Sunrun Inc (RUN) 2022 Q1 法說會逐字稿

Greetings, and welcome to the Sunrun 1Q '22 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 of Investor Relations. Please go ahead.

Thank you, operator. Before we begin, please note that certain remarks we will make on this 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 Mary Powell, Sunrun's CEO; Tom VonReichbauer, Sunrun's CFO; and Ed Fenster, Sunrun's Co-Founder and Co-Executive Chair. Following their prepared remarks, we will conduct a question-and-answer session.

And now let me turn the call over to Mary.

Thank you, Patrick. It's wonderful to connect with all of you again today on what Sunrun has been up to in the last quarter. It's hard to believe it has only been about 2 months since our Q4 call because we have been incredibly active. And I am pleased to say we have a lot of positive developments to share.

I'm encouraged and excited about the progress we're making as a leading provider of clean energy. With climate-related events becoming more urgent daily, our passion and optimism about our purpose and our ability to lead a distributed clean energy revolution has never been stronger.

Bottom line is we delivered results in Q1 that beat our expectations. We added over 29,000 customers in Q1, representing over 213 megawatts of solar energy capacity installed, a 27% increase from last year and well above our guidance. We delivered a net subscriber margin of over $7,100, which was also slightly above guidance, with an increase from last quarter.

I want to cover a few topics today before I turn the call over to Tom and Ed for their quarterly updates. First, customer demand remains incredibly strong and Sunrun is growing at a rapid rate. We are also achieving these growth levels at a scale that is 2x our nearest competitor while innovating and continuing to generate value from the combination of the 2 companies. Our customer orders grew 39% compared to last year, outpacing our still impressive robust installation growth of 27%. The strong demand trends resulted in expected growth in our backlog of customers.

We are working strategically and expeditiously to ramp our installation capacity both internally and with our partners. We are seeing strong improvements in our internal installation capabilities and feel blessed to have some of the longest-standing channel partner relationships in the business, which are strategic and valuable for not just the incredible reach they provide in the market but also for meeting additional customer demand.

I fundamentally believe we are at a tipping point of adoption [where clean energy is a novel] concept but something customers are demanding. Customers see escalating energy costs and a lack of reliable power all around them. And they want the security and peace of mind that comes with energy independence. Climate change and geopolitical issues are now affecting the daily lives of so many consumers, accelerating what I have always seen as a looming consumer-led revolution to a cleaner, more decentralized energy future, one that is customer-centric and can incorporate the more reliable, localized and innovative way consumers are thinking about powering their vehicles and home from their rooftops.

Second, we are quickly adapting to the world around us. Material cost and interest rates have increased, and we have taken fast and effective action to adjust to these industry-wide dynamics in a way that will make us faster, better and stronger. We recently increased prices across most markets with flexibility granted to us by double-digit utility rate inflation around us. These pricing adjustments will lead to considerable increases in subscriber values and can help mitigate the recent cost pressures faced by our industry.

You can see in the accompanying slide deck that the customer additions to our backlog following this price change and other changes we have made are coming at much higher subscriber values, which we expect to realize over the coming quarters given the size of our backlog and cycle times, which vary by market.

Third, we are continuing our focus on innovation. We have now deployed over 37,000 residential batteries, far more than any other energy company and are networking these batteries together to form virtual power plants in many markets. While it takes time to enter new markets and show how valuable dispatchable distributed energy resources are for the grid, at a certain point, I believe it will become self-evident to traditional utility companies and grid operators that they need to partner with us and our growing customer base, as utilities start to realize the resiliency value we offer to the grid and their customers, regulators will undoubtedly push them to do so as well. There is no quicker way to get to a more affordable resilience than by embracing the rapid adoption of distributed resources.

Our partnership with Ford is on track and poised for exciting things in the very near future. Ford launched production of the F-150 Lightning last week, and Sunrun is now in the process of connecting with customers to facilitate the installation of the Charge Station Pro and the Home Integration System, along with providing options for solar and battery systems in participating markets. Over the next few months, Sunrun expects to install thousands of these systems for F-150 Lightning customers. And we will provide an update on the realized benefits of the partnership later this summer.

During the quarter, we also invested an incremental $75 million in equity into the venture we co-established with SK. The venture is making a significant progress and expects to unveil powerful new technology by the end of 2022, with commercialization expected this year or early 2023. Sunrun currently owns approximately 37% of the venture and has preferential access to the technology being deployed. Sunrun expects the differentiated products and services will accelerate Sunrun's business and expand the customer value proposition considerably. I am incredibly excited by the unique product offerings we will have for Sunrun customers through this partnership.

Fourth, we have a strong team, and we're moving fast. I am leveraging my experience transforming companies and finding ways we can make Sunrun even faster, better and stronger, adding to the foundation that has been put in place. Over the last few months, we have collapsed several layers of management structures in various parts of the business to ensure we operate nimbly and can share information and learnings from our branches and from our customers in the fastest, most streamlined way possible. We have also taken actions to expand certain areas of the business while reducing investments in others.

For instance, we opted to transition a few of our subscale branches to a channel partner-driven go-to-market strategy and took decisive action to walk away from aspects of markets that fundamentally weren't hitting our return thresholds. We also refined our approach to pricing home upgrade projects and increased our investment in our customer-facing teams. With this change, we are now achieving customer care agent answer times of 10 seconds on average when a customer calls with an issue. This is a big improvement from where we were in Q4 at about 3 minutes. We're always innovating and finding new opportunities for improvement, but these are a few examples of the kinds of investments we are making to make the company stronger. All of these changes were made with a laser focus on customers and the culture of customer obsession we are building together.

I firmly believe that the more focused and deliberate we can be in our go-to-market strategies and organizational structure, the faster we can grow, innovate and respond to the needs of our customers and the communities we serve.

Today, we are also announcing that effective May 30, Danny Abajian will succeed Tom VonReichbauer as our CFO. Danny currently oversees Sunrun's Project Finance group, where he has produced significant results for the company for nearly 12 years. He is a talented, driven and passionate member of the Sunrun team, who brings a wealth of experience and knowledge to the CFO role. I look forward to partnering with him for the next chapter in Sunrun's journey as he leads the combined Project Finance and Corporate Finance team.

Tom, who has been our CFO for the last 2 years, will be leaving Sunrun to pursue another opportunity at a private technology company outside of our industry. I am so grateful for the partnership with Tom over the last 2 years, a period which included transformational changes with the acquisition of Vivint Solar and rapid growth while navigating the challenges of COVID. Tom will remain in the consulting capacity to ensure a smooth transition for the next 4 months, and we wish him all the best in his future endeavors.

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. Every time I am in a branch location or out in the field with our team, I am inspired by their passion, ingenuity and willingness to take on challenges. My mantra is delivering on our customer obsession faster, better, stronger. And I am proud of Sunrun's team, who's embracing this opportunity to maximize our impact for our customers, investors and the communities we serve.

In addition to thanking our amazing employees, I also want to express my sincerest gratitude to our customers. They are the ones transforming our country's energy system and helping to solve climate change, one home at a time at a very rapid pace. It is an honor to serve them.

Over to you, Tom. And again, thank you so much for your service to Sunrun and our planet.

Thanks, Mary. It's been a privilege to get to work with you and so many talented and passionate Sunrunners over the last 2 years, and I look forward to following the company's continued success.

Turning to the results for the quarter. In the first quarter, customer additions were approximately 29,500, including approximately 22,000 subscriber additions. Solar energy capacity installed was 213 megawatts in the first quarter of 2022, a 27% increase from the same quarter last year, which exceeded the guidance we provided of 195 megawatts to 200 megawatts.

We saw strong customer demand for our products and services in Q1, continuing a trend we saw throughout 2021. Customer orders increased by 39% in the quarter compared to the prior year, outpacing installations, leading to a growing backlog. While this sets us up for continued strong deployment growth, the mismatch between sales and installation activities creates a drag on reported financial performance, as we've been highlighting over the last few quarters.

We've now installed over 37,000 batteries, and we expect battery installations to increase by more than 50% in 2022, which is twice the growth rate of overall solar installations. While battery availability constraints continue and supply chains remain dynamic, we expect to ramp up battery installations considerably in the quarters to come as supply increases.

We ended Q1 with approximately 690,000 customers and nearly 589,000 subscribers, representing 4.9 gigawatts of network solar energy capacity, an increase of 21% 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 Q1, our annual recurring revenue, or ARR, stood at $883 million with an average contract life remaining of over 17 years.

In Q1, subscriber value was approximately $37,000. And creation cost was approximately $29,900, delivering a net subscriber value of over $7,100. Total value generated, which is the net subscriber value multiplied by the number of subscriber additions in the period, was $151 million in the first quarter. This result was slightly above the outlook we provided last quarter as we noted the continued effects of COVID on reduced installation capacity and knock-on effects for crew productivity in early Q1 and continued fast growth in orders. While demand has been incredibly strong over the last few quarters and our backlog has grown, we believe in our ability to scale fulfillment capabilities to serve this backlog as we move through 2022.

As Mary mentioned, we adapted to changes in our underlying cost environment, both on higher material costs and capital costs by increasing prices across our markets, with some markets seeing double-digit increases. The underlying utility rate inflation that our customers are experiencing is in line with these pricing changes. And in many cases, utility rates are rising even faster, creating an opportunity for price increases without impairing the savings component of our customer value proposition.

As you can see on Slide 9, this is having a significant impact on the subscriber values we are adding to our backlog, increasing by over $3,000 per subscriber. As we work through the backlog over the coming quarters, you'll start to see this flow through our reported subscriber value once installed, offsetting many of the cost pressures the industry is facing and delivering net subscriber values of more than $10,000 in the third quarter of this year. We are strategically optimizing overall sales activities and revising our policies on pricing and product mix in certain markets. These moves are already producing positive results.

