Sunlight Financial Holdings Inc. (SUNL) on Q1 2022 Results - Earnings Call Transcript
Operator: Greetings, and welcome to Sunlight Financial First Quarter 2022 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lucia Dempsey with Investor Relations. Please go ahead.
Lucia Dempsey: Good afternoon, and welcome to Sunlight Financial's First Quarter 2022 Earnings Call. After the close of the market today, we announced first quarter 2022 financial results and posted an earnings presentation to our Investor Relations website at ir.sulnigefinancial.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 expectations or predictions of financial and business performance and conditions and competitive and industry outlook. 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 Sumit Financial's website and Sumit 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 A - Rodney Yoder, Sunlight's new Chief Financial Officer. Matt will provide an operational update on the quarter, and then Rodney will share additional detail on our financial results. Following these prepared remarks, we will open the call to Q&A. It is now my pleasure to turn the call over to Matt Potere.
Matthew Potere: Thank you, Lucia, and thank you all for joining us as we discuss Sunlight Financial's first quarter 2022 operational and financial results. I'm pleased to report strong first quarter results, which are on track with our expectations for 2022. As such, we are affirming each of our previously provided full year 2022 guidance metrics. In the first quarter, Sunlight funded $593 million of solar and home improvement loans, $8 million higher than the midpoint of our first quarter funded loan guidance of $580 million to $590 million and $12 million higher than our funded loans in the first quarter of 2021. Importantly, this level of volume is in line with typical seasonality where sales and credit approvals slow down over the holiday season, driving lighter installation volumes in the first quarter. Home improvement volumes were particularly strong, with $76 million in the first quarter of 2022, more than double the first quarter of 2021 volume of $31 million. While it will take some time for home improvement to become a significant portion of our business, we're excited about this strong growth trajectory as we drive more business in its rapidly growing $400 billion market. And we're further encouraged by the strength in customer demand we've seen over the last 2 months as the Omicron wave has receded. That said, we are keeping a watchful eye on the overall macro environment, as I'll discuss in greater detail shortly. Sunlight continue to perform well on other operational key metrics. We remain a leading financing choice for contractors and homeowners as our Orange platform provides a fast and frictionless process for financing solar installations and home improvement projects. We funded loans for nearly 17,000 borrowers in the first quarter, up 5% from the same period a year ago. Average loan balances also continue to increase, which drives incremental revenue for Sunlight without any additional expense. First quarter 2022 solar loans in particular, averaged $44,000, the highest yet for the company and up 12% relative to the first quarter of 2021. Sunlight's battery attachment rate was 13% in the first quarter of this year, while this is lower than attachment rates we saw in 2021, driven by tighter battery supplies and our contractor mix, we believe that battery storage will continue to provide increasing benefits to homeowners over time. And that our battery attachment rates will increase as a result, particularly as battery supply shortages abate. We were also pleased to have 80 additional active contractors on our platform in the first quarter of this year, bringing our total relationship to nearly 1,600. We continue to see rapid growth in our home and improvement contractor network as we build brand awareness in that market. On the solar side, we're focused on adding new contractors as well as strengthening loyalty and increasing volume with existing contractors by building relationships that lead installers to choose Sunlight first, each and every time. While Rodney will discuss our profitability in more detail, I'd like to share an update on our strategic capital deployment as we continue to operate a capital-light business that generates significant cash. I'm excited to announce that our Board of Directors has approved a share repurchase program, under which the company may buy back up to $50 million of Class A common shares over the next 18 months. This program will be funded with excess cash on hand as well as cash generated from operations. We believe the program is an attractive use of capital to drive long-term shareholder return while maintaining ample cash on hand to ensure liquidity and execute on our breast strategies. To that end, we also continue to invest in our contractor advances program, where we provide qualified contractors with working capital for Sunlight finance installations. We find this to be an effective way to leverage our balance sheet to strengthen relationships with our contractor partners. In the first quarter, we invested an additional $19 million in advances, and we'll continue to allocate capital to this program opportunistically to drive profitable volume. We may also strategically use capital toward M&A opportunities and are continually evaluating acquisition opportunities that further enhance our value proposition or that enable us to apply our unique capabilities in adjacent verticals. It's now my pleasure to turn the call over to, A - Rodney Yoder, Sunlight's new CFO, who joins me today for his first Sunlight financial earnings release.
