Sunrun Inc (RUN) 2021 Q4 法說會逐字稿

Greetings, and welcome to Sunrun 4Q '21 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Patrick Jobin, Senior Vice President, Finance and Investor Relations, Sunrun. Please go ahead.

Thank you, Vikram. 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 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 Mary Powell, Sunrun's CEO; Tom VonReichbauer, Sunrun's CFO; and Ed Fenster, Sunrun's Co-Founder and Co-Executive Chair. Following the prepared remarks, we will conduct a question-and-answer session.

And now let me turn the call to Mary.

Thank you, Patrick. It's wonderful to connect with all of you. I'm looking forward to talking about what Sunrun has been up to in the last quarter. As I close in on 6 months as CEO, I am so pleased to be able to share our financial and operating results with you. I am encouraged and excited about the progress we're making as the nation's leader in a critically important industry. With climate-related events becoming more urgent daily, never have we felt more passionate and optimistic about our purpose.

The headline is that the Sunrun team delivered record volumes in 2021, having added over 110,000 customers in the year, representing 31% growth in new installations while bringing 2 large companies together and navigating a dynamic operating environment during COVID. We are entering 2022 with a growing deep backlog of customers who are excited to become more energy-independent and secure in their own homes. At the same time, as we drove a surge in our business, the surge in Omicron created some late Q4 and early Q1 challenges that already seem to be behind us. Along those lines, there are 4 key highlights I want to discuss with you before I turn the call over to Tom and Ed for their quarterly updates.

First, clearly, we continue to see tremendous growth in our business. Again, we closed out 2021, adding over 110,000 customers, representing 31% growth in solar energy capacity installed, exceeding our guidance and marking the highest growth rate for Sunrun in 5 years. And to put our customer additions in context, this is 2x our nearest competitor. We did this all at an operating scale nearly 3x larger than we were just 5 years ago. We are seeing customer demand accelerating significantly, and our talented team is capturing this interest, generating orders far in excess of installations, resulting in more than a 57% growth in our direct business backlog. I believe we fundamentally have achieved a tipping point whereby our product and services are something customers increasingly see as essential for affordable, reliable, clean energy that puts them in control, something they simply cannot get from utility power. Ed will touch on this later, but we also believe the inflationary pressure in the economy, combined with rapidly rising utility rates and climatic events, will continue to turbocharge this customer demand.

Second, during 2021, we closed out significant portions of a massive transformational integration with Vivint Solar. Today, we are operating as one team. While some might see this as routine, something easily put together in a spreadsheet, this was a tremendous accomplishment. Late in the year, we also brought together large operating groups and combined the leadership teams to build the strongest, best go-forward team in the business. You may have seen some of our recent appointments, including Paul Dickson, who is our new Chief Revenue Officer; along with Chance Allred, who is our Chief Sales Officer, both experienced leaders from the Vivint Solar team. Together, along with high-powered members of the existing Sunrun team, we are leveraging the best of both organizations and accelerating the impact we will have on the market, the planet and for our customers. I'm also proud to report today that we exceeded our acquisition-related synergy target of $120 million exiting 2021.

Third, we continue to advance our strategic efforts to accelerate home electrification and transportation. We now have over 32,000 residential battery systems deployed, far more than any other energy company and are increasingly networking these together to form valuable energy resources for the grid, something I am convinced will pay significant dividends in the years to come as grid operators continue to see they fundamentally need our growing fleet of resources.

We are also making tremendous progress with our partnership with Ford, where we are the preferred installer of a bidirectional inverter nationwide that we codeveloped with Ford. We expect meaningful flywheel effects from this partnership and the widespread adoption of electric vehicles. Consumers want to charge their cars with clean, affordable energy and often consider a solar and battery system when they make the switch to an EV. It also provides us the opportunity to install larger solar systems, which can carry high incremental margins and bring even more value to our customers. Our partnership with Ford is already driving increased brand awareness for Sunrun in all 50 states.

Sunrun is not just a company who can provide solar systems but a company who can deliver an electrified future. You'll hear a lot from me over the next few quarters on virtual power plants, our electrification efforts and steps forward on providing innovative, advanced product and pricing solutions for customers. Importantly, these initiatives not only deliver increased value to customers. They prove how important distributed resources will be to the grid of the future. I believe Sunrun is positioned to lead in this new category given our growing brand strength, technical capabilities, operating scale, broad multichannel customer reach, and increasing solar and battery system network density.

Fourth, as noted in my opening comment, while we did exceed our volume guidance, we experienced significant effects from the national Omicron surge on our installation organization, limiting our ability to quickly fulfill customer orders, hindering labor productivity and requiring us to pursue higher cost fulfillment options in certain circumstances. The health and safety of our crews is paramount, and our operating procedures reflect that. Some of these capacity, productivity and cost pressures persisted into early 2022. Tom will discuss these impacts in more detail. But the brutal fact in terms of this quarter is that our strong sales growth, combined with pressures from the Omicron surge late in the quarter, led to in-period margins that were below the target we shared with you in early November. The very good news is that the backlog growth provides us great visibility into 2022. And as we see the Omicron wave abate, this should lessen the effects on our installation team.

