Sunlight Financial Holdings Inc. (SUNL) on Q4 2022 Results - Earnings Call Transcript
Operator: Greetings and welcome to the Sunlight Financial Fourth Quarter and Full Year 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lucia Dempsey, Head of Investor Relations for Sunlight Financial Group. Thank you, Lucia. You may begin.
Lucia Dempsey: Good afternoon, and welcome to Sunlight Financial's fourth-quarter and full-year 2022 earnings call. After the close of the market today, we filed our 2022 Form 10-K, announced fourth-quarter and full-year 2022 financial results, and posted an earnings presentation to our Investor Relations website, ir.sunlightfinancial.com/. 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 Financial's expectation or prediction of financial and business performance and conditions and competitive and industry outlooks. Forward-looking statements speak as of the date 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. Joining me today are Matt Potere, Sunlight Financial's Chief Executive Officer; and Rodney Yoder, Sunlight's Chief Financial Officer. Matt will discuss our recently announced financing agreement, summarize our fourth-quarter and full-year 2022 performance, and provide a preview of our first-quarter 2023 operational metrics. Rodney will then share additional detail on our financial results before Matt closes with an update on our key priorities for our ongoing success. Given the timing of this call in relation to our first-quarter 2023 quiet period, we will not be hosting a Q&A session following these prepared remarks. It is now my pleasure to turn the call over to Matt Potere.
Matt Potere: Thank you, Lucia, and thank you all for joining us. Before I discuss our fourth-quarter and full-year 2022 results, I'd like to briefly summarize the comprehensive financing agreement we announced earlier this month and closed last week with Cross River Bank, our third-party bank partner that warehouses funded indirect channel loans before they're sold to investors. This agreement builds on our long-standing relationship with Cross River Bank to strengthen our balance sheet and bolster our liquidity, enabling us to remain well positioned to continue to support our contractor partners. The agreement includes a commitment for a new $89 million first-lien secured term loan, which was used to repay outstanding borrowings under the company's revolving credit facility with Silicon Valley Bank and will fund accrued expenses and deferred proceeds that we owed at Cross River Bank. A portion of the loan will also be used for general corporate purposes. With the funding of the term loan and termination of the revolving credit facility, Sunlight will have no debt maturities in 2023 or 2024. We have also modified the Cross River Bank warehouse facility to increase origination capacity, reduce our cost to use the facility, and extend its maturity by nearly two years, improving our ability to continue originating indirect channel loans. Despite a challenging macroeconomic environment, Sunlight funded $2.9 billion of solar and home improvement loans in 2022, reflecting a 15% increase over 2021. Funded volume in the fourth quarter of 2022 was $753 million. That's up 18% year over year. And solar volume came in 13% higher than in the fourth quarter of 2021. And home improvement volume was particularly strong with $118 million funded in the fourth quarter of 2022. That's a 61% increase relative to the same period last year. We consistently hear that salespeople and homeowners continue to appreciate the ease and efficiency that our Orange platform provides for financing solar installations and home improvement projects. We funded loans with over 19,000 borrowers in the fourth quarter, up 6% from the same period a year ago. And throughout the full year, we funded loans for over 79,000 homeowners, a 12% increase over full-year 2021, and we look forward to bringing frictionless financing to even more borrowers in 2023. Average loan balances also continue to rise throughout 2022, driving additional revenue without incurring additional costs. Solar loans averaged over $47,000 in the fourth quarter of 2022, a 13% increase over the prior-year period, while home improvement loans were up 23%, averaging nearly $18,000. We also continue to maintain strong relationships with our network of contractors, adding 117 new active contractors to our platform in the fourth quarter. Throughout 2022, 88 new solar installers and 400 new home improvement contractors became active users on our platform, increasing our total contractor relationships by 32% to just under 2,000 at the end of the year. While we're not providing full-year 2023 guidance metrics at this time, I'd like to provide you a short preview of the first quarter of 2023's operational results to demonstrate our continued operational strength. Throughout the past three months, we've continued to execute on our core business, funding $627 million in loans in the first quarter of 2023, representing loans to nearly 16,000 borrowers. This volume reflects a 6% increase relative to the first quarter of 2022 or a 12% increase when normalizing for the impact of the solar installer that filed bankruptcy in late 2022. Within the first quarter, we also added 73 new contractors, bringing our total active contractor count to 2,070 on March 31 of this year. With that, I'd like to turn the call over to Rodney Yoder, Sunlight's CFO.
