Sunnova Energy International Inc.

Good morning and welcome to Sunova's second quarter 2023 earnings conference call. Today's call is being recorded and we'll have allocated an hour for prepared remarks and questions and answers. At this time, I would like to turn the conference over to Rodney McMahon, Vice President, Investor Relations at Sunova. Please go ahead.

Thank you, Operator. Before we begin, please note during today's call we will make forward-looking statements that are subject to various risks and uncertainties that are described in our slide presentation earnings press release in our 2022 Form 10-K. Please see those documents for additional information regarding those factors that may affect these forward-looking statements. Also, we will reference certain non-GAAP measures during today's call. Please refer to the appendix of our presentation as well as the earnings press release for the appropriate GAAP to non-GAAP reconciliations and cautionary disclosures. On the call today are John Berger, Synovus Chairman and Chief Executive Officer, and Robert Lane, Executive Vice President and Chief Financial Officer. I will now turn the call over to John. Good morning and thank you for joining us.

Sunova achieved record growth in customer additions in the second quarter. This outstanding performance can be attributed to the strong demand for our comprehensive suite of services, the continued growth of our dealer base, and the expansion of our addressable market and market share. What sets Sunova apart and fuels our growth is our unique business model, exemplified by an unwavering commitment to delivering responsive and reliable service. While solar forms the foundation of our existing customer base, we have observed a growing trend among newer consumers. We see homeowners seeking a broader range of services that go beyond panels on the roof. To meet this evolving demand, we have introduced innovative solutions such as the Sunova Adaptive Home and the Sunova Adaptive Business, which combine advanced technologies to optimize energy usage for homeowners and businesses, as well as Sanova repair services to ensure the uninterrupted performance of solar systems without service. Underpinning our commitment to providing exceptional customer service is our 24-hour response time for our customers, currently in four markets. We have plans to expand to seven markets by the end of this year, which is expected to cover 70% of our customer base. This rapid expansion of our 24-hour response time will help us to solidify our position as the fastest service delivery leader while expanding our Sanova repair service business. Our ability to navigate macroeconomic financial conditions, regulatory changes, and market trends, all the while focusing on the customer, is unmatched in our industry. One market trend we are actively involved in is the current deflationary environment for equipment. In the current equipment cycle, falling prices coupled with our open equipment platform and our strong relationships with best-in-class manufacturers has empowered us to access top quality equipment at favorable pricing, thereby enhancing our scalability and market competitiveness. To get a sense of how drastic price declines have been so far this year, at the end of 2022, the average equipment stack consisting of panels, inverters, and a battery for an 8 kilowatt system in one of our major markets priced around $15,100. Now that same composition of equipment can be purchased for approximately $9,500, a reduction of 37%. This notable price shift translates to the equivalent of a 330 basis points decrease in the cost of capital, which will inure to the benefit of both the consumer in the form of lower pricing as the majority of the cost savings will be passed through to them and service providers like Sunova in the form of consumer demand upside as long as the service provider has managed their inventory properly and operate an open equipment platform. Slide 3 showcases the continued growth in Sunova's customers' solar power generation and energy storage under management, battery attachment rate and origination, and expected cash inflow over the next 12 months. During the second quarter, we placed over 39,000 customers into service, which brought our total customer count as of June 30, 2023 to 348,600 and brought our megawatt hours under management to 869 and total solar power generation under management to 2.1 gigawatts. As a reminder, we will count a customer only after they have been placed into service and we have an ongoing economic relationship with the customer. If the economic relationship ends, we will remove from our customer count. Additionally, we will count a customer only once, regardless of the number of services we provide to them. Our growth is fueled by our dedicated dealers. In the second quarter, we added another 216 dealers, bringing the total count to 1,592 as of June 30, 2023. Our strong customer additions during the first half of the year, our continued robust originations, and our conservative customer count methodology gives us the visibility and confidence to increase our customer additions guidance for 2023 by 10,000 customers at the midpoint and issue preliminary 2024 customer growth guidance of 40% over 2023. Given the timing of when these customers go into service, we expect the bulk of the financial benefit of the customer additions to accrue to Sanova in 2024 and beyond. We are furthering our growth by upselling our existing customers' additional services and are tracking this growth effort through our services per customer metric, which stands at 3.5 as of June 30, 2023. We continue to target seven services per customer by the end of 2025. Additionally, Our battery attachment rate on origination was 32% in the second quarter, and as of June 30, 2023, we reached 3,173 battery retrofits live today. Finally, we have updated our customer contract life and expected cash inflows. As of June 30, 2023, the weighted average contract life remaining on our customer contracts equaled 22.2 years and expected cash inflows from those customers over the next 12 months increased to $597 million. By focusing on being an energy as a service company, we have successfully differentiated ourselves and we are building a reputation for reliable and responsive service. Detailed on slide four, Sunova's growth strategy is built around the following key opportunities. In the U.S., we estimate there are approximately 108 million homes that could become Sunova adaptive homes. With only a 4% solar market penetration rate, there is significant untapped growth potential for Sunova. By aggressively expanding our operations, we are determined to establish our presence in all 55 U.S. markets by the end of 2024 to take full advantage of this untapped opportunity. Our larger footprint will also lower our concentration risk and reduce our exposure to region-specific concerns such as the recent change in the net metering tariff in California. Of the roughly 4 million homes that have solar in the U.S., approximately 2.5 million of them lack a service provider, creating additional market opportunity for Sunova through our Sunova Repair Service business. Based on our analysis, we have determined that these systems typically require at least one truck roll every three years resulting in a substantial revenue potential of approximately $1 billion per year when considering an average ticket price of approximately $1,100. While our current focus is on providing repair services to residential systems, there are opportunities to expand this capability to our Sunova Adaptive Business customers and future European customers. The Sunova Adaptive Business Market opportunity is vast, encompassing approximately 2.6 million businesses that could benefit from our solutions. Our goal is to expand our presence into all 55 U.S. markets by the end of 2024, positioning Sunova as a leading provider of energy as a service for businesses across the country. And finally, with an average EU energy cost of 1.61 euros per watt, and approximately 66 million potential Sanova adaptive homes and an estimated solar revenue opportunity of 462 billion euros, the European market presents a substantial opportunity for Sanova as we look beyond the U.S. and its territories. Additionally, a move internationally will further reduce our exposure to U.S. specific challenges and open Sanova up to more regulatory and consumer choice friendly markets. We will be nimble and opportunistic about capitalizing our growth opportunities overseas, and we intend to be methodical in our approach. As of now, our 2024 customer projections do not include Europe. In addition, we have determined that the rapidly growing Sunova customer base, particularly the storage and load management assets, possess substantial untapped financial potential as it pertains to existing accessible wholesale markets and emerging opportunities in other wholesale markets. As highlighted in slide five, our expanding optimization and modernization expertise extends into wholesale power, grid services, and retail energy provider services, collectively known as energy services. Leveraging our Synova sentient platform and employing realistic addressable market and attachment rate scenarios We project that Sanova Energy Services has the capability to generate cumulative revenues of $1 billion by 2030. With our primary focus on delivering outstanding value to our customers and shareholders, we continue to drive revenue growth, provide great service to minimize capital loss, and strengthen our brand. Our unique model serves as the foundation for these goals, allowing us to meet our customers' expectations regarding power reliability and affordability. As we move forward, we are committed to investing in innovative technologies, operational efficiencies, and logistical capabilities to enhance the quality and responsiveness of our services. I will now hand the call over to Rob, who will walk you through our financial highlights.