Last but certainly not least, before I turn the call over to Tom and Ed, I want to thank our team for their hard work. Disrupting a multitrillion-dollar industry while also integrating 2 massive operating companies during a pandemic is a big challenge, and Sunrunners deserve a lot of credit for their dedication to our mission and these strong results in 2021. I also want to express my gratitude for our customers who are transforming our country's energy system and helping to solve climate change one home at a time at a very rapid pace.

Over to you, Tom.

Thanks, Mary. We are entering 2022 in a strong position with strong order momentum, record backlog and a healthy balance sheet. We're growing faster at scale, exceeding our prior volume guidance and continue to be excited by the consumer demand trends in our business.

Turning first to volumes. In the fourth quarter, customer additions were approximately 30,000, including approximately 22,000 subscriber additions. For the full year, customer additions were over 110,000, including nearly 89,000 subscriber additions. Solar energy capacity installed was 220 megawatts in the fourth quarter of 2021, a 28% increase from the same quarter last year, pro forma to include Vivint Solar. For the full year 2021, solar energy capacity installed was 792 megawatts, representing 31% growth compared to the prior year. This growth rate exceeded our prior guidance and represents the highest annual growth rate in new solar energy capacity installed that Sunrun has reported in 5 years and at nearly 3x the operating scale.

We've continued to experience strong customer demand for our products and services in Q4, continuing a trend we've seen throughout 2021. Over the course of the full year, while installs grew 31%, our backlog grew by 57% due to strong demand and sales productivity. While this sets up a strong 2022, the mismatch between sales and installation activities in 2021 creates a drag on financial performance in the year, as we first highlighted on our Q2 results call.

We closed out the year installing a record number of batteries, representing over 100% year-over-year growth in 2021. While battery availability constraints continue, resulting in fewer battery projects than we initially forecast at the beginning of the year, the supply situation is improving, and we expect to ramp battery installations considerably in the quarters to come. We qualified a third battery supplier in Q3 that met our price and performance criteria and expect to introduce more battery suppliers in the next few quarters to meet the strong consumer interest.

We ended Q4 with over 660,000 customers and nearly 568,000 subscribers, representing 4.7 gigawatts of networked solar energy capacity, an increase of 20% compared to the prior year. Our subscribers generate significant recurring revenue with most under 20- or 25-year contracts for the clean energy we provide. At the end of Q4, our annual recurring revenue, or ARR, stood at $851 million with an average contract life remaining of over 17 years. In Q4, subscriber value was approximately $37,000 and creation cost was approximately $29,900, delivering a net subscriber value of approximately $7,100.

Total value generated, which is the net subscriber value multiplied by the number of subscriber additions in the period, was $156 million in the fourth quarter. Total value generated was $631 million for the full year. This result was lower than our guidance, driven primarily by the effects of Omicron on reduced installation capacity and knock-on effects and faster-than-anticipated growth in orders. Additionally, as crew availability in each geography moved around during the Omicron surge and battery availability remained tight in the quarter, the specific product mix that was ultimately installed from our backlog in Q4 was slightly less advantageous than anticipated. Put simply, we were caught with significant Omicron-related installation productivity and cost challenges, but we continue to execute above our expectations on customer orders.

As you can see on Slide 7, we estimate these pressures impacted total value generated by approximately $107 million in 2021. The excess growth in backlog during the year resulted in stranded margin of more than $75 million, which we expect to harvest in 2022. Additionally, in Q4, the Omicron-related labor productivity impacts and resulting product mix changes delivered a $31 million headwind. If you remove these headwinds, total value generated would have been above $737 million in 2021.

We believe in our ability to ultimately fulfill the strong consumer demand we're facing as we move throughout 2022 and, in Q4, made no efforts to throttle sales activities in the face of short-term operational challenges. As a result, we continued to incur the sales-related and initial project development costs as we built a large backlog of orders, pressuring our reported net subscriber margin and, therefore, total value generated. We made this decision with a long-term perspective. We want to build the largest base of high-value customers and know that trying to solve for single period reported results by throttling sales won't drive the most long-term value for the company.

You can see that on an absolute basis, our product mix and pricing remained strong with the highest subscriber value of the year in Q4 and only off 1% from Q4 2020, despite flowing through a significant reduction in the ITC level. In fact, the current backdrop of rapidly escalating utility rates and inflation provides meaningful opportunities for us to increase pricing in many markets again, and we intend to execute these changes over the coming months.

Turning now to gross and net earning assets on our balance sheet. Gross earning assets were $6.7 billion at the end of the fourth 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 cost of capital. Net earning assets were $4.6 billion at the end of the fourth quarter, an increase of over $55 million from the third quarter and $434 million from the prior year. Net earning assets is gross earning assets plus cash less all debt. We ended the year with $850 million in total cash.

Turning now to our outlook. We are forecasting solar energy capacity installed growth of 20% or more for the full year 2022. Several factors, including California net metering, various proposals in Congress to extend and/or increase the investment tax credit and a volatile interest rate and inflation environment, limit our ability to provide precise guidance on total value generated in cash generation at this time. We believe, however, the trajectory for cash generation remains robust especially over the longer term.

