Tesla Inc (TSLA) — Q2 2015 Earnings Call Transcript

Thank you and good afternoon to everyone joining us today for SolarCity's second quarter 2015 earnings conference call. Leading the presentation today will be a discussion from our Chief Executive Officer, Lyndon Rive; our Chief Operating Officer, Tanguy Serra, and our Chief Financial Officer, Brad Buss, after which point in time we will open it up to 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 as guarantees of future performance or results and reflect information that may change over time. Please refer to SolarCity's quarterly shareholder letter issued today, as well as the slides accompanying this presentation and 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'll 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 of these terms 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. With that behind us, I would like to introduce SolarCity's Chief Executive Officer, Mr. Lyndon Rive.

Thank you, Aaron. Q2 was an amazing quarter for SolarCity. We booked two new records, bookings and installs. As we look at our business, we essentially have two companies in one. We're a development company and a 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 revenue from selling the energy. As we look at our company, this quarter we booked 395 megawatts. Our previous record was 237 megawatts. We installed 189 megawatts, another record for us, with 77% year-over-year growth. We reduced our total cost of installation to $2.91 a watt. The assets we deployed achieved an unlevered IRR of 12%. After counting our fully loaded costs and paying back all sources of financing, we created $196 million of economic value for the quarter. Now let's look at the power company. We have 262,000 customers, adding over 44,000 customers this quarter, and 86% growth year-over-year. We're well on our way to achieving our 1 million customer goal. We added $1.6 billion of normal contracted payments with a total of $7.7 billion. The power company generates a lot of cash. Over the last 12 months, the power company has generated $114 million. I'm excited about this number as this is the first time we've broken out the cash for the power company from our GAAP financials. Brad will cover this in more detail. I'm now going to hand you over to Tanguy Serra, our COO.

Thanks, Lyndon. So Lyndon mentioned we had a really solid quarter of installs. We deployed 168 megawatts of residential systems and 21 megawatts of commercial systems. I'm very happy with our continued build and scale and delivering incredibly strong sales, and our leadership team has continued to work hand-in-hand to offer customers an amazing experience. Housing installs grew at 86% year-on-year. And as Lyndon mentioned, we believe we have cracked the code on commercial growth through a combination of sales execution and significantly lowering our commercial install cost, allowing the commercial team to book significant profitable megawatts in Q2, thereby ending our flattish commercial megawatt deployment record, and we expect to see substantial growth in commercial megawatts in the back half of the year. Our costs continue to climb. Our all-in costs are down 2% year-over-year, and our install costs are down 7% despite flat power prices, which speaks to the continued increased productivity of our team. Our like-for-like install costs on housing and on commercial are down versus last quarter, but in this quarter, we had a higher proportion of higher-cost projects like carports, which also carry higher PPA rates, and so the overall blend of the cost is up versus last quarter, but the like-for-like project trend continues to be declining sequentially in cost. The sales costs and, to a certain extent, the G&A are sized for the next quarter of continued growth and to always include some element of investment in the future. We see panel prices and inverter prices coming down over the next few quarters. That, combined with the effects of in-sourcing our commercial projects, allows us to nicely bridge the gap between the current $2.13 of what we're at and the $1.90 target cost we have for operational costs. With that, back to you, Lyndon.

Thanks, Tanguy. So with our lower commercial cost, I'm excited to announce that we're going to be entering the small and medium commercial markets. This is a massive market that has been neglected by the solar industry. Until recently, if you were a small business and you wanted solar, most of the large solar companies would not provide you with a lease or power purchase agreement and issue projects over 300 kilowatts in size. That included SolarCity. The two main reasons for this are cost and financing. Almost every large solar company outsources the installation of commercial systems. This makes it extremely hard to be cost-effective for small businesses. As Tanguy mentioned, we are able to bring down the cost with the combination of doing the installation work ourselves and using a unique commercial mounting hardware system called the ZS Peak. The next big challenge is financing. Most commercial buildings that have solar today have good investment-grade credit. Without good credit, it makes it hard to finance solar systems over 20 years. This makes it hard to provide financing for small businesses. In Q4 last year in California, a law change allowed leases under the PACE program. The PACE program is the Property Assessed Clean Energy program. With the combination of our lower cost and adding the lease program to the PACE program, we are able to offer attractive financing to small businesses. The economics for SolarCity will be very similar to our residential business with a gross retained value of around $1.90 a watt. I'll now hand over to Brad.