Turning now to gross and net earning assets on our balance sheet. Gross earning assets were $10.2 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 capital cost.

Net earning assets were $4.5 billion at the end of the first quarter, an increase of over $200 million from the prior year but a reduction of around $150 million compared to the fourth quarter. Net earning assets is gross earning assets plus cash less all debt. The sequential decline is primarily due to the $75 million investment in the venture with SK, the continued consumption of working capital given the strong sales activities and growing backlog and our decision to maintain strong inventory positions in the face of a dynamic supply chain environment. We ended the quarter with $863 million in total cash.

Turning now to our outlook. The strong customer demand we continue to see and success increasing our fulfillment capacity gives us confidence to revise our full year guidance to over 25% year-over-year growth in solar energy capacity installed. Consistent with last quarter's guidance, the volatile interest rate environment, pending California net metering policy and proposals in Congress to extend and/or increase the investment tax credit, limit our ability to provide 2022 guidance for total value generated and cash generation.

Due to the rapid rise in interest rates, we now expect the projects we originated prior to the recent pricing changes to generate less proceeds than previously anticipated. 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 total value generated and cash generation in either direction.

We currently forecast total value generated for the full year 2022 will grow meaningfully faster than volumes and that net subscriber values will increase sequentially throughout the year. As I mentioned earlier, we expect to deliver net subscriber values above $10,000 in Q3.

For the second quarter, we expect solar energy capacity installed to be in a range of 235 megawatts to 245 megawatts, which reflects more than 12% sequential growth and more than 25% year-over-year growth at the midpoint, well on track for our increased annual outlook.

Now I'll turn it over to Ed.

Thanks, Tom. I want to echo Mary's appreciation of Tom's contributions and also to share my excitement for Danny's promotion to CFO. I have worked shoulder to shoulder with Danny for over a decade and know he is the right person for this role. His knowledge of Sunrun and his finance capabilities are unparalleled. And in his 12 years of the company, Danny has also pinch hit in several other areas, for instance, in Corporate Planning and M&A. He was instrumental to our convertible debt offering as well.

Following Danny's ascension to CFO, Stewart Bewley will lead Project Finance and report to Danny directly. I've been looking forward to Danny having this opportunity, and I'm very excited to see him open this next chapter.

Today, I'll discuss the impacts of increases in inflation and interest rates on the company, summarize our recent capital market activities and provide an update on regulatory matters.

This quarter, we've been busy positioning for increasing interest rates. For instance, raising prices to new customers as necessary behind the large utility price increases that are underway. As regulated monopolies, utilities are able to pass through their higher labor, fuel and capital cost to customers. And despite an 11% year-over-year increase in national electricity prices, this pass-through has just begun. In addition, our existing capital structure is well hedged through a mix of interest rate swaps and fixed-coupon, long-dated debt securities.

As Mary noted, we have implemented meaningful price increases and expect recently originated customers when installed to generate at least $3,000 in incremental net subscriber value as measured at a 5% discount rate. This benefit will flow through in Q3 and is designed to mitigate the higher material and capital cost the industry is facing.

On Slide 9, you can see the sensitivities to subscriber values using various discount rates. We currently observe our capital cost is between 5% and 6%. Increasing the discount rate 25 to 75 basis points above 5%, for instance, would reduce pro forma subscriber values by approximately $750 to $2,100.

As you may recall, several years ago, we used to report the figure using a 6% discount rate and didn't update it to 5% until we saw capital costs below 4%. While we actively monitor capital costs, we don't plan to update the discount rate for minor fluctuations above 5%.

In April, we priced a $0.5 billion asset-backed security senior note. The transaction was the largest solar lease portfolio placed in the ABS market ever across all issuers in the sector. We expect to achieve proceeds on this portfolio, net of fees from all sources, rebates, tax equity, customer prepayments, swap terminations and senior and subordinated debt of about 95% of contracted subscriber value measured at a 5% discount rate.

We expect to achieve a weighted average cost of capital for this pool of assets of about 4.5%, including benefits from interest rate swaps or about 5.5% excluding swap benefits. As we've shared before, we frequently enter into interest rate swaps to hedge capital costs on our newly installed customers.

As we tweak our financing strategy and benefit from less robust swap terminations, we expect total advance rates to settle over the moderate term between 85% and 95% of contracted subscriber values discounted at a 5% rate. We believe a wider range is appropriate given the current volatility in the fixed income markets.

Finally, as described on the last earnings call, we retired our $250 million recourse lending facility and arranged a larger $425 million facility at enhanced terms and with a longer tenure. During the quarter, we upsized that facility to $600 million on the same terms. The facility is only partly drawn.

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 400 megawatts for subscribers beyond what was deployed through the first quarter. The multitude of events causing massive delays in the utility scale segment are causing several capital providers to experience unexpected shortfalls in 2022 transaction volumes, especially among tax equity investors. We expect this to provide a modest tailwind for us.

