Sunrun Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 16 speakers on the call.

Operator

Good afternoon and welcome to Sunrun's Third Quarter 2024 Earnings Conference Call. Please note that this call is being recorded and that one hour has been allocated for the call, including the Q and A session. I will now turn the call over to Patrick Jobin, Sunrun's Investor Relations Officer.

Speaker 1

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.

Speaker 1

On the call today are Mary Powell, Sunrun's CEO Amy Badgien, Sunrun's CFO and Paul Dixon, Sunrun's President and Chief Revenue Officer. A presentation is available on Sunrun's Investor Relations website along with supplemental materials. An audio replay of today's call along with a copy of today's prepared remarks and transcript including Q and A will be posted to Sunrun's Investor Relations website. We have allocated 60 minutes for today's call including the Q and A session. And now let me turn the call over to Mae.

Speaker 2

Thank you, Patrick, and thank you all for joining us today. This was a strong quarter. Sunrun is becoming faster, better and stronger at everything we do, providing a differentiated customer experience and delivering value to the bottom line. While public markets fret policy uncertainty and changes in the short term, Sunrun is more confident than ever in our leadership position, differentiated offering and our ability to generate enduring value. All Americans want reliable, affordable energy and that has not changed.

Speaker 2

Our focus is yielding strong operating and financial results. In Q3, in addition to reaching the 1,000,000 customer milestone, we again set new records for storage installations, net subscriber values and delivered solid quarter over quarter growth for solar installations. We delivered the 2nd consecutive quarter of positive cash generation and are reiterating our strong cash generation outlook for the Q4 and for 2025. Our primary focus is accelerating our clean energy differentiation, launching additional products and services to expand customer lifetime values and remaining the disciplined margin and customer focused industry leader growing cash generation in the business for years to come. One way we are executing this higher margin strategy is by leading with our storage offering, which increases the customer value proposition through enhanced resiliency and control, delivers a more sophisticated clean energy platform and lays the foundation for future value creation from grid services.

Speaker 2

We are blazing the trail to a storage first future with a nearly 50% share of all residential storage installations in America. In Q3, we installed storage on 60% of our new customers, nearly double the 33% attachment rate a year ago and a 6 point increase from levels achieved in Q2. We installed 336 megawatt hours of storage in Q3, up 92% from a year ago, the most we have installed in any quarter. Our fleet of network storage capacity has reached 2.1 gigawatt hours with 135,000 storage systems installed. While still in the early stages of commercializing these important dispatchable energy resources, we continue to advance programs that generate value for customers, the grid and Sunrun.

Speaker 2

We now have 16 grid service programs active across the country with over 20,000 customers participating. These resources are being utilized by the grid and can replace several costly and polluting gas fired taker plants. Sunrun is leading in establishing a platform to turn homes and vehicles into smart controllable load that can be dispatched to and improve the electric grid. Most recently, we activated New York's largest residential power plant with the utility Orange and Rockland. This adds to our recently announced partnerships with Tesla Electric and Vistra to support the grid in Texas, as well as our other programs in California, Maryland and Puerto Rico.

Speaker 2

Our customers are actively reducing the need to over invest in costly centralized peaking power plants and the associated infrastructure. Customers are also benefiting from direct payments for participating in these programs or in some cases receiving batteries at discounted prices when subscribing to our service. Sunrun is also earning incremental revenue for enrolling storage systems in these programs. These incredibly reliable clean energy resources lower the cost of the grid for all users. These same storage resources routinely provide financial value to customers by optimizing their use against far too complicated utility rate structures, while also powering them through far too frequent grid outages.

Speaker 2

This hurricane season again showed the crippling effects of climate change on our country's aging infrastructure. I'm pleased to report, but not surprised at all, that our systems performed remarkably well as they are built to withstand these harsh events. Nearly 3,000 Sunrun storage customers powered through Hurricanes Beryl, Helene and Milton with 100,000 hours of critical backup power during and in the aftermath of these devastating storms. It is so inspiring to hear from many of our customers that while their local grid systems were down for multiple days, they were able to keep their homes powered and in many instances share some of that power with neighbors in need. A cornerstone of our strategy to increase our differentiation and augment our competitive advantage is to become a multi product company that offers a suite of clean energy products to new and existing customers in a bundled, easy to finance way.

Speaker 2

By continuing to invest heavily in service and providing a leading customer experience, we are able to monetize opportunities to provide additional products to our large base of customers for decades into the future. We are demonstrating this potential by testing products through pilots and scaling them once success is proven. On Slide 7, we highlight the various initiatives underway to learn from and inform our strategy to provide valuable services to existing customers. One of the areas where we are seeing tremendous success is offering batteries to existing customers. Nearly 87% of our existing 1,000,000 customer base today does not have a Sunrun store system.

Speaker 2

We already have thousands of orders, which have been growing rapidly. One way we are selling the offering is through our Sunrun app. We are seeing tremendous interest from customers in signing up through the app, which positions us to fulfill quickly, simply and at a low cost. You will hear a lot more about this multi product strategy and our success providing additional products and services to customers in the quarters ahead. I want to spend a minute on what we are seeing in recent industry data.