Thanks, Lyndon. I'm going to start us off on slide seven, and as usual, we had a very busy quarter with a lot of accomplishments in our financing. As you can see, we've launched our latest ABS into the market. It's about $124 million. Unfortunately, since this offering is in the market, there's nothing further we can say or any of the details we can get into, so we'll give you a full summary once it closes. This is the final tax equity structure to be rated for the ABS market, and we now have two rating agencies and two banks well-versed in all of our structures, and I expect a much more predictable flow going forward. As for tax equity, our pipeline remains very robust. In Q2, we added a new fund. We upsized an existing fund, and we ended the quarter with 447 megawatts undeployed. We have 2015 covered, and we plan on closing additional funds with new and existing investors in the second half with a focus on selling up our 2016 needs, which is proceeding very well. In addition, our revolver has been increased to support growth with additional banking partners added. Our financing factory is leading the industry in innovation and cost of capital, and we are in great shape to support our continued growth in 2016 and beyond. Economic value creation is a key metric we introduced last quarter, and it captures the total value creation to equity using our actual Q2 installs and cost for the forecast for debt. Our EVC increased 33% from Q1, driven mostly by deployment growth and lower cost. The Q2 unlevered IRR was 12%, up nicely from 11% in Q1. The NPV on a per-watt basis was approximately $1.14 per watt, suggesting a range of approximately $1 billion-plus of annualized equity value creation in 2015 based on our megawatt guidance. If we run this same model applying the expected impact of a 10% ITC in 2017 with our 2017 cost goal, we would still maintain healthy unlevered IRRs of approximately 7.5% and an equity NPV of roughly $0.60 per watt. Now getting to the main event, as promised, we are introducing new disclosure with respect to our cash flow generated from our power company. This is very important since due to our rapid growth, the strong cash flow generated by our power company is hidden in our GAAP financials by the investment in DevCo, which is driving our rapid growth. CAFD is the focus in the industry and our PAC disclosure, as we call it Power Available Cash, is our proxy given that our capital structure is very different than the average YieldCo as we use tax equity and debt versus equity to fund their business. The quarterly detail we've provided includes all direct costs to manage the power business, and it is derived from our consolidated GAAP financials. We have prepared a detailed white paper that details our methodology and calculations, and it's also available on the website. The trailing 12-month PAC totaled $114 million, of which a record $41 million was produced in Q2 alone, thus adjusting an annualized run rate at the end of Q2 closer to $160 million plus. Regarding NRV, we continue to generate strong gross as well as net retained value, and we ended the quarter with a net retained value of $3.1 billion, an increase of almost 13% quarter-on-quarter. Notably, our gross retained value per watt increased across the board and commercial rebounded back to its historic range. I'll wrap up with some guidance. For Q3, we expect to install approximately 260 megawatts, which is a very strong 90% growth rate year-on-year. We entered the quarter with record bookings, and July has continued to be very strong. We also have our usual GAAP guidance listed on the slide for your reference. For the full year 2015, we're aligning our full-year guidance to megawatts installed versus deployed, which is consistent with the way we've been providing our guidance for the last two quarters, and is the way we'll provide guidance going forward. As such, we expect to install 920 megawatts to 1,000 megawatts for 2015. Remember, deployments tend to lag this number by several weeks on average due to our large volume and the scheduling of third-party inspections. In summary, I think we had a great Q2 and I expect an even better Q3. As a company, we remain very focused on rapid growth, lowering costs, and driving higher equity returns to our shareholders. I'll now turn the call back to Lyndon.

Thanks, Brad. Okay, let's wrap things up. I really want to explain how the management team thinks about the company and the equity value that we are creating. We have a power company. The power company has 1.4 gigawatts of deployed assets generating gigawatt-hours. Over the last year, the power company has generated $140 million of cash, and those assets will step up to $166 million in the next six or seven years post the tax equity flux. This cash flow is contracted with investment-grade entities and high FICO scores. If we were to stop the business today, we would collect $9 billion over the next 30 years. Using a 6% discount rate, the net retained value of the power company is over $3 billion. We also have an amazing development company with over 12,000 employees selling a product that is cheaper and cleaner than the alternative. We install one out of every three homes in the U.S. We also have the best safety record and the lowest cost in the country. When we deploy a watt, we create a cash stream of $0.07 per year. If you discount that back, it's worth a little over $1 a watt for our freeholders. Over the last six months, we've deployed 342 megawatts and created $343 million of value. We keep this value in our balance sheet and then we put it onto the power company. For the year, we plan to install 922,000 megawatts, which should create around $920 million to $1 billion of value, growing at 86%. We feel really good about the company and we also feel good about the company post-ITC reduction. We believe that our cost structure will allow us to thrive post-ITC reduction and generate $0.60 per watt for equity value. Now we'll open up to questions.

