Vivint Solar's (VSLR) CEO David Bywater on Q4 2017 Results - Earnings Call Transcript

Vivint Solar (NYSE:VSLR) Q4 2017 Results Earnings Conference Call March 7, 2018 5:00 PM ET

Executives

Rob Kain - VP, IR

David Bywater - CEO

Dana Russell - CFO

Analysts

Vishal Shah - Deutsche Bank

Julien Dumoulin-Smith - Bank of America

Brian Lee - Goldman Sachs

Colin Rusch - Oppenheimer

Sophi Karp - Guggenheim Computers

Joseph Osha - JMP

Operator

Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vivint Solar Q4 Financial Results Call. [Operator Instructions] Thank you.

I'll now turn the call over to Mr. Rob Kain, Vice President of Investor Relations. Please go ahead, sir.

Rob Kain

Thank you, Operator. Good afternoon, everyone, and welcome to Vivint Solar's Fourth Quarter 2017 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 the 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 April 30, 2018. 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 in 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 disclaims 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.

David Bywater

Thank you, Rob and good afternoon everyone.

Let me begin by stating that as we exit 2017 and begin 2018 the overall business principles of Vivint Solar remain the same. We're focused on generating stronger unit economics, creating more efficient operations, delivering a better customer experience at every juncture, driving innovation and generating attractive investor returns.

We believe that by adhering to these guiding principles, we will have the most sustainable and well run residential solar company in the industry. We continue to adapt to the changing market conditions, evolving technology, regulatory considerations and of course competition. We firmly believe that we are making strong progress and will continue to make the necessary adjustments going forward to capitalize on the vast opportunities of the residential solar market.

We've adapted to the challenges and roadblocks the solar industry has seen during 2017.

Regulatory issues took a significant amount of time and energy from our team during the year. In particular, the 201 trade case presented a risk to the industry as well as Vivint Solar. The remedies requested by the plaintiffs would have set the industry back years and threatened thousands of jobs.

The industry took the threat seriously and reacted by coming together to provide regulators and the administration a clearer picture of what was at stake, as opposed to what the plaintiff's case portrayed. Although, the final determination from the president is not to our new customers liking, we were engaged in the process. We help to mitigate the potential risk and have been proactive in change in our business activities to maximize our long term goals.

There is no doubt that tariffs will restrict some ability to grow as fast as customer demand might dictate. And our planning to manage these issues has caused us to shift courses in some markets we serve. Those markets that were just reaching economic viability for us before the tariffs may now be more difficult to reach until we're able to bring overall cost down further.

The 2001 tariff is disappointing on many levels, but we are confident Vivint Solar has made the right decisions in front of these challenges to serve customers in the markets that benefit the most and to provide pleasing returns for investors and shareholders.

We believe that residential solar will continue to advance and expand, despite these external regulatory challenges. At the end of the day, customers want clean affordable solar energy and we look forward to continuing to lead this exciting revolution.

Throughout 2017, we focus on ensuring that we improve the economics of the business at all levels. This focus to grow in the right markets at the right unit economics has been a difficult, but necessary journey for Vivint Solar. Rather than growing megawatts over the past five quarters, we've remained essentially flat but have done so, while improving our mix of business that comes from higher economic states and by substantial increase in the percentage of our business that is lower cash sells.

We did all this while significantly improving the customer and sales force experience. In particular, we are happy with the rollout of our system sales across all our markets allowing us to satisfy the demand of our customer base that is ours to own their own systems.

System sales have improved our cash flow and has addressed a need in the market. This was not an easy process and required training, coordination, systems and operational processes to facilitate this activity.

System sales has been positive overall, but has impacted total volume to some degree as a result of the concentration of our own efforts to put this in place and sustain the sales process. We believe accepting lower volume in the near term in order to develop these capabilities and improve our capital structure is the right decision and will benefit us in the long term.

On the operation side we revamped how we staff our installation crews across the country. Among other things, we move from a five person installation crew to four person crews for the majority of our installations which improved our productivity by 18% on a kilowatt installed per hour basis.

We have look for ways to improve efficiency and quality and believe our progress benefits our customers and shareholders. We believe customers get the best quality, maintenance and performance in the industry when Vivint Solar install their system.

I am proud of these improvements, but realize that we must do more. I believe we are now ready to return to growth in 2018 while we simultaneously generate healthy unit economics and to lot of our customers. Two key initiatives that will support our return to growth is our role out of dynamic pricing and expanding the number of independent dealers that use our platform.

