Sunrun Inc (RUN) 2018 Q2 法說會逐字稿

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

Second Quarter Earnings Conference Call.

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

I would now like to introduce your host for today's conference.

Patrick Jobin, 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, 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 second quarter financial and operating results, along with progress against our strategic priorities.

In the second quarter, we added more than 12,000 customers, representing 20% growth in megawatt deployments.

This result exceeds guidance and represents the highest quarterly volume in the company's history.

In the first half of 2018, we generated $142 million in net present value and created NPV per watt of $1.03 or over $7,700 per customer.

We're excited to announce that we have now surpassed 200,000 customers.

For a company that is disrupting a multitrillion-dollar industry, we learned a lot from winning these first customers that will make the next million easier.

Throughout the past 11 years, we have solidified our position as the industry leader with scale, brand, technology, and financial strength.

I'm most excited by what the next decade means for Sunrun and the families that want a superior energy service, a service that is customized to their energy needs, is more resilient and offers backup power, and contributes to healthier communities.

Sunrun makes going solar simple, and we are committed to creating an exceptional customer experience because our customers have chosen to be with us for decades.

We are reiterating our full year guidance of 15% growth in deployments and growth in cash generation above this rate.

This growth, plus investments in customer acquisition and product innovation, will be achieved while delivering NPV above $1 per watt for the full year.

The opportunities in front of us are increasing our confidence for growth acceleration and continued market leadership.

As the leading solar company in the U.S., Sunrun has the largest national footprint.

We are capitalizing on this position by investing in our direct customer acquisition, onboarding platform, and customer experience capabilities, which we will -- which we believe will increase the moat around our business and deliver a superior cost structure over time.

Our direct business grew over 40% year-over-year.

This current success, combined with the opportunities in front of us, which include multiple retail expansion opportunities, lays the foundation for a strong 2019 growth rate.

Strategic partnerships like retail are a place where national capabilities, track record, brand and scale all matter and separate Sunrun from the pack.

We are also well positioned to take advantage of the recent California new home mandate.

While the volumes aren't large yet, we already have installed new home installations and are engaged with half of the top 10 homebuilders in California.

Most importantly, Sunrun has the opportunity to be the loved energy provider for homeowners.

Utilities are falling short in providing what customers want.

Sunrun is leading in product development to extend our value proposition to customers and the grid.

Our BrightBox home solar and battery service continues to gain traction and exceed expectations.

We have installed thousands of BrightBox systems thus far, and we will more than double BrightBox installations in the second half of 2018 as compared to the first half.

This has caused short-term cycle time and cost headwinds.

However, financial returns are attractive, and this service further differentiates Sunrun as the nation's leader.

This superior energy service has been launched in 7 states in Puerto Rico and already represents about 10% of our direct business.

In California, well above 20% of the time, our direct customers are choosing to add a BrightBox.

In certain markets in Southern California, this rate is now nearly 60%.

With increasing wildfires and extreme weather causing outages, we are a solution for resilient, clean power that can be rapidly deployed.

For instance, customers are being told by utilities in California that they will cut off power proactively when the temperature is high and the wind is blowing.

Homeowners want reliable, affordable power, and our BrightBox home solar and battery service can deliver.

In the second quarter, we entered Puerto Rico through channel partners, offering residents the freedom to create their own energy and enjoy backup power during outages.

We also officially launched BrightBox in Florida.

Sunrun continues to advance the role distributed energy resources will play in the country's future energy system.

Together with National Grid, we are already active in California and have recently started to work on a small program in Massachusetts, where certain customers are able to participate in grid services.

We're encouraged by the growing interest from utilities and regulators.

In addition to our market and product leadership, we continue to deliver strong financial performance.

As a result of our capital allocation discipline and financing strategy, we are cash flow positive, even while investing in future growth and product leadership and have maintained a strong balance sheet.

I'll now turn the call over to Bob Komin, our CFO, to review Q2 performance and to discuss guidance in more detail.

Thanks, Lynn.

Customer NPV in the second quarter was approximately $7,400 or $0.98 per watt.

In the first half of the year, NPV per watt was $1.03, in line with our target levels, despite the headwinds from tariffs and tax reform, along with the investments we're making to accelerate our direct business and product leadership.

Project value per customer was approximately $31,100 or $4.10 per watt in Q2, and for the first half 2018 was $4.32 per watt.

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.

