Spruce Power Holding Corporation Q3 FY2025 earnings call

• Third quarter achieved positive free cash flow, revenue grew 44% y-o-y, operating EBITDA jumped 48% y-o-y, driven by NJR acquisition and SREC revenue. - Company's business model is resilient, not dependent on aggressive new customer acquisition, etc. - Three growth opportunities: opportunistic M&A (e.g., NJR acquisition, leveraging SRECs), programmatic offtake (working on first agreement, seeking ongoing acquisition/service of new installations), and expansion of Spruce Pro servicing business. - Cost containment initiatives: SG&A and O&M expenses down, expecting continued decline; NJR acquisition included SRECs, entered multiyear agreement to sell SRECs generating $10M revenue through 2029; actively evaluating new portfolios, in active conversations for programmatic offtake, and Spruce Pro has growing pipeline of partners.

Third quarter revenue was $30.7 million, up 44% from the prior year period. Core operating expense (SG&A and O&M) was $14.8 million, down 15% from the prior year period. Operating EBITDA was $26.2 million, up 48% from the prior year period. Revenue breakdown: SREC revenue was about $6.5 million of the $30 million quarter, with $11.5 million PPA, $9.7 million lease revenue, and other revenues. Cash increased to $98.8 million from $90.4 million at the start of the quarter, and positive free cash flow was achieved.

• No specific fourth quarter revenue guidance given, mentions seasonality but no detailed outlook. - Highlights forward-looking impact of cost cuts, continuing to look at programmatic deals and larger M&A deals, but no particular guidance on exact return profile, and can't promise immediate announcements on deals.

• Residential solar market policy changes (e.g., elimination of some residential solar energy tax credits) negatively impact cash loan deals and new asset origination. - Installers may face difficulties, assets could become distressed, affecting TPO deals. - Financing market conditions could change, impacting debt rollover and credit options.

Q: Could you give a little bit more breakdown of the revenue, specifically the solar renewal credit revenue in the quarter?

A: Yes. The SREC revenue was about $6.5 million of the $30 million for the quarter. It's slightly lower than it was last quarter. And then $11.5 million of PPA, $9.7 million of lease revenue and the rest is the other, including some of the ADT and other revenues that we have.

Q: Since some of these kind of are newer to this game, could you speak to a little bit how we should think about fourth quarter in terms of revenue given maybe the seasonality and the electricity generation?

A: Yes, for sure. So what I would say about that, obviously, being in the Northern Hemisphere, we do have seasonality in the numbers. At this point, we are not giving guidance, so I can't really provide more clarity than that other than to say we do get less sun in this part of the world, and that does drive some of the top line revenues down.

Q: In terms of just capital allocation from here, I mean, given the improvement in cash flow, it sounds like you are looking more and more at deals. Can you give us just some color in terms of how to think about valuation of some of these deals that you might be looking at, whether it's portfolio acquisition versus, say, the programmatic offtake opportunities that you mentioned, too?

A: Yes, for sure. So I'd say this, Will, we feel pretty great about the forward-looking impact of the cost cuts that we made. It was obviously a hard decision, but we think it was the right decision. So that does materially change our financial position. And we have continued through this period to look at both programmatic deals and larger M&A deals, much like the New Jersey Resources we did, which was 9,800 systems. I'd say this, we don't give particular guidance on the exact return profile that we look for, but we care quite a bit about what state they're in, what the average FICO scores are of the homeowners. And then as you'd expect, the IRR, which we have said consistently is in the teens. And lastly, we want to figure out what technologies are used in the system, age of the system, what's the tenure. And based on that, we will then make the decision to go, no go [indiscernible]. And I would say, lastly, on that front, look, we've been in this business for a long time. And what that means is from an origination perspective, we are always beating the bushes, but we do get a lot of inbound calls, right? I mean players know Spruce has been doing this for a long time. We certainly don't buy everything. We don't swing at every pitch, but we do look at a lot of stuff. And so we're doing a bunch of underwriting now. And I would hope that we have an announcement, but I certainly can't promise that.