Spruce Power Holding - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 revenue was $30.7M, up 44% YoY, while net loss narrowed sharply to $(0.9)M (EPS $(0.05)); cash increased to $98.8M ($5.44/share) and operating EBITDA rose to $26.2M (+48% YoY).
• Sequentially, revenue declined 7.6% vs. Q2 ($33.2M) on normal seasonality; management did not provide formal guidance.
• Core operating expenses fell to $14.8M as O&M slipped to $1.8M (−53% YoY) and SG&A to $12.9M (−4% YoY); adjusted cash flow from operations more than doubled YoY to $20.2M.
• Management highlighted a cost-reduction initiative expected to deliver ~$20M annual SG&A savings and is proactively engaging lenders ahead of the SP1 debt maturity due in Q2 2026; all debt is non-recourse and materially hedged.

What Went Well and What Went Wrong

What Went Well

• Cost discipline drove material operating improvements: core opex to $14.8M (from $17.4M), O&M to $1.8M (−53% YoY), SG&A to $12.9M (−4% YoY).
• Operating EBITDA increased to $26.2M (+48% YoY), supported by NJR portfolio contributions and stronger SREC revenue; adjusted operating cash flow rose to $20.2M (+104% YoY).
• CEO: “operate efficiently with a laser focus on costs and cash management while sustainably growing the business.”
• CFO detailed hedged, non-recourse project debt ($705.6M; blended rate 6.1%), with swaps extending into early 2030s (net MTM $12.2M).
• Strategic momentum: multi-year NJ SREC sale expected to generate $10M through 2029; Spruce PRO wins in NC and Puerto Rico.

What Went Wrong

• Sequential revenue decline to $30.7M from $33.2M (normal seasonal sun exposure); management withheld formal guidance.
• Interest expense remained high at $12.8M, constraining GAAP profitability despite operating gains.
• Gross portfolio value stepped down ($901M Q1 → $887M Q2 → $872M Q3), reflecting updated PV6 cash flow assumptions.
• SREC revenue was ~$6.5M, “slightly lower” than Q2, indicating variability in that stream.
• Continued GAAP net loss (though much improved), with EPS $(0.05) in Q3.

Transcript

Operator (participant)

Thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spruce Power third quarter 2025 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. I would now like to turn the call over to Julia Gasbarre, Investor Relations. Julia, please go ahead.

Julia Gasbarre (Head of Investor Relations)

Thank you, Operator. Good afternoon, everyone, and welcome to Spruce Power's third quarter 2025 earnings conference call. Joining me today are Chris Hayes, Spruce's Chief Executive Officer, and Tom Cimino, the company's Interim Chief Financial Officer. Before we begin, I would like to remind you that we will comment on our financial performance using both GAAP and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to the comparable GAAP measures, is included in our earnings release for the third quarter 2025, which has been posted on the investor relations page of our corporate website. Our discussion will also include forward-looking statements. These statements are not statements of historical fact. They reflect our current expectations and are subject to risks and uncertainties that could cause actual results to differ materially than those expressed.

There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement except as required by applicable law. Please refer to our earnings release and our other SEC filings for further discussion on Spruce Power's risk factors and other important information regarding our forward-looking statements. All comments made during today's call are subject to that Safe Harbor statement. With that, I will turn it over to Chris.

Chris Hayes (CEO)

Thanks, Julia, and hello, everyone. Before we dive into details of the quarter and our outlook, I want to express to you the excitement we feel at Spruce. Our actions over the past few months, while difficult, position us for outstanding performance in the quarters ahead. Even as many peers in our sector struggle or face bankruptcy, our balance sheet, cash position, and resilient business model give us an ironclad foundation for success. Just looking at our third quarter results, you can sense the change in direction and the exciting outlook for our business. We believe Spruce is ready to blossom in the year ahead, thanks to the efforts this year of everyone on our team. Okay, let's start with highlights of the KPIs by which we measure ourselves.

This quarter, we achieved positive free cash flow, increasing our total cash to $98.8 million, up from $90.4 million at the start of the quarter. Revenue grew 44% compared to the year-earlier period. Operating EBITDA jumped an even better 48% year-over-year. The growth primarily reflects the positive impact of the November 2024 acquisition of approximately 9,800 rooftop assets from New Jersey Resources, as well as sizable growth in solar renewable energy credits, or SREC revenue. Furthermore, our core operating expenses, which include both SG&A and operations and maintenance, or O&M, were $14.8 million in the aggregate, down 15% from the year-earlier period. I want to emphasize that nothing is more important to us than generating positive free cash flow. Now, let me give you some perspective on the residential solar market and our position in it.

