Sunrun Inc (RUN) 2018 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Q4 Sunrun Inc.

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, Mr. Patrick Jobin, Vice President of Investor Relations.

Sir, you may begin.

Thank you, operator.

And thank you for 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 Cofounder and CEO; Bob Komin, Sunrun's CFO; and Ed Fenster, Sunrun's Cofounder 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 and full year financial and operating results, along with progress against our strategic priorities.

In the fourth quarter, we added more than 14,700 customers, representing 115 megawatts of deployments, again breaking the record for the highest quarterly volume in the company's history.

We generated $116 million of net present value and created NPV per watt of $1.21 or over $9,600 per customer.

In 2018, we executed our full year volume, NPV margin and cash generation targets.

We grew deployments over 15% in the year.

We added almost 50,000 customers, growing our total customer base by 29%, and closed out the year with about 233,000 customers.

We are excited about the year ahead.

We are introducing guidance for growth to accelerate in 2019, unit margins to expand further and cash generation to grow by more than 50% to over $100 million.

These strong financial and operating results can be achieved while continuing to invest in our customer experience and product leadership.

By the end of 2018, we had installed nearly 5,000 Brightbox systems, and we expect Brightbox installations to grow in the triple digits in 2019.

We have already launched the service in 8 states, and it represents over 10% of our direct business and more than 25% in California.

Brightbox provides customers with backup power, ability to manage time-of-use pricing and offers Sunrun additional revenue streams through energy services.

It also protects us against attempts by incumbents to undermine the value of residential solar.

Today, we announced a large expansion with The Home Depot, further demonstrating the advantages of being the category leader.

We will offer our solar and Brightbox battery service at Home Depot stores in 15 states, including California.

We expect installations arising from the new stores to ramp throughout the year.

As David Wallace-Wells articulates, "The slowness of climate change is a fairytale.

Not only is it happening faster than expected, its extreme weather events are destroying the very electric grid rely on.

We need to take action quickly."

Sunrun is helping our country decarbonize through our rapidly growing customer base and pioneering work building the grid architecture of the future.

Consumer preferences for clean energy they can control and rapid advancements in battery technology mean that households will increasingly get a major portion of their energy on-site.

The available market size, our leadership position and declining costs support our 200,000-plus solar customers turning into millions, independent of regulatory structures.

However, there is even more opportunity for Sunrun and our country's ability to decarbonize if we advance grid architectures that incorporate the full value these assets can provide.

Therefore, we're designing our footprint of energy assets to provide ongoing value to utilities and grid operators as well as our individual customers.

Most importantly, this will help us create a 100% clean energy future for Americans, a model for the rest of the world, whether or not you have solar panels on your roof.

Demonstrating our success with these initial efforts, Sunrun won its bid to provide 20 megawatts of energy capacity from Sunrun's Brightbox home solar and battery service to ISO New England, beginning in 2022.

We expect to deliver this capacity from approximately 5,000 New England customers.

Our participation in this capacity market is the first time in The United States that a home solar and battery storage has directly participated alongside centralized power plants in a wholesale market.

This signals a transformational shift away from the traditional, more polluting centralized electricity model towards a system powered by local clean energy, like home solar and batteries.

While the size of the award is small compared to our large and growing customer base, it is meaningful, because it suggests the future as utilities and regulators recognize the values our assets can provide to the grid.

This also represents an incremental source of revenue for Sunrun, which would be upside to our current customer value.

We conservatively estimate grid services, such as the capacity market in New England, could represent over $2,000 in customer NPV.

Our market share and density advantages will be an ongoing competitive advantage in accessing these opportunities.

Today, we also published our second annual impact report.

Sunrun is a company that is committed to leading in ESG and sustainability.

Our approach is to benefit everyone, our customers, our employees and the communities in which we operate as well as our business and financial partners.

I'm proud that Sunrun has prevented 3.7 million metric tons of CO2.

We've also saved households over $300 million in electricity costs.

A few other key highlights to point out for 2018.

We committed to and achieved 100% gender pay parity, we implemented a robust supplier code of conduct and we committed to developing 100 megawatts of solar for affordable multifamily housing over the next decade.