Regarding dynamic pricing, we have worked on a model which allows our sales teams to increase their compensation based on improved system attributes that increase profitability. Historically, Vivint Solar has been a low cost provider and we paid our sales team based on average sun hours and fixed PPA rates in each market we serve.

The simplified model was adequate for us in prior periods, but over the past year we believe we have lost PPA and lease systems to competitors were sun hours and rates were above average. This was an issue in all markets we serve, but most significant in California.

We do not want to look at installs and cost per watt as the sole measurement for success. Rather, we now look at the overall return of systems both at the unit level and a market level. By doing this we believe we can avoid losing superior systems in California and other markets by compensating our sales force based on the better attributes and profitability of such systems.

Even though we may spend more on customer acquisition costs, we expect to generate more profitable returns on the systems we install. In addition to allowing in more significant competition structure for superior systems, we expect to eliminate some systems we had previously have installed or expect to pay less in commissions for those systems if the system attributes don't meet standards that allow for respectable returns.

We feel this sophistication will advance the business model and improve our profitability. We've been working on this since early 2017, testing it in certain markets and with specific products. Starting in the first quarter of this year, we've been aggressively rolling out dynamic pricing across all markets and all products.

Early indications for dynamic pricing a very positive with meaningful increases in average sun hours and PPA rates which we believe more than offset the increase in customer acquisition costs. We are now retaining more of our sales people to recruit and train since we believe they are being paid more competitively at Vivint Solar and feel they also receive the best training, have the best sales tools, have the best install practices and can grow and thrive within a sales friendly culture and program.

In addition to dynamic pricing, growth in 2018 should also benefit from our efforts to accelerate our expanding independent dealer network. Many of the independent dealers some in the residential solar began their careers with or have former ties to Vivint Smart Home and Vivint Solar and left to start their own dealerships and sell to our competitors because of their higher pay scale.

Our new sophisticated pricing models allow us to make better economic choices, pay higher compensation were justified and still obtain a better overall return than we have previously realized. We are optimistic these efforts will result in a migration of select sales resources to Vivint Solar that will benefit our customers, shareholders and investors.

This will take some time to accomplish, but we are committed to making this work. We feel we can maintain a world-class direct selling organization and complement that structure with a dealer program that aims to be best in the industry.

We are in the early stages of the independent dealer program, but we are encouraged by the number of dealers we have already signed up since January. We are focused on key markets where we want additional volume and where Solar provides the savings to customers and a favorable return to Vivint Solar.

We believe these programs among others will keep us moving forward on a path of sustainable profitable growth allowing us to deliver affordable environmentally friendly energy to our customers.

We expect few one to be around 40 megawatts due to the number of transitional activities that I have discussed. As a result we had a much slower start to the quarter than we desired. Despite getting off to a slow start, the strong trends over the past six to seven weeks have fortified my belief that we will have a strong second quarter and return to growth on a full year basis in 2018. We now have the foundation for growth and strong unit economics which will benefit Vivint Solar over the coming years.

With that I'll turn the call over to Dana.

Dana Russell

Thank you, David.

We installed 45 megawatts in the fourth quarter that cost for us $2.95 and a total of 184 megawatts in 2017 with a full year cost per watt of $2.94. As David mentioned, we've been aligning our focus on processes that improve our profitability.

Total revenue grew 60% year-over-year increasing to $67 million in the fourth quarter versus $42 million a year ago. Revenue from systems were retained ownership was $31 million in the fourth quarter of 2017 representing 23% growth from the same period last year. Revenue from system product sales in the fourth quarter was $36 million versus $16 million in the fourth quarter of 2016.

Total revenue in 2017 was $268 million representing 98% growth rate from 2016. Of the $268 million revenue from systems were retained ownership came in at $151 million representing 43% growth from 2016 and revenue from system product sales was $117 million growing 293% from $30 million in revenue in 2016.

System sales were 12 megawatts representing approximately 26% of our total installation volume in the fourth quarter. The gross margin for system sales increased to 29% for the fourth quarter as more of the volume was coming from higher margins states such as California, New York and New Jersey.