Speaker 2

We don't manage to market share. We view our leading position in the industry as a natural long term result of pursuing a customer first disciplined growth strategy. There have been periods with irrational competitive behavior such as pricing and terms loan providers offered a few years ago and more recently pricing and terms being offered by certain financing only new entrants. But our view is that fundamentals always prevail in the long term. We lead with the best possible customer experience, underwrite healthy and financially sound business and grow in a sustainable strategic way.

Speaker 2

The latest data from market research firms highlights that our strategy is indeed leading to strong growth. We have seen our share of residential solar installations nationwide pick up significantly in the last few quarters from 13% in Q1 to 18% in Q3 and our residential storage share has expanded to 49% in the U. S. I'm pleased to see these trends, but more pleased that we are doing it in a way that is generating cash and delighting our customers. I also want to provide an update on the traction in our new homes business.

Speaker 2

This division is seeing tremendous growth. Sunrun is now working with 9 of the top 10 new homebuilders in California and over half of the top 20 homebuilders in the U. S. In September, we signed a multi year exclusive agreement with Toll Brothers in California. While the new homes division currently represents less than 5% of our volumes, we expect it to grow at least 50% over the next year.

Speaker 2

Homebuilders appreciate our leading subscription offerings, service commitments and long track record. Our offering can provide new home buyers with immediate value, savings on energy and resiliency from backup storage without increasing the cost of purchasing the home. To sum it up, we are gaining share in a disciplined and sustainable way and are on track to accelerate our cash generation in the quarters ahead. Utility rates continue to rise and utility service reliability is deteriorating, while solar and storage equipment costs are declining. Customers remain eager to take control of their energy needs with affordable and resilient solutions to power their lives, the ultimate in independence.

Speaker 2

Before handing the call over to Danny, as always, I want to take a moment to celebrate some of our people who truly embrace the power of energy independence and the desire to connect customers to the cleanest energy on earth. Our leading direct to home sales team in Bakersfield and our top installation team in Oahu have delivered some incredible results this quarter on safety, quality, battery attachment rates and customer experience. Thank you so much for all that you do every single day to make Sunrun the trusted and beloved clean energy partner for our valued customers. I want to make a specific shout out to Sterling Hill for your great leadership and achievements at Sunrun. Thank you, Sterling.

Speaker 2

All right. With that, let me turn the call over to Danny for our financial update.

Speaker 3

Thank you, Mary. Today, I will cover our operating and financial performance in the quarter, along with an update on our capital markets activities and outlook. Turning first to the results for the quarter on Slide 10. We have now installed over 135,000 solar and storage systems with storage attachment rates reaching 60% of installations during the quarter. We expect storage attachment rates to remain around this level or slightly higher for the next few quarters.

Speaker 3

This higher mix of storage continues to drive net subscriber values higher. During the quarter, we installed 336 megawatt hours of storage capacity, well above the high end of our guidance and an increase of 92% compared to the same quarter last year. Our total network storage capacity is now approximately 2.1 gigawatt hours. In the Q3, solar energy capacity installed was approximately 230 megawatts, at the high end of our guidance of 220 megawatts to 230 megawatts. Customer additions were approximately 31,900, including approximately 30,300 subscriber additions.

Speaker 3

Our subscription mix reached 96% of deployments in the period. We ended Q3 with just over 1,000,000 customers and approximately 858,000 subscribers, representing 7.3 gigawatts of network solar energy capacity, a 13% increase year over 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 Q3, our annual recurring revenue or ARR stood at over $1,500,000,000 up 22% over the same period last year. We had an average contract life remaining of nearly 18 years.

Speaker 3

Turning to Slide 11. In Q3, subscriber value was approximately $51,200 and creation cost was approximately $36,600 delivering a net subscriber value of $14,632 This strong result was from higher battery attachment rates, a higher average investment tax credit level and sequential growth in volumes, leading to improved fixed cost absorption. Our Q3 subscriber value and net subscriber value reflect the blended investment tax credit of 37.7 percent, which now includes all 3 ITC adders. Total value generated, which is the net subscriber value multiplied by the number of subscriber additions in the period, was $444,000,000 in the Q3. Our present value based metrics are presented using a 6% discount rate, but our financial underwriting already accounts for our current cost of capital, which was approximately 7.1% in Q3.

Speaker 3

As a reminder, we have taken this approach historically to enable ease of comparison across periods and have not updated the discount rate frequently. Instead, we provide advanced rate ranges that reflect current interest rates, enabling investors to calculate the obtainable net cash unit margins on our deployments. In addition, we provide a pro form a net subscriber value using the capital cost observed for the quarter. At a 7.1% discount rate, net subscriber value was $10,744 and total value generated was $326,000,000 On Slide 12, you can see our progress increasing subscriber value through higher value mix and higher ITC levels, while keeping creation costs largely flat, generating expanded net subscriber values. Efficiency improvements and hardware cost declines, coupled with our return to operating cost leverage from strong sequential volume growth, have largely offset the increased costs associated with higher storage attachment rates.

Speaker 3

We expect these trends will continue into Q4 and 2025. Turning now to gross and net earning assets and our balance sheet on Slide 14. Gross earning assets were $16,800,000,000 at the end of the Q3. Gross earning assets is the measure of cash flows we expect to receive from subscribers over time, net of operating and maintenance costs, distributions to tax equity partners and distributions to project equity financing partners, all discounted at a 6% unlevered capital cost. Net earning assets were $6,200,000,000 at the end of the Q3, up $550,000,000 from the prior quarter.

