Q3 2024 Sunrun Inc Earnings Call
Good afternoon, and welcome to Sunrun, Inc. Third quarter 2024 earnings Conference call.
Please note that this call is being recorded and that one hour has been allocated for the call, including the Q&A session to.
To join the such the Q&A session. After our prepared remarks. Please press star one at anytime we ask participants to limit themselves to one question and one follow up question.
Speaker Change: I will now turn the call over to Patrick Jobin son runs Investor Relations Officer.
Patrick Jobin: Thank you operator before we begin please note that certain remarks, we will make on this call constitute forward looking statements.
Patrick Jobin: Nobody is saying factor that's based on factors currently known to US actual results may differ materially and adversely please refer to the company's filings with the SEC for a more inclusive discussion of risks and other factors that may cause our actual results to differ from projections made in any forward looking statements. Please also note. These statements are being made as of today only.
Patrick Jobin: Claim any obligation to update or revise them.
On the call today are Mary Powell Sunrun CEO.
Patrick Jobin: Some of them as CFO, and Paul Dixon, sometimes president and Chief revenue Officer presence.
Speaker Change: A presentation is available on someone's Investor relations website, along with supplemental materials.
A replay of today's call along with a copy of today's prepared remarks, and transcript, including Q&A will be posted the son runs Investor Relations website.
Speaker Change: We have allocated 60 minutes for todays call, including the Q&A session and now let me turn the call over to Matt. Thank you Patrick and thank you all for joining US today. This was a strong quarter sunrun is becoming faster better and stronger at everything we do providing a differentiated customer experience and delivering value to the bottom line while public mark.
Speaker Change: It's Brett policy uncertainty and changes in the short term. So none is more confident than ever in our leadership position differentiated offering and our ability to generate enduring value.
Speaker Change: All Americans want reliable affordable energy and that has not changed our focus is yielding strong operating and financial results in.
Speaker Change: In Q3 in addition to reaching the 1 million customer milestone, we again set new records for storage installations, net subscriber values and delivered solid quarter over quarter growth for solar installations, we delivered the second consecutive quarter of positive cash generation.
Speaker Change: And are reiterating our strong cash generation outlook for the fourth quarter and for 2025.
Speaker Change: Our primary focus is accelerating our clean energy differentiation launching additional products and services to expand customer lifetime values and remaining disciplined margin and customer focused industry leader growing cash generation in the business for years to come.
Speaker Change: One way we are executing this higher margin strategy is by leading with our storage offerings, which increases the customer value proposition to enhance resiliency and control the Olympics and more sophisticated clean energy platform and lays the foundation for future value creation from good services.
Speaker Change: Blazing the trail to a storage first future with a nearly 50% share of all residential storage installations in America in Q3, we installed storage on 60% of our new customers nearly double the 33% attachment rate a year ago and up six point increase from level.
Speaker Change: [noise] achieved in Q2.
Speaker Change: Installed 336 megawatt hours of storage in Q3 up Q3 up 92% from a year ago. The most we have installed in any quarter.
Speaker Change: Our fleet of network storage capacity has reached two one gigawatt hours with 135000 storage systems installed.
Speaker Change: While still in the early stages of commercializing these important basketball energy resources, we continue to advance programs that generate value for customers a grid and.
Speaker Change: We now have 16, great service programs active across the country with over 20000 customers participating.
Speaker Change: These resources are being utilized by the grid and can replace several costly and polluting gas fired plants.
Speaker Change: Sunrun is needed and establishing a platform to turn homes and vehicles into smart controls the load that can be dispatched to and improve the electric grid.
Speaker Change: Most recently, we activated new York's largest residential power plant with a utility orange and Rockland.
Speaker Change: It adds to our recently announced partnerships tussle electric and restaurants to support the grid in Texas as well as our other programs in California, Maryland, and Puerto Rico.
Speaker Change: Our customers are actively reducing the need to overinvest and costly centralized, peaking power plant and the associated infrastructure customers are also benefiting from direct payments for participating in these programs or in some cases, it's even batteries at discounted prices when subscribing to our service Sunrun is.
Speaker Change: Also earning incremental revenue for enrolling storage systems in these programs.
Speaker Change: Incredibly reliable clean energy resources lowered the cost of the grid for all users.
Speaker Change: These same storage resources routinely provide financial value to customers by optimizing their use against far too complicated utility rate structures, well also powering them through far too frequent grid outages is hurricane season again showed the crippling effects of climate change on our country's aging.
Speaker Change: Infrastructure I'm pleased to report, but not surprised at all that our systems performed remarkably well as they are built to withstand these harsh about.
Speaker Change: Nearly 3000, Sunrun storage customers Howard two hurricanes barrel Helene and Milton with 100000 hours a critical backup power during and in the aftermath of these devastating storms. It is so inspiring to hear from many of our customers that while their local grid systems were down for multiple.
Speaker Change: They were able to keep their homes powered and in many instances share some of that power with neighbors in need.
Speaker Change: Cornerstone of our strategy to increase our differentiation and augment our competitive advantage. It can become a multi product company that offers a suite of products to new and existing customers and a bundle easy to finance way.
Speaker Change: By continuing to invest heavily in service and providing a leading customer experience, we are able to monetize opportunities to provide additional products to our large base of customers for decades into the future.
Speaker Change: We are demonstrating its potential by testing products through pilots and scaling them. One success is proven.
Speaker Change: Slide seven we highlight the various initiatives underway to learn from and inform our strategy to provide valuable services to existing customers.
Speaker Change: One of the areas, where we are seeing tremendous success is offering batteries to the existing customers nearly 87% of our existing 1 million customer base today does not have a sudden choices and stuff.
Speaker Change: We already have thousands of orders, which had been growing rapidly one way we are selling the offering is through our sunrun app. We are seeing tremendous interest from customers in signing up to the up which positions us to fulfill quickly simply and that are low cost.
