Sunrun Inc (RUN) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sunrun Inc.

Third Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Patrick Jobin, Vice President of Finance and Investor Relations.

Sir, you may begin.

Thank you, operator, and thank you to those on the call for joining us today.

Before we begin, please note that certain remarks we will make on this conference call constitute forward-looking statements.

Although we believe these statements reflect our best judgment based on factors currently known to us, actual results may differ materially and adversely.

Please refer to the company's filings with the SEC for a more inclusive discussion of risks and other factors that may cause our actual results to differ from projections made in any forward-looking statements.

Please also note that these statements are being made as of today, and we disclaim any obligation to update or revise them.

On the call today are Lynn Jurich, Sunrun's Co-Founder and CEO; Bob Komin, Sunrun's CFO; and Ed Fenster, Sunrun's Co-Founder and Executive Chairman.

The presentation today will use slides which are available on our website at investors.sunrun.com.

I'll now turn the call over to Lynn.

Thanks, Patrick.

We are pleased to share with you Sunrun's third quarter financial and operating results along with progress against our strategic priorities.

In the third quarter, we deployed 90 megawatts generating $93 million of net present value, up 21% year-over-year.

We've now grown market share for multiple quarters, while expanding our NPV margins.

This has allowed us to generate cash and add value to our net earning asset.

We created NPV per watt of $1.15, the highest margin result in the company's history, highlighting the progress we have made to drive cost efficiencies while offering valuable products.

Recording the highest NPV per watt is particularly rewarding considering the significant investments we are making in future growth and entry barriers through advanced products, grid services and new markets.

Sunrun has well over 160,000 customers who are enjoying the benefits of going solar.

We are proud of what this means for customers and the climate.

Too many times this quarter we were reminded of the great need to combat climate change to lessen extreme weather events, and we are humbled to be a part of the solution and excited by the strong consumer and regulatory demand for our solar-plus-storage, BrightBox, offering.

Our customers love their solar service and have a relationship with them for 20-plus years.

The expansive value of these relationships is being recognized by our strategic partners.

Our National Grid partnership will develop the upside in our customer value through grid services, and Comcast will develop value through additional home services, customer retention benefit and high satisfaction.

First, storage and grid services in our partnership with National Grid.

We can both help our customers save money and lower prices for the entire electric system.

Demand for BrightBox is strong.

Our customers are now choosing to add storage over 10% of the time in California in our direct business.

This has doubled within the quarter.

We are rolling BrightBox out to more states shortly following this initial launch in California, Hawaii and Arizona.

When you add batteries and the power of the Internet, you can build a more resilient, secure, dynamic and efficient system to benefit everyone.

Because our resources are located where power is consumed, they are at the most valuable locations on the grid and can improve stability through participation in capacity, energy and ancillary service markets.

We can solve local imbalances or acute congestion much more cost-effectively than investing in centralized resources and traditional transition and distribution.

And because we have a decade building customer relationship and a large install base, we are well positioned to deliver products that meet the needs of both homeowner and the utilities operating the grid.

Puerto Rico may offer an example sooner than we expected for the expansive societal value of distributed solar plus storage.

When the power grid went out in Puerto Rico and estimated restoration times were months away, we knew we had to act.

Within weeks, we had mobilized and joined forces with Empowered by Light to donate and install systems to first responders in Puerto Rico.

And within days of landing, we had already activated a first system for a fire station, allowing them to serve their communities 24/7 with solar plus storage despite the grid being down.

This system can ultimately plug into the grid when it is restored and reduce the amount of infrastructure that needs to be rebuilt.

This is just one example of the value of solar plus storage, a cost-effective and fast solution to rebuild and future-proof our infrastructure.

I mentioned last call that grid services in the U.S. could represent another $2,000 in value per customer.

Early progress is encouraging.

We've already secured an opportunity in PG&E's [Gram] program.

And in just a short time, it is apparent how distributed energy resources are being recognized as the go-to solution to cost-effectively modernize our grid.

We have gone from DERs being sourced to backfill a nuclear plant like SONGS, then backfill a gas storage leak at Aliso to now being proposed to replace a gas peaker plant in California before it is even built.

As one of the first movers in the market with a large portfolio of customers, we are ready and able to drive value for the system and to consumers.

Our multifaceted partnership with National Grid includes collaboration on these grid services and has made tangible advancements.

We are excited to work with such a forward-thinking leader in the global energy space.

