Tesla Inc (TSLA) — Q4 2015 Earnings Call Transcript

Thank you and good afternoon to all of those joining us today for SolarCity's fourth quarter 2015 earnings conference call. Leading the presentation today will be a discussion from our Chief Executive Officer, Lyndon Rive, as well as our Chief Technology Officer, Peter Rive, and our President and Chief Financial Officer, Tanguy Serra, after which point in time we will open up the call 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, and the slides accompanying this presentation, as well 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 these forward-looking statements. We do not undertake any obligation to publicly update or revise any forward-looking statement. 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 finally behind us, I would like to introduce SolarCity's Chief Executive Officer, Mr. Lyndon Rive.

Thanks, Aaron. As the same format as last time, we are not going to go through the slides; they are on the website. Feel free to ask any questions at the end. Before we get into questions, I just have a few comments to make regarding 2015. Overall, the year was a great year and we had 73% growth. We also reduced our cost to $2.71 a watt. We clearly now have the lowest cost in the industry. 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. So, intentionally the development cost is cash neutral and we're developing this long return revenue. For the year, this is the most important metric, we created $740 million of value, which is net of tax and debt. In total, we have over $2 billion. And once again, on that $2 billion number, that’s the recurring revenue without subtracting all the O&M, all the fees, that's the net amount. 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. As many of you know, the PUC decided to change net metering rates in Nevada, which forced us to stop installations. Our volume in Nevada is about 20 megawatts a quarter. Now homeowners in Nevada want solar, want the freedom to choose where their energy comes from, and I think this is going to be overturned by the public through a referendum, a ballot referendum by the end of the year. On a positive side regarding policy, the federal ITC tax credit got extended for five years. This is a big one for the industry and expect to see good growth in 2017 and beyond. California, our largest market was also a very positive outcome. The outcome is a well-designed outcome by the PUC. It allows the industry to continue to grow. At the same time, prompting the industry to provide more grid-related services to the grid. This will be things like reactive power, voltage control. This will actually help us educate customers in higher load balance and manage energy with peak loads. This design by the PUC is a great design, as it will allow the industry to install a lot of rooftop solar, and at the same time providing good stability to the grid. In December, I went to Paris for the climate talks and it was clear to all the world leaders that we have to transform our energy infrastructure, and the majority of this is going to move on to renewable energy, which will be solar. Overall, in terms of policy update, the solar market looks very positive. For 2016, we expect to continue to grow at 40% and be cash flow positive in Q4. So, why don't we open up to your questions?

Hi, thanks for taking the question. First question, just thinking about the volume miss in Q4 and more in the Q1 guide being about 18% year-over-year growth for Q1. I guess that includes the 15 megawatts of C&I slipping into Q1? It seems a little weaker than what we and I think the street was expecting. I guess what gives you confidence in a rebound in demand to hit that 40% for next year? That’s the first question. Thanks.

Yes, a few things went into Q1. So we actually created a specific slide associated with this. If you go to slide 11, so Nevada had an impact. It was a little over 20 megawatts. We have the standard seasonality which is about 17%, if you look at our historic performance. We also are changing what we are doing with commercial. So this is a really key thing. As you install commercial, specifically ground mounts, once we're done with the installation, there's a lag from installation completion to when the utility may do the interconnection upgrade. So, it is not a normal interconnection. There may be some electrical component that they have to upgrade. That electrical component can take six to nine months. And so what we are doing is we're shortening the time schedule, so we are delaying the installations, pushing them in closer to when their electric upgrade will be done, so that working capital of holding these assets will be reduced. So what you can expect in terms of our commercial installations, they are going to be backend loaded. A lot of the bookings are ground mounts in the East Coast. The other point is investment into sales and marketing. So in Q4, we were reducing the investment in sales and marketing. This is why our customer acquisition cost has come down. When we look at our portfolio, leads that come in, there are expensive leads and we have less expensive leads, and essentially we stopped buying expensive leads in anticipation that there was no extension of the ITC. Now of course with the ITC extension happening, we are now going to invest again in sales and marketing to make up that delta. But those are all the reasons why it is going from 272 to 180 in Q1.