Congrats on the new records and the IRRs. First question for me just on, I guess, the cash flow number, looking at that, before deducting the amortizing debt – or partially amortizing debt, I guess about $185 million annualized in Q2. I guess some of those megawatts have been added late Q2 as well. So, I guess, one, is that the right way to think about it? And then, two, looking at the capital structure for the PowerCo, just help us understand how you're thinking about optimizing that capital structure and anything to do for equity there. Thanks.

Yeah. Hey, thanks, Patrick. It's Brad. So, I think your quick math on your intro to your question is a good way to look at it. And remember, with the rate that we're adding stuff, the additions are constant throughout the quarter, right? So we've given historical numbers. I mean, obviously, we'll start looking at some more forward-looking data on a going-forward basis that I'm sure you'll all be asking for. But we think it's very important that you kind of get grounded in the past. There are lots of assumptions you can make, and we'll provide so you could see it going forward. I think as for the capital structure, we're very flexible as you can see. We've led the way in securitization. We got a couple of other things that we're working through. I think you'll continue to see us drive innovation where it can because our focus is not only on lowering those costs but lowering that cost of capital as well.

Got it. And then my second question, just thinking about organizational constraints. So 260 megawatts for Q3 installation, I guess that implies about 360 megawatts at the midpoint for Q4. Just the level of comfort around the organizational capacity, given you're doing some more of the commercial work yourself. And then a sub-part question, just thinking about the mix of commercial in the back half, given some of your comments there would be helpful. And then, sorry, last sub-point, I think you've already brought this up, but $900 million to $1 billion in value – or equity value created this year implies some pretty stable returns. I just want to make sure I'm interpreting that comment correctly given the mix. Thanks.

Sure. Yeah, thanks. We've provided a couple of details on scaling – we have been scaling historically at that growth rate, and the most important piece of when you scale is to build the infrastructure to do so. We have things like training centers and training programs close to universities, and so we're able to hire, onboard, train, and get installs on the roofs in a way that makes a lot of sense. There's a fair bit of software and algorithms that go into predicting where and when those crews will be needed, and so we feel very, very good about being able to scale as we have historically.

Yeah. One thing I want to add on that as well is the commercial bookings. We had early commercial bookings in Q1 and not so good commercial bookings in Q2. The big delay for commercial is the permit. Of course, to book them early in the year, the permits should come out in time for us to get it, so that's another reason that makes it easier to ramp up by the end of the year.

To specifically answer your question, the mix of commercial as a percentage will increase in the back half of the year.

And regarding the equity value, this is why we've added the extra disclosures, so you can calculate the $0.07 per watt that we generate. If you discount it back to today, it's roughly about $1 a watt – a little over $1 a watt. And so that's the reason for the extra disclosure. The company is growing extremely well and it creates tremendous value at every watt we deploy.

Thank you.

Hey, guys. Thanks for taking the questions. If I look at your average megawatts in installed base over the past 12 months on the same trailing 12-month basis that you're looking at this cash available for distribution metric that you're disclosing, it implies an unlevered number of somewhere around $0.14 to $0.15 a watt and then levered per watt right at around $0.10. Is that a fair way to think about the generation potential and future megawatt growth? And then I had a follow-up.

Yes, I mean, it's definitely in the ballpark. I mean, there are different things that impact that depending on some of our structures and prepayments, etc., but you're always going to have that. That's why we thought it was important to give you that trailing 12 so you could get a view on seasonality, and so on. But your concept is the right way to look at it.

Okay, fair enough. That's helpful. And, Brad, follow-up for you and you've kind of already alluded to it. But last quarter, you cited that the availability of capital was at an all-time high and you guys have obviously done a great job in adding some tax equity capacity since the end of last year. But as we move closer to 2016, how should we be thinking about general tax equity availability for new funds, which I would presume are going to start being slated for 2017 volumes? So the question would just be about how the 10% credit impacts the volume of tax equity and also the cost, and maybe if you're getting any early indications from the banks. Thanks.

