Sunrun Inc (RUN) 2021 Q1 法說會逐字稿

Greetings, and welcome to the Sunrun First Quarter 2021 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Patrick Jobin, Investor Relations. Please go ahead, sir.

Thank you, Hector. 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; Ed Fenster, Sunrun's Co-Founder and Executive Chairman; and Tom VonReichbauer, Sunrun's CFO.

I'll now turn the call over to Lynn.

Thanks, Patrick. We are pleased to share Sunrun's first quarter results, our improving outlook for 2021 and our progress transitioning the country to a clean, affordable and resilient grid.

The year is on track to be the best in the company's history. With an accelerating growth rate operating scale and expanding market reach, we are leading the country to a clean energy future. We ended Q1 with more than 573,000 customers, reflecting 18% year-over-year growth. We are increasing our new solar capacity installation guidance from 20% to 25% to 25% to 30% for the full year. We are innovating, accelerating growth, and integrating Vivint Solar while maintaining strong unit margins and performing at a scale that is 2x greater than our nearest competitor.

Sunrun's expanding customer value proposition and competitive advantages are delivering market share gains. We delivered all-time record Q1 volumes through our direct-to-home sales channel. And our homebuilder and our channel partner businesses delivered all-time record volumes.

We have an unmatched consumer reach through our multichannel strategy. We focused on working with a selective group of channel partners and grew the number of partners we work with by over 20% in Q1. Given the value of our brand strength, technology platform and financing advantages, nearly all of our new channel partners have agreed to exclusive agreements.

Our new home business is starting to scale and grew by more than 50% in the first quarter compared to the prior year pro forma for Vivint Solar. We are working with 20 of the top 30 homebuilders in California. Our pipeline of new homes spans hundreds of communities across the country. We continue to advance our lead on batteries and virtual power plants.

Sunrun has installed nearly 20,000 Brightbox systems nationwide, which offer homeowners the ability to power through blackouts with clean and reliable locally produced home energy on a daily basis. These batteries optimize when power is purchased or supplied to the grid, helping manage energy constraints during peak times. Battery attachment rates increased again from last quarter and are at record levels across the business.

Sunrun has already forged 12 virtual power plant opportunities, and we continue to grow the pipeline. We now have over $75 million in expected revenue from grid services opportunities that have been awarded or are in late-stage discussions. These opportunities provide incremental recurring revenue and offer an enhanced customer value proposition while further differentiating Sunrun's offering from competitive that -- competitors that lack the scale, network density and the technical capabilities necessary to serve this market.

We continue to expect more than 100% growth in battery installations this year despite supply constraints. As more manufacturers expand battery offerings, we expect cost to improve further and supply constraints to ease, allowing us to meet pent-up demand and accelerate adoption even faster.

We are actively exploring ways to help consumers in the grid manage the transition to electric vehicles. We know the country must make the switch to EVs to further reduce carbon emissions, and we believe Sunrun will be a key enabler of this transition.

Homes with EVs consume approximately double the amount of electricity. Home solar and batteries are needed to meet this increased strain on the electric system. And Sunrun is well positioned to be a leading provider of these services given our expertise managing and installing at-home energy infrastructure and our national footprint.

Electric vehicles create a positive flywheel of effects. Homes need larger solar systems to support the increased electricity consumption. These larger systems come at a high incremental margin since the cost to increase the size is relatively low. And EVs can be integrated into a comprehensive home energy management system to maximize the economic benefits and resiliency for families. These compounding benefits will accelerate the transition to a distributed grid with home solar, batteries and EVs even faster than most realized.

Turning now to our ESG and sustainability efforts. We are proud to lead one of the fastest-growing sectors in the American economy.

In Q1, we launched the Sunrun Academy, a set of initiatives and programs that expands job opportunities and enhances career advancement. By investing in our people, we can attract and retrain -- retain the best workforce with the skills needed to electrify homes across the country. As part of this initiative, all Sunrun employees have access to an expanded tuition reimbursement program to develop career-building skills. The Sunrun Academy will help us develop and train our emerging leaders with a focus on critical in-demand skills like electrical work.

In April, we unveiled sustainability goals in our annual impact report. These goals include offsetting more than 600 million metric tons of carbon emissions from the systems we will deploy over the next decade, achieving net zero carbon emissions from our operations by 2040, transitioning our vehicle fleet to 1/3 electric or hybrid within 5 years and deploying at least 500 megawatts of solar to lower-income households by 2030.

Finally, we aim to create a healthier environment for future generations by aggressively retiring fossil fuel plants with the virtual power plants powered by local solar energy. The solar systems we deployed in just Q1 are expected to prevent the emission of over 3.9 million metric tons of CO2 over the next 30 years.

Before I turn it over to Ed, I'd like to thank our fantastic team for another great quarter. Over to you, Ed.

Thanks, Lynn. Today, I'll touch on some recent political developments, our evolving capital structure strategy and recap our robust capital runway.

