Tesla Inc (TSLA) — Q1 2015 Earnings Call Transcript

Thank you and good afternoon to all those joining us today for SolarCity's first quarter and 2015 earnings conference call. Leading the presentation today will be a discussion from our Chief Executive Officer, Lyndon Rive, and our Chief Operating Officer, Tanguy Serra, and our Chief Technology Officer, Peter Rive, as well as our Chief Financial Officer, Brad Buss, after which point we will open up the call for questions. As a reminder, today’s discussion will contain forward-looking statements that involve our views as of today, based on information currently available to us. Forward-looking statements should not be considered guarantees of future performance or results, and reflect information that may change over time. Please refer to SolarCity's quarterly shareholder letter issued today and the slides accompanying this presentation as well as our periodic reports filed with the Securities and Exchange Commission for a discussion of forward-looking statements and the factors and risks that could cause our actual results to differ from our forward-looking statements. We do not undertake any obligation to publicly update or revise any forward-looking statements. In addition, during the course of this call, we will use a number of specially defined terms relating to our business metrics and financial results including non-GAAP financial metrics. We refer to the definitions and the required reconciliation between GAAP and non-GAAP financial metrics included in the shareholder letter issued today and the slides accompanying this presentation which are available on our Investor Relations website at investors.solarcity.com. And with that behind us, I would like to introduce SolarCity's Chief Executive Officer, Mr. Lyndon Rive.

Thank you, Aaron. I am excited about today’s earnings call. We’re going to provide additional information on the economic value we create every quarter. SolarCity is essentially two companies in one, the development company and the power company. The development company is responsible for acquiring customers and getting solar systems installed. The power company provides the financing and collects 30 years of recurring revenues through selling energy. This quarter, we booked 237 megawatts, which is a new record for the company. We also installed 153 megawatts. Our residential business grew 108% year-over-year with a total of 139 megawatts. Our total cost was $295 with a 9% decline year-over-year. Now looking at the power company, we produced over 110 million hours of energy over the last 12 months. Our contracted customer payments increased by $1.2 billion this quarter and we now have $6.1 billion in our contracted customer payments. We also have over 217,000 customers. For the quarter, we created $147 million of economic value. Brad will discuss this in more detail in later slides. Let’s take a closer look at our customer growth. As mentioned in previous earnings calls, we have a goal of 1 million customers by mid 2018 and we are 20% of the way towards achieving this goal. To achieve this target, we need to grow at 60% year-on-year. Historically, we’ve grown at 95%, which makes us feel confident in achieving the 1 million customer goal. As I just mentioned, our nominal contracts increased by $1.2 billion this quarter; this is a 144% increase year-over-year. We now have $6.1 billion in nominal contracts. I am now going to hand it over to Tanguy Serra, our COO.

Thanks, Lyndon. Our residential business continues to more than double with installed Q1 installs growing from 67 megawatts to 139 megawatts year-over-year. This is a combination of our existing states continuing to grow, and the opening of new states like Nevada, New Hampshire, and New Mexico. We are at 75 permanent warehouses in 16 states and have been opening one approximately every 15 days in 2015, identifying and expanding our geographic coverage. Through this growth, we have additional dedicated regional resources through the academy that allow us to recruit, onboard, and train installers. Our commercial installations have remained flat year-on-year. However, commercial is a very exciting market with very strong bookings and we expect to see significant growth in installations in that segment in Q3 and Q4 this year from jobs currently in the process. We have started to do commercial work with our crews and are seeing outstanding increases in productivity. For example, we installed a 157 kilowatt large commercial flat roof system in three days versus the industry standard of over 20 days using our Zep mounting hardware. Our installation costs have stayed flat in Q1 2015 versus Q4 2014, which is a remarkable achievement given the harsh winter months on the East Coast. I want to note that our safety and quality continue to lead the industry, and our sophisticated compensation structures are yielding solid results. Final prices in Q1 2015 were in the $70s, which gives us significant comfort in achieving our $1.90 cost target by 2017. Sales costs have increased, but we expect that number to start trending down as our mix of bookings shifts towards lower-cost channels in the coming quarters. Overhead is on a per watt basis and lower seasonal volumes in Q1, but the overall trend of scaling fixed costs remains unchanged. With that, let me pass it over to Pete Rive, our CTO and Co-founder of SolarCity.

