Sunlight Financial Holdings Inc. (NYSE:SUNL) Q1 2023 Earnings Call Transcript

Sunlight Financial Holdings Inc. (NYSE:SUNL) Q1 2023 Earnings Call Transcript May 16, 2023

Operator: Greetings. Welcome to Sunlight Financial First Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Lucia Dempsey, Head of Investor Relations. Thank you. You may begin.

Lucia Dempsey: Good afternoon, and welcome to Sunlight Financial’s first quarter 2023 earnings call. After the close of the market today, we filed our first quarter 2023 Form 10-Q, announced first quarter 2023 financial results and posted an earnings presentation to our Investor Relations website at ir.sunlightfinancial.com. Before we begin, I’d like to remind everyone that this webcast may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements.

Forward-looking statements include, but are not limited to, Sunlight Financial’s 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 Sunlight Financial’s website and Sunlight Financial’s SEC filings for a discussion of the risks that can affect our business.

Additionally, during today’s call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in both our press release and the supplemental presentation. Joining me today are Matt Potere, Sunlight Financial’s Chief Executive Officer; and Rodney Yoder, Sunlight’s Chief Financial Officer. Matt will start with an operational performance review of the first quarter of 2023. Rodney will then share additional detail on our financial results before Matt closes with an update on our key priorities for our ongoing success.

We’ll then open up the call for questions. It is now my pleasure to turn the call over to Matt Potere.

Matt Potere: Thank you, Lucia, and thank you all for joining us. In the first quarter of 2023 Sunlight funded $627 million of solar and home improvement loans, reflecting a 6% increase relative to the first quarter of 2022, or a 12% increase when normalizing for the impact of the solar installer that filed bankruptcy in late 2022. Home improvement volume was particularly strong with $92 million funded in the first quarter of 2023. That’s a 20% increase relative to the same period last year. We also funded loans for nearly 16,000 borrowers in the first quarter, demonstrating the sustained demand for solar and home improvement financing overall. We also saw average loan balances continue to grow relative to the first quarter of 2022, with average solar loans up 6% to $47,000, and average home improvement balances up 13% to $19,000.

Additionally, we continue to maintain strong relationships with our network of contractors and add new partners to our Orange origination platform, including 41 new solar installers and 32 new home improvement contractors that became active in the first quarter of this year, increasing our total contractor relationships to 2,070, a 30% increase relative to the first quarter of 2022. As previously disclosed, we believe that the new financing arrangements with Cross River Bank as well as other actions we’ve taken positioned Sunlight to address many of the key issues based in 2022 by enhancing our indirect channel execution, bolstering our liquidity, addressing the maturity of our SVB revolving credit facility, ensuring profitable pricing, rightsizing our expense base and reducing our Contractor Advance Program.

I also wanted to take this opportunity to provide an update on our credit performance, which demonstrates that we continue to be an industry leader in credit quality. While we don’t hold loans on our own balance sheet, we track the performance of loans originated with our Orange platform that we can ensure high quality credit performance for our capital providers and indirect channel partners. For example, solar loans that Sunlight originated in 2022 had an average credit loss rate of only 77 basis points after 24 months, relative to 162 basis points for similar loans originated by our peers in 2022. This superior credit performance reinforces our dedication to high-quality assets and supports our value proposition for current and future capital providers, providing them the opportunity to earn an attractive risk-adjusted return, which in turn benefits Sunlight’s margins.

I’d like to now turn the call over to Rodney Yoder, Sunlight’s CFO, to discuss the quarter’s financial results.

Rodney Yoder: Thanks, Matt. Sunlight generated total revenue of $20.6 million in the first quarter of 2023 relative to $30.1 million in the prior year period. While total funded volume was up 6%, total platform fee loans or solar loans were down 59%, and the proportion of direct to indirect channel loans also decreased. These factors led to a $5.7 million decrease in direct channel platform fees and a $4.9 million decrease in indirect channel platform fees as we only sold a small portion of home improvement indirect channel loans in the first quarter of this year. In the first quarter of 2023, our direct channel platform fee margin was 7.1%, up 180 basis points from 5.3% in the first quarter of 2022, reflecting the impact of pricing actions we’ve implemented in the last year.

Given the April indirect channel loan sale as well as upcoming Backbook Loans sales, we expect negative indirect channel platform fee margins in the near-term. However, thanks to pricing actions we’ve been implementing since mid 2022, we expect recently approved direct and indirect channel loans to be profitable and improve our platform fee margins later this year. Adjusted EBITDA for the first quarter was a loss of $12.4 million relative to a $7.8 million profit in the first quarter of 2022, and adjusted net income for the first quarter was a loss of $17.2 million or a loss of $0.11 per diluted share, relative to $4.9 million profit or $0.03 per diluted share in the first quarter of 2022. In addition to decreased platform fees, adjusted EBITDA and adjusted net income for the first quarter of 2023 were impacted by higher unsold loan balances at CRB, which increased cost of revenue from higher origination fees, partially offset by increased interest income.

While we did not sell any solar indirect channel loans in the first quarter of 2023, we completed the $296 million sale of solar indirect channel loans on April 28, and the associated deferred payments were added to the new term loan as specified in the Cross River Bank agreements. While we are originating new indirect channel loans at CRB’s balance sheet, we expect to maintain our unsold loan balances within compliance of the recently executed CRB finance agreements through additional loan sales in the coming months. I’ll now turn the call back to Matt to highlight the significant progress we made to address our key challenges from 2022.

Matt Potere: Thanks, Rodney. As just discussed, we’re continuing to reduce the balance of unsold loans at Cross River Bank, including the $296 million of solar indirect channel loans that we sold last month. Losses on the sale of the Backbook Loans are supported by the Cross River Bank financing agreements, and we’re encouraged by the strong demand we’re seeing for our high-quality assets in the indirect channel. With increased funding capacity, lower fees and an extended facility maturity, we are well positioned to originate profitable indirect channel loans. We’ve also been taking actions since the middle of last year to ensure profitable pricing, including the elimination of a number of unprofitable products and materially raising the interest rate of new loans that are being originated to ensure that they are profitable in both the direct and indirect channels.

As a result, we believe the loans we are approving today are profitable. We’ve also discussed the actions we’ve taken to right size our expense base to adjust for our full year volume expectations and we believe these will lead to approximately $5 million in annual cost savings. As previously disclosed, we indefinitely suspended our Contractor Advanced Program in March of 2023 to improve the company’s risk profile and liquidity position. This enabled us to reduce the total outstanding advances from $86 million as of March 31, 2022 to $18 million as of March 31, 2023. I look forward to providing additional updates on our progress over the coming months as we continue to strengthen our operations and focus on delivering long-term value for our stakeholders.

With that, I’d like to turn the call back to the operator for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Philip Shen with ROTH MKM. Please proceed.

Operator: Our next question is from Arren Cyganovich with Citi. Please proceed.

Operator: [Operator Instructions] Our next question is from Jeff Osborne with TD Cowen. Please proceed.

Operator: We have reached the end of our question-and-answer session. I would like to turn the conference back over to Matt for closing comments.

Matt Potere: Great. Thank you for all your questions, and thanks, everyone, for joining us today. We’re really pleased with the progress that we’ve made to address the key challenges from 2022. And we’re looking forward to generating long-term value for our partners in what we think is a very attractive industry. Thank you all, and have a good evening.

Operator: Thank you. This does conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.