Sunrun Inc (RUN) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 Sunrun Earnings Conference Call.

(Operator Instructions) As a reminder, this conference may be recorded.

I would like to introduce your host for today's conference, Patrick Jobin from Investor Relations.

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 the 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.

And now let me turn the call over to Lynn.

Thanks, Patrick.

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

In the fourth quarter, we deployed 85 megawatts, generating $91 million of net present value, up 35% year-over-year.

We created NPV per watt of $1.22, the highest margin in the company's history, highlighting our cost efficiencies and the value of our products.

We are now solidly the market leader in the residential sector.

Q4 caps a breakout year for Sunrun.

In 2017, we beat both our full year NPV margin and cash generation targets.

We grew aggregate NPV at almost 50%, deployments at 15%, and now have more than 180,000 customers.

We gained 4 percentage points of market share while turning structurally cash flow positive, and we expanded our home solar and battery service, BrightBox, to strong customer reception.

We also forged key strategic partnerships with Comcast and National Grid.

We expect an even better 2018 despite the impact of tax reform and tariffs.

We plan to continue our market share gains with 15% growth in deployments and growth in cash generation well above this rate.

These results are supported by NPV targets above $1 a watt and a strong project finance pipeline to turn that value into cash flow.

In the immediate term, we have experienced some external headwinds.

Q4 deployments fell slightly short of our expectations due to the wildfires in California.

Q1 is always the toughest quarter of the year.

Typically, deployments decline from Q4 levels due to seasonality, and the pull forward in installations from Arizona exacerbated the trend this year.

We took a particularly cautious position in Q4, given the unknowns from tax reform and the tariff, but we are pleased with where margins have settled out and that the uncertainties are removed.

Because of this prudence, we will be able to slightly grow aggregate NPV year-over-year in Q1, but the megawatt deployment comparison won't reflect the annual growth trend.

This means for the rest of the year, megawatts deployed will grow at about 20%, and we expect to approach that number in Q2 with a slightly stronger second half.

We are focusing on our direct business to develop our Comcast partnership and the launch of BrightBox.

Although neither of these are contributing meaningfully to deployments today, they will be larger contributors in the second half of the year.

The Comcast partnership is on track, and we are experimenting to refine our messaging, offer packages and marketing mix before we unleash broader campaigns.

As we've noted before, quarterly fluctuations due to the timing of various policy impacts have been the norm over the past 10 years.

Most importantly, the foundation is strengthening for Sunrun's sustained long-term growth and market leadership.

The U.S. electricity sector is undergoing dramatic change.

Renewable energy and natural gas prices have plunged and demand for electricity is stagnant.

Yet, U.S. utilities are on a capital spending binge.

That's why during this period of unprecedented declines in the cost of fuel, retail electricity price escalation in our markets has continued to increase at 3% per year for the past 14 years.

Even if wholesale prices go to 0, there will be no place to hide and rate escalation will accelerate.

Regulators are recognizing the danger of staying on this spending spree and building 30-year infrastructure we won't need in 10 or even 5 years.

We already have utilities asking for bailouts of large nuclear and coal plants for which homeowners are forced to pay.

The solution is to increase efficiency of the system while moving to cleaner generation.

Distributed solar and batteries can be more flexible, targeted and offer consumers control and savings.

It's what people want and it's the next-generation energy system, not yesterday's expensive, bulky centralized one.

Here's an example of how it works and why residential assets are the unique solution.

Utilities identify a circuit that is going to need a substation overhaul.

Sunrun can aggregate the batteries from about 500 homes in that exact neighborhood and supply energy to the grid when needed.

This replaces a multimillion dollar investment.

It's a win-win because those households also get to have solar power and a battery, which provide power during outages and offers control over energy costs.

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

The number of RFPs for these opportunities are growing swiftly.

We have partnered with National Grid to pursue these grid services efforts.

We don't expect them to have a 2018 revenue impact, but they are foundational efforts for our strategy to build a consumer-centered energy system.

We note that the top 20 utilities currently have an aggregate market cap of $500 billion.

Our customer-created utility can be on that list.

The pace of home battery adoption is surpassing our expectations.

Today, we announced our BrightBox launch in Massachusetts.

