Sunrun Inc. (RUN) Earnings Call Transcript & Summary

Thank you, everyone, for joining us at the Barclays Energy and Power Conference. We want to especially thank the management team of Sunrun for being here with us. We're going to conduct a fireside chat with Lynn Jurich, CEO. First, Lynn, maybe I'll actually just pass it to you, give a 2-minute overview of the company. And then from there, we'll just jump right into questions.

Sure, absolutely. So Sunrun is a company that Ed Fenster and I started about 13 years ago. And really, the vision was, we saw solar as this breakthrough technology. And really believe that the way it was going to change the energy industry is really to be a distributed technology, so on rooftops. And it would disrupt the entire sort of centralized hub-and-spoke model. And we decided to focus on consumers, assuming that would be the first place where you could really compete with the cost of power with solar because it was the most expensive, and we also believed that you could build [ active ] barriers in the business. So you could build things like a brand and distribution and reach and an operating platform that could form quite a compelling business as well. And 13 years later, many of those predictions have become true. And so we are -- here we are today. We have about 300,000 rooftop solar residential customers. And in -- when we combine with Vivint Solar, we'll have about 500,000, but just very much getting started. And the thing that I'm excited to talk more about today is we're really so much more than just a solar company. The vision is really to use homes as energy assets. And the addition of the battery technology that's come into affordability now, it has really enabled us to start to add the batteries, start to network all of our homes together, really building out sort of an energy internet and creating value and savings both for our customers, but then also really adding value to the entire grid. So now when we look at the business model, we really offer quite an attractive value prop to our customers, where they don't have to pay any money upfront for solar. We sell it as a service to them. And typically, they're saving money out of the gate. They're even saving money when they add a battery versus what they pay the utility. So it's a compelling value proposition for the consumer. For Sunrun, we average about $8,000 of lifetime value after all of our operations and maintenance expenses and our creation cost per customer. So it's an attractive unit margin to the company as well. And we feel like we're just getting started because we're 3% penetrated in a market that really can serve 40%, 50% of the entire U.S. electricity needs. So I'll stop there.

Great. No.

Go ahead.

That's a very helpful backdrop. I think it's great. We'll jump into a lot of those different matters. First, starting maybe with just the broader U.S. demand profile, the current environment where we are since COVID lows, the wildfire effects, so we sustainably back above pre-COVID levels, just sort of a state of where we are today, what the status quo is?

Yes, absolutely. I think despite how painful some of that initial reaction and planning around COVID and what does this mean, despite all of that, I firmly believe it's probably one of the best things that could happen to the company and the company's prospects, and it's really on 2 dimensions. One is just consumer interest and really the psychology that it helped cultivate, which is this idea of -- institutions are letting me down. I really want to have more control over my lifestyle, over my family. I'm in my house, and I'm using 25% more electricity. And so there's this psychology around I want to adopt solar because it's a smart financial decision and because it allows me to have control in this world that feels unsafe. And then I'm sure we'll get to the wildfires and the hurricanes and all of that, but there's a whole resiliency aspect to that as well. That's even more scary if you're going to be losing power when you're stuck in your home. So I think in terms of just the value proposition to the customer, it's really enhanced. And so we're starting to see that certainly come through in terms of order numbers. Then on the cost side, what it really forced us to do was increase our corporate metabolism, so many of the changes we wanted to make around efficiency, selling remotely. Our sales reps are now 50% more productive than they were previously, installation efficiency, rolling drones out to make the site audits more cost-effective and more hands-free. It just really accelerated a lot of the improvements that were on our road map, but forced us to do them quite quicker, which we believe will enable us to have a lower cost structure. And we can either pass that through with lower savings to grow the market or we can take that in terms of increasing our unit level margin. So I think that we're certainly seeing growth return. If you look at the comments from the Q2 earnings call, we expect the third quarter to grow versus the second quarter well above 20%, and then we expect Q4 to grow as well from there. So again, the short term is coming back, but really what I'm more excited about is the long-term prospects around just the changing consumer psychology and the cost reductions that we would expect to realize going forward in a more normal environment.

