Solarcity (SCTY) has filed its Form 10-Q on 11/12/2013 for the quarter ended September 30, 2013. It was no surprise to see that the most recent quarter still inked in the red, with net loss of $34.5 million. Meanwhile, revenue has reached to $48.6 million, with a 52% increase as compared to same period a year ago. Since its debut in public market, SCTY has increased more than sixfold of its IPO price, i.e. $8 as reported in its Form S-1. On Nov. 19th, 2013, SCTY has closing price of $46.72 and it had been on momentum so far this year.
Let’s take a look at SCTY’s financial statements before discussing further.
SCTY has gross margin in the range between 35% and 40% of total revenue, for the three months and nine months ended September 30th, 2013. When combined with sales/marketing expenses and GA&E expenses, cost of operating has squeezed out the room of profitability completely, even without considering interest expenses. It is obvious from SCTY’s cost structure to see that immediate upcoming quarters will continue the trend of loss in operation. However, the story doesn’t end here. We see that SCTY has begun to shift one of its emphases to operating leases, away from sales of solar energy systems. For the most recent quarter ended September 30th, 2013, more than 50% of revenue was contributed by operating leases, as compared to 43.53% of total revenue same period a year ago. This is partly due to the financing attributable to implement assets monetization strategy, as recorded in SCTY’s Form 10-Q. There are few structures that SCTY has in place now, as follows.
- Joint Ventures: SCTY and its fund investors contribute funds into a joint venture, which would acquire solar energy systems from SCTY and subsequently lease these systems to SCTY’s customers. SCTY consolidates the joint ventures and records fund investors’ share of net assets of the joint ventures as non-controlling interests in subsidiaries. For nine months ended September 30th, 2013, $221 million was poured into the joint venture by non-controlling interests, a 248% increase as compared to a year ago.
- Lease Pass-Through: SCTY leases solar systems to solar energy systems to fund investors under a master lease agreement, and these investors in turn sublease the solar energy systems to customers. Cash upfront payments will be received by SCTY from its fund investors. There was an 49% increase in Solar energy systems, leased and to be leased – net account, which implies more reliance on this structure.
- Sales-Leaseback: SCTY generates cash through the sale of solar energy systems to its fund investors, and it then leases these systems back from the investors and subleases them to SCTY customers. Since more than 50% of revenue was contributed by operating leases rather than solar energy system sales, the liability account and cash flow related to this structure have not seen much movement for the quarter ended September 30th, 2013. Besides, the investment tax credits, accelerated depreciation and other incentives would be transferred to SCTY’s fund investors without taking effect in SCTY, different from what Lease Pass-Through structure would accomplish.
So the asset monetization strategy plays nicely into the financing and the business model of SCTY, which integrates the sales, engineering, installation, monitoring, maintenance and financing of its distributed solar energy systems. Customers of SCTY can have choices to purchase leases and power purchase agreements due to SCTY’s ability to finance the installation of the solar energy systems by monetizing the resulting customer receivables and related investment tax credits, accelerated tax depreciation and other incentives. According to its Form 10-Q, SCTY expects customers to continue to favor leases and power purchase agreements.
On mergers and acquisitions side, SCTY has acquired one of its channel partners In September 2013, Paramount Energy Solutions. Of total purchase consideration, only $3 million in cash was paid and $108 million was paid in SCTY’s common stock. In October 2013, SCTY has also entered into an agreement to acquire all of the outstanding capital stock of Zep Solar, Inc., or Zep Solar, for shares of the Company’s common stock valued at approximately $158 million. These two acquisitions should help SCTY bring down some burden levied by its cost structure. However, it remains unclear on the degree that these two acquisitions can generate.
Even with so much happening on SCTY’s operational and financing side, its stock price still floats at 26 for the price/sales multiple and at 12 for the price/book multiple. Investors should pay closer attention in the upcoming growth of revenue, growth of cost structure, and price multiples before investing in this stock.