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Edited Transcript of VSLR earnings conference call or presentation 5-Mar-19 10:00pm GMT

Q4 2018 Vivint Solar Inc Earnings Call

Provo Mar 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Vivint Solar Inc earnings conference call or presentation Tuesday, March 5, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dana C. Russell

Vivint Solar, Inc. - CFO & Executive VP

* David H. Bywater

Vivint Solar, Inc. - CEO, President & Director

* Rob Kain

Vivint Solar, Inc. - VP of IR

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Conference Call Participants

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* Luis Javier Amadeo-Resto

Oppenheimer & Co. Inc., Research Division - Energy Strategist

* Philip Shen

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Praful Mehta

Citigroup Inc, Research Division - Director

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Presentation

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Operator [1]

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Good afternoon. My name is Kenzie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2018 financial results call. (Operator Instructions)

Rob Kain, you may begin.

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Rob Kain, Vivint Solar, Inc. - VP of IR [2]

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Thank you, operator. Good afternoon, everyone, and welcome to Vivint Solar's Fourth Quarter 2018 Financial Results Conference Call. Joining me today to talk about our financial results are David Bywater, our Chief Executive Officer; and Dana Russell, our Chief Financial Officer.

This call is being webcast, and a supplemental investor deck is available on the Investor Relations section of the Vivint Solar website at investors.vivintsolar.com.

In addition, we will be discussing both GAAP and non-GAAP financial measures during today's call. We have provided non-GAAP to GAAP reconciliations in our earnings press release that was issued earlier today, and this press release is also available on the Investor Relations section of our website.

Please note that a replay of this call will be available within a few hours of the call today and available until March 31, 2019. After management's remarks, we will host a Q&A session.

During today's call, some of the statements we will be making constitute forward-looking statements within the meaning of the federal securities laws, including statements regarding our guidance and our expectations for our business, finances, operations and markets. Accordingly, we wish to caution you that such statements are just estimates based on current expectations and assumptions regarding future events and business performance and involve risk and uncertainties that could cause actual results to differ materially. We refer you to the registration statements and periodic reports that we file with the U.S. Securities and Exchange Commission from time to time, which are available on our website, and identify important factors that could cause the actual results to differ materially from those contained in our projections and other forward-looking statements. We undertake no obligation and expressly disclaim the obligation to update or revise any forward-looking statements whether as a result of new information, future developments or otherwise.

With that, I'll turn the call over to David.

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [3]

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Good afternoon, everyone.

Let me begin by stating that I believe we met or exceeded our corporate objectives in 2018 and delivered what we committed to our shareholders, our customers and our employees.

In the fourth quarter, we installed 54 megawatts, growing 22% year-over-year. For the full year, we installed 196 megawatts, returning to solid growth on a full year basis. More importantly, we did so while increasing our unit margins by 79% from 2017 and generating $188 million in estimated margin. We also added substantially to our cash position and put the company in a great position to capitalize on safe harbor and channel expansion opportunities in 2019.

Returning to growth. While improving unit economics was a key focus for us in 2018, a key component to this effort was strategic investments in our dealer program and inside sales. For the fourth quarter, these channels represented 24% of our installation volume and will continue to be a key area of expansion for us in 2019.

I am also particularly pleased that our growth in 2018 essentially cured -- occurred in markets with the most advantageous system economics. This was a result of concerted management focus and actions on concentrating our sales activities in our most favorable markets. The sales momentum we are experiencing will require continued focus and management to ensure we remain a clear leader in the most advantageous markets. We are also excited about the prospects of creating other customer acquisition models and access new and existing markets in more profitable ways in 2019 and beyond.

As important as growth is, it is important to operate with the right unit economics, performance and quality. It is easy to grow for growth's sake without regard of profit or long-term sustainability or customer satisfaction. That kind of growth violates our core principles and values and is a trade-off we are not willing to make. Over the past year, we have done much to improve our profitability. As you might remember, at the beginning of 2018, we introduced our dynamic pricing program, which provides increased sales incentives to our sales force for finding systems with the best attributes. Although it increases our customer acquisition costs, the improvement in system attributes more than offsets the increase in cost. In addition, we worked hard on improving the efficiencies of our operation teams and saw improvements in our installation unit cost. As a result of these activities plus others, we have increased our unit margins by 79% in 2017, as I mentioned earlier. This is a significant accomplishment and we believe we can continue to improve our unit margins in 2019.

Throughout 2018, we have discussed the importance of diversifying our sales channels and working with independent dealers. We have been delighted by the growing list of dealers that value how we service the market and how we help their teams be more effective as we utilize our sales tools and sales support resources. As we have discussed previously, these new channels generate viable sales diversity, and our dealer program allows us to capture sales volume for which we do not historically compete.