Speaker Change: You won't hear a lot more about this multi product strategy and our success, providing additional products and services to customers in the quarters ahead.
Speaker Change: I want to spend a minute on what we are seeing in recent industry data.
Speaker Change: We don't manage to market share, we view, our leading position in the industry.
Speaker Change: Natural long term resolve pursuing a customer first disciplined growth strategy there.
Speaker Change: There have been periods with irrational competitive behavior, such as pricing and terms loan providers offered a few years ago and more recently pricing and terms being offered by certain financing only new entrants, but our view is that fundamentals always prevail in the long term, we lead with the best possible customer experience.
Speaker Change: Underwrite healthy and financially sound business and grow in a sustainable strategic way.
Speaker Change: The latest data from market research firms highlights that our strategy is indeed, leading to strong growth we have seen our share of residential solar installations nationwide pick up significantly in the last few quarters from 13% in Q1 to 18% in Q3, and our residential storage share has expanded to 49.
Speaker Change: In the U S. I'm pleased to see these trends, but more pleased that we are doing it in a way that is generating cash and delighting our customers.
Speaker Change: I also wanted to provide an update on the traction in our new homes business. This division is seeing tremendous growth Sunrun is now working with nine of the top 10, new homebuilders in California and over half of the top 20 homebuilders in the U S. In September we signed a multi year exclusive agreement with toll brothers.
Speaker Change: In California.
Speaker Change: While the new homes Division currently represents less than 5% of our volumes, we expect it to grow at least 50% over the next year homebuilders appreciate our leading subscription offering service commitments and long track record our offering can provide new homebuyers with immediate value savings on energy and Revere.
Speaker Change: She'd come backup storage without increasing the cost of purchasing the home.
Speaker Change: To sum it up we are gaining share in a disciplined and sustainable way and are on track to accelerate our cash generation in the quarters ahead.
Speaker Change: Utility rates continue to rise and utility service reliability, it's deteriorating well solar and storage equipment costs are declining customers remain eager to take control of their energy needs with affordable and resilient solutions to power their lives the ultimate and independents.
Speaker Change: Before handing the call over to Danny as always I want to take a moment to celebrate some of our people who truly embrace the power of energy independence and the desire to connect customers to the cleanest energy on Earth.
Speaker Change: Leading direct to home sales team in Bakersfield, and our top installation team in Oahu has delivered some incredible results this quarter on safety quality battery attachment rates and customer experience. Thank you. So much for all that you do every single day to make sun on the trusted and beloved clean energy partner.
Speaker Change: Our valued customers I wanted to make a specific shout out to Sterling Hill for your great leadership and achievements at Sunrun. Thank you Sterling Alright with that let me turn the call over to Danny for a financial update.
Danny: Thank you Mary today, I will cover our operating and financial performance in the quarter, along with an update on our capital markets activities and outlook turning first to the results for the quarter on slide 10, we have now installed over 135000 solar and storage systems with storage attachment rates, reaching 60%.
Danny: Of installations during the quarter, we expect storage attachment rates to remain around this level or slightly higher for the next few quarters.
Danny: This higher mix of storage continues to drive net subscriber values higher.
Danny: During the quarter, we installed 336 megawatt hours of storage capacity well above the high end of our guidance and an increase of 92% compared to the same quarter last year.
Danny: Our total network storage capacity is now approximately two one gigawatt hours.
Danny: In the third quarter solar energy capacity installed was approximately 230 megawatts at the high end of our guidance of 220 to 230 megawatts.
Danny: Customer additions were approximately 31900, including approximately 30300 subscriber additions our.
Danny: Our subscription mix reached 96% of deployments in the period.
Danny: We ended Q3 with just over 1 million customers and approximately 858000 subscribers, representing seven three gigawatts of solar energy capacity, a 13% increase year over year.
Danny: Our subscribers generate significant recurring revenue with most under 20 or 25 year contracts for the clean energy we provide at.
Danny: At the end of Q3, our annual recurring revenue or a R. R stood at over one 5 billion up 22% over the same period last year.
Danny: We had an average contract life remaining of nearly 18 years.
Danny: Turning to slide 11 in Q3 subscriber value was approximately $51200 and creation costs was approximately 36600, delivering a net subscriber value of $14632.
Danny: <unk> result was from higher battery attachment rates, a higher average investment tax credit level and sequential growth in volumes, leading to improved fixed cost absorption.
Danny: Our Q3 subscriber value in that subscriber value reflects the blended investment tax credit of 37, 7%, which now includes all three ITC adders.
Danny: Total value generated which is the net subscriber value multiplied by the number of subscriber additions in the period was 444 million in the third quarter.
Danny: Our present value based metrics are presented using a 6% discount rate, but our financial underwriting already accounts for our current cost of capital, which was approximately seven 1% in Q3.
Danny: As a reminder, we have taken this approach historically to enable ease of comparison across periods and have not updated the discount rate frequently.
Instead, we provide advanced rate ranges that reflect current interest rates, enabling investors to calculate the obtainable net cash unit margins on our deployments.
Danny: In addition, we provided pro forma net subscriber value using the capital cost observed for the quarter.
Danny: At a seven 1% discount rate net subscriber value was $10744 and total value generated was $326 million.
Danny: On Slide 12, you can see our progress at increasing subscriber value through higher value mix and higher I D. C levels, while keeping creation costs largely flat generating expand at that subscriber values.
Danny: Efficiency improvements and hardware cost declines coupled with a return to operating cost leverage from strong sequential volume growth have largely offset the increased costs associated with higher storage attachment rates.
Danny: We expect these trends will continue into Q4 and 2025.
Danny: Turning now to gross and net earning assets and our balance sheet on slide 14.
Danny: Gross earning assets were $16 8 billion at the end of the third quarter.
Danny: Well its earning assets is the measure of cash flows we expect to receive from subscribers over time.