Yeah. I think the big thing you'll see is, obviously, a lot of stuff on the utility scale that's expected to dry up pretty heavy. We've seen dollars that were allocated to wind moving over, and we're actually seeing some people that were playing more in the low-income housing credits coming into this market. So if anything, I think the moves toward distributed solar are picking up much quicker than we expected. The companies we're dealing with have remained very profitable. A lot of banks that were underwater for a while are coming back. They now have possible income that they want to manage. So I think, net-net, the market is actually better and bigger, and I think to where you're going, I think terms and with our size and, more importantly, the frequency and consistency that we can deliver is being very well noticed. We get a lot of people that are like, why would I want to deal with anybody else because you guys have got the track record? We have a great machine on the front and back end and we most importantly deliver to these guys when they need it. So I'm very comfortable for 2016 and, who knows where 2017 will go, but I don't think that will be an issue.

Okay. Thanks, guys.

Hey, can you hear me now?

Yes. We can.

Hey, guys. Thanks for taking my questions. It looks like you've reduced your 2015 outlook by an implied 6% by shifting guidance and the units from deployed to installed. What drove the decision to change the units, and what would it take for you to hit the high end of the revised guidance? Also, can you elaborate a bit more on what your bottlenecks might be causing the shift? Thanks.

Yes. So, yeah, we did change that. We changed it from deployed to install. We can control the install, and what we noticed happened last year is we had the large volume, the mad rush going into November, December, and the city departments and the utility inspectors could not keep up with us, and so that's the constraint. In order to hit that, you have to book two weeks or a month earlier, and if you look at our monthly run rate, we wouldn't be able to get that deployed number by the end of the year, although the install number, we feel very good about.

And I think, from my perspective, we just want to be very consistent. We've had a few people that, in conversations and modeling, have mixed installed and deployed, and we want to be on the same page regarding what we could control. Again, we're very confident in the install, which is the most important thing because if we don't get installed, nothing else is going to matter.

We are very optimistic about the deployment and installation numbers we are reporting. Certain factors, as Lyndon mentioned, could cause fluctuations within the range, particularly as we approach the end of the year with an expected run rate of around 50 megawatts, which equates to about two weeks' worth of volume. Delays in permitting of about two weeks on projects could also affect the range, but they do not impact the underlying economics. This is about timing rather than our ability to complete the installations.

Great. Thanks, everyone. As for my follow-up, can you give us your latest view on how you expect megawatts to scale in 2016 and potentially into 2017 as well?

Yes. Good question. We're not ready yet to give a forecast for 2016, but we're confident that our growth would be above the industry growth for 2016, so we'll be just – we're just not ready to give a megawatt install for 2016.

Hey, guys. This is Andrew on for Krish. A quick question on the deployment versus install breakdown, just curious if you had an estimate of where deployments would be in 2015. The main part of the question is really how – what are the implications of this going into next year for getting installations qualified for the investment tax credit? Will that be an issue if you have something on a roof installed by the end of – in mid-December 2016 but it doesn't get approval or is officially deployed until sometime in 2017? Does that raise some ITC issues?

Let me take the first part. In our press release, we show you installs and deployed figures and we're going to continue to show that information. We're just not going to guide to it, just to be clear. You'll always see that information when it happens, and we'll put it out there, but it's too hard to guide to right now. The amount of commercial and the hundreds of jurisdictions we're dealing with, it's all over the place, especially with Christmas. So we'll be glad to provide the information, talk about it historically, but it's too difficult to predict.

It should range between two to three weeks in delay, so roughly speaking. So whatever the deploy number is, that number will grow, but you have to look at weeks of megawatts installed versus total megawatts being deployed. There's a difference between installed and deployed.

Right.

In terms of the second question, yes, absolutely, this would be a concern on especially larger projects that have to PTO in time for the ITC. This has to be included in our guidance and has to be built in as we look at selling. The way we would look at it, however, for most of the projects, this is more applicable for the commercial projects that don't meet the cutoff without it, but for most of the projects that we were deploying, we will continue to just install and have a $0.60 per watt economic value creation instead of over $1, but yes, we'll just continue.