At just $1,000 upfront, BrightBox is a fraction of the cost of the alternative: dirty, noisy, diesel generators.

Year-to-date in California, nearly 20% of the time our customers are now choosing to add batteries.

This has almost doubled again since Q4 and we expect further penetration throughout the year.

Our massive and growing base of more than 180,000 customers remains our largest strategic asset.

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

I'll now turn the call over to Bob Komin, our CFO, to review Q4 performance and discuss guidance in more detail.

Thanks, Lynn.

In the fourth quarter, we recorded the highest NPV per watt in the company's history and exceeded our cash generation and NPV targets.

NPV was $1.22 per watt in Q4, resulting in aggregate NPV created of $91 million, representing 35% growth compared to the prior year.

While NPV per watt can fluctuate from quarter-to-quarter given business mix, Q4'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, grid services initiatives with National Grid and in new market entries.

We calculate NPV as project value less creation costs, so let's go through the components.

Q4 project value of $4.52 per watt was $0.03 higher than Q3 and $0.11 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.

As Ed will describe, we expect the impact of tax reform to reduce project value by about $0.10 per watt beginning in 2018.

Turning now to creation costs on Slide 13.

In Q4, total creation costs were $3.30 per watt, an improvement of $0.11 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 peers because of our channel partner business.

Blended installation cost per watt, which includes the cost of solar projects deployed by our channel partners as well as installation costs incurred for Sunrun-built systems, improved by $0.10, or 4% year-over-year, to $2.61 per watt.

Install costs for systems built by Sunrun were $1.85 per watt, reflecting a $0.19 or 9% year-over-year improvement.

Sunrun-built installation costs increased modestly from Q3, owing primarily to higher mixes in strategic growth areas, including our BrightBox solution, and new markets which tend to initially have higher costs over a few quarters while we are scaling.

We expect total installation costs to show modest declines by the end of the year, even with the module tariff impact, and as we continue to invest in new geographies and grid services.

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

In Q4, our sales and marketing costs were $0.53 per watt, an 8% improvement from the prior year, driven by channel mix and our focus on the most cost-effective customer acquisition channels.

For the full year of 2017, G&A costs were $0.30 per watt, flat compared to 2016.

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 with the prior quarter and prior year.

In the fourth quarter, deployments increased 10% year-over-year to 85 megawatts.

For the full year, we deployed 323 megawatts, 1% below our guidance of 325 megawatts.

There were several factors that influenced this, most notably the natural disasters in California during Q4.

Fires in both Northern and Southern California not only disrupted the specific areas affected by the fires but also caused extremely poor air quality conditions for the broader region.

The safety of our crews is paramount and we did not want our crews from the 6 affected branches installing during unhealthy conditions.

I think this was absolutely the right call for us and many of our partners to make.

We did our best to try to make up this gap later in the quarter and in other geographies but we were unable to fully mitigate the impact.

Our cash and third-party loan mix was 13% in Q4, in line with recent levels and the prior year and consistent with our outlook of low to mid-teens.

Turning now to our balance sheet.

Our liquidity position remains strong.

We ended Q4 with $242 million in total cash, including restricted and unrestricted cash, the 10th consecutive quarter we've been above $200 million.

We generated $43 million in total cash in 2017 on a normalized basis, exceeding our target of $40 million.

This excludes about $20 million in accelerated inventory purchases as a partial hedge for the module tariff, along with the $9 million payment in Q2 for the lead-generation business we acquired in 2015, as I mentioned on the last call.

We define cash generation as the change in our total cash balance after subtracting the change in our working capital recourse debt facility.

We estimate our cash generation will grow materially faster than our deployments in 2018.

As the year progresses, we will be in a better position to be more specific with our cash generation and net earning asset outlook.

Also please note that our cash generation outlook excludes any strategic opportunities or accelerated market entries beyond our current plan, and we'll discuss our capital structure strategy in more detail later on this call.

Moving on to guidance on Slide 15.

We remain confident in our growth trajectory and are guiding to 15% deployment growth for the full year.

In Q1, we expect to deploy 67 megawatts, consistent with the historical seasonal patterns in our business and driven by some market-specific timing.