This quarter, we also announced an exclusive sales partnership with Comcast.

Our previous pilot with Comcast proves that solar can help Comcast with customer retention and satisfaction and that Sunrun can add Comcast customers for an attractive acquisition cost.

This partnership is a broad expansion of the 2015 pilot.

Comcast will market Sunrun products and services and in return earn fees for customers that go solar through the partnership.

The wheels are in motion, and marketing efforts will commence by year-end in select markets.

While the partnership is multiyear in nature and expected to ramp gradually, I'm encouraged by the opportunity ahead of us.

We continue to believe fundamentals support a long-term industry growth rate of 15% to 20%.

While weather and other temporary factors impact market growth over the next couple of quarters, we believe growth will reaccelerate in 2018, allowing us to grow deployment at or above this year's 15% growth rate.

Finally, our massive and growing base of more than 160,000 customers is our largest strategic asset.

We aim to differentiate through the best customer experience at the initial interaction and for decades to come.

In support of this differentiation, we added another industry veteran to our executive bench, Evelyn Huang, who most recently spearheaded Capital One's transformation into a consumer-centered organization.

I'll now turn the call over to Bob to review Q3 performance in more detail and to discuss guidance.

Thanks, Lynn.

In the third quarter, we exceeded our deployment guidance and recorded the highest NPV per watt in the company's history.

NPV was $1.15 per watt in Q3, resulting in aggregate NPV created of $93 million, representing 21% growth compared to the prior year.

We're raising our full year target for NPV per watt to $1.05.

While NPV per watt can fluctuate from quarter-to-quarter given business mix, Q3's strong results highlight our leading position and our continued focus on managing the business to drive NPV.

We're particularly pleased with the unit economics we achieved this quarter, especially as we invest resources in additional product offerings such as BrightBox, our solar-plus-storage offering; grid services initiatives with National Grid; and in new market entries.

We calculate NPV as project value less creation costs.

Let's go through each of the components.

Q3 project value was $4.49 per watt, just $0.02 higher than Q2 and $0.06 higher than last year.

As a reminder, project value is very sensitive to modest changes in geographic channel and tax equity fund mix.

We expect project value will decline slightly over time but with costs declining more, although in the short run there can be quarterly fluctuations.

Turning now to creation costs on Slide 8. In Q3, total creation costs were $3.34 per watt, an improvement of $0.02 year-over-year.

Similar to project value creation, costs can fluctuate quarter-to-quarter due to changes in geographic and channel mix.

As a reminder, our cost deck is not directly comparable to those of our peers because of our channel partner business.

Blended installation costs per watt, which includes the cost of solar projects deployed by our channel partners as well as installation costs incurred for Sunrun-built systems, increased slightly by $0.09 or 3% year-over-year to $2.72 per watt.

The slight increase was due to a higher mix of channel partner business and an increase in attachment rate of storage offerings.

Install costs for Sunrun-built systems, however, were $1.72 per watt, reflecting a $0.29 or 14% year-over-year improvement.

This marks the lowest cost we've been able to achieve to date, highlighting reductions in equipment costs and increased efficiency of our direct installation organization over the last year.

We expect total installation costs to remain roughly stable, owing to fluctuations in business mix, as we remain on offense by investing in new geographies and grid services.

We also expect the attachment rate of storage will continue to increase, which carries a higher per-watt cost but also delivers higher NPV.

In Q3, our sales and marketing costs were $0.49 per watt, a 23% improvement from the prior year, primarily driven by channel mix and our continued focus on the most cost-effective customer acquisition channels.

Next, G&A cost per watt was $0.27, a slight improvement compared to the last few quarters.

We expect to realize further operating leverage in the long term, with volume growth exceeding G&A cost increases over time, although there can be quarterly fluctuations.

Finally, when we calculate creation costs, we subtract the GAAP gross margin contribution realized from our platform services.

This includes our distribution racking and lead-generation businesses as well as solar systems we sell for cash or with a third-party loan.

We achieved platform services gross margin of $0.15 per watt, flat from the prior year.

In the third quarter, deployments increased 12% year-over-year to 90 megawatts, exceeding our guidance of 88 megawatts.

The strength was primarily attributable to an increase in our channel volumes.

Our cash and third-party loan mix was 11% in Q3, in line with recent levels and our outlook of low to mid-teens.

In Q3, our net bookings were 93 megawatts, an increase of 12% from the prior year.