Speaker 3

Net earning assets is gross earning assets plus cash less all debt. Net earning assets does not include inventory, other construction and progress assets or any net derivative assets related to interest rate hedges, all of which represent additional value. The value creation upside we expect from future grid service opportunities and selling additional products and services to our customer base are not reflected in these metrics. The recent run up in treasury yields is a strong reminder of the value of our prudent risk management approach. We programmatically enter into interest rate hedges to insulate our capital costs from adverse near term fluctuations.

Speaker 3

The vast majority of our debt is either fixed coupon long dated securities or floating rate loans that have been hedged with interest rate swaps. As such, we do not adjust the discount rate used in net earning assets to match current capital costs for new installations. Turning to our capital markets activities. As of today, closed transactions and executed term sheets provide us with expected tax equity capacity to fund approximately 2 72 megawatts of projects for subscribers beyond what was deployed through the Q3. We have also we also have over $900,000,000 in unused commitments available in our non recourse senior revolving warehouse loan.

Speaker 3

This unused amount would fund approximately 3 18 megawatts of projects for subscribers. In July, we expanded our warehouse loan by $280,000,000 to $2,600,000,000 in commitments, matching the growing scale of our business. Our strong debt capital runway allows us to be selective in timing term out transactions. Since the start of the year, we have closed 4 ABS transactions, including 3 that were publicly marketed. Sunrun's industry leading performance as an originator and servicer of residential solar assets continues to provide deep access to attractively priced capital.

Speaker 3

In September, we closed a $365,000,000 securitization of residential solar and battery systems. The oversubscribed transaction was structured with 2 separate classes of publicly placed A plus rated notes. The weighted average spread was 2 35 basis points and the weighted average yield was 5.87%. The initial balance of the Class A notes represents a 73.8% advance rate. The credit spread was 30 basis points higher than our last transaction and in line with the overall credit spread environment.

Speaker 3

Similar to prior transactions, we raised additional subordinated non recourse debt financing, which increased the cumulative advance rate to above 80%. When we think about our balance sheet, we prioritize a strong cash position and use of asset level non recourse debt financing. This strategy provides the lowest cost capital to finance cash flow producing assets backed by highly creditworthy consumers and is intended to avoid the use of parent recourse capital to fund our recurring origination activity. Cash generation was $2,500,000 in Q3, consistent with our guidance of positive cash generation. Timing of tax credit realization will continue to play a factor in cash generation timing as the transferability market grows and matures.

Speaker 3

The terms of each sale vary depending on the buyer's tax return timing, with some resulting in faster payments, but at lower prices and some with higher pricing, but slower payments. Our approach is to optimize first for the best value realization for Sunrun, instead of the fastest payment timing. We executed transactions according to this principle, which delayed cash generation from Q3 to future periods. We expect as the number of participants in the tax credit transfer market increases, there will be more predictability and timing, and we will create financing solutions that efficiently bridge this working capital investment, accelerating our realization of cash proceeds over the coming quarters. We have a strong balance sheet with no near term corporate debt maturities.

Speaker 3

We have extended our recourse working capital facility maturity to March 2027. And as of today, we have already reduced parent debt by over $100,000,000 since March. We ended the quarter with over $1,000,000,000 in total cash. Total cash declined $32,000,000 from the prior quarter as we consumed $46,000,000 in cash to repurchase $50,000,000 of our 20 26 convertible notes at a discount. We had $133,000,000 of these notes outstanding as of the end of the quarter.

Speaker 3

We have continued to repurchase this debt into Q4 and currently have $83,000,000 of principal outstanding as of today. In Q3, of the $143,000,000 increase to our restricted cash balance, dollars 133,000,000 relates to establishing a reserve account to repurchase the remainder of our 20 26 convertible notes. Establishing this reserve provided us the ability to extend the maturity of our Recourse working capital facility to March 2027. We addressed all of our corporate debt maturities very early in the year. We have no parent capital needs at this time.

Speaker 3

Turning now to our outlook on Slides 1718. The underpenetrated nature of our industry gives us confidence we can sustain robust growth throughout this decade. In this strong long term demand backdrop, our priority is to generate cash by continuing to increase customer values through growing our mix of higher value products and by keeping our costs low. Storage capacity installed is expected to be in a range of 320 to 3 50 megawatt hours in Q4. This represents 52% growth year over year at the midpoint.

Speaker 3

This implies over 1.1 gigawatt hours of capacity added in 2024, an increase to our prior guidance and 100% growth at the midpoint. Solar energy capacity installed is expected to be in a range between 240 megawatts and 250 megawatts in Q1. At the midpoint, this represents 8% growth compared to the prior year and 7% sequential growth from Q3. This level represents a decline of 17% for the full year, which we believe represents substantial market share gains. We expect year over year growth to remain positive in 2025.

Speaker 3

Given our emphasis on more valuable product mix, higher ITC levels through optimization of adders and cost efficiencies, we expect our net subscriber values will increase in Q4 compared to Q3 levels. We are reiterating our cash generation outlook. We expect cash generation to be $50,000,000 to $125,000,000 next quarter. Because of the discrete large capital transactions inherent to our business, where we ultimately land within this range will depend on project finance transaction timing in Q4. We continue to expect cash generation to be $350,000,000 to $600,000,000 in 2025.

Speaker 3

On Slide 18, we have outlined assumptions and sensitivities related to key variables that would affect our achievement. We expect a 45% weighted average ITC level in 2025 and further underpinning our guidance are assumptions of 7.5% average cost of project level capital, battery attachment rates around 60% and slight improvements to the timing of tax credit transfers as that market further matures. We expect solar install volumes to grow next year closer to our long term outlook of 10% to 15%, but our focus will be on margins and cash generation as opposed to specific volume attainment. As we increase our cash generation, we will continue to allocate excess unrestricted cash to reduce parent recourse debt and are committed to a capital allocation strategy beyond this initial deleveraging period that drives significant shareholder value. With that, let me turn it back to Mary.

Speaker 2

Thanks, Danny. I so appreciate the work of the entire Sunrun team committed to providing customers with a greater sense of independence, stability and security in their own homes, while producing value for our shareholders at the same time, a winning combination. Operator, let's open the line for questions.

Speaker 4

Thank you.

Operator

And our first question comes from Brian Lee with Goldman Sachs. Please state your question.

Speaker 4

Hey, everyone. Good afternoon. Thanks for taking the questions. I guess first one, just appreciate all the guidance metrics here and you're reiterating the $350,000,000 to $600,000,000 of cash generation in 'twenty five. Dollars Obviously, closing up financing the ITC adders, you've kind of laid out the path to get to that cash generation target for next year.

Speaker 4

But the big question, I guess, on investors' minds is just how de risked is that given, especially the election outcome we had a couple of days ago. Can you speak to that in any sort of whether quantitative, qualitative color, the term sheets, do you have percentage committed, etcetera? Just how do you think about the implications of the election outcome for some of the key moving pieces of that cash generation target for next year, especially the ITC related ones? And then I have a follow-up.

Speaker 2

Sure. Hey, Brian, this is Mary. Good to hear from you. Yes, so at a high level, Brian, we see an outright repeal of the IRA as highly unlikely. Americans want affordable, reliable energy.

Speaker 2

The Inflation Reduction Act targeted lots of investments in med states, very concentrated in Republican areas. So it was no surprise in August of this year to see 18 Republican representatives in Congress write a letter to support a more surgical approach to look at the IRA. So as we move forward and as we think about the ITC, I think again it's important to remember that the ITC under the former Trump presidency actually came up for expiration and it was extended. So, one of the things that is really important to remember in the context of the work we do in the residential solar and storage space is that it really is the area of energy that holds so strongly across party lines. So I think that then leads to support in a more general way across party lines.

Speaker 2

So and then there's some technical as I think about cash generation for next year, there's also just some technicalities in place that would make it very, very hard even in surgical changes for them to happen rapidly. So certainly as we think about next year, we feel very strong about our cash generation guide. But Danny, let me turn to you to answer some of Brian's more specific questions.

Speaker 3

Sure. Hey, Brian. I'll add like qualitative on the capital side. As far as on the flow basis, what's being funded today is funding against all 3 adders through all of our funds and we believe our investors view that as very secure. As we go into next year, what's underpinning the cash generation guidance is a 45% weighted average ITC level.

Speaker 3

That is about 9 points of domestic content, roughly. There's some plus or minus there, but roughly 9% with the balance being energy communities and low income. And as we've documented our funds, whatever qualifies gets funded against, and we've been working in order here. As we've mentioned in the past, we've got low income energy communities previously. And through the quarter, we started to get increasing amounts of approvals for domestic content across a number of funds, even some of which go back to last year.

Speaker 4

Okay, awesome. I appreciate all that color. Maybe just a quick follow-up, hopefully a quick one for Danny. The pro form a asset level cost of capital, you showed 7.1 this quarter and that's kind of encouraging given it's been 7.5, 7.6 consistently for close to a year. I know you had the caveat in that same slide saying based on where that over rates are, I'd be right back at 7.5.

Speaker 4

But can you kind of speak to the change you saw in the quarter? Was it a unique transaction or are you seeing better cost of capital over that 3 month period? And then I know the slide is assuming 7.5 is still the base case for your 25 assumptions. But what do you think the path is from here? It seems like that's a conservative view, but would appreciate any thoughts now just given the performance you saw in the quarter being below the 7.5 base assumption to begin with?

Speaker 4

Thanks.

Speaker 5

Great.

Speaker 3

Yes, I would say we saw a declining base rate environment through the quarter that inflected in September. So as we average that period with the 2.35 spread on our term out transaction and what we're seeing on subordinated debt, that was the 7.1. As we look at it today, assuming we hold the credit spread constant, today mark to market is about it's probably spot on with 7.5% today, even through the Fed rate move. So the Fed has been easing, base rates have moved up a bit, perhaps on expectations for what's going to happen on both the monetary and fiscal side with even more clarity over the last few days with the election. So we think largely that's repriced through the system.

Speaker 3

We have an outlook for 7.5%. The credit spread environment, as we noted, is up slightly deal over deal. I think we're still in a normal range for what we've seen on transactions. Participation remains good. And as we've noted also in the past, participation for us is can be over time, deal by deal can be private, privately placed through big private debt funds, publicly marketed, such as the last one, which had good participation.