Got it and then I guess my second question relates to capital. So with the potential, I guess market fears of increases in capital costs or fears of capital availability, I guess a two-part question. One, how durable are the sources of capital that underpin your growth forecast for 2016? Do you need equity capital to fund that growth? Then just broader, how do you think about taking projects on and what the minimum spread may be between formation returns and your cost of capital? Just how wide is that spread and do you think about the business in that way? Thanks.

Hey, thanks, Patrick. So, the multipart question as you said, if you look at our last year, it is easier to talk about last year. We cleared $2.73 per watt on all the watts that we deployed. That's cash that came into the company for each watt that we deployed. That's taking the cash in from the cash flow statement divided by the watts that we deployed. That's a true financed number that's coming in. That’s obviously about $1.70 of tax equity and $1 of debt, about 2.7. The debt as you know, the way we fund our business is, we originate these assets and then we put them into the aggregation facility, which are really long-term maturities and don't have any significant repayments. Those feel pretty good. Then what we do is, we take the assets out of those aggregation facilities and either secure tie these assets or what we are doing right now, as we disclosed in the Analyst Day, is monetizing the full value of these cash flows. These are the two things we are working on. Obviously, the SEC won't allow me to talk about securitizations so we are not going to discuss it on this call. But the cash equity, we are positively surprised by the appetite in the market and I think there's been some press releases and research reports written about this asset class generating significant appetite for not only us but for a number of solar players. We received multiple term sheets on that basis and we’re looking that through. That is a series of investors that are reasonably independent from day-to-day market movements. The other point, Patrick, I want to make which I think is really, really important which is, what we are really focused on is our cost structures. So our cost structure right now is at 2.7, and as you know panel prices and inverter prices in Q1 and Q2 are going to decline. So we're going to see a decline in our cost and so what really matters is how much can you clear upfront to be able to finance that. And even if you assume higher costs, which we don't want, we will negotiate against. But even if you assume that higher cost, we're still clearing north of our costs, which is ultimately what matters here in this business to be cash flow positive.

And we should expect that to be positive into 2016, raising more asset financing and the cost structure?

Yes. Absolutely. Again, just look at 2015, it was 2.7 that we raised versus the cost of 2.7 going into 2016. We think our costs are going to continue to decline, and we think that the 2.7 did not have any full monetization cash flows; it was just our debt and securitization. If we include caution cash flows, that mix effect will drag that number up.

Yes, hi. Thanks for taking my question. Can you talk about where you are with the securitization? I know you talked about doing one a quarter, how that market is looking, especially given the recent ABS market volatility. And also can you talk about your efforts in monetization, how we should think about - what kind of assets you are looking at, how many megawatts are you looking to monetize those assets for? Thank you.

Sure, Vishal, I really apologize. The lawyers in the room are looking at me shaking their heads saying we just cannot talk about the securitization market right now. I really apologize. I really would want to, but we can't. The only point I would make is if you look at our past track record on securitization it should actually be very good and we expect that track record to continue going forward. On the cash equity, look, obviously what we've done and I don't want to disclose too much here. But what we've done is - in the analyst presentation we laid out the full pro forma - the full actual cash flows that these assets generate on a unit basis. And the appetite that we are seeing in this market is for a diversified pool of assets, which includes a mix of states, totally typical of our portfolio, a mix of commercial, totally typical of our portfolio, and there's a real appetite for that exposure. And if you think about it, these are very, very high-quality cash flows in US dollars. The energy bill of a homeowner or the energy bill of a very high-quality commercial establishment so these are really, really high-quality cash flows. We've got track record around this, we've got track record on people moving and what happens there, we have track record around billing. We've got massive amounts of data from this company over the last seven years on these assets. When we talk to investors who are looking for yield in US dollars, this is an asset class that really generates interest. We have seen there have been rumored or actual transactions in the space which we think are pretty encouraging.

That's helpful. Can you just also maybe talk about timing of when you should be looking for monetization? It should be soon or maybe a second half phenomenon? And also you talked about increasing your focus on the sales and marketing efforts. Are you still able to maintain your cash flow guidance for the end of this year that you outlined late last year? Thank you.