As a reminder, bookings are calculated net of cancellations.

Turning now to our balance sheet.

Our liquidity position remains strong.

We ended Q3 with $236 million in total cash, including restricted and nonrestricted cash, the ninth consecutive quarter we've been above $200 million.

We continue to expect to increase our total cash balance by the end of the year.

On a normalized basis, we estimate the increase would be approximately $40 million for 2017, while growing our net earning assets by over $200 million.

Given the strength of our balance sheet and due to the rush by utility scale developers to purchase modules in light of the trade case uncertainty, we accelerated procurement of module inventory primarily in Q4 to ensure continued availability and attractive pricing even if the recommended tariffs are imposed.

We expect this increased procurement activity will accelerate the use of approximately $20 million of cash into Q4.

As we highlighted on the last call, we made a final payment of $9 million for our 2015 acquisition of Clean Energy Experts in Q2.

Including these nonrecurring items, reported total cash is forecast to increase by approximately $10 million during 2017.

Ed will discuss our capital strategy in more detail later on this call.

Moving on to guidance on Slide 11.

We remain confident in our growth trajectory and are reiterating our guidance of 325 megawatts for the full year, implying a 15% growth rate.

In Q4, we expect to deploy 87 megawatts, consistent with the historic seasonal patterns in our business.

As I've mentioned earlier, we are increasing our NPV per watt target to $1.05 for the year.

We now estimate we can generate approximately $300 million in aggregate NPV in 2017, which represents a 40% increase from the prior year.

Given our outlook for cash mix in Q4 is slightly lower than last year, and on cash or third-party loan system installs we recognize all of the revenue upfront instead of over multiple decades, we currently estimate total revenue and earnings per share will be roughly similar in Q4 to Q4 of last year.

Slight variations in our business mix can impact these items, however, and we primarily manage the business to NPV.

Now let me turn it over to Ed to discuss project finance and regulatory topics.

Thanks, Bob.

Today, I want to touch on a few items.

First, I'll review growth and net earning assets; second, I will discuss our capital structure strategy; and third, I'll provide a brief update on the Section 201 trade case.

Turning first to our installed asset base on Slide 12.

We're pleased to report that net earning assets increased by $97 million in Q3, ending the quarter at $1.2 billion, reflecting a 24% year-over-year increase.

As a reminder, net earning assets represents the present value of cash flows that Sunrun Inc.

expects to receive from our fleet of deployed solar systems after deducting estimated operating and maintenance costs, project level debt service and distributions to cash, equity and tax equity partners.

For both tax equity and nonrecourse debt, we continue to experience gradually declining capital costs and increasing depth of market.

We have tax equity and back-leverage capacity well into Q2 of 2018.

As always, we continuously consider options to balance our goals of maximizing long-term equity returns while delivering upfront cash flow while minimizing our exposure to changes in base interest rates.

On Slide 13, we set forth the 2 strategies we employed this year to capitalize assets.

Earlier this year, we completed a cash equity structure which prioritizes upfront cash.

This quarter, we closed a loan structure which prioritizes long-term value.

Because we aim to balance upfront cash with the creation of long-term value, we are employing a mix of the 2 strategies.

Both structures continue to be available to us, and next year, we may again make use of both markets.

For the curious, I will spend a few minutes discussing how we think about balancing these objectives.

In a cash equity structure, we receive cash upfront equal to approximately 95% to 100% of contracted project value.

In addition, when we refinance the National Grid transaction in about 6 years, based on advanced rates available in today's debt markets and our partnership agreement with National Grid, we expect to receive incremental proceeds of approximately 2% to 3% of initially contracted project value.

In a loan structure, we receive approximately 90% of contracted project value upon closing.

However, at year 6, when we refinance, based on today's capital costs, we expect to achieve cumulative cash proceeds of approximately 105% to 110% of initially contracted project value.

Compared to applying cash equity today, the loan structure delivers more cumulative cash to Sunrun by year 6. This is because over the first 6 years the loan balance amortizes, while at the same time the present value of cash flows distributable to Sunrun Inc.

actually increases.

This increase occurs because periodic distributions of cash flow to Sunrun Inc.

are greater once tax equity investors are repaid.

In addition, the repayment of tax equity simplifies the capital structure, allowing for higher advanced rates and access to a deeper market.

So the loan structure creates more overall value but less cash this year.

