Greetings. Welcome to the Sunrun Second Quarter 2021 Earnings Call. At this time, all participants in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.
I will now turn the call over to your host, are Patrick Jobin. Please go ahead.
Thank you, Stacy. Before we begin, please note that certain remarks we will make on this call constitute forward looking statements. Are Although we believe these statements reflect our best judgment based on factors currently known to us, actual results may differ materially and adversely.
Are 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 are in the line with the SEC. Please also note that these statements are being made as of today, and we disclaim any obligation to update or revise them. Are on the call today are Lynn Jurich, Sunrun's Co Founder and Current CEO Mary Powell, Sunrun's incoming CEO and current Board Member are Ed Fenster, Sunrun's Co Founder and Executive Chairman and Tom Von Ruckbauer, Sunrun's CFO. Following their prepared remarks, are ready to take questions. We will conduct a question and answer session.
We ask that you limit yourself to just one question, so we can take as many questions from participants as the scheduled time allows. Are And now let me turn
the call over to Lynn.
Thanks, Patrick, and good afternoon, everyone. Before we turn to our results and outlook, are ready to take a moment to discuss the leadership news we announced today. After nearly a decade as CEO of Sunrun, I have decided to make the transition to Executive Co Chair of the Board. Are ready to begin. Following a thorough process, I'm excited that Mary Powell, a visionary leader in the energy sector and distinguished member of our Board, will be appointed CEO on August 31.
Adding Mary to the team brings more firepower to achieve our mission and climate goals are And given the company's strong foundation and momentum, I believe now is the optimal and natural time to make this transition. Are I'm thrilled to hand the roll over to Mary and confident that she is the right leader. Mary has a proven track record of driving operational excellence and are in the range of innovation for
customers and shareholders.
Her experience running the utility Green Mountain Power for over 10 years makes her an ideal leader for Sunrun's next chapter of growth are welcome to join us on the call as we help this country build a reliable and clean grid with electrified and networked households. Are in the range of $1,000,000 in the Q1 of 2019. In addition, Mary has a deep understanding of Sunrun's people, business and strategy, having served as a member of our Board for the last 3 years. Are I've gotten to know Mary well and was a driving force to recruit her to Sunrun. I can personally attest to her passion for our people, are welcome to the planet and for the company's success.
And with that, I'll hand it over to Mary to
introduce herself. Mary? Thank you, Lynn. Are ready to take questions. It is such a pleasure to have the opportunity to speak with all of you today and share why I am so excited to lead this company.
Are ready to take questions. I've been in the energy industry for over 2 decades and I know the landscape well. Sunrun has always stood out as an innovator and the future of the electric grid. Are It's clear the team cares deeply about transforming the lives of customers by providing a more resilient and affordable energy experience. Are My appreciation for Sunrun has grown tremendously, seeing firsthand Sunrun's leadership to advance the clean energy revolution while delivering on our value creation objectives.
Are With the increasing and devastating effects of extreme weather from climate change and an electric grid system well over 100 years old, are ready to take questions. I believe Sunrun's mission of creating a planet run by the sun is more critical today than ever before. I have enjoyed overseeing and contributing to Sunrun's strategy as a Director over the last few years, and I'm eager to build out on this great work. Sunrun has an incredibly strong foundation in place, and I have full confidence are pleased to capitalize on the significant opportunities ahead. As I step into the CEO role in the coming weeks, I look forward to partnering are very much with Lynn, Ed and the entire talented Sunrun team to continue to execute the company's strategic initiatives are in line with our expectations and drive long
term sustainable value for all of our stakeholders. With that, Lynn, back to you. Thanks, Mary. Are As executive co chair, I'll be working closely with Ed, Mary and the senior management team. Together, the 3 of us will focus our respective are sharing with us today and we will continue to support Sunrun's strategic initiatives are welcome to join us with the freedom to explore and design future scalable solutions for solving the climate crisis.
I am more energized than ever for this next chapter. Are now ready to begin. Now to our quarterly results. Our positive momentum has continued into the 2nd quarter. Customer orders are accelerating and we delivered record installation volumes.
Orders increased more than 25% quarter over quarter are in the range of $1,000,000 and $1,000,000 and $1,000,000,000 and $1,000,000,000 and $1,000,000,000 and $1,000,000,000 and $1,000,000,000 are executing on the integration with Vivint Solar and navigating a particularly dynamic supply chain environment. Are Despite these external factors, we are delivering strong unit margins, increasing our cash balance and growing our stream of recurring cash flows. Are We are increasing our full year growth guidance to 30% year over year. More importantly, during the quarter, the dire need for our service are ready to take questions. This offering has been made even more apparent.
Extreme weather caused by climate change has resulted in record setting wildfire season, more power outages, are: accelerating cost of utility power and increased pollution. The need to address the climate crisis continues to mount are in the range of $1,000,000 We ended Q2 with nearly 600,000 customers, reflecting 19% year over year growth. Are Our installation volumes included records in our new homes business, our channel partner business and our direct business. Are We also set records again with the highest battery installations, more than doubling year over year in the second quarter. Are We continue to advance our lead on batteries and virtual power plants to bring clean and resilient energy into more communities.
Are More than 23,000 families are benefiting from our solar and battery systems to power through blackouts. Are on a daily basis, these batteries optimize when power is purchased or supplied to the grid, helping manage energy constraints during peak times. Are Battery attachment rates increased again from last quarter and are at record levels across the business. We network these batteries together to form virtual power are making a significant progress on our plans, providing incremental recurring revenue and offering an enhanced customer value proposition. This further differentiates are from companies that lack the scale, network density and technical capabilities to serve this market.