We made significant strides in 2018 and have put a strong foundation in place for 2019. We believe our performance will be quite strong again this year and our expectations remain high. The residential solar market continues to be robust, with increasing customer awareness and favorable regulatory support for renewable energy in many states.

Let me elaborate on several of the goals we have set for this year. First, as I mentioned earlier, we intend to grow above-market growth rates. After reviewing entry forecast for the U.S. residential solar market, we think the market will grow around 10%. Customers are demanding clean, reliable energy, and we believe our high-quality standards and customer support separates us from the rest of the industry. We continue to increase our marketing efforts, telling our story and raising our voice to protect the industry and homeowners so they are better educated and capable of making a more informed decision. We believe we lead the industry in consumer protection by ensuring every customer has a recorded sales verification call, of the key contractual terms and the ability to cancel a contract at any time before installation work.

Second, we're continuing to diversify our routes to market. Earlier, I spoke about the progress we have made with our inside sales teams and independent sales dealers. This year, we will begin to benefit from our partnerships with new homebuilders. To date, we have signed contracts with 6 of the largest California builders and are in ongoing discussions with others. Installing on new homes provides a number of advantages for us. It allows us to reach new customer segment with first-time homebuilders. It also is a more efficient installation process. Finally, it should help us lower our customer acquisition costs.

Although the new home solar mandate does not start until 2020, we've already begun installing on new homebuilds. The volume is small at this point while we work on ensuring our processes run smoothly and efficiently for both the end customer and our partners. However, we believe this channel will become more meaningful as the year progresses and we get closer to the mandate start date.

We are also starting to work with major retailers to offer their customers residential solar. Currently, we are working on expanding our partnership with Home Depot and have ongoing discussions with a number of others. We believe this type of partnership will provide a new touch point for us to reach potential customers. We are excited about the possibilities this channel presents for us. However, we are in the beginning phases, and we believe we'll see modest volumes as we build processes and ramp up this program. We believe that diversifying our routes to market will allow us to reach more customers with a lower overall customer acquisition cost. Although we are encouraged with the progress we have made with our inside sales and third-party sales dealer initiatives, we believe there's still significant room for further expansion of our channels.

Finally, Vivint Solar remains deeply committed to leading the residential solar industry when it comes to safety, security and peace of mind for homeowners who are investing in a clean energy system they expect to last 20 to 30 years. We have installed solar on over 150,000 homes, and with quality as a top priority, we are happy to share our knowledge with others to help set standards as the industry matures.

Vivint Solar is quality focused in which our internal standards often exceed code requirements for solar panel installations in 22 states in which we operate is helping set the tone for the industry at large. Recently, the Solar Energy Industries Association, the national trade association of the U.S. solar energy industry, turned to Vivint Solar when it was developing industry best practices. The SEIA quality assurance working group incorporated our guidelines in its residential installation best practices guide and that was released earlier this year.

In recognition of our track record of quality, Vivint Solar also recently received the 2019 quality solar installation -- installer designation from the New York State Energy Research and Development Agency (sic) [New York State Energy Research and Development Authority.] To the best of our knowledge, no one else in the industry has as rigorous a program as Vivint Solar, and it is excited to be able to share this with the broader industry.

With that, let me turn the call over to Dana.

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [4]

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Thanks, David.

Let me start by taking a few minutes to talk about our operating metrics. We're introducing some new metrics and making a few changes in some of the old ones. I believe the new information we include in the investor deck will help everyone better understand the financial condition of the company to simplify the analysis needed and provide a straightforward way to review our performance. The metrics will also allow a better comparison to peers in the marketplace and help identify key measures that are recorded in our financial statements in a way that shows the value we're generating.

We've listened to many of your comments, reviewed the metrics and financial information of others, and sought to present our metrics in a digestible way that simplifies the work involved to understand the basic economics of our business. We think there are several things that every investor seeks to understand. This includes understanding the basic economics of the projects we invest in, which starts by showing how much project value we create versus the cost to create that value on a per-unit basis. We're changing our cost-per-watt methodology so that we no longer divide the portion of our sales and marketing costs that are recognizing the period they are generated by bookings. Rather, we're dividing all our costs by the megawatts we install in the quarter.

Using this new methodology, our cost per watt for the fourth quarter was $3.18, which is higher than the previous cost-per-watt calculation, which would be $3.12. We believe this new method simplifies the calculation and provides an accurate reflection of our unit cost.

Next, we're introducing a project value metric for our PPA and lease systems. Project value represents the value we expect to receive from a system over its lifetime discounted by 6%. Specifically, this quantifies the present value from customer cash flows, payments from tax equity partners and incentives less expected operating and maintenance expenses and future payments to our tax equity partners.