Thank you, John. Starting on slide 7, you will see our second quarter financial results. We captured 17% of our expected annual adjusted EBITDA together with the principal and interest we collect on solar loans in the second quarter, slightly below our guide of 20%, but keeping us in line with our 30% projection for the first half of 2023. The second quarter results came in below our initial guide, primarily due to a lower than expected contribution from inventory sales to our dealers. Materially better credit terms from several vendors and a concerted effort to collect accounts receivable and lower inventory orders rationalize our working capital position, and we fully expect increased inventory gain-on-sale contributions in the third and fourth quarters. Additionally, in the second quarter, we recorded a $15.7 million impairment. A portion is due to the purchase of a product that was ultimately found to be impractical to the vast majority of residential rooftops, and the manufacturer is no longer on our approved vendor listing. will responsibly recycle what equipment we cannot donate to charities. On slide 8, you can see the steps Sunova recently took to strengthen its access to capital. Thus far in 2023, we have added $255 million in additional tax equity funds as the tax equity market remains healthy. We continue to utilize tax equity partnerships. However, we are engaged in several potential transactions to sell tax credits in the current quarter and in the fourth quarter in order to diversify our funding sources. Also during the year, we have expanded our warehouse capacity by $535 million while securing amendments to keep pace with our evolving origination, entered into $611 million in asset-backed securitizations, entered into a $50 million secured revolving credit facility to support selling inventory to dealers, and announce a conditional commitment by the U.S. Department of Energy Loan Programs Office. Included in our $510 million of liquidity as of June 30, 2023, are both our restricted and unrestricted cash, as well as the available collateralized liquidity we could draw upon from our tax equity and warehouse credit facilities. Given available unencumbered assets as of June 30, 2023, This available collateralized liquidity equaled $104 million. Beyond that, subject to available collateral, we had $215 million of additional capacity in our warehouses and open tax equity funds. Combined, these amounts represent $725 million of liquidity available exclusive of any additional tax equity funds, securitization closures, in the money interest rate hedges, further warehouse expansions or other sources of liquidity during the year. In addition, we expect to close at least four more amendments, extensions and new capital sources in the next 30 days, exclusive of any publicly announced transactions. On slide nine, you will see our fully burdened on level return on new origination increased 10.9% as of June 30th, 2023, based on a trailing 12 months. On a quarter to date basis, this return equaled 11.1%. We are forecasting further increases to our fully burdened unlevered return over the remainder of the year as we have seen positive trends as this return equaled 11.6% over the last 30 days. This more recent increase is partially driven by the addition of a limited amount of IRA adders, leaving room for further gains as adder guidance improves and equipment manufacturers establish manufacturing capabilities in the United States. Additionally, we anticipate a slightly lower tax equity cost of capital in the upcoming quarters. And we have recently implemented several price increases with additional price increases going into effect next month. With these combined factors, we are closing in on our target 12% fully burdened unlevered return. The implied spread for the trailing 12 months decreased to 4.5% as our weighted average cost of debt over the past 12 months increased as older securitizations have fallen away even though our marginal cost of debt has decreased relative to the fourth quarter of 2022. Given the impending impact of our Department of Energy loan guarantee, with our continued extremely low capital loss rate and market signals of falling inflation and slowing growth, we anticipate that our marginal weighted average cost of debt is more likely to fall as we approach 2024. Slide 10 reflects the strong growth we have seen in our net contracted customer value, or NCCV. At a 6% discount rate, NCCV was $2.65 billion, an increase of 39% compared to June 30, 2022. Our June 30, 2023 NCCV at this discount rate equates to approximately $7,600 per customer and $22.76 per share. As higher fully burdened unlevered returned assets start going into service, we expect this to be very accretive to NCCV in the second half of the year. Slides 12 through 14 provide our 2023 guidance and liquidity forecast as well as our major metric growth plan, the triple-double-triple. As John noted earlier, our sustained robust growth and ongoing demand have prompted us to update our customer additions guidance once again for 2023. We are increasing our guidance range by 10,000 customers at the midpoint, resulting in an updated range of 135,000 to 145,000 customer additions for the year. We anticipate that the financial impact of this increase will be fully realized in 2024 and beyond. For the past two and a half years, we have been using gain on sale activities and accelerated customer payments to complement our recurring cash flows. Coming into 2023, we expected approximately 24% of our customer cash inflows to come from these activities through a combination of cash and other direct sales, such as inventory sales, repair services, new home sales, forward flow activities, loan prepayments, and investment tax credit transfers or sales. Based on our most recent forecast, we continue to estimate a similar contribution from these activities, although slightly more back-in weighted than initially estimated. This back-in weighting is primarily due to slow guidance from Treasury on the ITC sales and other parts of the IRA. As such, there is no change to our full year 2023 adjusted EBITDA or principal and interest from solar loans guidance. As of June 30, 2023, 98% of the midpoint of our total 2023 targeted customer revenue and principal interest we expect to collect on solar loans was locked in through existing customers as of that same day. Due to our growth exceeding expectations, we're updating our liquidity forecast, which can be found on slide 13, to include a $500 million corporate capital raise by the end of this year, primarily to fuel the outsized origination we are currently experiencing and which is driving our customer count expectations for 2024. Our current expectation is 85% of the potential $500 million of corporate capital expected to be raised by year-end will be debt in the form of a high-yield bond, and 15% of the $500 million of corporate capital will be common equity. However, this may change due to market conditions. As we expect this market growth trend to continue into 2024 for 2025, We felt it prudent to now plan for another potential $500 million corporate capital raise in 2024, again subject to realized growth over the next year and market conditions. We currently expect that raise to take advantage of the expected significant growth of levered cash flows to the equity to support an additional bond issuance. As a reminder, our capital strategy is to use a combination of corporate capital, which is primarily corporate debt supported by our contracted cash flows, and asset-level debt raised through the institutional asset-backed securitization market. This structure gives us the lowest cost of capital with the least amount of risk. This is especially true over the past few quarters as the spreads between different credit attachment points in the ABS market are significantly wider than those observed in the corporate debt markets. As we are refreshing our expiring S3 security shelf, we will also be papering an ATM program to allow us opportunistic and low-cost access to equity capital with maximum flexibility over a multi-year period. In addition to the potential to utilize the ATM on an as-needed basis to fund opportunistic smaller acquisitions, including potential opportunities in Europe, we may also use the program for core customer growth. However the program is used, it will be clear and transparent with the market on its potential utilization. Over the years, we have elected to primarily retain our assets and cash flows, which has benefited us in the form of default and delinquencies coming in well below market expectations. It has also given us the ability to receive a corporate rating, allowing us to issue a corporate bond and to further issue more corporate bonds, as we just mentioned. Due to these benefits, we have not sold any assets out of our securitizations, a practice that will only become more accretive once our DOE loan guarantee is active. As such, it currently appears that issuing a small portion of equity and a second corporate bond by year end is the most efficient cost of capital approach to fund our rapid growth. Furthermore, scaling our operations plays a pivotal role in enhancing our operating leverage. Although we have observed increases in operating expenses over recent quarters, we anticipate the rate of increases of expenditures will reach its peak by year-end, resulting in improved operating leverage beginning in 2024. The revenue and margin growth is following this spending, which was and is primarily directed towards initiatives such as software development to enhance both the customer and dealer experience, and energy services. Investments were also made to bring our service response times from multiple weeks, and in some cases months, to 24 hours in most cases for at least 70% of our customer base. These investments are coming to an end as we expect to be at our desired service levels by year-end. Before turning the call back over to John, I wanted to give more visibility on Sunova's NCCP metric and the embedded levered cash flow profile over the next several years. For our analysis, we expect to generate $100 million per year of levered cash flows for the next 10 years, increasing to $170 million per year beginning in year 11. This is inclusive of our current capital loss rate and servicing our corporate and convertible bonds, but does not include assets currently not in securitizations, accessory loans, service revenues, and other gain on sale activities or expenses. We expect that this will cut our existing ABS debt in half by 2031 to scheduled amortization payments and continuation of our capital loss rate. Generate sufficient cash to the equity to allow even further pay downs of debt above the scheduled payments or issue a dividend. Expand our levered cash flow profile to follow directionally with the rapid increase of our asset base, which is currently expected to triple by the first quarter of 2025. provide the option to monetize forward cash flows to pay down debt faster, and assist in bringing our debt to asset ratio back down to our targeted 55 to 60% over time. I will now turn the call back over to John.