Great. That's a very comprehensive answer. And I like that phrase, corporate metabolism, it really does show you the sort of acceleration of some of the expectations we all had for where the business is going. And looking toward 2021, it's always hard to have real visibility, but new markets or high potential markets like Texas or Florida, what's the core value proposition? How is it evolving? Take -- you take Texas, for instance, it's competing very impressively with the incumbent energy source -- electricity source for the customer without net metering. So how do you think of some of these new exciting markets? How does this all pull together for '21? Customer education, all the different aspects driving that. So thoughts on a '21 and beyond basis?

So we -- as I mentioned, are exiting the year with strong momentum. So Q3, up over 20%; Q4, up even above that. It's hard to always judge with what will happen with COVID. Certainly [ there are ] some frictions that are really short term, but some permitting offices that are understaffed. There's still some restrictions for selling in Illinois. We're still not fully staffed in our -- some of our retail properties. So there's some real -- still short-term frictions in the business. But there's a couple of big, exciting growth drivers that are happening. It's both in terms of unit level growth and interest, but then in terms of also expanding the value proposition and the opportunity per home. So on the unit side, what we're seeing is, again, this -- there's a -- it's really a -- it's starting to -- the value proposition is starting to shift a bit. Whereas in our early -- in our first decade, it was really a savings-oriented type offer, save 20% by switching over to solar. And now where we're seeing the real consumer pain is around resiliency. And you just see with the wildfires, the rolling blackouts, the hurricanes, and the value proposition that a battery can bring is quite compelling. So for those of you guys that -- first of all, everyone on the call should have solar at home, just put that plug out there. We're all...

Not yet. I don't have it yet.

Okay. Okay. Well, let's work on that. We're in 22 states and for you, a New Yorker. We're in New Jersey. We're in New York. We're in Connecticut. We're [indiscernible]. So we've got some compelling programs out there for you. But I think what we're seeing is that those outages are significant, and they're starting to hit a significant number of people. So [indiscernible] last year, 2 million people lost power for multiple days. So imagine what that is like when you're sheltering in place and you're doing Zoom calls for school. It's a real pain point. If you look at the East Coast, Hurricane Sandy, I think we lost power for about 2.4 million people. And then we -- the utility spent billions of dollars kind of hardening the lines and trying to make it more weatherproof, but then you have the latest Hurricane Isaias, sorry, apologies if I get that wrong, but that's the latest hurricane that came and after that -- which was weaker than Sandy, after we've hardened all the lines, another 1.4 million people lost power. So what you're starting to really see both at the consumer side, but then also at the regulator side and also at the political side is that with the extreme weather coming through, increasingly, the system of transporting power over old power lines, and it's just not -- it's not going to meet the needs of the 21st century. So I think you're starting to see both consumers realize that as well as regulators realize that and I'll -- I'm sure you'll have more questions on this. So I'll stop there, although I just -- I do want to highlight the sort of value proposition just because -- just to make it as simple as possible. So if you're -- for many customers in California, so an average customer might pay currently $190 a month for a -- for their electric bill. We would come in and put solar and replace much of the energy with solar. That would be $105. We would charge $45 per month for the battery. And then you would still have about $10 a month that you're still buying from the utility. So that's -- so you add that all together, and you're at $160 versus $180 from the utility. So the value proposition is that strong. It's 0 upfront cost. It's savings out of the gate. It's the battery that offers the resiliency. So again, that value proposition is very strong in California. It's increasingly strong on the East Coast where power prices are high. And so that takes some time to work its way through the system for people to get educated that this actually exists. So I think that's going to be a major driver for growth. And then in terms of the second point, which is expanding margin per home, the other trend that I think we'll talk a bit about is there's just a trend towards further electrification of the house. So when you want to add an electric vehicle, that adds another 30%-ish to your solar system size. And those incremental panels on the roof are very inexpensive for us to produce. So we're going to be increasingly pushing into the home to own more of the energy wallet, switching more of the devices over to electric, the heating, the cooking, switching the car over and really being the company where when you want clean, reliable, affordable electricity, you think of Sunrun. So a lot of that.

