SolarCity's (SCTY) CEO Lyndon Rive on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: SolarCity Corp. (SCTY)

SolarCity Corp. (NASDAQ:SCTY)

Q2 2014 Results Earnings Conference Call

August 07, 2014, 05:00 PM ET

Executives

Aaron Chew - VP, Investor Relations

Lyndon Rive - CEO

Bob Kelly - CFO

Tanguy Serra - COO

Peter Rive - Founder, CTO

Analysts

Brian Lee - Goldman Sachs

Edwin Mok - Needham & Company

Andrew Hughes - Bank of America/Merrill Lynch

Philip Shen - Roth Capital

Josh Baribeau - Canaccord

Patrick Jobin - Credit Suisse

Vishal Shah - Deutsche Bank

Ben Kallo - Robert W. Baird

Carlos Newall - Raymond James

Operator

Greetings; and welcome to the SolarCity's Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Aaron Chew, Vice President of Investor Relations for SolarCity. Thank you, Mr. Chew. You may begin.

Aaron Chew

Thank you, operator, and good afternoon to everyone joining us for SolarCity's second quarter 2014 earnings conference call. Leading the presentation today will be a discussion from our Chief Executive Officer, Lyndon Rive; our Chief Operating Officer, Tanguy Serra; as well as our Chief Financial Officer, Bob Kelly, after which 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 a guarantee of future performance or results and reflect information that may change over time.

Please refer to SolarCity’s earnings press release issued today and the slides accompanying this presentation as well as our periodic reports filed with the Securities and Exchange Commission for a discussion of these forward-looking statements and the factors and risks that could cause our actual results to differ from our forward-looking statements. We do not undertake any obligation to publicly update or revise any forward-looking statements.

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 definitions of these terms and required reconciliation between GAAP and non-GAAP financial metrics included in the earnings release issued today as well as the slides accompanying the presentation, which are available on our Investor Relations website, at investors.solarcity.com.

And, with that finally behind us, I would like to introduce SolarCity's Chief Executive Officer, Mr. Lyndon Rive.

Lyndon Rive

Thank you, Aaron. We really had an amazing quarter this quarter. Here are some highlights.

We saw 218 megawatts of new bookings this quarter. That's a 216% growth rate. We only expected these types of bookings in Q4. With adding 30,000 customers in one quarter, we're well on our way to achieve our 1 million customer goal in 2018.

We also grew our installed capacity 102% to 107 megawatts. With the third securitization we're able once again to reduce our cost of capital.

Earlier we announced the Silevo acquisition and we expect it to close at the end of this month. We're in active discussions with the State of New York regarding the manufacturing site. Once we completed this process we'll be able to communicate our financing strategy regarding the manufacturing facility. We are super excited about the acquisition and what it can do for our total installed cost.

Moving on to nominal contracts. We now have over $3.3 billion of customer payments coming to us for the next 20 years. We've added 800 million in one quarter. This growth and demand for our product has really exceeded any of our previous forecasts. And, I guess, we find ourselves in a very exciting situation.

With each investment, we yield high returns for the company and save our customers money. So now is the time to really capture the market and grow as fast as we can. The highest growth rate does increase our working capital needs.

In the past we've communicated our goal of being cash flow positive for the year, but in light of the opportunities ahead of us we're going to invest in customer growth, and – which is way better for the company.

I'm going to now hand it over to Tanguy our COO.

Tanguy Serra

Thanks, Lyndon. So as Lyndon mentioned we deployed 107 megawatts in Q2 2014, or about 1.2 megawatts per day every day of the quarter. This represents a doubling year-on-year with a very similar mix of residential and commercial megawatts. As you might remember, we used to deploy 1 megawatt every 10 days in 2010 when we did 31 megawatts in the entire year.

We have been able to achieve this 102% year-on-year growth through a significant increase in productivity of our crews. This is coming from using our proprietary Zep hardware, a new approach to centralized scheduling on our Las Vegas platform, a change in our incentive structures across the company. I'm extremely proud of all the contributions and achievements of men and women at SolarCity. Amazing quarter for all of us.

This year-on-year doubling is consistent with our historical track record and with the goals we have set for ourselves. Given the substantial portion of our growth has come from productivity increases, we have seen a continued reduction of our unit costs and are performing well ahead of our initial guidance at the time of the IPO.

