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.

If you're involved in the running of a company called SolarCity, one question you really don't want to hear on your earnings call is: "What is SolarCity?"

The existential dread raised by that particular inquiry from an analyst on Monday evening was no doubt heightened by the fact that SolarCity's stock was plummeting 20 percent in after-hours trading.

Nasty, Brutish, and Short
Source: Bloomberg

This call was never going to be a "great quarter guys!" love-fest. SolarCity missed the consensus earnings forecast for the third out of the past four quarters, according to data compiled by Bloomberg. More importantly, it cut its guidance for installations this year by between 12 and 20 percent. You may recall how, back in October, SolarCity touched off a rout in its shares by announcing a 2016 growth target of "only" about 40 percent. Well, that's now been cut in half.

Dimmer Switch
SolarCity's installations of solar panels
Source: the company
Note: Current guidance for 2016 reflects the mid-point of SolarCity's range.

Apart from coal, few things are less popular in solar circles than cutting growth estimates. In SolarCity's case, this is compounded by the fact that it missed its original guidance and that slower growth raises a further obstacle to fixing one of its biggest problems: unit costs.

These costs are stubbornly high, in part because SolarCity has historically spent heavily on advertising and acquiring customers in the name of growth. In the past three years, its selling, general and administrative costs jumped almost 6-fold, according to figures from Bloomberg. Part of the reason SolarCity cut growth projections back in October was to rein in expenses. The problem is, if the number of megawatts you're installing is lower than anticipated, then it's even harder to get the cost-per-watt down.

Overhead Ache
SolarCity's unit cost of solar panels deployed
Source: the company
Note: Excludes research and development expenses and corporate capital expenditure.

The nasty jump in selling and administrative costs seen in the chart above was due to SolarCity booking fewer sales -- which gives you an idea of how tricky it will be to reach its cost target for 2017 if growth doesn't pick up.

SolarCity claims the lower bookings in the first quarter resulted from an unfortunate confluence of events, mostly around regulatory changes that had either pulled sales forward into the fourth quarter of 2015 or simply scared off some customers. The latter relates particularly to Nevada's ruling against solar incentives, which raised the prospect of customers signing 20-year leases only to have some state functionary mess with the economics somewhere down the line. 

Nevada was indeed harsh. SolarCity's bigger problem, though, is its waning credibility. Since at least last summer, it has become clear the company is struggling to maintain growth while also dealing with a bloated cost structure. It has been cutting and missing guidance since then.

Meanwhile, net debt, including convertibles, has more than doubled in the past year. Bulls hailed a recent financing deal with John Hancock Financial to raise $227 million as innovative. But it also appears that SolarCity sold Hancock the majority of cash flows from a portfolio of assets while retaining the maintenance and re-contracting risks.

A proliferation of non-GAAP metrics aren't helping either. Over time, SolarCity has elevated, and relegated, various metrics such as "retained value" and megawatts deployed versus installed. The cost per watt number shown in the chart above, for example, requires a methodology that runs to 7 pages. Even supposedly straightforward things such as positive cash flow begin to lose their moorings in SolarCity -- its version includes financing (other than share sales).

In its defense, SolarCity's core business model boils down to helping homeowners take advantage of tax credits that are, for most individuals, largely unusable, in order to get solar power under a long-term lease. This necessarily involves a lot of upfront spending and some complicated financing. Indeed, the convoluted edifice of incentives and permitting for solar power in the U.S. is precisely why a middleman like SolarCity exists in the first place.

The same analyst who questioned SolarCity's identity warned the company on Monday evening's call that "Wall Street thinks this is way too complicated." Some things are clear enough, though: SolarCity's debts are mounting, its costs are stubborn, and its growth targets are negotiable.

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