Good afternoon, and welcome to Sunrun's Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. I'll now turn the call over to Patrick Jobin, Sunrun's Senior Vice President, Investor Relations. Please go ahead.

Thank you, Kevin. 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; and Danny Abajian, Sunrun's CFO. Paul Dickson, Sunrun's Chief Revenue Officer, is also on the call for our Q&A session. 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&A will be posted to Sunrun's Investor Relations website shortly after the call. And now let me turn the call over to Mary.

Thank you, Patrick. Sunrun's team delivered a strong quarter. Our disciplined margin-focused growth strategy continues to position the company well for long-term success and generating cash. This quarter, we beat by a large margin, our volume guidance for solar energy capacity installs, but more importantly, we are rapidly accelerating storage adoption, growing our lead as America's clean energy company, one that delivers a superior value proposition to customers and creates multiple value streams for our shareholders. We installed more than 100-megawatt hours of storage capacity in Q2, growing 35% compared to the prior year, and we now have more than 900-megawatt hours of storage capacity installed across the country. We are accelerating our pace. Our storage offerings provide customers enhanced value and generate significantly higher margins for Sunrun today while providing a foundation for considerable monetization in the years to come. Our strong attachment rate was nearly 18% of our installations across the country in the second quarter and we expect this percentage to continue to increase rapidly. In the second quarter, we grew our customer base to nearly 870,000 customers, which represents 6.2 gigawatts of installed solar capacity. We added approximately 40,000 customers this quarter, 7,000 was storage, with an improving net subscriber value of over $12,000, resulting in total value generated of nearly $400 million. Our rapidly accelerating storage attachment rate presents a powerful opportunity to grow our clean energy generation business by providing at-scale power plant capabilities across America. This quarter, we again set the all-time industry record for installed solar energy capacity. This scale combined with a rapidly increasing storage attachment rate, presents a powerful utility scale generation solution. We grew net earning assets by over $400 million and increased our total cash position by $78 million compared to the first quarter. These strong financial and…

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. In the second quarter, customer additions were approximately 39,800, including approximately 32,400 subscriber additions. Our subscription mix represented 83% of our deployments in the period. A meaningful increase from 78% last quarter and the highest level in 2 years. Our recent sales activities and the forthcoming benefits from the tax credit adders in the inflation Reduction Act, which are only available to the solar subscription model indicate the mix of customer additions is likely to continue to shift more towards subscribers in the quarters ahead. Solar energy capacity installed was approximately 297 megawatts in the second quarter of 2023, a greater than 20% increase from the same quarter last year and significantly exceeding our guidance of 270 to 290 megawatts. Our installation teams executed well in the quarter and our affiliate partner channel outperformed significantly in Q2 as the strength of our subscription model captured increased share among dealers in the industry. We have now installed over 65,000 solar and storage systems. We expect storage installations will grow rapidly in the quarters ahead and attachment rates will increase meaningfully as our recent sales are well in excess of 30% nationally for reasons Mary mentioned earlier on the call. Our backup battery offerings carry higher margins typically by several thousand dollars per customer. We also expect our Shift offering to achieve margins that are higher than prior solar-only margins received in California under NEM 2. We ended Q2 with approximately 869,000 customers and 725,000 subscribers, representing 6.2 gigawatts of networked solar energy capacity, an increase of 21% year-over-year. Our subscribers generate significant recurring revenue…

Thanks, Danny. I am so appreciative of our hard working team whose incredible passion for the work we do and commitment to our purpose helped deliver another strong quarter results. Our team is laser focused on accelerating the strong momentum, embracing this massive shift and extending our lead as America's clean energy company, driving continued efficiencies across the business and generating more value for our shareholders, our partners and our customers. Operator, let's open the line for questions.

[Operator Instructions]. Our first question is coming from James West from Evercore ISI.

Congratulations on the massive pickup in battery attachment rate, very impressive. I have really 2 questions around that. First, on the -- I think what you said earlier around margins that the attachments, the batteries, they come in at higher margins that are offsetting some lower volumes. Is it just an offset? Or is it actually more than offsetting somewhat temporary lower volumes?