The opportunity to build a large California backlog or further changes to interest rates and the resulting timing of project finance activities could result in meaningful swings in these metrics in either direction. We currently believe, however, total value generated for the full year 2022 will grow faster than volumes and that margins will increase sequentially throughout the year. For the first quarter, we expect solar energy capacity installed to be in a range of 195 to 200 megawatts. As noted previously, many of the Omicron-related effects on margins and product mix continued into Q1, and we expect Q1 margins to be comparable to Q4 but increasing in subsequent quarters.

Now I'll turn it over to Ed.

Thanks, Tom. Today, I will discuss the impacts of increases in inflation and interest rates on the company and also touch on California net metering and our new corporate credit facility. Sunrun is well positioned for increasing interest rates, especially those driven by escalating inflation as we're able to raise prices to new customers as necessary behind the large utility price increases that are underway. In addition, our existing capital structure is well hedged through a mix of interest rate swaps and fixed coupon, long-dated debt securities.

Utilities, famous for ensuring customer rates escalate faster than overall inflation, are wasting no time exercising their monopoly powers to raise prices. In January, inflation in electricity services was 10.7% year-over-year. We have seen a handful of utilities in our largest markets filed for even larger increases. Pacific Gas and Electric and Con Edison have filed for rate increases of 18% and 11%, respectively, on the backs of a capital expenditure bonanza as well as higher labor, fuel and capital costs. Just last quarter, Florida Power & Light was granted a 12% increase. In 2021, Sunrun implemented modest price increases that offset the reduction in realized ITC percentage across the year. In 2022, we have a more significant pricing opportunity which we can execute against while still expanding the wedge between incumbent utility costs and our customer offering. This will allow us to drive significant value for customers even as we pass through higher costs.

Our existing portfolio is well hedged through interest rate swaps and long-term fixed rate debt. As we deploy systems, we use interest rate swaps to programmatically fix the cost of debt for about 20 years. The vast majority of our $2.6 billion in floating rate debt is fixed as a result. Our current portfolio of long-dated amortizing interest rate swaps has an average final maturity extending nearly 16 years. Of our $3.9 billion in fixed rate debt, including recourse debt, only 7% has a maturity or anticipated repayment date before December 31, 2025, and only 5% has an actual maturity in this period. Despite the recent increase in interest rates, we still expect to achieve an advance rate on our upcoming long-term financing in the range of 95% to 100% of contracted subscriber value at a 5% discount rate.

In December, the California Public Utilities Commission published a proposal to materially reduce the value of power that residential solar customers export to the grid; to tax power, both generated and consumed on-site, through a fee; and to reduce the grandfathering period of existing customers by 5 years. As described in my statement posted to our website in December, their proposal is contrary to the state's objectives of addressing climate change and eliminating frequent blackouts as well as contrary to what Californians say they want.

The proposal met with swift and significant pushback from national and international electric rate design experts, national and state politicians, community groups, environmental justice groups, environmental groups, influencers and at least 125,000 individual petition signers. On January 10, Governor Newsom said there's work to do on the proposal. On January 21, the one major environmental group that had supported the proposal walked back its position. On February 3, the commission said it was pausing the proceeding until further notice to consider revisions. The CPUC also likely needs more time because of the head of the energy division and the 2 commissioners most involved in the proceeding have all left the commission, causing the matter to be reassigned.

The response of environmental and solar groups broadly has been that the grandfathering period should be maintained; the reduction in export prices be phased in over time to permit battery manufacturing capacity to increase; and the tax on power, both produced and consumed on-site, be eliminated. That tax alone at about $0.14 a kilowatt-hour would be higher than the full retail cost of electricity in 42 states.

Despite the outpouring of concern over the proposal, it is too early to know how significant the revisions to the proposal may be or how long achieving a final outcome may take. However, we are hopeful a more even-handed policy, which also encourages solar customers to support the grid with peak period exports, will be adopted. Californians demand and deserve resiliency, control over their energy costs in the future and faster progress against global warming. We hope to answer these needs with products that benefit all Californians, whether or not they are Sunrun customers. But we are confident that in time, we and the industry will innovate to meet this overwhelming customer desire regardless.

Due to the delay in the proceeding, the size of our existing installation backlog and our expectation that we will build an even larger backlog of California systems prior to the enactment of any new policy, we may not deploy a material number of customers under a new policy until late 2022. However, 2022 financial results, especially quarterly results, are likely to be impacted by strong demand from Californians eager to sign up before rates change. We will refine our go-to-market strategy and forecast as clarity emerges from the CPUC.

In January, we retired our $250 million recourse lending facility and arranged a larger $425 million facility at enhanced terms and with a longer tenor. The cost of the new facility was unchanged. While the asset borrowing base was expanded, financing terms for inventory and project backlogs were improved and the discount rate applied to existing assets was updated from 6% to 5%. These changes will support the scale, growth and backlog of the combined company. We continue to maintain a robust project finance runway. As of today, closed transactions and executed term sheets provide us expected tax equity and project debt capacity to fund over 375 megawatts for subscribers beyond what was deployed through the fourth quarter.

And with that, I'll turn it back over to Mary.