For the fourth quarter of 2018, our project value for PPA and lease systems is estimated to be at $4.42 per watt. This is up 19% over the fourth quarter of 2017 and is reflective of the improvement in system attributes and state mix that we've previously discussed.

We're also introducing estimated margin and unit margin metrics to our quarterly reporting package. To estimate our margin, we take our estimated project value, multiply it by the PPA and lease megawatts installed. We add our system sales revenue to arrive at total value created in the quarter. From this, we subtract the costs required to generate this value to arrive at our margin. The margin divided by total megawatts installed in the quarter represents our estimated unit margin for the quarter or net present value per watt.

For the fourth quarter, unit margins were $1.04 per watt and net value created of $57 million. For additional details on changes to our operating metrics and to see these metrics applied to prior periods, please see our fourth quarter investor deck that is on the Investor Relations portion of our website.

With our focus on the most profitable markets and improving the efficiency of our organization, we increased our net retained value by $82 million in the quarter. On a per-share basis, this represents $9.20, up from $7.47 in the fourth quarter a year ago. The value we are creating can also be seen in our cash and restricted cash balances.

We've been cash flow positive for some time. In 2016, our cash balances increased by $16 million, in 2017, they improved by $31 million, and in 2018, they increased by $136 million. These steady increases include project debt, and it is our business practice to monetize system cash flows to enable us to invest in new systems to continue to grow the business.

Our debt as a ratio to contracted retained value is on par with our peers in the industry. We feel very positive about the capital structure of our business, and we believe we'll remain cash flow positive given our current business practices before considering using any capital to safe harbor equipment in the future.

Given our strong financial position, we see safe harbor as an opportunity to expand our margins as the ITC begins to step down in 2020. The opportunity does come with costs and potential risks that we're carefully considering. For instance, the equipment that we purchase to extend the ITC could become out of date or be purchased at lower prices in the future, negating some or all of the benefit of the safe harbor. However, we do believe that safe harbor represents a unique opportunity for a small number of organizations with the capital strength to make the necessary investments. We're planning to participate in the safe harbor program and view it as a competitive advantage.

There are a couple of things we're in the process of working through in evaluating how to approach safe harbor in equipment.

First, we're underway with a review on what amount of capital can be provided by investors and at what cost versus what capital is available or necessary from Vivint Solar. We believe to fully mitigate the decline of the ITC from 2020 to 2022, we would need to buy at least 5% of the fair market value of the systems we expect to deploy and retain ownership, which would require a substantial investment in the hundreds of millions of dollars. Second, we're working with vendors to understand how much equipment we could possibly purchase over what timeframes without creating price increases.

We're hopeful that an ITC extension may be possible, but we're well positioned to take advantage of the ITC safe harbor, and we'll be taking steps in the near future to maximize its benefits. We'll provide further information later in the year on our strategy and approach to utilizing the safe harbor program.

Our balance sheet is strong with $291 million in cash and restricted cash. Our capital structure is in great shape with capacity of $325 million in the aggregation facility and committed tax equity agreements that should take us well into 2019. We expect our first quarter install volume to be 43 to 45 megawatts. We also expect to be able to grow beyond market growth rates for 2019 and anticipate growth of 15%. As discussed, some of this growth will be the result of new channels with retail partners and homebuilders. We're currently investing in new routes to market and building programs, technology and teams to support homebuilders, retail channels and further invest in new dealer programs. Some of this investment is occurring prior to significant installations from these routes. Therefore, we anticipate our first quarter 2019 cost per watt to be between $3.45 and $3.52 under our new methodology.

We will not give cost guidance for the full year at this time but expect to reduce cost throughout the year as volumes increase.

With that, I'll turn the call back to David.

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [5]

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Thank you, Dana.

As I conclude my prepared remarks, let me reiterate that we were pleased with Q4 2018. In summary, we substantially improved our unit economics with margin improving by 79%. We have returned to solid growth in 2018 and expect to grow around 15% in 2019. Our growth has come in the best solar markets. We materially solidified our cash position in 2018 with innovative capital market solutions and partnerships. We have never had this strong a balance sheet and capital structure. We materially improved our NPV per watt and believe that validates the value we bring to shareholders. We believe our installation quality and consumer protection efforts are best-in-class. And we are expanding into new channels with homebuilders, retail and others that we believe will bring higher-quality growth going forward.

We have followed our core business principles and they have served us well, although at times they required us to make difficult choices. Our progress has been steady, resolute, and we continue to build the foundation for future success.