Great. And then just on the PowerCo cash flow modeling, thanks for that and all the incremental detail. When you look into 2017, just curious if you guys can comment on how quickly do tax equity obligations ramp down versus how quickly interest and amortization might ramp up as the financing mix renews installs changes. In other words, do you have legacy tax equity obligations that you'll maintain as new systems will be financed more with debt and increase your interest and amortization requirements?

Yeah, that's a future question. But I think it might just be the extent to which your pre-30% ITC stuff rolls off as the 10% rolls in, and the pace with which that happens.

Yes. Essentially, what happens is we'll do less tax equity and more debt. Nothing changes with the past systems. Those obligations stay exactly the same. All the systems to deploy in 2016 will have similar obligations to what you're seeing in 2015. In 2017, on a 10% ITC, we'll be raising less tax equity so we'll be giving less of the cash flows to the tax equity investors and then more of the cash flows to debt providers. I think that answers your question.

Thanks, guys.

Yes. Hi. Thanks for taking my question. In the near term, have you seen any change in the margin pricing environment because of the change in the trade case ruling for some of the Chinese companies that the prices have gone up a little bit? Can you maybe give us color about your international strategy, are you starting to look at some of the international markets as you look beyond 2016?

Sure. I'll answer the first one and then let Lyndon answer the second one, but on the first one, yeah, we're seeing module prices being flattish for the last several quarters, last five to six quarters, and we're seeing now pricing start to come down. There are a number of really high-quality module manufacturers both in China and outside of China for which we are grateful partners that are seeing their price reductions from these quarters, so that is really good when we look at our cost target.

Yes. And on the international markets, we're absolutely very interested in looking at international markets. There are many international markets where the equity value creation is really good without any incentives, so it's just pure on the fundamentals. So, yes, we are looking at those and stay tuned.

Hello. Can you hear me?

Hey. Sorry about that. So I understand you guys have the ABS on the road and can't talk too much about it. But can you clarify two things? First, this ABS is only for the historical lease project; it doesn't include any MyPower? And then related to that question, how much MyPower contract do you think you need to build up before you can actually do a MyPower ABS?

Edwin, we really can't talk about that deal. So I would suggest maybe realigning your question.

But then my question relates to MyPower ABS, maybe any way you can quantify how much do you think you can build up – you need to build up in MyPower contracts before you can do a MyPower ABS?

We really don't want to talk about ABS right now, if you don't mind.

On MyPower, just like when we would do an ABS on MyPower, yeah, it has to be large enough to go through the transaction.

It's easier, and like Lyndon said, we're building up the assets. Then we'll look at the back-leveraging at the time that's appropriate, and if ABS is the right vehicle, away it goes.

Right. Yeah. I kind of agree with that. It seems like it should be much easier. And then thanks for providing the PowerCo cash flow information. That was very helpful. Any way we can think about – as I walk through that, right, so obviously, you guys are financing a lot of it with debt, right? Any way we can think about how much – what kind of interest rate we should expect? As we look forward, how do we think about interest rate that we should expect that you guys need to pay to finance those cash flows? Any kind of way you can help us think about that?

Could you clarify exactly what you're asking?

So we...

We disclosed our interest rates, so you have that.

I mean, you guys disclosed – I can use the historical information to get a rough idea of what rate, what your blended interest rate are right now for your debt that you have, right. Is there a way we can think about that longer-term? What rate do you – is it – because you guys have a lot of different debt – different types of financing, right, it's kind of hard for us to figure out how much of which each component of that is baked into the MyPower debt?

I mean, there are two elements obviously, right, what happens with rates, and then the corresponding offset hopefully is where does our credit spread continue to go. Our paper is doing really well. We'll talk across the securitization once it's done, but we're moving in the right direction, and the assets are great. So we're in that low 4s now, and it's just a reflection of where those two net out. I think we're going to be comfortably well below all our competitors out there and, more importantly, below the 6% we've been using for a lot of our present value calculations. So you tell me where rates are going to go and then I'll fill in the rest.

Yes, okay. Right, hey, thanks very much. I appreciate your answer.

Hey, guys. It's Ben from Baird. Thanks for all these disclosures there. My question was on any kind of bottlenecks you're seeing in construction crews out there? We've heard some of that, and I just want to see where you guys are in your hiring for installation crews and as we look ahead to 2016 how you feel versus some of the competitors out there that aren't vertically integrated?