Thanks, Rob. As we celebrate our fourth IPO anniversary this week, we reflect on the remarkable growth our team has achieved since becoming a public company. Driven by our commitment to enabling energy independence through clean, affordable, and reliable energy services, Sunova is steadfast in its pursuit of financial and operational excellence. Our dedicated team is comprised of individuals who possess extensive knowledge of the renewable energy landscape and who share a profound passion for creating a positive impact both globally and on our bottom line. Embracing a collective entrepreneurial mindset, we capitalize on opportunities, expand to new markets, and adapt swiftly to the evolving dynamics of our industry. Our growth has been remarkably strong, outstripping our original expectations. For example, our originated capital for June of 2023 compared to June of 2019, the month prior to our IPO, was 700% higher. The customer growth during the same time period was 800% higher. This month alone, every 72 hours, we've been originating the same amount of value that we originated during the entire month of June of 2019. Our critical advantage as an energy as a service leader is supported by service, scale, and the retention of long-term contracted cash flows. Sunova's growth is propelled by multiple factors across various key areas. In terms of geography, we have a goal of being in all 55 US states and territories for both residential and business markets by the end of 2024. Additionally, international expansion further positions us for substantial geographic risk mitigation and growth opportunities. As a leading energy as a service provider, Sunova offers a comprehensive, sustainable, and streamlined approach to energy services for homes and businesses. We simplify an increasingly complex and multifaceted service offering. With our approach, customers no longer need to worry about the upfront costs, maintenance, or technical intricacies of how they power their homes and businesses. Instead, they can rely on Sunova as their trusted energy partner, gaining access to reliable, affordable, and sustainable energy solutions. With the Sunova Adaptive Home, we are pioneering innovative services that integrate solar power, battery storage, energy control and management technologies, electric vehicle charging, generators, and more for the consumer. This comprehensive approach not only makes clean energy more affordable, but also enhances reliability and resiliency, enabling us to meet the evolving needs of our customers. By providing exceptional service and addressing our customers' unique needs, we have distinguished ourselves as a leader in the market and are fostering lasting customer loyalty and sustainable revenue streams. This customer-centric approach not only fuels the growth and prosperity of our company, but also bolsters our long-term cash flows by minimizing our capital loss rate and increasing our cash flow per share. Moreover, our ability to deliver this level of service at scale in an industry that has historically overlooked service issues further drives profitable growth that is capital light and highly scalable. Finally, Our financing strategy contributes significantly to our growth trajectory. By adopting an agnostic approach to lease, loan, or PPA contracts, we provide diverse financing options to our customers. Moreover, our software supported systems facilitate seamless transition between different contract types, empowering our dealers to adapt swiftly to market demands and drive solar adoption throughout our market coverage. Our growth engines are firing on all cylinders or discharging on all batteries to modernize the saying. With that, operator, please open the line for questions.

Thank you. As a reminder, if you'd like to ask a question, you can press star followed by one on your telephone keypad. If you'd like to remove your question, you may press star followed by two. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Andrew Picocco from Morgan Stanley. Andrew, your line is now open. Please go ahead.

Great. Thanks so much for taking my question and congrats on another strong quarter here. I just wanted to hone in on slide 13 and just the funding needs for 2023 and 2024. It looks like based on that slide you have roughly 700 million or so of a funding hole combined in 2023 and 2024. And you're outlining roughly a billion of corporate capital from here. Can you just maybe explain what the delta in that 300 million will be used for? Is that the pre-fund Europe growth? If you could just maybe talk through that. And this is a quick follow-up to that. You guys are talking a lot about price declines, hardware cost declines, and passing a lot of that along to the end customer. Can you maybe just explain that rationale? Why not maybe absorb some of that yourselves and securitize more of those cash flows to reduce corporate capital needs? Thanks.

Yeah, this is Rob. I can go ahead and sort of cover, I think, maybe both of those. The idea behind using the high-yield bond to fund those deeper credit attachment points with a much lower cost of capital is to both utilize that lower cost of capital and to unlock the cash flows and let them go to the corporate just up from the trusts. If we use the deeper credit attachment points, not only is the cost of capital much, much higher, we're talking about a delta of as much as 10 points or 1,000 bps between what you could find in the corporate market versus what is potentially available in the ABS market at a double B or single B theoretical attachment point. So it's a much more efficient use of the cost of capital to use the corporate bond. And even a little bit of the equity that we're looking at, that is twofold. One, it helps enhance the credit value to the rating agencies of that high-yield bond and helps to maintain our credit rating. And two, just like we've talked about, it's just good hygiene for us to be able to have that there. But the biggest thing about, you know, what's the delta? Why do you show 700 versus 1,000? Remember, most of that high-yield bond is going to be able to fund that delta that we would otherwise do with a double B attachment point within the securitizations, but that's also feeding into 2025. So whenever we do a corporate capital raise, it's not to fill a hole for a specific year. It is to provide growth for the stub of that year and well into the next year.

Great. Thank you. Thanks, Andrew.

Thank you. Our next question for today comes from Julian Dumoulin-Smith from Bank of America. Your line is now open. Please go ahead.

Hey guys, it's, uh, Alex, uh, for, uh, for Julian today. And again, congrats as well, um, on the secondary rates here. Um, just, uh, you know, when we think about where the growth is coming from this year, obviously, you know, you guys not only think it seems like a lot of growth and sort of your legacy segments, but also new verticals. Um, I'm curious if you can just sort of expand on what you're seeing. I saw the breakout of service for the first time. Um, it looks like we're seeing a lot of the accessory loans in the mix as well. Just curious as far as, I mean, where you're seeing the growth, what's driving it, and how that's informing your view on 24 and the need for additional capital to fund all of those verticals before, I guess, considering you're up on top of that. Thanks.

Alex, this is John. Yeah, things are pretty strong across the board. I would say with the possible exception of California and, you know, running a little north of 20% down for us, but The offset there is the attachment rate is zoomed much higher, I think 42% or so for the quarter with some of that quarter having NEM 2.0. So I think most days we're pushing well past 50% to 60% attachment rates. So the overall capital deployed is not down as much because you're deploying more value or capital per customer. The service business is why we broke it out is just killing it. There is so much demand out there. There's a lot of broken systems. Everybody that just took a loan from a provider needs service. And so we're cleaning up a lot of messes. There's a lot of broken systems. Power's not flowing out there. We're assisting some of our other partners as well. So there's a lot of business out there for scale operation. You have to be really big. The logistics, supply chain, And the technicians, the labor force, plus all the software that you need to be able to operate something like this is huge. And definitely, we're seeing a pretty nice pickup there. In terms of accessories, generators, and EV chargers, and load managers, there's a ton of demand from our existing customer base, which we'll hit on more and more as we move into 2024 in terms of upselling as these new products come to market, as we have time to plug those new products and the data into our overall software platform. And we're also seeing a tremendous amount of growth in areas that we didn't expect. For instance, new homes. We're very bearish on new homes going into this year. That was wrong. Things have gone very well, including on bookings that We will not see until 2024. The durations for new homes is quite a bit longer than the retrofit. The other growth channels are more states, more geographies. So this, you know, powers of services is growing and it's spreading into the middle part of the country. In other states, in the southeast is very, very strong. The southwest is strong. for us. And if you look at one of the top reasons why, it's the movement from loan to lease and PPA. It is just, we're dominating in the southern parts of the United States. Puerto Rico is doing very well. The northeast is doing well. In fact, it's picking up steam. And even parts of the west, however you consider Arizona, consider southwest, but that's done well as well. So there's a There's a lot of growth in a lot of areas. Business markets, a little bit slower than we expected, but still we're seeing some growth there. So, again, as you said, discharging on all batteries, you know, we're really hitting stride. And, you know, at the end of the day, you've got a lot of growth. It's profitable growth. We continue to raise our unlevered returns that are fully burdened. And we see the cash flows that are coming out with our levered cash flows increasing. It needs more capital, mostly on the debt side, some on the corporate debt side, some on the asset level debt side. A little bit maybe on the equity. We'll see. Depends on what market conditions are in the corporate debt market and so forth. But I think all in all, a huge amount of growth, huge guidance upside for this year, for next year. I think it pretty much smashes anybody's expectations of growth out there. And a little bit of capital that we need to go out there and raise that we didn't already have.

uh you know forecasted so pretty darn good trade yeah fair enough um just one follow-up but just on the service segment specifically notice that the uh the revenue stepped up quite a lot um after you guys added i think over 6 000 customers in the fourth quarter um is this sort of a heuristic we should be thinking about moving forward i mean the i guess what 20 million revenue at 2q pretty impressive um I guess, Tasha, would you sort of think about revenue conversion off of that mix of customers being added? Thanks.

