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spk01: Thank you for standing by. This is the conference operator. Welcome to the Sunlight Financial second quarter 2021 earnings conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Lucia Dempsey, the head of IR. Please go ahead.
spk02: Good afternoon, and welcome to Sunlight Financial's second quarter 2021 earnings call. After the close of the market today, we announced second quarter 2021 key financial metrics, filed an 8KA with the SEC, and posted an earnings presentation to our investor relations website at ir.sunlightfinancial.com. Joining me today are Matt Pateri, Sunlight Financial's Chief Executive Officer, and Barry Edinburgh, Chief Financial Officer. Before we begin, I'd like to remind everyone that this webcast may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, beliefs, estimates, plans, and prospects. Such statements are subject to a variety of risks uncertainties, and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Forward-looking statements include, but are not limited to, sunlight financials expectation or prediction of financial and business performance and conditions and competitive and industry outlooks. Forward-looking statements speak as of the day they are made, are subject to risks, uncertainties, and assumptions, and are not guarantees of performance. Sunlight Financial is under no obligation and expressly disclaims any obligation to update, alter, or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. The company also refers participants on this call to the press release issued by the company and filed today with the SEC, the supplemental presentation posted to Sunlight Financial's website, and Sunlight Financial's SEC filings for a discussion of the risks that can affect our business. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in both our press release and the supplemental presentation. It is now my pleasure to turn the call over to Matt.
spk06: Thank you, Lucia. Good afternoon and thank you everyone for joining us. Today is officially our first earnings call following our listing on the New York Stock Exchange on July 12th, 2021. We're excited to have completed the business combination with Spartan Acquisition Corp 2 and are eager to execute on our strategy as a publicly traded company. I'm pleased to share some of my second quarter 2021 results as we generated excellent growth in all of our key metrics. In the second quarter of 2021, Sunlight's funded loans hit a record level of $666 million, triple the amount of loans funded in the second quarter of last year. As of June 30th this year, we reached $4.8 billion of cumulative loans funded, positioning us to exceed $5 billion in the third quarter of 2021. This outstanding growth is a testament to our ability to rapidly and effectively meet the growing demand for residential solar nationwide. Despite solar contractors indicating they're facing permitting delays and some supply chain constraints, we facilitated financing for nearly 19,000 borrowers in the quarter. Almost three times as many as in the prior year period. In addition to funding more homeowners, our average loan balance increased with our overall average loan balance rising 11% to just under $36,000. and our average solar loan balances in particular growing 15% to nearly $40,000. We also added 184 contractors to our network this quarter, representing 77% growth since the second quarter of 2020, and our largest quarterly increase to date, bringing the total number of contractors on the Orange platform to over 1,400. We're pleased to begin providing these 46 new solar contractors and 138 new home improvement contractors, our best-in-class technology platform, and unmatched service to fuel their growth. When asked about what differentiates Sunlight and drives contractor loyalty, I often talk about the four Ps, platform, products, pricing, and payments. I'd like to highlight the first two today, platform and products. We continue to be the provider of choice for an ever-growing network of contractors, thanks to our best-in-class proprietary point-of-sale platform, Orange. Orange provides both contractors and homeowners with a frictionless, simple, and fully digital process to finance high-quality loans in less than two minutes, while delivering industry-leading credit quality to our capital providers. We receive consistent feedback from our contractor network that Orange empowers salespeople to provide better options for homeowners and to close more sales. And quite simply, Orange is a real differentiator that enables us to continue expanding our market share. Earlier this month, we announced several new innovative loan products as part of our continued push toward providing contractors and homeowners with the broadest suite of loan options. These products provide homeowners the opportunity to save even more on their electricity bills. and provide contractors additional ways to grow their businesses and partner with Sunlight. In addition to these Sunlight specific factors, there continue to be several key macro drivers that support our growth trajectory and we believe will persist in the subsequent quarters and years ahead. The residential solar market is continuing its rapid ascent and it's expected to grow to nearly $18 billion in 2023. That's a 45% increase from 2020 levels. Homeowners are increasingly looking for ways to reduce their utility bills and energy usage, which drives demand for not just residential solar, but also battery storage systems, electric vehicles, and smart home appliances. We are well positioned to support this shift toward comprehensive home energy solutions. Not only is the overall solar market growing, but the systems are increasingly being funded by loans, which perfectly aligns with Sunlight's business model. Loans are expected to finance over 70% of residential solar systems, and Sunlight is well-equipped to provide homeowners a seamless financing experience with attractive pricing. Along with the market tailwinds and the rising popularity of our platform, we continue to see increasing demand for battery storage systems to supplement homeowners' residential solar systems. In the second quarter of 2021, the battery attachment rate for sunlight solar loans grew to nearly 26%, more than triple the rate of 8.6% in the prior year period. This growth is being driven by homeowners increasing desire for reliability in the face of grid instability. Importantly, this increase in battery storage demand significantly benefits sunlight. Given the inherent operating leverage of our platform, As contractors add battery storage to more systems, our average balances increase, thus creating additional revenue without any incremental expense. In short, our top-line growth flows all the way to the bottom line, driving margin expansion. And while not in our direct control, we believe we'll see a continued increase in battery storage demand over time, particularly as new suppliers enter the market and prices come down. Our ability to meet this substantial growth is supported by our strong partnerships with our diverse network of capital providers. We remain focused on providing them with attractive risk adjusted returns driven by our industry leading credit quality. And in exchange, our capital providers provide Sunlight with increased demand for Sunlight facilitated loans, attractive pricing, and the ability to continue to innovate new products to support our contractors network. While our second quarter showed substantial growth in volume and continued operational strength, as Barry will review in more detail, we have revised our full year 2021 guidance to reflect the impact of reduced platform fee margins and costs related to being a public company. While we've lowered our 2021 adjusted EBITDA guidance, I remain confident in the continued strength of Sunlight's highly profitable cash flow positive business. I'm proud to be leading Sunlight as we execute on our growth strategy, connecting solar and home improvement customers, contractors, and capital providers with frictionless financing. With that, I'd like to turn the call over to Barry Edinburgh to discuss our second quarter financial results in more detail.