Rodney Yoder: Thanks, Matt. I'm excited to be here, and I've thoroughly enjoyed my first 6 weeks here at Sunlight. Sunlight generated total revenue of $30 million in the first quarter of 2022, up 11% from the first quarter of 2021, primarily driven by an increase in platform fee margin. As we've discussed, our industry-leading credit quality and capital provider demand for Sunlight loans led to increased margin in the second half of last year and into the first quarter of 2022. Our total platform fee this quarter was 4.7%, up 50 basis points from 4.2% in the same period last year. The direct solar platform fee percentage was even higher at 5.3%, up 90 basis points from 4.4% in the first quarter of 2021. Adjusted net income for the quarter was $4.9 million or $0.03 per fully diluted share relative to $9.3 million in the first quarter of '21 million. Adjusted EBITDA for the first quarter was $7.8 million compared to $11.5 million in the first quarter of 2021. This decrease was driven by higher operational expenses, including approximately $4 million of public company expense that did not incur as a private company in the first quarter of '21 as well as $1.4 million of incremental SG&A and other costs to drive growth in the business. This was partially offset by increased platform fee revenue relative to higher platform fee margins, as I just discussed. Due to higher expenses, adjusted EBITDA margin decreased from 42.5% in the first quarter of 2021 to 25.9% in the first quarter of 2022. However, we expect adjusted EBITDA margin to improve throughout the year as we continue to generate higher revenue relative to a similar cost base, setting us up to drive incremental operating leverage in '23 and beyond. Sunlight continues to operate a profitable business model and generate significant cash flow. In the first quarter of 2022, free cash flow was $6.5 million, representing an 83% EBITDA to free cash flow conversion rate. The company is also well capitalized and maintained strong liquidity with nearly $70 million of unrestricted cash and cash equivalents and only $21 million of short-term debt on the balance sheet, underscoring our cash-generative, capital-light business model. While free cash flow may fluctuate from quarter-to-quarter due to various adjustments, we expect to maintain a high conversion rate and deploy our free cash flow to earn attractive returns through share repurchases, contractor advances and/or M&A opportunities, all of which Matt discussed earlier. I'd also like to provide a short update on our capital provider relationships. Our ability to execute has always been driven by our funding strategy with long-term capital partners, which we are able to maintain and grow, thanks to our industry-leading credit quality. We are working closely with our capital providers to monitor the interest rate environment and ensure they are receiving high-quality assets with attractive returns. While we are not immune to the impact of rising interest rates, our relationships with depositories and the strong demand for our credit quality reduces our exposure to pricing changes relative to capital markets execution. We also expect to continue to add in capital providers in the coming quarters in order to expand our access to low-cost funding and enhanced platform de-stability in various market conditions. Before we open up for question and answer, I'd like to turn it back to Matt to provide our perspective on the macro industry environment and outline for the remainder of the year.
Matthew Potere: Thanks, Rodney. As we discussed on our prior earnings call in March, Sunlight has a history of achieving results amidst challenging macro environment. While the industry is facing a number of macro challenges, we remain focused on our execution and are positioned favorably, particularly relative to our peers. First, while we saw Omicron related impacts to volume improved in the back half of the first quarter, component availability, labor shortages and permitting delays have not yet normalized from pre-COVID-19 levels. And second, while inflation is having an increasing impact on our industry with rising installation and equipment costs, Sunlight fortunately does not procure equipment and therefore, is not directly exposed to increasing equipment costs. From an industry perspective though, solar is becoming more competitive due to significant retail rate increases from utilities across the nation, including double-digit rate increases in several states. As solar presents a cost savings opportunity relative to these utility price increases, we expect solar and battery storage demand to remain strong. Now rising interest rates are having an impact on the broader industry, though initial impacts to Sunlight are more muted. We intentionally choose to fund our loans primarily by depository institutions versus accessing the ABS markets, which provides some protection against this. While rising rates may have some impact, particularly in our indirect channel, our industry-leading credit quality and the strength of our capital provider relationships enable us to maintain strong demand for our loans. And lastly, while the recent anti-circumvention tariff investigation has not yet had an impact on Sunlight's business, we are watching these developments very closely. Sunlight doesn't take inventory risk, and our Contractor Advance Program supports our contractor partners in their efforts to secure sufficient inventory to meet demand. On the net metering front, we are encouraged by recent developments in Florida and in California. We see both Governor DeSantis' veto of Florida's net metering bill and the California Public Utility Commission reopening of its net metering docket as positive regulatory developments and further indications of bipartisan support of solar. Despite these macro challenges, our first quarter performance was in line with our expectations, and we remain on track to meet our full year outlook. Therefore, I'm pleased to affirm Sunlight's 2022 full year guidance ranges as follows; total funded loan volume up $2.9 billion to $3.1 billion, total revenue of $145 million to $155 million and adjusted EBITDA of $55 million to $60 million. With that, I'll turn it back to the operator for Q&A.
Operator: Thank you. Your first question comes from the line of Philip Shen with ROTH Capital Partners. Please proceed with your question.
Philip Shen: Hi, everybody. Thanks for taking my questions. First one is on the anti-circumvention case. And Matt, I know you just alluded to it just now, but I was wondering if you could give us a little bit more color on whether or not your contractors are experiencing any difficulty in securing modules? Have they communicated any challenges to you? Or is it really just a price question, meaning they have to pay more for the modules and they have access to the supply they need to meet their demand. Can you share what you think might be happening with your customer base? Thanks.
Matthew Potere: Yes, Phil, thanks for the question. So on the anti-circumvent front, we are watching it very closely. It is early. So far, we have not seen any impact of the case on our installers and on our results. And as I mentioned, it is early. We're mindful that it could have an impact first on price and the price of equipment. Fortunately for Sunlight, we don't take inventory risk. So we don't bear those costs directly. And from a contractor standpoint and from a broader market standpoint, while the cost of equipment could go up over time as a result of the case, offsetting that is that we've seen significant increases from utilities in their rates. In the first quarter, somewhere around a 9% plus increase across the country and that's likely before some of the increased costs related to higher cost of commodities. So that is on a relative basis, making solar more attractive. From an availability standpoint, again, we'll monitor it closely. We're working closely with our partners. And as I mentioned in my remarks, one of the benefits of our advanced program is it helps provide working capital to our partners to ensure that they can access equipment. So we'll watch it closely, and we'll certainly continue to update you as things develop.
Philip Shen: Great. Thanks, Matt. Shifting gears to rising funding costs. Our -- some of our checks suggest that the price sheets that loan companies issued to their contractors haven't really changed too much. Our checks aren't the ones we did weren't that comprehensive. So just a few conversations, but it suggests that the one -- the 20- and 25-year products are still kind of the dealer fees and the rates are still kind of where they were before the ABS movements. I could be wrong on that. But curious if you're seeing that from a competitive standpoint? And importantly, you’re not tapping into the ABS market. And so I’m guessing you guys don’t see a meaningful need to change your pricing. And so I was wondering if you can talk through some of the dynamics you’re seeing from a competitive standpoint as well as what that might mean for your business ahead in terms of share and opportunity.
Matthew Potere: Yes, thanks. It's a great question. So we -- as we've talked about for a long time, we have a very intentional funding strategy. We partner with most of our funding partners are depositories. And that helps provide diverse and stable low-cost capital. And then the other thing that we've always talked about is that we focus on having the best credit quality and having high-quality originations. And we do that because it benefits us not during the good times, although it does certainly bonuses during the good times, but we do it because we know that cycles change, interest rate cycle change, credit cycles change, and it provides a real strategic advantage as they become additional challenges in the market. And so because of that thoughtfulness, we think we're really well positioned over the long term. It doesn't mean that we're immune from rising rates, particularly in our indirect channel that does have some exposure to market rates. But as you mentioned, fortunately, we were very thoughtful about not building a large ABS program where we would have significant exposure to market rates and our depositories give us much more stable and diverse capital. So we think we're well-positioned over the long term. And certainly, from a quarter-to-quarter basis, you could always see things bounce around a little bit just from broader market or because of product mix or contractor mix, but we do think we're very well positioned.
Philip Shen: Great, thanks. And then I was wondering if you could give us a little bit more color on the outlook for margins. I think we saw some compression. They stayed over the past year, then we saw stabilization and then expansion. Given your stable depository funding, could we see that expansion accelerate in the coming quarters?
Matthew Potere: Yes. Great question, Phil -- Philip. So overall, we expect the full year '22 platform fee percentage to exceed that of the full year of '21 as many of the improvements we saw come through the second half of last year will continue into '22. I think it's important, that I'd add some context. So first, our margins have some normal variability quarter-to-quarter, as Matt suggested and that is being driven by product, installer mix and capital provider mix as well as the competitive environment. So you shouldn't expect margins to be perfectly consistent. And secondly, we think that we're relatively well positioned in this rising rate environment relative to those peers that are relying on the capital markets. So it's likely we will see some impact from rates, especially in our indirect channel, but we feel really good about where we are.