I think we can give you a little more detail later on. But, yeah, we do see that business, as I said earlier, growing quite strongly. And I don't want to confuse that with the overall energy services, as we term it, or VPP or grid service, aggregation services. It goes by many different names, right? We have the largest book of business in that area. And we see just an enormous amount of opportunity there, especially with the batteries. So we're really more focused on the megawatt hours under management than the megawatts. Megawatts kind of basically just think about it as fuel for the tank that is the battery. So the battery is more critical and key into unlocking the overall energy services and realizing the integration between the behind the meter and front of the meter. So we'll do a little bit as we build that business up rapidly. As we talked about, we expect to have a about a billion dollars cumulatively by the end of the decade. We'll do a little more of an effort to break that out for you as well.

Got it. Appreciate it. Thanks, guys. Take care. Have a good one.

Thank you. Our next question comes from Philip Shen of Roth MKM. Philip, your line is now open. Please go ahead.

Hey, guys. Thanks for taking my questions. First one's on pricing power. You talked about raising prices in your remarks. How much longer do you think you can increase prices with power prices peaking? What are your expectations for raising prices in 2024? Hi, Phil.

This is John. I do think that power rates are peaking with the utilities. I will point out, though, that there is a growing recognition, and I think regulators are a little miffed, but the utilities are not lowering rates, really pretty much across the board. In fact, many are going in for rate increases, which has a lot of people's heads scratching, but it really shouldn't be scratching your head. Utilities are very inefficient. They didn't raise rates as much as the fuel costs went up last year, and so by definition, they're going to flow through those increases in costs over a multi-year period. They didn't go up as much as the natural gas and coal and such went up last year, but they're not going to go down as much as natural gas and coal. So there's really, I think, a large misunderstanding of how the U.S. regulated power industry actually works. And so we could see some and we expect to see some marginal increases as we go into the back part of this year into next year overall. I would say that it has never occurred where you have falling energy prices and rapidly rising overall inflation. That would be the first time in history. So I guess anything can happen, but it doesn't make any logical sense either. So that would mean that the overall inflation rate would trend off if the overall energy prices, hydrocarbon prices in particular, stay very low. Now, there's another phenomenon that could occur, which is the energy, specifically oil, natural gas, as those inventories tighten up some more, as we've seen, those prices actually rise as the economy declines due to pressures from the global central banks, and you could actually have a situation where the power rates start to move up more than we think, and the cost of capital drops due to the overall economy moving into recession. So, Uh, you know, in terms of what we're planning for, we're not planning for any additional rate hike, uh, you know, at price hikes, but we are expecting to see a lot more of the ITC adders, uh, coming in play, um, includes including the domestic content. In fact, we have more confidence in that even over the last 48 hours than we had before. So we see the ability to continue to move up FUBER quite nicely, uh, the fully burdened unlevered return. And, uh, We may get a little more price increases. I didn't expect to be able to do some of this next month, but it's possible that we could see some more. But I would count on we probably have seen the peak at this point in time in this cycle.

Got it. Thanks, John. A couple of follow-ups here. Why was your NCCV flat when GCCV went up by $600 million? Is it just a timing issue? And then Can you talk about the number of accessory loans, direct sales in the quarter? Thanks.

Yeah, I'll cover the NCCV. Part of that was that the GCCV did go up, but a couple other things did go down. You'll notice that the net inventory came down a little bit. And then part of it was that some of the timing of the tax equity. So the tax equity is going to be used as a source of funding, but it doesn't count against the NCCV. It gets incorporated into the GCCV when it happens. And then there's also the timing of how and when things go into service and what goes into service when. So we had a lot of sort of the last of the legacy loans that we had originated last year going to service. A lot of those had been stuck in certain parts of our queue as far as the getting actually commissioned. We did a really great effort that started late in the quarter of getting a lot of those commissioned moved into the in-service block, but some of those were some of the lower FUBER, like the 10% FUBER type of assets. It sees 11 and 11.5% FUBER assets start going into service. You're going to see a much bigger pickup there in the NCCV. And that's all contemplated in our projections and how we're viewing the triple, double, triple. I'll let John handle the other one.

Yeah, Phil. And the accessories, as price declines have been pretty significant in batteries, and we expect that to continue, we're seeing a lot more consumer demand come in, which shouldn't be surprising. and then we're lighting up new products. There's an awful lot of manufacturers around the world that have come up with new innovative products. It appears that there's a lot of companies making a lot of batteries. Now, it doesn't mean that everybody makes a great battery, but there are certainly a ton of firms that are manufacturing a gargantuan amount of batteries around the world. And then also on the solar module side, inverter side, There's a lot more players, if you will, that are pretty strong. And they're also coming to play for like load management, EV charging, and so forth. So you should continue to see pretty rapid growth in the accessories, both in upselling the existing base and then on a forward basis. So we, again, see that as a high-growth area, part of our Sonoba Adaptive Home, Sonoba Adaptive business. And I think I'll just leave it at that.

Great, thanks guys.

Thanks. Thank you. Our next question comes from Brian Lee of Goldman Sachs. Brian, your line is now open. Please go ahead.

Hey guys, good morning. Thanks for taking the questions. The first one was just around some of the guidance metrics, I guess. This is the second quarter in a row where you guys have raised the the growth targets for this year, but your EBITDA and some of your other metrics aren't changing. So I know there's a lot of moving parts here. Your customer mix is changing. You've got loans, lease, service, et cetera. Can you kind of walk us through, you know, the EBITDA implications of different types of customers? And then I guess the simple question of why, you know, having 20,000 more customers potentially doesn't move the needle this year on any of those metrics. And then I'll follow up

Yeah, Brian, this is John. It's the same as it's always been. We don't count a customer until they're in service, and then we recognize the revenue or the P&I, if it's a loan customer, over several years, 25 years mostly, right? So it's pretty simple. The closer you get to the end of the calendar year, by definition, you're going to get very little revenue out of that customer that you added to the guidance. But you'll pick up the full amount of that revenue annual revenue or P&I in the next year. And that's what we expect, and we list it out very clearly in the script. So nothing more than it has been for years. It's the same dynamic. In terms of some of the other pieces of revenue, gain on sale that we've planned in there, up front during the year said in about the mid-20s, I think 24% or so, That's going to be lumpier. We lay that out very clearly with the ITC sales. We have either term sheets or in deeper negotiations on at least three transactions and not more. And that will get us, if we did all of those plus maybe some others, maybe one or more other, that would probably get us all the way through, I think, next year even on ITC sales. Loan sales, not as attractive to us because of Hestia. And so... We're getting very close there, by the way, getting that to where we can start using it. Nothing's done complete, to be very clear about it, but we're getting very close. And so that switched our gears a little bit to moving towards the ITC sales and more gain on sale, and that's going to be heavily weighted to third and fourth quarter by definition because of the Treasury guidance. Again, we list that in the script. The last one I would say in the inventory sales, look, we've been talking about a everybody was running around screaming and yelling about supply chain problems and all this last year. And we were like, hey, look, it's about to really change. And boy, were we right. We were more right than we thought. And we started destocking and telling in the fourth quarter, we told our dealers early in the first quarter, start really making sure you're selling a lot and don't carry as much inventory. We dramatically took our inventory carriage for ourselves in multiple months to to two weeks. And I would say it's even maybe less than that now. And we basically just hit the brakes and they flew right by the rest of the market. And that caused a hiccup here in the second quarter. But we'll pick it right back up. Our growth is obviously blowing the doors off, particularly look at the storage attachment rate. And we saw a lot of the equipment there. So we could pick it up fairly easily in the third and fourth quarter. Sorry about the second quarter. We did hit the adjusted EBITDA plus P&I as we laid out at the beginning of the year. 30% in the first half. So we said what we would do. We hit that. I know a lot of people had it a little bit higher, but we'll pick that up in the third and fourth quarter.