spk05: Thanks, Matt. In the second quarter of 2021, Sunlight generated $26.9 million of total revenue. an increase of 162% over second quarter 2020 total revenue of $10.3 million. Adjusted EBITDA for the quarter was $11.5 million, a significant increase from $0.2 million in the second quarter of 2020. This reflects our 10th consecutive quarter of recording positive adjusted EBITDA and its further validation of our approach to the market, our revenue model, and the capital light nature of our business. In addition, Operating leverage in the business has enabled our adjusted EBITDA margin to increase from 2.2% in the second quarter of last year to 43% this year. Total operating expense per borrower improved from $1,700 last year to just under $900 in the second quarter of 2021, 44% reduction. An additional indicator of our operating leverage taking hold is that our adjusted EBITDA per borrower increased from $32 in the second quarter of 2020 to $619 in the most recent quarter. During the second quarter of 2021, our overall and solar platform fee margins were both 4%. This compares unfavorably with our second quarter of 2020 platform fee margin of 4.5%. Platform fee margins have been impacted negatively by competition in the market, but we expect to see improvement from this level throughout the remainder of 2021. as previously enacted pricing changes with our capital providers fully take effect. It is important to note that the growth that we've been experiencing, together with the operating levers in the business, partially offset the impact of quarterly variances in platform-free margins, as our contribution margin in the second quarter of this year was 1.3%, up from a negative contribution margin in the second quarter of last year. Positive free cash flow is a unique and attractive feature of the Sunlight business, and is a result of the cash-based nature of our revenue model. We generated approximately $12 million of free cash flow in the second quarter of this year and converted adjusted EBITDA to free cash flow at an extremely high rate. While we continue to expect strong year-over-year growth with regard to funded loans, total revenue, and adjusted EBITDA, and are well poised for long-term growth, we are revising our full year 2021 outlook for our key metrics to the following ranges. For funded loans, $2.6 to $2.8 billion. For total revenue, $113 to $121 million. For adjusted EBITDA, $46 to $51 million. And for adjusted EBITDA margin, 38% to 42%. Although our updated forecast for funded loans has remained consistent with previous guidance, Our updated forecast for total revenue, adjusted EBITDA, and adjusted EBITDA margin has been negatively impacted by higher-than-anticipated costs relating to transitioning to and operating as a public company and reduced platform fee margins relative to expectations. These two drivers each account for roughly half of the difference in adjusted EBITDA between our previous guidance and the midpoint of this updated guidance. On the expense side, a portion of the increased costs are initial setup costs that we do not expect to impact the business beyond 2021. We anticipate that the remaining portion of the increased costs will become a smaller part of our expense base as the company grows. On the revenue side, we expect improvement in platform fee margins through the second half of the year, as noted previously, but anticipate that the market will continue to be competitive. With regard to adjusted EBITDA margin, we believe that our platform fee margins and expenses will stabilize and that the operating leverage in the business will continue to drive material improvements to adjusted EBITDA margin over time. I want to follow up the guidance revision discussion with a little bit of context. The midpoint of the ranges I just described would be from 2020 actual results by 84% for funded loans, 68% for total revenue, and more than 100% for adjusted EBITDA. One housekeeping note relating to guidance, we plan to initiate full year 2022 guidance on our fourth quarter full year 2021 call in February. With that, I'd like to turn it back to the operator for Q&A.