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

Thanks, Lynn.

Customer NPV in the fourth quarter was approximately $9,600 or $1.21 per watt.

For the full year 2018, NPV per watt was $1.08, in line with our target level despite the headwinds from tax reform and tariffs, with continuing investments in growth and product leadership.

Project value per customer was approximately $34,900 or $4.38 per watt in Q4.

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

Turning now to creation costs on Slide 9. In Q4, total creation costs were approximately $25,300 per customer or $3.17 per watt.

Similar to project value, creation costs can fluctuate quarter-to-quarter.

Creation costs per watt were down 4% year-over-year.

We expect creation costs to show modest declines for the full year 2019, even as we deploy more Brightbox battery systems.

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

Blended installations and 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, improved by $0.13 year-over-year to $2.48 per watt.

Install costs for systems built by Sunrun were $1.96 per watt.

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

In Q4, our sales and marketing costs were $0.65 per watt.

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

A higher mix of direct business results in higher reported sales and marketing costs per watt, and it also means that there will be lower blended installation costs per watt over time due to the higher mix of direct business installations at a lower cost per watt.

For the full year 2018 compared to 2017, sales and marketing costs were higher and blended installed costs were lower by approximately $0.18 per watt.

In Q4, G&A costs were $0.22 per watt, an $0.08 or 28% improvement year-over-year, demonstrating the benefits of operating leverage as the market leader.

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 $0.17 per watt, in line with recent trends.

In the fourth quarter, we deployed 115 megawatts.

Our cash and third-party loan mix was 16% in Q4, also in line with recent levels.

We expect this mix to be in the mid- to high teens in 2019.

Turning now to our balance sheet.

We ended the year with $304 million in total cash, a $29 million increase from last quarter.

For the full year 2018, we increased our total cash balance by $63 million without increasing our parent level debt, by monetizing the tax attributes of systems we deployed and raising project-level nonrecourse debt, which is solely secured by cash flows from underlying systems.

We expect cash generation to increase to over $100 million in 2019.

Quarterly cash generation can fluctuate due to the timing of project finance activities, but this represents our best view based on our plans for the year.

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, along with IPC safe harboring activities, which we may undertake.

You'll note that net income to Sunrun was slightly negative in the quarter but positive for the year.

We expect next income will also be positive for the full year 2019.

Moving on to guidance on Slide 10.

We are issuing full year guidance of 16% to 18% growth in deployments, and increasing unit economics of $1.10 per watt or greater in NPV.

In the first quarter, we expect deployments to be in the range of 83 to 85 megawatts.

Now let me turn it over to Ed.

Thanks, Bob.

Today, I plan to recap our December asset-backed security issuance and discuss our capital strategy for 2019.

I will also review net earning assets and capital runway.

Over the last decade, strong asset performance has led the cost of capital for residential solar assets to improve steadily.

That said, general market turbulence in November and December, when we priced our $322 million ABS transaction bucked the trend a little.

Despite the imperfect market conditions, we are pleased to have exceeded our cash guidance for 2018.

Although the cost of debt wasn't all that we had hoped, we achieved the lower yield and a substantially higher advance rate than the other residential solar lease securitization in market at the time.

The print suggests that our capital cost advantage versus competitors is amplified during imperfect market conditions.

A first for the industry, our transaction is also fully amortizing and, in about 5 years, callable, thereby, both reducing risk and preserving refinancing upside for the future.

The note priced at a yield of 5.55%, but by January, had already traded up in the secondary market to a yield of 5.16%, and market conditions continue to improve.

In December, we also closed a subordinated loan against the same asset pool as the ABS transaction.

This loan is similar in nature to the National Grid project equity transaction but structured as nonrecourse debt.

The loan is callable after the underlying tax equity funds slip, affording us refinancing upside at that time.

The total advance through tax equity, the ABS transaction and this subordinated loan implies an advance against 20-year project value in the 95% to 100% range are consistent with our prior comments.

Looking forward, we still see the opportunity for higher advance rates and lower capital costs when refinancing seasoned assets.