Washington is taking note that distributed solar represents about 7 in 10 of all jobs in wind and solar development. The labor department predicts that job growth for solar installers will exceed any other category of employment through 2026. Even better, our jobs are desirable. We employ people nationwide throughout local communities rather than in desolate locations. Our jobs remain consistent year in and year out rather than the feast-or-famine reality of project-driven jobs. And the need to automate, scale and organize our industry's growth creates a wide range of career advancement opportunities.

Over the coming years, distributed energy is uniquely positioned to add hundreds of thousands of jobs that are secure, well paid, close to home and don't require a college degree, exactly the sort that are the focus of our leaders today. We're at a crossroads and believe our vision of an intelligent grid where power is reliably produced and locally consumed is the obvious future.

Support for our vision within the media and at the state level is strong. Key editorial boards continue to see the intuitive elegance of distributed solar and storage. And to that end, we've seen recent compelling editorials in the most influential publications such as The New York Times, The Los Angeles Times and The Sacramento Bee. These papers recognize that electrifying our vehicles and our heating will require doubling the electricity needs of our communities and that the major utilities, particularly in California, have fallen decades behind maintaining the grid and are unable alone to deliver against the urgent needs of today, let alone tomorrow.

State regulators, by and large, appreciate this as well. For instance, in South Carolina, we reached a win-win settlement with Duke Energy. When Dominion was unwilling to negotiate in good faith, the public utilities commission that regulates them entirely rejected their request.

Our all-in capital costs are at or near all-time lows despite the increase in treasuries earlier this year. For now, treasuries have stabilized at very attractive levels, while the spreads to treasuries we pay continue to fall. While we don't expect materially higher interest rates in the near term, I note that Sunrun delivered excellent customer values and cash flow results in recent periods when base rates were at least twice what they are now. And today, we enjoy lower costs and more revenue sources, like batteries and virtual power plants; a modest inflationary environment, which would further drive up retail electric rates would frankly be good for us.

Meanwhile, our increased scale continues to open new financing opportunities. We expect to leverage that scale into an overall lower-cost capital strategy that will increase long-term cash flows available to our common shareholders. We're evaluating a number of possibilities to achieve this vision, and we'll share updates over the next quarter or so as we finalize a course of action.

We continue to maintain a robust project finance runway. As of May 5, closed transactions and executed term sheets provide us expected tax equity and project debt capacity to fund over 540 megawatts for subscribers, beyond what was deployed through the first quarter.

I'll now turn the call over to Tom.

Thanks, Ed. The strong momentum we saw in the fourth quarter has continued into 2021. The Sunrun team again delivered an exceptional quarter with year-over-year volume growth at strong margins. We are proud to post a solid quarter even as we meet the significant ongoing demands of integrating Vivint Solar into our operations. We are leaning in to accelerate our growth even further while enhancing our customer offering and value we bring to our partners.

Turning first to volumes. In the first quarter, customer additions were approximately 23,500, including approximately 20,100 subscriber additions. Solar energy capacity installed was 168 megawatts in the first quarter of 2021, a 9% increase from the first quarter last year, pro forma to include Vivint Solar; and down approximately 2% from Q4, a much smaller decline from Q4 into Q1 than what we have historically observed given seasonality in our business.

Our network solar energy capacity was 4.1 gigawatts at the end of Q1, an increase of 18% compared to the prior year. We ended Q1 with over 573,000 customers and nearly 499,000 subscribers. Our subscribers generate significant recurring revenue with most under 20- or 25-year contracts for the clean energy we provide. At the end of Q1, our annual recurring revenue, or ARR, stood at $683 million with an average contract life remaining of 17 years, representing over $10 billion in revenue visibility just from existing customers.

In Q1, subscriber value was approximately $35,700, and creation cost was approximately $27,500, delivering a net subscriber value of approximately $8,200. Total value generated, which is the net subscriber value multiplied by the number of subscriber additions in the period, was $165 million in the first quarter.

Turning now to gross and net earning assets on our balance sheet. Gross earning assets were $8.1 billion at the end of the first quarter. Gross earning assets is the measure of cash flows we expect to receive from customers over time, net of distributions to tax equity partners and partnership flip structures, project equity financing partners and operating and maintenance expenses discounted at a 5% unlevered WACC. Net earning assets were $4.2 billion at the end of the first quarter. Net earning assets is gross earning assets plus cash less all debt.

We ended the first quarter with $813 million in total cash. Note that, in Q1, we consumed approximately $43 million in cash related to the convert, capped call and acquisition-related costs.

Turning now to our outlook. Our team is executing exceptionally well with strong sales momentum across all of our channels, even as we focus on integrating Vivint Solar. We believe our strengthening brand, investment in customer experience and expanded sales reach have us well positioned to respond to the market opportunity in front of us.

We are increasing our growth outlook for 2021. We now forecast solar energy capacity installed growth to be in the range of 25% to 30% in 2021 for the full year, an increase from the prior guidance of 20% to 25%. Total value generated is now expected to be over $750 million for the full year, up from the prior guidance of more than $700 million. We continue to estimate cost synergies derived from the acquisition of Vivint Solar to be approximately $120 million in run rate synergies exiting this year.