spk01: We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. The first question comes from Philip Shen with Roth Capital Partners. Please go ahead.
spk03: Hey, guys. Thanks for taking my questions. First one is on the platform margins. Can you talk about what has changed with the competition? Was it something that happened in the past few months, or has this been building? And, Barry, you talked about the margin improving as we get through the year. But with the guidance reduction, it suggests that it won't be improving as much as you had originally thought or hoped. So, just some additional color would be really good.
spk07: Thanks. I need to get off mute. Appreciate the question, Phil.
spk05: So, we've definitely seen increased competition in the market, and that has taken a bunch of different forms. But, you know, we think it's at least in part caused by the interest rate environment, but it impacts the fees being charged to solar contractors, and that in turn impacts our margins we feel good about our position relative to our peers though given our differentiated funding model investing class technology and we generally take a long-term approach when dealing with market trends so we've been pretty measured in our competitive response and we generally try not to compete in the market solely on price all of this you know this approach is influenced by our years of consumer credit and management expertise And it's why we're so focused on deepening relationships with our contractor network by making it as easy as possible for them to make sales for the use of Orange. That said, we made proactive steps. We took proactive steps in the second quarter to improve our margins by negotiating pricing improvements with certain of our capital providers. These were finalized and put in place in the second quarter, but it takes some time for pricing changes to flow through to margin improvements because of the sales cycle for residential solar. That's why we feel confident that our margins will improve over the second half of the year, as you mentioned, Phil.
spk03: Thank you, Barry. Can you quantify how much better margins could be in Q3 and Q4?
spk05: Well, we haven't disclosed that, but we expect to see a material improvement in the next couple of quarters. and feel strongly that we'll see that improvement as the changes we've made in the second quarter with some of our capital providers pull through.
spk07: Great.
spk03: And what do you expect the competitive response by your peers to be?
spk07: Phil, thanks for the question.
spk06: So when we think about the market, we really think about how we're positioned relative to the market. And I often talk about these four P's. Pricing is really only one. So pricing is the first P. And we are well positioned because of our diverse network of capital providers and because we have the best credit quality in the industry. And so over the long term, we think we're in a very strong position from that standpoint. But as Valerie mentioned, we do compete beyond price. Our network of capital providers allow us to have a broad suite of products. And it's why we've been so innovative around products. We were the first in the market to offer a five-year loan and a 25-year loan. We recently announced additional enhancements to a number of our products to help our contractors sell more. And we expect we'll continue to innovate with a really healthy pipeline of additional innovations coming out. And then the other parts of our value proposition, our platform, Orange, which is our proprietary technology platform, makes it really simple for homeowners and for contractors at the point of sale. And we're continuing to innovate there as well. We were the first in the market that we're aware of to offer pre-qualification. We recently rolled out pre-approval, and we have additional enhancements there as well. And then finally, from a payment standpoint, because of the strength of our balance sheet, we're able to assist contractors to help address their near-term cash flow as they continue to accelerate. So when we think about the competitive environment, we think we're really well positioned by competing against the entire value proposition and not just price. That doesn't mean from time to time we won't see competitors do certain things, but we do think we're in a strong long-term position. And if you look at our growth in being able to attract new contractors, for instance, just on the solar side, our contractor network's up almost 50%. year over year, and that's just solar alone. So we're having a lot of success in continuing to attract contractors to partner with us.
spk03: Great. Thank you, Matt. As it relates to your direct and indirect business, historically you guys shared that split from a fund and loan standpoint, as well as platform fees and revenue and total platform fees. Can you Can you break that out by chance? Should we expect that in the queue? Any thoughts on that breakout? And if you're not breaking out, maybe just some thoughts as to why.
spk05: Yeah, no, that information is in the queue. So you'll find it in there, Phil.
spk03: Okay, great. Thanks, Barry. And then as it relates to storage, you guys had a really nice attach rate there, 26%. In past conversations, Matt, on webinars and things I've posted with you, that I think you guys were looking to get to that point, I think by year end of this year, as opposed to Q2. So what do you think that could be by the end of this year, meaning how high and maybe talk through the battery trends in general? Thanks.
spk06: Yeah, so we don't explicitly forecast guidance around battery catch rate, but there are these macro trends where consumers and homeowners are increasingly indicating that they want stability. And especially with some of the challenges in grid stability across the country, whether it be the winter storms in Texas or hurricanes or California wildfires, we see increasing consumer demand. With the network, with the size of our network of contractors we reflect the market really well. And so we're picking up that overall demand. While we don't directly drive, we're not selling directly to homeowners, we don't directly drive the attach rate, we certainly enable it. And we do that by being able to innovate around products. And Barry mentioned earlier, we're the first in the market to offer a standalone battery. I believe we're the first in the market to offer, I'm sorry, a standalone battery loan. The first in the market to allow that battery to be rolled out into solar, into the overall solar loan. And that helps enable contractors to sell more. And so we expect we'll continue to see that increase over time as the market increases over time. And that helps, that certainly helps us from a profitability per loan standpoint.