Turning now to an update on regulatory matters. Sunrun is in a strong position to navigate a dynamic supply chain environment, most recently compounded by the uncertainty of potential retroactive tariffs actually called by many the AD/CVD anti-circumvention matter. This investigation by the Department of Commerce concerns solar imports from Malaysia, Thailand, Vietnam and Cambodia using Chinese inputs.

To maintain high levels of component supply, particularly solar modules, we continue to increase our inventory position. As of March 31, we held over $0.5 billion of inventory on balance sheet, up $49 million during the quarter and up $273 million since the start of 2021. We have over 100 days of supply on hand of both modules and inverters and continue to procure modules from a diversified base of manufacturers.

We believe the Department of Commerce's investigation is misplaced and contrary to the administration's objective to encourage the transition to clean energy. Most head scratching is that the application of tariffs against these countries would simply cause American solar developers to buy panels directly from China, which currently exports almost no product to the United States.

We have entered into several supply arrangements for hundreds of megawatts of solar modules in total for manufacturers unaffected by the investigation. We also expect to enter into additional agreements in the coming months. Purchases from such manufacturers may be on less favorable terms than our existing suppliers and result in increased working capital investments.

Last week, the Republican Governor of Florida vetoed an anti-solar bill that was drafted by the state's utilities and pushed through the legislature earlier this year. The vetoed bill, which was somewhat watered down as it went through the legislature, proposed certain reductions to net metering in future years and called for a regulatory proceeding to consider a fixed fee for solar customers.

While also citing inflationary pressures. Governor DeSantis' veto statement essentially said that no one should be forced to pay utility for power, the utility never produced or sold in the first place. Prior to the veto, the largest utility in Florida was granted a double-digit rate increase. We believe the read-through to California is positive and the comparison was immediately taken up by the media. For instance, political opined, "DeSantis is now in the position of setting a pro solar bar for his rival, California Governor, Gavin Newsom, to clear." In addition, the massive delays in utility scale renewable development are causing elevated blackout risk in California.

On April 27, Governor Newsom wrote the Commerce Department that their investigation alone threatens our ability to maintain energy reliability ahead of the retirement of 6,000 megawatts primarily generated by aging gas-powered once-through cooling plants. Utility-scale projects are also struggling under pressure from unforeseen capital cost increases and permitting delays. Throttling rooftop solar and storage deployment against such a shortfall looks even less wise than it did in December.

We remain optimistic that Congress may come together to pass some sort of climate legislation, which includes an investment tax credit extension. But we don't proclaim to have a crystal ball to predict when parties will come to the table, if they will reach an agreement or what the scope of any agreement might be. We will remain active in urging Congress to act. But we'll manage the business assuming the status quo for the time being.

With that, let me turn it back over to Mary.

Thanks, Ed. I'm so excited about Sunrun's leading position in this industry. I believe we are at a tipping point of adoption and starting to see a transformational change in how consumers think about energy.

Before we open the line for questions, I want to stress how appreciative I am of our team, our customers and our partners, who are all helping create a planet run by the sun. With that, operator, let's open the line for questions.

(Operator Instructions) The first question comes from Brian Lee from Goldman Sachs.

Kudos on the nice execution here. I guess first question I had was just on the subscriber value. You're going from $7,000 here for the past couple of quarters to now $10,000-plus in Q3. I know you've talked about pricing a ton. So I know that's a clear driver. But I would assume there's other drivers here in terms of mix and cost improvements, more batteries.

So can you kind of give us a bit of a bridge from the $7,000 to the $10,000? How much is price? How much is other drivers? And then I know historically, you've talked about subscriber value targets up into the $10,000 to $12,000 range. What is this sort of pull forward here this year to get to that $10,000 range already mean for kind of the longer-term targets? And then I had a follow-up.

Yes. Thanks, Brian. So the last 2 quarters, we saw abnormal effects from the drag of COVID and labor productivity challenges there at the end of Q4 and early Q1. So we saw those abate throughout Q1 and certainly haven't continued to here into Q2. The pricing moves will be a large component of this but continuing to increase battery attach rate as well. Some of the general ongoing efficiency measures we've taken as well will show up as positive moves on net subscriber value. Offset partially by rising material costs. So as we've taken on slightly more expensive components over the last couple of quarters, those start to work their way into the installed volume here in subsequent quarters.

We view the greater than $10,000 number for Q3 as an outcome that we're particularly excited about and optimistic in. And I don't think it's fundamental change from long-term views. Maybe it sounds like, to your point, it's sooner than you had expected, but definitely the direction we've been pushing for quite a while. I think we want to see where the pricing changes land and work through our backlog.

The one dynamic that we continue to work through is the incredibly strong demand we're facing that in any given period, if demand outpaces, that creates this reported margin drag because of the timing of sales and marketing expenses versus installed volume. So that may have some variability in there. But we're confident in the $10,000 number. I feel like the majority here is moving through these pricing and product mix changes.