Danny: Operating and maintenance costs distributions, the tax equity partners and distributions to project equity financing partners, all discounted at a 6% Unlevered capital cost.
Danny: Net earning assets were $6 $2 billion at the end of the third quarter up $550 million from the prior quarter.
Net earning assets or the gross earning assets plus cash once all that.
Danny: Net earning assets does not include inventory other construction in progress assets or any net derivative assets related to interest rate hedges all of which represent additional value.
Danny: All he creation upside, we expect from future grid service opportunities and selling additional products and services to our customer base are not reflected in these metrics.
Danny: The recent run up in Treasury yields is a strong reminder of the value of our prudent risk management approach, we programmatically enter into interest rate hedges insulate our capital costs from adverse near term fluctuations.
Danny: The vast majority of our debt is either fixed coupon long dated securities are floating rate loans that have been hedged with interest rate swaps.
Danny: As such we do not adjust the discount rate used in net earning assets to match current capital cost for new installations.
Danny: Turning to our capital markets activities.
Danny: As of today close transactions and executed term sheets to provide us with expected tax equity capacity to fund approximately 272 megawatts of projects for subscribers beyond what was deployed through the third quarter.
Danny: We have also where we also have over 900 million in unused commitments available one recourse senior revolving warehouse alone.
Danny: This unused amount would fund approximately 318 megawatts of projects for subscribers in.
Danny: July we expanded our warehouse loan by 280 million to $2 6 billion in commitments matching the growing scale of our business.
Danny: Our strong debt capital runway allows us to be selective and timing term out transactions.
Danny: Since the start of the year, we have closed four ABS transactions, including three that were publicly marketed.
Danny: Sunrun is industry, leading performance as an originator and servicer of residential solar assets continues to provide deep access to attractively priced capital.
Danny: In September we closed a $365 million securitization of residential solar and battery systems be oversubscribed transaction was structured with two separate classes of publicly place a plus rated notes.
Danny: Weighted average spread was 235 basis points and the weighted average yield was 587%.
Danny: Actual balance of the class a notes represents a 73, 8%.
Danny: The credit spread was 30 basis points higher than our last transaction and in line with the overall credit spread environment.
Danny: Similar to prior transactions, we raised additional support subordinated nonrecourse debt financing, which increased the cumulative advance rate to about 80%.
Danny: When we think about our balance sheet, we prioritize a strong cash position and use of asset level nonrecourse debt financing.
Danny: This strategy provides the lowest cost of capital to finance cash flow producing assets backed by highly credit worthy consumers and is intended to avoid the use of parent recourse capital to fund our recurring origination activity.
Danny: Cash generation was $2 5 million in Q3, consistent with our guidance of positive cash generation.
Danny: <unk> of tax credit realization will continue to play a factor in cash generation timing as the transferability market grows and matures.
Danny: The terms of each sale vary depending on the buyers' tax return timing with some resulting in faster payments, but at lower prices.
And some with higher pricing, but slower payments our approaches to optimize first for the best value realization for sunrise instead of the fastest payment timing, we executed transactions. According to this principle, which delayed cash generation from Q3 to future periods.
Danny: We expect as the number of participants and the tax credit transfer market increases there will be more predictability and timing and we will create financing solutions that efficiently branch, that's working capital investment accelerating our realization of cash proceeds over the coming quarters.
Danny: We have a strong balance sheet with no near term corporate debt maturities, we have extended our recourse working capital facility maturity to March 2027, and as of today, we have already reduced parent debt by over 100 million since March.
Danny: We ended the quarter with over $1 billion in total cash.
Cash declined $32 million from the prior quarter as we consumed $46 million in cash to repurchase $50 million of our 2026 convertible notes at a discount.
Danny: 133 million of these notes outstanding as of the end of the quarter.
Danny: We have continued to repurchase this debt into Q4, and currently have $83 million in principal outstanding as of today.
Danny: In Q3 of the $143 million increase to our restricted cash balance 133 million relates to establishing a reserve account to repurchase the remainder of our 2026 convertible notes.
Danny: Establishing this reserve provided us the ability to extend the maturity of our recourse working capital facility to March 2027.
Danny: We addressed all of our corporate debt maturities very early in the year, we have no parent capital needs at this time.
Danny: Turning now to our outlook on slides 17 and 18.
Danny: The underpenetrated nature of our industry gives us confidence we can sustain robust growth throughout this decade.
Danny: This strong long term demand backdrop, our priority is to generate cash by continuing to increase customer values through growing our mix of higher value products and by keeping our costs low.
Danny: Storage capacity installed is expected to be in a range of 320 to 350 megawatt hours in Q4.
Danny: This represents 52% growth year over year at the midpoint.
Danny: This implies over 1.1 gigawatt hours of capacity added in 2024, an increase to our prior guidance and 100% growth at the midpoint.
Danny: Solar energy capacity installed is expected to be in a range between 240 and 250 megawatts in Q1.
Danny: At the midpoint this represents 8% growth compared to the prior year and 7% sequential growth from Q3.
Danny: That's a level represents a decline of 17% for the full year, which we believe represent substantial market share gains we expect year over year growth to remain positive in 2025.
Danny: Given our emphasis on more valuable product mix higher ITC levels through optimization of adders and cost efficiencies. We expect our net subscriber values will increase in Q4 compared to Q3 levels.
Danny: We are reiterating our cash generation outlook, we expect cash generation to be 50 to 125 million next quarter because of the discrete large capital transactions inherent to our business, where we ultimately land within this range will depend on project finance transaction timing in Q4.
Danny: We continue to expect cash generation to be $350 million to $600 million in 2025.
Danny: On slide 18, we have outlined assumptions and sensitivities related to key variables that would affect our achievements, we expect a 45% weighted average I T. C level in 2025 and further underpinning our guidance are assumptions of seven 5% average cost at a project level capital.
Danny: Battery attachment rates around 60%.
Danny: And slight improvements to the timing of tax credit transfers as that market further matures.