Are We continue to expect more than 100% growth in battery installations this year, even as we work through the supply constraints. Are As more manufacturers expand battery offerings, we do expect cost to improve further, allowing us to meet pent up demand and accelerate adoption even faster. Are in the line with us. Sunrun is actively exploring ways to help consumers and the grid manage the transition to electric vehicles. Are We know the country must make the switch to EVs to further reduce carbon and we believe Sunrun will be a key enabler of this transition.
Are Homes with EVs consume approximately double the amount of electricity. Home solar and batteries are needed to meet this increased strain on the electric system are in the range of $1,000,000 and Sunrun is a leading provider of these services given our expertise managing and installing at home energy infrastructure and our national footprint. Are in the line with our expectations. We are now ready to take questions. Electric vehicles create positive flywheel effects.
Homes need
larger solar systems to
support the increased electricity consumption. Are in the range of $0.05 These large systems come at high incremental margins since the cost to increase the size is relatively low. And are These can be integrated into a comprehensive home energy management system to maximize the economic benefits and resiliency for families. Are These compounding benefits will accelerate the transition to a distributed grid with home solar batteries and EVs even faster than most realized. Are ready to take questions.
To this end, in May, we announced a partnership with Ford to be the preferred installer for Ford's ChargeStation Pro and Intelligent Backup Power System. Are This debuts with the all electric F-one hundred and fifty Lightning. Under the partnership, we co developed Ford's are in the home integration system, including the bidirectional inverter, which enables the F-one hundred and fifty Lightning to serve as a reliable home backup energy source are by powering the home during an outage event. Through this partnership, customers will also be provided with the opportunity to install a solar and battery system on their home, are enabling them to power their household with clean affordable energy and charge the truck with the power of the sun. Ford sells 1,000,000 F-150s each year.
In just the 1st 3 weeks since it was announced, they received more than 100,000 reservations. Are ready to share more in the coming quarters. This year is on track to be the best in the company's are ready and I'm confident Sunrun is well positioned going forward, especially with Marriott at the helm. Our broad omni channel go to market strategy has enabled us to reach are Our next question comes from the line of John Franzrebrenberg Capital. Please go ahead.
Thank you, John. Thank you, John. Thank you, John. Thank you, John. Thank you, John.
Are We have built a business that offers consumers a strong value proposition, addresses climate change and generates strong financial returns. Are Before I turn the call over to Ed and Tom, I'd like to thank our employees and partners for their contributions to our success are
welcome to
the Q
and A session. Thanks, Lynn. First, I want to share my excitement that Mary is joining us full time. Her passion for our customers, her intuition for people matters are And her focus on operational efficiency has made her a driving force for years on our Board of Directors. I can't wait for Sunrun to get all her time going forward.
Are Lynn
and I have been
a team for 14 years. I'm pleased she's going to be joining me as Co Executive Chair, where her contributions to Sunrun will continue. Are I know I was invigorated by the opportunities provided by my transition from CEO to Executive Chairman, completed about 7 years ago now, are And I'm sure Lynn will feel similarly. Now moving into the details. Turning to Slide 8.
We've concluded our capital structure review. Are We have decided principally to pursue a strategy that will drive near term cash generation using non recourse debt. Under this strategy, we expect to achieve are cash proceeds equal to 95% to 100% of contracted subscriber value measured at a 5% discount rate are about $30,000 to $31,500 per subscriber based on Q2 subscriber values. Are Because this strategy employs debt that we can ultimately call and refinance, we'll be maintaining full ability to upsell additional products and retaining refinancing upside for our common shareholders. Are Upfront cash proceeds of 95% to 100% of contracted subscriber value is well in excess of our fully burdened costs.
Are And so we do not need to execute equity or equity linked financings to fund our strong ongoing growth. Are While our capital costs have been steadily falling since inception, in the last year, we've seen an acceleration in these improvements, are which have been most pronounced in our non recourse subordinated debt costs. Today, this market is pricing 175 basis points to 350 basis points below where we've placed comparable loans over the last several years. Are We largely credit our continued asset performance, scale and consistently strong collections, are including through COVID and the 2,009 financial crisis, with discontinued capital cost decline. Are While our large scale affords us access to the lowest cost capital in the industry, the same large ticket sizes that afford us this advantage also make our free cash flow generation a little lumpy.
Are We have developed a backlog of transactions to close and we expect to be busy clearing this transaction for the balance of the year and into 2022. Are Over the near term, cash flow generation may also be nonlinear due to investments in working capital. However, under this financing strategy, are in
the range of
$1,000,000 over several quarters and especially next year, the cash flow generation of the business should be substantial. Are We may also selectively employ structures that grow our recurring cash flows from our asset base, while pursuing this strategy of generating upfront cash. Are normalized for increases in working capital, we expect to see steady quarterly gains in net earning assets. As we head into next year, we'll update the market are on our cash flow targets and capital allocation strategy to maximize shareholder returns. We continue to maintain a robust project finance runway.
Are As of August 5, closed transactions and executed term sheets provide us expected tax equity and project debt capacity to fund over 4 30 megawatts for subscribers are beyond what was deployed through the Q2. And with that, I'll turn the call over to Tom.
Thanks, Ed. The strong momentum we saw in the Q1 has continued further into 2021. Our team again delivered an exceptional quarter with strong year over year and sequential volume growth. Are We're proud of what the team accomplished, especially as we meet the significant ongoing demands of integrating Vivint Solar into our operations and as we navigate a dynamic supply chain environment. Are Turning first to volumes.