Hi, everybody. We’ve exceeded 1 terawatt hour of energy production over the past 12 months and as we enter the spring and summer, we are breaking records. Over the past couple of months, we have broken through four, five, and six gigawatt hours a day. We expect to see summer trends continue in the future and at the scale we're aspiring to, we have to ensure that energy delivery is not intermittent and is also available at night. This is a segue into our recent factory releases. As many of you know, we announced new versions of our solar battery systems in all of our business units—commercial, government, microgrid, and residential. We are seeing great growth and strong demand for commercial and microgrid offerings and the new test batteries are helping to widen the addressable markets where we can offer those systems. On the residential side, our fully installed solar battery system costs are about one-third of what they were a year ago. We expect costs to decline further at manufacturing scale over the next five to ten years. These cost reductions will make it feasible to deploy the battery by default with all of our solar power systems. A solar battery backup system will sell for $5,000 as an add-on to leases and PPAs, which is comparable to other backup generator options. It’s important to note that the costs of $3,500 include the inverter, permitting, installation management software, and electrical equipment to wire the circuits that need to be backed up. All of these are included in our turnkey service for our solar battery systems. Interestingly, the residential backup generator market is actually larger than solar, with over 3.5% of residential customers having backup generators. The industry leader in this space had over $1 billion in revenues last year and has seen a 12% compound annual growth rate over the past 10 years. Now, extending the appeal of SolarCity to the traditional market is interesting, but it is a small part of the strategic interest we have in batteries. Batteries spread throughout the distribution can lower the cost of and hitting the grid, and new market structures designed to take full advantage of this benefit appear likely in several states. Our products, including the contracts as well as the management software, are ideally positioned to benefit from this trend. As grid services become ready and as these markets develop, it's intended to be a 50-50 revenue share model embedded in the contracts that we have with our customers. We are not in a position to estimate what these revenues could be, but it’s interesting to note that in California, it is currently estimated to cost $190 per kilowatt per year to meet new peak loads. The other strategic options that batteries make available to us are hedges against bad policy outcomes, with examples being changes in net metering and solar penalties such as high fixed charges. As always, Hawaii serves as a postcard from the future, as the high electric rates there make it economic NOW, which will be affordable in other markets with further cost reductions. As a result, we would be offering a zero-down lease in Hawaii next year that gives customers the ability to go completely off-grid. With that said, I want to reinforce that removing customers from the grid is a bad policy outcome. There is so much value in distributed energy resources, and we are hopeful that utility business models will adapt to embrace solar with batteries, rather than penalize adoptions, which in turn will encourage grid detachment. And with that, let me hand it over to Brad Buss, our Chief Financial Officer.