We expect solar install volumes to grow next year closer to our long term outlook of 10% to 15%, but our focus will be on margins and cash generation as opposed to specific volume attainment.
Danny: As we increase our cash generation.
Danny: We will continue to allocate excess unrestricted cash to reduce parent recourse debt and are committed to our capital allocation strategy beyond. This initial deleveraging period that drive significant shareholder value with that let me turn it back to Mary <unk>.
Speaker Change: So appreciate the work of the entire Sunrun team committed to providing customers with a greater sense of independent stability and security in their own homes, while producing value for our shareholders at the same time, a winning combination operator, let's open the line for questions.
Speaker Change: Thank you and at this time, well conduct our question and answer session.
Speaker Change: If you would like to ask a question. Please press star one on your telephone keypad, we ask participants to limit themselves to one question and one follow up question a confirmation tone will indicate your line is in the question queue.
Speaker Change: You May also press star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Okay.
Speaker Change: And our first question comes from Brian Lee with Goldman Sachs. Please state your question.
Speaker Change: Hey, everyone. Good afternoon, and thanks for taking the questions.
Speaker Change: I guess first one just a appreciate all the the.
Speaker Change: The guidance metrics here and you know you read integrating the $3 50 to 600 million of cash generation in 'twenty five.
Speaker Change: Obviously closing out financing the ITC adder as it was you know you you've kind of laid out the path to get to that cash generation target for next year.
Speaker Change: But the big question I guess on investors' minds is just how how derisked given especially the election outcome. We had a couple of days ago can you speak to that in any.
Speaker Change: What are their quantitative qualitative color like you know the term sheets, you know to get done.
Speaker Change: Finish committed et cetera, just how do you think about the implications of the election outcome for you know some of the key moving pieces of that our cash generation target for next year, especially the the ITC related ones and then I'll follow up.
Speaker Change: Sure Hey, Brian. This is Mary did you hear it from you yeah. So at a high level, Brian we see an outright repeal of the I R. A is highly unlikely Americans want affordable reliable energy.
Speaker Change: The inflation reduction act targeted lots of investments in Red States very concentrated and Republican areas and so it was no surprise in August of this year to see 18 Republican Representatives in Congress to write a letter to support a more surgical approach to look at the IRI and so you know as we as we move forward and as we think.
Speaker Change: About the I T C. I think again, it's important to remember that the ITC under the former Trump presidency actually came up for exploration and it was it was extended so you know one of the things that is really important to remember in the context of the work we do in the residential solar and storage space is that it.
It really is the area of energy that pole, so strongly across party lines and so I think that then leads to support in a more general way across party lines. So you know and then there are some technical Ah.
Speaker Change: You know as I think about cash generation for next year. You know there's there's also just some technicalities in place that would make it very very hard even in surgical changes for them to happen rapidly. So certainly as we think about next year, we feel very strong about our cash generation Guy, but Danny let me turn to you.
The answer someone's buying for specific classes sure Hey, Brian I'll add like qualitative on the capital side as far as on the on a flow basis, what's being funded today is funding against all three hours through all of our funds and we believe our investors view that as very secure and as we.
Speaker Change: Go into next year, what's underpinning the cash generation guidance.
Speaker Change: Is it 45% weighted average is D C level.
Speaker Change: That is about nine points of domestic content.
Speaker Change: Roughly there's some plus or minus there, but roughly 9% with the balance being energy communities and low on the low income and as we've.
Speaker Change: Documented our funds whatever qualifies gets funded against them and we've been working are in order here as we've mentioned in the past we've got low income energy communities previously and through the quarter are we starting to get increasing amounts of approvals for domestic content across a.
Speaker Change: A number of funds.
Speaker Change: Even some of which go no go back to last year.
Speaker Change: Okay Awesome I appreciate all that color and maybe just a quick follow up hopefully a quick one for Danny.
Speaker Change: Hum.
Speaker Change: My asset level cost of capital you you showed 7.1 this quarter and that's kind of encouraging given its been 70 576 consistently for close to a year I know you had the caveat in that same slide saying you know based on where that operates our it'd be right back at seven five.
Speaker Change: Can you kind of peaked.
Speaker Change: Speak to the change you saw in the quarter or was it you know a unique transaction already or are you just seeing better cost of capital over that three month period, and then I know the slide is assuming seven and a half is still the base case for your twenty-five assumptions, but what do you. What do you think the package from here it seems like that.
Speaker Change: The conservative viewpoint.
Speaker Change: I appreciate any thoughts just given the performance you saw in the quarter being below the seven and a half.
Speaker Change: Our assumption to begin with.
Speaker Change: Great Yeah, Yeah, I would say, we saw declining base rate environment through through the quarter that inflected.
Speaker Change: In September it says we average that period.
Speaker Change: With the 235 spread on our term out transaction.
Speaker Change: And what we're seeing on the subordinated debt that was the 7.1 as we look at it today, assuming we hold the credit spread constant.
Speaker Change: Mark to market is about saying, it's probably start on Saturday and a half percent today, even through the fed rate moves.
Speaker Change: So the you know the fed has been easing base rates have moved up moved up a bit perhaps on expectations.
Speaker Change: Or what's going to happen on both the monetary and fiscal side with even more clarity over the last few days with the election, and we think largely that three price through the system and we have an outlook for 75%.
Speaker Change: Be a credit spread environment as we noted is up slightly a deal over deal I think we're still in a normal range for what we've seen on transactions that participation remains good and as we've noted also in the past participation for us is can be over time.
Speaker Change: On deal by deal can be a private privately placed through big private debt funds publicly marketed such as the last one which I'd get participation. So that the spread environment. We also can see fluctuate, but today, we see a 235 basis points up a bit but still in a kind of a normal historical range.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Julien Dumoulin Smith with Jefferies. Please state your question.
Speaker Change: Hey, good afternoon team. Thank you guys very much appreciate it.