Yes. I mean, again, like we are, as I said, so thrilled as well with the work of our team and the appetite of our customers. I mean the reality is our customers want storage, and we're the company to deliver it. So we're really excited by that, and we're excited about the momentum we see going forward. And yes, they produce much higher value every customer because in essence, we're selling 2 very significantly priced products now instead of one, every customer is worth a lot more. But make no mistake, again, we see that the momentum is building on the sales side and we expect to see again, hit our target for the year to hit our target range.

Okay. Got it. And then on grid services, which looks like a huge, huge opportunity for you guys, how do you see the evolution here? I guess, one, is that accurate? And two, how do you see the evolution of that playing out? I know you have PG&E working with you now? Do you think other utilities will be working with you soon?

Yes, about 100%. I think as I've described before, principally as a former utility CEO for so long, we just -- were building significant scale of power plant capabilities all across America at the exact same time as you're seeing, James, where the grid is actually showing real stress and strain under increased heat, different climatic events. So yes, we absolutely expect to continue to see an uptick. It's why -- again, as I mentioned, we're looking at sort of a minimum of $2,000 NPV per customer from a grid services perspective, but seeing a lot more potential as we look to the future.

Next question today is coming from Brian Lee from Goldman Sachs.

Maybe first one, just a follow-up on James' question about the high battery attach rate and the margin accretion potential there. I think in the past, you all have talked about maybe a couple of thousand dollars of incremental subscriber value for a battery plus solar customer as opposed to just a solar-only. Not sure if that math still holds true, but can you maybe give us a sense of what the incremental subscriber value accretion is? And then maybe is it different between a backup battery customer versus a Shift battery customer? And then I have a follow-up.

Yes. Brian, this is Danny speaking. Yes, it could be a few thousand dollars per customer and as we blend to the mix. So we said on the call, greater than 30% back up and that's not just in California, that's a national event that's occurring. So as we get that through our pipeline and deliver to install, as we've noted, like battery installations do take a little while longer. So over the coming couple of quarters, we could see a few thousand dollars per customer magnitude of pickup is what we're planning for.

Okay. That's great. And obviously, that would feed into that substantially higher subscriber value as you're sort of guiding to here in the second half. Fair enough. Second question I had was around the $200 million to $500 million run rate annual recurring cash generation. It's a fairly wide range. I know it's lumpy, as you said. But can you maybe just give us a sense of what's driving that wide range? How it impacts your financing strategy, if at all? And I just feel like we've seen this metric introduced in the past, but it's been tougher to get a sense of how consistent and maybe even the practical implications of what this metric is going to mean for you going forward? And I know in the past or recent past, it's gone kind of in a negative direction. So I'm just trying to get a sense for how you're thinking about this implications-wise as well as how consistently you think you can maintain the cash generation going forward.

Yes. Thank you for the question. I would start by saying strategically, that is the target. That's what we're driving towards. That's where we're working towards. And in part of the commentary, we did also highlight the interest rate increases and some of the events over the last year that took us off that path, frankly. And it wasn't just the magnitude of the interest rate increases, but it was the speed with which it happened. And then coupling that with the dramatic rise, we had an inventory balance managing to supply chain, those were prohibitive to cash gen, although we have been increasing pricing and margins and cost efficiency in the business. So as we chart out our future, kind of where we are now, and some of the assumptions we'll make on volume, backup battery mix, ITC adders, the general environment around cost of capital where again, as Mary said and I reiterated, we do plan the business now for our current cost of capital. So we have recuperated the effective interest rate increases. And as that has kind of maintained in a range, we look at that and a few other factors like what's happening in the external environment on equipment cost. And as we put all that together, from a micro level, $200 million to $500 million becomes the target. And from a macro level, as we think about kind of the overall full cost stack annualized spend of the company and relate that on a percentage basis, like even net of working capital, we think that's a reasonable range for us to target and an expectation, frankly, that we have on ourselves.