For instance, in Q2, we had a higher mix of lower value and also lower cost projects in our channel business that affected our metrics.

We expect project value will return to levels more consistent with recent trends in Q3.

Turning now to creation costs on Slide 6. In Q2, total creation costs were approximately $23,700 per customer or $3.12 per watt, and were $3.29 for the first half of the year.

Similar to Project Value, Creation Cost can fluctuate quarter-to-quarter.

Creation Costs per watt were 7% lower year-over-year.

We expect Creation Costs will return to levels more consistent with the last few quarters in Q3 and expect them to show modest declines for the full year, even with the module tariff impact and as we continue to invest in growth in our direct business, as Lynn described.

As a reminder, our cost stack 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 $0.35 year-over-year to $2.35 per watt, largely due to the higher mix of lower value and lower cost projects in our channel business, as I mentioned earlier.

In the first half of 2018, total installation costs were $2.48 per watt.

We also expect installation cost will return to levels more consistent with recent trends in Q3.

Install costs for systems built by Sunrun were $1.95 per watt, reflecting an $0.08 or 4% year-over-year increase.

Most of this increase is related to a higher mix of batteries.

We expect the adoption rate of home batteries to continue to increase, which will carry a higher per watt cost, but also a higher project value.

In Q2, our sales and marketing costs were $0.69 per watt, reflecting an $0.08 improvement from Q1.

We're pleased to report that we are seeing strong sales efficiency improvements year-over-year.

Our total GAAP sales and marketing expenses increased 40% year-over-year, but our volumes in the Sunrun direct business grew at a faster rate.

Our sales and marketing unit costs are calculated by dividing the cost we record in the period by total megawatts deployed.

Most of these expenses relate to our direct business, and these sales activities occur somewhat earlier than the related systems are deployed.

When we're growing direct sales rapidly, this causes reported unit sales and marketing cost to increase.

A higher mix of direct business will result in higher reported sales and marketing cost per watt over time, but this also means there will be lower blended installation cost per watt over time due to lower channel business mix.

In Q2, G&A costs were $0.25 per watt, a $0.04 or 14% improvement.

In Q2, G&A cost per watt excluded a nonrecurring item of $1.9 million for settlement of the consolidated state port class action lawsuit related to the IPO.

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 third-party loan.

We achieved platform services gross margin of $0.16 per watt, in line with recent trends.

In the second quarter, we deployed 91 megawatts above our guidance of 88 megawatts, reflecting 20% year-over-year growth.

While we don't manage the business for a particular mix between channel partner and direct, our direct business is growing at a strong rate and is the platform that enables Sunrun to be the desired partner for large national strategic and retail partners.

The direct business is also the platform behind the Comcast partnership and where we focused our initial BrightBox sales and installation efforts.

Our cash and third-party loan mix was 13% in Q2, also in line with recent levels and consistent with our outlook of low to mid-teens.

Turning now to our balance sheet.

Our liquidity position remains strong.

We ended Q2 with $270 million in total cash, an 11% or $27 million increase from last quarter.

We continue to forecast our cash generation will grow 15% or more, which would be $50 million or higher for the year 2018.

Quarterly cash generation can fluctuate due to the timing of project finance activities so we provide forecasts on a multi quarter basis.

We define cash generation as the change in our total cash less the change in recourse debt.

Also, please note that our cash generation outlook excludes any strategic opportunities beyond our current plans.

Moving on to guidance on Slide 8. We remain confident in our full year guidance of 15% growth in deployments and unit economics of $1 NPV or higher.

In Q3, we expect to deploy 100 megawatts, reflecting 10% sequential growth from Q2.

Our full year guidance implies just over 13% sequential growth from Q3 to Q4, or just over 20% year-over-year growth for the second half.

Now let me turn it over to Ed.

Thanks, Bob.

Today, I plan to address 3 topics: the benefits in the next decade of June's IRS guidance to margins especially to providers of residential solar-as-a-service; changes during the quarter to gross and net earning assets; and finally, our near-term capital strategy and pipeline.

First, on Slide 9. I want to illustrate how the recent guidance issued by the IRS regarding the investment tax credit will make managing the step-downs of the investment tax credit especially comfortable, and we believe will cause increased market share for solar-as-a-service.

This June, the IRS clarified that by incurring at least 5% of project cost in advance, for instance through advanced purchase of inventory, a company can delay the step-downs in the investment tax credit.