The loan structure has increasingly -- has become increasingly attractive to us, as the continued strong performance of Sunrun and our decade-old fleet causes lenders to offer us increasingly better terms.

For example, each of the senior and junior loans we just closed includes lower spreads and higher advance rates than our prior comparable transactions.

Pulling back from our latest transactions, we note that the cash proceeds available to us as we refinance assets aged about 6 years is material.

During Q3, we closed a warehouse facility to begin aggregating such assets.

We expect to amass the scale to become a regular asset-backed security issuer of refinanced assets by Q1 2019 with expected transaction sizes of $200 million annually.

We will further discuss the net cash flow benefits to Sunrun of this refinancing program as we enter 2018.

In sum, we continue to be very pleased with overall project finance conditions, our relative position and our strategy.

Before moving on to the trade case, I want to touch quickly on restricted cash.

Given the structure of some of the nonrecourse financings we entered into during the second half of 2017, our restricted cash balances will tick up slightly in Q4.

This is primarily related to debt service reserve accounts, which are available to service debt.

We expect restricted cash levels to fall to more historical levels by mid-2018.

I now turn to my final topic, the Section 201 trade case.

On October 31, the U.S. Trade Commission recommended increasing trade restraints on solar panels.

2 of the 3 proposals recommended tariffs that could amount to $0.12 per watt in 2018, declining about $0.02 per watt thereafter per year.

Tariffs are paid to the United States Treasury.

The third recommendation proposed charging importers a $0.01 per watt fee that would be paid directly to domestic manufacturers.

All proposals are limited by law to 4 years.

In response to a question from the Trade Commission, the Solar Energy Industry Association provided written analysis demonstrating that the petitioners' financial outcome is about the same under a $0.01 per watt license fee and a $0.32 per watt tariff.

This is because the petitioners receive the license fee based on all imported quantities but only benefit from tariffs on the products they sell and only to the extent they can raise price.

As is widely known, imports dwarf domestic production.

Thus, the petitioners may advocate and negotiate for the license fee construct rather than a tariff.

A final decision is expected by January 12.

However, if the parties to the case are in settlement negotiation, as frequently occurs in such situations, the President may delay decision until April.

We firmly believe the facts and politics are on our side and see no compelling economic or political reason the administration would prioritize a bailout of lenders to 2 foreign-owned, bankrupt companies over tens of thousands of good American jobs.

The purpose of trade protections is to create jobs, not to eliminate them.

Even the editorial boards of The Wall Street Journal and the Washington Post agree the President should fully retract -- fully reject the Trade Commission's proposals.

The cost of any trade restraint would be absorbed partly by our suppliers, channel partners, customers, changes in renewable energy credit prices and the investment tax credit.

Nevertheless, we have taken actions to ensure continued attractive pricing on modules for a large portion of volumes for next year, even if a recommended tariff is imposed.

I'll now turn the call back over to Lynn for closing remarks.

I think that's it.

Professor Ed closes the call, so let's please open the line for questions.

(Operator Instructions) Our first question comes from Brian Lee with Goldman Sachs.

I just had a couple here.

Maybe first for you, Lynn.

On the at-or-above-15% outlook for 2018 volume growth, how much of that do you expect to be Sunrun specific, i.e., continuation of the share gains you saw this year?

And then how much is going to be due to the overall market picking back up?

And then related to that, I guess, what are some of the GOs or drivers or other factors that you're able to point to for the confidence in the reacceleration that you hear?

Sure.

Thanks, Brian.

The way we always model this is really bottoms-up.

So we look market by market, channel by channel, which acquisition channels do we think deliver the best NPV, and that's the result we come to.

I think, if we look at the next couple of quarters, there are some challenges due to the weather.

Two of the new markets we entered into were Arizona and -- or excuse me, Florida and Texas, as you know.

And then there were the wildfires in Northern California.

So that's a little bit of what's keeping that growth rate in Q4 at that 12%.

But with the combination of the -- just existing market being underpenetrated and us getting smarter on how to acquire customers, plus the fact that over the last couple of quarters we've doubled our available market size, plus the Comcast relationship that obviously has reach to 6 million customers in our current operating footprint, we're confident in that 15% growth number and really, again, stand by the fact that this is an industry that can grow 15% to 20% CAGR for a long time when you look at where penetration is.

The other things that are very exciting on that longer-term frame is what's happening with storage.

So where we I think have always looked at the per unit margin, and certainly Sunrun has been oriented around generating that and are pleased with our results, there's also just increasing value per customer to be had.