Rodney Yoder: Thanks, Matt. Sunlight generated total revenue of $6.3 million in the fourth quarter of 2022 relative to $36.6 million in the prior-year period. This decrease was primarily due to negative platform fees on indirect channel loans, including a $22 million loss associated with an indirect channel loan sale in December 2022. For the full year, total revenue was $101.1 million, a decrease from full-year 2021 total revenue of $120.6 million as an increase in direct channel platform fees was more than offset by significantly decreased indirect channel platform fees. Adjusted EBITDA for the fourth quarter was a loss of $23.3 million relative to an $18.5 million profit in the fourth quarter of 2021. In addition to decreased platform fees, adjusted EBITDA for the fourth quarter was impacted by higher cost revenues related to higher origination fees and increased provision for losses, partially offset by higher interest income. Adjusted EBITDA for full-year 2022 was a loss of $35.7 million relative to a $52.9 million profit in 2021. This decrease is primarily driven by a $24 million reduction in gross margin and a $49 million increase in provisions for losses, $33 million of which is related to the previously disclosed installer, who declared bankruptcy in the third quarter of 2022. Adjusted net income for the fourth quarter was a loss of $3.1 million or a loss of $0.02 per fully diluted share relative to $10.3 million profit or $0.06 per fully diluted share in the fourth quarter of 2021. Adjusted net income excludes the impact of a $61.4 million non-cash goodwill impairment taken in the fourth quarter of 2022, driven by macroeconomic market conditions. For full-year 2022, adjusted net income was a loss of $22.2 million or a loss of $0.14 per fully diluted share relative to a $40.5 million profit or $0.13 per fully diluted share for full-year 2021. We ended the fourth quarter of 2022 with a direct channel platform fee margin of 6.2%, up 50 basis points from 5.7% in the fourth quarter of 2021. We also saw a 50-basis-point increase in our full-year 2022 direct channel platform fee margin at 5.6%, up from 5.1% for the full-year 2021. These margins reflect the work we've done to update pricing with our capital providers and contractors since the end of 2021. Our indirect channel platform fees, however, were impacted by the significant increase in interest rates in the second half of 2022, which occurred much more rapidly than expected, leading to loan approvals in the second and third quarters of 2022 that were below current market pricing. We've referred to these loans as back-book loans and indicated that the sale of these loans will result in a loss. In December 2022 we sold $228 million of indirect channel loans, resulting in indirect channel margins of negative 10.5% in the fourth quarter of 2022 relative to 4.2% in the prior-year period. Our full-year 2022 indirect channel platform fee margin was negative 2.4%, driven by negative indirect channel margins in the third and fourth quarters of 2022 relative to a 3.1% indirect channel margin for full-year 2021. Following the closing of the Cross River Bank financing agreement on April 25, we completed a $296 million sale of indirect channel solar loans on April 28, adding the associated deferred payments to the new term loan as specified in the Cross River Bank agreement. While we expect the sale of remaining back-book loans to negatively impact indirect channel margins in 2023, we are currently originating and funding profitable direct and indirect channel loans, which will improve platform fee margins throughout the year. I'll now turn the call back to Matt to discuss an update on our key priorities.
Matt Potere: Thanks, Rodney. We believe that with the new financing arrangement with Cross River Bank, Sunlight is well positioned to support our contractor and capital partners over the next year as we've made significant progress toward addressing six key areas of focus: first, enhancing our indirect channel execution; second, bolstering our liquidity; third, ensuring profitable pricing; fourth, rightsizing our expense base; fifth, reducing our Contractor Advance Program; and finally, sixth, addressing the SVB revolver maturity in April 2023. The rapid rise of interest rates in the second half of last year, alongside other factors, increased our reliance on the indirect channel and impacted its profitability, leading to a growing balance of indirect channel loans. We enhanced our execution of indirect channels, as Rodney mentioned earlier, in December of 2022, with the sale of $228 million of indirect loans and are continuing to reduce that balance, starting with the sale of $296 million in April as Rodney mentioned as well. The Cross River Bank financing agreement further improves our indirect channel execution by increasing our funding capacity and extending the facility's maturity. To bolster our liquidity, the finance agreement enables us to complete back-book loan sales while maintaining liquidity as up to $49 million of proceeds owed to Cross River upon the sale of back-book loans can be deferred under the new term loan. Proceeds of this term loan were also used to pay fees and accrued interest owed Cross River Bank. We've been taking actions since the third quarter of last year to ensure profitable pricing, including the elimination of a number of unprofitable products and materially raising the interest rate of new loans that are being originated to ensure that they're profitable in both the direct and indirect channels. As a result, we believe the loans that we are approving today are profitable. In tandem with improving revenue is rightsizing our expense base without impacting our ability to provide high-quality service to our contractors and capital providers. Since the fourth quarter of 2022, we have taken a number of steps to reduce costs related to the Cross River Bank fees, reduce our vendor expense, technology expense, and compensation as well, including implementing a headcount reduction completed in March of 2023. In the fourth quarter of 2022, we also took steps to tighten the advanced criteria to mitigate our risk in our Contractor Advanced Program. And in March of 2023, we suspended the program indefinitely. These actions have enabled us to significantly reduce the total outstanding amount -- advances since September 30 of 2022. And finally, as we've mentioned already, we utilized proceeds of the new term loan with Cross River Bank to repay any remaining balance under the SVB revolving credit facility, which was set to mature in April 2023, marking the completion of our relationship with Silicon Valley Bank. I look forward to providing updates to these ongoing key priorities over the coming months as we continue to strengthen our operations and improve our profitability. While market challenges in the second half of 2022 have negatively impacted our recent financial performance, I'm pleased with our progress towards mitigating these challenges, and I'm excited about returning to a profitable cash-flow-positive operation with a goal of generating long-term value for our partners in this attractive industry. Thank you for joining us on the call today.
Operator:
