Sunlight Financial Holdings Inc. (SUNL) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon and welcome to Sunlight Financials Second Quarter 2021 Earnings Call. After the close of the market today we announced second quarter 2021 key financial metrics filed an 8-K with the SEC and posted an the earnings presentation to our Investor Relations website at irs.sunlightfinancial.com. Joining me today are Matt Potere, Sunlight Financial's Chief Executive Officer; and Barry Edinburg, 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 can 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 industry outlooks. Forward-looking statements speak as of the day they are made, are subject to risks, uncertainties and assumptions and are not guaranteed 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 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.
Matt Potere: 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 12, 2021. We're excited to have completed the business combination with Spartan Acquisition Corp. II and are eager to execute on our strategy as a publicly traded company. I'm pleased to share Sunlight's 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 30, 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 are facing permitting delays and some supply chain constraints, we've 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. In our average sober 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 1400. We're pleased to begin providing these 46 new solar contractors and 138 new home improvement contractors our best-in-class technology platform, an 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 received 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 towards providing contractors and homeowners with the broadest suite of loan options. These products provide homeowners the opportunity to see 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 it's 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 overtime, 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 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 finance. With that, I'd like to turn the call over to Barry Edinburg to discuss our second quarter financial results in more detail.
Barry Edinburg: 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 tenth consecutive quarter of recording positive adjusted EBITDA, and it's 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 2020 platform fee margin of 4.5%. Platform fee margins have been impacted negatively by competition in the market but we expect to see improvements in this level throughout the remainder of 2021 as previously enacted pricing changes with our capital providers fully take effect. It's important to note that the growth that we've been experiencing, together with the operating leverage from the business partially offset the impact of quarterly variances in platform fee 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 for the following ranges; for funded loans $2.6 billion to $2.8 billion, for total revenue $113 million to $121 million, for adjusted EBITDA $46 million 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 forecasts 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 expectation; 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 or 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 anticipated 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 overtime. 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 up 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.
Operator: Thank you, the floor is now open for questions. Okay, and it doesn't look like we have any questions coming in the queue. With that, I'd like to close out the webcast. Thank you for joining this does conclude today. Have a great day.