And so that's another area we're going to be exploring in 2018 and beyond through the grid services, through the storage, through the partners with Comcast.

And then one other highlight I want to offer is just that for a while a lot of the questions were around what's happening to California.

And some of the popular discourse was, okay, is this market flattening off or tapering off?

And we're really pleased that in the quarter we saw strong growth in California that seems to be rebounding.

And especially as you throw storage into the mix, it really -- with the time-of-day rate, there is a very compelling customer value proposition, and so California looks like a very bright spot going forward.

Okay, great.

And I appreciate the color.

Just second question, and I'll pass it on, was on cash flow.

In the second quarter, you guys talked about $20 million of cash generation ex the acquisitions.

And it looks like you did an incremental $10 million in 3Q on the National Grid-related cash flow.

And then overall, that netted to positive cash flow of about $4 million.

So question, first is, is my math apples to apples and in the right ballpark?

And then if we look at Q4, I know you're making some comments around the pull forward and cash usage.

But if we x out the module purchase and then the acquisitions-related cash again, what would net cash flow generation have been targeted to be for Q4?

Sure, Brian.

So this is Ed, so I will start.

So the way that we think about the business, obviously, is that in each quarter we earn a certain amount of net present value that sort of goes into the piggy bank.

And then based on how we capitalize the assets in the quarter, some of that shows up on our balance sheet as cash, and some of that adds to the net earning assets that we report as well.

And so if you compare Q3 to Q2, you'll see Q3 was actually a significantly stronger quarter when you look at the change in net earning assets plus the change in total cash.

Nevertheless, we did add to the cash balance in each of the 2 quarters.

Bob had made the comment on the call that excluding the 2 onetime items discussed we would expect total cash generation for the year of approximately $40 million.

And so you could add that to the cash result for the first 3 quarters to estimate the Q4 change in cash that we anticipate.

And I would just say, you -- so you are thinking about it right, Brian.

And this is a big deal.

We're excited for where we are right now.

This is -- again, we're taking share.

Again, our margins have expanded, and we're generating positive cash flow, while adding to this asset base that we can continue to tap and refinance.

So it's -- it was a big milestone last quarter when we crossed over that, and we're extremely thrilled to project that that's going to be $40 million for the year.

Our next question comes from Julien Smith with Bank of America.

It's actually [Josephine].

So congrats on the recent financing.

I was wondering moving forward how should we think about cash equity Term Loan Bs on a per megawatt basis for deployment?

Like are we going to see a greater shift in the advance rate?

Yes, so I think -- as I was mentioning on the call -- so that's a great question, [Josephine].

This is Ed.

We are -- we aim to balance these 2 uses of capital and generally want to achieve a return on equity on our own capital of at or above 15% where we're holding onto pieces ourselves.

So the exact mix will be determined based on the prevailing market conditions in these 2 markets, but it's a reasonable expectation from where we sit today that we may execute on a mix of these 2 transactions next year similar to what we did this year.

Got it.

So that you have either a little bit of cash equity or Term Loan B depending on where you -- on how you want to use it?

Correct.

I mean, we have -- the good news is our unit economics are such that we have great flexibility with how we finance the business.

And so really at this point, we're just optimizing on the capital structure and wanting to ensure that we're adding to cash while also building long-term value.

Both of these markets are available to us in the future, and it'll really just be an on-the-margin analysis as to how we optimize.

But we do expect to execute very likely in both markets.

And then on the battery storage, I know that's still in the early stages.

But I was wondering, how do you think of terms about revenue contribution in the market that you are using batteries?

And then also in terms of like what is the tax equity interest in funding the solar plus battery project?

Sure.

Great question, and such an exciting growth area for us.

I'll take the first piece, and then Ed can add on the tax equity piece.

I think, again, the storage adoption rate at California at 10%, I think, is still growing and will grow pretty decently.

When you just look at the customer value proposition with the time-of-day rate structures in many markets, a big portion of the state, it's more cost-effective to install the battery plus the storage.

And just like we were a leader in delivering solar as a service in the beginning, we are the company that's delivering the battery plus solar as a service.

And so we like our position there.

We like our ability to really take share in that market.

So you're going to see higher project values and higher NPVs through that in California.

We think, in other markets, the value proposition is more about backup at this stage, so I think you're going to see adoption rate closer to like what a generator adoption rate would be like for now.