In the 2nd quarter, customer additions were approximately 26,100, including approximately 21,900 subscriber additions. Are Solar energy capacity installed was 186 Megawatts in the Q2 of 2021, an 11% increase from the Q1 of this year and are. Our energy capacity was 4.2 gigawatts at the end of Q2, an increase of 19% compared to the prior year. We ended Q2 with approximately 600,000 customers and nearly 500 21,000 subscribers. Our subscribers generate significant recurring revenue with most under 20 or 25 year contracts for the clean energy we provide.
Are At the end of Q2, our annual recurring revenue or ARR stood at $747,000,000 with an average contract life remaining of 17 years, are representing well over $10,000,000,000 in revenue visibility just from existing customers. In Q2, subscriber value was currently $34,500 and creation cost was approximately $28,900 delivering a net subscriber value of approximately $5,600 are Pro form a for growth timing effects on cost recognition, it would be approximately $8,000 Total value generated, which is the net subscriber value multiplied by the number of subscriber additions in the period was $122,000,000 in the 2nd quarter. On a pro form a basis for the adjustment related to accelerating growth, Total value generated would be approximately $176,000,000 As we noted in our outlook during last quarter's call, net subscriber margins were sequentially lower in Q2 owing to our accelerating growth trends and synergy realization timing. While our subscriber values were down slightly quarter over quarter due to changes in ITC mix are And our G and A and platform services saw solid sequential improvements. The accelerating growth in our business creates a near term drag on installation and sales and marketing costs.
Are Creation costs are calculated as total in period costs, including OpEx and CapEx divided by recognized volumes. Are As our growth rates accelerate, we incur more costs upfront such as sales and marketing costs along with in construction systems prior to recognizing the volume in future periods. Are If we were to normalize sales costs by the growth in customer orders and exclude costs associated with systems that are not complete, are reported net subscriber margins would be approximately $2,400 higher or approximately $8,000 in Q2. Are Turning now to gross and net earning assets on our balance sheet. Gross earning assets were $8,600,000,000 at the end of the second are Gross earning assets is the measure of cash flows we expect to receive from customers over time.
Net of distributions to tax equity partners and partnership flip structures, are in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000,000 are $4,500,000,000 at the end of the 2nd quarter, an increase of over $233,000,000 from the Q1. Net earning assets is gross earning assets plus cash are We ended the Q1 with $858,000,000 in total cash, an increase of $44,000,000 from the prior quarter. Are Turning now to our outlook. The continued acceleration in sales activities, the integration of Vivint Solar and investments in customer experiencing differentiation set us up for a strong second half. We are increasing our growth outlook for 2021.
Are We forecast solar energy capacity installed growth to be 30% for the full year, an increase from the prior guidance range of 25% to 30%. Total value generated is now expected to be in a range of $700,000,000 to $750,000,000 for the full year, which has been revised to include the effects of accelerating growth And to a lesser extent, the dynamic supply chain environment. This range includes the drag highlighted earlier and does not reflect the pro form a adjustment of $54,000,000 for Q2 2020 are We forecast net subscriber values will be significantly higher in the second half of the year than Q2 as the gap between sales activities and installation activities normalizes and are recognized as we realize more synergies from the Vivint Solar acquisition. We continue to estimate cost synergies derived from the acquisition of Vivint Solar to be approximately $120,000,000 in run rate synergies exiting this year. While we are still very focused on integration in the near term, are We expect to see strong sequential quarterly growth in solar energy capacity installed in Q3 with growth of approximately 15% sequentially from Q2.
The mandate for a modern energy infrastructure with consumers at the center continues to grow, and we believe our products and capabilities have positioned us well to respond to the opportunity in the quarters and years ahead. With that, let's open the line for questions, please.
Are in the queue.
Thank you. We will now be conducting a question and answer session. Are are. Are. Your first question comes from Stephen Byrd with Morgan Stanley.
Hi, good afternoon. Congratulations on the management changes.
Are open. Thank you.
You have a deep bench at summer. It's nice to see these changes. Are And Lynn, looking forward to working with you in your new role. But I wanted to talk about the timing of the sort of growth adjustment
are As you continue
to grow and get larger, how should we think about the what that number may look like conceptually? I've been trying to kind of think about are How that will look given that you have an incredibly high growth rate, how might that sort of trend over time?
Are Yes. So the effect of growth on margins in this quarter, we viewed as largely one time here. We expect some level of this are As we continue to grow, it will take several quarters for this to reverse out. But in any period where our sales growth and installation growth are diverge as much as we saw this quarter. There's going to be more of a misalignment between costs and volumes in period.
Obviously, are We're still at a $700,000,000 to $750,000,000 range in total value generated for the full year, which at the 30% growth rate now shows strong unit margins in the second half and exit in the year in particular as synergies are realized fully.
Are Understood. And you gave a lot of very good commentary on your financing outlook and it looks like the debt markets are very, very receptive are To your asset class to the value of grading, could you just maybe talk a little bit more about what that are opportunity might mean in terms of just some of your legacy debt that is more expensive. You kind of talked about that are The magnitude of the differential between some of your older debt and where the market is today. Could you just talk a little bit more about what that might mean in terms of are Financing activity going toward refinancing activity, but just how you think about tapping into that over time?
Are Sure. It's a great question. So definitely, you're correct. With the asset performance and collections data that we've continued to print, are Our capital costs continue to decline. And so the credit facilities that we would close today against newly placed in service assets are cheaper and higher in advance than those that we historically placed.
It is also the case that are A good chunk of our debt when we place it is subject to lender call protection for are 3 to 5 years, some transactions as much as 5 to 7 or 8 years. And are We won't be able to recap the entire balance sheet in one fell swoop over the next 12 months, but certainly over the coming years are As we begin to refinance our existing transactions, there is a significant unlock available there as the capital becomes less expensive.