Speaker Change: With respect to the the debt principal pay down here just how would you expect the show this going forward. Obviously, you did a nice proactive.
Speaker Change: Pay down below par here 50 million ultimately showing slightly better than zero cash obviously in terms of the cash gen. But that's obviously inclusive of some debt pay down just how would you expect to kind of talk to the cash generation next year should we be should we kind of expect that some of the cashless practically used for debt pay down.
Speaker Change: Since to pay off the remaining 83 as you start to execute against your range for 25 that you just reiterated.
Speaker Change: Yeah, I would characterize it as kind of a strong focus on debt pay down yeah. What we've demonstrated so far is the continued pay down of the convert.
Speaker Change: What youll start to see yeah. It is a star.
Speaker Change: But you know paying down our corporate revolver as well.
Speaker Change: We like that the combination of debt pay down are you know getting to lower leverage levels are replenishing capacity and prioritizing stronger balance sheet. As we go through this period of time, so I'd say it would be substantial.
Speaker Change: And we will start to evolve more and more.
Speaker Change: Over time, the majority of the debt pay down will be more geared towards the recourse a revolver that we have outstanding.
Speaker Change: Got it and then just how is the market shaping up right now from a competitive perspective, I mean, you didn't you took out some of the run rate them language in the slides here about cash Gen. Beyond 25, how do you think about just the competitive backdrop or any other thoughts about about that positioning here I know obviously you reiterated your two.
Speaker Change: 25 cash Gen targets.
Speaker Change: Yeah, I don't think anything in terms of cash Gen targets beyond 'twenty Baidu has materially changed I think we're bullish and optimistic we can do.
Speaker Change: The landscape has had a bit of evolution, we've actually seen some of the people. We've mentioned on previous calls as you know, having we've categorized as irrational pricing essentially offering pay in cost in excess of the total proceeds you can raise against the assets and that's before consideration of G&A or any cost for service.
Speaker Change: He knows assets.
Speaker Change: And we've seen correction in some of those partners who have been out in the market for a year plus a week.
Speaker Change: We like new entrants in this space, but we've actually seen the replacement of those people with a.
Speaker Change: New entrants, bringing even more aggressive pay into the market and as Mary mentioned, despite that we arent out there playing dollar for dollar to try to win business, we have a very thoughtful.
Speaker Change: Talk to a programmatic approach to deliver differentiated value to our customers.
Speaker Change: They were picking up market share doing that but we do consider continue to see that.
Speaker Change: Aggressive pricing structure to attract market.
Speaker Change: And I think there'll be.
Speaker Change: A quick correction for these players as they were in a better understand the economics of solar.
Speaker Change: Great guys. Thank you.
Speaker Change: Our next question comes from Andrew per Cocoa with Morgan Stanley. Please state your question.
Speaker Change: Hey, good evening guys. Thanks for taking the question I did want to come back to the election point for a second and just slightly different question on that and in terms of like how you guys are managing tariff risk I know, obviously, you're buying batteries in and Inverters and racking equipment in the U S to hit that domestic content, but how are you thinking.
Speaker Change: About panel supply in the context of potentially higher tariffs either universally youre directly on China. How are you dealing in how are you diversifying your supply chain with this current backdrop.
Speaker Change: Yeah, we I mean, just generally we like it just as a reminder, our module costs are less than 10% of our cost stack.
Speaker Change: So any impact we think will also be a very small percentage of our total top stack yeah. We we've seen we've.
Speaker Change: We've had diversity of supplier base, that's not just modules, that's across inverters and batteries and our supply.
Speaker Change: Supply chain is already a diverse I think there's also the angle with domestic content as we see more of that transition to U S. Made that will also be part of the mix and that can be higher cost, but also delivers yet more value against the cost differentiate a differential through the ITC adder.
Speaker Change: Yeah, So generally we feel well positioned.
Speaker Change: As a reminder of the industry is already burdened somewhat by by tariffs and I think we've been able to manage through it.
Speaker Change: Okay understood that's helpful context, and then coming.
Speaker Change: Coming back to the IR, a I know it's not your base case that you get any repeal but are you expecting any impacts are too.
Speaker Change: The ABS market share or tax equity agreements just given the uncertainty around the eyrie repeal or are you expecting any kind of change in behavior from some of your counterparties there as you move into 2025.
Speaker Change: Yeah, again like I like I answered before what what's going into service.
Speaker Change: It is qualified is clear at the moment.
Speaker Change: You know to the extent you were playing out scenarios on ours I think that you know there is a built in experience in the industry on how to deal with times when.
Speaker Change: You know there is something in the tax code like even considering a.
Speaker Change: The corporate income tax rate just to throw that one in there.
Speaker Change: There was a period not too long ago, where that was in flux right. So I think theres a.
Speaker Change: Experience on our side and amongst all of our Counterparties.
Speaker Change: To the extent, we're looking at I array or what happens with them you know.
Speaker Change: The current tax provisions, how they get extended how they might change there will be a period, where we will have to be more thoughtful about how to deal with that through transactions that I'd say, we have a lot of built in experience doing that from cycles of the past.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Kashi Harrison with Piper Sandler. Please go ahead.
Kashi Harrison: Good afternoon, and thanks for taking my question and no surprise, it's a it's an intellectual one as well.
Speaker Change: So some you know Mary Youre, 100% correct that a whole sale repeal is extremely unlikely, but the prevailing thought is that the Republicans will look towards the iras to at least partially offset the cost of.
Speaker Change: Extending the original tax cuts because you know they they want or at least minimize the impacts of the deficit.
Speaker Change: And so even if the I R. A you know it doesn't completely go away, there's certainly the potential for tweaks and obviously no one knows what's going to happen what that looks like and what that's going to look like at this point and so my question is you know what is the appetite for a structurally revisiting the business structure to be able to be capable to.
Generate you know meaningful cash out on you know at a lower rate you've seen maybe 30% just in case, perhaps the hours go away.