Our market faced challenges this year, and certain business models proved that they were not sustainable. Notably, recent policy changes in Washington, D.C., eliminated some residential solar energy tax credits. These changes are expected to negatively impact cash loan deals and origination of new assets. We believe that many players will not be able to adapt to this changing environment. In contrast, Spruce's resilient business model is fundamentally different. We are not dependent on aggressive new customer acquisition strategies, externally financed working capital, or continuous growth in new installations. In contrast to installers, our business produces steady cash flows from our operating assets, so we are not hostage to the origination treadmill. Moreover, our business does not depend on IRA tax credits. Spruce's model is designed to maximize the value of existing solar assets through operational efficiencies, maintenance, and superior asset management.

Today, we own and manage a portfolio of approximately 85,000 home solar assets and customer contracts. We also provide servicing to roughly 60,000 residential solar systems owned by others. As a third-party owner, we buy systems after installation and after any tax credit has been monetized. The installations we acquire generate stable, long-term contracted cash flows. Simply put, our differentiated model does not bear the same risks as the installer model. Now, let me offer context on our market penetration capacity for growth. According to a September 2025 analysis from the Solar Energy Industries Association, or SEIA, residential solar installations declined 9% year-over-year. However, there are over 5 million solar installations in the United States, 97% of which are on residential rooftops. If residential solar installation growth slows due to recent policy changes, Spruce still has significant room to grow.

With only 145,000 systems and contracts, our portfolio size is just a fraction of the addressable market. We can grow whether new installations are growing or not. To be clear, we do not believe the solar energy industry has peaked. According to the same report, solar accounted for over half of all new electricity generating capacity additions in the first half of 2025. The need for power, especially distributed generation, is significant and increasing in the U.S. Individuals and companies are experiencing higher costs as rates rise, driven by load growth from data centers, the electrification of everything, and reshoring industrials. This underscores the need for an all-of-the-above energy strategy. Spiking power demands, rising utility rates, and the phase-out of the 48E tax credit in 2027 should drive a shift towards the third-party owner or TPO channel.

With most regulatory uncertainty behind us, Spruce is taking advantage of market changes to actively pursue three key opportunities to grow our business. These are: one, the acquisition of installed systems; two, programmatic off-take partnerships; and three, the expansion of our Spruce PRO servicing business with both primary and backup servicing contracts. The first revenue driver is opportunistic M&A. When we acquire portfolios of installed systems and then sell in additional services, we command a higher return on opportunistic acquisitions because of our M&A expertise, cash discipline, relationship with underwriters, and low servicing costs. These advantages, coupled with a limited pool of potential buyers, enable us to only pursue agreements that meet our deal terms. Our NJR acquisition last year is a recent example of this type of transaction.

We expect to secure more attractive deals as installers seek to recycle their capital and/or recognize that they do not have the expertise or resources to efficiently manage all their systems. Indeed, the bid-ask spread has narrowed considerably this year. In addition, some interesting assets could become distressed as the industry transitions following the elimination of certain IRA tax credits. This could lead to a renewed urgency to complete new TPO deals by the end of 2027. We are actively evaluating new portfolios as we speak. Importantly, we are not just passive acquirers. We actively maximize value from the installations we acquire. For example, the NJR acquisition included many New Jersey SRECs. In August, we entered into a multi-year agreement to sell New Jersey SRECs to an energy sector conglomerate. The transaction is expected to generate a total of $10 million in revenue through 2029.

This partnership is part of a broader initiative to leverage our platform and experience to capture the benefits of our SRECs. These are a low-cost, low-risk opportunity to generate capital-light, high-margin cash flow for Spruce. The SREC transaction is another example of our ability to maximize value from our assets while hedging against future price movements. The forward contract provides an important ongoing hedged revenue stream and reinforces the dependability of Spruce's cash flow generation. We anticipate similar opportunities may be available in certain northeastern states as well as California, which we are actively pursuing. The second revenue driver is programmatic off-take. We are working to secure our first programmatic agreement and are enthusiastic that this strategy can drive de-risk revenue. With programmatic off-take, we seek to acquire or service newly installed systems on an ongoing basis as our partners complete them.

These partners may include home builders as well as legacy solar originators that are pivoting into TPO ownership leases and PPAs. Our model is one where programmatic partners bear the risk of getting systems through construction to operational status, and only then will we buy or begin servicing these nearly new installations at an agreed-upon price. Partnership opportunities did slow this year as many waited for clarity on the budget bill and IRA tax credits. Some originators revamped their business models in recent years to eliminate dependency on IRA tax credits and are poised to grow without any government support. We are in active conversations with these strong industry players. We believe that our programmatic off-take initiative should ultimately generate double-digit IRRs as we acquire a steady number of new installations each month. The third revenue driver is Spruce PRO, our third-party servicing platform.

