SolarCity Corp. (NASDAQ:SCTY.DL) isn't being judged like a normal public solar company today given its pending acquisition by Tesla Motors (NASDAQ:TSLA), but that doesn't mean its quarterly reports aren't important. If the deal falls through, SolarCity will have to survive on its own, and if the merger happens, Tesla Motors will take on SolarCity's strengths and weaknesses. So, yesterday's quarterly results are important either way.
What happened to solar growth?
In the second quarter, SolarCity installed 201 MW of solar systems, which is down slightly from 214 MW in Q1 and up slightly from 189 MW a year ago. Next quarter, it expects to install 170 MW and in Q4 installations will potentially more than double to 315 MW-415 MW if management is going to hit its newly lowered 900 MW-1,000 MW guidance for the year.
Growth is slow, which isn't a huge surprise given guidance figures, but costs are a big concern. You can see in the chart below that installation costs are higher than they were two years ago. This is mainly due to a rise in SG&A expenses, which have been a problem for residential solar companies across the industry.
We knew that 2016 growth wouldn't be very strong, but management is expecting the final quarter of the year to pick up much of the slack.
Cash and loan sales are going well
One of the big transitions I think SolarCity needs to make is toward cash and loan sales. So far, so good.
The company said that 20% of bookings in the second quarter were cash or loans and that's likely to increase in the next few quarters. This will bring more immediate cash into the business and make the company more competitive with companies offering financing beyond just leases.
As these systems are installed in the third and fourth quarter, investors should watch system sales margins to see how they'll help the bottom line. If margins are solid, this could be a great business with immediate bottom-line impact in 2016.
Show me the money
One concern with the Tesla Motors acquisition is that SolarCity's financing will slow in the meantime. Investors and customers don't want the uncertainty of not knowing what company they're buying solar projects from, and we saw that result in Vivint Solar's financing sources and sales dropping significantly when it was going to be acquired by SunEdison last year. The worry is that the same would happen to SolarCity as it waits to be acquired by Tesla Motors.
We saw some early evidence that financing is uncertain in Q2. Management said that cash consumption in the quarter was $216 million, largely because project financing was delayed because of the acquisition. And that left SolarCity with just $145.7 million in unrestricted cash at the end of the quarter.
Management said the delay is temporary and projected that cash will increase in Q3 and Q4, but keep in mind that's assuming it can finance at least 485 MW of solar in the second half of the year. Also, it couldn't fully finance 201 MW in Q2.
When combined with the high cost of installing solar today, the uncertainty surrounding financing should be a worry for SolarCity and Tesla Motors investors. The business needs constant financing to stay afloat and that financing isn't coming in right now.
Shares of SolarCity won't likely move much unless the Tesla Motors acquisition falls through, and right now it appears to be on track. But there are a lot of questions to answer from installation costs to growth to how much financing there is for solar projects right now.
It looks like SolarCity is working through those challenges but execution in the back half of the year will be key. And it's execution that has led to a lot of disappointment in the past year for SolarCity, so there should be some skepticism in the company if the Tesla Motors deal falls apart in the coming months.