Residential solar leader SolarCity (NASDAQ:SCTY.DL) reports earnings after the market closes on Wednesday, and investors will be watching closely to see how the company did in Q4 as well as what they expect in 2015.
What investors may not be expecting is blowout numbers, but as the company transitions from a lease model to a sales/loan model, its finances will change dramatically. Here's what to look for and how to know if earnings are headed in the right direction or not.
Have installations kept up with expectations?
One of the shocking takeaways from SolarCity's third-quarter earnings report was that for once, SolarCity's sales weren't growing as quickly as expected. Management didn't execute on a commercial solar project, and it brought down its midpoint of expected installations in 2014 from 525 MW to 512.5 MW. That's a small miss, but SolarCity had a habit of beating its own expectations, so the miss was significant.
In Q4, it'll be important to see that growth in the quarter met expectations and, more importantly, that 2015 is on target. Three months ago, management said it expects to install 920 MW-1,000 MW of solar in 2015, and missing or beating that target could move the stock significantly.
How profitable is the solar sales business?
On Jan. 14, SolarCity announced a $200 million financing facility for its MyPower loan product, something it launched in the fourth quarter. In the release (found here), the company said it had signed up 8,000 solar customers to the MyPower program, so we should start to see the impact in Q4.
Instead of signing customers up to a long-term lease or power purchase agreement, MyPower is a sale of the solar system to the customer, meaning revenue and margin will be recognized in the quarter the system is sold. This won't be a large number in Q4, but it'll be important to watch, because sales haven't been profitable throughout SolarCity's history.
In Q3, sales of solar systems and components were $6.17 million, and the cost of those goods (not including overhead) was $6.64 million. MyPower should come with much higher margins than that, but investors will need to watch where those margins are heading. Long term, management said it will create more than $1 per watt installed in value, a target it has to exceed early in the MyPower product cycle in anticipation of the ITC expiring.
How is Silevo coming along?
Silevo hasn't gotten a lot of attention from the media since SolarCity announced it was acquiring the solar panel start-up, but this is the one development that could transform SolarCity's future. The reason is that Silevo's efficiency is higher than commodity solar panels that SolarCity has typically installed, meaning it could squeeze more power from each roof.
SolarCity is currently building a 1 GW plant in the Buffalo, New York area that could transform the company and give it a huge leg up over competitors. When the acquisition took place, cell efficiencies were reportedly at 21%, and the goal was to increase that to 24% in the near future. If SolarCity can accomplish that, it would be nearly as efficient as world leader SunPower (NASDAQ:SPWR), whose Maxeon cells are over 24% efficient today.
I'm not sure if Lyndon Rive or Elon Musk are going to give much of an update on Silevo, but they've had about five months to get up to speed on the technology and get the manufacturing plant started. If it's going well, it's a good sign for SolarCity's cost structure and competitive position long term.
Last, but not least
The other thing to look for is SolarCity's retained value per watt during the quarter. This measures SolarCity's expected value generated over 20+ years of a leased system's life and has changed wildly over the last two quarters. In Q2 2014, SolarCity said it had retained value of $2.32 per watt installed (boosted by a securitized debt offering) and in Q3, the figure fell to $1.72 per watt.
What will be key to look at is whether or not that figure continues to drop, and if pricing pressure is starting to creep into the market. Vivint Solar (NYSE:VSLR) and SunPower are expanding aggressively in SolarCity's biggest markets in the Southwestern U.S., and it's possible that price begins to be a differentiator in that region.
SolarCity's stock is certainly priced for high growth and high margins well into the future, so seeing progress in those areas is essential for investors this week. We'll see if management can deliver on high expectations once again.