One of the few times during the year when a company's management answers questions investors want to know about is during the quarterly conference call after earnings. For a company like SolarCity (SCTY.DL), it's a time to let investors know how the business is going and where it's heading in the future.
During the recent fourth-quarter 2014 earnings call, I thought there were five key takeaways for investors.
1. SolarCity is making progress on all of its growth goals
We added $3 billion in nominal contracted payments. Our retained value increased by $1.4 billion. We lowered our unit cost by 20% despite the fact that module pricing stayed roughly flat. We grew our residential megawatts by 106% and we've closed most of our structured financing funds for 2015. -- Lyndon Rive, CEO
For SolarCity to live up to the market's lofty expectations, it has to grow and lower costs consistently. 2014 showed progress, adding $3 million in contracted payments and lowering costs 20%. Both are keys to staying ahead of competitors in the long term, and investors should hope that the trend continues well into the future.
2. The 1 million customer market should be achievable
Our customers continue to scale. We're now at 190,000 customers. In order for us to achieve our million customer goal by mid 2018, we need to have a growth rate of 61%. Our current growth rate is 98%. -- Lyndon Rive, CEO
The million-customer goal by mid-2018 is one many in the market point to as a key milestone for SolarCity. Given its current size, expecting to install 1 GW of solar panels in 2015, growing double or triple digits annually is getting more and more difficult. What should give some comfort in reaching 1 million customers is that growth can slow significantly from its 99% rate of the past five years to meet that goal.
In particular, 2017, could be a tough year if the investment tax credit isn't extended at a federal level. If it isn't, the residential solar market could virtually dry up overnight. So, the quicker SolarCity can reach 1 million customers, the better.
3. Commercial solar is... complicated
We built 28 megawatts worth of commercial jobs in Q4. We had a further 16 megawatts worth of commercial jobs that we had forecast would make it into Q4. We won't build 2 megawatts of those 16 megawatts given the economics of the projects changed. -- Tanguy Serra, COO
This was part of the explanation for missing guidance of 179 MW-194 MW of solar deployed in the quarter (the actual result was 177 MW). Commercial projects have been lumpier than management expected, and they're not seeing the speed they expected or the margins they may want. So, some projects were moved into 2015, which resulted in the guidance miss, and another 2 MW of projects were abandoned altogether.
Going forward, commercial solar is a challenge, because while it can add many MW in a single installation, commercial buyers are more sophisticated than residential buyers and can make competitors win on price alone, which isn't SolarCity's forte.
4. Loans are a smash hit, but accounting is challenging
I love having a loan product for people that want to own their system; however, the accounting is really not that straightforward. At a high-level the system sale will be capitalized as deferred revenue and then ultimately recognized as customer payments are received over the life of the loan. The attributable system cost, as well as variable cost, will be capitalized as well and ultimately depreciated over the period of the contract. -- Brad Buss, CFO
SolarCity's loan product, MyPower, has been a hit with consumers, accounting for about 30% of sales in Q4, but it also makes accounting complicated for investors. SolarCity will record revenue and costs over the life of the loan, which is more like a bank than a solar company.
In the future, this brings up that SolarCity's risks are really more similar to a bank's than those of a company building and selling solar systems. Leases started that trend, and loans will only magnify it. That's something to keep in mind when looking at SolarCity stock.
5. Value metrics are changing
The one thing I will tell you is your levered retained value is going to be lowered than your retained value. I know some people hear levered return and normally think it goes higher, but obviously you've got to take into account the debt repayment because they're paying for all of our capital investment in the first place. -- Aaron Chew, VP of IR
As a public company, SolarCity has been using retained value as a metric of value created for the company. At the end of 2014, the company had $2.6 billion in retained value from leases, power purchase agreements, and loans.
What's missing from retained value is the fact that it's a measure of enterprise value, not just equity value. Debt is often used to finance projects, and therefore, debt holders will take some of the value. But unlike a company's bottom line, or a bank where leverage increases value per share, leverage in this sense takes away value from shareholders and transfers it to debt holders.
In 2014, the company added $1.4 billion in retained value, but added $800 million in debt, so equity holders are only entitled to about $600 million in value. This "levered retained value" figure will be reported in future earnings reports and will be a key metric for investors to watch.