But as the grid services stuff comes online -- and this has surprised us with how many RFPs there are out today that we're working on with National Grid, but the -- if you're able to rely on capacity payments for that storage in many markets, like New York and perhaps Massachusetts and California, now you're able to subsidize a bigger portion of that battery and drive more adoption.

So we're still working through what the 2018 plan is, and as we talk with you guys next quarter, we'll have some more insight into that.

But we like it structurally for our competitive position.

We like it for our customer value.

And we like it, frankly, because it really takes away a lot of the regulatory risks that people -- that we've been hounded on around net metering over the years.

And the growth -- just to close, again, the growth in California was twice this quarter what it was -- the attach rate was -- excuse me, twice this quarter what it was last quarter.

So fast acceleration.

So Ed, you want to talk about tax equity?

Sure.

So maybe just to summarize first.

We are absolutely not constrained by our capital sources in the deployment of batteries, and we do not expect that we will be constrained in the future.

I think, like everyone who follows the industry, folks who provide project financing, no batteries are the future and that it's important to integrate them into systems.

What lenders and tax equity investors want to know is that they work and that we've been thoughtful about it.

So we've done enormous analysis, testing, projections, analysis of our existing installations.

Like anything else, if you present the right, correct, thorough data, rational actors act rationally.

And so we expect the market to be very supportive of the deployment of solar plus storage, and certainly, we experience that in our current transactions.

Got it.

And then last one and I'll pass it on.

I was just wondering, I know that you include the contracted portion of the [Sreg] in your revenue, specifically for the Northeast part of your like portfolio.

But I was wondering, how do you think about like the uncontracted portion about that?

And how much value is there that might not be captured right now?

Great question.

So this is Ed again.

So again, in keeping with reporting sort of conservative metrics, we have not included the value of uncontracted renewable energy credits in our reported metrics.

There certainly are curves available from brokers and other parties that would allow someone to estimate that value.

We don't think it's appropriate from where we sit to make those estimations, but we do agree that there's considerable upside in the value of our fleet that will arise from those renewable energy credits as they are contracted and sold in the future.

And then just maybe to quickly follow-up, like in terms of how much is contracted there, is that like a 3-year period?

Am I thinking about that correctly?

Typical contracts in solar renewable energy credits vary, but most contracts tend to be in the 3- to 5-year range.

Our next question comes from Vishal Shah with Deutsche Bank.

This is Rachel on for Vishal.

So first question is a clarification.

So for the project value, do you guys include any of this -- the $2,000 customer value for solar plus storage and also the grid service payments?

No, those are not included.

That would be outside.

So contracted payments -- well, payments that customers are contractually obligated to pay us will show up in project value.

But additional revenue from utilities or ancillary services would be in addition to that and are not reflected in project value.

Okay, okay.

So if you -- so the customer payment for your BrightBox products would be included?

Correct.

Yes.

So just along those lines, do you guys have any color around -- as the storage attachment rates goes up, what kind of upside -- is $2,000 even conservative?

What kind of upside are we expecting to see from a project value perspective?

It's really too early to say still.

And that -- and I'm glad you asked about the $2,000 too because that is really directional, and it's going to be highly locational.

And that's one of the real values of our asset as compared to more in front of the meter, utility scale-type storage is that congestion in power prices vary hugely based on like neighborhood to neighborhood, right?

And so like it can actually be extremely valuable in certain targeted ways, and I -- we're just at the early, early days of figuring how to monetize that and how do you pitch it to a consumer and who shares in the value.

And that, again, is one of the things we're exploring with National Grid.

That's one of the reasons why we believe there will be a really strong entry barrier in this market, as companies like Sunrun now we're amassing the largest fleet of customers, of happy customers, and we're able to figure this stuff out and take advantage.

But I will tell you that there is a lot of real-time bidding happening on these RFPs and particularly in New York and California.

Great, great.

That's very helpful.

So the second question is about the customer acquisition cost.

So your direct business and also your channel partners, in terms of the customer acquisition cost, which is bundled in the install cost, we see that kind of trending up.

And we also heard maybe in the industry there's a lot of -- there's potentially more competition there on the dealer side.

Can you maybe give us some color around that?

So we focus on managing and the mix that we have both among how we go to market and the channel versus what we do direct to optimize for NPV.

So for us, as we look out quarter by quarter, it really depends on what we're seeing in the marketplace.