Yeah. I think you answered your question; I’m really grateful for that. Being vertically integrated is the key to this stuff, which is – we call it – you can use the bicycle chain analogy or whatever analogy you want to use for tension, which is if you've got a pipeline of sales coming through and then a fast deployment and a high-quality deployment of audit and then a call center in Las Vegas with over 1,000 people taking the calls, handling the customer care issues, going through the paperwork, and then pushing that out to the field with permitting, ultimately creating jobs for installers – that tension is what creates success. What that does is allow us to pay people well obviously, because we've got a really sophisticated form of incentive pay for installers. The more jobs that they filter through, the more pay they get, which creates a really positive tension in the organization. It also allows us to attract and recruit the best in the industry as well as from other industries because, as I said, we're able to pay more than comparable jobs. And I think that productivity focus is key here.

In terms of our bottleneck, hiring install crews is not at the top of the list. The biggest bottleneck we face is picking up from booking to getting it ready for installation. That involves dealing with all the permitting and getting back to customers, finalizing the designs, and back and forth if customers are on vacation; that is our biggest bottleneck, moving from booking to getting it ready for installation. The installation itself, as Tanguy mentioned, we need to have really good processes to ramp that up.

All right. Thank you very much.

Yes. Thanks very much for taking my question. Just on I think the economic value creation, page 8 or 9, your capacity factors seem to go down a little bit. Is this because of a geographic shift or is there something else going on?

I don't understand your capacity factor; what do you mean by that?

Yeah, how are you calculating that, Paul?

Four hours per annum, it seems to have come down a little bit relative to the price.

Okay.

Yeah. That's a mix increasing in terms of the percentage of our installations. So, that's just the mix.

Right. Got it. Okay. And then can you tell us anything about FICO scores and where you're headed and ultimately here and maybe also what kind of default rates you're seeing at the moment, if anything?

So, on FICO scores, I mean, our goal as a company is to get to the point where we can solar affordable to everyone. So, that's what we're trying to do – we're going to do more and more innovation to achieve that goal. Right now, if you take the history of the company, we went from 725 down to 700, down to 680, down to 650, and now we have to figure out how to make solar affordable for everyone in America to get cheaper, cleaner energy.

They're minuscule. The best thing to look at is the last securitizations we've done. That describes it really well.

Yeah. Real quick follow-up; just to clarify Lyndon's comments, the numbers he gave you are our bottom, our minimum. They don't represent our actual average. Our average is still comfortably in the 700s, around 730 to 740. So, you're not going to see that mix change too quickly. The delinquency – even just aging is well below normal, it's sub-1% just aged stuff, and as far as true write-ups, it's a couple of handfuls. And it's usually due to unfortunate circumstances.

Right. Okay, got it. And then lastly, if you could give us a quick update on the manufacturing capacity up in New York State labor, and what's your latest thinking on when that comes online and starts contributing towards lowering costs?

Yeah. We're excited about that. We're still on track. We'll have the buildings ready towards the end of this year and the equipment getting installed in H1 next year, ramping up and being at full capacity in 2017. That will significantly contribute to reduction in costs both because the panels themselves on a dollars-per-watt basis will be cheaper, but also because they're higher efficiency panels, and as a consequence, all of these per panel costs will come down on a per watt basis.

Okay. Thank you very much.

Thanks for including me, guys. Can I ask about the small business opportunity? So you talk about how it's in the donut hole? There are no FICO scores the way you have in residential, but you don't have corporate credit ratings either. How are you going to decide which small businesses are creditworthy to sign a lease and which ones are not?

Yes. That's a really good question. So this new program – it's actually not that new, but it's new to leases and power purchase agreements. It's called the PACE program. That's essentially a program that allows you to tie the lease payment to the property tax of the building. And so, with that, you essentially take a building on our customer that it was hard to underwrite credit to automatically an investment-grade credit. So it's really, really strong credit, in fact stronger than most investment-grade credit. And so now you can use that and finance systems, and the key thing is to tie it to that. It's available right now in California. We expect that the results of this will show other states to follow it because the PACE program has been deployed in about 14 states, but California is the first to allow leases under that program. The whole purpose of the program is to allow building owners to make an operational building upgrade to reduce operating costs. So any business that actually does this, becomes healthier using the property tax to pay for it.

Okay, understood. And is this viable so this approach that you outlined, this is applicable in all of the states where you're going to be rolling out the small business product?