We expect to execute such a transaction by midyear.

For the full year 2019, we remain confident we can achieve more than $100 million in cash flow.

We also expect that number can grow in years to come.

I note this view of our free cash flow is presented before considering the impact of any inventory prepurchasing we may do to preserve access to the investment tax credit at a 30% rate into 2020 and beyond, given the high expected return on capital associated with such a purchase.

As the year progresses and our financing plans take firmer shape, we will update our outlook for cash generation accordingly.

Moving to Slide 11.

At quarter-end, net earning assets was $1.4 billion, an increase of $222 million or 19% year-over-year.

Cash was $304 million, an increase of $63 million or 26% year-over-year.

Net earning assets is our way to describe the value of the cash flows to Sunrun shareholders after payments to financing counterparties.

Turning finally to our pipeline.

Our debt and tax equity capital commitments already provide us runway well into Q3.

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

Thanks, Ed.

Let's please open the line for questions.

(Operator Instructions) Our first question comes from Michael Weinstein with Crédit Suisse.

One thing I want to ask you about was the Comcast deal, and maybe you can give us an update on how that's going?

I think you were expecting 6,000 to 8,000 customers this year through that.

And I'm wondering if you can compare the cost per customer at Comcast to whatever the mechanics of the deal is -- are with Home Depot?

Sure.

One of the things we're excited about in terms of the guidance and what we think underscores that, our acquisition mix is getting evermore attractive is that we're expanding the margin.

So we finished this year with $1.08 in NPV, and we're expecting north of $1.10 in '19, and that's despite a pretty heavy ramp in Home Depot.

You might imagine that you spend early to get their stores up and ramp before you start to realize on some of the benefit there.

So despite that headwind for the beginning part of the year, we're still going to exceed the margin.

So I think we like both channels, we like where the mix is, where the mix is coming out.

In terms of Comcast in particular, not a ton of update from the last call.

We restructured the deal in order to make it just be more specific and work better for parties in 2019.

It's progressing as expected.

If they end up hitting those numbers, then they will execute into the warrant.

And we look at the value of that and include that plus the lead fee and still think it's a competitive acquisition channel for us, and Home Depot as well, just given the comments that I issued earlier around despite the early ramp, we're still going to hit expanding margins for the year.

Got it.

And when I look at those customer acquisition cost, is that showing up in the sales and marketing line on Slide 14?

Is that where I should see that, just curious?

Let me just make sure that the slide is -- I'm not looking at the slide.

Slide 14, yes, correct.

If you're looking at the acquisition costs on the key operating metrics, correct.

So at some point, we'll see the lower customer acquisition costs from these 2 channels start to reduce those sales and marketing costs?

And I think you said also during the call that there was a interplay between that and the installation costs?

Correct.

Yes, let me explain that a bit.

Not -- what will happen is that the retail channels and the Comcast channels are to sell-through our direct business.

When we shift more to the direct business, you see the sales and marketing costs increase but you see a similar decrease in the installation costs.

The reason is, because through the channel business, we capitalize everything.

The channel spends money to acquire the customer.

And so we're buying the project, it's capitalized and that go -- would go into the installation line.

And so what you'll actually see in that sales and marketing line is a slight increase in the year because of that mix shift to direct, and -- but the overall -- to Bob's point, the overall creation cost set should see a slight decline.

So there's a little bit of -- versus our peers, there's a little bit of noise in that, just given the -- our multichannel model.

Thanks for asking that question.

Our next question comes from Colin Rusch with Oppenheimer.

Obviously, you've demonstrated some of the value of being able to increase services from existing footprints, but can you talk a little bit about the growth opportunity and the cadence of opening new markets as you go through the balance of 2019?

Yes, new markets in terms of geographies, is that what you mean?

We -- our current plan in hitting those growth targets does not anticipate entering any new markets.

It's just growth in our existing markets.

The incremental revenue opportunities we're really excited about for the long term are the ability to both sell in the energy service to our customers but then also sell energy services to the utility, and that was the announcement we made with the ISO New England capacity award just this quarter.

Yes, okay.