Most recently, we've had more favorable -- we've had favorable channel mix that has benefited the company.

But going quarter-to-quarter, that can change.

And as we look into 2018, with new sources of demand that mix could change.

What we're finding is that the customer acquisition costs for us -- for others, I think you have seen costs going up.

For us, it really depends on channel mix.

We have optimized over the last year or so and improved our customer acquisition approaches, and we'll just continue to do that and continue to manage to NPV.

We just put up the best NPV quarter we've ever had, and we think we can continue to do that going forward.

Yes.

So approximately what percentage of the deployment is coming from channel partners?

Yes.

We have not typically disclosed what the mix is, and it's because it does vary and because we do manage it.

We don't try to manage to specific mix targets.

Our next question comes from Colin Rusch with Oppenheimer.

Can you guys talk a little bit about the drivers for the cost reduction on the built systems?

It's a pretty material number.

Are there technologies that you're using that are enabling quicker installs?

How can we think about that?

Really, the year-over-year improvement was largely driven by us seeing material cost improvement.

And then there has been a component that was smaller that was due to labor and other soft cost efficiencies, but the bulk of it was due to material costs year-over-year declining.

Okay.

And given what we're hearing about module prices and in order prices, at this point how are you thinking about potential cost reductions as you exit this year and into 2018?

So I think -- as far as the proposed trade actions and things like that, we think that the range of potential impact, if it was adopted, is very small on our overall cost structure.

It's on the order of like 3% of our total creation costs.

So we think that -- and that would be at the high end.

There's other components of that, that could be absorbed in the channel and in other ways.

So we don't think it's going to be a material impact on our overall cost structure going forward.

Okay.

And if I can sneak one last one in.

It's a little bit more philosophical.

With one of your biggest competitors really losing a substantial amount of market share and your velocity capital picking up here, why not think about growing at an accelerated rate versus what you have -- you've done in the past?

I love the aggressiveness.

I feel like we love our position right now.

We think we're absolutely on offense, and the share gains that you see, we think are pretty strong.

And we as always, and why we didn't get into trouble where other people did, is we focused on cash flow and value creation, and so it's really a balance.

And we were asked that same question 3 years ago, and we're like we're growing for sustainability, and that's where it sits today.

So you're going to -- that's -- we're doing this for the long run, and our view on this market is like you don't get markets as big as this in your career often.

And we're at the very early stages, and we're going to be as prudent as possible to set up the right strategic framework so that we're still talking to you in 15 years and we're not a $600 million valuation.

(Operator Instructions) Our next question comes from Sophie Karp with Guggenheim Securities.

I have a couple of questions.

Ed, you mentioned that the cost from the trade action that -- as is proposed would not be that material to you.

But with that said, do you plan to drop some markets where you're in right now in favor of the others as a result of this temporary dislocation in the market?

Or is it just not material at all?

Sophie, it's Ed.

So I think I want -- maybe to reiterate a couple of things that we were making -- we were saying on the call is that the high end of the current recommended tariffs would be something like $0.12 a watt.

If that occurs, you would expect it to be partly absorbed by suppliers, channel partners, customers, changes in renewable energy, credit pricing and the investment tax credit in addition.

And so with that, and then also combined with the fact that we have secured consistently attractive pricing on modules well into next year, even if one of the recommended tariffs is implemented, I think we feel very good about our current position.

The trade case generally, I think, has been a little bit of a distraction for the industry.

The purpose of trade laws, as I mentioned, is to create employment not to eliminate it.

The coalition that has been amassed in opposition of these lenders to 2 bankrupt companies is unlike anything I've ever seen before.

And we expect -- we obviously manage risks prudently but expect to push forward with the business.

Great.

And then on the inverter side, are we going to see any meaningful innovation anytime soon?

Several players promised -- in the space promised, I guess, to deliver new products.

Huawei promised outright and Fusion home product.

Is that something that you see coming soon?

Or is it still kind of distant future?

Yes.

I mean, we see hardware advantages are going to happen through everything, storage, in inverter, in particular, over the coming period of time.

And in particular, in storage on the string inverter -- or excuse me, on -- inverters on the string inverter side, we see increasing competition there, and that could be a nice source of lower costs coming forward.

All right.

Well, thank you, everyone.

We're really pleased again to share the record results and the share gains and are looking forward to speaking with you again next quarter with some more specifics on 2018.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may all disconnect.

Everyone, have a great day.