A few years ago, at an overhyped battery unveiling, CEO Elon Musk was asked when he predicted that Tesla would finally begin to see some profits.
"Profits? Pfffffft," was his answer.
Keep that in mind as we summarize Tesla and SolarCity's 2016 earnings results, cash burn, production plans and SEC 10-K filings.
What does SolarCity's future look like?
If you had asked that question three years ago, you might have thought that SolarCity, the largest residential solar installer by far, was going to keep growing fast while raising (and losing) vast sums of money. SolarCity would continue its market dominance by grinding down cost-per-watt with software, scale and strategic acquisitions (such as Zep's mounting gear and Silevo's solar cell technology).
Solar leases from a vertically integrated national solar installer jacked up on Silicon Valley DNA were supposed to crush the local or regional installer model. But instead, growth was slowing, loans were in vogue, Wall Street was disenchanted, conventional accounting methods revealed deep losses, and local installers were winning.
Back to TeslaCity present
SolarCity just filed a 10-K statement.
- The company installed 201 megawatts of solar versus a pre-merger guidance of 250 megawatts in the last quarter of 2016.
- The firm's net loss grew to $820 million in 2016, up from $765 million in 2015, despite revenue jumping from $400 million to $730 million.
- $828 million of principal debt comes due this year, likely to be refinanced by Tesla.
- In 2016, SpaceX purchased $165 million in aggregate principal amount of 4.4 percent solar bonds due in 2017. SolarCity’s CEO and CTO purchased $100 million of 6.5 percent solar bonds due in February 2018.
What is Tesla's vision for SolarCity?
Depending on whom you ask, Tesla acquired SolarCity because residential solar was a perfect fit as part of an energy company's offerings -- or it was a bailout that would bury SolarCity's financials while preserving some of Musk's and SolarCity CEO Lyndon Rive's fortune. Goldman Sachs said that Tesla's acquisition of SolarCity "comes at a time when we believe Tesla should be singularly focused on becoming a mass automobile manufacturer."
The acquisition's "fair value of the consideration transferred" was $2.1 billion, with the additional cost of a 10 percent stock dilution for Tesla. Solar -- and SolarCity -- are now just a small piece of the Tesla empire.
Tesla aims "to reduce customer acquisition costs by cutting advertising spending, selling solar products in Tesla stores, and shifting from leasing to selling solar energy systems." The firm is looking to "prioritize cash preservation over growth of megawatts deployed" ahead of the solar roof tile product launch later this year and hoping to curb expenses and improve the bottom line.
SolarCity aims to get its shiny solar roof-object in production at the Buffalo, New York factory in the summer of 2017, with customer installations starting later in 2017. Despite the hype and high expectations, it remains to be seen just how much revenue this building-integrated photovoltaic product will really attract.
Silevo technology is finished
In October of last year, GTM asked if SolarCity was backing away from Silevo's high-efficiency solar cell technology at its Buffalo factory in favor of Panasonic's solar cells. Was the Silevo technology being mothballed?
After all the stealthy VC funding and lawyers' fees and press releases, due diligence and promises, after the sketchy solar cell efficiency announcements from Peter Rive -- it turns out that Silevo is pretty much finished, as revealed in the annual report. Silevo will not receive certain milestone payments as part of the terms of its acquisition.
Tesla’s Buffalo factory, dubbed Gigafactory 2, will be operated by Panasonic to produce Panasonic’s high-efficiency HIT (heterojunction with intrinsic thin layer) cell technology in 2019.
SolarCity bought Silevo in 2014 for $168 million in stock and $9 million in cash, intent on joining First Solar and SunPower as the third vertically integrated solar company in the U.S. "We will be the most vertically integrated solar company in the world," said SolarCity CTO Peter Rive at the time. SolarCity CEO Lyndon Rive viewed the acquisition as a measure preventing against potential industry supply constraints, as well as a source of differentiation.
The firm claimed to be producing cells on full-size substrates with efficiencies in the 20 to 21 percent range, with "headroom to 24 percent."
According to The Buffalo News, the Empire State would invest more than $225 million into the facilities of Silevo (and LED firm Soraa), with Silevo agreeing to spend $750 million in the region. Such are the aspirational promises made at state-funded energy hub unveilings.
Despite the Silevo fiasco, Tesla is still on the hook to the State of New York.
According to the 10-K, "Under the terms of the build-to-suit lease arrangement, we are required to achieve specific operational milestones during the initial term of the lease, which include employing a certain number of employees at the facility, within western New York and within the State of New York within specified time periods following the completion of the facility. We are also required to spend or incur approximately $5.0 billion in combined capital, operational expenses and other costs in the State of New York over the 10 years following the achievement of full production. On an annual basis during the initial lease term, as measured on each anniversary of the commissioning of the facility, if we fail to meet its specified investment and job creation obligations, then we would be obligated to pay a $41.2 million 'program payment' to the Foundation for each year that we fail to meet these requirements."