Speaker Change: Yeah, I mean, I guess I would I'll make some opening comments and then I'll I'll ask Paul to talk a little bit more about our specific revenue strategy as we look out but you know from a broader picture perspective like yes, you're right. There it's possible like Theres always [laughter] actually I would say I've been in the energy business over a couple of decades, there's always tweaks. So.
Speaker Change: I would say you know from a policy perspective, having tweaks as kind of something that we've certainly always had and I I think can adjust to for sure. The other thing is they take time, which means that you know you certainly have time, you see things coming in you can alter.
Again, this business and Sunrun have used the last couple of years as an example to emerge a much stronger position and so you know that's sort of how we look at any changes that we see coming down. The Pike is you know how do we look at those and how do we think of it in our very margin focused disciplined way and.
Speaker Change: And and we really again are managing costs and a <unk> you know I would say a maniacal way, we're really focused on making sure. We're operating very efficiently and effective because that always gives us maximum flexibility. So with that Paul why don't you give some more specifics, but I think I'd, maybe start by just saying you know.
Speaker Change: As we all know equity markets don't respond well to uncertainty, but when you look at the box there's always risk in.
Speaker Change: Rebates and incentives and you know from previous presidency, you actually had the opportunity not to extend the ITC because it did come up for renewal.
Speaker Change: Two elected the ITC has existed for decades.
Speaker Change: And we're optimistic and confident around that.
Speaker Change: That said the way the ITC and the the adders work in our business because it does enable market expansion enables route expansion.
Speaker Change: Enables us to reach customers that we otherwise couldn't.
Speaker Change: So in the event of no contraction them out we would react like we have regularly and consistently doing our business to adjustments in rebates and incentives.
Speaker Change: That said, we feel like were significantly more intuitive and derisk relative to others, given our focus and strategy is less around shaping and offering a savings product too.
Speaker Change: To consumers and we've invested heavily around building out our consumer offering to be more focused around.
Speaker Change: Functionality and service and resiliency.
Speaker Change: And so we think we would see you know far less contraction than our competitors.
Speaker Change: We're about to happen.
Speaker Change: Got it I appreciate the thoughts from both of you and and then my follow up question is maybe for Danny you know I think you referenced that 10% to 15%.
Speaker Change: Megawatt growth year, but then you also said look it's really about cash generation not growth that said if I. If I just think about normal quarterly seasonality over the course of a typical year you combine that with your 250 megawatt exit rate and then the fact that you also have like pretty easy comps in the first half of next year.
Speaker Change: Oh It would suggest your starting point is as you know quite a bit of upside to that 10% to 15% range and so it is a $2 50, a megawatt exit rate.
Speaker Change: Is there something unusual about that activity level or is the thought that you know if you guys are running a hat.
Speaker Change: Just pull back to focus on cash I'm, just I'm, just trying to think about that growth rate relative to your baseline level in <unk>.
Speaker Change: Yeah, I think that the best bet.
Speaker Change: The metric to look at because we've had irregular year on your comps.
Speaker Change: And because we've now gotten through three quarters of sequential increase and we've returned closer to levels. We saw prior to the name change in California, but year on year growth rate indicated for exiting this year is about seven or 8%.
Speaker Change: They had seven or 8% sequential and seven or 8% year on year. However, you look at that.
Speaker Change: And that's trended towards a double digit number and we you know we think we'll hold that sort of pace now we'll of course have.
Speaker Change: Some of that again year on year comp irregularity too to a much lesser degree, but if we roll back like Q1 over Q1.
Speaker Change: Last Q1, we were still in recovery.
Speaker Change: But we think you know double digits area is achievable for the business that will well managed seasonality worked out ways. The balance seasonality. So we can you know really put the focus on volume in relation do text in a fixed cost structure of fixed cost absorption.
Speaker Change: And as we've been getting the volumes up and it's really seeing the cost efficiency of return to the business has been where we've been delighted to see what we thought would happen finally happened and you can see that that's where the metrics of creation costs of different elements to creation cost how we've been able to get the battery attach rate higher increase.
Speaker Change: Or value, but keep the cost relatively flat and actually I think we have three consecutive quarter consecutive quarters of creation cost.
Speaker Change: Declines on a unit basis that we're trending where we wanna be through volume.
Speaker Change: Volume in itself is not is not the primary objective. It's it's a it's the unit margin expansion, which we expect to hold.
Speaker Change: Got it thank you.
Speaker Change: Our next question comes from James West with Evercore ISI. Please go ahead.
James West: Hey, Thanks, and good afternoon, everyone.
James West: I'm very curious about the.
James West: I won't ask what the election, I think we've kind of killed that one so let me ask you about the your virtual power plants. You added several this quarter I think that's a big growing opportunity for you guys. What's the impediment to two grocers as utilities as well I guess, how do you think about the impediment to grow.
James West: If there is one.
Speaker Change: Yeah. Thanks for the question I am as you know very excited about that the development in a leading position sunrun has around monetizing the value of these assets to help the grid and help customers and you know it certainly contributes to the bottom line of suddenly and you know it is really it is all about.
Speaker Change: Having it continue to catch an edge in the context of the regulatory and utility environment. So I have always felt for so many years going back to when I was at your utility CEO for over a decade that we were going to be in the situation that we're finding ourselves in today right which is as.
Speaker Change: People electrify their homes as they electrify their transportation and now we have the pressures of AI and the grid simply can't add resources or manage resources fast and effectively and are what we're finding is again. These resources that we have are proving to be very valuable for the grid and we.
Speaker Change: Really helping to sustain it as it's adjusting to these increased capacity demand. So I think we're just going to continue to see that's trying to grow I was really encouraged just in every venue.
Speaker Change: Then you and every conference I go to it is certainly becoming something that was talked about I would say more on the fringes to something that is being discussed and a much more mainstream way. So I feel very positive about that and we are of course scaling you know at an incredible pace, we we had.
