Silevo solar installation. Source: SolarCity
SolarCity's (SCTY.DL) third quarter earnings are in, and the company continues to grow at an enormous rate. Revenues in the quarter were up "only" 20%, but a couple of other key metrics, megawatts (MW) deployed and MW booked, increased 77% and 154%, respectively. The number of customers the company has booked reached 168,000 in the quarter, double the count from one year ago.
In short, the foundation the company has built for growth continues to perform incredibly well. Let's take a look at some key pieces of the earnings release.
Continuing to build its future revenue streams
As I wrote about in the earnings preview, cash payments under contract -- now called "Contracted Customer Payments" in the Q3 release -- increased another $800 million this quarter and is now up to $4.1 billion:
Source: SolarCity Q3 earnings release.
Over a 20-year period -- the time that most of these contracts will pay out -- that's $205 million in annual revenues. For perspective, the company could stop selling solar systems today and would still bring in more annual revenue than the $164 million in sales from last year. That's what the company is building.
In the pre-earnings release, we also talked about the addition of a finance option, called MyPower, for customers who want to own their solar system but aren't willing or able to pay for it up front. The potential implications for SolarCity are notable, because of the superior profitability of lease and PPA contracts versus cash sales. However, over this past quarter, revenue from lease and solar incentives more than doubled from last year's $24.8 million, to $52.2 million this quarter, while system and component sales revenue fell almost 75%.
Management said in the release that the launch of MyPower -- it was introduced very recently -- had minimal impact. Whether or not MyPower will lead to sales with the same margins and potential profits as PPA and leases, the company is right in stating that this is an underserved segment of the solar market. It will be worth watching to see how this segment plays out over time.
Growth in megawatts deployed, booked continues to nearly double
After deploying 137 MW in the quarter -- again, a 77% increase from last year -- SolarCity was able to fine-tune its guidance for the full year, as well as 2015:
Source: SolarCity Q3 earnings release.
The high end of guidance for 2014 was reduced from 550 MW to 520 MW, which would work out to 86% growth over 2013. The high-end target for 2015 remains 1 gigawatt, while the low end was increased from 900 MW to 920 MW.
As to booked business, the company reported 230 MW booked in the quarter, nearly 85% of total deployed megawatts in one quarter as all of last year. That's some serious growth.
Scale benefits continue to drive down costs
Cost per watt, a common measure for solar businesses, continues to fall, and largely based on the benefits of SolarCity's growing scale:
Source: Q3 earnings release.
That's almost 5% lower on a per-watt basis from the second to the third quarter, with the reductions a combination of fixed costs becoming a smaller percentage of sales, and more efficient utilization of installation resources.
Silevo plant construction under way
This might be one of the most exciting parts of SolarCity's future. The company paid $200 million -- plus up to another $150 in potential incentives -- for Silevo earlier this year, and has already committed to investing $1 billion to construct a state-of-the-art solar panel manufacturing plant near Buffalo, N.Y. We got a sneak peek in the earnings release of the factory in this rendering:
Source: SolarCity Q3 earnings presentation.
Design and construction of the plant is under way, and it is targeted for completion and equipment installation in 2016. The company is expecting that this vertical integration will further reduce its costs per watt, reducing the installation portion of its costs from the $2.19 reported this quarter to $1.90 per watt.
Furthermore, getting into the panel business will secure the company's supply of panels, a potential challenge with the solar business growing at a much faster rate than manufacturing capacity.
Cash and debt
SolarCity increased its cash and investments position to $733 million this quarter, up almost $330 million from Q2, but it also significantly added to its debt to do so. At the end of last quarter, total long-term debt was $751 million, and that amount has ballooned to almost $1.3 billion at the end of September. The total debt is a combination of traditional fixed-rate financing, convertible notes, and the solar asset-backed notes. Interest expense increased to $16.3 million in the quarter, almost triple last year's $5.7 million.
The new debt shouldn't be a surprise, and frankly, it's likely to keep stacking up. However, the company has done a great job of leveraging its assets to fund growth, and as the business continues to grow, it's very likely that its cost of capital will be very low, and the returns it generates because of that will be quite strong.
Mass and momentum building
What we're seeing with SolarCity right now is just how powerful compounding can be, especially when you're doubling your business every year. It's probably fair to say that SolarCity is no longer making small numbers very big, but as CEO Lyndon Rive wrote in the earnings letter, it's "starting to double some really big numbers now."
Looking even further out, the company's goal is 1 million customers by 2018. What would that be worth? How about $1 billion in annual revenue under contract for the next 20 years -- or nearly five times the amount booked today? Here's some perspective: There are more than 110 million households in the United States. Just 1 million customers might be lowballing things.