Are That's very clear. And then last for me, just on storage. Obviously, it sounds like customer demand continues to be are strong. Could you just talk longer term about actual availability of equipment, ability to source the level of storage that are You and your customers would like to have over time?
Yes. It's a huge tailwind in the business for us because I do think that are This opportunity will unlock over the next year, over the next 18 months. I mean, so what you're seeing right now is still phenomenal growth with doubling of the battery install, but we are even we are that's not with are Wholehearted sales efforts, right? Like there's still some restraint here. So we do expect are A number of suppliers should be coming in early next year with much bigger volumes.
And that That will have a 2 fold benefit really. The first benefit is that, obviously, we'll be able to just have the consistent and reliable supply that the market demands, but it's also put pricing pressure still on the battery. So you're seeing are Right now, we're delivering these strong margins, but still the cost of the batteries have not declined with the cost of the inputs. Are So I think you're going to also see that additional benefit that the value proposition is going to get stronger. So as we've said in the past in many markets now, it is are The vast, vast majority of customers are choosing to add a battery.
In Bay Area, it's are almost 100%. And I think as with some of the changes in California around rates and things, there will be even more encouragement for batteries. Are In Texas, we went with the storms. We went from a minority to a majority adding the battery. So I think it could happen quite quickly are that the majority of solar is paired with the batteries and I believe the supply chain will get there.
It will take a few more quarters, but I believe the supply chain will get there.
Are That's really helpful. Thank you very much.
Thank you. Next question, Brian Lee with Goldman Sachs.
Are Hey, everyone. Thanks for taking the questions. And obviously, congratulations on the transition here. And are It's been great to see you grow the company here from the pre IPO day. So kudos to you and the team here.
Thanks, Frank.
I guess, are First question I had was just kind of a clarification. Tom, you mentioned if I do the math, the total value generated are for 2021 based on the guidance is going to be $7,500 to $8,000 per customer For the year, that would imply a further downtick in the second half. You said it should be up substantially from the Q2. So are we talking are up from the pro form a levels or are you talking about being above $8,000 are per subscriber throughout the balance of the second half. Just want to make sure I have that metric correct.
Yes. So are The range you got to there is directionally right, as you assume, something on system size and lease mix that gets you in sort of that, yes, $7,500 to $8,000 range. Are We're obviously around $8,200 in Q1, the $5,500 level here in Q2. This is all on a non pro form a basis. So, not at the $8,000 level in Q2.
So I think are The math you might be doing there is thinking, okay, we had 8,200 in Q1 and 8,000 in Q2. Therefore, it would be lower in the second half. Are If you use the non pro form a number in for Q2, it'll show it trending higher sequentially throughout the year.
Are Okay, fair enough. So on a reported basis, that's helpful. And then I guess just a follow-up to that on some of the cost are taking a look at the are which you did talk to a bit here. The installation costs were the major driver of the cost uptick from 1Q. Are Can you maybe break that down a bit more?
Are you seeing higher supply chain costs? Is it installation labor being more expensive? Are I know you've talked about a pull forward, so it's a timing issue, but are you seeing kind of impacts across different parts of the installation costs? Maybe you could
are Yes.
So the main factor here that really relates are to growth as you see it in installation cost is all of the cost that we begin to incur as we start building systems that aren't yet recognized and completed. And the easiest place for are Investors to see that is in the footnotes looking at construction in progress. You can see that balance grew $72,000,000 quarter over quarter. There's some level of that that we would expect through growth. There's obviously a much larger growth in that amount are Relative to our installed volume growth than one would expect and that's sort of all of these systems that we began work on, are But haven't yet reached the full milestone for completion.
So we take a pretty strong definition on what completes the system, solar, inverters, batteries, electrical work, everything being done. Are Everything being done. And so that's the main place where you can see that growing. So not necessarily underlying cost changes are That drove that, but really the one time effects of accelerating growth in the period.
Are Okay, fair enough. Thanks a lot guys. Appreciate it.
Thanks, Brian.
Next question, James West with Evercore ISI. Please go ahead.
Are Hey, good afternoon, everybody. My congratulations to Lynn and Mary as well.
Thank you.
Are So in the release, you guys talked about something that really caught our eye a couple of weeks ago and that said 0 emission HOME Act, where we're electrifying a lot of are Parts of all of our home and there's going to be some rebate potentially for that. I know that increases your TAM and we're obviously pretty well are being reimbursed in what EVs would do to that. But what do you have any idea how much of an increase, something like this would have for your team?
Are Yes, absolutely. And I'll just have to also offer, I mean, these additional opportunities are some of the things are I'm really excited to be more aggressively helping the company on. I just feel that like we said, are We got to go faster on climate and I think the government is starting to realize that and so these some of these more aggressive programs are putting in place. And for those that don't know what James is referring to, this is would be Rebate for customers to get electric appliances to switch over things like upgrade their electric panel and switch over things like their HVAC and things. Are Yes.
So if you look at just the additional electricity needs to if you fully convert some of these like key are machines in the house, namely the HVAC, which would be the biggest one, as well as cooking, washer and dryer, things like that. Are Again, you're going to get that incremental system size benefit. So it's not quite as large as the EV, but just are I think you can probably find some external third party research on this, but it probably like ticks up the energy usage by the electricity usage by 30 ish are Additional kind of percent there. And I think the more but again, the more important piece of all this stuff is I always go back to are Everybody wants our products. They save money.
They're better.
It's a
better service. It's just why do I do it now? It's are There's an urgency issue and I feel like that's what's starting to really propel this business is there's now a whole new set of urgency around. I do need that battery for resilience. Oh, there is a rebate available here that I can take advantage of for these devices.