While we are very focused on integration in the near term, we expect to see sequential quarterly growth in solar energy capacity installed in Q2 that is well above 10%. The combination of investments to accelerate growth and our progressive ramp in the synergy realization will result in more front-loaded costs resulting in lower net subscriber values in Q2 but with sequential increases throughout the second half of the year.

Consumer demand for alternatives to an old, expensive and dirty energy infrastructure continues to increase at a rapid pace, and we believe we have the products, business model and operational capabilities to deliver against this demand in 2021 and beyond.

With that, let's open the line for questions, please.

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

Kudos on the solid execution here and increased guidance. I guess on that topic, just wondering, understandably, comps are easy for Q2, but if we assume, let's say, a 50% growth in Q2, it still implies 30% average growth through Q3 and Q4 on a year-on-year basis to get to your range. Is that kind of the right cadence of how we should be thinking about the run rate here in the second half given the skew that we'll see in 2Q? And then I had a follow-up.

Thanks, Brian. Yes, that is the right way to think about it.

Okay. And then I guess as a follow-up, just given the better demand outlook, 2 questions here, and then I'll pass it on. One on the supply chain, just anything, whether panels, inverters, batteries that you're seeing tightness or potential price fluctuations that could impact the guidance for the year.

And then on -- the second part of the question would just be around labor. We are hearing some industries are having challenges getting workers back to work. With the increased volume growth outlook, it's a high-quality problem to have, but how are you guys thinking about it? Or what sort of visibility do you have on the labor side of things?

Sure, Brian. So this is Ed. Maybe I'll just kick it off on batteries and then hand it off to Tom to keep going. In terms of battery supply, the good news is we installed more batteries in Q1 than in Q1 -- sorry, than in Q4, which represented total install growth of more than 100% year-over-year. And we also still expect to grow battery installations over 100% during 2021.

The bad news is we could be growing that even faster if not for the tightness in the market. And one impact of the tightness is that end pricing for batteries has not fallen alongside [made-to-fit] prices for those batteries. We do forecast significant increases in both supply and demand of batteries with supply increasing a little faster than demand over the near term, which should help a little bit.

Across all manufacturers, we expect to obtain enough batteries to support the growth we've forecast if not full intrinsic end customer demand. And we are experiencing a little bit of low inventory levels, but we've been working through that and planning around that successfully so far.

Maybe I'll hand it to Tom to talk about inventory.

Brian, so across the rest of the supply chain, we feel comfortable that we're well insulated to the supply chain situation that some manufacturers are highlighting. As we said before, our position as the market leader, we sit in a pretty important customer position for these companies and believe that puts us in a strong position in their pecking order. Given our scale, we have strong supply contracts that, in many cases, have none -- have penalties for nondelivery of orders.

We've also increased our target inventory levels in response to some of the supply chain disruptions, and we already reached those new buffered levels without difficulty. Finally, the diversified supply chain that we manage using multiple suppliers for all of our components, helps further mitigate risk here. So we feel pretty good on this issue.

Maybe pass it over to Lynn for the labor issue.

Yes. Yes, sure, Brian, great question. This is something we're extremely vigilant about. As we know, electrifying all of the homes in the U.S. can add 25 million jobs. So that's why it has the bipartisan support it does. We do feel like we're in a solid position for the foreseeable future, but we're investing a lot here. We talked about some of the external partnerships we've launched, like SkillBridge in partnership with the Department of Defense, which gives us access to a talent pool of 75,000 people. We're launching our Sunrun Academy to develop internal talent and just always offering competitive wages and career pathing and really focusing on building that talent brand out. So short story, we feel solid right now, and we're continuing to invest here.

Your next question comes from the line of Julien Dumoulin-Smith with Bank of America.

Congrats again on all the updates here. So perhaps just to start with that, you talked about $750 million in value generated this year, right? And I suppose this flows naturally from the added compounding customer growth up to 25% to 30%. But how do you think about this trend through the course of the year?

It's a little bit like the last one. Given that the NEA growth for 1Q, I think, here was $59 million, how do you think about that trending through the course of the year? Really, again, I think this is the same genre of the question. How do you think about that back-end weighted, presumably?

And then in terms of the percent increase versus customers, going from 20% to 25% to 25% to 30%, I would have thought that going from $700 million as a baseline maybe might be implied a little bit more than $750 million.

So both kind of trend and cadence as well as how do you think about the customer growth relative to the value addition in terms of the uptick.

Yes. Sure thing, Julien. So on -- first, on the guidance point, we increased volume guidance at the midpoint of the range by approximately 4% but increased total value generated by approximately 7%. So you are seeing some of that incremental leverage there as we bump up volume guidance if you just kind of look at the midpoint of the range on volume.

Throughout the course of the year, we expect to continue to tighten operating costs, continued process improvements, reductions in our physical branch footprint as a result of the acquisition as well as cycle time improvements. And further, we reaffirmed the synergy delivery this year of $120 million in exit rate value. That obviously has a ramp throughout the year.