As our business grows, so does our commitment to our core business principles, our vision and our values. Our commitment remains the same as we enter into 2019, and we believe we will deliver improved growth, higher performance and greater shareholder returns. We are committed to bring -- we are committed to being the most sustainable and well-run residential solar company in the industry. We continue to adapt to changing market conditions, evolving technology, regulatory considerations and, of course, competition.

We firmly believe that we are making the right decisions and the necessary adjustments to capitalize on the vast opportunities in the residential solar market.

With that, I'll turn the call over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Julien Dumoulin-Smith from Bank of America Merrill Lynch.

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Unidentified Analyst, [2]

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This is actually Arik on for Julien. And I guess maybe the first thing to discuss, with the 15% megawatt deployment growth guidance introduced for 2019, do you see any -- could you first talk about what growth drivers in '19 you see supporting that?

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [3]

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Sure, I'll take a stab at that. This is David. So we have our core business, which is our direct to home. Continues to perform very well. And as I mentioned in my comments, we've been layering in new channels to market. So the independent dealers, we spent a lot of time in 2018 making sure we had a strong foundation, and we're doing a good job with that channel. We see really nice growth coming this year from that. The homebuilders will kick in largely in the back half of the year. So as I mentioned, we have 6 of the Top 10 homebuilders in California, and we're working on others. We're looking forward to a nice uptick from that. That started to be deployed right now, but it accelerates in Q2 to somewhat in Q3 and Q4. And then the retail relationships that we have, they're just kicking off right now. A strong ramp process right now. And once again, just given the gestation cycle of getting that from account creation, to permit, to install takes a little bit of time and so we see that really picking up in the second half of the year. So those are the ones we talked about. We're working on other things, but those right there is a lot to chew on. And it's requiring a fair bit of investment from the organization to prepare for that. And that really gives us our confidence that we'll be able to grow above-market growth rates for the year and have a strong 2019.

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [4]

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And I think on a couple of things. The markets that we're in, we think we feel very good about. We feel like we can continue to grow and expand in those markets. We're also opening up a couple of new markets. Chicago would be one. So Illinois is -- be a market that we're pretty excited about that we're seeing -- we expect some significant growth in as well.

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [5]

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We just need some warmer weather. It's been a brutal Q1, so we need more warmer weather, and that will be a strong spring and summer push there.

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Unidentified Analyst, [6]

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Got you. And would you say that all the growth drivers in '19 you would view as reoccurring in 2020 and beyond?

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [7]

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Yes. You got to earn your business every day. And you guys thematically focused, but all of these -- we have every intent to establish relationships that are long-lasting in nature and that are reoccurring, but definitely something that every day you have to earn that business.

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [8]

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If anything, I would say that, that probably expands, though. As we think about it, what David talked about was growth with retail and homebuilders and dealers, which we're seeing is going to -- and you talked about that kicking in really the second half of the year, even though we're seeing activity and seeing that start to materialize in the first half. In 2020, obviously, you're going to have a full year of that. So we'll be more prepared with our systems, our processes, our teams and so we should see acceleration of that growth and have a full year versus maybe more of a partial year where we don't see that much activity in the first quarter of 2019.

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [9]

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And what I've really enjoyed about these partnerships, I mean -- I think our current -- I know our current channels value this tremendously, but the quality of these partners really value that we own our install teams. They love our commitment to quality and how we can prove that we do 100% Q&A on everything. They love our -- just the process and rigor we go through with. So these are blue chip organizations that require a partner that sees the role the same and controls resources and has invested the resources and proven those resources out. So I'm very bullish about these great partnerships. Appreciate our team is further bringing them to us for us to work on and go execute on. And we love the alignment on how we view the industry and the long-term relationship with these customers and that we control and can prove that we have the quality for these long-term contracts.

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Unidentified Analyst, [10]

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Got it. That's very helpful. So you -- just to confirm, you would view both the Home Depot partnership as well as an upcoming ITC safe harbor plan as supporting incremental growth volumes beyond the 15% guidance introduced with the ITC safe harbor also providing incremental NPV margin?

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [11]

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Well, we look at the safe harbor as an extension, I think, first and foremost. I think Dana would agree with that, which is it allows you to have a longer runway. Those who can participate and take advantage of that, I think, will have a differential opportunity to have better margins than those who are not equipped to do that. So first, I think it extends the runway, and then relative to certain folks in this industry, you have a differential opportunity. Anything you want to add to that, Dana?

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [12]

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Well, we mentioned Home Depot, specifically, but that's not the only party that we're working with. And we're optimistic that we're going to have other -- others as well that we'll mention later. But we think that there's some real opportunity there for the second half of the year that's beyond what we mentioned there with Home Depot.