For the year system sales were 41 megawatts or 22% of our total volume. The geographical mix of install has shifted to more profitable markets due to the programs we initiated during 2017. As David mentioned during the fourth quarter, we began rolling out our dynamic pricing models and we’ll continue to implement this model in all the markets we serve by the second quarter of 2018. We seen positive initial results, we’re aggressively meeting the competition with better compensation rates for superior systems with higher sun hours and PPA rates.

Cost per watt has been relatively stable over the past year. We've managed to contain costs even during the transition period where we're moving headcount to more advantageous markets and we have seen some lower volumes as a result of the decisions that we've made. Our gross margin in the fourth quarter was $4 million and improvement of $10 million over the prior year. We've increased our margins due to more productive state mix with a higher percentage of business in California. This was our third consecutive quarter with positive gross margin.

For the full year our gross margin was $38 million and increase of $77 million over 2016. We expect our gross margin to be positive on a full year basis in 2018. However, it can vary from quarter-to-quarter our revenue from operating leases and incentives is seasonal while the associated expenses are primarily amortized on a straight-line basis. I do want to note that our earnings per share for the fourth quarter and for the year were significantly affected by the tax cuts and Jobs Act enacted in December.

For GAAP standards we revalue the deferred tax liabilities on the balance sheet for the new corporate tax rate. The corresponding reduction in the liability resulted in non-cash one-time gain of $188 million or $1.63 per share for the quarter. With our focus on the most profitable markets and increasing the efficiency of our organization, we increased our net retained value by $44 million in the quarter. On a per-share basis this represents $6.67 up from $6.30 last quarter.

As a reminder, we believe the net retained value is a good proxy for the values that we have created over time and the improvement on per share basis is a result of the improvement in the value the systems were created. We ended the year with $108 million in cash and cash equivalents of $12 million over the prior year. The increase in our cash balance was due to increased operating cash flows driven largely by the increase in system sales and project financing related tax equity and increases in - nonrecourse level debt.

Our capital position continues to be quite strong with $240 million in available capacity in our aggregation facility. We ended the year with approximately 17 megawatts of contracted tax equity capacity. Subsequent to year end we signed a new tax equity partnership with a $75 million commitment that will fund approximately 52 megawatts.

In addition we received 401 million in non-binding tax equity term sheets for five additional tax equity partnerships. We estimate that these tax equity partnerships will allow us to install approximately 265 megawatts.

We're in a transitional period where we’re shifting sales resources to acquire systems with a combination of better sun hours and PPA rates. We’re paying more for the systems that create higher margins and we pay less for systems that have lower sun hours in PPA rates. We've seen an increase in activity in key markets like California.

As we mentioned California has year-over-year growth in the fourth quarter of 29%. We're also seen some lower activity in other markets that are less economical where we pay less. The transition has resulted in some disruption in the short-term that has impacted volume in the fourth quarter and we’ll continue to impact volume in Q1.

We believe that the second quarter will be stronger and return to growth but we’re not going to give more specific guidance for the full year until we have a better feel for how are new programs gain traction beyond Q1. We will aggressively implement our new dynamic pricing program and we believe that we will see traction internally and with dealers in the second quarter and the second half of the year.

We expect our cost per watt in the first quarter will be $3.15 to $3.20. Although we're willing to pay more for customer acquisition costs in Q1 and beyond the main increase in cost per watt is a result of lower volume. Much of our cost structure including some of the operations sales and G&A are fixed costs.

We believe the increase in cost per watt from the fourth quarter to the low end of the range in the first quarter will be approximately $0.15 related to volume and approximately $0.05 for variable cost which includes equipment sales.

We expect to have some ongoing increase in equipment prices as a result of tariffs and the customer acquisition costs will be slightly higher given our programs with dynamic pricing. We believe our margins and system profitability will continue to improve. And we also believe that cost per watt will be lower as we see volumes increase beginning in second quarter.

With that I'll turn the call back to David for some final comments.

David Bywater

Thanks Dana.

In wrapping up our prepared remarks, I want to emphasize a few points. The first point is we are committed to making decisions for long term that benefit our customers, employees and shareholders.

Second, we have a renewed comp as it runs through our entire organization. We have a committed leadership team and engaged workforce and we are providing customers with what we believe to be the best experience in the residential source space and we're committed to making that even better.

Third is that I'm bullish and very excited for 2018. Now that we have dynamic pricing in place, we're able to grow and retain our internal sales force better than we've ever done. Our sales force knows that the overall value proposition for them to grow their careers with Vivint Solar has never been better.