Speaker 3

So, the spread environment, we also can see fluctuate, but today we see a 2 35 basis points up a bit, but still in a kind of a normal historical range.

Operator

Thank you. Our next question comes from Julien Dumoulin Smith with Jefferies. Please state your question. [SPEAKER

Speaker 1

JULIEN DUMOULIN SMITH:]

Speaker 6

Hey, good afternoon team. Thank you guys very much. Appreciate it. Just with respect to the debt principal pay down here, just how would you expect to show this going forward? Obviously, you did a nice proactive pay down below par here of $50,000,000 ultimately showing slightly better than 0 cash obviously in terms of the cash gen, but that's obviously inclusive of some debt paid out.

Speaker 6

Just how would you expect to kind of talk to the cash generation next year? Should we kind of expect that the some of the cash that's proactively used for debt pay down for instance to pay off the remaining 83 as you start to execute against your range for 25 that you just reiterated?

Speaker 3

Yes. I would characterize it as kind of strong focus on debt paydown. What we've demonstrated so far is the continued pay down of the convert. I think what you'll start to see is a start to paying down our corporate revolver as well. I think we like the combination of debt pay down, getting to lower leverage levels, replenishing capacity and prioritizing stronger balance sheet as we go through this period of time.

Speaker 3

So, I'd say it'd be substantial and will start to involve more and more. And over time, the majority of the debt pay down will be more geared towards the recourse revolver that we have outstanding.

Speaker 6

Got it. And then just how is the market shaping up right now from a competitive perspective? I mean, you didn't you took out some of the run rate language in the slides here about cash gen beyond 25. How do you think about just the competitive backdrop or any other thoughts about that positioning here? And obviously, reiterated your 25 cash gen targets.

Speaker 5

Yes. I don't think anything in terms of cash gen targets beyond 25 has materially changed. I think we're bullish and optimistic. The competitive landscape has had a bit of evolution. We've actually seen some of the people we've mentioned on previous calls is having what we've categorized as irrational pricing, essentially offering pay and cost in excess of the total proceeds you can raise against the asset.

Speaker 5

And that's before consideration of G and A or any cost for servicing those assets. And we've seen correction in some of those partners who have been out in the market for a year plus. We like new entrants in this space, but we've actually seen the replacement of those people with new entrants bringing even more aggressive pay into the market. And as Mary mentioned, despite that, we aren't out there playing dollar for dollar to try to win business. We have a very like thoughtful and programmatic approach to deliver differentiated value to our customers, and we're picking up market share doing that.

Speaker 5

But we do continue to see that, basically, aggressive pricing structure to attract market volume. And I think there'll be quick corrections for these players as they learn to better understand the economics of solar.

Speaker 6

Great, guys. Thank you.

Operator

Our next question comes from Andrew Percoco with Morgan Stanley. Please state your question.

Speaker 7

Hey, good evening, guys. Thanks for taking the question. I did want to come back to the election point for a second and slightly different question on that end. In terms of like how you guys are managing tariff risk, I know obviously you're buying batteries and inverters and racking equipment in the U. S.

Speaker 7

To hit that domestic content. But how are you thinking about panel supply in the context of potentially higher tariffs, either universally or directly on China? How are you dealing and how are you diversifying your supply chain with this current backdrop?

Speaker 3

Yes. Generally, we like just as a reminder, module costs are less than 10% of our cost stack. So any impacts we think will also be a very small percentage of our total cost stack. We've seen we've had diversity of supplier base. That's not just modules, that's across inverters, batteries and supply chain is already diverse.

Speaker 3

I think there's also the angle with domestic content as we see more of that transition to U. S. Made that will also be part of the mix that can be higher cost, but also delivers yet more value against the cost differential through the ITC adder. So generally, we feel well positioned. As a reminder, the industry is already burdened somewhat by tariffs, and I think we've been able to manage through it.

Speaker 7

Okay, understood. That's helpful context. And then coming back to the IRA, I know it's not your base case that you get any repeal, but are you expecting any impacts to the health of the ABS markets or tax equity agreements just given the uncertainty around IRA repeal? Are you expecting any kind of change in behavior from some of your counterparties there as you move into 2025?

Speaker 3

Yes, again, like I answered before, what's going into service that is qualified is clear at the moment. To the extent we're playing out scenarios on adders, I think there is a built in experience in the industry on how to deal with times when there is something in tax code like even considering the corporate income tax rate, just to throw that one in there, there was a period not too long ago where that was influx, right? So I think there's experience on our side and amongst all the counterparties, to the extent we're looking at IRA or what happens with the current tax provisions, how they get extended, how they might change, there will be a period where we'll have to be more thoughtful about how to deal with that through transactions. And I'd say we have a lot of built in experience doing that from cycles of the past.

Speaker 4

Thank you.

Operator

Our next question comes from Kashy Harrison with Piper Sandler. Please go ahead.

Speaker 8

Good afternoon and thanks for taking my question. And no surprise, it's an election one as well. So Mary, you're 100% correct that a wholesale repeal is extremely unlikely. But the prevailing thought is that the Republicans will look towards the IRA to at least partially offset the cost of extending the original tax cuts because they want to at least minimize the impact of the deficit. And so even if the IRA doesn't completely go away, there's certainly the potential for tweaks.