In December 2012, at the time of the IPO, we were targeting a 5.5% annual reduction in our all-in costs. A year and-a-half later, we have achieved a compounded reduction of over 11% reducing cost twice as fast as our goal.

In an effort to increase the transparency of our cost structure, we have reconciled the GAAP numbers from our 10-Q to our unit costs. We have published a memo reconciling 10-Q to our unit costs and the detail of that calculation is available on our website.

Let me walk you through it. So these are the unit costs that we focus in day-in and day-out as a team. Hay, our CRO focus on the sales costs, I focus on taking out the sense out of our installed cost and the entire management team is highly focused on the overhead cost.

On average, we spend $2.29 to build a solar system. This includes the panels, the inverters, our proprietary Zep mounting hardware, the balanced system, the labor cost, the call centers, the processing and engineering function, as well as all the infrastructure, vehicles and warehouses necessary to install our solar assets to $2.29 install cost.

We typically also incur sales-related costs at the time of the signing of the energy contract, when one of our sales representatives gets a lead and helps a homeowner or a business go solar.

So to get to the unit cost, it is important to look at the sales and marketing cost of that quarter and divide by the bookings of that quarter as opposed to deployed numbers and add the commissions to that account.

That’s the true cost of acquiring the account, and we’re currently at $0.48 acquisition cost. So when you add the cost of building the asset of $2.29 to the cost of acquiring the account of $0.48, you get to a total cost of $2.77 per watt. Those are the marginal costs associated with growing our asset base, $2.70 a watt.

On top of that, we find overheads, which you can obtain by looking at the G&A lines in our P&L and dividing by the megawatts deployed. Arguably, overheads should be allocated somewhere between megawatts booked and megawatts deployed, as things like HR, legal, payroll, IT, accounting, asides for the bookings and the growth of the business.

We have opted for a more conservative approach and allocated the overhead to the megawatts deployed. Currently, we have $0.26 of overhead costs. So when you add the $2.77 of marginal costs and the $0.26 of overhead costs, our total costs are just above $3, at $3.03 per watt. We’re all focused on those $0.03.

Our installed costs have dropped from $3.16 at the time of IPO to $2.29 in Q2 2014, as I talked about. We have been able to take out $0.87 out of our cost structure to close to $0.30 for a year-and-a-half. Downward prices helped marginally, about $0.12.

The majority of the cost reductions have come from a significant growth in the productivity of our crews. On average, it used to take 2.4 days to get a job installed. And now it typically takes us less than a day. Zep has been a phenomenal acquisition for us and really enabled a massive productivity growth of our residential business.

Our goal is to take another $0.40 out of the cost structure over the next two and-a-half years and get to $1.90. We have a number of operating initiatives mapped out to get there, including further automation of our processes, further reduction of our balance of system unit costs, continued productivity improvements and introducing high efficiency, low cost to level margins through our panel mix.

We're excited about our $1.92 per watt installed cost goal and having this transparent cost structure available to all of our shareholders.

Bob, over to you.

Bob Kelly

Thanks, Tanguy. Let me give you an update on the financial side of the business, beginning with our tax equity capacity.

As of July 31st, we had 155 megawatt of available tax equity capacity. As you know, the raising of tax equity is a constant financing flow to our business.

Our focus today is on supply relating to 2015. Our current backlog of transactions remains very strong with a number of new entrants considering investments. We have seen our success in the securitization markets, which I'll talk about next, directly benefit our tax equity financing activities.

Turning to the long-term capital markets and in particular our securitization activity. On July 31st, we completed our third securitization financing in the amount of $201.5 million, our largest transaction to-date. It also included a tranche A interest rate of 4.03%, our lowest interest rate to-date.

While, I won't spend much time reviewing the various stats which are provided on the slide deck, I'd like to give you a little more color on the transaction.

This is a 118-megawatt portfolio which was the first ITC or Investment Tax Credit portfolio to move entirely through the financial strategy we established when we became a public company. The assets were constructed in part using our $200 million revolver or as I occasionally refer to it, our construction facility. They were dropped into a tax equity vehicle. They then accumulated in a $158 million aggregation facility and we're ultimately refinanced with a $201.5 million securitization. The $201.5 million equates to $1.71 per watt of debt.