So you're not expecting to enter into any new markets in 2019?

Or you're just not guiding to any growth from those markets?

I just want to clarify that.

Yes, precisely.

We -- our guidance does not contemplate any new geographic market expansion.

Okay.

And the just in terms of cost reduction on the nonmodule and nonequipment costs with installations, can you talk a little bit about where you're seeing opportunities to start trimming and optimizing some of those costs as you go through the balance of this year?

Absolutely.

So first, there's puts and takes in that number.

One that you'll see, we're -- as we discussed in Bob's section, we're going to see a slight decline overall in that number, and that is despite the fact that we're increasing the attachment rate of the Brightbox.

So the cost of that battery is going into that line.

So where we expect to see the positives are really around operating efficiencies.

We still -- so the battery prices have really not come down much.

They will, but right now, it's still a pretty immature supply chain.

And so where we're going to see the benefits is really around operating leverage and installation efficiencies.

Our next question comes from Brian Lee with Goldman Sachs.

Maybe first one just on the quarter.

The operating lease revenue was up a healthy mid-teens percentage sequentially.

It's a bit better than we've seen seasonally over the past couple of years.

Just wondering, can you help us figure it out, how much of that's driven by volume growth versus mix?

I'm wondering, I guess, how much of the (technical difficulty) volumes are helping that revenue line item here?

So if you're including incentives in the lease revenue number, Brian, that number is higher.

The ITC revenues recognized in Q4 and Q3 have been higher than they've been in the past.

So that's a big part of the reason that the lease revenue line has been increasing, and that's just due to the type of fund structure that we have in place.

So with the financing obligation funds, we get to recognize the ITC revenues and it comes through with lease and incentive revenue.

So I want to make sure that I know whether you're looking at it including incentives or whether you're looking at the revenue number excluding the incentive component.

Yes, just looking at the GAAP reported number, so all-in.

So yes, that ITC color is helpful.

Should we be thinking about that as being highly variable into 2019?

You don't know what you'll actually monetize out of what fund in Q3 and Q4 of next year, so it could be a different dynamic?

Or is this something that is a multiyear dynamic that we'll see extend out for the next couple of years?

This is Ed.

I think the -- obviously, as the year progresses, we can add or change our financing strategy.

So it's difficult to predict fund mix that far in advance.

That said, the transaction that was driving the higher ITC revenue in Q3 and Q4 of this year is materially complete, and I would expect the revenue to be between $15 million and $25 million over Q1 and Q2 of next year as that transaction comes to completion.

At which point, I would expect it is most likely that we would return to the more traditional partnership flip structures, which result in increased income at the bottom of the P&L and the net loss attributable to the noncontrolling interest line.

Okay, that's helpful.

Yes, that'll help us fine-tune the revenue model for next year.

Maybe just a second question on the battery side of the business, and then I'll pass it on.

Can you talk a little bit about the supply availability and sort of where your position, supply chain wise?

I know some of your peers have talked about component shortages and battery supply availability issues.

It doesn't sound like you're necessarily too worried about that based on the triple-digit expectation or target you have for '19.

But maybe if you could just level set us there in terms of how you're positioned from a supply availability perspective?

And then related to that, just the strategy around Brightbox, is this all a new build strategy at the moment?

Or are you embracing a retrofit strategy as well against the installed base, just given how many -- the 200,000 homes you now installed that?

Just trying to get a sense for what the kind of mix is on the battery side of the business.

Thank you.

Great questions.

The -- there are -- we do not anticipate any supply constraint.

So we believe we're well positioned.

A lot of that, again, is another advantage to being the market leader.

We can have good leverage with suppliers.

So that's not something we're currently experiencing, and we're also very encouraged by all the innovation.

You might expect we're in conversations with a number of different manufacturers, and we're optimistic that those innovations and that costs will come through.

But again, this plan is anticipating supply that we're confident we have and no real cost improvement in the battery.

So that's all upside for the future.

In terms of the retrofit versus the new build, it is exclusively new build in that number.

We will offer retrofit.

We have not announced that or launched it yet, and the reason is that it's just much more cost-effective and we've been on a new build, and so that's where we've been focusing.