Thanks, Ed. I am so excited about this year and what this team can accomplish. I know rapid growth distorts some of our metrics, but the underlying fundamentals are enviable. To be the nation's leader in a fast-growing space with unprecedented customer demand provides a tremendous opportunity for value creation. I'm so encouraged and excited about the work we have done, delivering record volumes in 2021. With climate change accelerating and the utility rates rising around us, the time is now to fulfill our aspirations of working with customers all over the country to self-generate, store energy, electrify their homes, adopt leading EV technology and together create a more affordable and resilient future and a planet run by the sun.

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

(Operator Instructions) You have first question from the line of James West with Evercore ISI.

Mary, I love this relationship with Ford that you guys have. I think it's a huge positive on both sides but certainly helping out your brand and the home integration system, which we've learned about recently. I think it's a very unique proposition and creates a nice moat. I'd love to hear if you've already started to see people inquiring about installing solar because they want to do that ahead of their Lightning deliveries and if there's any other OEM relationships that you're working on that may come to fruition this year.

Thank you. We couldn't agree more. We are really excited about this partnership and really optimistic that it is going to really fundamentally move the needle. As you may or may not know, the car is launching late spring, and they've already doubled production targets to 150,000. And yes, to your point, from a brand perspective, we are already seeing like tremendous uplift. Again, with our announcement, and again, as I think so many of us noticed, even with the Super Bowl, right, there's so much focus on the adoption of EVs right now and so much incredible excitement around the Ford. So again, we're seeing just incredible customer demand overall. Candidly, I can't say we're tracking specifically if this customer inquiry came relative to their excitement about them bringing on their Ford. But what I can tell you is we're creating a lot of buzz in all 50 states both in terms of Ford and Sunrun. So it's really going to be a big game changer.

That's great. And I'm sure it is. Just one follow-up from me on pricing. I know you mentioned -- and Ed, you talked a bit about what electricity price has been doing nationally and in California and other places. Is it fair to say -- I think you also said that you wanted to keep that wedge between you and the utilities. So is it fair to say your price increases would be below kind of the national increase? Or am I thinking about that the wrong way?

I -- it's a great question. I think what we're trying to underscore is we obviously want to provide the best possible product for our customers as we can. Like many businesses, we're facing some increases in our operating and capital costs. We have plans to combat that, but some of those are a reality. And I think as necessary, we feel like we have ample room to recover those from customers over time given the competing product, utility electricity, is escalating at its fastest rate in many, many, many years.

We have next question from the line of Mark Strouse with JPMorgan.

So it sounds like you might be experiencing some pull forward in California because of NEM 3.0. Just curious, in the outlook for this year, the 20%-plus volume growth that you're expecting, how significant is that pull forward that you're kind of baking into that number?

Mark, so I think in the Q4 results, if you think about the timing of that NEM decision coming out, it's very late in Q4. I think the general growth in demand there we're seeing is from underlying consumer interest in the value prop and product that we deliver. I think as that proposal has gotten a bit more airtime, certainly, there are some customers that are thinking about, "Okay, a change in rate structures may incentivize us to buy earlier." And that's certainly a tactic that, depending upon where the exact proposal or changes in net metering land, we see as a very large opportunity. I think there's a potential if NEM lands in a very draconian state where every customer would naturally be incentivized to get an order in and an interconnection permit on file well in advance of that cutover.

And so we're expecting some amount of growth in backlog certainly through the first half of the year at least. I think right now, we're in this moment where we're still waiting on real clarity on where the proposal is going to land, when will it be implemented, what's the time line for that. And there's a lot of uncertainty around that right now. So it's a little tougher to give you a precise answer on backlog growth. I think the more than 20% installed volume growth is a range that we feel comfortable in around being able to grow our own fulfillment and external fulfillment capabilities as well as manage that backlog, but it's entirely possible that you actually grow backlog throughout the year well in excess of that if the proposal lands in a particularly bad spot.

Okay. Tom, and then just a quick follow-up maybe for you. The inventory level continues to build. How should we expect that to trend over the coming quarters? Is the supply chain improving enough where you think that can start to decline over time?

So there are spots that we definitely see it improving. I think the battery situation that was notably tight all throughout 2021 is an area that we definitely expect to alleviate here a bit over the balance of the year. The uncertainty on the ITC is another element as we think about inventory levels this year. If it continues to step down, we'd move back into a safe harboring program. If it's held flat or steps up, our dynamics there might change. And then I think on overall trade and industry demand, I think we definitely put capital to work to put ourselves in a strong position in terms of availability of materials in 2021 and are at abnormal levels well in excess of triple-digit days. And so we'd naturally draw that down as we get more comfort with the overall picture.

We have next question from the line of Brian Lee with Goldman Sachs.

I've got 2. I'll just ask them all at once. First, just clarification on the total value generation target growing above capacity installations this year, is that on a base of the $631 million as reported? Or is it versus the base of $737 million adjusted?

And then second question just around labor and productivity. It sounds like clearly, you're seeing a ton of demand. Trying to keep up with the demand is an issue. How do you think about that heading into 2022? What are some of the puts and takes, mitigation strategies for having those pressures not repeat this year and being able to kind of fulfill that more closer to where backlog growth is versus what you're able to actually do on the installation side?

