The first quarter is never a banner period for the solar industry, but for Sunrun (NASDAQ:RUN) and Vivint Solar (NYSE:VSLR), it was a chance to show how well they're doing during a slow season. Unfortunately, the Q1 results they released last week didn't show the kind of improvements investors should be looking for long term -- they showed two companies continuing to struggle with costs.
Not only are sales and marketing costs not coming down, they seem to be consistently on the rise. In order to grow revenue, residential solar installers are spending more and more money, and it's not clear they'll make up for the added costs with increased long-term value.
For Q1 2019, Sunrun said that its cost per watt jumped to $3.46 from an average of $3.26 per watt in 2018. Compared to the year-ago quarter, costs were down $0.05 per watt, but that decline was a result of third-party installers lowering their costs. Sunrun's sales, marketing, general, and administrative costs were up $0.02 per watt from a year ago. Even worse, in the systems Sunrun installed itself, installation costs rose from $1.92 a year ago to $1.95 per watt.
Vivint Solar's cost trajectory is even more concerning. Total cost per watt rose from $3.22 a year ago to $3.46 per watt, although installation costs fell $0.08 to $1.85 per watt.
The most concerning figure in Vivint's results was its year-over-year jump in sales and marketing costs from $0.84 per watt to $1.16. Two years ago, sales costs per watt were just $0.68.
Clearly, Sunrun and Vivint Solar are spending more on sales generation because they are finding it harder to attract customers. But when they do make sales, the cost of installation should be coming down over the long term -- and that doesn't appear to be happening consistently.
Where the competition is headed
In an attempt to counter the rising cost of sales, competitors like SunPower (NASDAQ:SPWR) and Tesla are investing in digital sales processes. SunPower is hoping that a web-based tool that can give potential customers a quote in less than a minute will benefit both the company and the third-party installers who are the boots on the ground selling its products.
Tesla (NASDAQ:TSLA) has said it's going to an entirely digital sales model in an effort to lower costs. This may be more out of necessity than an indication that online sales will be successful in this niche, but the company's leadership thinks that if it leads to lower prices for customers, the shift will pay off.
If sales costs are going up, installers have a few options. They can try to lower costs by focusing more on online sales, although that strategy may not deliver the levels of success in terms of unit sales that the high-touch, live salesperson methods have. They could also adapt to slower growth rates and concentrate on picking the "lower hanging fruit" -- a strategy that might not please investors who demand greater top-line growth. But at least two competitors are trying the digital strategy, and if their costs keep rising under the status quo, Sunrun and Vivint may need to as well.
A tailwind for Sunrun and Vivint Solar
One thing investors should like about where Sunrun and Vivint Solar sit today is the impact that shifting interest rates will have on their business models. Both companies finance most of their solar power systems on their balance sheets, then sell some of the future cash flows those solar systems generate to investors. Falling interest rates over the last six months are going to make cash flows more valuable when sold to investors.
Interest rate changes alone won't be enough to counteract the challenges residential solar installers face, though they'll help. It's up to the installers themselves to create more sustainable businesses with lower sales and installation costs. And it's not clear they'll to be able to do, that given the trends so far this year.