But going back for the retrofit opportunity is a real opportunity for us in the future, certainly.

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

This is actually Eric on for Julien.

First question, would you be able to talk about the year-on-year direct business growth both for fourth quarter '18 and full year '18, and how you see that going forward?

We have not typically broken that out, and the reason that we don't is because it's just not how we manage the business.

We manage the business regionally to what is the most cost effective and strategic value chain.

So what we're -- what we can say is that the direct business did grow quickly last year.

We do expect that it will grow quicker -- more quickly than the guidance -- than the baseline guidance.

But beyond that, we're not going to break it out anymore because it's just not how we manage the business.

Understood.

And in terms of The Home Depot partnership ramping over 2019, presumably that should have more of a growth contribution into 2020.

Is that the right way to think about this?

The partnership, I think, certainly, we would expect 2020 would be -- have certainly more volume than 2019.

However, we are in the stores.

It will take some time to ramp, but we should see a nice contribution from it in the year as well.

That'll just be more weighted towards the back half.

Got you.

So we should still be expecting a portion of the guidance -- growth guidance to come from Home Depot in 2019, just more -- okay.

And then last question.

In terms of the ITC safe harbor, would you view that as upside to the 16% to 18% growth range?

So the -- so this is Ed, hoping to answer the question.

So if we -- safe harbor equipment, that will be to extend the margin into our growth rate in 2020 or 2021.

It wouldn't have an effect on the 2019 megawatt growth rate.

The comment, yes, I think I was trying to make in the prepared remarks was just that if we do execute a very large prepurchase of equipment, it could consume some equity capital.

And in the cash guidance, we're not contemplating that at the moment.

Right.

So I'm just thinking more so 2020 and beyond.

If you expect growth in the direct business to sustain from '19 into 2020, still with 16% to 18%, would you see an ITC safe harbor supporting beyond that range of growth in 2020 through 2023 potentially, from a broad perspective?

I know you guys, obviously, have not provided guidance for those years.

Yes.

Certainly, we have strong belief that the long-term growth rate in this market can be 15% to 20% for a decade, and we support that in our investor materials looking bottoms up.

And so we definitely, certainly stand by that.

Maybe one thing worth pointing out on that for -- is that the safe harbor is a distinct advantage for the solar-as-a-service model as compared to the homeowner model, because only commercial entities are able to take advantage of that safe harbor program.

So we would expect that our competitive position would increase in subsequent years vis-à-vis the long tail of solar providers that are unable to offer that service as well as our -- the size of our balance sheet, which enables us to safe harbor potentially a larger amount than our peers.

Got it.

If I could get one last question, sorry for this.

In terms of the battery retrofit opportunity, have you -- do you have any view on potential pricing of that thus far?

I know you've discussed upfront payments in Florida, but could we potentially see early -- effectively early renewals of contracts?

So your question was battery retrofit market size and contract renewals, did I get that correctly?

Can you repeat it?

Right.

So with battery retrofit in terms of how you would price the battery retrofit.

I know in Florida, you guys charge a portion of it upfront for the new installations.

I was just wondering if there's any potential opportunity for an effective early renewal of the contract when including the battery, like a 20-year contract on the date you retrofit.

We should get you on our product team.

No, I think that's certainly a great idea.

And one comment I wanted to make that I had neglected to make earlier is on Brian Lee's question on the retrofit.

We do believe -- because we're in conversations with suppliers, we do believe that there will be shortly, pretty -- far superior, on a cost perspective, ways to retrofit people's batteries.

So from a customer value standpoint and a customer experience standpoint, we are -- we have been eagerly tracking the technologies to come to market.

In terms of the opportunity to add a battery and extend the contract, I think absolutely.

I think that could be something we would -- that we would certainly explore.

Thank you.

And I'm showing no further questions in the queue at this time.

And I would like to turn the call back over to Lynn Jurich, CEO, for any closing remarks.

Well, thank you, everyone.

Thanks for listening, and hope you have a great evening.

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

This does conclude your program, and you may all disconnect.

Everyone, have a great day.