So we need the law to change to allow leases – the PACE program is in about 14 states. But the change in California last year allowed a lease program under the PACE program. That's a key change, so it's only available right now in California. We expect that to roll out to other states as policymakers see the job growth and the movement of small commercial because PACE has been around for commercial for four or five years, and the adoption has still been very low. If you combine PACE and lease, we are convinced that the adoption will increase dramatically. The example I could give it’s very similar to what the residential business market was back in 2007; financing was available for residential back in 2007, but you had to go get home equity loans and finance the solar system. It was really hard and a lot of work to pay for commodity. Now we make it easy, we take care of everything, and we just provide them a lower cost source of energy. One key thing, which you may have picked up in the media report is the lease payment is locked in, so the value proposition for the small business is tremendous. They save money – call it about 5% to 25% from day one, and the lease payment is locked in at that rate for the next 20 years.

Okay. And then just quickly on the geographic footprint, I think you went into three new states just in the past 90 days, New Mexico, New Hampshire, and Rhode Island, should we expect a similar pace of new state entries, or are you kind of reaching a more natural limit at this point in your footprint?

Yes. As Lyndon said, our ambition is to provide solar to everyone, and we're really working hard on that. The key to providing solar to everyone is to continue lowering cost. As we continue to lower cost and have the regulatory regimes in states that allow us to create economic value, we will open in those states. We've opened three. We've got a couple more that we're evaluating and likely to open pretty quickly. And as we continue to lower costs, we'll be able to open more states. But those are the ones we're focusing on now.

Yes, some states' policy needs to change. Like you have Florida, which should be a good market, but there needs to be some policy change there to make solar work in progress. So as those things happen, we'll look to expand.

All right. Appreciate it, guys.

Hi, gentlemen. This is Noah Kaye in for Colin. Let's just pick up on the last question, which turned to a discussion of policy. I think in your letter, you mentioned Nevada and Hawaii as kind of a near-term policy focus, where I guess the industry is playing a bit of defense on the net metering. Where do you see the incremental opportunities for progressive policy? What are you putting most of your focus on these days?

So I'm highly optimistic about where we end up in Hawaii, California, and New York. I think these are the three states that are going to look at how the future of the utility and solar industry will look like, and they are going to come up with programs that allow and continue to generate renewable energy adoption. So those are the three states that have a closest understanding of it.

Okay. Turning to a different topic, looking at sales cost and thinking about sales cost efficiency, you had a record bookings number in the quarter that's a high denominator. Year-over-year sales costs are still picking up. Can you help us understand and maybe better tease out how you're thinking about driving down those sales costs over time and what your expectations are to lower the acquisition cost process?

Yes. The acquisition cost is quite tied to our growth as well. If you look at – a lot of the acquisition cost today is referrals, which is the largest source of our new customers. So if we were to stand on the growth, the acquisition cost would come down dramatically. So that last mile and reaching those extra customers who have never thought of solar before and then spending money to get them excited about it, we are going to start trying to sell over the Web. We are establishing new partners; as you may see, we have established a partnership with DIRECTV, one with Best Buy and Home Depot, and those partners are still doing well. But the acquisition cost has been slightly increasing but is flattening, and unless we succeed at really funneling it through the Web or changing the sales process to get more units through the same sales team, that's where we have to get.

Understood. Thank you.

Hi, guys. Thanks for taking my question and appreciate the incremental disclosures here. First, cost per watt, installation costs were up quarter-over-quarter, and I was wondering if you could help quantify the impact from the investments that you're making in capacity and maybe any under-absorption that happened there as those costs were up quarter-over-quarter. C&I was called out as being a driver of higher cost in the quarter, which kind of surprised me, because I would have expected C&I installation costs to be lower on a per watt basis, and then I have a follow-up.

Sure. A couple of things; so one is, on a like-for-like basis if you look at housing, rooftops for commercial, ground mount for commercial, carports for commercial, on a like-for-like basis all the costs are down sequentially. Housing is down. It costs us less this quarter than last quarter to install a given house. In Q2, we had a number of higher cost projects, including in particular carports, which have a higher cost per watt than the average blend. When you pull those through the financials, the blended cost goes up. So it's a mix effect. Now, as I mentioned earlier, the PPA price of those carports is also higher, so even though the costs are higher, the revenue associated with that is also higher. So it's somewhat of a mix effect on the cost. On a like-for-like basis, the costs continue to decline. We’ve cracked the code on being able to grow without having excess capacity and hiring just in time. If you don't do that, your cost is too high really, really quickly.