Dynamic pricing also lets us accelerate growth of our expanding dealer network. Given that we have now neutralized our pricing disadvantage versus our key competitors. Independent dealer seeking a partner that can help them grow with competitive pricing, world-class sales tools, best-in-class solution capabilities and a sales culture that can truly help their teams get the most out of their sales force are excited to partner with Vivint Solar. We're looking forward to 2018 and beyond.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from line of Vishal Shah from Deutsche Bank. Your line is open.

Vishal Shah

I just wanted to better understand your comments around the cost structure. You mentioned some increase in the cost of your modules in the near term. You talk about what you expect the cost structure to evolve as the year progresses and also how you see the tax equity market in terms of both the reliability and cost of tax equity? Thank you.

David Bywater

Vishal, I think the cost structure as far as cost per watt the difference between the fourth quarter and the first quarter, we're seeing some increases on a cost per watt basis as a result of this lower volume running through the model based on some of the transactional activities we talked about. So, most of that cost increase is on a per watt basis is volume related from a macro standpoint our cost structures haven't changed in fact they've come down slightly.

I think the second part of that question was related to tax equity and changes there. And as we've continued to say over the last number of quarters we feel very good about the tax equity pipeline. We haven't seen a decrease or an impact as a result of tax reform. We mentioned in the prepared remarks that we feel very good about the pipeline, that's very strong.

We've got a number of deals that are in the queue and so we feel pretty good about that. The impact of that - there will be some impact in terms of the amount that we receive from tax equity partners as a result of them getting less value associated with the depreciation or their tax attributes that we provide through this partnership.

But we think that's small and minor and we don't think that the terms are going to change significantly and we certainly haven't seen that in the fund that we just completed. Hopefully that's what your question Vishal.

Operator

Your next question comes from line of Julien Dumoulin-Smith from Bank of America. Your line is open.

Julien Dumoulin-Smith

So I just wanted to follow up on a couple of things. I know you started to allude to it but, first on this new dynamic pricing growth model, I just want to understand how you think about volumes through the course this year et cetera. I mean are we to kind of think about their being sort a normalization and kind of a reengagement of the sales force such that, that's the way to think about this first quarter trend or how are you thinking about this, as being sort of a new run rate for the business going forward? And how do you scale?

David Bywater

I think for us just the shift towards making sure that we are capturing the most vital systems was key for us. And just making sure that we're paying the right amount for those systems and paying a lower amount for less viable systems was kind of a shift.

And we just knew that we were losing volume part of the competition by not having that sophistication in the model. As I mentioned in my comments, you know we really started - we did a pilot all throughout 2017 on various - in various markets on various products. And then in this year in January - late in January, we really rolled it out in California. And then since then, we've gone full market in not all of our markets, but almost all of our markets.

The reaction to that has been very favorable. Our ability to recruit, our ability to retain and just the excitement that is brought through the organization has been extremely positive. And I think that's why both in our bullish as we look at the trends by each market and roll it out and just that activity has been - underlying that has been very, very positive.

I think for me, most importantly I just think that we've neutralized kind of the disadvantage that we had relative the dealers in the past where they're paying much more. And in this situation, I'll pay more for what's warranted and I'll pay less where it's warranted. And I think that that gives us a lot of encouragement as we move forward that not only can we attract and retain our internal sales force but we can attract and retain these independent dealers as well, that want to return back to the Vivint platform.

They love all the tools that we bring to them. The tools that help them have a very productive sales force and they're with us. But now we've neutralized that big gap that we have or that gap that we had. And you know they're coming back to us now saying, hey you finally resolved that issue. I'm excited to get everything you bring to the equation. Julien does that helps?

Dana Russell

Julien just one comment, in David's prepared remarks he did mention that we believe that we're going to have growth in excess of what we saw in 2017 or growth in 2018 beyond the numbers we had in 2017. That said, we gave you numbers for the fourth quarter. In only way that we can get that growth is to grow substantially Q2 and beyond.

So even though we haven't given specific numbers out in terms of what those look like for the year, we certainly are sending the message and they're not shy about the thought and the believe that will grow substantially in Q2 through Q4 of 2018 even though we're in a transitional period in Q1, we don't think that that is going to be representative of the numbers that we see for the year. And as David also mentioned we're quite encouraged by the initial results that we're seeing as we've transition to this new model.