Your next question today is coming from Julien Dumoulin-Smith from Bank of America.

Following up on that last question on the $200 million to $500 million range here of cash over time. I mean, can you talk a little bit more specifically about how lumpy that could be? I know you disclaimed in the remarks here that you're not reflecting anything better than the 30% tax credit. Transferability and monetization remains in flux. But how much of a step function change could we see next year as domestic content and especially attached with a higher attach rate on storage really starts to impact numbers. When you say over the next few quarters, is this really just waiting to get that clarity on the tax credits to pivot to that kind of cash?

Yes. So I think I highlighted some of the factors like backup battery mix, we observed in our sales and that's a matter of putting that through a timing model and seeing the ramp on installs. So that is not, I would say, in the basket of things that would cause lumpiness. ITC adders are obviously, as we mentioned, energy communities are about to be up and running kind of formally in the system, if you will and we'll talk more about that as we get that starting to get realized in the margins. And then low-income domestic content, those will phase in over time. We think low income will be a single event and domestic content would phase in over time and we do have a little bit of uncertainty on the exact timing but as we get more and more of that clarity, we will share it. The lumpiness comment is more around the fact that we do have several term out events into the capital markets a year as we scale up deals, have them ready with fully installed pools of assets and turn them out into the capital markets. And sometimes you might have a transaction that could be November, December or January and you might get the cash event hitting in a slightly different period. So that's not a quarterly target, that's an annualized target. That's why we're speaking on an annual number, but I think the point was more to remind folks that we should look at it over many quarters as opposed to any one individual quarter.

Right. Certainly. It sounds like it will filter up over the next few quarters in particular. Just digging in on one of the silos here. When you think about the delta between these inventory number you cited and just broadly current market prices of equipment, and given when and what is that delta when you think about it, right? And especially when you get to that point in which you're recognizing current market pricing?

Yes. So I'll hit that one again. The -- and we have detailed the guidance on that timing. I would say, using an example system more directionally, but you could see, again on Slide 11, the decrease happens over the balance of the year and it's probably more heavily noticed and present in Q1 and that does recycle elevated inventory levels. We are giving those numbers as reflecting current purchasing activity in the business. So we have line of sight to the achievement that we show in Q1 with equipment prices getting substantially lower. That's just because we record the equipment cost on the install and there's a time lag with the elevated inventory level. So it's a couple of quarters to see that come through.

Got it. And 7.25%, why that number?

It's a math. We look at -- our longer-term capital costs are driven by a 7-year base rate, right? We -- I look at that several times a day, more than I should and then credit spreads are a function of the market, like we're not observing the data points every day, but there are several deals in the residential solar market, very big scale that get done. I think there was a loan transaction that priced today that had a spread compression of over 50 basis points from its last transaction. So we're reflecting all of these things as we, again, constantly evaluate the capital markets environment.

Your next question today is coming from Andrew Percoco from Morgan Stanley.

Just wanted to circle in on the net subscriber value guidance for the back half of the year. Is there any way you can provide some kind of bookends in terms of how we should be thinking about it? Looking back to this time last year, you did see a pretty noticeable uptick in 3Q. Should we think about order of magnitude relatively similar to what we've seen in 3Q of 2022? And maybe slightly differently, how should we think about growth in total value generated in the back half of the year when you combine it with your customer growth?

Yes. I mean what you're seeing is, as we described, a really different like customer profile moving forward. So we are selling to much higher margin customers. So a big part of how we see value creation is in the context of the product mix that we're selling and that increasing storage attachment rate. And again, what we're seeing from just a sales perspective, funnel perspective, we're feeling really strong about the whole -- the second half of the year and consistent with our guidance. Danny, do you want to hit the more specific question on.