Just one more thing to add. Keep in mind, just one more quick thing to add. Keep in mind that as we are increasing both the customers for this year and the customers for next year, there's a creation of those customers, and that is creating a slightly higher sales OPEX, sales GNA, and that is counterbalancing some of the pickup that we are in fact getting from the higher customer count this year. So we are picking up some, as John's saying, but part of that's being countered by the fact that we're also doing so well in the customer growth, and yet there is a burden. That's the fully burdened part of that unlevered return, but that's generally felt up front. And so that's counterbalancing slightly And so that's why we're not really moving the metrics.

Okay. I appreciate you bringing that up, Rob. I think that's kind of the second question I had because, you know, one of the things that seems to be weighing on investor sentiment is, you know, you guys are clearly outperforming on growth and you've executed flawlessly on that front. But when we look at, you know, the liquidity walk and the capital raise forecast and you run through some of the numbers, It seems like, especially if you look at slide 13, you got 60% customer growth in 23, 40% target in 24. But the cash walk on slide 13 is much more negative next year, even than this year on the slightly slower growth, although 40% is quite robust. So is this a function of the business getting more expensive to fund? You know, growth just bringing in less cash flow? Are the customers less attractive in this environment than they were the last couple years or so? I think there's a question as to, you know, how much are you having to fund here to keep this growth rate going as part of the investor sort of debate, if you will. Thanks, Ike.

Yeah. Yeah, it is, John. Yeah, most of that, you know, cash usage there in next year on the corporate capital side is what Rob answered earlier. And if you've got anything else to add, you're answering the operating leverage question. you can add to it, but basically that capital is going into fund the stub pieces of the securitizations just as we laid out in our long-term capital strategy. So you shouldn't look at that as burn. And in fact, if you look at operating leverage, we continue to actually improve the amount of burden if you look on a per-customer basis so far this year pretty rapidly compared to history. When you look at an adjusted EBITDA basis, though, it doesn't look that way. One, what I would say is that we've been preparing, as Rob just mentioned, a ton of growth opportunities. We've been funding those, specifically on the software side of things for these different businesses, but also setting up these different businesses like service, for instance. And then taking service where you had a service level that was out weeks or months and taking that down to 24 hours, we're not going to have the Maytag repairman sitting around waiting for a customer to have a problem. So we're not going to have a burn issue there with the service business, but you're going to have a one-time expenditure to get that service where it should be, in our opinion, which is industry-leading at that 24 hours, and then you won't pay that again. So it's a way of thinking about it is to catch up. But we are very fixated, as the script said, on operating leverage. I get it. I see the investment, the spending, and the operating leverage will improve as we go into 2024. That will happen. We're now reaping the benefits of these investments that shareholders have allowed us to made. We will get that money back and then some. This will further our growth and know we're not burning a bunch of cash or anything else. And the customers that we have today are actually better return customers than we've had over the last couple of years or so. So these customers are more profitable. And then when you look at the storage attachment and what we can do in energy services, lights out more profitable. So this is a very increasingly more lucrative business than I think most people think about, you know, putting some panels on a roof, net metered it and argue about whether you finance with a loan or lease. Those days are over. We're moving into the power industry.

I'll add one more thing, which is just a bit of a timing issue with loans. you can, as long as you have a critical mass of loans, you can just package those up and put them out into a securitization. And certainly we see some, a lot of promise in Hestia. We, we, we may be putting a little too much gray sky in our estimates of what the Hestia, uh, securitization stack is going to look like, but, uh, you know, we do, we want to be a little bit conservative there as we look into 2024, but, uh, with you look at it at a lease or PPA securitization, Those are a lot lumpier. You have to get all your tax equity funds closed because of a lot more movement into the lease and the PPA. It affects a little bit of the timing of when we do the full securitization, which we expect to be a slight pickup, and our ability to use debt as well. And so some of that is just the timing of the difference between the warehouse debt and the securitization debt. But it's de minimis. I mean, that's maybe 10% of it is the timing there. And when we talk about that is you know, that's the piece of the working capital is supposed to be funding.

Great. Appreciate all the details, guys.

Thanks. Thank you. Our next question comes from Joseph Osher from Guggenheim Partners. Joseph, your line is now open. Please go ahead.

Thanks. Good morning. I have two questions. The first kind of following up on what Brian was just discussing, you talked about In your prepared remarks, $100 million a year of levered cash flow, I'm trying to understand what that means. Is it your assertion that following this next two years of corporate capital raises that you'll have a business that can generate $100 million of net cash flow a year going to $170 million? What exactly does that mean in the context of these corporate capital raises? Thank you. And then I have a follow-up.

Hey, Joe, it's John. Yeah, so what we're trying to do is give more visibility, which I think you and others have asked for in the NCCB. So think about the way we looked at it was, what's the profile of NCCB? So if you have the cash inflows of the company, they're under contract, which are not the gain on sale. So this does not include the gain on sale businesses that we've talked about, service, the inventory. um, the other business, you know, the, uh, new home sales and so forth does not include the gain on sale. And that's really important. Um, when you look at the profile of that NCCB, basically after you service all your debt, we're generating today on the existing basis, which about five and a half billion at cost, about a hundred million dollars of cash a year. And then that moves up into the year 11 and beyond to about 170. That's all due to the tax equity flips and the way that some of the SRECs work and, uh, some of the way the loans and such. And so there's some ins and outs there. But basically, that is where we sit today. So where are we going? We're going to triple the capital base by Q1 of 25. We've got about $1.8 billion ready to securitize in our backlog right now. So it's all in service, throwing cash, which is not included in that $100 million number, by the way. And we have about another $2 billion under construction. So we're well on our way to moving towards that $15 to $16.5 billion of assets at cost. And so when we look at where we're going to be by then, you would say that you'd probably triple that. I mean, there's some ins and outs, but looking at towards a $300 million a year, free cash coming out to fund the expenses. So you look at how do you fund the expense of the service? And then the burden of the growth is picked up in the securitizations with the corporate debt that's funding it. So that growth burden is paid for. We then want to, after we move to that 300-ish level and by 25, we want to de-lever down to 55, 60% as we've talked about our long-term leverage ratio, mainly using the gain on sale businesses and cash generation from those businesses versus selling assets. That becomes a you know, a bit of a spiral downwards in cash flow, if you will. We can pay down some more debt that way, which will further increase the levered cash flows, obviously. And then if we slow growth at any point in time, whether it's the market or us, we need less cash for the working capital. So that's some of that corporate capital, or probably about 30% of our working capital is corporate capital, comes back upwards. And then from there, we look to see if we pay a dividend. So this is cold hard cash coming out on a per year basis today.

So not to put too fine a point on it, are you telling us that, you know, after 2024, you're done raising corporate capital? Is that what I'm hearing?

Nope, I'm not going to make that commitment because I didn't see this kind of growth. And especially when we went public, if you'd have told me we'd have been done this, even as the entrepreneur, the founder, I would have said that that's crazy. And here we are. So, look, there is a big world out there and we're changing the entire global energy business, not just stationary transportation. So we will do what makes sense. But if there is a way to, you know, to not, you know, to increase the leverage of the company or to not, ability to pay down debt, we're going to do it for sure. But I'm not going to close this off because I have no idea how big this company can end up being. It's certainly massive now and it's going to get a lot bigger.

I can just add one thing to that real quick is that the goal is to have the best cost of capital for our assets. And right now, Corporate capital is providing us a better cost of capital than the deeper parts of the ABS stack. If we can get back to how things were at the beginning of 2021, where the spread between the AA and the BB was less than 100 bps, we'll go all the way back to that market. That is perfect right there. That's not where the market is today. Pardon me. So what we want to make sure that we do is to finance our growth in the most capital efficient way possible, regardless of how we're going to label it.

Okay. Thank you. And then just quickly, my follow-up, unless I missed something, I don't think I heard anything about the DOE credit wraparound facility. I'm just wondering if you can update us on how that's going and when we might see that turn up in some of your securitization activity. Thanks.

Yeah, I just mentioned that to Brian, actually, but I think fair to say, Rob, very, very close.

We are imminently going to be entering into the 30-day review process with the interdepartmental review process, and then we expect to close concurrent with the issuance of the first HESTIA securitization sometime shortly thereafter. So it's, we are pretty much looking forward to it.