All right. That's great. I appreciate that. And then just the second question I had, and I'll pass it on was around some of the comments you just made, Tom, about the strong sales pipeline kind of not being able to keep up the healthy backlog. So high-quality problem to have. But can you kind of elaborate a bit more on sort of labor or if you're seeing any challenges there on the EPC side, if you're having to adopt any new strategies or thinking about that differently? Just kind of how you're addressing the high level of backlog and trying to keep up here as you move through the year?

Yes. Actually, Brian, it's Mary. I can answer that one. Yes, so as I hit -- basically, a lot of what you're seeing that Tom hit that's flowing through subscriber value is attached to not just the pricing but like are really going at the go-to-market strategy, taking decisive action in some markets, where we weren't hitting the return thresholds we wanted to. And at the same time, some streamlining and improvement and putting into place a team and an approach that can help us make significant progress on the backlog in the next couple of months.

So what we have is we're in a strong position. From a labor perspective, we're growing fast. We're hiring people. We're finding we're a very attractive employer. We're really hiring high-quality installation crews. And at the same time, we also, as I was talking about, are leveraging this amazing position we're in, in the market with the kind of partners we have, channel partners we have, where some also want to be built partners. So we're working very decisively with them in terms of having a real approach to make sure that we're closing a lot of that backlog in the coming months.

The next question comes from Julien Dumoulin-Smith from Bank of America.

Congrats to all those with the new roles here. Just to come back to the core question here on the 10-K. Can you talk about like the puts and takes, if you will, right? I mean obviously, cost, especially as you roll in off your inventory could be a detriment there. But can you talk about the extent of that price increase being a positive sort of like a grossing before you netted out to that $10,000 versus where you're starting at today? And just to go back to the prior point, the sustainability and trajectory from here, any nuance we should be considering beyond 3Q here as you roll it forward?

Yes. So the price increases certainly are additive. Obviously, there have been modest material cost increases. As Ed noted, we presented net subscriber value at a 5% basis, have had moments in time where we've been well below that on capital costs. We're now in that range. We're still going to hold that at 5%. And so the price increases are moves that more than offset material cost increases for us. The additional moves around higher battery attach rate and some of the changes that Mary noted that we've made around product and pricing policy that will drive more profitable projects through.

The one area, again, we're obviously confident enough to put out the $10,000 number here for Q3. The item that we've noted now for several quarters has been this backlog growth dynamic. I think with the things Mary just noted in the last question, we're really confident in our ability to ramp. It is worth noting we are at massive scale and still growing installation volume quite considerably, 27% year-over-year for the quarter, continuing to believe that we're going to increase at very fast rates. It would appear to be share gaining rates relative to some of the external forecasts.

And we're doing that at scale. So we're able to add a lot of capacity, both through ourselves and through partners. There's some chance, I guess, in there that demand continues to rip. And that, again, creates a drag on reported values. But with where we are right now and what we see, we feel confident in our ability to execute and get to this level.

And Julien, maybe just to add to that, it's our expectation that the improvements that we're describing are structural and not like some temporary high watermark for Q3.

Right. No, indeed, I'm almost curious to push again. And the second question here on just how far you can go with it, not if it's sustainable, really. But if I can actually -- I mean, Professor Ed, if I can address you as such. Do you want to talk a little bit more -- can you talk a little bit about this. I hear you on the customer metric. But let's talk about levered value creation quickly and how we might think about a metric there, especially against this notion of lower advance rates. How do you think about that metric evolving very specifically here against your $10,000 target? And how is your financing strategy evolving more specifically? I know you laid it out in part here. I just want to make sure we've got that clear cut.

Sure. So maybe just to recap a few of the things we described on the call first. The transaction that we're in the process of wrapping up right now will have an experienced weighted average cost of capital of about 4.5%. It is benefiting from interest rate swaps. Without those swaps, we think it would have been about 5.5%.

In the presentation, we make the point that subscriber value at 5.25% to 5.75% discount rate as compared to 5% would be worth about $750 to $2,100 less. So we see the improvements in net subscriber value that we're describing as outpacing the increases in interest rates. Obviously, that's a moving target, which we're watching carefully, including today, but one that we are staying on top of. We see, obviously, as we mentioned, significant and escalating increases in utility cost prices, which is fundamentally our most significant competition.

In terms of the strategy for how we finance the assets, I don't know that we're looking at any significant differences. One dynamic worth mentioning is that the spreads that the cost of our capital that is over treasuries right now appears to be lower in the bank market than in the ABS market. My suspicion for the reason of that is there have been capital withdrawals from long-term fixed income based on the rapid increases in interest rates. And obviously, those rapid increases in interest rates haven't caused bank deposit withdrawals.

So there's still significant excess liquidity in bank deposits. And so we haven't seen spreads in that market move. So it's possible in the future, you'll see us doing more work in the commercial bank markets if the current relative spread dynamics between those markets continues to hold.

All right. Fair enough. I'm curious to see what happens. Cheers guys.

Thanks.

The next question comes from Kashy Harrison from Piper Sandler.