And then with the market opportunity that we're seeing in front of us right now, the accelerating growth and investment in that opportunity and the timing of some of these sales cost recognitions, recognition does create a bit more drag in Q1 and Q2, where we're seeing a higher ratio of sales to installs. But if you look at the results here in Q1, install costs are down in spite of higher battery mix, and G&A costs are coming down. So you can see a lot of this is beginning to materialize.

At the beginning of Q1, we also had a slightly higher mix of 26% ITC-eligible projects than we had in 2020. So I think you will see some of that drag here in the first half of the year, but continued ramp throughout the year as synergies are realized.

And then I think on NEA and cash, we mentioned in the commentary there that we had about $43 million of onetime cash expenses from the convert, the capped call and some integration items that created a bit of a drag on NEA under the new definition, which is now inclusive of cash.

All fair points. And then if I may, right, I want to sidestep the net energy metering conversation. But really thinking beyond the current year into '22 onwards, how do you think about the various puts and takes on value creation levers, right, whether that's, again, storage deflation returns in terms of cost, you got solar panels continue going down, perhaps other scale advantages, et cetera?

But at the end of the day, when you think about the DevCo side of the piece here, obviously, perhaps you might have a little bit of pressure from an NEM perspective. What are the offsets when you think about customer value creation sort of beyond the current year?

Thanks. Great question. We -- the outlook is extremely positive. So on the top end here, you have the grid services markets opening up. So -- and for those newer to the story, grid services are markets where we're able to actually monetize the capacity out of the battery to add another source of value. And if you look at the grid services programs we have in our pipeline right now, that represents about 10% of our -- oh, excuse me, the contracts we have represent about 10% of our geographies, but our pipeline shows about 50%. And as the country moves further to intermittent renewable resources, the demand for instantly dispatching power out of the battery will become increasingly valuable. So that's one.

You also have just the additional revenue from the battery and the battery adoption. I think we're just still on the very early innings of people feeling the resiliency pain around outages like we saw in California and Texas, which will continue to really drive the consumer interest in adding the battery.

You also have the further electrification of vehicles in the house, and this is a huge one. So if we -- just by electrifying your vehicles in your home, you need twice the amount of power to your house. And so one, that increases the potential system size, which is really the most profitable business for us because a lot of our costs are per home, not per kW. So you have that massive increase in the system.

So I think what you're really seeing for what our vision is, is to help really lead this energy transition. And we're really moving from just a solar-only company to a company that offers broader electrification both for the home but then also into the grid to help build a stable grid that can actually hit the carbon goals. So I think the unit-level economics are going to look different going forward because of that, and the overwhelming majority of the trends are tailwinds.

Your next question comes from the line of Moses Sutton with Barclays.

And congrats on sizably beating on what seems like every metric. Is California specifically helping drive the NPV strength? And simply looking at average realized utility rates in California rising about 7% year-to-date, wondering if you're capturing this in lease and PPA origination pricing.

Thanks for that question. We -- while that will be a long-term benefit, we have not changed pricing in California. So it's not coming from that.

Great. Great. And then thinking about which states and areas you're actually pushing deeper into, maybe you could provide an update on high-growth markets like Texas and Florida and really any new states you're looking at where utility rates versus the solar economics are starting to emerge that you're not at yet.

Sure. I think we are in about 23 states right now. I think some of the places we're really excited about are Texas, Florida. I think Puerto Rico is poised to deliver some growth for us as well.

But I would note that the current growth rate and the current guidance is not predicated on a lot of geographic expansion. I think you will see a return for us to have more geographic expansion this year.

And particularly, like you said, the value drivers are enabling that, whereas grid power prices are getting higher, our equipment costs are decreasing, the appeal of batteries is that much more powerful. And then again, this addition of electric vehicles and the bigger system sizes makes that even that much more economical.

So we do -- last year, we did not expand into a lot of new geographies. And this year, we will be doing that. But again, the growth expectations are not reliant on that.

That's very helpful. And maybe one last one, then I'll jump in the queue. Maybe this one is for Ed. You came to market with an ABS on legacy Vivint assets recently with great terms. It's been maybe 1.5 years now since you came to market with RUN assets. Any update on timing? Could we expect something in the next 1 to 2 quarters?

Great question. We are -- we obviously periodically access the financing markets in various different formats and during the pandemic actually raised the number of delayed-draw credit facilities that were designed to be delayed -- to draw -- to be drawn and used over time as a way to mitigate risk had things looked different than they did ultimately during that period.

So we will again continue to avail ourselves of the securitization market but haven't made any public statements at the moment as to when the next transaction will occur. But we certainly do have a number of, obviously, funds deploying and a number of refinancing opportunities that are starting to develop this year. And obviously, for assets originated recently, there is no delineation between a legacy Vivint and a legacy Sunrun asset.

Your next question comes from the line of Stephen Byrd with Morgan Stanley.

Congratulations on the great results and the excellent update on growth. I wanted to focus on the opportunity for home electrification. And Lynn, you've spoken quite a bit about this. You all have a couple of very good slides describing it. I wanted to talk about EV charging.