Yeah. All right. All right. Thanks.

Thanks, sir. Thank you. Our next question comes from Praneeth Satish from Wells Fargo. Your line is now open. Please go ahead.

Thanks. Good morning. Maybe on the adders, you mentioned you have the most confidence on the domestic content adder. Can you maybe elaborate on, I guess, when you expect to book that benefit? I would imagine that it's a few years away, but do you see any near-term opportunities?

Yeah, we actually had the most confidence in the energy communities adder, and so we see that, and we're working on getting that added into our tax equity funds now. And then we have confidence around one particular manufacturer with a particular piece of equipment that we feel pretty good about as well. I've been very conservative in our estimates, and there's definitely some more upside, as I alluded to. And we're going to be working with our tax equity investors to add those in now as well. So we see that now.

Got it. And then maybe if I could follow up on your California comments. You mentioned down around 20%. I guess, where do you see that tracking over the balance of the year and into 24? When do you think you could see originations in California under NEM 3 turn positive again? And then I think you gave an attach rate in California, but it was kind of a blended NEM 2 and NEM 3. Specifically for NEM 3 customers, do you have a sense of what the attach rate looks like currently?

Yeah, in terms of, by the way, our California quarter-over-quarter, sorry, year-over-year, is actually a little bit higher. We grew it. But I would give these questions about California over to my competitors. They seem to be heavily invested there. And so I think they're a better litmus test for the market, quite candidly, than us. As I mentioned earlier, We're going to stick to our guns with the best service and providing these actually whole home backup or partial home backup. When the power goes out because of the wildfires and such, we want to make sure those customers, when they have a battery, they have the power. If you have solar and batteries on your house, when the grid utility goes down yet again, you kind of expect the power to be there. We know that from our experience. So we're going to stick to that. And if that means less sales, well, heck, we're already – crushing it on growth anyway, so I don't really need that. Um, we're just going to do the right thing for the customers, uh, and, uh, making sure they've got, you know, what they think they got. Um, in terms of the attachment rate for us, as I mentioned, it was about 40, a low 40%, uh, for the entire quarter Q2. And we see most days are around the 50, 60% attachment rate on the, on the storage side of things. So, um, you know, quite strong, uh, and again, decent market for us, but, uh, you know, nothing that we're, you know, weighted into as compared to others. So I'd kick more of the detailed questions back over to those firms. Got it. Thank you.

Thank you. Our next question comes from Mark Strauss of JP Morgan. Mark, your line is now open. Please go ahead.

Yep. Good morning. Thank you very much for taking our questions. Kind of sticking with the state-specific questions here. I understand what you said earlier about kind of Texas and Florida growing significantly year over year. Just looking at the appendix, though, they did decline quarter over quarter. I'm just curious what your guidance for the rest of the year implies for those two states in particular. I fully get you're increasing your guidance, so it's being offset in other areas maybe, but just kind of more color on what you're seeing in those two markets.

Yeah, Mark, this is John. This goes down to the road to health paid with good intentions, right? Breaking all these states out and keep getting questions like this. In fact, I think we added more states than ever, more transparency than ever. Just a reminder that those are in-service customers, and so those customers were originated two to three quarters ago. So when we talk about origination, you're not going to see that flow through in the numbers for another, you know, probably another quarter. It may be two quarters. It's that much of a lag. So that's, I think, the straight answer to your question there.

Okay. Okay. Fair enough. I wanted to follow up on the inventory sales as well. I mean, just given what is seemingly easier to import panels now, you mentioned the cost deflation across the value chain. how we should think about inventory sales going forward to the extent that it is now, I would think, easier for your dealer partners to get that inventory themselves.

We're bulk purchasing. We're using our purchasing power to get a better deal. And it ultimately ends up, we buy everything anyways, right? Loan lease or PPA. So it's a part of what we, as a service, we work with our dealers on. And storage is in particular very – and the load management side is a particularly strategic important asset as it relates to the energy services side. So, look, I think the revenues will certainly fall as the equipment prices continues to fall, but we're selling a lot more. So I think overall we're still, you know, pretty confident in that line of business. And, you know, we don't make that much money on it, but it certainly is worth doing. for the amount of making a few million dollars on that. And again, we managed the working capital that was more important and the inventory, making sure we didn't get stuck with a billion dollars or more of inventory like we've heard a lot of folks out there and have a big breakdown. And so I think we've managed that. I'd like to have seen us manage it a little bit better than we did, frankly, but we managed it pretty darn well.

Got it. Okay. I'll take the rest offline. Thanks, John.

Thanks. Thank you. Our next question comes from Steve Fleischman of Wolf Research. Steve, your line is now open. Please go ahead.

Yeah, thanks. Good morning. You mentioned you're going to be filing an ATM shelf, I think, soon. I know the 15% of equity, I guess, for this year, the $500 million, that would be about $75 million, but I assume you might want to have more flexibility than that. So just what should we expect the size of that to be?

Steve, this is John. We are going to be very clear and transparent. No one else gives this kind of liquidity forecast and sources of uses of cash measured in years, by the way, than us. I think nobody discloses it at all. And so what we're trying to do is be open, transparent, let the market know what we're seeing even two years ahead, which is a lot to ask for given the pace of growth of this industry, as you know. And we'll update accordingly. With that said, this is what we see now. We see the math. Your math is obviously correct. It's $75 million. Do we need to do this now? We're going to do this now? Probably not. We said by the end of the year, we'll do the bond. And We might do the equity. If the bond comes in better, maybe we don't do the equity. I don't see that we do a lot more equity than that, nor maybe some other alternatives out there. But right now, this is what we see, and we don't think that's going to change in terms of the $500 million. But if we were to use the ATM for more than what we said on this carve-out, this 15%, the 75%, we'll let you know. We're saying that this is a tool. We're not saying anything more than $75 million. I wouldn't jump to the conclusion that some portion of the $500 million that we've laid out next year is equity. We actually think it's going to be bond, given the tripling of the asset base and the levered cash flows. So we'll be very clear. I think we've earned that in saying when things change, like a lot more growth, we've laid out what we think is going to happen in enough time. And so I would not assume anything above the 75, whether we use the ATM or we do it in a single overnight.

Okay. That makes sense. I just didn't know if you file for a bigger number, people might misinterpret that. So that's helpful. Yeah.

One other question, just in terms of... That's an appropriate risk. I agree with that. Yeah.

Yeah. Okay. And then... just the just strategically you're really ramping up growth and customer growth and geography products kind of accelerating that just, you know, makes a lot of sense from the standpoint of opportunity, but it's also a relatively more expensive cost of capital environment than it's been. And just it, strategically do you just see this as like now's the time we you know the opportunity is there we got to grab it and get ahead of people and that's that's why we're doing this or just maybe a little more thought process on you know balancing acceleration of growth versus just the you know cost of capital and getting the organization ramped up and all those things

Yeah, certainly. What I would say is that, you know, you look at the return profile, yeah, capital has gotten more expensive. You know, some would say a lot more expensive. I think I would agree with that. But also, if you look at the fully burdened unlevered returns that we've laid out and what we're seeing, we've been able to raise price because the utilities have been jacked up prices and are keeping them there, not moving a little bit higher overall. And then we have the ITC adder. So we have the IRA, which seems like everybody's kind of forgotten, I guess, the last few weeks. But it's here. It's now starting to show itself. So we see the returns there to grow the business. And we kept all our cash flows. Again, going back to that $100 million a year levered cash flow, nobody else has that. So we prepared for this. Is it a deliberate strategy to grow through a downturn to what I see as a recession? Yes, it is. It has been. It is. If you look at others are going to have to pull back on their platform investment, their software investments and so forth, we are not. We moved ahead and we're putting a lot more software into place to fire off these different growth engines, if you will, or batteries, as I said, to modernize the saying. With that said, everything I said earlier to answer a question about operating leverage increase in us, we invested the money. I want to see the money plus come back for next year stands. So we've made a lot of investment. I see a slowdown in that spending in terms of the rate. In some cases, like service technicians and so forth, they'll need to keep up with the growth of the business, particularly as the service-only business is really booming. But in terms of more and more heads on the software development side, we don't see it. Again, operating leverage is in focus. We've made the investments. Now I want to reap the returns.

