In the fast-changing world of solar energy, it's important to know how management is thinking about a business and how they're adapting to the market. In the case of SolarCity Corp (NASDAQ:SCTY.DL), the business has changed a lot in the last six months alone, causing management to adjust its tactics along the way.
The one time that management has a candid discussion about the business with investors is during the quarterly conference call. After fourth-quarter 2015 results were announced, CEO Lyndon Rive and team gave a few looks into the business, and there was both good and bad for investors.
The financing model is at full speed
For the first time in the company's history, the asset financing that we get is higher than the actual cost of the developing end.
One of the keys to SolarCity's business model is being able to finance as much as it costs to build each solar power system. In the fourth quarter, the company finally did that and actually financed a bit more than its cost. What investors will want to look for going forward is that this trend continues and that borrowing costs remain low. If SolarCity can cover over 100% of its installation costs each quarter, there's very little risk in the business long-term.
The ITC extension will be big beyond 2017
On a positive side regarding policy, the [federal investment tax credit] has been extended for five years. This is a big one for the industry and expect to see good growth in 2017 and beyond.
The expiration of the ITC wasn't going to kill the residential solar industry, but it was going to put a lot of pressure on margins and growth over the next few years. The extension, agreed upon in December, leaves in place the solar industry's largest subsidy and gives SolarCity greater visibility to its own finances in 2017 and beyond. It'll also allow SolarCity to gradually adopt a sustainable long-term business model instead of falling off a cliff at the end of 2016.
SolarCity didn't hit guidance for the second quarter in a row
For the guidance, we came in 8 megawatts short for Q4 at 272 megawatts. I'm disappointed in missing the guidance. This is primarily due to commercial delays and stopping installations in Nevada. ... Our volume in Nevada is about 20 megawatts a quarter.
The most disappointing part of SolarCity's fourth-quarter earnings report was the announcement that the company missed its own guidance. Management has had a hard time understanding the timing of commercial projects, which have been delayed months beyond what they had planned for.
There was also the ruling in Nevada that eliminated net metering and compensated customers at the wholesale rate for electricity exported to the grid. This makes the economics of rooftop solar unmanageable and SolarCity was forced to shut down operations in the state.
Nevada may turn around... eventually
I think this is going to be overturned by the public through a referendum, a ballot referendum by the end of the year.
This was Rive commenting on the state of Nevada's net metering debate. There's a lot of backlash to the Public Utility Commission's ruling, but it may take a referendum or action by the legislature to overturn current rules. Until that happens, Nevada won't have much rooftop solar installed. At least Rive is putting on a happy face as his company challenges regulators.
Silevo is very delayed
Just a little update on Silevo: The building should be completed at the end of this quarter, probably early Q2. We'll then start moving in equipment. As some of the equipment has longer lead time than we originally expected, and so that equipment will only be arriving around Q2, Q3 next year. Because of that it will actually -- the effect of that [is] we can delay the purchasing of some of the other equipment and so a lot of the capex or probably about half of the capex will actually move to 2017.
When SolarCity bought Silevo in 2014, it was supposed to change the company's future. Silevo promised higher-efficiency solar panels and lower costs than competitors. And the plant was going to be completed in just two years.
Nearly two years later, we're now finding out that full production of Silevo solar panels is still about two years away. Getting into solar panel manufacturing is a lot more complicated than SolarCity had thought, and becoming a manufacturer may eventually be something the company regrets doing. There's no proof that SolarCity can actually make solar panels for an attractive cost, and it may be years before we find out if it can. In the meantime, competitors are lowering their own costs and improving their own efficiency. SolarCity may already be playing from behind in the solar panel manufacturing game.