In the most extreme example, by making a large advance purchase in December 2019, we could continue to claim a 30% investment tax credit through December 2023, rather than have it phased down to 26% in 2020; 22% in 2021; and 10% in 2022.

While we have not finalized our strategy regarding this opportunity, the rule is clearly a favorable development for the company, and it presents more options to extend the higher tax credit levels.

Our strong balance sheet in relationship with capital providers positions us well to benefit from this guidance.

In addition, the ability to delay the step-downs of the investment tax credit through this guidance exists only for solar systems owned by businesses such as Sunrun.

It does not exist for homeowners buying and owning systems themselves.

Although businesses and homeowners both enjoy a 30% tax credit today, the business and individual tax credits exist in different sections of the code and are subject to different phase-out schedules and rules.

As such we would expect to see an industry-wide mix shift of volumes from customer-owned toward lease begin in 2020, when individuals buying directly would face a 26% tax credit and solar service providers like Sunrun could benefit from a 30% tax credit.

This advantage would peak in 2022, when individuals would receive no tax credit and solar service providers like Sunrun would benefit from a 22% to 30% tax credit.

Thereafter, this advantage would settle at 10% as solar service providers like Sunrun enjoy a 10% permanent tax credit, but the individual tax credit expires in December 2021.

GTM estimates that approximately half of the market today is customer-purchased systems.

Importantly, this guidance makes managing the step down of the investment tax credit even easier.

Assuming we raised consumer prices by approximately 2% per year, in the face of expected retail rate escalation of about 3.6% in our main markets, we only need to achieve just under 4% annual cost reductions to maintain 2018 margins in 2024, under a 10% tax credit.

To be clear, we think we can do significantly better.

Historically, we have achieved 9% annual cost reductions for the last 3 years, and since inception, we have managed through federal and state subsidy reductions 3x the size of a full step-down between today and the 10% ITC.

Turning now to Slide 12.

In Q3, net earning assets grew slightly, while cash increased $27 million to $270 million.

Net earning assets is our way to describe the value of the cash flows to Sunrun's shareholders after payments to tax equity and debt counterparties.

Because there is different accounting treatment for different tax equity structures, I want to point out where you can find the components on the financial statements to calculate these figures.

This quarter we used a structure called a pass-through, which we haven't used in several years, so I want to explain how to unpack it.

Tax reform has made pass-throughs more competitive with partnership flips so we may use more of them in the future.

The pass-through financing obligation used to calculate net earning assets is reduced by $36 million, which is the portion of that liability we expect will be eliminated when the pass-through financing provider receives investment tax credits on assets it has funded.

At that time, the $36 million would be recognized as revenue.

Due to its short-term nature, this amount is reflected in the current portion of the pass-through financing obligation.

In a pass-through financing, we book the value of tax benefits on the revenue line.

For partnership flip structures, because GAAP requires it, we book the value of tax benefits at the bottom of the P&L as a loss allocated to noncontrolling interests.

For pass-throughs, we book the value of tax benefits upon receipt of interconnection permission from the local utility.

For partnership flip structures, we book this value earlier, beginning at deployment.

As such, in a period such as this one, where we begin to use a pass-through, income moves above the operating line, but lags.

This effect resulted in the depressed EPS in the quarter.

Each method generates net income to Sunrun common shareholders, although under GAAP, the timing and geography is different.

Turning to our upcoming capital strategy and pipeline.

As we shared on the prior call, we expect the remaining annual cash build will occur in Q4 due to project finance timing, but also increased operating leverage.

As such, we expect principally to increase net earning assets rather than cash during Q3.

We believe we will achieve the best possible execution by sequencing our transactions, first, in the public senior debt markets; next, if applicable, in the subordinated debt market; and finally, to the extent desired in the project equity market.

We're still on track to generate at least $50 million of cash this year.

Our 2018 outlook does not require refinancing of post-flip assets, which opportunity is still on the come for 2019.

Between operational growth and refinancing opportunities, cash generation could double to $100 million next year.

Our debt and tax equity capital commitments already provide runway into next year.

And with that, I'll turn the call back over to Lynn.

Thanks, Ed.

And just wanted to correct one thing, quickly.

At about 18 minutes in, Ed said, "In Q3, net earning assets grew slightly, while cash increased." In that, he meant Q2.

So we are through.

Let's open the line for questions, please.

Operator, can you queue up the questions?

