Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

"My bad."

That was SolarCity's newly-installed chief financial officer taking responsibility on Tuesday evening's analyst call for not offering first-quarter revenue guidance -- albeit using similar language to how you might take responsibility for spilling someone's coffee.

Equally, the confession could be the title of a chart of SolarCity's share price over the past year; although, technically, since it is investors that pay the price, the more accurate title is probably this:

Your Bad
Source: Bloomberg

The CFO is new and flippancy is hardly a shooting offense -- like, get over it -- but investors are trigger-happy right now. SolarCity's plunge of as much as 31 percent on Wednesday is the most negative reaction to the company's quarterly results in at least three years, according to data compiled by Bloomberg (the stock has recently made up some of that ground). And don't forget that these earnings actually beat the consensus forecast. 

Sin City
The share-price reaction to SolarCity's latest set of results is one of the worst in years
Source: Bloomberg

The valid counterpoint to this is that earnings don't really matter in this case, as the whole premise of SolarCity's leasing model is to spend large amounts upfront on finance, marketing and installation in order to earn a revenue stream over the next couple of decades or so. What really matters is maintaining investors' faith in the notion that the revenue stream is worth something and that SolarCity can keep growing at a fairly rapid clip while also keeping a lid on costs.

On the central question of the value of the leasing model, the company's numbers had a positive message. Using SolarCity's assumptions, each watt of capacity that it deployed in the fourth quarter was worth $3.64 in present value terms compared with an installation, marketing and overhead cost of $2.71, a record low.

The central phrase there is "using SolarCity's assumptions." At this point investors either have some faith in the long-term value of the company's leases or they don't.

Still, the company's use of a 6 percent discount rate to get that present value number may be a tad aggressive. Residential solar leasing is a nascent business with 20-year contracts and risks around long-term electricity prices, panel obsolescence, customer default and -- as the recent regulatory ruling in Nevada gutting financial incentives showed -- political risk.

On this front, SolarCity's decision to switch from its old metric of "retained value" to a new one of "pre-tax unlevered net present value" served to highlight the uncertainty about what the core business is worth.

The more pressing issue concerns growth and costs. The last time SolarCity's stock dropped more than 20 percent after an earnings release was in October, when it announced that it would shift its focus to becoming cash-flow positive rather than single-mindedly pursuing growth. That shift not only made sense, it was mandatory in an environment where pretty much any energy-related sector relying on public-market access to fund growth has come up against a brick wall -- look at what has happened to master limited partnerships.

The real problem with SolarCity's announcement on Tuesday is that it didn't show much in the way of progress in this new direction, other than that growth had slowed. Installations of 272 megawatts in the fourth quarter meant SolarCity missed guidance again. And its estimate for this quarter, at 180 megawatts, was way below expectations, implying growth of just 18 percent, year over year. These numbers are low, regardless of the impact of Nevada's pernicious ruling.

The Next Thrilling Installment
SolarCity's rate of panel installations has slowed sharply
Source: the company
Note: 1Q 2016 figure as per company guidance

SolarCity did reaffirm full-year guidance of 1,250 megawatts. But the flip side of such reassurance is that it means the rest of the year must pick up the slack, averaging 357 megawatts per quarter. That is 31 percent higher than the record installations in the latest quarter.

Even allowing for seasonal effects, which tend to favor the second half of the year, that is a tall order, especially when you consider that the company is trying to cut general and marketing costs -- a key selling point for the new CFO when his appointment was announced. SolarCity showed some progress there, with non-installation costs per watt falling 12 percent compared with the third quarter. But this remains a show-me story: Costs were still higher than a year before.

Overcast
SolarCity's selling, general and administrative costs fell in the final quarter of 2015 but remain elevated
Source: the company

SolarCity needs significant progress on that front if it is to address its ferocious habit of burning cash, which reached new intensity in the fourth quarter:

Burning Man
SolarCity's free cash flow has plunged further into negative territory
Source: Bloomberg
Note: Net cash from operations less net cash from investing

The stock market is closed to SolarCity as a cash machine for the foreseeable future, given its latest drubbing. Showing the company can tap other sources of funding is now a critical test. It hinted at this in Tuesday's release:

We believe the key will be the cash equity monetization of up to 100% of the contracted value of a portion of our new assets with no (or much lower) debt. We expect to have an update on this strategic initiative soon. Stay tuned.

In layman's terms, that means SolarCity wants to sell the expected cash flow stream from new projects to outside investors. The speed, scale and terms of any such deal will be important signposts for fretful shareholders, and the company must show it can deliver -- no excuses. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net