Philip Shen: Thanks, Rodney. Look forward to working with you. Thank you, Matt as well.
Matthew Potere: Thank you.
Rodney Yoder: Look forward to working with you.
Operator: Your next question comes from the line of Arren Cyganovich with Citi. Please proceed with your question.
Arren Cyganovich: Thanks. I just wanted to follow up on the question about funding costs. Are your bank partners asking for rate increases in this environment? Or has it -- have they not really pushed back in terms of pricing it?
Rodney Yoder: Great question, Arren. So we have continuous dialogue with our capital providers building and maintaining mutually beneficial relationships agreements. As Matt mentioned, we continue to deliver the highest credit quality in the industry. So strong demand remains in both solar and home improvement. We're constantly evaluating our pricing in the market with our contractors in order to be as competitive as possible. And as I mentioned earlier, there could be some noise quarter-to-quarter. But again, we are heavily reliant on our depository institutions and feel good about where we are.
Arren Cyganovich: All right. And then following up on the new buyback that was announced. I think you said it's over an 18-month period. Looking at the free cash flow that you generated, is that kind of an idea of from a quarter-to-quarter basis, how much you might think about as being available for buybacks? Or is this more of a just in case type of a plan and you may not utilize that near term?
Rodney Yoder: Great question. Thanks. So as you mentioned, we've been operating a very profitable business that generates a significant amount of free cash flow. So within that context, the Board has authorized this program $50 million over 18 months to address under valuation, return value to our shareholders and build long-term investor support. And so we think this program really affords us the flexibility to do that to maximize value as an attractive returns for these levels. The other thing I would say is the size is fairly standard given our company size and market dynamics.
Arren Cyganovich: Okay, thank you.
Operator: Your next question comes from Maheep Mandloi with Credit Suisse.
Chandni Chellappa: Hi, thank you for taking the question. This is Chandni on behalf of Maheep. You walked us through the adjusted EBITDA margin impact from 1Q '21 to 1Q '22. Just wanted to understand how should we think about adjusted EBITDA margin beyond 2022. Could you possibly disaggregate these public company expenses? How do you expect that to evolve? And also in terms of your hiring needs for 2023 and beyond. Since you pulled forward some of that growth, can you expect that it will be flat or just slightly above for 2023 and beyond. And finally, like what, in your view, would be sort of a long-term stable rate for adjusted EBITDA margin for this business?
Rodney Yoder: Great question. Thank you. So as you mentioned, our expenses in the first quarter, were in line with our expectations. And as you mentioned, we had $4 million of public company-related expenses that didn't occur last year. And I would expect a similar increase when you compare Q2 '21 to Q2 '22. And those expenses are the things that you would expect that drive the public company expenses, accounting, D&O and so forth to support a public company. And we also have year-over-year increases in our SG&A related to additional costs to drive business growth and some wage inflation. But I do think about this as normalization to a new expense baseline and expect that our adjusted EBITDA margins will improve in the back half of this year and in future periods as fixed costs remain relatively constant in the context of continued volume growth. and our operating model -- operating leverage continues to take hold. This operating leverage that we've talked about consistently is an attractive feature of the business. And we expect that our expenses will grow at a much smaller rate than revenues going forward.
Chandni Chellappa: Thank you.
Operator: Your next question comes from Chris Donat with Piper Sandler. Please proceed with your question.
Chris Donat: Good afternoon. Thanks for taking my questions. First one, just on the higher average solar loan balances going up about 12% year-on-year to nearly $44,000. But coming with the lower attachment rates, what was driving that increase? Is it something in the costs? Or are you dealing in different geographies? Or are there other factors driving the higher loan balances.
Matthew Potere: Thanks, Chris. It's a great question. So as solar has continued to add value really across the market, it's provided an opportunity for installers to both build larger systems and also provide other services, which help increase the average ticket and ultimately increase our average loan balance. That plus we do think we're likely seeing some inflation in cost, and that's getting priced into the higher average ticket. So in some ways, inflation actually benefits us in that we're not taking the inventory risk, but we see higher balances, which then translate to -- which then pull through the bottom line.
Chris Donat: Okay. And if you were to see higher attachment rates or attachment rates rebound from where they are now, that should also be favorable to the balances typically, right?