Yes. So the first part of the question is, these are super candidly, these are, you know how it is, which is when you're figuring out a new form of monetization here the last thing you want is to put timing pressure. That is not just good for anyone. So right now, these assets are in aggregation facilities that have long-term maturities. So from a liquidity perspective, there is no massive pressure to release these assets from there. As and when we like the pricing and we negotiate terms that we like and this is going to be a landmark deal for the industry, not just for us. We’ll let that happen. Again, I really don't want to put any timing pressure on the company by announcing something here. We received term sheets. We like what we are seeing. We are making progress but that's all I will commit to. To your second part of the question, I think Lyndon answered upfront, which is the answer is yes, and we are going to stick to that.

Hey, guys. Thanks for taking the questions.

Hi, Philip. How are you?

I wanted to walk through your sources and uses of funds for 2016. So if we assume your guidance of 1.25 gigs and 250 watt, we get to about $3.1 billion in 2016. I'm guessing so later requires another $160 million for a total of $3.3 billion. Does this total number sound right and is there anything we're missing?

Let me make sure that the, Lyndon, do you want to talk about Silevo?

Yes, just a little update on Silevo. So 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 times than we originally expected and so that equipment is going to arrive around Q2, Q3 next year. Because of that it will actually – the effect of that then we can delay the purchasing of some of the other equipment and so a lot of the CapEx or probably about half the CapEx are actually moving to 2017.

Yes, so that’s key, right, which is a significant portion of this CapEx, we've already incurred and you can see in our financials to build out Fremont, a portion of CapEx for New York can actually get pushed back. So it’s really important to recognize that and keep that in your mind. The second point is, round numbers, your math feels right, and the way I think about it is tax equity, I don’t really talk about forecast, the lawyers in the room are not going to let me but if you look historically our costs are coming down, so our cost are 2.7 and they are already continuing to come down in 2016. And if you look at what we received historically it’s 1.7 of tax equity and another $1 of debt. So if you assume that growth continues going forward and you assume some cash equity to the mix that’s how you get to your funding sources.

And with increased pricing.

And with increased pricing across the country. And the other thing to recognize Philip is that we still have capacity available in our aggregation facilities. We have about $200 million and as you know, one can upsize that and two, as you recycling away out of that aggregation and you're increasing the amount of capacity going over there. So your math is right, and we're highly, highly focused on making sure we have that. The other point I'd say is that the - no, we didn’t say the solar bonds have September maturity. There is an agreement to roll those over and so push that out in these two years in terms of maturity, which allows us to not have maturity in 2016. Yes, fascinating topic. I agree. So if you look at the tax equity piece, the tax piece is a combination of what tax payers want to monetize a tax credit for and with the tax credit we are based on the fair market value. So if you are saying that the 1.7 has been dropped, you're making implications on the fair market value going forward, which I don’t want to comment on. But that's the driver there. But if the tax equity piece goes down, then the percentage of the cash flows the tax equity provider is lower, and so the amount of leverage available is actually higher. And it's a balancing act where if you lower the amount of tax equity that you can actually increase the amount of debt or leverage get because more tax further available. So that's the mechanics there. Some I think deal with asset monetization, those are two different concepts. For what it's worth, yes monetization is the mechanics, as you mentioned, market which is if there's more cash available from the cash flows to that cash equity provider then for a given yield, the upfront financing goes up.

Yes, thanks for taking my questions. First wanted to ask in terms of your guidance on turning cash flow positive in the fourth quarter, what are the underlying assumptions in terms of tax equity per watt and debt per watt finance, as well as on the blended basis to asset sales, per watt and that is reference to the 2 gigawatts guidance?

Yes, I don’t think we're ready to commit quite yet to the percentage mix, it could be high-level numbers, right, which is – so in 2015 we got 1.7 for tax equity, I think you can make assumptions on where that goes forward, the debt we were clearing about a dollar in 2015 from the securitization we put more in that, that’s get you to in 2015 2.73, so that is a ballpark. And then cash equity is going to be higher than that, so because you might have a full value of the cash flows. Then our costs there at $271 a watt, and our costs are going to continue coming down in 2016, I think we provided some 2017 guidance of 225. And so cost continue coming down in 2016, so there is spread between what we monetize upfront and our costs thus far. And then as we have some CapEx that if we can push on that on to 2017 and we're reducing our working capital cycle time associated with commercial, so when we put that all together that’s how we get there.

Got it. Thank you.

Again, I think this is it. Thank you very much for your time today and look forward to the follow up.