So just first one for me. You've obviously had a very strong order growth here in Q1 and 39%, which is solid. The market right now is very focused on leading-edge demand trends these days just given just the massive amount of uncertainty globally. And so I was wondering if you could maybe just give us a sense on how order growth in April is tracking. Are you still seeing that 39% year-over-year continue? Or are you seeing any sort of deceleration in April?

Yes. I mean, basically, again, as I hit, we feel like we're really at an incredible tipping point that's happening from a consumer perspective. So overall, we see the trends of adoption continuing. So that's what informed everything that we've reported today, informed our raise in guidance on the year to now 25% or higher. So yes, we're feeling like there is really sustainable demand.

Okay. And my follow-up, Ed, you highlighted in your prepared remarks that you're currently experiencing a tailwind in the tax equity market due to the AD/CVD issue. Can you give us an update on where you see the cash cost of tax equity today, and maybe talk about how that's evolved just given the fluctuation in the interest rate market?

Sure. So good question. So I should mention -- so first, when I discussed the delays in the utility scale segment, I think it's much more profound than the Commerce Department investigation. My suspicion is that the changes in capital costs and equipment prices would probably drive underwater 1/3 of utility-scale projects even if the Commerce Department investigation was resolved with no further tariffs.

So I think that generally speaking, among capital providers who are focused on renewable projects, there's just a lot of slippage. And some people are looking for additional 2022 product. And the tax equity market is even more of a calendar year market than most markets so you're seeing there.

That said, the cash cost of tax equity continues to be up and down on the 13 years I've been doing this, really very, very close to 2% on a pretax basis, like that's really about what it costs. Usually, when you see excess supply flush to the market, it's usually -- whether it's just bigger funds or more flexible terms on certain other things, but we don't typically see very significant variation in the actual like pretax IRR in this transaction.

The next question comes from Maheep Mandloi from Credit Suisse.

Congratulations on the quarter and the guidance increase. Maybe just one question from me on the price increases or potentially higher value kind of like thing for the customers going forward. Are you just seeing price increases because of higher electric builds from the utilities? Or is that something you're kind of expecting later this year or next as we -- the utilities get into their rate-based approval side?

Sure. So this is Ed. So as I mentioned, obviously, the 3 major costs of utilities are all increasing: fuel, labor and capital. These are reflected in different speeds in retail rates. Capital, certainly in rate cases. Fuel, sometime most quickly. Labor, in the middle. And what we're describing is the clear CPI data for national electric energy is up 11%. And to your point, a lot of those cost dynamics haven't yet been approved or measured or even filed for. So that's what gives me the confidence that the 11%, which we've seen so far, is only the tip of the iceberg.

Yes. And just to pile on to that, Ed. From my perspective in the utility business, one of the things I saw many years ago, and I've only seen it accelerate is we have to remember that with all of the investment you're seeing, so all of the investment in transmission, distribution, all of that is creating long-term systemic rate pressure. So really on top of the sort of shorter term items that Ed's hit that are absolutely going to cause pressure, you also just have systemically these significant drivers of rate increase pressures.

Well, I think on a recent call, I described the bonanza utility capital expenditures, which are running multiples ahead of depreciation, which programmatically causes increased rate base and rates.

Got it. Thanks for the color. And just last one from me and I'll jump back in the queue is around your partnership with Ford. And you talked about more than 200,000 of reservations. But like could you just talk about like how should we think about upside or EBITDA contribution from that segment for this year or going forward?

Yes. So we're relatively early in the ramp, as Mary noted. Production and the launch just began. We're reaching out to those early customers. You can think about a couple of different components of the business. There's our EV charger sale and installation business. That extends to include the home integration system with the bidirectional inverter, enabling whole home backup from the vehicle.

That portion of the business on its own, you're going to go as a solid hardware and services distribution business, where we're selling hardware at reasonable margins and providing our installation services. And then I think the -- that will ramp as vehicle production ramps and will be a nice business in its own, right?

I think the larger unlock here is when those offerings then get coupled with a solar install, where I think those customers are more likely to have a larger system potentially a home battery. It might have lower customer acquisition cost because of the efficiency of coming through the Ford channel. And that will have a much more meaningful impact on subscriber values. But given the shape of the ramp in vehicle deliveries, you can expect more of that to probably materialize in 2023 and beyond, although there's definitely positive benefits this year.

Right. And just to sort of underscore the customer unlock, if you're a Ford customer wanting the bidirectional feature, for example, you can pay thousands of dollars to get a bidirectional charger installed, right? Or you can get solar installed with at all, in which case now it has a negative cost rate. You're now saving money from the solar system and you've got the home backup. So it's like a very compelling customer value proposition.

And look like they have to buy the backup generator from you -- the backup charger from you, right?

Yes. We're their insulation provider of choice and co-developed the home integration system.

The next question comes from Joseph Osha from Guggenheim Partners.

Professor Ed, you're now stuck with that nickname for all time, by the way, just so you know that. I think you commented during your prepared comments a little bit about hedging out cost of capital exposure as it relates to your pricing. Can you help me understand that a little more? I'm thinking about the backlog and how that backlog continues to grow, how you manage to hedge out your cost of capital exposure? And then I have another question.