Julien Dumoulin-Smith

That's exactly what I was looking to understand and reconcile. Let me come back to the second point you made in the prepared remarks about the $0.15 related to volume, I think is what you said on the higher cost. How do you see that evolving over time because clearly part of that is a disadvantage of the first quarter.

So as you think about our run rate at or no 2019 hypothetically, how much of that $0.15 kind of goes away as you get back to this as you begin to get back into growth, if you will?

Dana Russell

Yes, I think that all goes away. We're confident that those growth rates grows from a fixed cost standpoint, our fixed costs are not going up. And by definition by what we said, we also believe our volumes are going to go up.

So we're going to see a lower cost structure. We believe overall now we've also said the variable cost did go up slightly. So there is a $0.05 increase associated with equipment and sales expense in the first quarter.

Now that's going to - as we see that transpire over the course of the year, we'll see what happens on the equipment. The prices on panels and things we think will normalize a bit. We have not run, where we're working on equipment or with flowing through the model from a cost standpoint is inventory that we've had, that we've purchased.

And so new cost as we buy equipment in the future, we're going to see the reflection of that and our cost per watt in Q1/Q2 and beyond. So the variable costs are going to go up slightly, but the fixed cost structure, I think we’re going to more than offset that increase that were seen in the first quarter and that’s going to be lower and lower overall for the year.

Julien Dumoulin

If I may just following up on the tax equity commentary and just the upfront rates, just exactly just exactly how much are the term shifting here in terms of an upfront rate from like $1 per watt perspective? And then is there anything else with regards to the terms of the new tax equity term sheet that you all have looked at that we should be taking account from a cost perspective - sort of cost of capital perspective?

Dana Russell

No we’ve not seen anything substantially different or materially different in the terms. I think the terms are quite similar or the same. Now we’ve only closed one fund so it’s not like we have – and we haven’t completed everything to close the other funds that we’ve talked about that are in the pipeline. But we don't expect to see a materially different terms.

And the amount that we received from tax equity investors, we think will be quite similar to what we have been receiving will be slightly less. I don't want to quantify that because I don't know for sure what that looks like. But we don't think that's going to be a significant. We think that that’s going to be a fairly small in terms of what we receive…

Julien Dumoulin

In fact, sorry to clarify one more just altogether from when you think about the capital structure for new project this year is it going to be meaningfully different from last year outside of the higher costs to begin with?

Dana Russell

No.

Operator

Your next question comes from the line of Brian Lee from Goldman Sachs. Your line is open.

Brian Lee

Maybe first off just - I want to make I am understanding, but the sort of transitional shift you're talking about David here, it sounds eerily similar to your peers Sunrun when you talk dynamic pricing and a dealer channel. I guess first off, is that's fair am I hitting that right?

And then secondly and maybe more importantly, how do you think you'll distinguish from them they seem to have a bunch of momentum at their backs in terms of market share gains. And they’ve been executing on that model for some time now and you're moving into that mode. So just want to better understand sort of what got you to that point in the strategic shift here and then what do you think is going to distinguish you?

David Bywater

Thanks Brian for the question. I think with regards to similarities, I think you're right. So you know this market - I don’t necessarily agree with the pricing you pay in the market, but you have to respect it. And I think we’re at disadvantage so the fact that we held flat last year with that disadvantage and all the changes that were made, I’m personally proud of the organization what they did.

I mean with the loan changes and everything else we did, I think it was pretty good complement to the organization what they pulled off. We've known that the number one thing that we're always fighting against was the fact that we weren’t doing dynamic pricing.

And now that we are, I'm actually really encouraged because when you think about what we did last year, I didn't have the advantage of dynamic pricing to attract and retain and motivate. I didn't have the benefit of dynamic pricing to make sure getting the very best systems that flow through our portfolio. And I did not get much advantage from dealers.

And most of the growth in the industry has come from dealers. In fact with Solar City declining and us declining I think Run benefited that and kudos to them for doing that. So the way I look at Brian, it’s all upside for me. It’s all upside for our company because we’re now doing things that put us on a level playing field on those two dimensions.

I'm very happy with my other advantages. When I think about what our team do around culture, productivity of our sales reps, the quality of our installs, the fact that we control all of our installs and we do a really good job there. I will take all my other advantages and I’ll complement it with the two things that head us as disadvantage.

And I’m looking forward to 2018 with great anticipation. So that’s good thing. So I’ll take all of our strength before, neutralize what was the disadvantage for us and I’ll turn that into a level playing field.

