SolarCity Corp (SCTY.DL) just had by far its worst quarter as a public company, and management has a lot of questions to answer as it shifts strategies to cash flow and slower growth. It started to answer some of those questions on the third quarter conference call with investors and analysts. Here's what we learned.
A big change in strategy
Now that we've achieved scale, we as an executive team and the board have decided to focus on cost reduction and being cash flow positive by the end of 2016. With this new focus, we're going to reduce our growth rates to roughly 40% in 2016. -- Lyndon Rive, CEO
If there's one thing SolarCity said that shocked investors, it was this shift in strategy. SolarCity has long been about growth, and this change to worrying about cash is dramatic. Long-term, it's probably the right move for SolarCity, but it's not one the market expected.
Cash flow breakeven is coming, but here's what that actually means
I want to let you know that the cash flow breakeven that Lyndon talked about and how we're going to define that. So all of that will come right off of our quarterly financials, and the formula that we're using is the net increase in cash and investments which obviously included securities, etcetera, less net cash provided by equity issuances that comes off the cash flow is going to be greater than or equal to zero. -- Brad Buss, CFO
With a new focus on cash flow, investors shouldn't think SolarCity is suddenly going to be funding operations without increasing debt or selling the tax equity portions of projects. Management doesn't view that as part of the cash flow. What management wants investors to look at is the net cash position, meaning that SolarCity's net cost to build new projects won't be higher than the net cash provided by debt or cash flow from existing projects.
The most recent earnings presentation slide shows that SolarCity financed $307 million of the $543 million project costs in Q3 with tax equity, and projects another $251 million in debt financing. Taking all of these flows of cash into account should get the company to a positive number. So debt will go up in the future, something investors should be expecting.
This isn't positive cash flow in the way most businesses look at it, so it's important to understand what SolarCity is actually thinking. Hopefully this comment gives a little clarity.
Prices are going up
Now we are actually going to be increasing our pricing in Q1 next year, but we have small increase depending on the state we'll increase roughly 0.25 cents to 1 cent a kilowatt hour in our leases and PPAs, and essentially matches the escalation of the utility rates. -- Lyndon Rive, CEO
A fascinating takeaway from the conference call was SolarCity's explicit statement that it is raising prices next year. Customers can expect to pay up to a penny per kWh more for solar, which is a strange move given the increased competition in this space.
SolarCity is betting that demand for rooftop solar will be so high ahead of the reduction in the investment tax credit that it can charge more for its product. What will be interesting to see is if competitors take a similar strategy or use this as an opportunity to beat SolarCity on price, or even justify more cash and loan sales. It's a risky move to say the least.
Demand is strong?
One thing I want to make clear is this changing focus is not a lack demand. We expect in Q4 bookings to be greater than Q3 bookings. Normally Q4 is lower than Q3 because of the seasonality you have less selling days, but the demand is strong. And in 2016, we expect the demand to be very strong. -- Lyndon Rive, CEO
If there was one comment in the entire conference call that didn't seem to make sense it was this one. If demand is so high, why are sales costs rising faster than installations? If demand is so high, why slow growth plans? If demand is so high, why wasn't SolarCity able to reach cash flow breakeven in 2015 as it planned?
Saying that demand is high is one thing; proving it is another. SolarCity has spent a lot of money creating the demand it has. That's proven to be very expensive, and that's what's crushed the stock recently. As the solar industry moves from pushing solar sales through door-to-door and telemarketing calls to shopping online, we'll see more efficient sales from the demand that's there. SolarCity's results are showing it's pushing faster than customers are willing to adopt solar, not the other way around.
Regulatory concerns are overstated
Despite utility efforts regulators are rejecting proposals to unfairly penalizing solar customers as evidenced by recent failed attempts in Colorado, New Mexico, and Kansas. Additionally, net metering caps recently extended in New Jersey, New York and the Nevada PUC extended its program through year-end while it will evaluates the benefits of rooftop solar. -- Peter Rive, CTO
SolarCity is at the front of fighting utilities trying to fight solar. So far, that battle is going well. SolarCity is confident that challenges to net metering and new fees for solar will either be avoided or overturned across the country (except for Hawaii, which is its own story).
Management is also confident the ITC will be extended, which seems to fly in the face of the company's growth reductions. But the real takeaway here is that SolarCity doesn't think policy will be a problem for the company in the future.