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Unidentified Analyst, [13]

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Got it. That's very, very helpful. And then just lastly, in terms of the 8 states specifically included in the Home Depot partnership, could you discuss any particular reasoning for why those specific 8 states?

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [14]

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No. Those are the ones that we're starting with, and we'll continue to push to expand in other states. The beautiful thing about this industry is that it's merit based and you earn the right to expand with any partner that you join. And we're very confident that we'll expand as we continue to demonstrate our value. So we're excited about that.

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Unidentified Analyst, [15]

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Are those states exclusive partnerships given Home Depot's other announced partnership with your peer?

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [16]

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They are.

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Operator [17]

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Your next question comes from the line of Praful Mehta from Citigroup.

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Praful Mehta, Citigroup Inc, Research Division - Director [18]

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So very helpful to have the updated style of presentation. I think that's helpful. But maybe we just start with the cash flows, and you've talked about being cash flow positive. And we look at, obviously, the cash flow statement from your release, and there's obviously tax equity in there as well. So how would you -- when you look at -- and you say that you're positive cash flow in Q4, how are you looking at it? Are there like specific numbers that you are looking at within your cash flow statement that you would say these are the kind of elements we add or subtract to kind of get to a positive cash flow perspective for the quarter? Just so we can get like the historicals kind of -- at least understood from your perspective.

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [19]

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Go.

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Rob Kain, Vivint Solar, Inc. - VP of IR [20]

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Praful, this is Rob. Yes, much like our peers, when we talk about cash flows, given the nature of our business, we say it's our operating cash flows plus our project financing. So any nonrecourse debt against those, our operating assets plus, as you talked about, the tax equity. So it's when we can make those combinations that we talk about being cash flow positive. And that goes back to the numbers in Dana's comments that when you look at our cash -- restricted cash balances over the last 3 years, you can see the increase, and it's due to those 3 components.

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Praful Mehta, Citigroup Inc, Research Division - Director [21]

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Got you. All right. Understood. And all right, moving from there, maybe just to the value that you create per watt, and that's obviously in your updated presentation around the margin created and the project value per watt. As you enter into these new contracts, if we were to think about it from an IRR or return perspective, how should we think about what kind of returns you are achieving today? You've talked about, I think, a 19% increase in the value per watt. So if you can give us firstly some perspective on what kind of returns you're achieving, and secondly, maybe a little bit on what has helped drive up that value per watt versus what you were achieving before.

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [22]

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Well, I think for us, the metrics that we are -- that we have created there that we're distributing today is going to be a very clear reflection of the margins and the value and those returns, those IRRs, both in aggregate and on a unit basis as we go forward here. So when we think about it before, sometimes -- the calculations that we had before, net retained value, didn't necessarily incorporate the expense structure of the company, where your net present value per watt is going to incorporate everything. So it's going to be very transparent on a quarterly basis when you get the results to see whether we're generating business that improves that or detracts from that. And so there will be some trade-offs and there will be a little bit of a bounce from quarter-to-quarter where it won't be perfectly in line. But we expect to be able to show that, and it'll be pretty clear. Some of the routes and some of the markets that we operate in are obviously less valuable than some of the other routes that we operate in. California, we've increased our market share and taken market share. And that's been a very conscious effort to do that over this past year, and therefore, we've increased the attributes and the returns in the markets and in Vivint Solar as a whole. So as we continue to operate, the ability for us to maintain or improve that will come as a combination of entering other markets. And if those markets have less value, then we have to do that at a lower cost structure. To perfectly equate that to an IRR or another metric, I think we could help do that and maybe close that gap, but that should give you a very good indication in terms of the kind of returns that we will expect. And then from quarter-to-quarter, you'll be able to see what we actually achieve.

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Praful Mehta, Citigroup Inc, Research Division - Director [23]

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Got you. That's helpful, but -- and just to be specific, is the range you can provide of what kind of levered IRRs you're achieving on projects you, let's say, entered into in Q4?

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [24]

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Any thoughts there Rob?

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Rob Kain, Vivint Solar, Inc. - VP of IR [25]

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Yes, not when it comes to the levered IRR, Praful. But yes, we're not -- we haven't been giving out any kind of levered IRR kind of guidance.

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Praful Mehta, Citigroup Inc, Research Division - Director [26]

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I got you. Again, I'm just looking for a broad ranges, but I understand you want to hold off on that, so I'll follow-up maybe to see other ways to help understand returns. I'll just get to my last question then, which is more on the strategic side. And the question is, given the business model and given you've been looking at different ways to highlight value, and there always seems to be a disconnect between how you look at value and what the market seems to be attributing in terms of value to your story and the underlying assets, is there a thought around a strategic review at all? And is there broader interest from the private market for assets like yours or any kind of interest in that kind of strategic review direction? So any color on that would be helpful as well.