Great. Thank you.

Thanks, Steve.

Thank you. Our next question comes from Pavel Molchanov from Raymond James. Your line is now open. Please go ahead.

Thanks for taking the question. Can we get an update on the commercial I think it's now, what, about a year in? What's the status?

Hey, Pavel. This is John. It's doing okay. I think this year will be about what we expected in terms of a small investment, you know, south of, you know, $4 million or so in a net burn. And then, you know, moving into profitability next year, probably more likely in kind of the Q4 of this year timeframe. So I think it's largely on track. I would like to have had a little bit more of a deal closure in the second quarter here, but we feel pretty good about where the pipeline stands for Q3, Q4. Again, it's not a needle mover necessarily, but it certainly is a growth area and certainly helpful and will be more so as we move into 2024 and beyond.

Question about Europe. Last quarter, Amit Singer- Talked about having some initial dialogue with prospective partners in Germany are is the kind of evolution of the European market. Amit Singer- Looking no better or worse or about as expected, given what you know we've seen a lot of cooling off and kind of natural gas prices, etc.

Yeah, no, from my perspective, it looks better. I need something that's more stable, not going to the moon. And when you're looking at, particularly for different acquisition opportunities, we need to find something that makes financial sense. We're not going to do a dumb deal. I think we've proven that before is that we're very disciplined on the acquisition side. So we see a number of potential partners out there. Nothing I see is too large because there's a, you know, for what we do as a service provider, there's a pretty big hole. When you look at the overall market and the regulatory structure, it does differ a bit by country, of course, but overall it's more progressive, more capitalistic, believe it or not, than the U.S. market. And what I mean by that is the integration of behind the meter, in front of the meter, and providing a single electricity bill to a customer is with all of the solar and the batteries, the EV charging, the load management, and the grid power together. You can do that in a lot of those markets. That's very, very interesting. It looks a lot like the Aussies, the Australians. As I know you know, they're far ahead of everybody. And the U.S. is really behind in that. And let's hope that we can get some regulatory overhaul and get those consumers freed up and be able to choose their provider.

Appreciate it.

Thanks.

Thank you. Our next question comes from Sean Morgan of Evercore. Sean, your line's now open. Please go ahead.

Hey, guys. Thanks. So in terms of the growth that you saw, obviously it's maybe a little higher than some of your peers. So I was wondering how much of that is is sort of if you measure it this way sort of organic growth off of the existing dealer base and how much would you attribute to sort of new dealers that kind of been added over the last few quarters sort of like a growth to a dealer versus growth the organic original platform yes john this is john i would say a large part of the new dealers as of now

Some of our bigger dealers have been up years, but nothing really huge and nothing like what we're seeing here in this kind of growth. So it's largely for new dealers. With that said, I know of a couple of the big dealers really have a lot of plans of forward growth as they move forward over the next 12 months or so. So that probably be more felt in 24, quite candidly, because we're going to the peak of the selling season of the entire year right now, as you are aware of. So I'd say that probably balances out more to the growth of the existing base as we move into 24. But the interest by contractors in becoming a dealer has been pretty massive. I was about to say significant, but it's massive, and it continues to be. So who knows? And as we pick up more verticals, training generator contractors to be able to install solar and storage, etc., That's a big area for us, as well as some home security, HVAC, and such. So there's a lot going on in terms of bringing new dealers up to speed and getting them to where they can make more money and becoming a Sanova partner. So I think largely right now it's new dealers, but we see some growth expectations of some of the big ones. But we still see a lot of huge demand for new dealers coming in and providing that more growth. So it may continue to be weighted to the new dealers.

Great. Thanks, John. That's it for me.

Thank you.

Thank you. Our next question comes from Kashi Harrison of Piper Sandler. Your line is now open. Please go ahead.

Good morning, gentlemen, and thanks for taking the questions. So first one for me, you know, John, you're looking at roughly 200K customers next year, which, as you mentioned, is well above expectations. Can you help us think through how many customers may be tied to more of the core solar or core solar plus storage business versus the accessory offerings? And then maybe a follow-up question for Rob. What's the project financing strategy for some of these accessory offerings, and how do the unlevered returns compare to the core solar and solar plus storage business?

John, I'll answer the first one. So I think it's pretty interesting that you made reference to the core solar plus storage business. I remember when that was a hot debate not too long ago about that, will that ever even work? And it certainly is not a 100% attachment rate or anything close to it, right, for the country. So we've got a long ways to go there. So all of its accessories is the way to look at it. The answer is I don't know, and the only thing I really care about is I want to sell more storage, and that gives us the ability to have the optionality. So I'm more focused on megawatt hours than the megawatts of capacity, and I also want to see the demand management side. That gives me a lot more capability in the energy services side as well. So we've got the market looking at the wrong things. It's old history, megawatts, this and that. That's fine. That's fuel demand. But at the end of the day, I just care about selling power service, the best power service to the customers. What makes that up? At the end of the day, I can value the physical optionality, like in the case of storage and demand-side management, but I don't really care. But we'll certainly, as we move forward with the budget for next year, try to give some a little bit more guidance if that's desired.

And I'll try to answer what is actually a very complicated question as simply as possible, which is that when you take a look at these customers, a lot of the customers are service-only customers that we're bringing in, and we don't have to finance those customers at all. So their return is significant. But if you'll notice, when we did our disclosure, we sort of did the change in service-only customers this time because some of those service-only customers come in and it's a, you know, we have them for maybe 18 months because we're putting on service and giving them a workmanship warranty and then others are in fact converting into lease or PPA or loan customers because of the satisfaction with the service they're actually becoming much bigger Sunova customers and those have very high returns so we didn't really have to acquire those customers we didn't pay the acquisition cost there as far as how we're going to be financing some of the loans and what are the returns that we're looking for on the loans that have to do with accessories Very similar to how we're using the loans for the solar plus storage customers. And if you take a look out there in the market, some of our competitors, they actually package all those loans up together into single securitization. So while we don't expect to see those loans fall into the HESTIA program necessarily, we would certainly expect to see those fall into a regular waste securitization program.

That's helpful. Thanks for the responses. And then just as my second question, I wanted to revisit maybe an earlier question in the Q&A session. John, you talked about the 330 basis point spread improvement that you're seeing for lower equipment costs. Given that your growth is already significantly above market at current pricing, I'm just wondering, you know, what the strategic rationale is behind, you know, passing the savings on to the customer versus just keeping it to yourself until, you know, you see some sort of impact to growth relative to others.

Yeah, I think it's – look, there's a moment in time here. As I said, we hit the brakes and the market flew right by yesterday. We have a competitive advantage. We don't have a ton of inventory at a really high cost. And so we're going to make hay while the sun shines where everybody else is in trouble. And I think it makes perfect strategic sense. If our dealers want to take some of that and help offset some of the price increases that we've done and continue to do, that works for us. If they want to pass, which we expect, and that's what we're seeing the majority over to the customers to try to get this, um, you know, demand drop that everybody is running around screaming about in this industry that this guy's falling, then, then that, that makes a lot of sense to us. Uh, so at the end of the day, I'm going to keep, you know, our pricing and our Fuber to our cost of capital, uh, plus our cat, our gain on sale businesses, the service, et cetera. Uh, you know, we're, we're keeping our pricing nice. Our margins are good. And, you know, look, we're not going to be, you know, as they say, you know, pigs get fat, hogs get slaughtered. And so we need to share some of the benefit that's going on with both the customer and our value dealers.

Thank you. Thank you. Our next question comes from Davis Sunderland of Baird. Davis, your line is now open. Please go ahead.

Hey, good morning, guys. Thanks for squeezing me in here at the end. A quick one for me, just circling back to the IRA and looking at the second half EBITDA guidance. Are any of the adders baked into this? And if not, maybe is there any upside that we could see from them materializing? And then any other commentary on seeing these materialize to returns over time would be helpful. Thank you.