Thanks Pete. Overall, I was very pleased with our Q1 results and I will cover some of the financial highlights that we’ve detailed on our earnings deck which is posted on the website. On Slide 10 of that deck we had another record quarter on the financing front and we are in great shape for the rest of 2015. With respect to tax equity, we created four new funds and we continue to see strong and growing interest from our current investors as well as new financial and corporate investors. Our undeployed tax equity capacity stood at 624 megawatts, up from 592 megawatts as of our last call, and the team is hard at work nailing down commitments well into 2016 already. Outside of tax equity, it’s been very busy as you’ve seen from a bunch of press releases lately. In May, we will begin our first drawdown on our revolving MyPower credit facility, and as you saw today, we just closed on a new $500 million aggregation debt facility. That’s at a rate of about 3%, and again, this is the best cash advance rate that we have seen so far. Not only is this our largest aggregation facility to date, but it’s also the first with three major bank partners. It’s a revolving facility and most importantly we will be able to draw down at installation, which is approximately 90 days faster than our old facilities, and is a huge benefit as we continue to lower our working capital cycle time going forward. With respect to ABS, we are very close to a new facility. There’s not a lot that I can publicly say expect that we anticipate all of our tax equity partnership structures will be soon investment grade rated, and we will be continuing to work with all of the agencies to move this asset class forward on a more predictable basis as I expect that we will be a frequent issuer to this market. Slide 11 is a new slide, and it’s our focus on economic value creation as Lyndon talked about upfront. This slide has two new metrics that we think will do a great job at laying out our economics and expected cash generation from our most recent quarterly installations, and again, this is just focused on Q1 installation. The first metric is unlevered IRR and the second is economic value creation to equity. What we’ve done here is layer in the blended contracted financing terms of all of our Q1 2015 installations and again that’s all of our products: commercial, residential, as well as MyPower. You can see that our blended energy price is approximately $0.13 per kilowatt. We have detailed our year one energy production hours as well as the blended terms of our current tax equity investment, and you can see that our Q1 deployments are expected to generate a strong unlevered IRR of 11% over the 30-year expected life of the system. We then layered in the non-recourse debt that we expect to raise on the Q1 megawatts. This yields year one positive cash flow of $5 million on these deployments and a 30-year NPV of $147 million for our equity shareholders. If you annualize this, it would represent close to $600 million or approximately 10% of our equity market cap. So you can do the math in your own models and factor in your future growth, and you'll see that this number is going to grow significantly. We will continue to provide this information every quarter going forward, and more importantly, we are going to be introducing our cash per distribution or GAAP metrics for the entire contracted portfolio beginning in Q2, as we are finishing all the system work and testing that data, and I've been glad to see where things are coming out so far. On Slide 12, net retained value is again another enhancement to our metrics. We have traditionally done retained value, which we have now renamed gross retained value, and we are adding net retained value, which details the forecast of the value remaining to our equity holders after subtracting our net debt. The gross retained value, which is to the enterprise and, like I said, is consistent with retained value that you have seen historically, exceeded $3 billion or approximately $1.77 per watt at the end of the quarter. For those of you who are focused on incremental gross retained value, we saw an overall total increase in Q1 excluding MyPower of $1.58 per watt, which was an increase of $0.12 per watt and again mostly due to a better mix in the quarter. If you then back out all of the debt on the balance sheet at the end of our quarter except the convertible debt, which we expect to settle in equity, and you also look at the expected cash cost to complete our backlog, you will see what we call net retained value of $2.7 billion as of the end of the quarter. In simple terms, if we stop booking any new contracts at the end of the quarter, the present value of all of our unlevered project cash flows for distribution after paying off all of our debt was worth about $2.7 billion to equity holders, a pretty material number that I expect to continue to grow strongly. Another new slide on number 13 is our financing receivable, because much of our debt financing is not expected to come in for months after installation. Our financing of installed megawatts will always lag our cash costs to install. To help better represent the true cash generation of our portfolio, as well as bridge the divide between our investing cash outflows and our financing inflows, we will begin reporting financing receivables every quarter. For Q1, we are estimating approximately $665 million to be in our financing receivable at the end of the quarter. Most of you have probably seen the guidance, and I’ll just touch on a couple of things. We are targeting megawatts of installed over 180, which will be a new record. As you can see, our revenue increases significantly as we are exiting winter and we are adding thousands of new customers. Our OpEx dollars increase as we support the plant growth in a very measured manner, and we are also planning for a significant ramp in megawatts supplied for the second half of 2015. To sum it up, I was very pleased with the quarter. We are really excited to introduce the new metrics and I look forward to rolling them out in Q2. We can start spending our time looking at the future and the strong growth that we have ahead of us. Thanks for all your support this quarter and we will now take calls from the audience.