Tesla and SolarCity: 2016 versus 2015
Automotive revenue increased $2.16 billion, or 63 percent to $5.59 billion in 2016 compared to 2015, driven by a 55 percent increase in vehicle deliveries to approximately 50,700. Automotive leasing revenue increased $452.4 million, or 146 percent, to $761.8 million in 2016 compared to 2015. Service and other revenue increased 61 percent, to $468.0 million in 2016 compared to 2015.
"Energy Generation and Storage" revenue now includes sale of solar energy systems and energy storage products, leasing revenue from solar energy systems under operating leases and power-purchase agreements, and the sale of solar energy systems incentives. "Revenue in this segment increased $166.9 million, or 1,153 percent, primarily due to $84.1 million as a result of the inclusion of revenue from SolarCity, as well as an increase of $82.8 million in energy storage revenue," according to the 10-K filing.
As GTM just reported, revenue from China in 2016 tripled to more than $1 billion, up from just $318 million in 2015. According to some estimates, Tesla delivered about 7,500 electric cars to Chinese buyers in 2016.
While Tesla’s U.S. sales dwarfed that figure, accounting for about $4.2 billion in revenue, China’s emergence as a growing opportunity for Tesla is significant. The country is the largest market in the world for electric cars, partly thanks to strong government support, but Tesla -- like many foreign car companies -- has struggled to sell to Chinese buyers.
In order to localize its cars better, Tesla later launched higher-end options like “executive rear seats” geared toward Chinese car owners who have drivers. Tesla has also built out Supercharger stations and destination chargers around the country to offer Chinese Tesla owners better charging options.
How to burn through $35 billion
Musk said Tesla has enough capital to reach the market with the Model 3, but its cash situation would be “close to the edge." To reduce the company’s risk, it “probably makes sense to raise more capital."
The company plans to build 500,000 vehicles in 2018 and will continue to invest heavily in the tooling, production equipment and construction of the Model 3 production lines and equipment to support cell production at Gigafactory 1, as well as new retail sites, service centers and Supercharger sites.
Tesla expects to spend between $2 billion and $2.5 billion in capital expenditures ahead of the start of Model 3 production in 2017, up from $1.3 billion in 2016. The company has $3.4 billion in cash.
Tesla will have spent about $10 billion in R&D and capital expenditures since 2014, according to Morgan Stanley. Tesla went through $970 million in cash in the fourth quarter. UBS writes, "Cash burn was bad and is getting worse."
Barclays said that a $2.5 billion stock offering wouldn’t be a surprise. Morningstar expects Tesla to raise $3 billion to fund Musk’s ambitions.
According to UBS, Tesla would need to spend up to an additional $8 billion in its network of charging stations in the U.S. alone if it wants to make recharging a car as convenient as going to a gas station. Add that to the planned costs for Gigafactories, Model 3 investments and costs associated with building a network of service centers, and Tesla might need $35 billion in capex through 2025.
10,000 Model 3 cars per week in 2018?
Tesla's fate depends on the production ramp-up of its $35,000 "mainstream" Model 3. Musk said that his firm is "on track for initial production" in July, followed by "volume production by September." At some point in Q4, Tesla says it will be able to make 5,000 Model 3 cars per week, followed by 10,000 Model 3 cars per week in 2018. "I currently think that we should build...500,000 vehicles next year and 1 million vehicles by 2020. That's 500,000 vehicles in total, Model S, Model 3 and Model X combined next year," said Musk.
SolarCity lost over 3,000 full-time jobs in 2016
SolarCity dropped over 3,000 full-time jobs in 2016, cutting almost 20 percent of its staff, and finishing the year with 12,243 full-time employees, according to its SEC filing. In 2016, SolarCity cut 550 jobs in Nevada after the state killed a crucial solar incentive, and it also lost employees after Silevo’s 100-megawatt pilot line in Fremont, California was shuttered. By contrast, in 2015, the number of SolarCity employees grew by almost 70 percent.
An abrupt CFO exit and executive churn
Tesla announced the resignation of CFO Jason Wheeler and the hiring of Deepak Ahuja (who served as Tesla's CFO from 2008-2015), for the position. Ahuja will earn a base salary of $500,000 and a $15 million equity grant. Tesla received notice from Wheeler on February 21, a day before Q4 earnings were issued.
Tesla claims it loses fewer executives than other high-technology firms. According to Bloomberg, 75 percent of senior management has more than three years of service.
Self-driving progress and autonomous vehicle insurance
All Tesla vehicles in production have the hardware necessary for full self-driving, according to the firm. Musk acknowledged "some challenges in the transition from Mobileye to Tesla software."
"We could have released Tesla Vision and including 'high speed,' probably three months ago -- I was driving at 'high speed' personally three months ago, but I think we want to just have an exhaustive testing process [and] vetting process before enabling that throughout the fleet."
If vehicles with autopilot and self-driving features are probably safer than other cars on a per-mile-driven basis, shouldn't insurance premiums reflect that? In fact, Tesla is already offering its own insurance product.
The CFO said: "The majority of Tesla cars [in Asia] are sold with an insurance product that is customized to Tesla. It takes into account not only the autopilot safety features, but also the maintenance cost of the car. So, it's our vision in the future that we'll be able to offer a single price for the car, maintenance, and insurance, in a really compelling offering for the consumer."