Yeah, so for the IRA guidance, I mean, to the extent that we have some of those adders in the ITC sales, maybe you could see some of it materialize there. but we expect most of it to materialize in our fully burdened, unlevered return. And I think that really sort of captures both the questions. That really is where we expect to see it happen. And because John's just talked about, you know, the falling equipment pricing is giving both the dealer and the customer plenty to chew on right now. That's helpful. Thanks, guys.

Thank you. Our next question comes from Abby Sinha from Northlands Capital Markets. Your line is now open. Please go ahead.

Yeah, hey, thanks for squeezing me in here. If I look at the average kilowatt deployed per customer, that has been falling since last three quarters. So I was just trying to get any color that you could provide and why that should not be a concern.

Yeah, a lot of that comes from the fact that we're just dividing it by the total number of customers. A lot of those customers have accessory loans where they may just be getting a battery, right? They're new customers to us. They're just getting a battery. Maybe they're getting some of the other solar-related financing. If you go back to even the first calls that we did, here we are, four years anniversary from our IPO. But if you go back to our very first conference calls that we did right after the IPO, we were talking about the fact that Megawatts deployed is a very false metric in the age when you're trying to understand what battery storage attachment rate and how do you apply that. As our offerings continue to expand, main panel upgrades, EV chargers, things like that, generators, those do not get measured in megawatts on the roof. So it really is just a testament to the expansion of what's happening with our entire customer base. At the same time, I can tell you that there are different dynamics coming always. We see folks with smaller homes wanting to get full systems and adding a battery, and that increases the amount of solar that they put on the roof. And us moving into newer markets, especially in the At higher latitudes, those are actually larger systems with more megawatts on the roof. So to us, it's really a question of what is the fully burdened unlevered return? What are the returns that we're going to get for the dollars deployed? And then what's the net returns we're going to get after our current cost of capital?

And I would add on page slide 28, you can see the long-term trend on the solar deployed and those customers that had the solar deployed has been moving up. It's all listed out there. I don't think anybody else does that, by the way.

All right. Thanks, guys. Just one last, if I could follow up. You talked about in your prepared remarks that the rate of office increase should peak by the year end. So, I'm just trying to see here, like, you are increasing jobs with presence and whatnot internationally. So, is it simply that base is growing and so the rate will peak, or is something else going on that you're changing operations that would contain the office increase?

Well, I expect that you can spend the money as long as you bring that money plus some in to the door, right? And so what I'm saying is that I expect to see that, and we will see that. When I look at, for instance, the business markets, business markets are going to make money. If they don't make money, they all know, well, then we're not doing it anymore. But I expect it, and I'm very optimistic about where we stand. Service only makes money today, and it's going to make a lot more money And so as we build the business up, we're going to generate more of the EBITDA. If it's EBITDA negative, it doesn't last very long here.

Thank you. Thanks, guys. Thank you. Our next question comes from Chris Southern of BRI Securities. Chris, your line is now open. Please go ahead.

Hey guys, appreciate all the color on the corporate capital moving pieces and the growth driving that. Can you just maybe provide, is there a base of growth we should assume beyond next year where we would or wouldn't need additional corporate capital assuming the spreads you're seeing on the stubs don't change here?

And we laid out, I think we went way out there, right, in terms of 40%. The good news is because of our very conservative customer counting methodology, which I think everybody ought to publish their definitions of what the customer count is that they use. So we use in-service, right? I think everybody else uses installation. So what that gives us is at least a two-quarter visibility. So we're booking into 24 right now with our sales, which has been, by the way, pretty strong as we move into the end of July, really strong. We felt very comfortable given the trajectory of giving a 40%. And in terms of anything beyond that, I don't think that we would feel comfort, nor is anybody else even going to venture out to say what they're going to grow at the end of the year. So I think we've gone above and beyond. We plan for 40%. That's what we laid out in the corporate capital. If it moves slightly upwards or downwards, we'll continue to update you as we always have been doing, or at least the last couple of years or so. in the quarterly update. That's why that slide's there. That's why that slide will stay there.

Got it. Okay. Appreciate that. And then, you know, the jump of dealers is pretty significant and things like that and, you know, strong, you know, growth within kind of dealers is also driving the growth here. You know, you give that kind of regional customer addition breakdown and now there's 17 different states and territories in there, but the other group, you know, is up pretty significantly too, more than 20% of the total. Can you give any color on what's in that other group there?

Other states? I mean, not to be flip, but, you know, I'm not going to have, I got so much disclosure and pages here. I mean, it's, I think this is a lot. This is too much, frankly. So I think this is enough to build off And at the end of the day, I love a customer, whether they come from Puerto Rico or they come from Texas. But, you know, I don't really care what state it is. Now, I may start to care more. I will start to care more with the energy services. We want more densification and such. That helps us there. But outside of that, this number, you know, by state thing is frankly just done for you all. I don't really care what state the customer lives in.

Got it. Okay. Thanks.

Thank you. Our next question comes from Biju Parenchiril from Susquehanna. Your line is now open. Please go ahead.

Yeah, good morning. Thanks for asking me. And just a couple of quick questions. Obviously, your new dealer additions have picked up quite a bit this year. Can you just give us some details on what the or how the dealer acquisition costs have trended Is it easier to add dealers in the current environment?

Yes, is the answer. It's a lot easier. The ability to go from lease, PPA, and loan, and then all the other products that go with it, storage only. And we have the best product set in the entire industry by far. There's no one even close to us. So that's... that's obviously very compelling. And then the service that we provide across the, you know, whether it's Loan Lease or PBA, I was visiting with a home builder CEO just a couple of days ago, and he's like, that's compelling. Nobody else offers that. So we've got a fantastic product set. We're never happy. We're always going to introduce some new products and keep ahead of the marketplace. We've got a couple of others, one in particular, new products we'll be launching here in the next few days we're pretty excited about. So There's a lot of reason to sign up and being a Sanova dealer and joining the family, so to speak. I wouldn't say the account managers at Sanova work very, very hard, and so I don't want to take anything away from them. They have to go out there and make the effort and then some, and then they've got to take care of the dealers, and they do a great job. With all that qualified, I would say that the inbounds are pretty heavy and continue to be. So we're taking orders on dealers as far as like who we can bring on board. So it's a nice position to be in. I know it doesn't last forever, but it's a great position to be in. And there's a lot of contractors out there that are in different areas like generators, HVAC, as I mentioned earlier, home security and so forth that want to come in and start selling the full SNOVA adaptive home. And we'd love to talk with them.

So maybe can you comment on the acquisition cost if you look at maybe in the solar type dealers?

It's pretty low. It's very low. We don't spend a lot of money to acquire a dealer. Got it. Thank you.

Thank you. Our final question for today comes from Karina Blanchard of Deutsche Bank. Your line is now open. Please go ahead.

Hey, good morning, guys, and thank you for taking my question. Obviously, most of them have been answered, but I noticed in the prepared remark you put a lot more focus on outside of the U.S. business or the European market. Could you give a little bit more details, if you can, like maybe on timeline, like should we start thinking of incorporating some of this market into the 24 or 25 number? And if you have any idea on how much quality could bring to the business.

This is John. No, we're not going to give any more. I try to give as much visibility, and I've learned that over the last four years being the CEO of a public company. I think more visibility when you can give it. You've got to mind the rules, right, is always best. And so what we're doing is saying, hey, we're going to do this. We're going to do this. We're going to be methodical about it. We've talked about looking at potential acquisitions and so forth. We've talked about moving ahead very carefully. So at this point in time, I'm just communicating and saying, hey, this is where we're going. We're not going to spend a lot of money, and the 24-count growth that we laid out does not include Europe. And I think we'll just leave it there.

All right. Thank you, Fano.

Thank you. Thank you. We have no further questions for today, so I'll hand back to John Berger for any further remarks.

This industry has changed rapidly for a variety of macro and micro reasons. Not all apparently similar companies have the same business models. I think we all see that now. We are moving from simple panels on a roof with a NEM construct to selling integrated, distributed, and centralized power service from a product sale to a service sale. We are not a finance company. We are not an installer. We are an energy as a service company. And we are focused on delivering the best energy services to customers around the world. Thank you for joining us.

Thank you for joining today's call. You may now disconnect your lines.