Congrats on the quarter and thank you for the new metrics, very helpful to get the unlevered IRR and the equity value here. So first, how should we think about the evolution of those numbers 11% from unlevered IRR given the geographic and segment mix into Q2 perhaps and then a few follow-ups? Thanks.

Yes, Patrick. We are not looking to start forecasting data at this point in time. Even if you hit it bang on the head, I think you’ll see a little mix that will knock the numbers around, but our models how we are approaching this business on a portfolio basis are pretty tight; we shouldn’t see a ton of volatility, but mix is always going to impact that.

Okay, and then just a few follow-ups here. How should we think about the hurdle rate for entering new markets, and if you have any targets for new market entry for the year that would be helpful? And then just lastly on Arizona, have the regulatory developments that are PAPS, TP altered any of your growth projections for the year, or are you seeing strength in other markets to offset a few of those markets? Thanks, guys.

Jobin, this is Lyndon. In terms of new markets, we look at the economic value that it creates. It's important that day one, if you add all the financing, that day one the region itself is cash positive, and then we look at the returns. The IRR, if it is day one positive, is essentially an infinite IRR. In the commercial sector, it will probably be in the 20% range for the IRRs. Regarding the second part of the question, SRP and developments in Arizona—unfortunately, we will not continue to grow in Arizona, and we’ve asked some of our employees to move to other states. This will help us in the other states, but it is unfortunate given the status; we would prefer to grow in the state. The utility is using its monopoly strength to kill the market, and we will see where that ends up. Once that is resolved, we will move back into the market and continue to scale in Arizona. For now, we are reallocating that volume to other regions.

Just a quick follow, Patrick. The 20% Lyndon referred to is the levered IRR.

Got it, thanks, guys.

Hey guys, thanks for taking the questions. We appreciate the kudos for the new disclosure. On the Q1 deployments being $1.7 per watt, how should we expect that number to trend in 2015 and into 2016 given pricing, mix, and cost assumptions? I know there are a lot of moving parts there. Also, what do you see as the potential for the debt cost assumptions? I think you are using 4.5% right now, and are you assuming all that new debt is fully amortizing? I have a follow-up.

That’s a lot of questions. Again, I don’t think we are in a position to do any forecasting. Even if we were, we are probably not going to go down into forecasting the next quarters. Like I said earlier, we have targets like Lyndon mentioned on the day one cash, and we have return targets we want to run on a portfolio level.

One thing I’d add to that is you can kind of pick some of that up with the retained value. So if the incremental retained value is increasing, then naturally the IRR should be increasing as well; if it stays flat or goes down, then it will have the same effect.

On the debt, the 4.5% I mean, that’s obviously very conservative. We are doing better than that, and I would expect we continue to do better than that, obviously subject to where rates may end up going. Every six months, I only see our credit spread shrinking as we continue to perform, as the paper continues to perform. I am very happy with where things are going from that perspective, and obviously on cost spend, it is really the cost of capital that’s driving our success. I think we will continue to outdistance cost efficiency.

The two most sensitive numbers to economic value creation are what the PPA rates do.

Yes, the two most sensitive numbers in economic value creation are the PPA rates; whether they are $0.13 per kilowatt-hour going up or down has an impact, and then up cost assuming financing phase.

Okay, great. That’s helpful. Follow-up on volumes: I think you guys mentioned targeting 1 gigawatt for residential by year-end. Wondering how close you are in relation to that target, especially since you installed almost 180 megawatts, which is the target for Q2 here, but you had seasonal impacts in Q4. So you would have thought maybe you could be significantly higher here versus the guidance you provided, so any thoughts there would be helpful? Thanks.

Let me just clarify one thing before Tanguy answers. It’s not a gigawatt residential; they forecasted 922 gigawatts for residential and commercial.