Speaker 8

And obviously, no one knows what's going to happen, what that's going to look like at this point. And so my question is, what is the appetite for structurally revisiting the business structure to be able to generate meaningful cash at a lower ITC, maybe 30% just in case perhaps the adders go away?

Speaker 2

Yes. I mean, I guess I would I'll make some opening comments and then I'll ask Paul to talk a little bit more about our specific revenue strategy as we look out. But from a broader picture perspective, like, yes, you're right, it's possible like there's always actually, I would say, I've been in the energy business over a couple of decades, like there's always tweaks. So I would say, from a policy perspective, having tweaks is kind of something that we've certainly always had and I think can adjust to for sure. The other thing is they take time, which means that you certainly have time you see things coming and you can alter.

Speaker 2

And again, this business and Sunrun have used the last couple of years as an example to emerge in a much stronger position. And so that's sort of how we look at any changes that we see coming down the pike is how do we look at those and how do we think of it in our very margin focused disciplined way. And we really, again, are managing costs in a, I would say, a maniacal way. We're really focused on making sure we're operating really efficiently and effective because that always gives you maximum flexibility. So with that, Paul, why don't you give some more specifics?

Speaker 2

Yes.

Speaker 5

I think I'd maybe start by just saying, as we all know, equity markets don't respond well to uncertainty. But when you look at the facts, there's always risk in rebates and incentives. And in Trump's previous presidency, he actually had the opportunity not to extend the ITC because it did come up for renewal and he opted to elect it. The ITC has existed for decades and we're optimistic and confident around that. That said, the way the ITC and the adders work in our business is it does enable market expansion, it enables route expansion and it enables us to reach customers that we otherwise couldn't.

Speaker 5

And so, in the event of contraction in that, we would react like we have regularly and consistently do in our business to adjustments in rebates and incentives. That said, we feel like we're significantly more insulated and derisked relative to others, given our focus and strategy is less around chasing and offering a savings product to consumers and we've invested heavily around building out our consumer offering to be more focused around functionality and service and resiliency. And so we think we would see far less contraction than our competitors were that to happen.

Speaker 8

Got it. Appreciate the thoughts from both of you. And then my follow-up question is maybe for Danny. I think you referenced the 10% to 15% megawatt growth here, but then you also said, look, it's really about cash generation, not growth. That said, if I just think about normal quarterly seasonality over the course of a typical year, you combine that with your 2 50 megawatt exit rate and then the fact that you also have like pretty easy comps in the first half of next year, it would suggest your starting point is quite a bit of upside to that 10% to 15% range.

Speaker 8

And so, is the 250 megawatt exit rate, is there something unusual about that activity level? Or, is the thought that if you guys are running ahead just pull back to focus on cash. I'm just trying to think about that growth rate relative to your baseline level in 4Q.

Speaker 3

Yes. I think the best metric to look at, because we've had irregular year on year comps and because we've now gotten through 3 quarters of sequential increase and we've returned closer to levels we saw prior to the NEM change in California. The year on year growth rate indicated for exiting this year is about 7% or 8%. I think it's 7% or 8% sequential and 7% or 8% year on year, however you look at that. And that's trended towards a double digit number.

Speaker 3

And we think we'll hold that sort of pace. Now, we'll of course have some of the, again, year on year comp irregularity to a much lesser degree, but if we roll back like Q1 over Q1, last Q1, we were still in recovery, but we think double digits area is achievable for the business. That will manage seasonality, working on ways to balance seasonality, so we can really put the focus on volume in relation to fixed cost structure, fixed cost absorption. And as we've been getting the volumes up, it's really seeing the cost efficiency return to the business has been where we've been delighted to see what we thought would happen finally happen, and you can see that through the metrics of creation cost, the different elements to creation cost, how we've been able to get the battery attach rate higher, increase customer value, but keep the cost relatively flat. And actually, I think we have 3 consecutive quarters of creation cost declines on a unit basis.

Speaker 3

We're trending where we want to be through volume. Volume in itself is not the primary objective. It's the unit margin expansion, which we expect to hold.

Speaker 8

Got it. Thank you.

Operator

Our next question comes from James West with Evercore ISI. Please go ahead.

Speaker 9

Hey, thanks. Good afternoon, everyone. Mary, curious about the I won't ask about the election. I think we've kind of killed that one. So let me ask about the your virtual power plants.

Speaker 9

You added several this quarter. I think that's a big growing opportunity for you guys. What's the impediment to growth there? Is it utilities? Is it I guess how do you think about the impediment to growth if there is one?

Speaker 2

Yes, thanks for the question. I am, as you know, very excited about the development and the leading position Sunrun has around monetizing the value of these assets to help the grid and help customers, and it certainly contributes to the bottom line of Sunrun. It is really it is all about having it continue to catch an edge in the context of the regulatory and utility environment. So I've always felt for so many years going back to when I was a utility CEO for over a decade that we were going to be in the situation that we're finding ourselves in today, right, which is as people electrify their homes, as they electrify their transportation and now we have the pressures of AI, the grid simply can't add resources or manage resources fast and effectively. And what we're finding is, again, these resources that we have are proving to be very valuable for the grid and really helping to sustain it as it's adjusting to these increased capacity demand.