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [27]

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I'm not exactly sure...

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Rob Kain, Vivint Solar, Inc. - VP of IR [28]

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Yes. So Praful, if you are asking would we consider doing something with our existing asset base such as selling it to a yield co or would somebody look at it from that kind of perspective, we don't address -- or we're not going to comment, obviously, on any kind of potential M&A opportunities down the road. But I think partially what you might be getting at, and we saw this last year when we did our forward flow agreement, is there is investor appetite out there to have access to the cash flows from our existing asset base. So you see it partially in the project debt markets, where the ABS market has been very good for us, and for the most part, for our peers as well. I think you see it with our -- the forward flow agreement that there's an appetite from investors to participate at that layer if you will. So yes, I think there is interest there. We'll see how that keeps going, and we'll see how the year progresses there but...

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [29]

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And I think our success in raising capital and being able to generate the funding that we have is indicative of the appetite that folks have out there. It's been very strong. We certainly raised capital at rates that were market leading, I would say, and in amounts that were substantial. We feel very good about that. I think it was also an indication of our quality and the review from partners. So I don't know if that's specifically answering the question that you have, but in terms of the way that we think about these assets and the rigor that we put around creating them, we think that there's a very strong appetite for them and continue to be so. We also think the new metrics that we produced here are going to be very valuable in terms of taking a look at the underlying economics and take out some of the science and need to do some kind of brain surgery there to come up with answers around what those economics are. We think it's a much simpler way to look at the business.

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [30]

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Yes, let me add to that. I think the NPV per watt metric is and how it compares, I think, demonstrates a significant amount of value that we bring. And you can compare that and come to your own conclusion. But I just want to echo. I think I'll just compare the tone and tenor in the calls that we have today from a year ago versus 2 or 3 years ago. And I think that people are telling us that we're definitely doing the right things and driving real value, and they appreciate the fact that we really focus on the fundamentals of running the company around value creation.

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Praful Mehta, Citigroup Inc, Research Division - Director [31]

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Got you. No, like I said, I think the new disclosure definitely is helpful. Maybe one final point on the PG&E bankruptcy and everything going on in California. Given it is such an important piece from a geography perspective, how do you look at that scenario or the PG&E situation playing out? Is that generally seen as a positive given any structural challenges to investor-owned utilities could help you get more market share? Or kind of how are you kind of thinking about that evolving, and does that help or harm your story?

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [32]

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First of off -- first off, it's unfortunate what happened to California with the fires. We had employees impacted and customers impacted so that obviously was a sad thing to see. I think it definitely has raised the awareness with customers of the need to embrace alternative ways to create energy and consume energy. And if you just look at our growth and where we've grown, California, we're growing much, much faster than the industry by far and we think our peer set. I think in our Tier 1 markets, and California is one of our Tier 1 markets, I think we actually spent like 36% in Q4. So it was a really, really strong increase. And so we believe that our message resonates well, in addition to just kind of use needs and just how real this conversation is in California. From our growth and what happened in California, we're seeing a very strong demand. So fortunately or unfortunately, we think that we'll see a lot more consumers adopt solar, which is a very fortunate thing. And the reason why can be unfortunate. But whatever helps us get a larger swath of customers embracing clean energy, we welcome. Praful, does that answer your question?

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Praful Mehta, Citigroup Inc, Research Division - Director [33]

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Yes. No, that was super helpful. Really appreciate it, guys.

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Operator [34]

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Next question comes from the line of Colin Rusch from Oppenheimer.

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Luis Javier Amadeo-Resto, Oppenheimer & Co. Inc., Research Division - Energy Strategist [35]

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This is actually Luis Amadeo for Colin. Just what are you seeing or expecting in terms of racking labor efficiency or other areas where you expect to drive efficiencies as you go through the year?

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [36]

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Well, I'll begin on some of the efficiencies and then Dana can probably talk specifically around supply chain. But with regards to our operations team, very pleased with the progress they made. We mentioned on some earlier calls that we're now seeing a large piece of our installs are now being done by 3-person crews. When we first started 2.5 years ago, I think the vast majority of them were 5- or 6-person crews. So the team continues to find ways to do things more efficiently across our full array of states that we service and doing it with higher quality and higher safety. So proud of the progress they've made, and they continue to refine every step of the process and how they pull it off. So how much farther they're going to go on that, I think it's going to be kind of adoption to the full -- to the extent possible and appropriate given the size of the systems, can we get into a higher percentage that are on 3-man or 3-person teams. With regards the racking, Dana, you want to talk about that at all?

