: The sequential decline from Q4's net subscriber value of $16,600 was primarily driven by the change to our discount rate assumption. Prochorama using a 5% discount rate, net subscriber value would have been 15,761 in Q1.
Speaker 5: After isolating the discount rate impact, the remaining $839 decrease in Q4 was driven by typical seasonal sex of less favorable fixed cost absorption and accelerating sales activities ahead of volume recognition, offsets partially by more favorable pricing.
Speaker 5: Our Q1 subscriber value and net subscriber value both assume a 30% investment tax credit and thus exclude any benefits associated with the tax credit adders as final guidance is still pending. We are seeing easing supply chain conditions and substantial cost reductions across our key hardware components which have provide further unit cost reductions as we work through inventory.
Speaker 5: These beneficial trends may be obscured, however, by an increasing mix of storage, which carries higher net margins, but will increase hardware and install costs, and therefore impact creation costs.
Speaker 5: Total value generated, which is the net subscriber value multiplied by the number of subscriber additions in the period, was $302 million in the first quarter. This represents an almost doubling compared to the prior year period, even without adjusting for the less favorable discount rate used this year.
Speaker 5: Each quarter we provide ranges for advance rates measured as a percentage of contracted subscriber value that reflect current capital costs.
Speaker 5: We finance our systems upon installation with tax equity and project level non-recourse debt, which monetizes a portion of our subscriber value. Our advanced rate ranges allow investors to approximate the approximate proceeds from all sources, net affees, engage the obtainable net cash unit margins on deployments. As you can see on slide 10, as the cost of capital increased over the last year.
Speaker 5: As you can see on flight 10, as you can see on flight 10, that are steadily increasing subscriber values, due primarily to price increases in numerous other profitability actions, have allowed proceeds as measured at the midpoint of the advanced rate ranges to increase modestly and mitigate increases we have faced from higher capital costs. Turning now to gross and net earning assets and our balance sheet.
Speaker 5: Gross earning assets were $11.6 billion at the end of the first quarter. Gross earning assets is the measure of cash flows we expect to receive from customers over time, net of operating and maintenance costs, distributions to tax equity partners in partnership flip structures, and distributions to project equity financing partners, discounted at a 6% unlevered capital cost.
Speaker 5: Net earning assets were over $4 billion at the end of the first quarter. Net earning assets is gross earning assets plus cash, less all debt.
Speaker 5: Net earning assets declined compared to Q4 owing primarily to the change in discount rates. Proforma for a 6% discount rate, however, the decline was slight and for a few reasons, including increased inventory and timing of sales and marketing costs, as well as timing of project finance activities. We expect net earning assets to grow meaningfully over the next several quarters.
Speaker 5: We ended the quarter with $843 million dollars in total cash, a decline of 110 million compared to the prior quarter, principally driven by working capital consumption and timing of project finance activities.
Speaker 5: We continue to maintain a robust project finance runway. As of today, close transactions and executed terms sheets provide us with expected tax equity capacity to fund over 450 megawatts of projects for subscribers beyond what was deployed through the first quarter.
Speaker 5: 75 megawatts of projects for subscribers.
Speaker 5: This strong capital runway allows us to be selective in timing our capital markets activity.
Speaker 5: Turning now to our outlook. We continue to guide growth in solar energy capacity installed to be between 10 and 15% for the full year 2023, which we believe will result in market share gains.
Speaker 5: We see more upside opportunity than downside risk in achieving growth in this range and expect to finish the year around the high end of the guidance range. As we obtain more California sales data and further Treasury guidance on the tax credit adders, we may increase our outlook next quarter.
Speaker 5: We expect our storage attachment rate will increase significantly in 2023 from approximately 15% both in 2022 and in Q1.
Speaker 5: In Q2, we expect solar energy capacity installed to be in a range of 270 and 290 MW. This represents double-digit growth year over year and double-digit sequential growth from our Q1 installations and implies second half growth squarely on track with our full-year guidance.
Speaker 5: We expect net subscriber value to increase sequentially in the second quarter and to be materially higher in the second half of the year compared to the first half. We are focused on delivering profitable growth while adapting to the economic and regulatory environment, coupled with the likelihood for substantial value from ITC adders.