Are With these EV mandates that are coming out, I mean, that's just an incredible unlock for this business as well. When you look at the stats that EV are Owners, 40% of them, I think, are installing solar right now. So, I think it's really what's changing in the business are The technology is improving and getting cheaper, but it's this, okay, now is the time to do it. It's this, urgency drive that, are, I think, will create a lot of value to come.
That's great color, Lynn. The other question a are Call from me on SolarAPP. I know you guys were early champions of the app and it's been deployed in some areas. Are we out of the development phase and in the testing phase. Is this now a live app that should get some of these soft costs out of the system?
It is, yes. In fact, it is a live app are in the process of adding storage to it as well. I think so I think that's the more complete picture here. And are We're really encouraged by the Department of Energy's focus on this. There's money directed to it in California.
There's $20,000,000 of are directed to helping encourage HJ's to switch over to the solar app. So, it does have to be a little bit of a bottoms up are by HJ with a little bit of this top down encouragement and pressure. So we do believe that it will have a very big impact, are But it will there'll be a learning curve. And I think it'll it's not going to be it's only going to be a single digit percentage of our are Through the end of this year that will be on the app. But again, I think it's one of these things that can really are You know, snowball once people get confident that it works and they see their neighboring cities adopting it and there's a financial incentive for them to do it.
So, are It is one of the easiest unlocks for value for this business. Our estimates are that it will save between can save multiple 1,000 of dollars per project. So it's are Again, this is also one of the things that I want to work on more in my new capacity is helping institute some of these programs.
Are Right. Thanks, Lynn.
Thanks.
Next question, Joseph Osha with JMP Securities.
Are Hi there. Congratulations, Lynn. It's Guggenheim now by the way. And Lynn, I know you're really going to miss doing non deal roadshows with sell side analysts. Are We'll miss you.
I love I always enjoy being with you for sure.
That was a contentious negotiating point
on the
are Well,
I'm sure Mary, Mary, you don't know what you're in for, but congratulations.
Are Thank you. Duly noted.
Two questions. Ed, just on Page 8, looking at this upfront are cash realization. We've seen this dynamic where pre and post flip assets tend to price pretty differently. Do you think that is are It continue to be the case that we're going to get kind of deal 1 and then post flip refi or
does that maybe evolve over time? Great question, Joe. Are And I think the answer is that will that is for now, we're going to continue to see that effect play out. I think The key difference in the marketplace today between are Post flip assets and pre flip assets is actually a little bit less related to the fact that they're post are more related to the fact that they've been aged out 5 or 6 years. The ratings agencies still take these are Draconian sizing cases where they assume these ridiculous math defaults every 5 years, people renegotiating your contract, are Stuff that's never happened in 14 years of operating data.
And so once you've gotten that first 5 year are haircut behind you magically, the senior debt advance rate goes up significantly, just because are Lo and behold, the ratings agency stress case didn't materialize. And so for that reason, I think we'll continue to see these post flip transactions, are Where you're effectively substituting subordinated debt for very significantly cheaper senior debt, are Which lowers your capital cost and increases the proceeds from the financing.
Are Yes, that makes sense. Thank you. And then just the second question, I mean, there's still a lot of chatter about tax are Investor IRRs and whether they're kind of in this world inappropriately high. And I'm just wondering when as you look out are your tax equity partners and sort of think about your conversations with them. What are your thoughts about your cost of tax equity and how that might evolve?
I think all the capital we face is inappropriately expensive. Oh, really? Are No, but to seriously answer your question, tax equity has this unusual dynamic where the tax equity investor really needs to realize an inflationary pre tax rate of return to fit into the safe harbors are for the IRS safe harbor structure. And so their pretax returns are commonly in the are in 1% to 2% range. Because of the depreciation benefit that can cause the after tax are to be like 8% to 10%, which does feel extremely high.
But it's really a regulatory construct that drives that. Are And the pre tax capital cost still is similarly priced or maybe a little cheaper than senior debt. So as we and our common shareholders Experience that it's actually still quite cheap capital.
Okay. Thank you.
Are in line
with your next question, Mark Strouse with JPMorgan.
Yes. Thanks for taking our questions and I'll add my congrats to Lynn and Mary as well. Are Just in light of President Biden's targets that he laid out yesterday regarding electric vehicles this decade, are You've touched on the partnership with Ford. Can you just remind us, I mean, is that exclusive to the Lightning F-one are 50. Are there potential to expand within Ford?
And can you just talk about any discussions that you might be having with other are Auto OEMs to expand this in the future.
Thanks. Yes, we're pretty excited about that mandate and are And the partnership with Ford. So yes, the current partnership with Ford, is just with the are 150 lightning, but you can imagine that we're the company with the nationwide are able to navigate some of these trickier things around your electric upgrades and upgrading your electric service when you adopt the car, are making that easy for people. And also one of the things we're excited about with Fortis, we co developed the bidirectional are and that's the piece of the equipment that enables the truck to be the backup power for the house. And so that's also are a piece that we're pretty excited about our contributions and able to to be able to provide that service.
So, are This will be a segment of ours that we will aggressively pursue. And Ford is are The first partner we're pretty excited about. I think the other thing that we the other thing it unlocks in a lot of ways as well as I think it gives you an opportunity to also build out a little more of an are e commerce experience as well because it's going to help also enable there's going to be a buying flow for that person are to reserve the car, do they want to upgrade the charger, do they want the bidirectional inverter, do they want the solar. So that will be a are really strong online experience. And I think as we build out those capabilities, we'll be well positioned are the partner for all the auto OEMs.