Great. Let me make some comments. We’re still very much in that range for the full year installs. Commercial and residential seem to be tracking nicely. As I said, we will see revenue growth in Q3 and Q4 based on where the jobs are done and published right now, we feel very good about that. On residential, we have capacity today where we can do a little more than we currently are doing, and the key in residential is we don’t want to scale too far ahead of demand. If you do that, you are adding costs ahead of the curve, which you don’t want to do. What we’ve done is implement sophisticated forecasting models that allow us to look at our patterns based on when installs will hit by geographic area. This allows us to drive reasonably sophisticated hiring plans. We are hiring recruiters, hiring from social media, and training; this allows onboarding installers to be ready when the inflow is required. We are very confident being able to run multiple megawatts on a month-to-month basis without any particular issues. As a point of reference, at some time in 2014, those were the couple of months where we grew by more than 5 megawatts month-on-month in 2014, and we were much smaller back then. Now we are growing north of 5 megawatts month-on-month, and I think we can do that again.

One additional point, Brian: when you gauge capacity against the 4Q run rate, it's worth noting that Q4 is always your biggest commercial quarter, which relies on stronger growth on the revenue front.

Okay.

Okay, in Q1.

Thanks, guys.

Hey guys, I’m bouncing between calls here, so I apologize if this question was already addressed. I know you are focused on megawatts installed now instead of deployed, but your 2015 guidance remains on a deployed metrics. Can you share what megawatts deployed were in Q1?

143 megawatts. Just for future reference, you’ll always get that number in your EDC slide, which is based on deployment, not installation. So we get 143 total with about five cash systems, so that's 138 energy systems.

It’s in the tables on the press release.

Okay, thanks. With the introduction of the cash flow available for distribution metrics, it may back the question: when do you expect you may be able to make a distribution with visible cash flows that you have, and the limited requirements on equity investments, given the robust finance machine you’re developing? What is your view on actually paying a dividend?

I have a dream. No, I think about it this way: with the growth rate that we are on, every dollar that we are going to generate, we are going to invest right back into the business, and that’s going to go on for the foreseeable future from my perspective. That would be the best use of that capital at this time.

Fair enough, thanks, Brad. I’ll jump back in the queue.

Yes, hi, thanks for taking my question. I had a couple of them. First one on California: now that they're going to be collapsing the tiers when the new tiers are finalized, some of the earliest California leasing PPA customers might find their contracts underwater based on the per kilowatt rate design and that, plus escalators. Do you have any concerns on those?

I look at that; most of the ones were in the...

Let me tackle that, Krish. Most of our California pricing is in the 17%, 18% range historically. So, it’s not like we’re pricing 10%, 15% off a rate. So if a guy that’s a heavy user is at $0.30, he is not being priced at 28%. Our standard pricing historically seems to protect us; it’s based on the proposed rates so far.

And this is not the first time this has happened. This is the second time in the last I think probably three years. They used to have a tier 4 and 5. They still do have a tier 4, but it’s same as today. We saw no effect in our customer base.

Got it, that’s very helpful. And then as a follow-up, given some of the challenging policy environments that you encountered in Arizona and some of the changes in the U.S., have you been thinking about expanding the leasing PPA model overseas or internationally sooner rather than later? Your thoughts on that would be appreciated.

Yes, we are extremely bullish on the U.S. market. If you look at the policy changes that new offices are implementing, we actually believe in a future where the grid is a two-way grid, whereby consumers are actually providing services to the utility. So we are optimistic about the U.S. market. Arizona is a little different; it is a challenging state for us. We are in states where the utilities are using every method to prevent competition and give consumers a choice. In those states, we will have to fight the fights. In our primary states, we are very optimistic about our growth. That said, we are looking at international markets. I have mentioned a few times that we have been thinking about expanding internationally in the next year for the past eight years. We will probably expand in the next year or two.

Yes, I mean, with the growth rate we are experiencing right now and the size of the markets we are in, there is no urgency to expand internationally. That’s separate from the markets where we see opportunities.

Just to be clear, we are offering microgrid solutions internationally and are seeing healthy demand, comparable to the U.S. for microgrid systems.