Speaker 5: This places us on a path to achieving our goal for meaningful cash generation. Turning briefly to our capital market's activities in that look. After a period of rapidly increasing rates in 2022, our cost of capital is recently stabilized. We currently see capital costs in the mid-six to mid-seven percent range.
Speaker 5: Sq-2 slightly toward the high end of the range.
Speaker 5: While the events around the banking sector garnered significant headlines in March, there was no adverse impact to Sunrun. We responded to developments quickly and decisively, and numerous capital partners reached out to us indicating interest to step into another lender's funding commitments, which we ultimately did not need.
Speaker 5: We continue to utilize our lending facilities without interruption throughout the entire period and continue to do so today. We raise capital commitments in advance and from a diverse set of institutions. As we install systems for customers, assets are placed into our non-recourse revolving warehouse facility. For more information, visit www.fema.gov
Speaker 5: This facility includes a diverse group of nine lenders. As assets are aggregated to form appropriately sized pools, typically in the 200 to $500 million range, we execute term outfinant things, raising non-recourse capital, either in the securitization market or directly with banks. Because of the revolving nature of the warehouse facility,
Speaker 5: We can be selective when we choose to execute term out transactions.
Speaker 5: We periodically extend our warehouse availability and upsize it to accommodate a target of at least a year's worth of new subscriber additions.
Speaker 5: Contrary to fears about the capital markets being closed for our asset class, debt markets ever made solidly open.
Speaker 5: The durability of these sources of capital is intuitive as lenders appreciate our stable, predictable, cashflow-producing assets that are backed by a diverse group of high-pricot customers with a proven incentive to pay.
Speaker 5: Demonstrating our continued access to capital and recognition as a leading sponsor, last week we priced a $327 million asset back securitization. The senior tranche of A-rated notes priced at a yield of 6.13% and at a credit spread of 265 basis points. The book was solidly oversubscribed.
Speaker 5: with a diverse set of both repeats on run investors and numerous new entrants. The yield we achieved was over a half-point better than a similar transaction sector which priced within a week of our transaction. As we shared before, we regularly enter into interest rate swap to hedge capital costs on our newly installed customers.
Speaker 5: We are principally exposed to interest rate fluctuations between customer origination through shortly after installation. Around the time of installation, our systems are financed with project-level non-report step.
Speaker 5: Nearly all of this financing is insulated from near-term interest rate fluctuations, as our debt is either fixed-coupon long-dated securities or floating-rate loans that have been hedged with interest rate swaps. The long-standing relationships we have cultivated with many capital providers in multiple markets, our reputation as a high-quality sponsor, and the consistently strong payment performance
Speaker 4: Our team is laser focused on accelerating the strong momentum, driving continued efficiency across the business, and generating more value for our shareholders, our partners, and our customers.
Speaker 4: One of the greatest joys of my role is the time I spend every single quarter out in the field seeing our employees in action, talking to our customers, and literally witnessing the dramatic acceleration of this customer-led revolution. As we like to say at Sunrun, let's run. Operator, that's your cue. Let's open the line for questions.
Speaker 2: Thank you. And at this time we will be conducting a question and answer session. If you would like to ask a question please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question Q.
Speaker 2: We ask participants to limit themselves to one question and one follow-up question. You could press star 2 if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker 2: and so them themselves to one question and one follow-up question. You could press star two if you would like to remove yourself from the queue. For participants using speaker equipment, it made me necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions.
Speaker 6: Our first question comes from Julian Dumoulin-Smith with BOA. Please stay here. Thank you very much for the time. Nice to be done. Hey, look, hey, afternoon, Mary. Thank you. Look, on the net subscriber value, obviously it's trended lower to 12k, but your commentary about being materially higher in the second half of 23.
Speaker 6: Can you give us any greater sense here? I mean, is this back to the highs that we saw in the last quarter say or any sense on where you're trending here, and especially is that pro-former for the higher discount rate?
Speaker 5: Yeah, that is reflecting the higher discount rate. Hey Julian, it's Danny. That is reflecting the higher discount rate, so it's the sequential trending from here on out for the balance of the year. Part of the Q4 to Q1 move.