And just maybe talk a little bit more about sort of the capabilities you would need to be able to pursue this, the time period over which this could be very meaningful. I mean it strikes me as a very logical, pretty exciting, as you mentioned, in terms of additional value to customers as well as to shareholders. But I wonder if you could just talk a bit more about how this might unfold.

Sure. I think there's a couple of dimensions to note. The one -- just to quickly repeat that the increase in power needed in the house really can drive larger system size, which, again, I can't emphasize how those incremental kilowatt-hours are really quite valuable. So I think that's number one.

I think you also -- it also gives a moment of consideration for the homeowners. So one of the issues of our business is conversion. Most people want solar. They like it. It's very popular, but it's a why now. There's not often an urgency around that. And so what -- the purchase of the electric vehicle can create a moment where it makes sense then to make the investment into solar. Particularly, the solar company can then also take care of the car charger installation. And you know you're going to have double the electric bill and that you want them to be powered by clean energy.

So it's certainly an area that we're investing in business development efforts around. And so I do think that our success in that market should parallel the growth rate in EVs. So stay tuned on that one, that is a place we're really excited about. And again, because we have the -- because of the installation footprint, it really just makes sense for us to take care of that charging at the same time we install the solar panel.

That's great. And maybe just following up on that, Lynn. I mean the -- I very much take your point that at the point of sale when a consumer buys an EV, that's a logical point for them to consider providing their energy with renewable energy. So sort of awareness of Sunrun at that particular point strikes me as fairly important. Is that fair? Or could it just sort of be...

That's absolutely fair. And then what it also -- a follow-on effect, too, is resiliency becomes that much more important as well. And so I think this is a point that we're starting to talk about, we're starting to see in California, [what's happened] in Texas, but we will continue to see outages and multi-day outages. And so the demand for the solar plus the battery to power through that, especially if you're exposed to electric vehicles, I think that, that also is another potential reason to pique the interest of consumers and to encourage them to convert over.

Yes. And I guess it just strikes me that auto -- that there's not a -- I guess there's a positive overlap between you and auto OEMs. I mean you're not competing with them. You can offer quite a bit of value to their customers.

Exactly.

Your next question comes from the line of Kashy Harrison with Simmons Energy.

I agree with the congrats on the beat and raise.

So just looking at your cash balance, net of recourse debt, it's grown quite considerably over the past several years. Just wondering, is there a target level of net cash that you're looking for, maybe before you start exploring doing something creative with that cash? And then maybe just educate us on what you might be thinking about using any excess cash for to create value for shareholders.

Sure. This is Ed. So that's a great question. And it's one that we've been working on this year and definitely falls into the excellent problem to have category. So as I mentioned on the call, we're looking at what do we think is the right future run rate way to finance new asset growth and then also to reevaluate our existing credit arrangements to figure out which are most above market, which we should get rid of or maybe refinance or replace. And then as we finish that particular exercise and, I think, communicate the results of that, we'll then have more opportunity to talk about our general capital allocation strategy.

I think we -- I'd like to believe that we have a reputation of being good capital allocators. We have in the past had a share buyback program. We have no immediate plans at the moment to return that. But I think that the short story right now is we want to nail down the right capital structure for the business and then turn to figure out what we want to do after we achieve that goal. So stay tuned, and we'll probably be sharing more in the coming quarters.

That's great, Ed. And then my next question is -- surrounds the cost structure for resi solar. Looking at the external model that you all provide, customer acquisition costs are still pretty high. And it seems like that's the biggest opportunity for cost reduction, which feels even more crucial because net energy metering in its current form is unsustainable.

And I know you talked about some of the opportunities to increase value post NEM. But maybe if you could talk about some opportunities for rapid cost reduction that you think are possible and maybe give us a sense of a time line so that we can see how you intend to attack the cost structure of the business moving forward.

Yes. Great question. So on -- so a couple of things in there. Customer acquisition costs. One dynamic you're seeing is that the customer lifetime values support a high acquisition cost. So if we didn't spend that next incremental dollar to acquire that next customer, we'd be leaving money on the table. And that's a market force. And the reason -- a proof point to support that is if you actually look in some geographies where maybe the value proposition is a little weaker to the consumer, you can actually see pretty materially lower acquisition costs. So it's highly variable based on that. So that's one just feature, which makes it unlikely really to reduce in the near term and not something we would target because, again, we would want to -- that incremental customer is valuable to us.

Now we're still -- don't get me wrong. Like, we're still tightening our [operating] playbook and increasing -- improving our close rates and moving more to virtual selling and expanding and building out sort of online experience. So all of those initiatives are underway and will tighten it. But because of these market forces, it's unlikely to see that materially decline in the short term.

Over time, I'm confident it will come down because I think the category will be more comfortable for people. The e-comm people will get more comfortable through an e-commerce experience. There will be the [cross-selling] opportunities that I highlighted earlier with electric vehicles, the resiliency benefit of batteries is going to get more and more painful for -- more and more painful when the outages come, which will drive increased adoption. So all those are positive trends going forward.