Okay, great. I'll take the rest offline. Thank you, Lynn.
Are in the queue. Next question, Moses Sutton with Barclays.
Congrats on the leadership change and thanks for taking my questions. Are First on the cash generation, the capitalization strategy, it's quite clear, sort of back to basics. Are Are ABS issuances still going to play the leading crucial role? Are you looking at other debt strategies to
are Great question. I expect we'll be a very significant are Issuer of ABS Debt. We've always kept our toe in the water in many different markets. Are Pricing can change over time. And there are other markets developing.
Even people who are now interested are Uni tranche, they'll do the senior and the subordinated at a blended cost of capital. Are So I think it's just that what we're seeing is just a vast deepening of the market kind of from all directions. But yes, I do think are We'll be a significant ABS issuer as part of that overall strategy.
Got it, got it.
And are we going to start seeing the ABS issuance are It's interesting that you're saying 95% to 100% off, 5% are discounted, not 6%. That seems to be an incremental positive. How do you get there?
Yes. I mean, it's just as the capital cost gets lower, are What used to be interest expense becomes principal amortization, and so the advance rate goes up and people are increasingly more confident as we always have been about the performance of the assets over a long period of time and the collection performance as well. Are We obviously don't set the ratings agency cases. You could still benchmark it against the 6% are Capital cost and you might start seeing things like advance rates over 100. So it's are kind of a theoretical construct.
But definitely, the capital costs on a weighted average basis for our assets, are Particularly on the contracted side are now well below 5%. So we continue to think that's the correct number.
Are Right. That's very helpful. And then with shifting to the sales and installation growth timing sort of decoupling, are Can you give an increase in customer install lead times? Is it pushing visibility further out? Or is that not really the right way to think about it?
And is California proving an outsized role in the
growth year? Or is it
more broad based across geographies?
Great question. So I think are On California, and then you'll have to remind me of your first question again because it's been a whirlwind of a day. But on California, are It's not. It's pretty broad based. So I wouldn't say that there's any specific geo that's driving that.
Was your first question cycle times? Yes. Okay. Are No, yes. So it does give us more visibility certainly into Q3 and Q4.
And I think we're doing a nice job are catching up. So you can see the quarter over quarter guidance at 15% quarter over quarter for installs versus 11% this are So that is accelerating. We do think that they're still very much in a healthy spot and we'll exit the year in a healthy spot, but it does give us more have credibility around the confidence around the back half.
Great, great. And last one, have you started using any other battery vendor are Other than Tesla and LG or still not yet?
I think, no, those are our primary vendors. We're constantly evaluating new ones and are I know you guys all know how to find that data
ultimately. Great. We'll take the rest offline. Thank you.
Are in the next question, Julien Smith, Bank of America. Please go ahead. [SPEAKER JULIEN
DUMOULIN SMITH:]
Hey, good afternoon, everyone. Congratulations, Very excited to work with you and see where you take the business. Lynn, likewise, excited.
Thank you.
And finally, add even 2, congrats to your baby girl here. Are So all around, a lot of developments on your side here.
Wow. Are Congratulations on your engagement, Julian.
Let's go for it.
Thank you. I appreciate that. Are
Maybe just to kick it off here, I mean, what's your expectation on when and what exactly you're going to provide in terms of the cash flow update? Obviously, your peer here are provided a multiyear view on so called corporate cash. What's your sense, as far as what you guys would come up with in terms of sort of are Additional disclosure.
Great question, Julian. I think what we're hoping to roll out on this call are Was a view of the proceeds side, that's the $30,000,000 to $31,500 per unit, which as we are Our contracts out in the financial markets, we expect we can realize. I think are Over the course of the coming quarters as we start talking about next year, we'll be in a good position to roll out more information about are Cash flow generation, what we'll do with the cash. We don't want to steal Mary's thunder. So stay tuned are And hopefully this is a good interim update and we can get more prescriptive on it shortly.
Are Great. I mean, you may have just boxed me out of my next question in part. But I mean, my point is are Because if you look at what that 95% to 100% does through the course of this model and you've kind of alluded to it. I mean, are That's a pretty sizable uptick in available cash if you can lever up at the project level to that extent. I mean, Can you give us any sort of order of magnitude on how to think about it?
I mean, the models are pretty clear in what that would deliver, and it's pretty sizable. And then maybe the key point here is, are How do we think about what you're actually going to do with this cash, right? I mean, let's put repurchases in such a side. I mean, strategically, and this is the very question, it's like, are What exactly do you want to do differently? That's a fair question here.
Yes. Great questions. So first, are To acknowledge your comment, which is correct, yes. If you compare that amount of are upfront proceeds to our fully burdened cost. It does at our scale, you do get a quite significant are cash flow result.
Obviously, we do also have working capital investments like the investments in CIP that we made this quarter, are Potentially for the near term over and inflate in inventory as well. And often to achieve these sorts of are Advanced rates, we have to package things up, so they might sit on our balance sheet for 9 months. So are working through all that and building the plan for next year and working it through with the new and large team. Are I think we'll be in a better position to provide that additional layer, which is a critical layer in the coming quarter too.
Are Got it.
So if I'm hearing you right, it sounds like it may be somewhat lumpy, but clearly nonetheless the underlying trend is Substantively greater cash flow than previously anticipated at the corporate level.
Well, I leave anticipation to you, but are We do think it's significant. We're excited about it.
Got it. Excellent. Well, best of luck to you all. Speak soon.
Thanks, Julien. Thanks, Julien. Thanks.
Are in the
next question, Maheep Mandloi with Credit Suisse.
Hey, good afternoon and congratulations, Lynn and Mary. Are Look forward to working with you guys.
Thank you.