Speaker 5: involved seasonal volume declines, as you saw in our result there with some negative operating leverage effects as you see the Q-A-RQ decline as well as the massive ramp as we noted in sales activities causing the sales and marketing cost also be elevated in the period. So we'll continue to...
Speaker 5: see the volume increases, you know, it calls us to regain the operating leverage as we continue to move the customer values up and we improve margins net net as we see, you know, continuously higher like higher pricing, more battery attach, you know, a shift towards higher value systems also, you know, take effect.
Speaker 5: And I'll just point out that the 12,000 was in relation to an expectation we had of approximately 10,000 in the period. Got it. All right. But not prepared to necessarily share something more specific quite yet. Look, if I can just on the other side of this, you know, this is a question that I've been asking a lot of people. And I'm not sure if I'm answering it correctly. But I'm just going to say that I think that there's a lot of things that we can do to make sure that we're not just going to be able to do this in a short period of time. And I think that's a really important thing. And I think that's a really important thing. And I think that's a really important thing. And I think that's a really important thing. And I think that's a really important thing.
Speaker 6: bigger lease versus loan debate out there of late. Certainly a lot of different growth rates being thrown out, including yourself here on a growth rate. Can you talk a little bit about the migration towards lease and what that means for you guys, how different your growth rate might be versus say the overall market. And then specifically within that, can you talk about your ability to attract?
Speaker 4: coming in at the 12,000 level on that subscriber value and feel obviously it boasts very well for the years. We see preference leading to your next question towards the subscription model. And as in fact, as you know, as we noted in the script, we saw that go up 7% to 78% of the installed volume in Q1 and with the so many pressures on loan pricing, pressures in the context or opportunity souvenir we had played e-mail
Speaker 4: subscription service, but also in the context of how pleasantly surprised we've been at the volume uptake on our new shift offering already in California, post-policy transition, which in many ways shouldn't be surprising because we're still offering savings of anywhere from...
Speaker 5: and do so with increasing battery attach. We do see a steady kind of gradual growth in sequential volumes. And we also see an elevated size of pipeline still exiting the year implied within the volume that we guided to.
Speaker 5: Okay, great, that's helpful. And then, this is the second question around.
Speaker 5: I know, Danny, you said during your prepared remarks you're not seeing any adverse impacts from some of the banking turmoil that's out there. I guess asking it differently, are you seeing any opportunities? Maybe it's too early, but in the context of Julian's earlier question, do you see any opportunities?
Speaker 5: Is some of your share gained opportunity actually coming about maybe because of your financing strength relative to what else is happening out in the market? And are you able to maybe notice that we see any of those trends actually playing out here in the past few months?
Speaker 5: Yeah, I think it absolutely is. I think we just are poised in confidence just around the durability of capital markets.
Speaker 5: The fact that we do keep warehouse financing, we do keep unused runway of capital to fund our business and we see that looking out weeks, months, quarters. And also from a relative value standpoint as we see.
Speaker 5: cost of capital, move in slightly different ways between the subscription offering and the loan offering. I think there's been a relative value shift for sure, kind of implicit in how financing costs have moved depending on the modif financing. So putting all that together, in addition to just kind of the
Speaker 3: It does give us the poising confidence to deliver on the rest of the business as well. Thank you. I appreciate the comments on April , particularly in California, you noted maybe activity back to two-thirds a little level a year ago. Curious maybe where you're seeing that in terms of the tax rate as well. I mean we all kind of assume that you know this bundle becomes somewhat standard in California, but curious if you're seeing that you know in just in this early signs of that data. Yeah, person, thanks for the question. So we definitely are we're seeing.
Speaker 3: See on these markets that have lower cost, um, basis and the value and attractiveness of the subscription model, customers are still able to walk in attractive savings profiles, which makes it a really attractive offering for them where the loan has had to raise rates, you know, at a far higher pace.
Speaker 3: And we've seen more migration and really strong growth in several of our other markets, about half of the states we operate in are growing it over 20% not counting California. Thank you. And our next question comes from Andrew Perkiko with Morgan Stanley . Please, sir, question. Great. Thanks so much. I just want to follow up on the battery catch rate question. I'm just curious in terms of where you stand with suppliers. Is there a need to explain the supplier base for battery storage to keep up with the man for battery storage in California? Yeah, we actually feel really good about our wine of site into our battery supply. We're seeing.