The 118-megawatt portfolio has an average energy price of $0.15 per kilowatt hour, consistent with the other two financings. We received in total $3.62 of cash and the present value using a 6% discount rate of the surplus cash after debt repayment and cash reserves is $1.21.

The economic value created can be analyzed considering our all-in cost of installation. If you use Tanguy's numbers and assume an all-in installed cost of around $3 a watt, we receive $0.62 of cash and have remaining value of $1.21 coming in over time.

The financial model is working extremely well. It's providing multiple sources of capital. And we continue to drive down the cost of capital, as our deployment accelerates in the future.

On the retained value side of the business, the retained value forecast now stands at $1.8 billion, or $1.72 per watt. The retained value flows directly from the $3.3 billion of contracted cash payments remaining, referenced earlier by Lyndon.

When you evaluate or take a look at it and analyze these numbers, the key metric for the business is the incremental retained value added during the quarter. We added a little over $500 million of forecast retained value in Q2 alone.

Let’s move on to the Q2 financials. The operating lease revenues came in at $43.2 million for the quarter, more than doubling over the comparable quarter in 2013. Our portfolio of almost 700 megawatts of operating megawatts is performing as expected.

If you want to take a look, there is a couple of great charts in the offering memorandums for the securitizations, which support the high quality portfolio. The first chart compares the actual production of our assets to the forecast production – what we thought we would get out of the assets. When you look at the chart, essentially, they’re right on top of each other.

The second important chart in the documents shows that over 99% of the payments we build were collected. Our revenue performance is validating the high predictability of cash relating to the 20-year PPA and operating leases. This is also supported by the BBB plus rating of the various PPAs and operating leases.

The gross margin for the quarter came in at 52%, again, it performed as expected and our operations and maintenance number came in at around $0.01 per watt.

Moving down below the gross profit line to, what we call, the development side of the business and OpEx expenses, we now started to break out our R&D expenditures, considering their role in the future.

Earlier in the presentation, Tanguy outlined the various metrics to use in evaluating the efficiency of our sales and marketing expenditures and the economies of scale relating to the G&A spend. When you take a look at these numbers in the future, you'll go back to the website and get the metrics and be able to predict or evaluate our performance over time. And I'm referring you back to Tanguy's slide to see the progress on the development expense side.

We ended the quarter with a cash balance of over 400 million. We invested almost $277 million in the quarter and our financings approach $200 million. Historically, and in the future, our net cash flow will be heavily affected by the timing between installation investment and the financial closures. You can see that in Q2 when a third securitization funded after quarter end.

I'll turn it back to Lyndon to wrap up.

Lyndon Rive

Thanks, Bob. So Q3 should be another great quarter for us. We're expecting 135 megawatts to 150 megawatts in deployment. Given the unprecedented demand, we're going to continue to invest in growth. Our OpEx will come in around 115 million to 125 million. The guidance will stay the same for this year and we are once again on track to double for next year.

Operator, why don't we open it up to questions? Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Brian Lee from Goldman Sachs. Please proceed with your question.

Brian Lee - Goldman Sachs

Hi, guys. Thanks for taking my questions and also congratulations, Bob, on the retirement. It's been a pleasure working with you since IPO.

Bob Kelly

Thanks, Brian.

Brian Lee - Goldman Sachs

So, a couple things from me maybe a housekeeping one. On the incremental retained value this quarter when stripping out the recent ABS transaction, it looks like it's around 2.10 per watt, is that the right math first off? And if it is seems like there's been a nice jump here. Can you give us some sense of what the drivers of the increase were, whether mix or cost or anything else?

Bob Kelly

The right math is 2.32 per watt.

Brian Lee - Goldman Sachs

2.32 per watt. Okay. So even a bit higher than what I was estimating. And that's exclusive…

Lyndon Rive

2.32. It's not a metric that we like to focus on. Remember, the incremental will change every given quarter, depending on our commercial, residential mix, depending on our growth in different areas. The area that we like to focus on is the total retained value that gets added to the company, and the incremental will swing quarter to quarter.

