As SolarCity (SCTY +0.00%) has risen to dominance in the residential solar industry, one of the challenges has been communicating its strategy to investors. Each quarter after earnings are released the company has a chance to talk about its strategy with investors and analysts to make sure they understand where the company is headed.
This quarter, there were five key takeaways from SolarCity's conference call, and they shed a lot of light on the company that's captivating the solar industry.
SolarCity has moved into commercial solar installations, like this Wal-Mart distribution center. Source: SolarCity.
SolarCity is going to be a growth machine
After the first quarter, SolarCity's CEO Lyndon Rive said that he expected his company to be cash flow positive this year, after financing new projects. But that was thrown out the window during the second quarter conference call.
"In the past we've communicated our goal of being cash flow positive for the year, but in light of the opportunities ahead of us we're going to invest in customer growth, and – which is way better for the company."-CEO Lyndon Rive
SolarCity workers install a residential solar system. Source: SolarCity.
The reason SolarCity no longer expects to be cash flow positive is the incredible momentum of its sales teams. In the second quarter, the company booked 218 MW in new solar systems compared to installing just 107 MW. So, sales are going so swiftly that backlog is increasing and the company needs to invest in crews for further growth.
Any company that's growing quickly has to balance cash flow with investment in future growth, and SolarCity is clearly taking the later strategy in an effort to dominate market share in residential solar long term. That's not all bad, but it's something investors need to keep in mind when looking at the stock.
Costs are dropping... quickly
SolarCity gave more information than any other public solar company about its costs during the second quarter, and the numbers were impressive. Installation costs for the quarter were $2.29 per watt installed, which was down 6.9% sequentially and 27.5% from the fourth quarter of 2012. By 2017, the goal is to be spending just $1.90 per watt on installation of a solar system.
Even when the cost of sales, general, and administrative costs are included the total cost of a solar system is only about $3.03 per watt. As SolarCity scales further across the country and gets more out of each dollar it spends on SG&A, it will continue to drive costs lower, giving SolarCity a head start against the competition.
Solar installations come in all shapes and sizes. Source: SolarCity.
Scale is paying off
Some of the biggest moves SolarCity has made since coming public have been a bit puzzling for those observing the industry but they're coming together in the company's strategy.
Paramount Solar was acquired last year for $120 million in an effort to expand the sales force with a direct to customer strategy. The pace of bookings is showing how that's paying off today.
Zep Solar was acquired for $158 million, an astounding number when you consider it was a racking company. But Zep's products have allowed SolarCity to reduce system installation times with the goal of having each crew install two systems per day. If it can reach that goal the cost figures discussed above will continue to fall at a rapid rate.
Long term, the goal is to further vertically integrate with solar panels made in-house, made possible by the Silevo acquisition, which would give SolarCity almost complete control of the supply chain. Based on the execution of previous acquisitions, management has proven the ability to not only make the correct acquisition but effectively fold them into the business to lower costs. If SolarCity can do the same thing with Silevo it will be able to lower costs and stay a step ahead of the competition, which will be key as the residential solar space becomes more competitive.
Securitization is going gangbusters
SolarCity was the first to begin securitizing residential and commercial solar systems, and thus far the strategy is going well.
I've provided some of the key details below but the big takeaway is that investors are taking on larger portions of debt per installation, commanding lower interest rates, and taking on more residential versus commercial customers.
|
LMC I |
LMC III | |
|---|---|---|
|
Securitization Issuance |
$54.4 million |
$201.5 million |
|
MW Collateralized |
54.9 |
118.0 |
|
Debt Monetization ($/Watt) |
$1.24 / Watt |
$1.71 / Watt |
|
Spread Over Benchmark Rate |
265 basis points |
209 basis points (weighted between two tranches) |
|
Residential/Commercial Mix |
71%/29% |
86%/14% |
Source: SolarCity.
This is key because in 2017 the investment tax credit runs out for residential solar systems and therefore tax equity financing won't be necessary. Instead, SolarCity will need to finance new projects on its own, and securitizing them may be a cost effective way to do that. That's why the progress you can see above is so encouraging.
Silevo is expected to close later this month
CEO Lyndon Rive said the Silevo acquisition is expected to close later this month and that discussions with the State of New York about the manufacturing site are under way.
That's not a lot more detail than when the acquisition was announced in June and has to be at least a little worrisome to investors. Silevo is part of the company's long-term cost reduction plan, which I mentioned above, but it's also a risky move into manufacturing, something SolarCity has never done.
One of the biggest risks in the acquisition is execution risk surrounding its manufacturing plant, and every day we don't hear about a construction site, timeline, and financing partner is a day competition has to catch up. Keep an eye on more updates going forward because SolarCity needs to move quickly with the Silevo acquisition or risk it becoming a drag on future earnings.