Dana Russell

Kind of just jump in here too, so again in David's prepared comments when we talked about this Brian, most of these dealers or many of these dealers they have originated with Vivint or Vivint Solar. So they came out of us. We’ve kind of been the institution where we’ve educated and train these people.

Highly productive folks that have left the organization and been consolidated by one of our competitors because they paid more. So what we want to do is make sure that we take advantage of the investment that we’re making.

It’s not that outside of compensation there was no reason for most of these folks to go and do something different. They like our culture, they like tools, they like the company, I think the leadership is awesome. And so we have every advantage here to be able to attract these guys and have them work with us.

And we don't want to make that investment to continue to train people to put them out in the marketplace so they can be consolidated and rolled up by our competitor. We want to take advantage of that volume and roll it up under ourselves, whether they’re our own direct sales force and we have normalized that pay so, it's better for guys to stay inside and work with us.

But for those who prefer to go outside and have their own dealership, we want to make sure that we are also providing the compensation that market provides for systems where it make sense and so that we've done. We feel like we actually have a competitive advantage.

David Bywater

And one more thing and I’ll take your next question Brian if you have one. But also that bifurcation we’re paying averages before the fact is we can afford to pay more for better systems because we’re paying less for less advantage systems.

Dana Russell

That’s right.

David Bywater

And the competition is not going to pay more for those less advantage system. So once again I think it's a lever that I now have today that gives me great optimism for the coming battle out there. So looking forward to it.

Brian Lee

Maybe you on that topic since you talking about competitive advantages and levers one unique one that we've always thought you had was the Smart Home collaboration.

And you had talked about some specific targets like 8% to 10% I think exiting last year. I don't know if you're in a position to update us as to where you got to in terms of attach rates in 2017? Where you think they’ll be in 2018?

And I guess lot of the commentary today seems to be not touching upon Smart Home and I'd figure that that be an incremental source I suppose you consider it that just another channel. But I consider it an incremental source of growth this year, given it was just starting to get off the ground in 2017. So any commentary that would be helpful?

David Bywater

We’ve mentioned that, we wanted to have the Vivint Smart Home dealer deal over 10% of our bookings and they exceeded that they’re 12%, 13% in Q4.

As we’ve moved towards a dynamic pricing, I'm also seeing them have much stronger bookings once again, once we roll it out for them. We’re seeing them actually grow quite nicely and from February forward. So I’m encouraged by them. So I think what we’re doing internally will benefit them, will benefit the other dealers that are signing up with us. I think that’s first and foremost. So they’re growing and doing a good job there.

I think with regards to the Smart Home piece, we’ve sold several thousands of those. It has been a big of a focus for me in 2017 as we really focused on these other variables that meant a lot. Dynamic pricing, we had to get it right, rolled out. The dealer platform and changing our organization to allow to go from just a captive to an open platform, took an enormous amount of effort on our behalf.

And same with them as they really grew and shifted towards setting up their own dealer, it took an enormous amount of effort. So our guys can sell both, on both side of the platform. Many of them are very well skilled and trained to do both and they do it. And so, I think that will continue to improve overtime. Now we’ve got these other big list out of the way. So hope that helps Brian.

Brian Lee

No, that’s helpful. Maybe last few follow-ups here just on the growth outlook when you speak to expecting improvement into Q2, I’m assuming you meaning sequentially, but you anticipate that on a year-on-year basis, you'll be back to growth in the second quarter here or is that going to be something that you sort of flip the switch on in the back half of the year?

And then secondly, if I look at the book-to-bill not by a wide margin, but your book-to-bill ratio was actually the highest here that you saw throughout 2017. So can you reconcile a little bit as to why the bookings came in fairly robust here in Q4 and the outlook for Q1 is - would imply something a little bit different? So any color there would be helpful.

David Bywater

I was actually encourage the 55 that we did bookings in Q4 was encouraging. We had really bad January. So off the break as we walk through, actually moving a fair bit of folks from some market as we put out dynamic pricing, we’ve had some markets and you’ll see kind of loan percentage in two or three of our markets that we’re kind of marginal for us. All those guys have decided to actually move to California, Nevada and Massachusetts which we welcome. And so that had an impact.

If I - was able to quarterize if you would, the volume over the past six or seven weeks and do it for the full quarter, it would have been a really strong quarter. We decided we’ll report January. So I got to grow over that. And I look at the trends we have right now, that's why I'm saying, I think you’re going to see good growth in Q2. And then we plan on building upon that throughout the balance of the year.