Yes. Thanks, Brian. So on the total value generated guide, that's on the basis of the reported $631 million level. And yes, we expect that to grow in excess of our volume growth as we get back to more normalized margins and some of the margin expansion opportunities that we get excited about. The one notable item there that can move around quite a bit, as I mentioned in one of the earlier questions, is the impact of sales expenses well in advance of installs. And so the California situation is one that we're watching very closely.

On installation capability, really excited with what we did deliver this year, 31%, at 3x the scale we were at 5 years ago, installing twice as many customers as our next closest competitor. And so we're working hard to fill that. But Mary, I think you have a few things to add on how we think about...

Sure. I mean again, really the -- thanks for the question. The results so much now was driven a lot by what happened with Omicron. We have already seen that surge abating. We've seen that our crews are back at work and feeling better. And we also, as a team, have, of course, been working on our overall strategy to ensure we have a lot of capacity to keep up with demand. I mean the wild card, of course, as we talked about, is what will happen with California NEM, what is going to be the surge. I mean we are going to continue to want to take advantage of all of the customer demand that's out there. So again, we feel like we have a really good plan. We told you what we're expecting to see from a growth perspective, but again, there are factors that could say we could see an even higher surge in demand. And then obviously, we'd have to figure out how to meet that next level of demand.

We have next question from the line of Julien Dumoulin-Smith with Bank of America.

So actually, let me just pick up where you left it off actually. Let's talk a little bit more about the cadence of customer value creation through the year. You just said yourself fourth quarter was impacted. It was in fairly discrete items, right, labor, Omicron, et cetera. But you also, at the same time, described some of these factors as abating here and describing also fairly flattish per-customer metrics in the current quarter. Obviously, there's some seasonality. But how should we kind of frame that against the backdrop of growth? Is growth effectively going to continue to depress customer value creation metrics through the remainder of the year? Or what's the shape of that rather, if you will?

Yes. So on the Q4 effects, if you think about really the timing of the Omicron surge and where that hit us on labor productivity and capacity in really the last half of the quarter or so, and we saw that continue well into January and beginning of February again. I think we're feeling good coming out of that but a similar effect on a whole quarter basis to have a portion of Q1 that was affected by some of those. As we come out of that, we definitely expect that margins will improve over the balance of the year, potential for growth pressure on margins, especially on the sales and marketing side of things. But the operational cost elements, we expect, would turn back out. And then as we take some of the pricing actions that Ed and I have both mentioned, as supply chains continue to normalize, we expect to see benefits there on costs that will drive higher margins over the balance of the year.

And just I guess, Julien, I also would just add to that -- this is Mary, that I mean again, back to that point, Tom hit it really well and appropriate. But I would also just add when you look even at the customer margins that we produced in Q4, I mean that is still like the highest reported margins in our business. So again, we expect those to go even higher. We want to harvest all the growth that's available to us. And again, that's why I say we're in an enviable position from a market position and a growth position going forward. But again, I just wanted to make that point on Q4 margins.

And Julien, it's Ed. Just quickly on California, we could start to receive more clarity on that in a few weeks or maybe more likely in several months. Depending on what that time line looks like, the shape of the curve in terms of sales and installations will vary. And so I think part of the uncertainty you're hearing with us is we don't know if that process is going to come to a head next month or in June. And so it's hard to make a point production.

Right. And actually, let me just bring up a more strategic point to follow up on that. I mean you said in your prepared remarks, total value generated -- your cash generation guidance might be a little bit impeded on the margin. Can you talk a little bit about how you think strategically with the stock where it is, about producing and targeting cash generation to do something like a share buyback or something or conversely to monetize assets to demonstrate to the market the underlying value of your assets, cash guidance or asset sales, et cetera?

Julien, it's Ed. So first, I think as to the value of the assets, we have consistently been achieving just debt advance rates on the assets in excess of 95% of the contracted value. I shared on the call that the upcoming transaction, the next one that we do, we're still expecting to be in that 95% to 100% range. So hopefully, we've got quite a few data points on that in the marketplace. As to a buyback, look, obviously, at these sorts of share prices, there's a compelling argument for that. At the same time, we are in the middle of a major regulatory proceeding and do also see a number of other investment opportunities and so are sort of proceeding through this period with some caution. But it certainly is a topic that has been discussed at the Board and that we were thinking about. And as you know, in periods in the past, we have done a stock buyback before.

We have next question from the line of Maheep Mandloi with Credit Suisse.

Maybe just one question on the value generation. Can you just talk about like the growth, how much -- how to think about the different buckets? How much is coming from, say, the leasing mix increasing in the year versus just the net subscriber value increasing through the year?

Yes. So I think there's a few items there. One, as we've seen throughout this year, continued improvements in product mix, driving higher battery attach, larger system sizes, we expect those trends to continue throughout 2022. The Q4 effects here on labor productivity and product mix coming out of our backlog, I'd view as temporary. So you can think about those as really reversing out as we get past Q1 here in 2022.