spk03: Great. Thanks for taking my questions. I'll pass it on.
spk00: Once again, if you have a question, please press star, then 1.
spk01: The next question comes from Jeff Osborne with Cohen & Co. Please go ahead.
spk04: Good afternoon, guys. A couple questions on my end. Sorry to go back to the platform fee, but I think exiting 2020 and on the Q1 results, you had highlighted some weakness there, but expected it to be better by year end. So I'm a bit surprised by the comments on the call that you took actions in 2Q where I think some of these issues are manifesting themselves six months ago. So can you just touch on the timing of when you acknowledge that there was a problem and what actions you might have taken in Q4, Q1 versus the urgency in Q2?
spk06: Jeff, I think part of what we talked about in the first quarter was that our platform fees were impacted in the first quarter by one time sale related to home improvement. As Barry mentioned, in the second quarter, we took actions. As we saw some pressure on dealer fees on the front end, we took actions with our capital providers to improve our pricing. We expected some of that to pull through a little bit faster into the second quarter. We now expect we'll see more of that through the back half of the year. And that's why we have confidence that that fee will, or the platform fees will, in fact, improve in the back half of the year.
spk04: got it you mentioned material improvement and stabilizing do you think you get to a material improvement that stabilizes that where you were a year ago at four and a half or just trying to get a sense of what you think the right platform fee is going forward in light of the competitive dynamics people like rocket financial getting involved etc
spk05: Yep, we haven't disclosed a specific forward forecast on that, but as we've discussed in the past, we believe that a certain amount of changes to contractor fees can be offset by improved pricing on the capital provider side as the performance of solar loans continues to prove out and at Sunlight's credit performance continues to differentiate. And that's really what we did. We executed on that strategy. So we believe that the changes that we've made in this case are a solid step towards normalization of the platform pre-margins. As we stand here today, it seems likely that the margin decrease that we've experienced will be a temporary or relatively short-term impact, but the competition in the market is substantial and is likely to persist. We expect to be successful, though, given our market-leading technology, credit quality, and diverse network of capital providers, and believe that taking a long-term approach to the market, providing reliable service to our contractor network across the four Ps that Matt mentioned, will continue to serve Sunlight and its investors well.
spk04: I just had two other quick ones if I could squeeze them in. One is you highlighted unexpected public company costs. It's a bit unique, just first quarter out of the box. So I was wondering if you could be more detailed as to specifically what were some of the costs? Was it the warrant restatement or something else? And then I had another question around the time lag from when a loan is approved to when it's funded. Are you seeing that stretch out at all?
spk05: Sure. So the expense piece is – you know, higher than anticipated expenses. So these relate primarily to preparing to be or being a public company. For the most part, they're fixed expenses that don't relate specifically to the underlying business, which continues to show significant operating leverage. So specific examples include premiums for D&O insurance, which have increased materially across the market. Third-party consultants and law firms that we've engaged to supplement our internal resources as we transition from being a private company to a public one. It's important to note that a portion of these expenses will not recur after the transition period in 2021, and the remaining costs that will persist will become a smaller and smaller percentage of our expense base as the platform continues to grow.
spk07: Any thoughts on the time lag?
spk06: Yeah, on the time lag, we do hear from our contractors that they are experiencing some pressure as it relates to supply chain and permitting delays, as well as some labor shortages. And so that does lag or that does extend the period of time from when the customer signs the contract until the system is installed. We expect that to normalize over time, but our contractors have been telling us, at least anecdotally, that they are seeing some pressure there.
spk04: Got it. That's helpful.
spk07: And the 10Q, would you expect that out this evening or tomorrow or some other point? I keep pressing the wrong mute button.
spk05: Sorry, Jeff. Yeah, it should be out. It's on the SEC's site. It should be on our website. It should be out there. Got it.
spk04: Okay, perfect. That's all I have. Thank you.
spk05: And Jeff, just to note, I mean, our 10Q relates to Spartan, just to be a little bit confusing. We follow an 8KA, which presents the normal Q type information for Sunlight Financial Holdings. So when you're looking for our financial information, you're going to look at that AKA.
spk07: And if you have questions, please let us know. Great. Thank you.
spk01: This concludes the question and answer session. I would like to turn the conference back over to Matt Poter for any closing remarks.
spk06: Thanks, Anastasia. And thank you everyone for joining us on our first earnings call as a public company. We're proud of Sunlight's trajectory, and we're well positioned to continue to execute on our growth strategy. And with that, we thank you for your time and for your interest in Sunlight. Have a great evening.
spk00: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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