(Operator Instructions) And our first question comes from the line of Michael Weinstein with Credit Suisse.

So Ed, thank you very much for that explanation of pass-through financing, and how that's going to be changing things going forward, and also, in this quarter.

I guess, if things are lagging, and as this is the first quarter we're really seeing an increase and there's a -- it has a lag effect, so we should expect, if we look at Slide 13, we expect net earning assets to increase in future quarters to catch up, basically, with the lag that's happening there?

Sure.

Good question.

So there are 2 components to the lag.

The first one is on the income statement, which depressed net income in the quarter.

That should normalize beginning approximately next quarter and in a period where you might discontinue using a pass-through, you would actually see excess income.

In terms of how we are describing net earning assets on the slide, we are making a pro forma adjustment for that $36 million, which we describe a little bit more details in the footnote, and at the time that, that fund completes deployment, and the assets are placed in service, that pro forma adjustment will go away.

Okay.

So basically, it's already factored in there.

And that's -- so we're seeing -- at least on Slide 13, it's factored in?

Correct.

Okay.

And one other question I had was the -- your guidance for the third quarter for megawatts deployed would imply a pretty steep number for Q4.

Is there any reason why Q4 would be higher than past Q4s?

Yes.

Absolutely.

So Q4 -- so a couple of things.

The growth, particularly in the direct business, is really strong and is supporting strong growth.

So as we talked about, that's 40% year-over-year.

And if you look sequentially, the growth rate from Q3 from Q2 was 10%, and then, that would imply the 13% again, into Q4, which we feel very confident in hitting.

I think what you're seeing with the Q3 year-over-year comp is that on the channel side, it's a little bit of a tough comp because last year we had a lot of installations in Arizona due to the pull-forward of the change in the rate structure that was happening.

So the channel comp is tough for Q3, but this year we're seeing such strong order flow that the long-term trajectory is overcoming the normal seasonality you would see in the business.

And our next question comes from the line of Brian Lee with Goldman Sachs.

It's Rebecca Yuan on for Brian.

So tariffs have impacted the cost structure negatively to some degree, but the supply chain is also now seeing a lot of oversupply.

So I was just wondering, with the interplay of these 2 forces, where you stand on inventory and what magnitude of pricing decline you'd be expecting from what's embedded in current 2Q results for the next several quarters?

And if that extends into 2019, what consequence do you expect to see in panels, and maybe, inverters as well, if you see pressure there?

Great questions.

So I think, in terms of equipment cost, we definitely are seeing spot prices sort of across the board declining.

Panel prices on a spot basis are probably approximately back where they were a year ago prior to the run up in price ahead of the Section 201 tariff.

We likely, due to inventory, wouldn't see that rolling through the P&L until the fourth quarter this year.

We also are seeing, generally speaking, declines in inverter prices.

Those could fluctuate a few pennies one way or the other, depending on how the tariff situation plays out.

But generally speaking, I think any price increase arising from tariffs ought to be temporary because our -- the suppliers in the industry are just playing a little bit of musical chairs on what factories and what markets supply what markets, and we also -- just we're in such a global world these days that supply chains can adapt.

That said, the increased attachment rate of batteries will drive costs higher.

Although we do believe that over the next year, battery costs, power electronics related to batteries and labor costs related to the installation of batteries will all be declining.

So those factors are all at play.

Can you let me know if there are other components to your question that I didn't answer.

I tried to reach all of them, but I might not have been writing fast enough.

Yes.

And I think, this is from like a headline number, that you're going to see slight declines in the overall installation costs through the rest of the year, but there's going to be these competing factors.

So it's like we're going to see the operating leverage from the strong growth, offset by the tick-up in the battery cost adding to the stack.

I think you got it all.

And I just, as a follow-up.

You have a number of growth avenues kicking here -- in here, in 3Q, with Florida leasing, the Comcast partnership, and the [battery] entry in a new state like Illinois.

Can you just rank order those?

And how they're going to contribute to volume growth in the near term?

And any comments?

Sure.

Sure.

No, we -- again, we're really thrilled with the demand environment and our position here on the direct.

So you hit the big ones.

So retail, we're really bullish on retail.

That's an area that -- it's a channel we like.

We know how to operate it.

We've been in Costco and Home Depot for a while now, and we're -- given that retailers are also recognizing that this is a really profitable category for them, we're in discussion with 4 national chains that we're talking to today.