Yes. Happy to give you a little bit of bridging here, which I think is helpful in the context of the value creation per subscriber going up but also the discount rate changing in that period of time. So if you look at Q2 2022, is the number you referenced, that $7,910 per customer. And as we talked about, if we adjust our PV6 metric to a PV7 in a quarter, we get to $8100, which is a couple of hundred dollars higher year-over-year despite interest rates increasing significantly over that period of time. And then if you look at the total value generated and you do the same compare, and you take the current period total value generated and adjusted for discount rate and compare that year-over-year, that number is up 31%. So substantial pickup year-over-year and then as far as the outlook, again, reiterate the potential here with the battery attached lift is a few thousand dollars per customer. And then we'll -- as we get more clarity on the adders and other things, we'll talk more about that as well.

Got it. That's helpful. And maybe just one follow-up question on the virtual power plant opportunity. You've made some interesting announcements over the last few days in this space. And I'm just curious of the 900-megawatt hours or so of batteries that you have in the field, what percentage of that is already included in virtual power plant agreements and it does sound like you have a decent amount of retrofit in storage growth going forward, which is obviously an opportunity in itself. But just curious about the untapped potential in your existing customer base.

The untapped potential is significant. And again, one of the things that has been a really strong value proposition that -- Sunrun has been strong in the space of grid services and figuring out how to leverage these assets from a grid perspective for many years and we're really starting to see the acceleration of that and really -- and seeing the acceleration of the appreciation of what these distributed power plants can do from a growth perspective. So really, right now, it's a relatively small percentage in terms of the total available megawatt hours we have control of and that's one of the things that is so exciting when we think about the potential ahead. It's a huge part of why we also are really looking forward to launching retrofits for our existing customer base. We already have a significant list of customers that have let us know that they want to be -- they think they want a storage device. And then we also are going to be doing storage only solutions for customers as well.

Your next question is coming from Joseph Osha from Guggenheim Partners.

I have 2 completely unrelated questions. The first, can I read into your comments that barring extraordinary circumstances, you are not going to be raising recourse capital or equity to fund growth. Is that kind of what I'm hearing is the corollary to this commitment to generate cash?

Yes. That's what you're hearing.

Great. Very unequivocal. And the second question related to Lunar. Just so that I understand, is it the case that at least in some installations, you can use the inverter there to drive a panel string? I'm trying to understand what exactly that product is.

Paul, do you want to speak to Lunar?

Yes, of course. So we're really excited about the Lunar product. The install efficiencies of pairing the inverter with the battery create a lot of opportunity for us to speed up our installations and actually deploy full battery backup in more consumer situations. So we're excited about the operational efficiency as well as the ability to apply it in more situations.

But that -- just to clarify, is it the case that I can use that inverter to drive a string of panels, if I want to?

Yes.

Our next question today is coming from Kashy Harrison from Piper Sandler.

So first one for me, there's a very helpful color around equipment costs. And I wanted to broaden the discussion to customer acquisition costs of California. You've indicated sales are down maybe 1/3 year-over-year and smaller installers -- you're outperforming smaller installers post them. And so I'm wondering if this creates an opportunity for the industry in the run to maybe solve for improved economics by reducing customer acquisition costs, just given where we are in the cycle and where economics are in California. Or is that maybe not necessarily possible because there's still enough alternative opportunities for sales teams to go if the commission dollars come down.

Yes. I think we continue to see people recognizing the value of selling at Sunrun. We've seen a 6% -- 5.5%, 6% decrease in CAC over the last 6 quarters. So sequentially, CAC has fallen every quarter, the last trailing 6 quarters as our net subscriber value is increasing. So you're seeing that kind of translation take place actively historically and we forecast that taking place going forward as well.

And then maybe just for my follow-up. Just -- and apologies if I missed this in the initial prepared commentary, but just looking at the guidance, I think it implies a pretty big sequential uptick at the midpoint to maybe just over 310 megawatts by the fourth quarter. Can you maybe walk us through what drives the confidence in that sequential improvement? And perhaps how much of the outlook is currently de-risked by signed agreements?

Yes. So outside of California, we've been seeing 25% growth year-over-year in sales activity. And so we're seeing really strong growth outside of California. Speaking specifically inside California, we saw strong outpacing of growth quarter-over-quarter throughout the period and entering into the latter weeks of the end of the quarter and this first few days of this quarter, we're seeing, I would categorize as explosive sales activity from our teams there, bolstering our confidence in the number.