Speaker Change: No.
Speaker Change: <unk> strong record in terms of you know 60% of our installations now have storage and that just position sell immediately really well to benefit you know if you.
Speaker Change: Great benefit for our shareholders and our customers as we help out the garage.
Speaker Change: Okay, maybe a quick follow up for me on the data center.
Speaker Change: Team, what do you see as the opportunity set for Sunrun there.
Speaker Change: Oh, yeah very much an extension of the same so what you're finding is that again there are challenges and so many parts of the country to meet the demand and what Youre also finding is that in many cases a lot of the developers do want clean energy alternatives. So certainly.
Speaker Change: Now there are always there's always more than one solution, but sunrun assets could play a very important role in contributing to two solutions to the AI demands that are happening. So as as I think was reported and you know we are where we're in NDA is with a couple of AI developers.
Along those lines. So one of the things I Love again about our resources as somebody who ran a fully integrated utility where we have generation assets, we have transmission distribution.
Speaker Change: The whole power supply requirement on one of the things I really like about the storage and solar assets. The residential solar and storage assets are they are you know I would stack them up against a peak or plant any day of the week as being more reliable because you're aggregating so many different touch points and so let's just say a couple of.
Speaker Change: Don't come online it makes no difference in the overall value that you can supply to the grid. So again I think this is going to continue to be a very valuable resource I know so many regulators think so our regulators are a big part of why you're seeing increased demand for these types of virtual power plants and grid services.
Speaker Change: As programs.
Speaker Change: Thanks very much.
Speaker Change: Our next question comes from pennies Satish with Wells Fargo. Please state your question.
Speaker Change: Thanks, Good evening, maybe switching gears a bit here, obviously projecting a lot of a lot of growth in the new homes market maybe.
Speaker Change: Maybe if you could just help us understand better the unit economics, there I assume you've got some benefits from kind of streamlining the customer acquisition cost, but there's probably also revenue shares in and maybe a longer cash conversion cycle. So I guess, how does the cash generation economics compare.
Speaker Change: In that channel versus your typical residential solar sale.
Speaker Change: Just really simply as Mary mentioned I believe in your script about 5% of our business today, we see tremendous growth opportunities isn't that route and as you mentioned kind of across the board, it's a more efficient model.
Speaker Change: In terms of economics single permitting you have one to many kind of customer acquisition model and so it's it's an efficient route and so we would anticipate improved margins as that becomes and scales to a more meaningful part of our business.
Speaker Change: Got it and.
Speaker Change: Notwithstanding the elections, but just.
Speaker Change: As it relates to the ITC and domestic content, maybe specifically on domestic content can you walk through kind of your framework for.
Speaker Change: How you go about deciding whether to keep that our share that are it.
Speaker Change: Sounds like you kind of look at it market by market customer by customer, but I guess, what kind of signals are competitive dynamics with lean you one way or another.
Speaker Change: Yeah, I would say keep versus share is not like the decision framework, we've been applying it it's more.
Speaker Change: I'm more of a margin target setting exercise so.
Speaker Change: That results in in place at least some amount accruing out to the customer or being retained and it depends on the value of the market our relative positioning in the market are the.
Speaker Change: The product category, whether it's higher value, our lower value products are mainly being driven by whether or not there's a storage attachment to it so.
Speaker Change: So we're looking at a variety of factors and.
Speaker Change: Solving to.
Speaker Change: Attractive and you know a good margin profiles for us and a good value prop.
Speaker Change: To the customer.
Speaker Change: And a good competitive position within that particular space. So so it's a pretty granular exercise.
Speaker Change: Got it thank you.
Speaker Change: Our next question comes from Philip Shen with Roth Capital Partners. Please state your question.
Speaker Change: Yeah. Thanks for taking the questions first one is a follow up on your 10% to 15% growth for solar installs next year was wondering if you might be able to share the regional breakdown that you expect in 2015, sorry, 2025. So for example, California versus the northeast, Puerto Rico, a southwest et.
Speaker Change: Thanks.
Speaker Change: Yeah, I think we've had so California, we we.
Speaker Change: We've had good track.
Speaker Change: <unk> track record in California for many years, it's been at our Vegas market. We think it will continue to be of course, and I think we've shared in the past as well like the the return of volume in California, and its growth rate recently has been outpacing them everywhere else.
Speaker Change: We see strong spots continue to see strong spots in the northeast are Illinois and in the Midwest Puerto Rico.
Speaker Change: Is it good market, where resiliency is a big driver I'd say those are those are the major ones, Texas is Texas excess weather also had a high battery attachment rates, though so Texas has converted to much higher value recently as well and we think that will accelerate with the domestic content angle as well.
Speaker Change: Dan any chance you can quantify some of those regions. So, California is a strong spot well outpacing everywhere are we talking about 25% growth next year.
Speaker Change: Uh huh.
Speaker Change: We we haven't broken out kind of market specific year on year growth rates.
Speaker Change: California has been as much as half of our business that probably felt more like a third immediately after them.
Speaker Change: The name change and that's been coming back up but.
Speaker Change: But we don't have specific market regarding your growth rates for sure at the moment.
Speaker Change: Okay. Thanks, and then in terms of my follow up.
Speaker Change: Yeah we've.
Read a lot about the long lead times for power wall three our sense is the big customers such as yourselves.
Speaker Change: Have no issues with securing power wall threes, but on the margin you know the smaller.
Speaker Change: And and through distributions are having challenges.
Speaker Change: Do you anticipate any issues at all or.
Speaker Change: Do you guys expect to continue to get strong and reliable power at all three suppliers you know 25. Thanks.
Speaker Change: Yeah, Great Great question.
Speaker Change: We've experienced very much the opposite we view Tesla is a really key and strategic partner for us.
Speaker Change: And believe based off the way, we're being treated by bandwidth supply and the partnership that we're a very strategic partner for them as well. So we don't have supply chain shortages with carnival threes.