Got it. Thank you, guys.

Hi, thanks for taking my question. You guys talked about this $500 million battery system for stationary storage and backup generators. When do you think you can offer that system to residential customers in the U.S. and what price points do you need to see to attract some of the customers for base load storage?

I am not sure I understand the question. Is the question about when will the backup system be available?

My question is what price point do you need to see in order to have broader adoption of storage in the U.S. residential market?

This first generation of backup must meet certain price points to be released.

Market structures have to evolve as well. For example, aggregated residential demand response must significantly differentiate some of these pricing. I think the economics are kind of there now, but the right kind of market structure needs to be developed. At this point, I don’t want to put a cost target out there for what the combined battery and solar systems have to be, as that needs visibility in future tariffs. So it’s a tough question to answer because I will just reinforce we continue to spend in the hope that in the next five to ten years we will be installing batteries with solar power.

To us, it’s really about keeping the policy changes in mind. The policy benefits will also make sense for utilities. Peter has written a blog that I recommend you read. Most of the utilities would benefit if they could subscribe to the services that our customers can provide. It would simply be a past cost, not making money on it. They are motivated to deploy their own infrastructure because that’s the only way they make money. A change in policy would allow them to leverage other people's infrastructure while still making money.

And in the interim, I mean, the demand for the backup generation that we just announced has been off the charts and way beyond our expectations.

That’s helpful. And just one other question on the full year guidance for 2015: What percentage of your shipments will be, for instance, MyPower? I know you guys had provided some number in the past; I was just wondering if you can update that number?

It's tough to forecast. I don’t want to give a forecast, but I can give you an expectation based on the last quarter—what was the percentage of MyPower from last quarter.

One thing to keep in mind is our backlog and how it trickles through. It's a lot higher portion of our bookings right now than it is installed. Looking at the data, our expectation overall hasn’t changed in terms of the overall run rate.

I think roughly high-teens, low-20s.

And Vishal, it was about 15% of deployments, not installations in Q1.

Okay, great, thank you.

Hi guys, thanks for taking the question, and I apologize if it’s already been asked. It looks like a large portion of the dollars coming from cash flows and from the renewals, with the contracts being 20 years and now 30. Can you break down the additional 20-year contract versus the renewal?

It’s not a number where we are looking to split up right now. I would say roughly two-thirds from 20-year contracts and a third from renewals.

Two-thirds coming from that 20 to 30?

Well, don’t think 20 to 30 contracted versus MyPower is a 30-year contract. There are no renewal assumptions with MyPower, so it’s roughly two-thirds contracts and one-third renewals.

Okay great. And then in terms of different markets and potential adjustments to net metering, there's been quite a bit of talk there on current net metering programs. There are changes that are more on a state-by-state basis.

Everything is great for the installations, but it's safer to stay on the side for now.

Okay, great. Thanks, guys.

Hey, thanks for taking my question. Just on bookings, quite a bit about deployment, but you guys mentioned about conversion. Is most of the incremental booking from commercial in this quarter?

We had good commercial booking, but it's not much; the majority is still residential.

Historically, we’ve seen it being around 820; we expect it to probably be closer to low-teens to mid-to-low teens.

And Edwin, the residential portion of the mix in bookings was higher in Q1 than Q4.

Okay, great. Thanks so much.

You’re welcome.

One last question on MyPower. Since you guys launched the product, have you seen more competition come on the loan side of the market? How do you think that product has been received in the marketplace, and have you seen competitors offering similar types of products to compete with you guys?

Yes, we do think we are going to see competition. The strategy has never been to lead with financial innovation, but financial innovation does get commoditized at some point. For this asset class, we should have access to the same cost of capital. So our focus is on differentiating in cost, quality, and product set. That said, we aren’t seeing much competition yet in the MyPower sector; there are some loan products out there, but nothing designed the same way as MyPower.

Okay, that’s all I have, thank you.