For this channel, we leverage the company's decade-plus experience in managing our wholly owned residential solar assets to offer a suite of services that can be tailored for third-party owners of distributed generation assets. Our service offering covers financial asset management, billing and collections, asset operations, account services, homeowner support, IT support and implementation, and SREC management. Customers leverage our experience to maximize productivity, uptime, and efficiency. We have a growing pipeline of potential Spruce PRO partners that include traditional residential solar players, large owners of solar installations, developers, private equity, and numerous mid-size and local companies that own either residential or commercial and industrial solar sites. Our servicing model and deep expertise enables us to offer our customers significant flexibility when it comes to meeting the needs of their business.

While each of these third-party agreements will be customized, we are confident the company can source other partnerships like ADT. Servicing is a durable competitive advantage for Spruce, and we are benefiting by leveraging previous investments. We are delivering capital-light growth through this initiative and are proud to have announced several new wins this quarter. These include a full-scope deal servicing residential solar and storage in North Carolina and a backup servicing role for a Puerto Rico-based solar financing platform. Spruce will pursue both primary and backup servicer roles to meet the needs of this market. Importantly for us and our shareholders, Spruce PRO is unlevered, and there will be no debt financing associated with these agreements.

Even as we pursue these new growth initiatives, keep in mind that the revenue and cash flows generated by the installations we already own and service remain highly predictable regardless of conditions in the residential solar sector or changes to the IRA. We are confident in our ability to identify, structure, and execute new agreements that add shareholder value. Next, I want to dissect the other half of our strategy to sustain positive cash flow. Top-line growth is complemented by aggressive cost containment, and we are seeing results from recent cost reduction initiatives. In September, we announced a program to meaningfully improve operational efficiency, drive long-term profitability, and optimize our financial position. The program will reduce SG&A expense and lead to approximately $20 million in annual savings. Actions included workforce adjustments, the closure of the Denver office, and consolidation of certain roles.

These changes will redirect resources to accelerate sales of Spruce PRO, investment in IT systems and automation, and improve scalability across the entire business. Furthermore, we drove a sequential decrease in operations and maintenance expenses for the third consecutive quarter, reversing the earlier-than-expected O&M spike that began in 2024. We revamped our system to more efficiently route service calls from customers, we right-sized inventory on our trucks, and we appropriately managed customer contracts. This resulted in lower spending on third-party contractors. Meanwhile, our in-house service team is fully operational in New Jersey, where we have a heavy concentration of systems. This team can handle most of the service calls in-house, further driving down third-party contractor spend. The platform and methodical operational strategy we implemented in late February has produced thoughtful system issues management and is gaining ground.

We believe these improvements are sustainable and will continue to levelize O&M expenses into 2027. We believe the reduction in SG&A and O&M expenses will increase positive free cash flow through the end of 2025 and into 2026. These changes are moving the company toward a more sustainable business model that will support our long-term strategy for future growth. Before concluding, I want to highlight that we do not need to refinance any of the non-recourse debt associated with our portfolios in 2025. With that said, the lines of communication are open with creditors, and we continue to receive feedback that we can roll over our first debt maturity associated with our SP1 portfolio due in April 2026 on like-for-like terms if we choose to proceed.

In addition, we have identified additional potential credit options that could be more favorable, although those other options and our ability to roll financing on a like-for-like basis will be subject to changing financing market conditions. Finally, taking a step back, we are motivated by the progress we are making as we execute our strategy and realize our vision. Our revenue opportunities and operational improvements can deliver a combination of performance, flexibility, and value that is compelling to customers, partners, creditors, investors, and other key stakeholders. Customers and partners recognize that Spruce is a mature industry leader and a low-cost service provider with an established and high-functioning portfolio management and service offering. We are well-positioned as more players seek solar TPO deals, both PPA and lease, and as individuals and companies take energy matters into their own hands in the face of escalating rates.

Now, I'll pass the call to Tom Cimino, who will provide a detailed review of our financial results and outlook. This is Tom's second quarter serving as CFO at Spruce. Tom hit the ground running since joining us and is doing a great job in maximizing operational efficiencies and executing growth strategies. Tom, go ahead.

Tom Cimino (Interim CFO)

Thanks, Chris. Good afternoon, everyone. I will start with the details on the company's third-quarter financial results and the tangible progress we are making to strengthen our financial position and enhance our operating efficiency. Third-quarter revenue was $30.7 million, down from $33.2 million in the second quarter but up from $21.4 million in the prior-year period. The 44% increase from the prior-year period is primarily attributable to the NJR acquisition and the resulting lease and SREC revenues. Third-quarter core operating expense, which we define as SG&A and O&M, was $14.8 million in total.