And then the biggest opportunity here is the red tape around local construction of these assets. And we've been talking about this for a long time, about the soft costs around permit variations, code variations, delays on interconnection at about $7,000 per customer, including a lot in that CAC area because you're spending money on customers that don't end up converting because it's too cumbersome of a process.

So the biggest way to eliminate this is to streamline all the bureaucracy around going solar. And we're working on that. It's getting a ton of attention finally from the administration, the Department of Energy. And in a recent infrastructure bill, there's a proposal for $20 million every year to help fund soft cost reduction, where, as an industry, we're building a software program called the SolarAPP to have instant permitting. That's in trial right now in a number of [HJs].

And so then, again, as a proof point of how that will be meaningful, if we look at the customer acquisition cost in markets where there's instantaneous permitting and interconnection, it is dramatically lower than other markets. So that's an initiative we're really excited about.

And then if I could, I wanted to go back. One more benefit of EVs that I had left off that I think is worth discussing, which is the strain on the grid from EVs will make our batteries and solar that much more valuable. And that is -- again, I don't think people really appreciate that yet, is that our -- the amount of investment we're going to have to make in the distribution system than locally. It will be served easier and more cost effectively with using existing infrastructure of rooftops and batteries. So that will be another benefit from the electrification of vehicles.

Your next question comes from the line of James West with Evercore ISI.

Curious if there's any issues that perhaps are out of your control that have driven this recent acceleration in growth, things like housing market tightness or fear of inflation and driving up electricity costs. Is there something that's outside of just the pure brand recognition and the drive towards solar?

I don't believe that there's any short-term effect driving these sort of growth rates. I think if anything, it's just accelerating in a sustainable way.

Okay. Okay. Makes sense. And then obviously, Lynn, you've driven home how important EVs are for your -- will be for your business. How do you think about that with your go-to-market strategy and your sales force? Do you kind of link around where the EV -- where EV growth is the strongest? I mean, how are you guys thinking about that?

Great question. Again, we have a pretty broad distribution right now and are taking a ton of share in just our existing business and so, again, not counting on EVs to hit these growth targets or to even kind of sustain this accelerated growth. But what we are -- but because the cross-selling opportunity here is so -- makes so much sense, I think you will see us working to link up with [manufacturers] to offer programs that are win-wins. So again, stay tuned on that, but that will be a way to sort of cross-sell and reach customers at the moment when they are enticed to power their homes with solar to meet that additional need.

And one of the other advantages that Sunrun has is that -- with our nationwide footprint, is we're also appealing for those types of partnerships because we have such a broad geographic reach that it makes more sense for large OEMs to choose a scale player.

Your next question comes from the line of Mark Strouse with JPMorgan.

You mentioned there's kind of record volume across your channels in 1Q. When you look out to your guidance, the increase that you had, is that fairly broad-based as well? Or are you particularly seeing strength in one particular channel?

And kind of a related follow-up to that is the supply constraints that you're seeing within the industry, do you think that, that has accelerated? I mean I understand it's probably a bit early, but are you starting to see an acceleration in some of the smaller mom-and-pop installers that are looking to partner with a larger installer such as Sunrun?

Great questions, Mark. We are seeing growth across the board. So If you look at our different avenues to market around our direct-to-home business, our online business, our retail business in the Home Depots, Costco stores, our new homes business are low income and our channel partner business, all will deliver growth. So it's really across the board. And I think we're pretty excited about the sort of brands that we're creating and the consumer mindshare that we're creating around being in all those different places.

And to your point around the local installers, that has been a growth area for us. If you look at our Q1 result, which is typically -- Q1 is typically seasonally the -- a -- the lowest quarter of the year given weather and we saw a record in our partner business in that quarter, so across all quarters historically, so yes, we are seeing strong growth there. And we believe we uniquely serve that installer market with our tech, our financing advantages and the brand that we can offer them.

Your next question comes from the line of Michael Weinstein with Credit Suisse.

This is Maheep on behalf of Mike.

First one, just on the NPV per customer. I know Tom spoke about a potential decline in Q2 given the higher costs upfront. But just wanted to understand how should we think about it in the second half. Just looking at the annual guidance seems like in the $7,000 customer range, but just wanted to make sure we got the right number.

Yes. Great question. So in Q1, we were just shy of $8,200 per customer. If you take the guidance here of $750 million at midpoint of the range, you get to a full year number that's more in the $8,300 range. My suspicion is you're not adjusting for some amount of cash and loan mix in the volumes there and doing it on a -- not doing it on a leased customer basis, which is what we guide to.

Got you, yes. That would make sense. And then maybe just on the channel strategy then, could you talk about the split of the in-house and channel business? I think the press release spoke about channel business growing year-over-year. So how should we think about that mix going later this year or into next year?

Great question. We -- what we do is we really look at a geography and route our path to market in that geography with the best way to reach consumers. So we don't manage it to a mix of Sunrun sales versus channel partner sales. So we will give color on how it turned out each quarter, but we don't manage to a mix there, and so we don't We don't disclose it or guide to it.