That's great. No, I know that there's a lot there that people can work with that we could dig further into. A more high level question. At what point do we see the curve shift where we're -- it's really a 50-state solution. So some of the points you're making are specific to areas where customers are looking for resiliency. Sometimes the TV is just so, so attractive, maybe it's solar radiance, cost and so on. There's a certain point, maybe it's on the cost curve, maybe it's on the utility rates that you start to see everything go like this. Any thoughts on that very long-term view?

Yes. No. Absolutely, it will definitely get there. Now there's going to be -- it's going to be uneven in terms of how fast it penetrates just because the value proposition varies based on how much sun you get based on the incumbent power prices. But if you just look structurally at what's happening, our advantage is quite significant. So our costs continue to come down. The cost of solar and batteries has continued to decrease swiftly, and there's more to come. At the same time, incumbent electricity rates have been increasing 3% ever single year for the past on average. That's the CAGR for the past 15 years. And what's interesting in that number is that it really is disguising a ton of CapEx that is needed. So if you think about the last decade, we've had really inexpensive natural gas with fracking and things. So the wholesale cost of energy has actually really significantly declined, yet the retail price has continued to escalate. And that really shows you that there's just massive investment in transmission, distribution that has to happen and this extreme weather, it's just going to make it that much worse. So I think the spend -- the utility spend estimate over -- it's $120 billion in CapEx next year. It's $3 billion -- excuse me, $2 trillion over the next decade. So that's a market that we're definitely going to compete against, and it gives -- it does give you some tailwinds in terms of being able to be more and more competitive in additional states. If you look at some of the studies that NREL has done, there's some good mapping to say, okay, if you look state by state, how -- and look at suitable roofs, what percentage of the state's power needs could you fill -- fulfill by covering roofs with solar? And nationwide, it's 40%. So this is not a small piece of the solution. In California, it's 75%. So you're going to see variation in terms of how fast you penetrate. Hawaii is already penetrated in many cases at about 30% of single-family homes. Australia is similar. And again, U.S. is only 3% overall. So there's a lot of room to go. And a lot of it is going to depend on also how do we set up? As you add the battery, the battery can really -- particularly when you have a lot of customers and you can network those batteries and coordinate with the utility, they can really act as a virtual power plant and replace traditional infrastructure. So what we're really working on is how do we open those markets so that we can actually get some value from that because it's another value driver that'll enable adoption faster. And frankly, help us decarbonize which we -- decarbonize energy, which we have to do in order to hit any sort of reasonable climate goal.

That's very helpful. And I want to follow up on a point there. Like you, call it, the NREL metric of 40%. So is it fair to sort of -- if I'm -- I get this question a lot. If I'm sizing the overall market, let's say, it's 150 million homes, including multifamily, something around 40% of that, that's like saying 60 million homes, we have 2.5 million or 3 million penetrated. At a flat run rate, that's like saying half a century, hypothetically, just very high level type numbers.

Well, I mean, yes, if we continue at the current pace, but that won't happen because [indiscernible] increasingly get faster. The other interesting thing that's happening is this next year is the first year where the adoption of electric vehicles will be surpassing residential solar in terms of the forecast. I still may question that -- over time that forecast. But what's interesting about that is that's another sales channel for us because when you look at electric vehicle buyers, the majority of them are interested in powering that by solar. And in fact, the data suggests that as many as 40% to 50% of people who buy an electric vehicles get solar. And so that will be another unlock in terms of making this a little bit less of a push sell and more of a pull sell. You also have Biden's clean energy targets, where he put out -- full pretty much decarbonization by 2035, which is an ambitious target and a doable target. But it really is going to start at the home level. And so we feel like we're in a really privileged position in order to help realize that goal.

And if I move for narrower than broader demand and think of the leasing PPA-type products versus cash and loan. Can you discuss the dynamic over the next few years, assuming the ITC steps down, if it doesn't, how do you -- there's a whole discussion on that side of the market that is often missed by people. Any color there?