This is down from $17.2 million in the previous quarter and $17.5 million in the prior-year period. We are pleased with this trend but not content with the 15% decline in our core operating expense from the prior-year period. Breaking this out, our O&M expense was $1.8 million in the third quarter, down from $2.1 million in the second quarter and $3.9 million in the prior-year period. This represents an annual decline of 51%. SG&A expense was $12.9 million in the third quarter, down from $13.5 million in the prior-year period. As evidenced here, we have already made strides to decrease our core operating expenses. However, this does not yet reflect the cost savings initiative Chris discussed earlier. We expect to see our core operating expenses continue to decline through the end of 2025 and into 2026.

Contributing to the above, Spruce generated a net loss attributable to stockholders of $860,000 compared to a net loss of $3 million in the previous quarter and a loss of $53.5 million in the prior-year period. The significant loss in the prior-year period is in part attributable to a goodwill impairment charge recognized in that quarter. Moving to operating EBITDA. As a reminder, we consider operating EBITDA a key metric in evaluating the company's financial performance, which is defined as adjusted EBITDA plus select items that represent material cash inflows from our ongoing operations. Operating EBITDA was $26.2 million, up from $24.6 million in the second quarter and 48% higher compared to the $17.7 million in the prior-year period.

This increase was due to the NJR acquisition, resulting in both higher lease and SREC revenues, as well as our continued lower core operating expenses as we efficiently manage our costs. Turning now to cash flows, we are also pleased with the continued improvement in our cash flow from operations. In the third quarter, we generated $11.2 million in cash from operating activities. Net cash generated from operations in the quarter improved $17.4 million from the prior-year period. When adjusting for the recurring proceeds of our SEMTH master lease agreement and proceeds from our sale of solar energy systems, we generated $20.2 million in adjusted cash flow from operations during the third quarter of 2025 and $26.5 million for the nine-month period.

Moving further down the cash flow statement, for the third quarter of 2025, we generated $8.6 million from investing activities, including the above-mentioned proceeds from the master lease and solar system sales. Regarding our financing activities, we used $11.4 million in the quarter for debt repayment, and for the nine-month period of 2025, we have used $25 million further driving down our net debt balance. Finally, let me close with a brief discussion on our capital and liquidity position. At the end of the second quarter, total cash, inclusive of unrestricted and restricted cash, was $98.8 million, $53.6 million of which was unrestricted, versus $53.5 million at the end of the second quarter. Our total debt principal was $705.6 million at the end of the third quarter, with a blended interest rate of 6.1%, including the impact of our hedge arrangements.

Our debt principal was down from $730.6 million at the end of 2024. All debt consists of project finance loans that are non-recourse to the company itself. Our non-recourse debt is incurred at the project level. At the quarter end, all of our floating-rate debt instruments were materially hedged, with interest rate swaps extending into the early 2030s. These hedge arrangements had a net mark-to-market value of $12.2 million at the end of the quarter. With that, thank you very much, and now let me turn the call back over to the operator.

Operator (participant)

At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Will Hamilton with Kestro Merchant Partners. Please go ahead.

Will Hamilton (Partner)

Hey, good afternoon, guys, and congrats on the great quarter. I was wondering if you could just give us a little bit more breakdown of the revenue. What was the solar renewal credit revenue in the quarter?

Chris Hayes (CEO)

Yeah, thanks for the question. Will, Tom, do you want to break that out, please?

Tom Cimino (Interim CFO)

Yeah, sure. We'll break it out in our queue. But the SREC revenue, I think that you're referring to, 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 other, including some of the ADT and other revenues that we have.

Will Hamilton (Partner)

Okay. Since some of us kind of are newer to this name, 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?

Tom Cimino (Interim CFO)

Yeah, for sure. 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 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.

Will Hamilton (Partner)

Right. Okay. Got it. 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, that program offtake opportunities that you mentioned too?

Chris Hayes (CEO)

Yeah, for sure. 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. That does materially change our financial position. 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. As you'd expect, the IRR, which we have said consistently is in the teens. Lastly, we want to figure out what technologies are used in the system, age of the system, what's the tenure. Based on that, we will then make the decision to go, no, go. I would say lastly on that front, look, we've been in this business for a long time. What that means is, from an origination perspective, we are always beating the bushes. 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 do not swing at every pitch, but we do look at a lot of stuff. We are doing a bunch of underwriting now. I would hope that we have an announcement, but I certainly cannot promise that.

Will Hamilton (Partner)

Okay. All right. Thank you so much for your time.

Operator (participant)

That concludes our question-and-answer session. I will now turn the call back over to Chris Hayes for closing remarks.

Chris Hayes (CEO)

Sure. Thank you, Operator. Our focus at the end of 2025 is on containing costs and scaling our platform, driving down improved financial performance and shareholder value. Really appreciate your interest in Spruce Power and for participating in our call today. We look forward to updating you again next quarter.

Operator (participant)

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.