And then I think the big question, the one that we've touched on a couple of times here is this question of just how well matched sales and installed capacity are throughout the year. We definitely grew backlog at a pretty astronomical rate this past year. If you think about 31% installed growth and 57% backlog growth, that's a dynamic that we're working hard to open up incremental fulfillment capabilities and options. And we mentioned in Q4, flexing a bit more into slightly more expensive fulfillment options as well. And so we'll continue to work to get capacity well aligned, and that drag will go away. But then I think the general ongoing trends of finding ways to improve cost and improve customer experience and make the whole end-to-end journey much simpler and a much better customer value prop will be positive for us.

Got it, got it. And then maybe just part of that customer experience, just another question on the Ford F-150 partnership. I know it's still too early, but how should we think about the attach rates or expectations for either the Charge Station Pro or for the home backup systems?

Yes. So we haven't broken out any specific items to think about there. Obviously, we are the nationwide installation partner here for the bidirectional inverter and charger, and so we'll have some customers who are just getting that set of hardware initially. And our first consultation with them or conversation with them will be the moment where maybe they consider going solar. Others, they may choose to align these 2 as the vehicle goes into production and they're finalizing their order and saying, "Yes, I want to get solar and my charger at the same time." And so we're working on bringing those discrete customer offers to market. And I think as we get into actual delivery and deployment here, it will be easier for us to give you a little more color on the nature of that relationship and some of the metrics therein.

We have next question from the line of Joseph Osha with Guggenheim Partners.

Two questions for you. First, following up a little bit on what Julien was saying. In the past, we have communicated about cash generation relative to the pace of new capacity additions. I understand this year is a little disruptive. But over the longer term, how should we think about the relationship between either new business generation, or value added if you prefer to talk about it that way, relative to cash generation?

Joe, it's Ed. Great question. We continue, over a longer term, even medium term, to be confident that cash generation can grow faster than megawatts deployed. Just some of the special factors and arcs of this year make the production a little bit more challenging.

Okay. But that's a reasonable -- still a reasonable way to think long term. That's helpful. And then secondly, you alluded to this in your comments about the PUC sort of crossing the Rubicon in terms of messing with existing assets. I'm wondering if you've seen any impact in terms of the way existing assets are trading or accessing debt or securitization markets. Has there been any expansion of spreads based on a reaction to the CPUC's proposal there?

Good questions to ask. So first, in terms of customers, obviously, we think honoring promises made to customers in written cases is important. And we would hope that, that is -- we'd hope that, that occurs. That said, it has happened a couple of times...

There is that. Yes. It seems like a good idea.

It has happened a couple of times in the company's history where changes in rate structures have put customers underwater. It happened once in Nevada, as you're probably aware, also once in California after the restructuring of the tiered rates. We did not see any noticeable changes in collections or payment performance or anything other than maybe some aggravated views about the utility in those instances. So I don't anticipate, even if there were a negative effect there necessarily, a financial impact on us, obviously some upset customers potentially at other people.

I think as to the debt markets, we are not seeing any impact from that. Some people ask questions and -- just because that's something that's important to do. We haven't seen any noticeable reduction in interest. At this point, I think people also think that this will probably work to a reasonable perspective. There was a securitization in the industry yesterday. My understanding is this was not a topic of discussion amongst the lenders in that transaction either. So I'm optimistic that people here perceive that this will be worked out in a reasonable place and that there's not a reason for concern.

We have next question from the line of Tristan Richardson with Truist Securities.

I really appreciate all the overview on margins this year and all the puts and takes there. I mean I think historically, you guys have talked about all the dynamics that could really expand margins, whether it be greater battery attach rates, EV adoption dictating larger system sizes, additional services per household. I guess thinking long term, maybe just outside of 2022 guidance, does the business support some of that expansion towards net subscriber values that [runners] put up in the past? Potentially something with an 8 handle on it or a 9 handle on it, longer term as labor productivity issues subside and you have pricing power or pricing flexibility.

Yes. This is Mary. 100%, we absolutely see it the same way. And I think again, that's why I made the point of even with some of those challenges we outlined, we delivered a really strong best reported margin, right? So when you're starting there and then you're looking to the future and you're looking at the partnership we're doing with Ford, you're looking at really us being the leader in terms of battery attachment rate, et cetera, in the country. They just become more and more opportunities to add value to customers' lives and help them transform their relationship with energy and to do it in a way that, yes, is additive from a margin perspective.

We have next question from the line of Andrew Percoco with Morgan Stanley.

Just one on battery availability. Just wondering if you could talk through maybe time line of when you'd maybe add a fourth supplier and maybe an outlook for how quickly you can -- you'd expect to grow your battery business this year.

Yes. So certainly, battery attach, we expect to grow quite meaningfully here in 2022. I would assess the overall supply picture as better than it was for 2021 overall, especially the second half of the year. We -- as we mentioned, we deployed more than 100% year-over-year growth in batteries this year -- or this past year and expect that to continue to grow. We qualified the third supplier at the end of Q3. And while we had some supply chain unavailability challenges throughout Q4, we expect those to abate here in early 2022.