So I mean you won't see that stuff short term, you're not going to see that in Q3, but it sets us up for a really nice position for next year.

Similarly, with Comcast, the Comcast partnership is also progressing very well.

The thesis we entered into is really holding, meaning the acquisition cost is attractive for us, for Comcast it's delivering the funnel expectations that they were expecting, and so as we've said in the past, it's something that is a multiyear partnership.

They're a large company, and we're learning into it together, but we're also encouraged by the potential for that partnership.

Again, not a Q3 big contributor, but something that sets up for longer-term growth rates.

And then, the new markets as well.

I think all the new markets we entered into over the last couple of quarters are strong and are proving to be good, long-term markets.

So they're meeting our -- they're meeting our expectations.

We think they're durable and they also help -- will certainly help contribute.

So, that's part of getting back to Michael's question, why we're so confident that the back half, in aggregate, will grow above 20% year-over-year, and why we're confident that this growth acceleration is happening, and should happen into 2019.

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

The first one is a follow-up on the Q4 outlook.

You talked about the strength coming from your direct business.

To what degree does that give you confidence that you can see that strength go into 2019?

And if you can quantify it in any way, I know you're not providing official guidance, but insofar as you can kind of give us your view of how 2019 might be shaping up, that would be great.

Yes.

Absolutely.

So I think we've -- the question I just answered previously kind of hits on a lot of the drivers that are going to help support that strong growth.

But if you just look at, again, with the Q3 guide, what that implies for Q4, it's, I believe, that would be north of kind of 30% year-over-year growth rate.

If you look at Q1 from last year versus what we expect to do this year, certainly, we expect very, very strong year-over-year growth.

And so we're -- it's too early for us to make a comment on, officially, the guidance for '19, but it's certainly accelerating, the growth rate.

Great.

Let's shift to storage.

You talked about, I think, 20% of tax rates in California and some regions within California being 60%.

There is tightness of battery availability and we're hearing of lead times of 6 months to 7 months.

So my sense is that the release there might be in the first half of the next year in terms of supply, meaning more batteries come online.

But assuming supply was not a constraint today, how much latent demand would you be -- would there be?

For example, what I mean by that is, how much are you not able to serve because of battery supply constraints?

We are in a position where we are comfortable with battery supply through the end of the year and already have procurement in place for that.

So as we stated in the prepared comments, we will expect to install more than double the amount of BrightBoxes back half of the year versus first half of the year, so very strong growth with supply.

And so I do -- we do agree with you that given how big this market is, there's -- we're seeing a lot of people come into the market and that should bode well for next year, both on the cost side and on the supply side.

But we're well positioned through the end of the year, which, again, give us an advantage when other people are feeling the tightness.

Right.

And particularly, as more battery manufacturers come online, costs will decline, making the value proposition more attractive.

So those are all positive features.

But to Lynn's point, our supply situation for the year is secure.

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

So thinking about this advantage on the tax equity structure and rising rates, can you talk a little bit about the pricing strategy over the next 3 years or 4 years?

It seems like you might be in a position to accelerate some growth by not raising prices quite so much, especially if you're able to manage cost.

So just want to think about the puts and takes that you guys are considering and how you might go through that decision-making process?

Yes.

Great question.

I think, if you're referring to my discussion around the investment tax credits, I think what we are just trying to illustrate is the many degrees of freedoms and ways one can end up with a higher margin business in 2024 than today.

And so what we tried to chart here was just what do you have to believe for neutral.

And there -- we said, look, let's conservatively assume 2% -- that we'll charge 2% more per year to customers.

PA Consulting performed a study, looking at our top markets and concluded a 10-year CAGR of approximately 3.6% in those markets.

So we felt like the 2% was conservative.

We have a history of taking out about 9% from our cost structure every year, so the 4% number here is conservative.

So we feel like we have a lot of degrees of freedom in that department.

In terms of interest rates, obviously we are continuing to see spreads decline.

So far, spreads have been declining faster than base rate has been increasing.

If that trend were to cease, we still have a nice tailwind, which is that we're not the only energy company that cares about interest rates.

So our major competitor is the electric utility.

About 2/3 of the cost of a residential utility bill in the markets that we operate in is the amortizing capital cost of the utility.

And as the utility's cost of debt and equity increases regulators pass those costs through to customers and utility rates escalate.

And if you looked at a 50-year history of retail electric rates, you'll see a very strong correlation between rate escalation and interest rates.