Brian Lee - Goldman Sachs

Okay. Fair enough. Maybe, switching gears then. Thanks for all the cost transparency on install cost per watt and the new targets. Can you guys also comment on how you see the acquisition costs and overhead costs scaling, as you grow volumes, and what might be some reasonable targets on a dollar per watt basis to assume over the next few years?

Lyndon Rive

Yeah. So we're going to continue to invest in sales and marketing. We absolutely expect that to come down. We’re not yet ready to give a long-term forecast on net reductions. We may find ourselves an opportunity to make these investments, as they still yield phenomenal returns.

But if you look at the potential – as the area that I like to always use is potential cost of acquisitions is what the current cost of acquisition is for retail energy companies. So a retail energy company’s acquisition cost is roughly around $100 per customer. And, essentially, all they’re doing is selling energy, which is what we’re doing. We have a better product. It’s cleaner and cheaper.

So as market grows, I think, it’s possible to get to that levels of acquisition costs, as we start seeing a real penetration.

Brian Lee - Goldman Sachs

Okay. That’s helpful. And then maybe if I could squeeze one last one in. Sort of a bigger picture question, but there was a recent filing from Pinnacle West in Arizona proposing utility-owned DG. It sounds like it may be getting some traction, and there is a decision set to be made in September.

Question is, are you seeing that from any other states or utilities? And then related to that, how do you see that playing a factor in the near and longer term development of the solar DG market in the U.S. and is there a strategy in which you can benefit if that does become a growing trend amongst the utilities. Thanks a lot, guys.

Lyndon Rive

Yeah. I'm a big fan of energy companies and utilities starting to look at the space. And I really think they should invest into solar assets but not under the regulated division. And it should be doing it under the unregulated area.

Right now, the current way of – if you do it under the regulated division, the rate payer is held accountable for any mistakes or potentially cost overruns. So the rate payer pays for the entire system. If they do it under the unregulated area they can compete just like everybody else and take the same risk decisions like everybody else.

So I hope to see momentum in the unregulated side but we – it just won't – I just don't think it would be appropriate to put that in the regulated side.

Brian Lee - Goldman Sachs

Okay. And are you seeing traction at this point or is it more a one-off in the Pinnacle West example?

Lyndon Rive

I'm sure every utility, if they have the option, would love a guaranteed on solar investment. And given that option they'd prefer that one versus making the same investment decision that we need to make. So we will, of course, rebuttal that investment strategy for them.

Brian Lee - Goldman Sachs

Sure. Okay. Thanks, guys.

Operator

Our next question comes from the line of Edwin Mok from Needham & Company. Please proceed with your question.

Edwin Mok - Needham & Company

Hi. Great. Thanks for taking my questions. First, just to circle back on the installed cost per watt. The $1.90 target for 2017 does that include the potential benefit of or is that potentially something incremental can be on top of that $1.90 target?

Lyndon Rive

That includes a portion of level modules coming into our mix by that time, yes. Absolutely.

Edwin Mok - Needham & Company

The target seems like it's not that much lower than where you're at right now already you’re right so are you guys just being conservative in this target or is that the focus has shift to customer acquisition and other pieces of SG&A in terms of driving costs down?

Lyndon Rive

So, we intentionally chose 2017 that's been essentially when the ITC reduces from 30% down to 10. And as we ramp up our manufacturing and we get a higher blend, the net cost will come down. In that, we're still assuming a majority of our panels will be coming not from our factory. So once the factory runs out, they will absolutely come down.

Edwin Mok - Needham & Company

I see. Great. Thanks for the color. And then…

Lyndon Rive

One comment, 1.90 is amazing, by the way. It's pretty hard to get that type of cost out of the system.

Edwin Mok - Needham & Company

Yeah, I do agree.

Bob Kelly

Just to chime in on emphasizing I know we said in the presentation, but do note that that's a blend of legal impact and non. So you could assume legal is much lower than that.

Edwin Mok - Needham & Company

Great, thanks for the color. Second question I have is on the bookings. Obviously very strong this quarter and it looks like backlog is increasing quite a bit. Are you at this point capacity limited on deployment and is there any kind of need to or plan to expand that that might drive sort of deployment down the road?

