Source: SolarCity
SolarCity's (SCTY.DL) growth story has been amazing so far. For investors in the stock over the past year, it's been more of a mixed bag, with shares trading roughly the same price today as they were last November. And depending on when you bought -- the stock peaked at $88.35 in April -- you might be down as much as 35%.
With third quarter earnings set for release after the market closes on Nov. 5, what should investors expect? While we can be pretty sure the company will report a loss this quarter as it invests heavily in growth -- analysts are projecting anywhere from a loss of $1.30 to a loss of $0.90 per share -- there are a few key things that matter more than earnings at this stage. Here are the four things that I'm paying the most attention to this quarter.
1. Cash payments under contract
SolarCity's business is largely being driven by solar lease and PPA contracts, which allow customers to acquire a solar system with little or no money down, in exchange for agreeing to pay for the system over a 20-year period. The customer saves money versus their utility bill, while SolarCity collects money for two decades, and gains the ability to depreciate the solar system which it retains ownership of. As the rate of systems being deployed accelerates, this number is compounding in growth:
Source: SolarCity Q2 earnings release
Last quarter alone, the company produced $800 million in future payments -- that's as much as the company produced in its entire history through Q3 of 2012. If SolarCity stopped installing systems today, the current contract base would generate $165 million per year in revenue over the next 20 years.
The catch? Interest in ownership of the system is rising as more finance options become available, and SolarCity has said that cash sales produce lower margins than PPA and lease agreements. With this in mind, the company announced that it would begin offering loans, calling the program MyPower. While SolarCity won't retain the same value as it does via PPA and leases where it owns the systems, offering an in-house financing solution will likely mean better margins, and the potential interest income for those transactions.
In short, the company's business is likely to remain largely tied to its ability to grow this metric, whether loans, PPAs, or leases.
2. Growth in megawatts deployed and booked
In the first half of 2014, SolarCity installed 189 Megawatts of capacity -- that's 20% more than it deployed in all of 2012. Furthermore, the company is on pace to nearly double the 280 MW deployed last year, and projecting nearly another double in 2015:
Source: SolarCity Q2 earnings release
It's also good to look at booked MW, which measures new customers that have not yet installed. While there will be some cancellations that fall out, this metric -- essentially the company's backlog of orders -- can help us see if the growth is carrying forward from one quarter to the next. If there is a drop in the booked number, or if it falls below the projected growth rate, it could indicate that demand is slowing.
However, the booked MW metric is relatively short term, as the majority of systems are installed within a few weeks or a month of contract signing. It can also be weather affected, especially as the company expands into the Northeast and winter weather can impact installations.
3. Finding cost rationalizations
SolarCity -- and much of the industry -- has seen a lot of vertical integration over the past year. SolarCity's acquisition of Silevo this summer was a bold move to integrate panel making into its business, and probably a necessary step to both secure supply as it grows, while also remaining competitive against panel makers like SunPower and First Solar, both of which are involved in utility-scale and residential solar manufacturing, financing, and installation.
So far, the company is well ahead of its projected cost savings:
Source: SolarCity Q2 earnings release
In the Q2 release, the company said that most of the cost reduction so far is related to economies of scale. In the first quarter, costs actually increased sequentially, as system deployments fell due to seasonality. However, the Silevo integration is expected to drive installation costs -- which at $2.29/watt were 75% of Q2's cost per watt -- down 20%, to $1.90/watt by 2017.
4. Funding expansion; capital position
SolarCity has been almost as innovative at finding ways to fund its growth as it has with its business model. Over the past year, we have seen the company introduce the use of its solar assets to secure $54 million in long-term debt, similar to the way that utilities use their assets to secure debt.
In January, SolarCity acquired a company whose technology it would use to offer financial products to individuals who wanted to invest in the company's clean energy initiatives. On Oct. 15, the company announced the first so-called "solar bonds" for sale, with terms from one to eight years paying a fixed interest rate, and requiring as little as $1,000 to start.
These are in addition to more traditional financing measures, such as $500 million in unsecured notes, which can be converted to shares in 2019, and the $200 million revolving line of credit opened last December. In total, SolarCity had $751 million in long-term debt at the end of last quarter, and this number is likely to grow in coming years -- especially when construction on the Silevo plant begins in earnest. It also retains a strong cash position:
SCTY Total Long Term Debt (Quarterly) data by YCharts
Building something amazing
While these aren't the only things that matter, these are the four things that I'm paying the most attention to right now. SolarCity is growing at an enormous rate, and it looks like that growth is going to continue. However, the residential solar market is getting more competitive, so it's important that the company continue innovating in its offerings while also managing its costs. As the leader in residential solar, you can be sure SolarCIty's competition is watching closely, too.