Speaker 2

So I think we're just going to continue to see this trend grow. I was really encouraged just in every venue I'm in, every conference I go to, it is certainly becoming something that was talked about, I would say, more on the fringes to something that is being discussed in a much more mainstream way. So I feel very positive about that. And we are, of course, scaling at an incredible pace. We hit a really strong record in terms of 60% of our installations now have storage and that just positions Sunrun really, really well to benefit to create benefit for our shareholders and our customers as we help out the growth.

Speaker 9

Okay. Maybe a quick follow-up for me on the data center AI theme. What do you see as the opportunity set for Sunrun there?

Speaker 2

Very much an extension of the same. So what you're finding is that, again, there are challenges in so many parts of the country to meet the demand. And what you're also finding is that in many cases, a lot of the developers do want clean energy alternatives. So certainly, there are always there's always more than one solution, but, Sunrun's assets could play a very important role in contributing to solutions to the AI demands that are happening. So as I think was reported, we're in NDAs with a couple of AI developers along those lines.

Speaker 2

So one of the things I love again about our resources is somebody who ran a fully integrated utility where we had generation assets, we had transmission distribution, the whole power supply requirement. One of the things I really like about the storage and solar assets, the residential solar and storage assets are they are I would stack them up against a peaker plant any day of the week as being more reliable because you're aggregating so many different touch points. So let's just say a couple don't come online. It makes no difference in the overall value that you can supply to the grid. So again, I think this is going to continue to be a very valuable resource.

Speaker 2

I know so many regulators think so. Regulators are a big part of why you're seeing increased demand for these types of virtual power plants and grid services programs.

Speaker 9

Thanks very much.

Operator

Our next question comes from Praneeth Satish with Wells Fargo. Please state your question.

Speaker 10

Thanks. Good evening. Maybe switching gears a bit here, obviously projecting a lot of growth in the new homes market.

Operator

Maybe if

Speaker 10

you could just help us understand better the unit economics there. I assume you've got some benefits from kind of streamlining the customer acquisition costs, but there's probably also revenue shares and maybe a longer cash conversion cycle. So I guess how do the cash generation economics compare in that channel versus your typical residential solar sale?

Speaker 5

Yes. Really simply, as Mary mentioned, I believe in her script, about 5% of our business today, we see tremendous growth opportunities in that route. And as you mentioned, kind of across the board, it's a more efficient model in terms of economics. So you have single permitting, you have one to many kind of customer acquisition model. And so it's an efficient route.

Speaker 5

And so we would anticipate improved margins as that becomes and scales to a more meaningful part of our business.

Speaker 10

Got it. And notwithstanding the elections, but just as it relates to the ITC and domestic content, maybe specifically on domestic content, can you walk through kind of your framework for how you go about deciding whether to keep that or share that? It sounds like you're going to look at it market by market, customer by customer. But I guess what kind of signals or competitive dynamics would lean you one way or another?

Speaker 3

Yes. I would say, keep versus share is not like the decision framework we've been applying. It's more of a margin target setting exercise. So that results in implicitly some amount accruing out to the customer or being retained. And it depends on the value of the market, our relative positioning in the market, the product category, whether it's higher value or lower value product, mainly being driven by whether or not there's a storage attachment to it.

Speaker 3

So we're looking at a variety of factors and solving to attractive and good margin profiles for us and a good value prop to the customer and a good competitive position within that particular space. So it's pretty granular exercise.

Speaker 10

Got it. Thank you.

Operator

Our next question comes from Philip Shen with ROTH Capital Partners. Please state your question.

Speaker 11

Hey, thanks for taking the questions. First one is a follow-up on your 10% to 15% growth for solar installs next year. I was wondering if you might be able to share the regional breakdown that you expect in 2015 sorry, 2020 5? So for example, California versus the Northeast, Puerto Rico, Southwest, etcetera. Thanks.

Speaker 3

Yes. I think we've had so California, we've had good track record in California for many years. It's been our biggest market. We think it will continue to be, of course. And I think we've shared in the past as well, like the return of volume in California and its growth rate recently has been outpacing everywhere else.

Speaker 3

We see strong spots continue to see strong spots in the Northeast, Illinois in the Midwest, Puerto Rico is a good market where resiliency is a big driver. I'd say those are the major ones. Texas with a also with a high battery attachment rate. So Texas has converted too much higher value recently as well. And we think that will accelerate with the domestic content angle as well.

Speaker 11

Dan, any chance you can quantify some of those regions? So California has a strong spot outpacing everywhere. Are we talking about 25% growth next year?

Speaker 3

For that, we haven't broken out kind of market specific year on year growth rates. I would say California has been as much as half of our business that probably fell to more like a third immediately after NEM, the NEM change and that's been coming back up. But we don't have specific market regarding your growth rates to share at the moment.

Speaker 11

Okay. Thanks, Danny. And then in terms of my follow-up, we've read a lot about the long lead times for Powerwall 3. Our sense is the big customers such as yourselves have no issues with securing Powerwall 3s. But on the margin, the smaller dealers and through distribution, they're having challenges.

Speaker 11

Do you anticipate any issues at all? Or do you guys expect to continue to get strong and reliable Powerwall 3 supply in 2025? Thanks.