Sure. So typically, how that works, Joe, is that as we install a system, we're locking in the interest rate prevailing at the time of installation. And installation could occur 9 or 12 months before term out. So in the transaction that we just completed, obviously, you see the treasury rate embedded in the coupon at the time that we issued the security. But really economically, we locked in the treasury rate at the time of installation.

So all the assets that we have developed and that are sitting in our warehouse facilities are hedged with the interest rates that were in effect at the time those projects were installed. So certainly, as Tom pointed out, there are systems that we sold late last year that haven't yet been constructed that we're now constructing. And the proceeds we'll receive on those systems are going to be less than we forecast.

But the systems that were installed prior to the large run-up in rates, we were able to lock in the rates on those systems. And obviously, the more recent systems which are being sold at higher rates are insulated from capital cost in that regard. So we do have this sort of like middle zone that we need to work through. But other than that, I feel like we're pretty well matched.

But again, that -- just to amplify on the question, it does sound like you have the way this works for now still some sort of open cost of capital exposure between the time when you sell the system and when you install it. Is that what you're saying?

Correct.

Okay. And is there any way to mitigate that? Or is that just kind of it is what it is?

I mean you could buy options to mitigate it and, therefore, likely pay the expected value price of it. So if you look at a strong position, you thought interest rates were going to rise faster than everyone who trades interest securities like you could do that. But I think that our general approach instead is just to drive the cycle times down. That is a better customer experience. It's a more natural process for us. And that's the way we've been handling it.

Okay. Great. Got it. And then second, much more simple question, given how all of this is washing through your business model, how do you feel not just this year, but on a sort of a go-forward basis about how cash generation for the business looks are relative to growth.

I think over the long term, we continue to sell a product that is an excellently high demand, right? It is lower and more certain energy cost. It is better reliability. It is environmentally clean. And the tailwind there is significant, like certainly in the 13, 15 years we've been doing this, I've never seen a demand environment like this. And so certainly, that's helpful if you're experiencing increased costs, whether that's operational or capital. We're doing our best.

And I think meeting with some success, getting efficiency up and cost down and all the things that you want to do in any business anyway but also have the ability to pass through pricing because our competitor, the electric utility, turns out also capital cost is an input in their business. And so I have still very good -- I'm still very optimistic about the long-term cash flow capabilities of the business for that reason, right? It's not like we're the only energy company that capital cost is an input to. So capital costs may go up. That can pressure us, but it pressures everybody up. So everyone else prices up, we price up. And lo and behold, everyone is still making money.

The next question comes from Mark Strouse from JPMorgan.

I just want to go back to the anti-circ case. You mentioned the inventory you have. You mentioned the existing agreements and the potential future agreements that you have with kind of nontariff supplies. Can you just kind of directly address how -- does that give you enough visibility to meet this greater than 25% growth, your target for the year?

And then kind of the hypothetical follow-up to that is in the event that supply does become limited, I mean what would be the strategy? Do you -- buying for China with a known tariff. Do you keep buying from Southeast Asia with kind of an unknown tariff? What would be the hypothetical there?

You start, Tom.

So on the general -- or the first question as it relates to inventory levels and outlook, we feel very well positioned. As you can see on the balance sheet, we increased the absolute dollar of inventory that we were carrying quarter-over-quarter again, now north of $550 million. Triple-digit days of supply on the vast majority of the things we need and continue to have strong and steady flow of products even as we're ramping our installation volume here over the quarter and throughout this quarter. So I think the general view is we felt really confident moving up to the 25%-plus year-over-year growth and should be able to meet that even as things moderate. You've got at least a quarter that's fully covered here.

And then as we look at the general supply picture, as Ed noted, we're continuing to look at new sources of supply from different portions of the world, looking at other options here to get access to product, to the extent there's a large contraction in the available supply in the market, that obviously creates some pressure on terms that may be available for those products. But one where I think, thus far, we feel reasonably well protected.

Yes. I had mentioned like there are avenues to take -- to get the panels that are not from effective manufacturers. Those could be international manufacturers, not in Southeast Asia. It could be American manufacturers. And to your point, Commerce just very recently made clear they wouldn't see tariffs from Southeast Asia exceeding tariffs from China.

So if you did end up with tariffs, Chinese manufacturer is cheaper, so you'd probably end up buying from China as compared to Southeast Asia. But there's no reason to do that preemptively. And I think just stepping back, like everyone in government has made really clear how frustrated they are by this petitioner and by this petition. And the Commerce department has used language like, "Our hands are tied in terms of opening the investigation."

I think the chance of a negative investigation here -- a negative result is very, very low. But we are very confident we can meet demand from the module side kind of irrespective of what direction it goes. There'll be a question of around the edges, what's the module cost? Like what are the days payable on it? But we'll find that we're very comfortable that we'll meet our customer interest.

The next question comes from Andrew Percoco from Morgan Stanley.