Speaker 3: A lot of really great products in the market. We have diverse vendors that we're able to source from. And we're seeing some compression on cost of product that we're able to benefit us and our customers. So we feel really good about the agreements we have, the diversity of vendors and the price point.
Speaker 3: Great, thanks. Maybe just one follow-up on the guidance in terms of net subscriber value over the course of the year. Are you able to bifurcate how much of that is coming from additional pricing actions or cost declines versus a mixed shift to the battery storage?
Speaker 5: I think generally we would expect, notwithstanding the Q1 increase in cost, which I said was somewhat volumetrically driven, as we get volumes back up, we probably see costs moderate, even decline.
Speaker 5: And then the vision there is to hold it flat and partly should be driven as we get further and further into the year. Some benefits and tailwinds from supply chain costs.
Speaker 5: But generally a story of flattening out in costs and continually increasing the subscriber value as we get customer values up from higher your realization of higher pricing. So some of it is just pricing increase.
Speaker 5: And I would say the balance of it being the shift towards more battery attach, which delivers higher value customers from a monthly payment standpoint as well. Thank you, and our next question comes from James West with Evercore ISI. Please state your question.
Speaker 7: Hey, good afternoon guys. So Mary, I'm standing in for all of you guys were all very bullish on storage. You got a couple of questions on it so far. I think we all understand the NIM 3.0 and now we know about the shift.
Speaker 7: description service. Curious, the additional attachment rates that you're looking for, is this primarily a California thing, or are you seeing that spread out to other states? Yeah, great question. Thanks James. We're seeing really strong, growing demand for battery across our entire portfolio. Obviously it's more pronounced in California.
Speaker 7: with the compressed gap between shift and upgrading to full battery backup. But as the grid ages and more climate events take place, more consumers become aware of and experience the need or benefit of that storage. And so we're seeing growing attach rates on the consumer side and strong demand in the industry up from a Salesforce perspective.
Speaker 7: desiring to enter into, you know,
Speaker 7: workforce with an organization that has the ability to execute the sourcing of them as well as the deployment of them. Okay, thanks, Paul. It's very helpful. And then another question on the moving to site deliveries. I thought that was pretty interesting. That you're giving pretty more equipment on site. And I was wondering if you'd quantify or maybe qualify a little bit. You'll how much of the jobs are.
Speaker 4: Word on that way previously, are done that way, now, and what should expect to shift to overtime? Yeah, great question. I mean, again, the team has just continued to make remarkable progress over the last year and continuing to drive operational efficiencies, both in the context of the size of folks that take to safely do installs. So we've improved the efficiency from a sort of perspective of how many installers per job. And this was a great other step forward where we just do job site delivery. So in essence, the crews get to just show up at the first home.
Speaker 3: from Colin Rush with Oppenheimer, please state your question. Thanks so much. Can you talk about how many different markets you can monetize the VPP services in 2023 and 2024? Just trying to get a sense of the order of magnitude on that as it goes through this year and next. Yeah, no, it's a great question, particularly when you think about the scale, the massive scale, as I said in my remarks.
Speaker 4: about that's really positive for this summer. Those customers that we're selling shift products to right now will be able to participate in that program as an example. So, you know, in total, we probably have about a dozen project, you know, VPP programs, you know, around the country. We're consistently evaluating them in the context of...
Speaker 4: a program that is very beneficial for customers and very accretive for Sunrun.
Speaker 3: That's super helpful, thanks. And then with clarity from Treasury on some of these adders, what's your latest thought on this? We are getting data points all over the map, but I'm curious what you are hearing from folks on how you are building that to the underwriting process at this point.
Speaker 5: Yeah, we've been...
Speaker 5: So far in the metric that we just reported for customer value that fully excludes the adders as we look at the three buckets of adders, energy communities, low income, domestic content. We've gotten Treasury guidance, I think, more its forthcoming, almost to.
Speaker 5: and energy communities, we look at that. There is a little bit of a range as we parse through data and get those views finalized. But we express the range of mid single digit to as much as mid 20s.