Adding another one, we're -- as we mentioned before, we're constantly evaluating all of the different products that are coming to market, looking at performance criteria, price points, whether it meets the real customer need, and then working through the challenges of availability and who we want to partner with. But certainly, it wouldn't be [unbalanced] for us to think about adding some here faster rather than slower, but nothing more concrete to share on that today.

Great. That's super helpful. And just one other question from me. Mary, I think you talked about some additional potential product offerings. Any time line on that or maybe a sneak preview as to what that might look like?

No sneak preview but we do have a number of things that we're working on for sure. And another value proposition, as I know we've talked about in the past, is really again this aggregation we're doing of so many distributed devices, the solar battery network that we're building. And sort of from a -- not even long-term but longer-term view, there is nothing but upside from the perspective of the owner and operator of so many of those assets to leverage from a grid value perspective.

We have next question from the line of Ameet Thakkar with BMO Capital Markets.

Just real quick on the $80 million kind of headwind on product mix. I'm sorry if I missed it, but was that really kind of reflective of perhaps like less battery sales? Or is that kind of the mix between subscribers and kind of cash purchases? I have one quick follow-up.

Yes. Battery is the primary item there. So as you think about what transpired for us in Q4 in the quarter, we're generating new business. We enter in with a chunk of backlog. And just given Omicron-related impacts on crew and labor availability in given markets, the resulting portion of that backlog that was installed was a little different than we had anticipated at the start of the quarter. So just a different subset of our customer base that was installed and slightly less advantageous, but on the battery front, that being one of the primary items there.

I mean if you recall, our installations are done in crews of perhaps 5 people. Not everyone is battery-qualified. And managing through the absenteeism was a challenge and required heavier staffing on jobs and different sorts of jobs in those part of what you saw in the quarter.

Great. And then just thinking back to the third quarter call, I think Mary had talked about potentially kind of radical collaboration kind of being needed with the utility industry. And I think it's fair to say that kind of the NEM proceedings have been fairly acrimonious. And then we kind of look to Florida and the state's kind of incumbent utility has kind of, I guess, supported some legislation that is again kind of a little bit less favorable for residential solar. Mary, I was just wondering if you could give any kind of thoughts to kind of expand on kind of how you see that radical collaboration maybe kind of starting to kind of take shape or form?

Well, I think it's a great question. And yes, I'm as bullish on radical collaboration as I was in the fall last year, the year before because it is just so essential for the long-term health of an energy grid system or ability to build an energy grid system of the future that can serve society in the most cost-effective, resilient way. So yes. So while we have California and Florida going on, we also -- you may have seen this wonderful news, an example of radical collaboration coming out of Hawaii just last week.

So what you'll see in the sort of evolution and radical collaboration is many times, it comes out of the pain of failed attempts, looking at things from a very traditional perspective. And I think that's very much what we have going on here. It's the pains of looking at things from a very traditional perspective versus a very forward-looking perspective on how to create value not just for society, not just for customers, not just for the planet, but for the grid overall through radical collaboration. So yes. So I'm very encouraged by what we saw come out of Hawaii. We were a big part of that effort, working with HECO, and it was very impressive what they did and what we all accomplished. So I still have that same drive and optimism and energy for pushing it forward to the future.

We have next question from the line of Biju Perincheril with Susquehanna.

One more on battery availability. Can you talk -- when do you expect to start taking deliveries from the third supplier? And then can you also talk about opportunity to increase supplies from your 2 existing vendors? Do you have to sort of relax your pricing criteria to get more supplies from them?

Yes. So on the -- I'll take the second one first just on general availability here. Remember that over the last couple of years, we've seen rapidly escalating consumer demand that has simply outpaced manufacturing capacity. And many of the suppliers across the industry, the ones we work with and otherwise, have been working hard to ramp that. So getting our hands on more batteries from existing suppliers in part has just largely been a function of us working hand-in-hand with them as they ramp their supply chain. And I think we're confident in the outlook we have now from our suppliers and other prospective suppliers on availability over the course of the year that doesn't necessarily require concessions on our part in order to get access to product. I think our position as the largest player in the industry now puts us in a strong position to get preferred access to supply on terms that work for both us and them and I think we're happy with that. On the third supplier, we have begun receiving product and again are ramping that, and we'll continue to look to add others here as we move throughout 2022.

Biju, this is Ed. I might just add, if we take the protections from the manufacturers at face value, you'd actually be very encouraged as to the battery available in '22. Obviously, we do have a recent history of occasional negative surprises in the supply chain upstream of our manufacturers that have reduced deliveries. So we're taking a little bit of a hedge to that as we think through what we'll be able to accomplish. But at least the good news is the mood at the manufacturers is upbeat.

Okay. A follow-up to that. It seems like the attach rate is around mid-teens in fourth quarter. As you sort of proceed through the year with the additional supplies, what do you think you can get to, say, by the end of the year? Any thoughts around that?

Nothing concrete that we'd say yet. I think as we noted a few times, there's another area where the California NEM decision will have a material impact. The initial proposal would dramatically incentivize the adoption of batteries and for customers to store surplus power on-site and not export to the grid. And so that would be a meaningful mover. And I think we need to see exactly where that lands. But the multiyear trend that we've seen, I think, is continuing and accelerating in many respects given where utility reliability has trended over the last few years. And customers want more affordable, more reliable power, and this is one of the best ways for them to get it.