As we pointed out over the last few quarters, we saw strong demand in Arizona ahead of policy changes, which caused some demand pull, and that results in tougher sequential and year-over-year comparisons in early 2018.

This means beyond Q1, megawatts deployed will grow at about 20%, and we expect to approach that number in Q2 with a slightly stronger second half.

We are also focusing on our direct business, which is the platform behind the Comcast partnership volume ramp and where we focused our BrightBox sales and installation efforts, and both will be larger contributors in the second half of the year.

The increased adoption of BrightBox is exciting, given the additional customer value propositions and differentiation, but as markets launch, it also carries longer cycle times.

As I mentioned earlier, despite the headwinds from tax reform and import tariffs, we expect to maintain our unit economics at or above our target of $1 per watt of NPV for the full year, testament to Sunrun's competitive position, operational and NPV discipline, investment in advanced products and strong financial market execution.

Now let me turn it over to Ed.

Thanks, Bob.

Today, I want to touch on 3 items.

First, I'll review the changes during the quarter to the gross and net earning assets; second, I'll discuss the impacts of tax reform; and third, I'll discuss the finance market, which is the most robust we've seen in the company's history.

Turning first to our installed asset base on Slide 16.

Net earning assets was roughly flat in the quarter at $1.2 billion, reflecting a 16% year-over-year increase.

Nonrecurring items of about $50 million depressed net earning assets in the quarter.

First, we experienced impacts in the draw timing of tax and cash equity financings.

Our primary objective is to optimize for the lowest long-term cost of capital.

We focus first and foremost on the best execution of our financings, which can materially affect the timing of our total cash balance at any specific quarter and measurement date.

Second, we have estimated the total expected impact of corporate tax reform.

Finally, we purchased tax equity investor stakes in a couple early and unusual funds, allowing us to retire our most expensive piece of debt and placing us in position to execute financings on advantageous terms in the ABS market.

In addition, the net cash proceeds from the closing of a Term Loan B in Q4 reduced net earning assets but generated cash.

Because we reinvested this cash into working capital, such as inventory to hedge the solar panel tariff, we have not yet seen the corresponding increase in cash.

We expect working capital investment will peak in Q1.

I turn now to a discussion of federal tax reform and the impacts to Sunrun.

Most importantly, the investment tax credit was unchanged, which is no surprise given the bipartisan support for solar.

In fact, Congress newly extended tax credits for several renewable energy technologies in the budget bill that immediately followed tax reform.

For the existing fleet of assets, we estimate that all changes from tax reform, taken together, will reduce gross earning assets by about $13 million or less than 1%.

Tax reform also resulted in a $33 million GAAP benefit, reducing our Q4 income tax provision.

Because we enjoy a tax net operating loss carryforward of $700 million, this benefit, like our overall income tax provision, is noncash.

We continue to see strong availability of tax equity.

Based on a transaction we signed up after tax reform as well as ongoing discussions, we estimate that proceeds from tax equity transactions will decrease by about $0.10 per watt, slightly better than our prior guidance.

This reduction occurs because the depreciation we deliver to tax equity investors is less valuable at a lower corporate income tax rate.

Despite impacts to project value from tax reform and to costs from tariffs, we believe we can generate a strong NPV of at least $1 per watt in 2018 as a result of continued operational improvements and our strong competitive position.

I turn now to my final topic, project finance and capital market strategy.

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

Based on the increasing acceptance of the residential solar asset class and overall strong market conditions, we see opportunity to reduce our capital costs in 2018 both on new and existing debt transactions.

Across all components of our capital stack, current market conditions support spreads that are 50 to 100 basis points lower than our average 2017 transaction.

Based on market conditions today, we expect in 2018 to continue to deploy a mix of subordinated or Term Loan B debt and cash equity financing.

Finally, I note we have tax equity and back leverage capacity into Q3 of 2018, including tax equity which was negotiated in 2018 after tax reform.

We are pleased with overall project finance conditions and our relative position.

I'll turn the call back over to Lynn.

Thanks, Ed.

Let's open the line for questions, please.

(Operator Instructions) And our first question comes from the line of Brian Lee from Goldman Sachs.

I guess, first one on the cash generation comments.

I think you mentioned, Bob, that they'll be ahead of deployment growth.