Speaker 5: percentage of our current footprint. Now this is without considering any adjustments to our footprint where we, again, the 60 percent roughly market share of the subscription model where these adders are uniquely available to. There's also an opportunity to increase the mix through deliberate action. But the energy communities, we have it in a range of 20 to 100 plus million.
Speaker 5: low income, you know, that's 10% for low income, single family housing, low income, multi-family at 20%. You know, that could be as much as a third of our business. Again, existing footprint without adjustments.
Speaker 5: And the timing for that is looking like Q3, Q4 at earliest. So that's kind of more coming in exiting the year and into next year. But again, on a annual run rate type of number 0 to 150 million, 150 plus at the top end of the range.
Speaker 5: But we have that as close to zero for this year as far as our planning expectation. And depending on the timing we see that as upside. And then domestic content, Treasury guidance is forthcoming. And we have early traction with domestic supply. On the last call we talked about
US-made module equipment of nearly 200 megawatts that we had access to this year. But again, Treasury guidance is forthcoming on that element and we'll get more clarity and give it to you all over time. Thank you. Our next question comes from Mohit Manloy with Credit Suisse. Please say your question. Hey, good evening. Mahit Manloy here from Credit Suisse. Thanks for taking the questions here. First, maybe just on the...
shift of the battery products. I think the prepared remarks you talked about gross margins being similar to that of solar in pre-NM2.0. But curious, how should you think about net subscriber value for either of those battery products versus solar product in this second half of this year? Yes, so that the California...
a few thousand dollars per customer can be as much as a few thousand dollars per customer higher. So for the majority of California, we would expect similar pre and post. The customer savings range is probably a little bit different. Our margin is a little bit different but on both dimensions still quite robust and on the profitability similar range.
going forward and specifically any reason for that uptake. And give one for them. Yeah, if I look at GNA, still down quite considerably on a per customer basis as you look out over the last year or two.
In Q1 specifically, we saw increased spend probably on a gross dollar basis, just growth in the business, but I would say much more impacted by the decline in volume. So again, negative, that's one of the places where...
negative operating cost leverage showed up as we saw a sequential decline from Q4 to Q1 on our volumes. So that was, and then on the platform services, or you can also see it in the product sales margin, we did see a bit of a decline there. Again, similar story.
to the extent of system sales. So these are the systems we sell either for cash or more typically with a loan product that is provided by a third party where that looks more like kind of a simple gross margin. And we did see similar kind of volume impacts. So there is some of that.
And then included in that number is also the gross margin of our distribution business called AEE, in which we did have declining margins in the period largely due to elevated inventory levels in that business line and some price declines in the period.
that did depress the margin as we moved equipment through that business.
Thank you. The next question comes from Philip Shen with RothMKM. Please state your question.
Hey guys, thanks for taking the questions. First one is on customer additions. You maintained your annual guidance. You had a really strong and nice Q1 customer addition number. What's holding you back from taking up the annual guidance?
from that 10 to 15% range higher. And what are some of the risks that you might be concerned about and perhaps who...?
contributing to wanting you guys holding back from increasing the annual guide. Thanks. Yeah, I think I think directionally we did kind of give out the message that we're more skewed towards the high end of the range. We will you know the evaluation of whether or not to move it.
will depend on, you know, just us getting more weeks of traction in California. We are seeing a positive and encouraging trend, you know, over what timeline and to what degree we see sales move up from here will impact.
Obviously, we also said there's a backlog in California. So from a risk standpoint, like coming into the period, we were able to build up volume more so than we had planned for. And now we're just watching the week over week. Being a month in, we felt like it was a little too premature to call any differences related to California, which is a substantial percentage of our overall mix.
And then we have the, you know, on the other side, you know, opportunity can come from IRA adders, you know, the timing, the amount, you know, really matter to how they might be meaningful volume drivers for this year. And then lastly, I would say again, the shift towards more battery attach means we have a kind of a different productivity or, you know, labor efficiency in terms of numbers.
quantify what does materially higher mean for back calf 23? Can you also share perhaps the mix of the drivers? If you expect more dollars on average, what percentage of that is driven by lower cost the capital that you anticipate or the equipment price and coming down or...
interest rates. So we've run those at the new 6% discount rate. We have intention to hold that for the year, and the cost of capital environment has moderated. So that wouldn't be a driver. As far as magnitude of change, it could be a few thousand dollars per customer, so meaningful.