Yes, 100%. This is Mary. I would just add to that. What we are seeing definitely is increased customer demand. And to Tom's point, as we are seeing more climatic events and we're seeing more -- particularly in California, where you have the utilities forcing outages because of fire risk, we do expect that attach rate to really rev up as supply loosens up in the market.

We have next question from the line of Philip Shen with ROTH Capital Partners.

I just had a follow-up on the subscriber value. I was wondering if you could give a sense for where you expect net subscriber value to trend in Q1 and 2 versus the $7,000 from Q4?

Yes. So as we noted, many of the labor-related effects of Omicron continued in early Q1. And then as a result, we expect Q1 net subscriber value to look comparable to Q4. And as we move throughout the year, obviously, we expect that to improve from there quite meaningfully, full year total value generated growth exceeding our growth rate and volumes as we expand margins and get back to more normalized levels as some of these events subside.

Tom, also, in terms of Q4, the mix of customers purchasing systems looks like it increased to 26% versus the historical average of about 15%. What's driving that? Do you expect that to sustain as we get through '22? What's your latest thinking on solar loans? Would you ever consider putting loans on balance sheet?

Yes. So a few things there. Normally, you do see a mix of higher loans in Q4 as customers look to push for a tax credit for their annual tax filings. We've made some improvements in our loan offering as well. As you think about overall product mix that was installed in the quarter, as I mentioned earlier, this is one of the spots where the specific shakeout of what came out of our backlog given managing crews and availability in different regions at different moments in time shifted a little further from the historical trend. I'd say leases remain our core service offering, and most customers continue to favor that due to the strong value prop there and no upfront costs, no impact on personal credit and balance sheets, the general alignment of interest around performance guarantees and ongoing service. So we continue to be really bullish and optimistic on the lease but also continue to provide a suite of financial services available to customers.

And maybe just to answer your last question. Phil, this is Ed. I think we continue to think that the ROE of holding loans on balance sheet, particularly in an increasing interest rate environment, aren't necessarily meeting our corporate return thresholds. So it's generally been our perspective that while we're super happy to sell a cash system or a loan to any customer who wants one just as -- our business philosophy has been at this point that we'd likely dispose of that loan to a third party.

And I would just add on to that. And most important, I think, customers -- from a customer perspective, the lease product is just so incredibly powerful. And in fact, recent data would suggest a shift back towards that product in our mix right now.

Great. Mary, one last one, if I may in terms of...

I'm sorry to interrupt. Sir, you may come back in the question queue. We have next question from the line of Sophie Karp with KeyBanc.

A lot has been discussed already. I was wondering if you could maybe give us your read on the current situation with the Build Back Better plan that obviously appears to be dead for now, but any chance for environmental-only legislation or anything that's coming out of D.C. that could be incrementally positive for you guys?

Sophie, it's Ed. I think that the climate provisions that were in Build Back Better have broad support and have a reasonable chance of passing. There are going to be probably 2 opportunities for that. One would be in March after the return from the -- to the --senate of the senator from New Mexico, who's currently out sick. And the other one would probably be as part of tax extenders at the end of the year. And I think there's a chance that the Build Back Better climate provisions would pass as written or they could be slightly scaled back. But I do think there's interest, including bipartisan interest frankly, in trying to get something done there where possible.

Got it. And then also maybe it's a little bit of a qualitative discussion, but you identified multiple factors as reasons for that being challenging to quantify value creation this year in the -- California was one of them. But also, I think you mentioned interest rates and some other factors. I guess how much of that is California versus all of the other noise that we have in the macro backdrop? If you had the decision in California, let's say, within 2 months, would you be able to then more confidently quantify your value creation potential in 2022 and beyond and give us that guidance? Or would that still be clouded by other factors at that point?

Yes. I'd say on the total value generated guidance, it's disproportionately California. Things like the ITC or things that would have an impact on safe harboring and cash consumption, interest rate environment might have an impact on timing of project finance deals, which would hit the cash generation side of it. But on total value generated, California is the disproportionate effect.

So if California gets resolved, you would have potentially more clarity and -- to give us?

Yes. Certainly.

We have last question from the line of Colin Rusch with Oppenheimer & Co.

Can you talk about how many markets you're being into now in the ancillary services side of things? And then I just have a question around how much growth you're seeing outside of California, what the growth rate looks like embedded in the guidance.

I'm sorry. Can you just confirm? Was the second question the growth rate outside of California for 2022? We didn't hear you.

Yes. That's correct.

Yes. We haven't broken out our results state by state, but we obviously have a number of markets that continue to grow quite nicely outside of California. Frankly, even more mature markets like Hawaii continue to grow at a really nice clip, but continuing to see strong growth -- we're in 22 states and Puerto Rico, and continuing to be happy with the footprint we have. There's a lot of untapped market potential in those.

Yes. And again, we're in 22 states. And we -- back to your question on ancillary services, I mean again, our partnership with Ford is in all 50 states. So that gives us an entree to 28 additional states for services.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines. Thank you for your participation.