Lyndon Rive

So there is only one state where we have some capacity issues, especially with some of the licensing regulations there. But even that, we’re dealing with it, and I don’t think it will be a problem. Everywhere else, no, we don’t have capacity issues. We’ve got an extremely strong hiring program in place, and we’re ramping and growing in order to meet the demand. No, we’re not seeing any issues.

Tanguy Serra

Yeah. We expect to see this volume flow through within the next six to seven months or so.

Lyndon Rive

Yeah. We’re feeling very good about it.

Edwin Mok - Needham & Company

Great. That’s very helpful. And then, lastly, on securitization, I’m trying to understand the effect of securitization on ITs. I think Bob you kind of mentioned it. Are you saying that it helped bring new ITC tax investor into it or you actually reduced the need for ITC as you try to do a securitize product that has a tax component to that?

Bob Kelly

No. The comment I was making, as we work through with, particularly, new investors in the DG space and the tax equity side, the validation of the securitization market, the ratings of the transactions and the considerable demand and the low price – all those give a great deal of comfort to the asset class.

And anybody new coming into the tax equity world looks at that and nods their head and says, “This is good stuff.” So it’s really beneficial. What you try to do on the ITC is you monetize the ITC. So the securitization is additive to the cash you receive.

Edwin Mok - Needham & Company

I see. So it’s fair to say that as a result of securitization you’re attracting more potential new investor coming or new tax equity investor coming into the market?

Bob Kelly

Yes.

Tanguy Serra

Yeah. Our tax equity pipeline has never been as strong. It's looking really strong.

Edwin Mok - Needham & Company

Great. That's all I have. Thank you.

Operator

Our next question comes from the line of Krish Shankar from Bank of America Merrill Lynch. Please proceed with your questions.

Andrew Hughes - Bank of America/Merrill Lynch

Good afternoon guys. It's Andrew Hughes on for Krish. Just a quick question on the R&D in OpEx. Just curious what is comprising that now today, whether it's anything to do with Zep or maybe storage? And then, what the component, R&D component might be in the OpEx guidance for 3Q, if you start getting any Silevo into the OpEx line at that point?

Peter Rive

Hi. This is Peter Rive, CTO. So the R&D component right now consists of culmination of research in many homes, other developments with Zep, battery and other energy control systems as well as heavy investments in our sulfur platform. And it's difficult for us at this stage to be able to put a number out there in terms of what the long-term research and development. It is something that we're investing heavily in. But for Q3 I'd expect it in the kind of $4 million to $6 million range.

Andrew Hughes - Bank of America/Merrill Lynch

Great. Thanks. And then, just maybe a little bit bigger picture question. In terms of your own lease and PPA pricing, it's obviously – if you just look across the different securitization, it's been pretty consistent.

I'm wondering if in anticipation of potential retail rate redesigns in Arizona or California, if you're thinking about things a little bit differently, maybe lowering prices or if you think that the trajectory of retail power prices allows you to stay steady at that $0.15 or potentially increase it.

Lyndon Rive

Yeah, what we started doing is coming up with fixed pricing. And back to earlier discussions of full transparency, the goal is to have full transparency for our customers as well.

And so we’ve launched fixed pricing now in California. And we’ve launched it at $0.15 a kilowatt hour. And we've done this primarily to address Tier 2 customers and in California you have different tiers and with a customer with a small electric bill, historically, we've not been able to show any savings. And now $0.15 price we can show most -- almost all homeowners savings.

Andrew Hughes - Bank of America/Merrill Lynch

Great, that's all for me. Thanks, guys.

Operator

Our next question comes from the line of Philip Shen from ROTH Capital. Please proceed with your question.

Philip Shen - Roth Capital

Hi, everyone. Thank you for taking my questions. We're starting to hear more about solar loan products. What's your view on solar loans and how might they impact the economics of your business if you were to add them to your product offering?

Lyndon Rive

I think solar loan has a lot of potential. And we are testing different products on the solar loan side. And we've always been a financial leader in this space and once we have come out with the absolute best product out there, we'll make a big announcement of what it will look like.

Philip Shen - Roth Capital

Okay, great. And then one on securitization for me, can you give us a sense or some insight into the next ABS, when might it be and what should we look for, what are you seeing in terms of potential sizing demand and where are you in the process?