Dana Russell

And Brian the 55 megawatts that we booked in the fourth quarter some of that was installed in the fourth quarter. So when we think about that as an indicator for Q1 as David mentioned we were down a bit in the beginning of the quarter for the reasons that we talked about.

But your question about sequential growth and year-over-year growth for the second quarter, we certainly feel very comfortable about saying they will be sequential growth and we also feel like that the rest of the year we’re going to have to grow on a year-over-year basis as well in order to be up year-over-year from 2018 compared to 2017.

So and we’ll give better guidance around that, more specific guidance on that in Q2 as we see what happens through the rest of Q1 in those early weeks in Q2.

Operator

Your next question comes from the line of Colin Rusch from Oppenheimer. Your line is open.

Colin Rusch

Guys could you talk a little bit about the differences that you saw in your close rate as you moved into the dynamic pricing model versus the historical model?

David Bywater

So far they are holding pretty well and decided to get more and more data that’s probably one of the reasons why we’re a little reluctant on giving too much guidance for the full year. We want to get more data to have it actually fully cement.

But so far, it's looking very encouraging and we fell it’s been pretty consistent with our historical stuff. So as that matures we’ll share more on that in our Q1 earnings call which is part way call.

Colin Rusch

Yes, obviously. And then could you just give us a sense of how quickly you guys are prepared to move into refinancing any of the post flip assets do you have in the portfolio. Obviously that’s a potentially large source of funding for you on an ongoing basis. But if just give us an update on your plans there and your preparation?

David Bywater

Well, so we’re little ways off on any volume of assets post flip that’s kind of 2019/2020 timeframe for a good portion of those. But continue to work through the capital structure, I think there's a lot of opportunities for us to do some good things. And, but as far as more specifics around that, I think we’re a little ways away from post flip so structures.

Operator

Your next question comes from the line of Sophi Karp from Guggenheim Computers. Please go ahead.

Sophi Karp

Wanted to confirm with us dynamic pricing initiative, so the dealers that you are trying to get back in [indiscernible] are those relationship - are they exclusive?

David Bywater

Sophi, you did cut out a bit. Could you just restate that question one more time?

Sophi Karp

So the dealers that you’re trying to bring back into the fold with the dynamic pricing and presentation, I am wondering if the relationships with those dealers are exclusive?

David Bywater

Ours with Vivint Smart Home is with other dealers not necessarily. They obviously get rewarded for putting more and more volume through our platform. And we have to earn their business like anyone else does. And we think that, they utilize out tools and they see ease of that on their selling process.

We think that will earn good portion of it. We hope to earn all of it, but it’s not necessarily exclusive.

Sophi Karp

Right so…

David Bywater

And I think that’s the general relationship out there today in the industry so.

Sophi Karp

So that’s what I’m trying to get to. So if that’s the case and presumably you and the biggest competitors – two of your biggest competitors all have dynamic pricing models and they basically levels the playing field. Is the competition for business now strictly on price?

David Bywater

Not necessarily. But it’s a lever, I didn’t have before. So I think it’s a up for me and encouraging thing for us.

Dana Russell

And Sophi we feel like we have several things that are competitive advantages for us. One, we do have awesome leadership in the sales organization and the tools that we have and the culture we have many of these folks originated from us and like working with us. So that's a positive.

The things that we continue to touch on bring up is the platform and the operational capabilities that we have that no one else in the industry really has. So we have the opportunity from a quality standpoint, from an operational standpoint to do things that no one else has the ability to do.

And I think that also gives us some flexibility and some opportunity for dealers to leverage that that may not be present with other folks. So I think there is a number of things that give us a reason to be very hopeful. And a lot of this isn't necessarily just going out and attracting dealers, but really we want the guys that we train that we value that are great talents to stay with us, to work with us.

We have some awesome sales talent, best in the industry. We want them to be compensated at/or above for any value that they bring to the company that there's not another avenue for them to go out there and receive more value where it makes sense.

Now someone does something irrational and pays in an irrational way we can do that and we won't do that. But we certainly don't want to forego systems that, the economics are superior on because of a less sophisticated pricing model we pass them up and don't pay what it takes to retain that value inside the company. And that is what we try to accomplish.