Next question today is coming from Colin Rusch from Oppenheimer.

Within the sales process, can you talk a little bit about the trends on the conversion rates that you're getting in terms of lead to converting into actual sales? And then also on system size, particularly in California, as you transition into NEM 3.0.

Yes. So a lot of competitors inside California are downsizing systems because they don't have a Shift solution. So the way to preserve customer savings, given the time of use rate situation is to size down on systems. Our portfolio has not experienced that as we are deploying nearly a little in excess of 80% of the systems we're deploying have either a Shift or full battery backup. So we're not as susceptible to that decreased system size dynamic. Conversion rate is something we watch continuing and are very focused on and driving up conversions and customer experience is a constant focus for us.

And then as you look at monetizing the virtual power plant in those assets, I guess, it's still relatively nascent. Can you talk a little bit about the pricing dynamics and the potential to increase the functionality of the portfolio and monetize those assets at a higher level on a go-forward basis?

Well, as we said, right now, we look at it as a value of $2,000 NPV per customer with the opportunity to just grow that going forward, to your point. So again, anything that's new takes time in -- like energy generation space. And I feel very heartened by the fact that you now have one of the largest utilities in America, partnering on a substantive project that is very high profile. It is leading to many other conversations. So again, we see it as nothing but continued upside, not just for Sunrun and our shareholders, but for customers. Again, back to that California program that I talked about with PG&E, customers who went ahead and went with us for solar and storage for all sorts of financial and resiliency reasons, for basically a few months access to their storage, they have $750 of found money, which dramatically impacts the value proposition and the way customers see it. So again, I see this as a really strong growing opportunity for Sunrun and our customers and our shareholders.

The next question is coming from Tristan Richardson from Scotiabank.

Maybe just kind of curious, you talked about prioritizing some markets and the strength you're seeing in the direct channel business and obviously the long-term strategy to grow the direct channel business. Maybe if you could touch on the partner channel and just kind of what you're seeing there, just what we've heard from big box retailers, et cetera, foot traffic. Just maybe curious on outside the direct channel.

Yes. So we had -- as you saw really strong performance from our affiliate partners as we call them in our business this last quarter. We continue to see strong demand to get on to our platform, but have long held kind of a strategy around biasing towards scale versus driving towards attracting the smaller and long tail players. We have a really heavy focus on customer experience as well as installation quality. And so while demand remains and I would say, with this transition of the IRA adders, growing demand for dealers to join our platform, holding those standards kind of throttles that volume and ensures we're able to maintain installation quality and the customer experience that we require.

Helpful. And then just on the $2,000 NPV on the battery side, I mean, should we think of that as -- this is a high-level number that incorporates some of the cost savings you're seeing in the hypothetical example you gave? Or should we think that there could be upside to the 2,000 over some medium-term period of time?

And are you referring to the grid services number? Or was it the backup attach?

Backup attach, sorry.

Yes. So yes, on the backup, it's -- I think it's a weighted impact of a few thousand dollars per customer as we get the attach rate up overall in the business. But if you are actually walking one system from solar only to back up, it could be a little more meaningful than that.

Next question is coming from Philip Shen from ROTH MKM.

Want to explore the guidance cadence a bit more. So over the past 5 years, your Q3 installations are typically up, on average, 18% quarter-over-quarter but you're guiding Q3 installs to be down 11% quarter-over-quarter. And then for Q4, historically, over the past 5 years, the cadence is down 10% quarter-over-quarter but then the implied Q4 installers are now up 18%. I know you talked about it a little bit already, but I was wondering if you could talk bigger picture about that cadence, what's driving the weaker Q3 guide on a historical basis and then the reacceleration for Q4?