Matthew Potere: That's right. So it was unusual in the first quarter from recent trends that attachment rates went down. We don't think that's specific to Sunlight as we talk to others in the market, that's a pretty broad trend, and it's a result of tighter supply around batteries. So we think as those supply challenges start to resolve themselves, that will help drive up average ticket as well and could potentially provide some additional lift.
Chris Donat: Okay. And then just last for me. I was curious on the comment about you launched the -- your Credit 5.0 and it has higher approval rates. To me, that seems a little counterintuitive given the concerns around the economy or maybe that's the timing issue. But just wondering with higher approval rates, is that a function just to the sort of credit scoring -- or are there other factors that you're maybe seeing a different mix of customers. But just curious about higher approval rates given maybe a less certain environment.
Matthew Potere: Yes, absolutely. So we've always been really thoughtful about credit. I have a 25-year consumer credit -- 25 years in consumer credit, Rodney has 25-plus years. And if you go look across our team, you'll see really deep credit expertise. We build our credit strategies not based on FICO score alone. We use hundreds of variables to help drive the ultimate credit strategy. And so the result is to identify more goods, more customers who are -- have a very low propensity to go bad and also identify those that have a higher propensity. When you swap those 2 out, as our models get better and better over time, and we continue to leverage that data, the net result is we can actually increase our approval rates while maintaining or improving credit quality. So fortunately, we're experiencing the increases in approval rates and the benefits to our contractor network without taking on more risk for our capital providers.
Chris Donat: Okay. Got it. Thanks very much and welcome Rodney.
Rodney Yoder: Thank you very much. Appreciate it.
Operator: Your next question comes from Jeff Osborne with Cowen & Company. Please proceed with your question.
Jeff Osborne: Yes, good evening. A lot's been addressed, but I don't think you'll give an exact answer on this, Matt, but I was wondering if qualitatively you can touch on what the change has been over the last 6 to 12 months as it relates to time from loan approval to glass on the roof. You highlighted a couple of things that are sort of challenging the industry in terms of permitting and other delays. But I was curious what you're seeing in that regard?
Matthew Potere: Yes. Thanks, Jeff. So we have -- over the last couple of quarters, we talked about delays from credit approval to loan funding and system installation. We especially saw that slowdown in the back half of last year. And I think last -- when we announced year-end earnings in March, I mentioned we saw some green shoots that perhaps it was starting to improve. And we do believe we've seen some improvement, but it is not yet -- those installation time lines have not yet returned to what we would consider historical norms. And so when we look at year-over-year pull-through timing and pull-through rates, they are materially lower than we had seen historically. And that is something that we would expect to improve over time as supply chain issues work themselves through. But we're certainly watching that very closely.
Jeff Osborne: Got it. That's good to hear. A couple of other quick ones maybe for Rodney or you, Matt. Is there a minimum cash balance that you need or feel comfortable with as it relates to the balance sheet? I'm just trying to understand the 3 uses of cash that you talked about in the presentation here on the call, how low that could go as it relates to creating shareholder value.
Rodney Yoder: Yes. Great question. So as we mentioned before and as you know, we've been operating at a very profitable rate, generating significant amount of free cash flow. And so I think the size of this program gives us the flexibility to continue to invest in our contractor advances and continue to grow the business. We will continue to be thoughtful and mindful about M&A. And so we look at that from time to time. And so no, I think the program is really designed to give us flexibility to use our capital for its best investment purpose.
Jeff Osborne: Got it. And the last one I had is just I think it was 6 months ago or so, you talked about some initiatives in the non-prime market in terms of new capital providers and a go-to-market strategy there. Could you just give us an update on how that's panned out?
Matthew Potere: Yes. So we announced Sunlight Max, which helped partnering with other capital providers allowed us to substantially increase our credit approval rates and help serve the needs of more customers. And it's been very well received in both solar and especially in home improvement. We think it's a good example of our credit acumen and using that credit acumen to ensure assets are priced appropriately and get a capital provider and asset with a good risk-adjusted return and help homeowners go solar or make home improvements and help contractors sell more. So we're pleased with the results so far.
Jeff Osborne: Great to hear that. That's all I had, Matt. Thank you.
Matthew Potere: Great, thank you.
Operator: Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Matt Potere for closing remarks.
Matthew Potere: Great. Thank you. So we appreciate all of your questions and your continued interest and support of Sunlight Financial. Very pleased with our performance thus far, and I'm excited to continue executing on our growth plans as we leverage our capital-light, cash-generative business model to provide value for all of our stakeholders. So thank you for joining us this evening, and have a great night.
Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.