So I just wanted to be clear, does that mean better than 15% growth on the $43 million you generated in 2017?

So inferring $50 million of incremental cash generation expected in 2018?

Yes, Brian, that's exactly what we mean.

Okay, great.

And then maybe digging into it a bit more granularly, can you talk to maybe some of the high-level puts and takes that are embedded in that view?

I know 2017, there were a couple onetime issues that impacted it and you adjusted for.

Anything that might be in the 2018 numbers as well that we should be adjusting for or budgeting for?

Hey, Brian.

Nothing that would be an equivalent onetimer similar to what -- similar to the inventor buy or the acquisition.

We don't anticipate any of those, so the guidance is for really the steady-state operating business.

Okay, that's helpful.

Maybe a couple more questions, just around the cash flow profile here for the year.

First, on Slide 16, you showed a cash equity of $155 million to end the year.

Was that all National Grid related?

I thought they had invested $100 million or so.

So just wondering if there's something else reflected in there or how we should be thinking about that line item as we move through 2018.

Hey, Brian, this is Ed.

Great question.

I think you may be referring to the $155 million pro forma debt adjustment that we show in Q4 of '17.

That does relate to the National Grid transaction, but it is not their investment, specifically.

So what happens when we place assets into the National Grid transaction is that we eliminate the gross earning assets that those assets would have provided if we hadn't pledged those cash flows effectively to National Grid.

And because we are, therefore, eliminating the gross contracted assets of those systems, we are also eliminating 99% of the debt against those systems.

So the $155 million in debt is the debt that has currently been raised in that partnership with National Grid.

So their equity investment is still expected to be approximately $100 million.

Does that answer your question?

Yes.

No, that does clear it up.

That's helpful.

And the $155 million, is it fair to assume they were fully deployed on the 200 megawatt target for 2017?

So Brian, let me answer that with 2 comments.

The first one is that the fund is materially but not totally deployed, and the second one, though, is that there are debt draws as the -- as those systems continue to be placed in service in 2018.

Okay, okay.

Fair enough.

Last one for me.

I'll pass it on after that.

The $50 million headwind you guys spoke to for the net earning assets this quarter, you mentioned that the early fund repurchases, obviously, which are going to be to your benefit, that was part of it.

And without that and some of the other factors, you would have grown sequentially on that metric.

Can you quantify, specifically on the early fund repurchases, what the dollar impact was in the quarter?

And then to your comment around 50 to 100 basis point compression in spreads, the refis that you're planning on the back of those early fund repurchases, are those for 2018?

And should we be expecting those to generate significant cash flow for you in 2018?

And i.e., is that in part of your $50 million incremental cash generation target for the year?

Hey, Brian, so those are good questions.

So first, when I described the 3 components of the $50 million, we did that in order.

So the working capital component was greater than the tax component, which we disclosed at $13 million, which was in turn greater than the effect of the buy-in of the funds.

So that hopefully can give you a view towards the order of magnitude.

The further refinancings of our post-flip assets, such as those may not occur until as late as Q1 2019.

And so we do not, at this point, expect that to occur in 2018.

Okay.

So put another way, that the cash from that would be in your 2019 view at that point?

Correct.

And our next question comes from the line of Julien Dumoulin-Smith from Bank of America.

I wanted to ask -- just to follow-up on the last questions.

Can you talk a little bit about the advance rates you're seeing on tax equity and just how that market has evolved, if at all?

I take it from your comments here that it's still quite robust.

But what is kind of a good ballpark assumption on dollar per watt tax equity raise assumptions in light of everything that's transpired with tax reform?

Great questions, Julien.

So I think what we're saying is we expect to receive about $0.10 a watt less in 2018 than we did in 2017 because of all the changes to tax reform.

In terms of what's happening in the market, I would say, first, I think casual industry observers may have underestimated 2 components of the tax bill.

The first, that it's creating new cash taxpayers; and the second, the elimination of corporate AMT appears to be driving several tax departments towards the total elimination of tax liability rather than a desire to land near the AMT threshold.

And so we're actually seeing slightly declining after-tax yields.

But because the loss of the depreciation benefit that's still manifesting is about $0.10 a watt less in proceeds to us.

But Bob's comments on NPV and cash flow for 2018 take those expected impacts into account.

Got it.

All right.

So it wasn't just the changes in construction costs, et cetera.

Can you also talk about the Term Loan B market?

Obviously, you're talking about a step-up here in total proceeds.

How are you thinking about that in light of the tax equity comments you just made and also with respect to desirability of pursuing other Nat Grid-like transactions here?

How are you thinking about sort of a mix, if you were to think about at all about a mix, and/or just the total proceeds on that front as well?

I mean, is it basically back stopping and filling in the delta that is created with the tax equity?

Yes.

So I think the headwind that we're seeing, the $0.10 from tax equity, we'll be addressing that operationally and financially.

The good news right now is that all components of the capital stack are attractive to us, A Loans, B Loans, cash equity.

We're seeing, as I was describing, spreads on average between 50 and 100 basis points lower, taking all those into account.

So I don't want to make specific projections of the exact transactions that we're going to undertake in 2018, but we have many degrees of freedoms and good opportunities ahead of us.

Got it.

And then lastly, quickly on commenced construction for the ITC.

I mean, are you expecting any clarity or commentary from Treasury here?

I don't have any particular view as to when that clarity will be provided.

And our next question comes from the line of Michael Weinstein from Crédit Suisse.

This is Maheep on behalf of Mike Weinstein.

Could you talk about the impact of all the tariffs with solar, steel or aluminum on the cost structure in 2018?

And how does that play into your expectations for next year?

This is Ed.

Great question.

This would have, we think, very de minimis effects on our cost structure, potentially in the range of a $0.01 per watt.

So it's not something that we foresee as a major issue one way or the other.

Got that.

And last week, the IRS issued a private letter clarifying rules for tax credits on retrofit storage.

Could you throw some light on that?

Probably it's too soon to speak about that, but does that -- is it new for you?

Or does it create more demand for retrofit storage for you?

And how should we think about monetizing such retrofits?

Yes.

So good -- just for background for those on the call, the IRS just clarified that if you put a battery on an existing solar system that, that would be eligible then for the tax credit.

So I -- so it's a terrific outcome.

I think the way we're currently going to market with our BrightBox product is on new originations only.

So any of the commentary we've been making is around new business.

And as I said on the call, it's still early, but the demand is surpassing our expectations.

And particularly, as these extreme weather events continue to happen, we're seeing increasing interest from customers who are wanting to back up their home with power.

So we launched BrightBox in Massachusetts today.

I think with the latest storm, 2 million people didn't have power.

So increasingly, what we're finding is that utilities aren't meeting the needs of their customers.

It's too expensive, and it's not reliable power.

And so the demand for storage is better than we expected.

That said, on the retrofit side, that is not something we're currently offering, but certainly something we're taking a look at.

And just one last question from me.

Looking at the 2018 deployment guidance, how should we think about the geographic mix?

Or which regions are driving that growth versus what we saw in 2017?

Sure.

I think certainly the big factor with the Q1 numbers in late in last year was Arizona.

I think, as we described on the phone call last year, there was a strong pull forward in demand there, and Arizona ticked up above the 10% share in our overall business.

And so actually, if you would have kept Arizona at historic levels, there would've been strong growth in Q1.

So the reason why we feel confident in the growth returning and coming back in Q2 and beyond is the following.

Nevada is coming back, which -- quite strongly.

Our new markets are starting to contribute, the 7 new states that we entered last year.

So Texas, most notably.

On the East Coast, we're seeing very strong demand.

California, I believe, the external forecast shows California as about flat this year, but we believe we'll do slightly better there.

So across the board, consumer -- and Arizona's going to come back, too.

So what we typically see is after there's one of these pull forwards, companies clean out their backlogs and then there's a little bit of an air pocket but the market comes back.

And so we're starting to see strong sales in Arizona as well, so that will come back into the picture.

The place where there is some risk is South Carolina, as we are potentially going to reach the net metering cap this summer to fall.

And we're accounting for that in our plan.

We expect that it gets extended, but that would be a market where our current plan shows some decline year-over-year in that market.

But across the board, very strong growth and very, very pleased with where our consumer demand sits today.

And our next question comes from the line of Philip Shen from Roth Capital.

A quick follow-up on Maheep's question there on storage, and storage in general.

I think you mentioned that the attach rate has hit 20% in some states.

Looking ahead in -- further in 2018, how do you expect that attach rates will evolve?

What levels could we reach by the end of year?

Great question.

It's still early to say.

I think there is -- it's going to be different market by market, too, depending on what the regulatory set up is.

So in California, what we -- the specific comment we made was that in California, we're seeing attach rates at 20%, which is a doubling already year-to-date versus Q4 last year.

So it's accelerating very quickly.

And if you just look at, from a consumer value proposition standpoint, particularly in the San Diego market, it's arguably more affordable for someone to get solar plus storage because of the ability to store the power during the day and ship it to the grid when it's most expensive in the afternoon.

So you could imagine attachment rates in that market well above 50%.

PG&E and Southern California Edison are -- it's going to be driven by consumer interest in the extra reliability and the backup capability.

But again, we're being pleasantly surprised with how important that is to people, and it's more front of mind as the extreme weather continues to persist.

I think if you look at -- the other markets we look at to try to estimate penetration would be generator markets, what kind of share is that.

And that's maybe 10 percent-ish.

So we would think -- again, really early to say.

We would think that it would still be the minority of customers that would elect to attach storage outside of California, but certainly, 100% in Hawaii, and parts of California might exceed that 50%.

Great.

That's really interesting, the more than 50% in some locations.

Shifting gears to new geographies, can you walk us through how many new states perhaps or opportunities or regions that you might hit in 2018?

We don't anticipate the same level of expansion as we put forward last year.

So last year, we added I think it was 7 states, and those take a few quarters to ramp.

So we didn't see much of the benefit from that last year and are starting to see it now, today.

So the growth that underlies this 15% growth plan really is in existing markets.

Another area of the country we have our eye on -- although I'm not promising anything in terms of market entry, is Illinois and the Midwest area.

The economics are starting to look good.

There's some favorable policy there.

So that could be an interesting and promising market.

Puerto Rico is also interesting in that the consumer interest -- speaking of utilities not meeting the need of their customers, it's a perfect case in point there.

And the consumer interest in rooftop solar and battery storage is incredibly high.

So it's just a question of is the market -- do we get comfortable that the market is stable from a risk perspective?

So those would be 2 highlights, but again, the strong growth rate we're forecasting here is supported by the existing markets.

Great.

One last one here.

I just want to clarify, in terms of your outlook for the year and the cadence by quarter, with the 67 megawatts in Q1, and I think you talked about 20% growth for the rest of the year.

I think we ease into that in Q2, is that right?

And then there's greater acceleration in Q3 and 4 to get to the blended 15%?

Just if you can comment and confirm that cadence, that would be helpful.

Absolutely.

We specifically said we will approach 20% in Q2.

So I would assume a slight discount there and slightly above for the back half of the year.

So you're not going to see it super hockey stick second half, but yes, there will be a little bit of a gradual step into that.

The other thing I should mention that helps us get confidence with that back half acceleration is the Comcast partnership as well, which we've spoken about.

But we're -- we've really been still in testing mode to figure out what's the right messaging, what's the right packaging before we unleash that.

And that will be a second half contributor.

But we believe we have good visibility into those quarterly growth rates, and are looking forward to delivering them.

And our next question comes from the line of Colin Rusch from Oppenheimer.

Can you guys provide a little bit of guidance on the cadence of megawatts that will become unencumbered by the tax equity investors throughout the course of this year?

Colin, we -- I'm trying to think.

We haven't -- it looks reasonably close to just what our deployments looked like 5 to 6 years ago.

But what we have said is that we are expecting to do a first refinance of the post-flip assets in Q1 2019.

We would expect that transaction size to be about $200 million, and then to set us up to be in a position to be a recurring annual issuer of those sorts of assets.

Okay.

I'll pass you guys a little bit offline with that.

And then can you talk a little bit about the pricing dynamics?

Obviously, this is somewhat geographically dependent.

But with lower competition here, are you guys able to take price a little bit here from -- in some of these markets?

And should we think about a little bit of extra cushion in terms of the NPV that you guys are capturing along the way?

We really manage it to that NPV of around $1.