Maybe just one question on the higher costs in Q2. I just maybe wanted to understand how much of are That is related to in house cost versus your investments in your channel partners and maybe a follow-up to that, just how do we think about the are competition for channel partners over here, especially given all the labor shortages we're seeing out there in the market.
Are Yes. So on the Q2 margins, I mean, as Lynn noted earlier, we saw record growth in a lot of parts of our business. We saw a great growth in channel and direct. And so there's, there are elements there in the CIP growth that flow through both of them. Are Obviously, some of the growth in sales and marketing expenses, just given the way those are recorded, is purely reflective of our direct business, are Given all the channel partner payments show up in installation, but definitely growth in both.
I think on the channel partner Yes.
On the channel
partner side, I think we believe
we're continuing
to take share there. Are On the channel partner side, I think we believe we're continuing to take share there. And as we mentioned, record growth. I think people see that we're differentiated around are Our brand, the financial products we bring people, the sales and platform experience the operational experience to help take care of the customers. And so, we're that business is thriving and growing and we feel very well positioned there.
Are Got it. And then just second question here from me. And the EV opportunity with Ford or potentially other OEMs out there, are In a way, is also kind of adding another channel partner for you guys. But apart from that, like how should we think about are The immediate revenue opportunity like either selling the EV chargers or bidirectional inverters or anything else are to these Ford customers over the next few years?
Yes. I think we'll be I think Ford is still working on their specific launch plan. So I think we'll be in touch on that in future quarters. But again, are We expect that it is quite margin accretive, particularly around the solar, given that these are larger systems. It's a bigger ticket item.
Are so we're excited about what that can do to the customer our customer values.
Are All right. Yes.
And that's it for me. Thank you. Thanks.
Next question, Kathy Harrison with Piper Sandler.
Are. Good afternoon. Thank you for taking my questions and congrats to both Lynn and Mary. So my first my question, are excuse me, is guidance related. Tom, taking your 15% quarter over growth rate into Q3 implies 213 megawatts, are Full year guidance is 30%.
So that implies, call it, 2.17% entering Q4. Wondering if
that's conservatism
on your end or if there's are on your end or if there's another reason why the growth would be flattening into Q4. And then, if you could just are Help us think through about think through the long term implications of all these of the hirings on the growth rate entering 2022, are Just relative to the historical 15% medium term growth rate you've talked about in the past. And that's it for me. Thank you.
Are Yes. So, first, we were excited to increase our outlook for the year up to 30% for the full year, reflecting the growth we've seen are More recently, Q3, Q4 often have a level of seasonality in there. As we get deeper in the year, we're dealing with things like weather and sitting crews and having to navigate a few of those. Are So right now, the view that we're confident in is the 30% increase, which, yes, your numbers you backed into there are spot on. Are Often, we'll see some shift between those quarters.
I also think the dynamic supply chain environment and just keeping our eye on that, it's been an area we've had to manage very closely over the last couple of quarters. Want to make sure that we continue to have good visibility there and so happy with the full year outlook. I think as we head into next year, are Our goal is going to be to continue to gain share and grow at above market rates and cement our leadership position. Are And so as Ed mentioned earlier, in subsequent calls, we'll get a little deeper on some of the operational elements of the outlook for that period of time. But we definitely expect to use our brand, our technology, our omnichannel presence to reach more customers and take share over the medium term.
Are our next question comes from Tristan Richardson with Truist.
Hey, good evening, guys. Just a quick one for me on the new home business. Some Some interesting stats you talked about on market share and growth there. And just now that business is seeing a lot more scale for you, can you talk about are How or if it affects the mix at all, either just on the creation side creation cost side, given perhaps some efficiencies in master planning, but are Average system size is different, etcetera. Maybe as that continues to outpace the overall growth of the business,
are
How it might affect things from a mix perspective?
Yes. It has grown really nicely and we've are gone from pretty limited share there because we weren't focused on it to a pretty significant share very quickly, which I think again underscores are our reputation. The it's still a small enough business unit that it's not going to move the needle on any of the overall numbers, I think. Are Last I looked, the market size of that was something around 100 megawatts or something sort of annually. And so, again, you look at the are we're sort of operating in the overall business that even sort of even a healthy market share there isn't going to completely move the needle or make a big difference in sort are So the thing we're really excited about around that mandate is what it does is more of this creates are Comfort with solar, more normalization that you get a house, you put solar on it.
That's where I think consumers will be very quickly. Are So we feel like that's the bigger strategic benefit from that mandate versus what it does are from a financial performance, as part of the overall picture.
I appreciate it. Thank you guys very much.
Are in the queue. Next question, Colin Rusch with Oppenheimer.
Thanks so much.
Can you talk a
little bit about the progress you've made in terms of upselling are customer base into energy storage or EV charging and how that's impacting your overall cycle time with the sales process?
Are Yes. We really haven't even scratched the surface around that. So, that's all forward opportunity for us. Are Given the supply shortage in the batteries and the fact that it's much more are economical for people to pair the solar and the storage at the same time right now with where the technology is and where the hardware is. We've really been focusing on that market.
Are The sort of next cycle of batteries that are coming out will be really attractive for those retrofit opportunities. Are So that will be another upside for us going forward. But as of right now, we have not have big contributions from sort of upselling or additional sales to people, but I think that will definitely come.