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [37]

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I think a little of that is speculative in terms of what will be the impact, especially as we explore safe harbor and purchasing equipment. And how that might be impacted, I would say that across all of the major components that we buy and demand and how much of that demand is for 2019 and how much of that is for beyond. But right now, I think our expectation is that all of the equipment will continue to be more affordable and that we'll see some price declines there. But we think our major routes to other cost improvements would be outside of the equipment area.

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Luis Javier Amadeo-Resto, Oppenheimer & Co. Inc., Research Division - Energy Strategist [38]

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That's very helpful. And if I can ask one more, just in terms of cost of capital, what are you seeing? And is there opportunities to refinance the portfolio?

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [39]

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Go ahead.

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Rob Kain, Vivint Solar, Inc. - VP of IR [40]

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Yes. I mean at the moment, we're pretty locked-in on our cost of capital. As Dana mentioned, our capital stack is set given the large transactions we did last year. For the most part, most of our assets are set up for the next couple of years. Definitely, when we hit flip points in the funds, things along those lines will definitely be a chance to improve on that a little bit more as cash flows come in to us improve. And as far as expectations for the rest of the year, we likely won't do any other kind of take-out facilities this year. Won't preclude it, specifically, but just given the magnitude of the ones we did last year, it leaves a smaller asset pool for doing some kind of take-out of our current aggregation facility. And if we do, do one it'd be in the latter half of the year, fall or going into the winter time space.

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Operator [41]

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(Operator Instructions) Our next question comes from the line of Philip Shen from Roth Capital Partners.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [42]

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First one is on the outlook for the market. I think, David, in your prepared remarks, you talked about the market growing 10% and you guys are looking for 15%. In some of the checks that we've done, the expectations are getting kind of high for year-over-year growth in 2019. We're hearing 20%, maybe even 30% growth for some certain installers. And it seems like it's not just specific to them but rather, it could be just a strong U.S. resi market in general in 2019. Can you talk to that at all? Are you seeing perhaps the market having the potential to be better in 2019 than in 2018 for a variety of reasons? But is there any truth -- or do you see any credence in some of this?

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [43]

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Phil, what did you -- what's your estimation of the increase year-over-year for 2018?

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [44]

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In 2018, for resi, I want to say it was 15-ish percent, maybe 13%. So I wanted to see if for '19, there could be potential for 20% for the overall market. Or do you think that's too far afield?

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [45]

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Well, I'll make a couple -- just a couple of statements there. I think that whatever the market grows at, I think we can grow at or above those market growth rates. Our expectation is -- we've thought about this and we've talked about this, is that the whole market is not growing at a rate that, first of all, in 2018 was above 15% nor in 2019 expected to be above 10%. So -- and that's in conversations from things that we've seen published and also in discussions with vendors and other energy suppliers in the market. So it will be interesting to see, and we certainly believe that those markets that we concentrate in that we will grow and that we'll grow above-market growth rates. But I haven't seen that data where it would say that the rest of the market grew that fast in 2018, and it'd be interesting to see what data you're using for 2019. But we are optimistic about the market, and we do feel like the overall view and people having more exposure to solar is a good thing. And we'll continue to accelerate that pattern. Or people will accept it and embrace solar, not only in the markets that are open today but in markets that we are not yet in.

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [46]

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I'll add one thing to that, Philip. I'll echo what Dana said. Also, it's really, really important that our thesis is we grow and also do well in unit economics. So we all experienced 2015 and 2016, where the market grew a bunch of companies into bankruptcy, and they were not growing with anything around a positive unit economic. So you're talking about Vivint Solar, that's a primary core belief that we have, which is we're going to grow -- we believe we will grow above market, and we're going to do it the right way with quality and with consumer protection. And we're going to do it around taking care of our shareholders, unit margins that are great. We're going to create NPV per watt that's industry-leading or on par with our peers. So I always approach this conversation with kind of a balanced perspective, not just a growth. So I can refer you to a bunch of companies that grow for growth's sake. You probably won't be covering them in 2 years. But we're really going to work on making sure we do grow at above-market growth rate and provide all the other metrics that you also value in a sustainable well-run company.

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [47]

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And I think, too, Philip, as we think about this, we also try to balance out what it means to a customer. So David talked about the quality, and certainly, we're also concerned about the savings, not only because we think it's the right thing for the customer but also because we retain ownership of those assets and we need that customer to be engaged with and excited about what -- the value that they're receiving because they buy power from us and we're retaining ownership. And so that also plays into our thought process around how we supply the market, and we think we can do things in the right way. We don't think everyone does, but we think it's very important for us to do that, and as David mentioned, protect the company, the customers and shareholders.