Bob Kelly

Yeah, I think I'll just talk a little bit about sort of regurgitate the financial strategy, whereas you run the megawatts through the system. And with the volumes we’re doing right now, so you should see every quarter, as Tanguy gets quicker and quicker on installs, we need to get quicker and quicker on the financings.

The first few were difficult from a timing perspective. The execution turned out very well with one, two and three. And I think you’ll see four, five and six, as you get into the cadence of flowing megawatts through, happen on a regular basis.

On the size, I think, the $200 million just seem to be a great piece of paper. Based on the demand for the last one, it was just out of the ballpark. And there is liquidity with that size. I don’t know if we’d go from $200 million to $300 million or whatever. So you might see – you circle around. What you’re trying to do is figure out what is the most liquid piece of paper that creates demand for the customer, and I think you’re in the $200 million to $250 million range in the future.

Philip Shen - Roth Capital

Great. Thanks, Bob.

Operator

Our next question comes from the line of Josh Baribeau from Canaccord. Please proceed with your question.

Josh Baribeau - Canaccord

So I’d like to talk a little bit about escalators if I could. Could you help us with the – what’s maybe average escalator you have now and then maybe the incremental escalator, as you write more contracts?

Tanguy Serra

We give our customers the flexibility to choose what work – whatever escalator they want but not to exceed 2.9%. So, actually, I don’t know what the average is. I think the average is just below 2, but I don't know what that one is.

Bob Kelly

I think in the securitization it was 1.8%, but I'm looking up the number here quickly.

Lyndon Rive

Yeah. I think it's quite, well, I think a lot of standard escalator offering is 2.9. People can buy down an escalator with the – or have less of a discount. So there's plenty of people without escalators.

Bob Kelly

Yeah. So the two primary products that we sell is lower PPA rates with the 2.9% escalator, or a slightly higher PPA rate with a 0% escalator, and the customer has the choice between the two.

Josh Baribeau - Canaccord

Got you. And then, as the market intensifies, as competition increases whether it's from something in utility side or something with – some company with a similar business model as yours, do you think that escalator becomes a key negotiating piece for the customer as they get a little more sophisticated in pricing these leases up?

Lyndon Rive

It's a straightforward entity calculation. So the customer can – we actually show this to our customers. The software is actually quite easy to play with. The customer has a choice of where they want to price it and so if they want to pay slightly more today with their escalator, they can do that. In most cases, even the slightly more is still below the current retail rates.

Bob Kelly

Yeah. Josh, I found it in the deck here. The escalator in the third securitization average was 1.61% for that 118-megawatt portfolio.

Josh Baribeau - Canaccord

Great. Thanks a lot.

Just one more, if I may. Everyone's kind of going big picture, so I will too. This is definitely a few years down the road, but have you thought about or maybe can you help us think about or reconcile what may happen once people start selling their homes with obviously a different credit profile than the loans or the paper securitized under. Does that affect the credit rating at all, how does that come up and I guess how do we deal with that?

Tanguy Serra

Yeah, so we've had thousands of customers so far. And to-date, we've never -- none of our systems have ever been held up for any credit transfer. And so we will work with a customer to get them transferred to the new homeowner and then the credit score itself averages out.

Josh Baribeau - Canaccord

Okay. That's it for me. Thank you.

Operator

Our next question comes from the line of Patrick Jobin from Credit Suisse. Please proceed with your question.

Patrick Jobin - Credit Suisse

Hi. Thanks for squeezing me in, guys and congratulations on the knock-out bookings. It's quite impressive.

So two questions for me, first, just thinking about the bookings level and clearly what you were able to deploy in the quarter, what you're guiding to deploy next quarter, it would maybe suggest there's some bottleneck installation. Just help us understand I mean high growth company there's always something that's a bottleneck. So just maybe update us on that? Then I have a follow-up on the financing. Thanks.

Lyndon Rive

Yeah, good point. So the way it works is you book a contract and then you have to audit the system. You audit the roof, design the system then get a permit from the municipality, and then you schedule the install with the customer. So we've taken that number of days of that cycle time down a lot. We're in the 60s right now, feeling very good about that. And really what it comes down to is the growing of the platform. So the question is when do those 200 megawatts actually get deployed?