So if we do end up in a higher interest rate environment than the market expects, which the future interest rate market does show it's approximately flat around 3 or the low 3s for 10% -- sorry, for a 10-year treasury, you would expect to see escalating retail rates.

Finally, as it relates to our existing book of business, we are approximately 90% hedged on our existing fleet.

So those rates are locked in and most of those are swapped, which are even independent of the specific loans that we have on the balance sheet.

And then I would just also -- I think, Colin, you had also just asked about -- there's implicit in that question, I think, price elasticity.

And what we have found, historically, is that there isn't a huge difference in adoption when you -- once you kind of hit a 20-percent-ish savings threshold.

If you go further, there isn't a real increase in adoption necessarily.

People are choosing for other reasons.

And particularly, over the long run, our vision for this in -- over time, probably 100% of systems are going to have batteries attached to them, which changes the value proposition, again, away from a savings type of message to more of a control, reliability type of value prop to the consumer.

So we will always look at that price elasticity trade-off.

But we do believe that with the expected rate escalation, there's room to move the price up.

Great.

And then, I guess, the next question is related to the attach rates on the batteries.

And the portfolio impact to actually enter into the grid services market as an incremental source of cash flow.

And there's a fair amount of speculation around how prepared the technology is to really enable that functionality.

So I guess my question is twofold.

One, can you talk about how much of your portfolio really is capable of that sort of modular control.

And then, secondarily, how should we think about that starting to enter into our future cash flows?

And from a timing perspective, just initial cash flows and how it might scale up?

So great question.

I think the short story is the capability all exists today; it's a little bit more manual than I expect it will be in a few years.

As it scales, we will be putting over top of it automation to make that simpler.

But certainly, the plumbing to provide grid services with batteries today exists.

And I would also add that consumers are willing to do it as well.

So the early indications around, are consumers willing to let the utility draw from the battery, have been positive.

So that's obviously an important factor as well.

But in terms of major contributing to cash flow, I mean, again, a lot of these projects that we're working on, these are long-term planning cycles.

So these are 2 years to 3 years out when you think about the projects in any sort of meaningful scale that we're looking at.

But we feel confident the technology will work and will be there.

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

This is actually [Eric] on for Julien.

But Just a quick question on -- you discussed the sort of lower project value in 2018, that there was some lower-value, higher cost projects in the quarter.

And you expect it to be more normalized going forward.

But what is driving that, primarily?

Is that entry into lower-value markets?

Just wanted to clarify.

Yes.

We said, to be clear, we said lower value, also lower cost.

And remember, in our channel business, especially, we price to NPV, so the mix, there's a bunch of mix effects.

And when we look at those projects, it's NPV-driven.

So the NPVs on those were fine, but they were lower in this quarter than in some previous quarters.

Got you.

And so what was primarily driving that?

Just shooting to go for maintaining the NPV and the unit economics presumably?

Yes.

It really -- it can fluctuate quarter-to-quarter.

It's sensitive and it fluctuates depending on just various mix effects that we have.

Geo -- geo mix, the pricing that the channel has on their contracts...

I mean, just very simplicity, if someone presents you a contract that you think is worth $4, you might pay $3 for it.

And if someone presents you one that's worth $3, you might pay $2 for it.

Yes.

Got you.

And just going on, touching upon the ITC safe harbor, what's your strategy with that, in terms of expanding -- are you planning to expand more aggressively into new markets as well with the ITC safe harbor in hand?

And does that change, like long-term deployment guidance expectations?

So the ITC safe harbor obviously provides us fantastic optionality.

And we have a good deal of time to decide exactly how we want to execute it as we watch our own costs and political forces and other things unfold.

It also certainly will drive, we think, a mix shift towards pillars of service or leased products and away from homeowner-owned or loan products.

The exact size and execution strategy, we won't be determining until we get closer to the end of next year.

But we have a lot of options in our -- starting to consider that in due course.

Our balance sheet is strong.

We have good relationships with capital providers as well, so we have a lot of flexibility on how we might execute against that strategy.

Got you.

So we should just expect further commentary on the strategy in later calls.

Correct.

Correct.

Is that everybody?

That's everything.

All right.

Well, thanks, everybody, and we'll speak with you again soon.

Take care.

Thank you.

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

This does conclude today's program, and you may all disconnect.

Everyone, have a wonderful day.