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [48]

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So I hope that helps, we kind of rammed our answer there, Philip.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [49]

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Yes, David, that's great. Thank you both for the color and the candor. As it relates to -- and Dana, I think you talked about safe harboring. We're actually hearing that mono-PERC modules have very tight supply at this point, and I'm hearing that the larger players are actually getting access to modules. But -- and you guys would clearly be in that camp. But to what degree do you think that tightness might impact you in terms of slightly higher pricing from the module side, $0.02 per watt or something? And would you guys consider, for example, also shifting to multi? Or do you think you'll be able to have the supply to stick with the higher-efficiency products?

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [50]

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That's a good question, Philip. We're -- like I say, we're running kind of through the traps on that right now and talking to vendors, suppliers, and trying to understand exactly what that dynamic looks like. We do think that the market is reasonably tight, and we also believe that we can get quite a few panels if we want them. And then the question is does that create a price increase. So what we don't want to do is to go out there in the marketplace to buy and try to salvage that 4% and then lose more than that as a result of buying in the first year as a result of overpaying for panels. And this is going to be a longer-term program which is going to last multiple years. And we want to do the right thing, and so -- but I can't tell you today exactly what that means. I can just tell you that we're doing the analysis and we're talking to all the vendors that we buy from. And we feel like we are in a position because of our volumes and because of the kind of company that we are that people will -- that they are and will be willing to work with us.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [51]

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Great. And to what degree are you considering safe harboring other types of equipment specifically inverters? Do you think the safe harbor would be primarily addressed through modules, assuming pricing doesn't get away from you too much and the value proposition is still there? Or do you think there's a meaningful probability that you can actually shift to the safe harboring of inverters?

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [52]

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Well, we do think that there can be a shift to some inverters combined with other products or racking or different things as well. We obviously have to meet the threshold of being able to have over 5% of the market value -- or 5% of the market value of the project initiated. So that requires you to do certain things. The panels certainly get you there. The inverters, combined with something else, can get you there. There may be some other considerations there in terms of technology and also lessons that we'd be thinking through with inverters. But the combination of those is certainly what we're looking at and we think provides alternatives that doesn't just have to be panels.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [53]

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Okay. That's great. And then as it relates to NPV per watt, you introduced your new metric there. Can you give us a sense of the outlook of how -- you got Q1. You're, call it, 2/3 of the way through the quarter here, how is that looking on a go-forward basis? Do you see expansion? Or do you see a more kind of steady-state dollar-ish level?

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Dana C. Russell, Vivint Solar, Inc. - CFO & Executive VP [54]

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Good question, Philip. And I think we didn't provide guidance, but we can tell you directionally it's going to be a little bit -- it's going to be lower than it is in the fourth quarter. That's a result of volumes being a bit less than they are in the fourth quarter and our costs being a bit higher. So that's all going to translate to a bit of a lower net present value. So we expect that to be -- to happen seasonally because of the way our business runs. And right now, where the preponderance of the activity happens with the direct sales people that we have a lot more activity with that group outside of what we're talking about with retail and homebuilders and other dealer activity that were down in the first quarter, and then we accelerate quickly in the second, third quarter and beyond. So you'll see that go down and dip a bit in the first quarter, and then you'll see that come back up and improve beyond that. That's our expectation.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [55]

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Great. That's really good to know. And then this is the last question. You recently went through this process of a little bit of a transformation in the way you kind of take on new business. One of the new, I think, things that you guys are doing are adopting and -- partners effectively, where you are not just doing your own direct sales but you might buy a system from a partner. Can you talk about the number of partners you guys have in place now? And what percentage of your megawatts might -- maybe in Q4 or Q1 or perhaps in '19 might be partner driven as opposed to inside or direct sales?

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David H. Bywater, Vivint Solar, Inc. - CEO, President & Director [56]

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I'll take a crack at that, Philip. It's David. So we're approaching 100 dealers, which has been great. And they're -- for us, they have to have the same view on how they sell. They have to adhere to our customer protection policies and our install quality metrics. So we're really pleased with the 70 that we have now and approaching 100. They've been coming on in a good clip. So very pleased with that. We view that the balance of the year, that will continue to grow at a great rate. So I mean, honestly, it's just been building and building and building every quarter, and we're encouraged by that. The mix, we talked about the inside sales and our independent dealers represent about 25% -- 24%, 25% of our volume in Q4. I expect it will be in that range, maybe more. But we have a lot of different channels coming on. Retail could be quite large. Homebuilders could be quite large. Our direct to home that's captive is expected to grow. So we'll see with the differential growth rates for all this will be, but it'll be material. It will be a big chunk of our business when I think about our transformation over the last year plus. But I can't give you a number, but throughout the year we will -- we'll share that throughout the year.

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Operator [57]

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And this concludes today's conference call. You may now disconnect.