Speaker Change: At this time and don't foresee them in our forecast that said there are a lot of new exciting battery technologies that are coming online.
Speaker Change: We focus on.
Speaker Change: Virtual power plants and functionality for customers in the connected home.
Speaker Change: Knowing that space and understanding the technologies that are available there is paramount for us and so in Q1, we'll be launching some new battery hardware that we're excited about them, but continue to be focused on building and maintaining our strong partnership with firewall three Tesla.
Speaker Change: Great. Thank you very much.
Speaker Change: Our next question comes from Dylan Maisano with Wolfe Research. Please state your question.
Dylan Maisano: Yeah, Hey, everyone. Good afternoon. Thanks for taking my question just.
Dylan Maisano: Just wanted to go back to the domestic con.
Dylan Maisano: Qualification of 19% that you had in the quarter did you guys give us.
Speaker Change: Any idea of what that could be in <unk>, and just kind of give us a sense of what's the lowest hanging fruit to kind of get that number up higher in the next couple of quarters.
Speaker Change: Yeah, I think there's a gradual pick up.
Speaker Change: Through Q4, and Q1 will see a meaningful pick up I think that'll go.
Speaker Change: By early next year up to a qualification rate of around 90% or perhaps even higher.
Speaker Change: That's being driven by initially more quickly probably on the on the battery side.
Speaker Change: On a solar only installs are we have a combination of our equipment getting us above the 40% threshold.
Speaker Change: Where were cycling into that so that that's a meaningful area of pick up we'll continue to see let's say the relative pick up from here on out is more on the solar only side and the storage side, but both are yeah. We're starting from a low number and going to a very high once if both are picking up very meaningfully.
Speaker Change: Got it Okay. That's helpful. Thank you and then my follow up I just wanted to ask on grid services.
Speaker Change: So you know I understand that I guess the lifetime value.
Speaker Change: Services is something like $2000 per customer I think you have 20000 customers enrolled right. Now can you just give us an idea of what's kind of the current actual revenues that you're getting from grid services that if.
Speaker Change: Something that should kind of be aligned with that two K a lifetime value.
Speaker Change: Yeah, Yeah, so that the 2000 dollar lifetime value.
Speaker Change: Is expressed on a PV basis.
Speaker Change: And what's in that is an assumption for a few hundred dollars per year per customer.
Speaker Change: What were generally seeing a pick up that's like kind of inline with that with that assumption.
Speaker Change: Great. Thank you.
Speaker Change: Our next question comes from Colin Rusch with Oppenheimer. Please state your question.
Speaker Change: I know this is Andre Adams on for Colin.
Speaker Change: Are you starting to see any increase and labor availability and how should we think about construction cost trends going forward.
Speaker Change: Yeah, we were we're not kind of across the board we're seeing.
Speaker Change: Long demand and growth across our go to market.
Speaker Change: Roles as well as in our operation business.
Speaker Change: In supply chain.
Speaker Change: Got it thank you.
Speaker Change: For the follow up just from a permanent perspective, you've spoken about automated permitting is possibility for some geographies are you seeing any meaningful trends in permitting that could have material impact on yourselves cycle. Okay.
Speaker Change: Yeah, we were actually seeing nice progress on that and kind of across the business, we're looking for ways to automate more and more.
And ourselves for example, as Mary mentioned, we're growing and selling more of our retrofit batteries them rather than doing that through traditional routes.
Speaker Change: Our customer out we're pushing out leads.
Speaker Change: We have thousands of responses is far far higher and faster conversion rates and so technology and implementing that to cross sell and operations is bearing fruit for us.
Speaker Change: Thank you.
Speaker Change: Our next question comes from my Heat men Loy with Mizuho. Please state your question.
Speaker Change: Hey, Thanks for taking the question and then move to a different just most on the election of another topics over here, but maybe just one on the safe Harbor process here.
Speaker Change: Pasta when doctors, we're sunsetting, we saw two year safe Harbor, giving you ample time to buy equipment upfront and keep their credits.
Speaker Change: Any guidelines are you or any clarity on that under the new.
Speaker Change: The tax deferrals from the either.
Speaker Change: Yeah, there's a there's a there's a four year period in the yeah to the extent when your safe Harbor.
Speaker Change: We've had strategies in the past.
Speaker Change: Yeah to the extent, they're valuable yeah, you know through available financing sources and you know things they've done in the past I think we've got a good developed playbook there as well.
Speaker Change: Our you know our guidance considers all of the all the possibilities.
Speaker Change: Got it appreciate it that's all thank you.
Our next question comes from Jordan Levy with <unk> Securities. Please state your question.
Speaker Change: Yeah.
Speaker Change: Hey, Thanks, this isn't though off of a draw that I just have a quick one on bell getting used homes segment can you talk about profitability and margin profile when compared to your traditional subscription models and how should we think about the blend of the monitors. This second becomes a larger part of our mix.
Speaker Change: Thanks.
Speaker Change: Yeah.
Yeah. So I think it's as Paul shared there's good cost efficiency.
Speaker Change: On the business on the sales cost the efficiency on permitting he noted what you also get a relative to a retrofit on average they might be smaller system size.
Speaker Change: With cost efficiency.
Speaker Change: On a margin percentage basis.
Speaker Change: They're similar to the relative product like are yet in California for example.
Speaker Change: It will compare well to a retrofit product.
Speaker Change: We would otherwise do.
Speaker Change: So it is a.
Speaker Change: A majority of California. It is a high value market. It has a similar margin profile.
Speaker Change: The individual homes might be smaller, but the batches of units come in larger quantity.
Speaker Change: There's a strong upset when you consider the aggregate volume.
Speaker Change: Thank you.
That concludes the time that has been allocated for Q&A.
Speaker Change: You may now disconnect.
Speaker Change: Hi, Brad.
Speaker Change: Left to come.
Speaker Change: Yeah.