I think if we -- it is our -- just like a typical sort of software SaaS business, if you -- you want to keep spending on acquisition channels that are justified by the long-term value you're going to get from your contracts.

So I think we feel that to generate the right long-term value and right cash flow profile, that sort of $1, a little above $1 a watt is the right threshold.

And so the trade we would probably make more is invest more on the growth side.

And as you can see, we're just -- even given the haircuts we took with the tax reform of about $0.10, that's 10% of your NPV, and we're able to recover that.

But the majority of that is not through pricing, though.

It's through better operating -- better capital strategy.

And our next question comes from the line of Vishal Shah from Deutsche Bank.

It's Rachel for Vishal.

So first one is on the BrightBox.

So in terms of the NPV accretive, so what are the kind of drivers for the NPV?

Have you guys kind of assumed some decline in the battery cost there?

Or can you just give us a little bit more color on that?

Sure, sure.

The NPVs we're currently selling the BrightBox at are strong.

And we're not anticipating -- in terms of our current financial plan, we are not anticipating significant declines in the cost of storage this year.

But all the signs are really positive.

There's a ton of innovation happening in batteries.

There's -- we currently have partners, as we've mentioned, with LG and Tesla.

But there's Mercedes, there's BMW, there's Samsung, there's BYD.

And there's a lot of inverter manufacturers who are looking to put that storage and the inverter in the same box, which is going to drag cost out.

So there's a lot of exciting innovations happening there.

But right now, we're staying disciplined with our margin targets and pricing our BrightBox so that it's at a nice margin, seeing customer elasticity, learning more, and that's the strategy there.

Great.

So in terms of the Comcast partnership, can you give us a little bit more specific kind of your plans for the second half of -- there?

Sure.

I'm glad you asked that question.

We -- when things are outside of our direct control, we're cautious with them as a general matter of course.

So the partnership is very promising in terms of the signals we're getting from them, the testing we're doing, the visibility.

And again, the pilot results make it worth our while to invest in this area.

That being said, we're cautious about how much contribution we're going to count on from Comcast in the back half of the year.

It's a multi-year partnership, so that certainly is not the biggest driver of the strong back half growth years -- back half growth forecast.

Okay, great.

So the last question is, as you guys mentioned, your targets do not include any strategic initiatives.

So just wondering like what kind of initiatives you're maybe considering.

Does that include any potential M&A opportunities that you're thinking about?

That phrase would certainly catch those, but there's nothing that we're anticipating pursuing right now.

(Operator Instructions) And our next question comes from the line of Joe Osha from JMP.

I wanted to drill down a little bit more on the cash flow issue.

You mentioned better than 15% growth off the $43 million.

That -- does that include any assumed refinancing from post-flip assets?

And then I have a follow-up.

Hi, Joe, it's Ed.

There is not material impacts in there.

There can be modest changes as we move assets into warehouse facilities and whatnot, but it is -- but flipping assets is not a material source of cash flow in the year.

Okay.

And then I believe I heard you say that we would not see anything in terms of a securitization transaction until the first quarter of 2019.

Was that $200 million you referred to, I assume we would be talking potentially about an ABS?

Or you're just leaving your options open at this point?

Yes, sure.

So the transaction I was mentioning earlier would be a refinanced transaction, very likely in the asset-backed security market, of 5-year approximately seasoned assets.

It is certainly possible that during the course of this year, we would engage in an ABS transaction on flip assets if it were competitively priced with our other alternatives.

So we're certainly not foreclosing the possibility of an ABS transaction, broadly speaking, during the calendar year.

Okay, which would not be reflected either in these cash generation numbers that you just talked about?

Well, our general raising of whether it's back leverage or ABS on new assets does -- is incorporated in our full year view.

On new assets, but not on existing assets?

On new assets.

Correct.

And I'm showing no further questions over the phone lines at this time.

I'd like to turn the call back over to Lynn Jurich for closing remarks.

Thanks, everyone.

We're excited by 2018.

2017 was a breakout year for us, taking the market leadership position and turning to cash flow positive.

And we're really excited to exceed that next year.

Appreciate all the great questions.

Thank you.

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

This concludes the program, and you may now disconnect.

Everyone, have a great day.