Thanks so much. And then the follow-up is really and it may be early on this, but are Are there discussions around being able to capture any value for avoided cost of infrastructure or additional capacity that are Utilities would have to build out or grid operators would have to build out to service some of these communities. I'm not sure if that's something you guys can actually monetize other than through things
are
That's a great question. I mean, obviously, there's a lot of value add that we can provide there. And are Depending on the market and the partner, there are different methods to do that and different counterparties with whom we can do that. Are I think part of what we're hoping to do in the virtual power panel business over the coming years are is to really demonstrate that we're just a low cost provider for doing this sort of stuff and that it's a lot cheaper to install storage are It is the underground power lines out to the middle of nowhere. And ultimately, this whole exercise of creating are A reliable grid is so expensive that just bearing inefficient are Rubber stamping inefficient solutions just can't be the way forward anymore.
So I'm optimistic that it will take a little bit of time, but I'm optimistic we'll play a really significant
are Ann, I would just offer, this is one of the reasons why we're so confident Mary is the leader for the next are in the phase of the company. I mean, she pioneered the first virtual power plant in her utility in 2015. Are And so she brings real credibility around and she lowered her bills for her customers. So she brings real credibility around this is not a are Rooftop versus utility scale. This is, hey, we need way more clean power on the system and distributed is the fastest and sufficient way to do it, so let's take advantage of it.
Great. Thanks so much, you guys.
Thanks.
Next question is Philip Shen with Roth Capital Partners.
Are Hi, everyone. Thanks for taking my questions. As it relates to your channel partners, in Q1, you grew them by 20 are I think Q2, you're up 15% over Q1. What kind of pace do you expect in Q3? And how long do you think are This pace of share gain and with the network partners can continue.
Yes. We are really pleased with the growth and are But we also don't forecast channel by channel. I mean, what we really look at is how do we get market share in geography? What are the most attractive path are in the market to reach the most consumers and sometimes that can be direct and sometimes that can be channel. As I always say, not all channel partners are created equal in terms of are The quality, the reputation, and so we're really pleased with the share gains.
I think we believe we're going to continue to take overall share and I think we're the most attractive partner for the really high quality channel partners.
Are Great. Thanks, Lynn. And then, in terms of your financing strategy, Ed, you gave us some perspective there and it seems like you're
are focused on non
recourse debt. One of your peers is out there with a green bond. So I was wondering if you might be able to comment on your views of are Recourse Debt Options and Green Bond specifically, would you ever tap into them? If so, what kind of timing could we see?
Are Good question, Phil. I mean, every bond we issue is a green bond, given the nature of our business. And I think that's have been relatively understood by the financial markets for years. I think that we're obviously in the business of are delivering the lowest overall capital cost that we can for our common shareholders. And given the work that we did this year, we think are Over the foreseeable future, the right way to achieve that goal is through non recourse financing.
Are Does that mean that we might not like might we have a diversity of financing are looking to see the benefits are To being a rated credit over a period of time, yes. But I think that our overall general strategy is that are And we tend to lean very heavily into that strategy once we've established it as our core strategy.
Are Great. Okay. Thank you both.
I'll pass it on.
Next question, Sophie Karp with KeyBanc.
Are Hi, good afternoon. Thank you for squeezing me in. And congratulations to Mary and Lynn on the transition exciting are So a lot has been discussed, so I will keep it short. Maybe if you guys could give us some update on the grid service opportunities in are amounts and what you see in there. I know you guys talked about something like $75,000,000 in expected revenue are from opportunities awarded or in late stage last time.
So has this number changed? And have you seen any acceleration of opportunities? Are
Yes. So, absolutely, I think, as we mentioned, the 12 programs that we have announced are Cover about 10% of our geographies or kind of beachheads there, but the pipeline would be more like 50%. So yes, we are in counter parties as you might imagine. And so that's these are some advantages that will play out over the next couple of years is that we've been in these discussions are for the past 2 3 years because that's unfortunately how long they take, which again is why our assets are so important because we're solving the climate crisis right now are quickly. We've also we're also not super aggressive on immediate programs, again, because of are The battery supply in a sort of issue, but I think that will ease and you'll again see this to be a big differentiator for us.
You will not see a revenue line associated with this that we are Anytime soon. I think, again, we've said that we believe it'll add about $2,000 ish in incremental margin to our are But it's still at this stage of the maturity of it, it's still a vast minority of our projects that will have that.
Are Got it. And then maybe conceptually also, so you clearly moving forward with the various of the initiatives, are The charges of partnership with Ford, etcetera, you're selling batteries, you're selling solar. Does it make sense for you to kind of are move more towards the EFS space and have a maybe try to capture more of a customer, the share of customer wallet when it comes to these services?
Are That's core to our strategy. I think we are the dominate market share are leader in residential EFS and I see no reason why we wouldn't sustain that position and really accelerate the whole are So absolutely core to us and something we believe will be a competitive advantage.
Any particular product that could be added to this suite that are worth mentioning or is it too early to say it now?
Are Yes. We believe that if we are energy creates 90% of are in the home and there's some key big devices in the home that create those carbon emissions, the heating and ventilation, The water heater, the cooking and others. Are And so if we're going to as a society, we have to replace those fossil burning machines with electric machines powered by renewables. Are We absolutely see that it's our role in the industry to effect that change in households and make it easy for people to fully switch it over electric to network those and are making them into assets for the grid and that's very much the vision and many of those initiatives are some of are Things that get me really excited too for how I can help support the company. And Mary, again, was an early pioneer in that vision.
Are So I do expect that that's a key part of the company's future.
Thank you. That's all for me. I'll pass it on.
Are ready.
Thank you. We have concluded the time for the question and answer session. I will now turn the floor over to Lynn for closing remarks.
Are Well, thanks everybody. This is my 25th earnings call. It's pretty it's a good one to finish as CEO. But as I said, are not going anywhere and really excited for Mary to lead this next chapter. So stay tuned are And we'll talk to you guys after the call.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.