Speaker 5

Yes, great question. We've experienced very much the opposite. We view Tesla as a really key and strategic partner for us. And believe based off the way we're being treated by them with supply and the partnership that we're a very strategic partner for them as well. So, we don't have supply chain shortages with Powerwall 3s at this time and don't foresee them in our forecast.

Speaker 5

That said, there are a lot of new exciting battery technologies that are coming online. And as we focus on virtual power plants and functionality for customers in the connected home, knowing that space and understanding the technologies that are available there is paramount for us. And so in Q1, we'll be launching some new battery hardware that we're excited about, but continue to be focused on building and maintaining our strong partnership with the Powerwall 3 and Tesla.

Speaker 11

Great. Thank you very much. I'll pass it on.

Operator

Our next question comes from Dylan Messano with Wolfe Research. Please state your question.

Speaker 12

Yes. Hey, everyone. Good afternoon. Thanks for taking my question. I just wanted to go back to the domestic content qualification of 19% that you had in the quarter.

Speaker 12

Did you guys give an idea of what that could be in 4Q? And just kind of give us a sense of what's the lowest hanging fruit to kind of get that number up higher over the next couple of quarters?

Speaker 3

Yes. I think there's a gradual pickup through Q4 and Q1. We'll see a meaningful pickup. I think that will go by early next year up to a qualification rate of around 90%, perhaps even higher. So that's being driven by initially more quickly probably on the battery side On solar only installs, we have a combination of equipment getting us above the 40% threshold.

Speaker 3

We're cycling into that, So that's a meaningful area of pickup we'll continue to see. So I'd say that the relative pickup from here on out is more on the solar only side than the storage side, but both are we're starting from a low number and going to a very high one. So both are picking up very meaningfully.

Speaker 12

Got it. Okay. That's helpful. Thank you. And then my follow-up, I just wanted to ask on Grid Services.

Speaker 12

So I understand that I guess the lifetime value of Grid Services is something like $2,000 per customer. I think you have 20,000 customers enrolled right now. Can you just give us an idea of what's kind of the current actual revenues that you're getting from grid services? Is it something that should kind of be aligned with that 2 ks lifetime value?

Speaker 3

Yes. So the $2,000 lifetime value is expressed on a PV basis. And what's in that is an assumption for a few $100 per year per customer. And I think we're generally seeing a pickup that's like kind of in line with that assumption.

Speaker 13

Great. Thank you.

Operator

Our next question comes from Colin Rusch with Oppenheimer. Please state your question.

Speaker 13

Hi, there. This is Andre Adams on for Colin. Are you starting to see any increase in labor availability? And how should we think about construction cost trends going forward?

Speaker 5

Yes, we're not. Across the board, we're seeing strong demand in growth across our go to market roles as well as in our operation business and supply chain.

Speaker 13

Got it. Thank you. And for the follow-up, just from a permitting perspective, you've spoken about automated permitting as a possibility for some geographies. Are you seeing any meaningful trends in permitting that could have material impact on your sales cycle or pace of

Speaker 5

install? Yes, we're actually seeing nice progress on that. And kind of across the business, we're looking for ways to automate more and more. In our cells, for example, as Mary mentioned, we're growing and selling more of our retrofit batteries. And rather than doing that through traditional routes, in our customer app, we're pushing out leads and have thousands of responses at far higher and faster conversion rates.

Speaker 5

And so, technology and implementing that across sales and operations is bearing fruit for us.

Speaker 3

Thank you.

Operator

Our next question comes from Maheep Mandloi with Mizuho. Please state your question.

Speaker 14

Hey, thanks for taking the question. And you've definitely just most on the election and other topics over here. But maybe just one on the Safe Harbor process here. In the past, when tax rates were sun setting, we saw 2 year Safe Harbor giving you ample time to buy equipment upfront and keep the credits. Is there any guidelines or any clarity on that under the new tax credit rules from the IRA?

Speaker 3

Yes.

Speaker 2

There's a 4 year period.

Speaker 3

To the extent we safe harbor, we've had strategies in the past to the extent they're valuable through available financing sources and things we've done in the past. I think we've got a good developed playbook there as well. I think our guidance considers all of the possibilities.

Speaker 14

Got it. Appreciate it. That's all. Thank you.

Operator

Our next question comes from Jordan Levine with Truist Securities. Please state your question.

Speaker 1

Hey, thanks. This is Noah on for Jordan. I just have

Speaker 15

a quick one about your new home segment. Can you talk about profitability margin profile of this segment compared to your traditional subscription model? And how should we think about blended margins as the segment becomes a larger part of the mix? Thanks.

Speaker 3

Yes. So I think as Paul shared, there's good cost efficiency on the business, on the sales costs, the efficiency on permitting, he noted. What you also get relative to a retrofit on average that might be smaller system size with cost efficiency on a margin percentage basis. They're similar to the relative product like in California, for example, it will compare well to a retrofit product that we'd otherwise do. So it is a majority California, it is a high value market, It has a similar margin profile.

Speaker 3

The individual homes might be smaller, but the batches of units come in larger quantity, which is a strong offset when you consider the aggregate volume.

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Earnings Conference Call
Sunrun Q3 2024
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