Sophi Karp

And then lastly does this also mean that you will sort of deemphasized cash sales at this point or will that continue to be a meaningful or growing chunk of your business?

Dana Russell

I think as far as cash sales go, we think there's a portion in the market that wants a cash sale and we're willing to certainly provide that. Now as we migrate to more valuable systems, we have – those systems we can receive the funding and much of that funding comes to us upfront. The more valuable systems are the better the funding is and there maybe a little less emphasis on getting some systems to be cash sales.

So, but I think overall, we’re not going away from what we've done there. And we think that that’s going to be an integral part of our operations and our capital structure as we go forward and the cash sales will still be a meaningful thing for us in the future.

Operator

Your next question comes from the line of Joseph Osha from JMP. Your line is open.

Joseph Osha

I am not going to ask you a question about dynamic pricing. I know that your cash balance ticked up a bit this quarter and I'm wondering ex any non recourse financing or big moves in working capital accounts whether you'd be comfortable saying that, the business can start to generate some positive cash flow during the coming year? And then I have a follow up.

David Bywater

Well positive cash flow, so you know if we define positive cash flow as our operating cash flow plus our project financing which is tax equity and nonrecourse debt covering our operating needs, we've been cash flow positive for the last couple of years.

So I think that's - and we believe that the structure is improving and we certainly have been helped and aided by the operating cash flows in the system sales. If we were to find it any other way, I think there's still lots of things that we need to do and lots of work in the capital structure.

But we certainly feel better every period as we go forward here in terms of the maturity of the assets, the volumes that we have, and the revenues that we receive from those systems. And so as the model continues to mature, it makes it easier for us to meet our liquidity needs.

Joseph Osha

So that, - obviously if you add and tax equity that's going to be the case. But it sounds like you're saying if we look at it a little more tightly then we still have a little more room or work to do?

David Bywater

Well if you disregard tax equity or project level financing than yes. I mean then it comes down to having the revenue stream in and of itself to support the business. And I think that would be yes, then there's more definitely more work to do.

Joseph Osha

And then just to follow up, it sounds like you've done a lot of work on your new pricing strategy which is great, is there any possibility that one of your - really only your one effective main competitor at this point could respond in kind at some point over the coming year?

Dana Russell

I guess, I think we have a very smart competitor and the rational and irrational. The fact is you know you're looking for paying for - there an IRR that you look for. And we believe that you know we have smart competitors and as long as you're paying rationally for higher value systems and lower for less value systems, then I think we'll be okay.

Joseph Osha

And then earlier you're back to this issue post flip assets, I heard 2019 and I heard 2020, can you maybe give us a beat of a bead on when we might actually start to see some of these portfolios of assets hit flip in meaningful size, is it 2019 or is it 2020?

Dana Russell

That's 2019. So continue to look there.

David Bywater

We had it a little bit flip right, very, very early one. The majority of them are [$9 million] 2019 and forward.

Joseph Osha

You had a little flip. And have you said anything or would you be willing to see anything about the kind of alternatives you might be looking at in 2019, when these assets start to hit flip in terms of how you might re-fire, do whatever you're going to do?

David Bywater

Well you know nothing more specific than everything we've seen go out there is certainly on the table and we think that these markets are continuing to mature and these assets have a lot of value. So, we'll do all the same things that are being done and hopefully things continue to get better and more options and so. But I won’t get any more specific than that.

Joseph Osha

And then this is the last one for me really. So as regards the tariff and the impact on your cost of sales, inventory has kind of been piled to the rafters here. Any sense as to how long it takes to work through that? And when this begins to show up more meaningfully in your costs?

David Bywater

Well I think on this one Joe, there is a run up on the cost of panels before the tariff was actually finalized as you know. We saw an inflation in those cost per watt in Q3 and Q4. I think the full effects of the tariff we won’t see until later in Q1 and Q2 and beyond. And then we do believe and anticipate that it will start to abate. So we model for a 30% tariff as we've budgeted for back in the fall.

And so that's why we've walked our cost structure around. So I think you'll see us a blip up in Q2 and Q3. It's anyone's guess but we do believe that the competitive markets will start to fall down on the back half of the year. We look forward to that we'll see what happens. But we think a good portion of that was already baked into the prices. And then there was a small incremental piece that we will incur in the next two quarters.

Operator

And I'm showing no further questions. Ladies and gentlemen that does conclude today's conference. Thank you for your participation and you may now disconnect.