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Is SolarCity Making Money or Losing It? Key Metrics to Understand

By Jason Hall - May 5, 2015 at 7:29PM

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Depending on the headline you read, it can be hard to understand whether SolarCity is doing well or poorly.

SolarCity (SCTY.DL) reported financial results for its first quarter on May 5, and depending on which headline you read, it can be hard to figure out if the company is doing well or just bleeding money. 

This is why, as investors, we must get past the headlines and really dig into the financial results to better understand how a company is doing, and SolarCity is no exception. With that in mind, let's dig into its latest earnings release and see whether we can better understand how the numbers add up. 

Growth rate still extraordinary 
As we talked about in the earnings preview, SolarCity has struggled with the lumpiness in its commercial business, which has affected the company's results against its guidance. So to give more accurate guidance for investors and analysts, management decided to be more stringent with forecasting those commercial deals, requiring that they be much closer to completion before rolling them into the quarterly guidance. 

This approach was part of what led the company to exceed its guidance for total megawatts deployed by about 6%, with 153 MW installed in the quarter. That's an 87% increase from the year-ago quarter, with the residential segment growing 109%. 

For some context about the company's growth rate, SolarCity added 27,938 new customers in the quarter. At the end of the second quarter of 2012 -- less than three years ago -- SolarCity had 29,000 total customers. 

Building shareholder value: terms to know 
If you look at the company's GAAP results, it's definitely losing money. However, it's critically important that you understand the context of how those losses are derived, and also understand the non-GAAP metrics that management talks about, so that between both, you can better understand how it all adds up. 

From a GAAP perspective, SolarCity generated $67.4 million in net revenue in the quarter yet lost $146.9 million. Operating expenses alone were $147 million, up about $65 million from last year's Q1. That's a pretty scary amount of losses on a relatively small amount of revenue, right?

What those GAAP metrics don't report is fundamental to not only understanding SolarCity's business model, but also to finding value in it. And that value is found in three key measures: retained value, nominal contract payments remaining, and economic value creation to equity. In the quarter, that 153 MW of systems installed added around $1.2 billion in nominal contract payments, which is the gross sum of contracted future payments the company will receive over the next two decades. At the end of the quarter, that sum rested at $6.1 billion. 

That's a pretty huge number -- and it's one that's been growing steadily over the past few years: 

Source:SolarCity presentation.

However, that's only part of the story, because those incoming revenues won't be completely cost-free, as SolarCity must continue to support and maintain those systems, bill its customers, and pay off the huge debt it has accumulated to pay for its big growth so far. This is where retained value comes in. 

According to the company, it has built up $2.7 billion in net retained value. Essentially, that number is the revenue SolarCity's current installed systems would generate -- after debt is fully paid off -- over the next 30 years. 

While this doesn't give us a straight line to profitability, it does provide some extra understanding of how those future payments -- which won't show up in the GAAP results until they are paid to the company -- add value for the long term. Management projects that by the end of 2015, the company is likely to be generating about $1 billion per year in new net retained value. 

Beginning this quarter, management has added the economic-value-creation metric in an attempt to better draw that line between deployed systems and net cash generation:

Source: SolarCity presentation.

In short, this measure attempts to forecast the distributable cash flows that the past quarter's deployments should generate over their lifetime. 

Costs and debt 
An important measure for the company remains its cost per watt, which measures every expense against each watt of power production the company sells. The good news is, the raw installation costs have continued to fall, even staying flat sequentially last quarter in a seasonally slow period and facing some harsh weather in the Northeast. 

However, it's important that we continue to monitor the company's ability to keep sales, general, and administrative costs in check:

Source: SolarCity presentation.

Both sales and G&A costs have crept back up, after declining a few quarters ago. The trick right now is balancing adding costs to support future growth -- last quarter, CEO Lyndon Rive talked about how adding new sales expense today is necessary, as it takes time and cost to onboard and train staff as the company expands. 

However, once those new resources are put to work, those investments turn into more new growth, and the costs -- as measured per watt -- will begin to decline again. There is likely to be some cyclicality here, as the company enters new markets and expands, where costs outrun sales growth for a few quarters, before those new sales resources begin driving sales growth and providing a return on the company's investment. 

Similarly, debt is an important part of how the company will continue to fund its growth. With the majority of the company's sales tied to 20-year contracts, SolarCity can't afford to front all the capital to acquire and install systems that will be paid for over many years. 

With this in mind, it's quite likely the company will regularly add to its debt, but that debt will be associated with those long-term contracts. So far, it looks as if management has done a solid job of maintaining a spread between its cost for the debt, and what it will net in profits on system payments, making a profit on the "spread" between debt and internal costs, and the revenues the company will collect in payment from customers. 

Looking ahead 
SolarCity is a very interesting company to follow, and the nature of how it collects payments over long periods of time, and the importance of debt to fund growth, and the necessity of aggressively growing its operations expense to execute on that growth, can make it a little more challenging to understand. 

However, it's quite clear that solar -- especially distributed residential generation -- is a huge market that's only barely getting tapped. With its position as the dominant solar provider in the U.S., there's a lot to like. Factor in the potential benefits of in-home battery systems, just relaunched in recent days, and the market could grow even larger. 

At some point all those cash-flow-generating things should turn into "real" profits. How long that will take is something only time will tell us. However, having a better understanding of the metrics I've discussed here can make it easier to see how things are playing out. 

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