So part of that 200 megawatts is commercial part is ready commercial cycle times are longer by definition. So when you blend that all out, over the next six months, we expect to reach that run rate. So that’s half of the question.

The other half of the question is on how do we scale here. So really what it comes down to is training programs and hiring structures. So we’ve put in place reasonably sophisticated hiring approaches, which will work incredibly well and training programs associated with that.

If you do the math, our crew structure is five individuals. And I don’t want to go too much into details, but you get five individuals, you add one crew and then you need a boxed truck – again, not hard to get or find – not hard to get. Then, off you go, and you’re just adding capacity one crew at a time.

And it’s really difficult that you’ve got out one crew and you’re trying to add another crew. That’s actually real, really hard. When you’ve got hundreds of crews like we do, adding a marginal crew is not hard. And we’re growing very nicely and have been growing in the last few months.

Patrick Jobin - Credit Suisse

Thanks. And then my second question is on incremental retained value of $2.32 per watt. I just want to make sure I understand. There is no adjustment being made for retirement of any tax equity fund, given the tax equity was kept in place. So I just want to make sure that was a correct assumption.

And if so, it’s quite an improvement from the prior quarter, and, of course, it will be volatile. But maybe, if there is any composition or mix that impacted that, it’d be helpful to understand. Especially, I think, you mentioned maybe some commercial.

And then just bigger picture, when I think about your funding strategy, if you’re getting, call it, $1.80, $2 a watt in tax equity and the $1.71 in securitizations, it seems like you’re more than offsetting all of your costs today at that $3.03 number. Is that – is my ballpark right that you don’t need additional capital from the public market standpoint by utilizing ABS and tax equity.

Bob Kelly

Just one other clarity on that. That doesn't include any of the working capital. That's just in a given specific unit cost analysis at our growth rate. And depending where things end up with the manufacturing, we will absolutely need to come back to the capital markets either through some sort of convert or a mix of convert and equity financing.

Tanguy Serra

And Patrick, on the impact on retained value, there's some small impact there. Let me follow up with you offline and I'll give you more details as I will with any of the other analysts.

Patrick Jobin - Credit Suisse

Okay. Is there any mix in that number, just – or…?

Lyndon Rive

Well, suffice it to say, it's not like a big shift in mix in terms of resi, commercial, anything like that. Frankly, resi was very high. And on top of that, commercial was actually a little bit above the range as well.

Patrick Jobin - Credit Suisse

Okay. Thanks again. Congratulations.

Operator

Our next question comes from the line of Vishal Shah from Deutsche Bank. Please proceed with your question.

Vishal Shah - Deutsche Bank

Yeah. Hi. Thanks for taking my question. So, as you talk about the OpEx run rate going forward, I know you've been able to scale that OpEx firmly down quite a bit, how should we think about the scale going forward? In Q3, can we assume that number, $0.45 goes down to $0.40? And if that's the case, based on your guidance for next year, can we assume that OpEx remains at these levels of $120 million on a quarterly basis?

Lyndon Rive

Well, definitely, OpEx will increase, and on a – dollars per watt will come down. So we're going to definitely get leverage, more leverage through the OpEx but it will increase.

Vishal Shah - Deutsche Bank

But it looks like based on your guidance for next year’s megawatt deployed, you mean you can achieve gigawatt of deployments based on the current sales force. You don't need to add more salespeople unless you are planning to do more than a gigawatt next year?

Lyndon Rive

Yeah, we're going to do as much growth as we possibly can to capture the market opportunity.

Vishal Shah - Deutsche Bank

Okay, that’s helpful. And then can you maybe talk about your margin procurement strategy in light of some of the duties that have been talked about, what is your assumption for marginal cost in that $2.29 per watt number and how do you think about cost reduction over the next couple of quarters?

Peter Rive

Sure. So the 2.29 assumes current market prices for modules. For somebody that buys 100 megawatts one at a time there’s no surprise for that we’re totally there nothing exceptional in our current mix.

So going forward, we have actually been positively surprised. We've been locking in modest supplies. The IRC announcement that we put out and expect module prices to be at where we are today or below where we are today, actually, in the coming quarters.