All right. And then just the last one from me and then jump back in the queue was just on the potential impact of any higher cost in the supply chain. And so far for this year, you have said it manageable and you have enough inventory or enough contracts to manage the higher cost of modules or other components. But to the extent they increase later this year or next year, who absorbs that cost? Is it something which passes down to the end customer? Or does the acquisition cost absorb that -- any higher hardware costs?

Yes. So as we say, right, I think this year, we feel really well positioned given supply contracts, purchase orders in place, levels of inventory that we have on hand to be well buffered there. And I think longer term, actually, you get back into the general deflationary trends that we've seen on a lot of the equipment, places like batteries where you'll continue to see new manufacturers bring products to market that will increase competition there.

I think you'll see similar stories across inverters and a handful of other components, right? I think we'll continue to be in this cost decline environment, and the economic wedge between distributed residential solar and the local utility will continue to get wider over time.

So nothing significant of note there that we're particularly concerned about. We feel pretty well positioned given rising utility rates in terms of pricing power and the opportunity to have a small amount of buffer there to offset if needed.

Your next question comes from the line of Philip Shen with ROTH Capital Partners.

The first one is on the channel partners. The new ones that you've added, for those dealers, you highlighted some exclusives. I was wondering if you could provide some color on that. How many new exclusives did you add? And maybe some color on the structure would be helpful. So how long are they? How are those payments structured? How large are those payments?

And when you think about your net subscriber value, with the exclusive payments, do you expect the incremental megawatts from those dealers to be in line, lower or higher relative to net subscriber value?

Thanks, Phil. Great question. The -- as we mentioned, we've kept our channel partner business fairly exclusive. So our strategy is to focus on -- is an 80-20 strategy, so focused on the larger regional players that have competitive routes to market and unique routes to market in their communities and high-quality customer experience, most importantly.

And so we've kept that fairly tight, and that's served us well. And so what we said was, in the quarter, we grew those numbers by 20%. So we could -- certainly, it could have been -- there's much more demand than that. We could grow it much faster, but we really, again, manage who are the really high-quality partners that deliver a great customer experience that brings something unique in reaching an incremental customer base.

And when we strike those relationships, yes, we are quite disciplined at managing to unit-level economic thresholds and targets and maintaining consistency across our different channels and across our network in order to avoid any sort of channel conflict. And so you wouldn't expect any material changes in any of the unit-level economics for the results going forward.

Okay. And then I know we've talked about the EV opportunity for a while now. But just to be very clear, it sounds like, near term, there's an opportunity to strike a deal with maybe a utility or an auto company or somebody of that ilk or maybe a combination to perhaps drive volumes for both solar and EV chargers in -- at the point of sale, perhaps with EV. Am I characterizing that correctly?

And then you talked about staying tuned near term. So any sense of -- any more color perhaps that you can share on that would be nice.

I'm sorry, Phil. What was the last point, more color on what?

Oh, just if you could share, any more color would be fantastic.

Okay. I think we're -- on the utility comment, I think we have a two-pronged approach here for our go-to-market strategy. One is we go direct to customers, and we believe we provide them a superior electricity service with cheaper electricity, with clean electricity, with, increasingly, a battery for distributed -- for resiliency. And we try to make that as affordable as possible and just compete on a better value proposition.

In parallel, we're trying to work with utilities in open markets to enable those -- that home to be an energy asset that can plug into the market and get another revenue stream and benefit the entire [grid]. However, those -- you have to build those.

And like we said, we've been working on these grid services programs, and many of these -- the incumbent industry can be quite slow to change on those things. And so we're not waiting for that. So we're -- but we have the assets in place. We're going to build the [market infrastructures] to enable us to participate through the grid services and other programs.

And increasingly, I think utilities and other load-serving entities recognize that, okay, this is the place -- this is the way to get the capacity that we need. And so that's what you see through our programs with the CCAs in California and some of the other bilateral agreements with utilities.

So those are building. They're a slow burn, but it's a place where we have a head start and are continuing to invest, and that will reap a lot of benefits, we think, in the decades to come.

On the EV side, you are correct. Again, because it's such a natural time for consumers to adopt solar, a cross-selling relationship there is quite intuitive and accretive to all parties. So we are continuing to work those efforts from a business development standpoint.

Okay. Congrats on the strong results and the guidance.

Thanks, Phil. Great. Thank you.

Your next question comes from the line of Tristan Richardson with Truist Securities.

I appreciate all the comments today. Just one on my end on storage adoption. Certainly, there's a big and obvious value proposition to the customer. I guess, though, we've heard of one anecdotal instance where an installer out there is instituting sort of a mandatory bundling of solar plus storage almost as one product. It seems a bit one-off in nature, but do you see the installer market moving that direction at all?

Great question. I do believe that, over time, all -- effectively all solar will be paired with storage because the battery prices will come down, and it will be proven that aggregating these batteries is the most effective way to reach -- to deliver peaking power and to really actually help smooth out some of the intermittency that's going to come from a big renewable-based system. So I do believe that those markets will develop. And independent of what the consumer value prop is, there will be enough value in those -- that battery capacity to -- in delivering to the grid for that to be a large market.

