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SolarCity Corp. Delivers Improved Results With Merger Vote Upcoming

By Jason Hall – Updated Nov 11, 2016 at 9:37AM

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On what could be its last quarterly earnings as a standalone company, SolarCity delivered better cash flows, installed more solar capacity, and cut costs more than expected.

Image source: Tesla Motors. 

On Nov. 9, SolarCity Corp. (SCTY.DL) reported financial and operating results for its third quarter. As potentially the last earnings release for the company before it is acquired by Tesla Motors (TSLA 0.56%) pending shareholder approval by both companies later this month, SolarCity's financial and operating performance is critically important going forward. 

Let's take a closer look at how SolarCity did in the third quarter. 

Financial results

MetricQ3 2016Q2 2016 Change (YOY)
Revenue  $200.5  $113.9 76.1%
Net income (loss)  $(225.3)  $(234.3) N/A
Earnings (loss) per share attributable to stockholders  $0.48  $(0.20) N/A

YOY = year over year. Revenue and net loss in millions. Data source: SolarCity Corp.

As you can see above, SolarCity continues generating large generally accepted accounting principles (GAAP) net losses. But this is in no small part because of the way its cash flows are structured, particularly recognition of revenues from long-term solar lease and power purchase agreements -- or PPAs -- where revenue will flow in over a 20-year or longer period. Its operating cash flows, while still negative, were significantly improved from the year-ago quarter, falling from $140.6 million cash used in operations to $36.8 million. 

These improvements are important to note, since part of Tesla co-founder and CEO Elon Musk, who is a co-founder and chairman of SolarCity and the largest shareholder of both companies, has said that he expects SolarCity to be generating positive cash flows within a few quarters. And while Tesla Motors itself generated $176 million in free cash flow and a $22 million profit in the third quarter, both Tesla and SolarCity will be investing billions in capital in coming years. So steady growth in cash flows is pretty central to SolarCity's financial value to Tesla going forward. 

Operating costs improved in multiple areas

SolarCity management has been committed to reducing expenses, particularly as a percent of revenue, and they delivered on that in a few key areas in the quarter. Cost per watt, which reflects how much each watt of capacity sold must cover the company's sales, installation, and general/administrative expense, fell to $2.89/watt in the quarter. This was up from $2.76/watt in the year-ago quarter, but continued a trend of falling, after seeing this metric shoot up sharply at the start of the year:

Image source: SolarCity presentation. 

Both sales and installation costs fell sequentially, while G&A cost per watt increased due to a decline in MW installed, but actually fell in real dollar terms versus the second quarter. Sales and marketing expense was down sharply in dollar terms, coming in more than $26 million below last year's number. In the earnings presentation, the company said that it expects costs per watt to fall again in the fourth quarter due to restructuring actions taken in mid-Q3. 

In his letter to shareholders, CEO Lyndon Rive pointed out that total operating expenses fell 6% year over year, when adjusted for $34 million in primarily non-cash restructuring expense, and $19 million in nonrecurring pre-production expense related to the module manufacturing operations. In short, operating expense fell, on an "apples to apples" comparison. 

Due to the improvements in operating costs, the operating cash generated by 22 MW of solar loan and system sales, and access to steady funding to support lease and PPA sales, SolarCity ended the quarter with $113 million more in cash than it had at the start, leaving it with $259 million on hand at quarter-end. 

Looking ahead

With both Tesla and SolarCity shareholders set to vote on the acquisition on Nov. 17, SolarCity management didn't hold a call after the earnings release, but Lyndon Rive did write in his letter to shareholders that the company expected to install a total of 900 MW for the full year. Based on the 214, 201, and 187 MW installed in the first three quarters of the year, that puts SolarCity on track to install 298 MW in the fourth quarter. That would be the most ever in a single quarter for the company. 

Rive also wrote that management "expect continued improvement in our installation run rates, cost per watt, and most importantly our cash generation in the fourth quarter of 2016 and 2017," with momentum from solar loans and eventually the company's to-be-launched solar roof. 

Jason Hall owns shares of SolarCity and Tesla Motors. Jason Hall has the following options: long January 2017 $30 calls on SolarCity. The Motley Fool owns shares of and recommends SolarCity and Tesla Motors. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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