Vishal Shah - Deutsche Bank

So is it fair to say that your module – that you costs will remain flat over the next couple of quarters instead of going down and then maybe you see another sequential decline in 2015?

Peter Rive

I think it's fair to say that the module prices are going to be flattish over the next couple quarters but that's only part of our cost structure, as you can imagine. We have a series of initiatives to continue taking costs out of other parts of the cost structure.

Vishal Shah - Deutsche Bank

Okay. And just one last question. I mean, you mentioned $0.48 per watt of customer acquisition cost. I mean, that cost has remained at these levels for a while. I mean, would you assume that the customer acquisition cost scales down in 2015?

I know you mentioned $100 per customer longer-term. But how should we think about that number in 2015? Can that number go down to $0.30, $0.35 or is it going to remain at these high levels in the near term?

Lyndon Rive

Yeah. It’s not an easy answer to just give. If you had an opportunity to spend $0.50 a watt or you’re acquiring a customer that generates this type of value, then you’d do that. If you have to develop the market and you have to educate the customers, then you make those investments because, every time you make those investments, it yields phenomenal returns. We absolutely do expect it to come down, probably not in the $0.30 range. That may be on the aggressive side but below $0.48, for sure.

Vishal Shah - Deutsche Bank

Thank you.

Operator

Our next question comes from the line of Ben Kallo from Robert Baird. Please proceed with your question.

Ben Kallo - Robert W. Baird

Hi, guys. Very good quarter. Great progress. Good to see. And, Bob, sorry to see you go. It was great working with you.

Bob Kelly

Thanks, Ben.

Ben Kallo - Robert W. Baird

As we look ahead, I know, Bob, we’ve gone back and forth on this tax equity. Can you kind of comment, I know you did a little bit about where you are right now. But then looking ahead to next year, if we start thinking about gigawatt or as much as you guys can do, with new people coming in and obviously very talented, new talented CFO, but how fast do you have to run to raise that money? And how much of a challenge is that compared to the other parts of the business?

Lyndon Rive

I think I'd go back to things I've been pretty consistent in saying. We've been building up the backlog of investors and when you look at the last couple years, the success of bringing in an investor and then making them a repeat investor and a repeat investor and a repeat investor. So as you built up the backlog or your investors, you're just looking to repeat and then add on top of that the new investors coming into the market.

Over the last year, and you and I have talked about this, Ben, is that the number of people coming into the market, looking at the tax equity risk profile and the rates of return and the asset class has increased dramatically. I'd probably echo what Lyndon said in one of the comments there. Our pipeline is in the best shape it's been in since I've been here.

Ben Kallo - Robert W. Baird

Very good. Last question. On the $1.90 target, what's the significance of $1.90? Is there any significance or is that…?

Bob Kelly

So it's been tough to answer. One is, it's focused on what it would take to have a thriving business in a 10% ITC. So that would be the case. And it’s top down, bottom up analysis of what we think we can achieve and left to be achieve.

Ben Kallo - Robert W. Baird

Great. Thanks, guys. Congrats again.

Bob Kelly

Thanks, Ben.

Operator

Our next question comes from the line of Carlos Newall from Raymond James. Please proceed with your question.

Carlos Newall - Raymond James

Hi, In place for Pavel Molchanov. Can you give me some color on your plans for the consumer loan market; is this something you see as a core addition to the model or more of a side venture?

Lyndon Rive

You know it's still in self mode or R&D mode. So I don't want to comment on it at this stage other than I'm excited about it.

Carlos Newall - Raymond James

Okay. As a follow-up, let me ask you about the Chinese tariff issue. There's been some chatter in the industry about higher module prices potentially starting to dampen customer demand, are you seeing any of that in either the residential or commercial market?

Lyndon Rive

Sorry, I missed the question. Sorry.

Bob Kelly

The tariff in China on the modules, do we see any demand impact on that.

Peter Rive

Demand from our end customers. Our end customers buy energy contracts so they actually don't have a view on module prices. We're in the private so they don't think about that at all.

Lyndon Rive

Yeah, and just to repeat what Tanguy mentioned earlier, we have clear visibility on our pricing and it's flattish if not slightly reduced.

Carlos Newall - Raymond James

Okay, thank you.

Lyndon Rive

Operator?

Operator

There are no further questions in the queue. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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