So just one quick one for me. We talk a lot about or heard a lot today about utility price increases across the U.S. Has that opened up any new markets for you guys that you don't currently operate in today? And if so, what would be the potential go-to-market strategy there?

I mean we're always monitoring what is going on across the country for sure and evaluating strategic moves as it relates to new territories. As you know, now we're operating in 22 states and Puerto Rico and Hawaii. And we're feeling very comfortable in the markets that we're in. But we're always continuing to evaluate that, to your point. So yes, I do foresee that in the years to come, there are going to be other markets that, again, might not look attractive today but will quickly be looking attractive because of utility rate cost pressures.

The next question comes from Philip Shen from ROTH Capital.

I think you just filed a mixed shelf along with the results today. And in your Q, it looks like maybe you have $107 million undrawn. Can you walk us through your liquidity situation? And what is your view on tapping into the equity markets near term?

That's simply a corporate hygiene move that we periodically do. And as I mentioned, we have ample liquidity. And we just increased the size of our company's revolver, which isn't fully drawn. So we're -- we feel very comfortable in our current position.

Thanks, Ed. And then as it relates, Mary, to your comment that you collapsed several letters of management structures, can you talk about how many people left and departed the organization? And then how many more do you expect as you right-size? Are the layoffs over? And what do you expect to have there?

So I mean, overall, the company is we're growing fast. And so overall, from like an overall headcount perspective, we are in a growth mode. That's the position we're in. But yes, obviously, right, we did really collapse layers and look at, again, making sure it's a really streamlined, flat as possible, close to the customer organization. And we're hiring -- we're bringing in a lot of new employees. In terms of getting into specifics -- specific numbers, no, that's not really -- I don't think it's a place I want to go. But I will tell you, overall, we are a growing organization. And again, we're hiring fast to keep up with the demand.

The next question comes from Ameet Thakkar from BMO Capital Markets.

You guys have talked a lot about potential headwinds from higher interest rates or financing costs. But I was just wondering on kind of the other side, are you guys seeing a pickup in customers kind of opting for kind of third-party ownership models versus loans? And it seemed like loans have been a little bit more popular in the last year. And I was just wondering if you're getting a bit of a tailwind from that.

Yes. This is Ed. It's an interesting dynamic. Mostly speaking, it's really the sales reps that drive interest in loans versus leases, where sales reps who are looking for a simple sale with a better feature set but kind of willing to accept the controls that we put on something because we care about production and things like that prefer to sell a lease. And those that prefer the later control set tend to sell loans.

There's an interesting dynamic in the market right now, which is that the capital cost for solar loans have gone up almost 2.5%. And for the most part, we haven't seen any change in solar loan pricing. Like I doubt actually the United States Treasury could make money buying solar loans from us at the moment. So it will be interesting to see how the dynamics play out in that market. But certainly, right now, it's an attractive customer value proposition.

Great. And just one more real quick one. The battery growth of 50%, I mean, that's a pretty good off of a low base, I guess. Is some of that driven by people coming back and retrofitting their systems? Or is this all kind of just more availability and higher attach rates?

There is a little bit of that. But again, I wouldn't say it's on a small base. Just to remind you, we have 37,000 residential batteries deployed, I think, one of the highest numbers in the country. So yes, we're seeing just greater interest in the context of providing a lot more to customers than just the benefits of going solar. So it is -- we're rapidly moving into this customer obsessed place of providing customers a lot more as they think about improving their lives and their homes and what they drive. So yes, we continue to see that attach rate go up in the future.

The next question comes from David Peters from Wolfe Research.

The question I had is just on the mix of subscribers versus purchase customers. This quarter, it dipped even a little lower than Q4, which I understand has bit of a seasonal component to it being at the end of the year. But just going forward, should we expect this level to stay in the low to mid-70s? Or would you expect that to ramp back up?

Yes. No. Ed noted some of the short-term dynamics that are in play there. But what we saw in Q4 and Q1 here simply the mix of what was coming out of our backlog. We've seen with some of the pricing and product changes that we've made of late seen up-funnel sales mix begin to move back more in the direction of TPO or third-party owned. And so I think we'll come off the current levels. And the points that Ed mentioned there will impact maybe a little bit how long loan remains as attractive as it is at the moment. But we would expect to see a return to something higher than where we were in Q1.

Great. And then just switching gears, so the additional investment in the SK venture, $75 million, I think you highlighted, could you maybe give a little kind of preview of some of the initiatives you're working on through that? And when you do expect to commercialize some of these products and services, would you expect to see these flow into your net subscriber value metrics? In other words, be additive to the 10-K that you pointed to later this year?

I mean, make no mistake, everything we do is about how it can be additive from a customer perspective, clearly, an investor perspective and a community perspective. So yes, we're very excited about the technology that this venture is working on. But we're not in a position to give any more specifics about it at this time.

I think that's all the time we have for questions. Appreciate it.

Yes, it is. Ladies and gentlemen, we have reached the end of the question-and-answer session. This does conclude today's conference. You may disconnect your lines at this time, and thank you very much for participating.