And from a trending standpoint, similar to how we've achieved in the last year, if you look at subscriber value over the last year, since Q4 2021, we've pulled that number up 23%, 19% year over year.
I believe this is without adjusting for the discount rate even. Those are off of large, much, actually much larger pricing increases. I think the pricing increases, probably the frequency and the pace of it is regular, but I think the significance of it is smaller. Again, largely it will be...
I think the largest driver will be the battery attach as we get just kind of the higher monthly payment generate higher system value. But yeah, we think it's potentially a few thousand dollars per customer.
Our next question comes from Sophie Cart with KeyBank. Please state your question. Hi. Good afternoon. Thank you for squeezing me. Going back quickly to the loan versus lease debate and the illustration that you provided on slide 7, I was wondering if you could maybe.
add a little context around this because what it shows is that the difference to ratepayers about $7 per month, right, is in the lease and they are substandard subscription model.
Is that enough to drive the shift or can the loan players kind of move the economics to meet that same level of customer savings and level of the playing field? How should we think about this? Yes, so when customers are evaluating the options of solar...
as the owner of the asset, service the system, maintain the system, and plan to replace any parts that need to be replaced in that 25-year contract duration. So your inverter, for example, needs to be replaced if you buy battery backup as part of your offering. That's expected and priced to be replaced in that monthly fee. On a loan product, you pay that monthly fee that's...
more expensive out of the gate in most cases in the subscription. But then at year 10, you're spending thousands of dollars replacing your inverter or battery, whatever product may be. And then in many cases on the hook for regular service and maintenance. And so on a overall lifetime value, that's the big difference that we're kind of signaling and why we're bullish on this strong migration to the subscription offering. Thank you for the satisfaction.
With the subscription, the way I like to think of it, so obviously you're selling peace of mind. It's less expensive and you get the peace of mind of not having that worry and concern over the life of the contract.
And my second question real quick maybe on your shift product offering, could you clarify what exactly is the difference between this offering versus just regular battery? Is it just the size of it is smaller versus the regular battery backup or what are the differences versus just the normal battery plus storage product that's been available?
before? Yeah, great, great question. So the product itself is a battery. And the big difference is how it's constructed, constructed and configured inside the home. So a battery that is set up for battery backup requires more intense permitting and electrical work to load to relocate the loads that are needed to back up the home.
capacity for backup, so in an opportunity where you're looking at grid services, you have the full capacity of the battery available to maximize grid service opportunities or pushing back power to the grid at peak demand rates.
to maximize value to the customer. Thank you. And our final question comes from Luke Tillkins with Piper Sandler. All right. Thank you for taking the question. You mentioned that cash declined by about 110 million. And that was a result of working capital as well as project finance timing. We should be expecting.
Q1 to be the low point and corporate cash to increase over the course of the year? So I think we'll give more, you know, when appropriate, we'll share more on the element of cash generation, I would say from a trending standpoint, if you go from Q4 to Q1.
You can see it on the balance sheet, the meaningful increase in inventory balance.
happening at the same time as we're seeing the seasonally low volume, coupled with the more than normal uptick in sales activity, which it's not just the sales and marketing costs that get elevated as you move that pipeline through the operational funnel.
you start to spend dollars to advance an install where the cash comes in at the time of install. So it's all the costs leading to install trailing ahead of the actual cash event upon install both from tax equity and warehouse facilities. So that's all the timing impact.
We will have turned the corner on the seasonal aspect. And then as far as specific cash trajectory, we will talk about that more when the time is appropriate.
Okay, great. Thank you. And then just for a follow-up, have you, with the DOE on the guarantee program that they've been doing out there, and is it something that you think you could do on the lease side?
specifically how you might structure it through a kind of subscript like tax equity finance subscription model You know, I think we've also looked at just kind of capital markets also being open and attractively priced you know from a
from an upfront cash standpoint, the advanced rates that result from that relative to a program that would be potentially multiple years, have a lot of complexity to work through. Specifically on the tax equity side, we've evaluated it, we continue to do it. That program is...
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