In terms of Tesla's announcement, I think -- again, I like the purity of the announcement. I think that is where the industry is going. However, the reality of today is it's not appropriate for every customer to have a battery if you're in a place where you have a resilient grid. And there isn't this opportunity to monetize the battery versus with a virtual power plant. You may not -- it may not make sense, right now, and that is the case in many places.

And one of the realities of our business is that it does require a bit of customization at the home because just the physical nature of homes are different. And so one way we've differentiated and why we've emerged as the market leader is that we can attack that customization with process, with technology that we built over a decade plus to serve a more -- the more customized need that residential project demands.

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

Could you speak to what the key gating factors on growth are right now? It seems like there's an awful lot of opportunity, and you're building capacity. So I'm wondering, what's slowing you down at this point?

Well, we think we're going pretty fast. I think the -- one, we're a physical business, and there's just the reality of that. I think the -- one of the ways we can really even not have that be a concern is to continue to expand that channel partner business as well. So I think that's pretty unique about us, is that we're building the operating infrastructure and our own sales force and avenues to market. And we also have the partner business where we can get some scale efficiencies there and increased reach and really a market that's still way underpenetrated. So that's been our strategy there.

But you're right. I think the growth is in acceleration this year. We've said for many years that this industry can deliver a 10% compounded annual growth rate for a decade without reaching -- with a reasonable penetration, and there's no reason why that shouldn't be faster and particularly with the electrification I've discussed in the home needing 2x and more electricity. And the unit value is increasing that much more, too. So it's not only just additional units in capacity, but it's also just home -- the wallet share of the energy footprint.

So I think there's opportunities on both those dimensions. And you still have [to do this sustainably] and remember that, of course, this is a physical business. It's not kind of a software business.

Yes. No, understood. And thanks for the color on the utility-scale partners. I mean, could you guys speak to internal targets around ROE and how that's evolving as you look at the potential for partnering with utilities that are really looking for additional resiliency and deployment partners around distributed assets?

So our returns on those type of programs is your question.

No, no. Is it changing how you think about targeting -- your targeted ROE as you move forward into incremental programs over the next few years?

Well, so Ed, you can chime in here. But right now, we have an infinite ROE because we're actually pulling more cash out -- have really pulled more cash out of systems than we've invested. That's one of the, really, financial highlights of our business.

All right. I'll take it off-line, guys.

Okay.

Your next question comes from the line of Sophie Karp with KeyBanc.

Congrats on the quarter. Just a question on cash flows, if I may. You guys highlighted the recurring revenue metric. Would it make sense to also bridge that to recurring cash flows and so if you use that on a go-forward basis? And maybe if you could also, in this context, discuss how you think about the capital structure moving forward now that your scale is growing rapidly and with the additional Vivint and such.

Sophie, it's Ed. So that's a great question. I think one of the reasons that Tom has been talking about the recurring revenue is that it's a clean growing metric that doesn't vary significantly quarter-to-quarter.

A number of our credit facilities, as you know, either mature inside of the customer contract life or we'll refinance them inside of their maturity proactively due to declining capital costs. And so the cash flow forecast from existing assets varies from year-to-year and depends significantly on the time line on which we execute those transactions. So we do expect significant cash flows from our existing assets and distributions from those assets and refinancing proceeds from those assets. But it's not a simple, clean, linear growth over time.

On the development side of the business, with increasing margins over time and increasing volumes, we'll expect to see a nice steady growth from there as well. And again, exactly how much of that cash flow we realized in the first period when we installed the asset or later over time is an analysis and review that we're going through now to see if we have the right balance there.

But either way, as Lynn just mentioned, we do expect all of our systems on average when they go into service were receiving proceeds from nonrecourse finance that exceed the cost to install the company -- the customers and also pay all of our G&A. So I think we'll hopefully be able to talk more about cash flow soon, particularly once we're more buttoned up on the project that I described. But probably how we'll be able to do that is more giving multiyear cash flow views rather than sort of periodic, quarterly numbers that compound cleanly at a certain rate over one period of time.

Got it. Super helpful color. And then last one, real quick, if I may. Do you anticipate that the virtual power plant business will grow to be sizable enough to merit its kind of separate line item on the P&L or separate segment maybe anytime soon?

Great question. Not -- I would say not any time soon. So if you -- again, you look at the value we have under the contracts that are booked or near booked, it's about $75 million. So again, I think these bills basically take a while to develop, but it's not anytime soon that it will be meaningful enough to break them out.

I think the other benefit of the grid services relationship independent of what the financial contribution may be, which right now is looking like about $2,000 per customer of incremental value, the other value of it is it really just differentiates you to the customer and again provides -- moves the market more to a winner-take-most market with companies that have the technical capabilities of doing that and the network effects. So that, in many cases, will be a bigger financial driver than the actual revenues that come off those programs in the near term.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And this does conclude today's conference. You may disconnect your lines at this time. Thank you all for your participation.

Thank you. A very robust discussion. Appreciate it.