Yes. Just to be clear, for Q3, we're going to be up year-over-year is what we're guiding to and up year-over-year for the entire year, obviously as well. That said, I think we hit pretty clearly like what we're seeing is that we had this dip and it happened at the same time that we're selling much higher value, multiple product systems to customers. So that also impacts sort of the installation and cycle timing. So that's why, as I hit, we see Q3 as solid but really a transition quarter as we're moving into, again, multiple products for a very strong percentage of our overall customers.

Great. And then shifting over to 2024 and California. So I know you don't have guidance out and you won't give guidance and this is -- I'm not asking for guidance. But looking in California here, our work suggests you guys are doing really well in California with NEM 3 originations, you guys talked about today. And we have a sense that maybe you guys can break -- you guys be flat year-over-year growth on originations maybe in Q3 or if not maybe in Q4. I was wondering if you could talk through that at all a little bit. And then to the degree that you are flat year-over-year on that growth in Q3 and Q4 last year, very strong periods, that is a leading indicator for what 2024 could be for you guys. So I was wondering, you currently have this 10% to 15% growth for this year. For next year, do you think there's an opportunity for you guys to accelerate in 2024? Or do you think this 10% to 15% kind of growth pace feels like the right level.

Yes. So as I mentioned, I mean when we look at California, and we look at what's happening outside California, again I think we hit that pretty hard. We're seeing really significant growth outside California. And we're seeing volume in California, and we're seeing it uptick, and we see that California is actually massively underpenetrated, particularly when you think about the opportunity to again bring multiple products to California customers. So again, we guided, we're rock solid on our 10% to 15% guide that we gave for this year. And we don't see any reason to believe that, again -- consumer interest is very active for what we're selling, and we continue to see again tremendous opportunity in California and the rest of the country looking forward.

Your next question is coming from Jordan Levy from Truist Securities.

You start to kind of strength in the affiliate channel and that...

Pardon me, Jordan, I cannot hear you. Would you mind raising your volume? Speaking through the microphone?

Can you hear me?

Yes.

Just wanted to get your thoughts. You pointed out the affiliate channel as kind of a key outperformer for install and you also mentioned the changes you made in Arizona. I just wanted to get your updated thoughts as to any further opportunities there to lean more heavily on the affiliate channel and some of the trends you're seeing in that market?

Yes, I think we see a lot of opportunities for the affiliate business. We've got phenomenal partners that create and generate 25% to 30% of our business. And as I stated earlier, we see strong demand for partners to join our platform and are constantly working on adding partners to that platform who meet our criteria around customer experience and installation quality. But it's a piece of our business that we have long since held and are very excited about continuing to focus on and grow.

And was that kind of one of the key drivers behind the sequential decrease in sales and marketing per customer?

Yes. So in our affiliate business, the sales cost is recognized outside of CAC as far as the installation cost, but neutralize for that kind of a one-time event, which caused the steeper decline this quarter. As previously referenced, we've seen 6 sequential quarters of CAC over subscriber value declining.

Next question is coming from Ameet Thakkar from BMO Capital Markets.

Just coming back to the $200 million to $500 million kind of cash generation, appreciating that it will come in kind of different times in forms and fashion. But is all of that cash going to be available to you kind of unencumbered? Or will there be kind of cash traps associated with that, et cetera?

Yes. We view that as the kind of the nonrestricted amount of cash, so we do have a growing restricted balance as we reserve in our project finance deals. But we weren't thinking about that cash, really the nonrestricted as you called it, the unencumbered amount.

Okay. And then just real quick. You guys have mentioned a couple of times about other states and regions that have kind of accelerated in terms of kind of your sales through there. I was wondering if you could kind of share which states have kind of been most impactful relative to prior periods?

Yes, sorry, can you repeat that question? Are you asking which states are we seeing strong growth in or future growth states that we're not operating in?

Which states are you seeing strong growth in now?

Yes. So outside of California, we've seen that 25% blended growth. Our Northeastern states are weeding out, pulling those averages up. So we have really robust activities in Massachusetts and Illinois specifically.

Thank you. That concludes the time we have allocated for Q&A. You may now disconnect. We do thank you for your participation today.