All right. Thanks, guys. Appreciate that color. And then, as a follow-up...

One more thing on that same point. We're not giving up on this thing. I feel like I should explain how long it used to take us when we subbed it versus if we do it ourselves.

Yes. This is a fascinating topic. We've spent a lot of our time on it. We really, really think we can take a lot of cost out of commercial. A typical big-box retailer used to take about 26 days, 27 days to install, and with great subcontractors, super high quality, but when we do the job ourselves, with our people, SolarCity employees, our awesome people, our training, methods, and culture, it takes three days. That is a dramatic difference, obviously, in fixed cost because the crane and all of the associated fixed costs that you've paid per day just dramatically collapse. It also does for a big-box retailer who obviously finds every day of construction on a roof a pain that being able to take less than 27 days to three days has become a compelling and powerful sales argument for our sales team. We're winning a lot of business on that basis of just being lower cost, faster, better, safer than competitors.

Yes. In fact, people don't believe us, so we created a video to show how we can do it in three days versus 27 days. You'll see it.

With less people.

Very good. And I have a feeling this answer might be a little bit shorter, but I can't help but notice that you called out the CAFD per share of being $1.18, so that begs some obvious comparisons across the YieldCo space and healthy discussion around any premiums maybe associated with lack of dilution that it takes to grow that CAFD, but also it begs the question of whether – or how close we might be to seeing any kind of cash return to shareholders?

Cash return to a SolarCity shareholder, I don't think you're going to see it for a long, long, long time. Our goal is every dollar we're making is being reinvested as fast as we can driving growth until solar penetration is over 50% or 60% of the world. I think the return to the shareholder is going to be far greater if we continue to grow and spread the solar love.

All right. I appreciate it. Thanks, guys.

Hey, good afternoon.

Hi, Julien.

Hey. So first quick question, ABS not to get too touchy, but how frequently do you guys expect to come to the market now, just hoping to iron out the issues associated with it? Should we expect a pretty regular frequency at this point?

We're not going to comment on ABS.

Exactly, Brad. We're not going to answer that question.

I tried, right.

Fair enough. And then just on the commercial effort here you guys are talking about. I mean, obviously, it's somewhat exciting, but could you help quantify that in terms of the megawatt opportunity in terms of leveraging PACE? It seems like a step-change if you can provide some perspective, both maybe in the back half of this year as you think about that contributing to your targets, and then subsequently in years onwards if you can talk to it, maybe while we're at it, margin to the extent possible as well?

Yes. The next quarter is going to be very telling. We've cracked the nut on the cost. We've cracked the nut on financing; now we've cracked the next nut, and that is everyone's going to sign the same contracts. There's no negotiating, nothing. This is what you get. This is what you pay for, and we love your cost of energy. So that sales process just launched on Tuesday. We have to express that sales process to really give you a better forecast. The next earnings call will provide a lot more insight into how that division is doing. But in terms of market size, it is the second biggest market in the country: residential, number one; small commercial, number two; and then large commercial, number three. It has amazing potential, and if we crack it out, we'll create a similar type of factory where you sell onsite. You sell over the phone. You get customers signed up. We do the design. We do the installs. We leverage our existing operational centers. We create the crews within the same infrastructure, and we just grow. We'll take it from California and then eventually take it to the East Coast and expand it to the other states.

More importantly, the returns are on par, right, with our residential business?

Yes, the gross retained value should be around $1.90 a watt or so.

Okay. So it's similar? And you alluded to it earlier in terms of policy for PACE. Are you seeing adoption elsewhere? If you can speak to that and where – what is your expectation for the adoption if you have one in other states?

On PACE? Yes, PACE has a great story. It creates a lot of jobs and reduces the operating cost of the building. It's a good program to enable small businesses to use clean energy. I'm convinced that as soon as policymakers see the amount of job growth we create with this program in California, and the amount of savings we can provide to small businesses, policymakers will just change their policy. They already have the program in place; they just have to allow leases. It's not a big adjustment. They're not creating the PACE program; it just needs a modification to include leases.

Right. But no necessary timeline or forecast or expectations on specific addition dates, etc.?

I'm expecting the first half of next year.

Got you. All right. Great. Thank you.