SolarCity: Even Good Numbers Show Major Problems

| About: SolarCity Corp. (SCTY)


Company beat on top and bottom lines.

However, guidance was poor and yearly forecast reduced.

Average FICO score continues to decline.

After the bell on Tuesday, SolarCity (NASDAQ:SCTY) reported second-quarter results, seen in the company's shareholder letter here. While the headline numbers for revenues and the non-GAAP loss were quite good, the company again reduced its forecast for the year. Additionally, losses and cash burn showed more trouble.

For the quarter, SolarCity reported revenues of more than $185 million, well ahead of expectations, and exceeded guidance due to MyPower prepayments. However, revenue guidance for Q3 fell a bit short of what the street was looking for. Also, while the top line soared 81% year over year, the company reported a $250 million GAAP loss as opposed to $155 million in the year-ago period. So for every dollar of revenue generated in the quarter, the company lost $1.34 overall.

Net losses per share fell as a result but could have been worse because an extra nearly 2.5 million shares of dilution spread the loss out more. Also, as good as the non-GAAP EPS beat was for Q2, the loss forecast for Q3 was much worse than the street expected. The company is forecast to lose more than $10 a share on a non-GAAP basis this year, twice the loss expectation analysts had just 18 months earlier, while revenue estimates have dropped by about 20% since then.

After originally guiding to a target of 1.25 GW of installations this year, management has cut its goal twice. Now, the forecast is for just 900-1,000 MW, and this assumes the residential business shows an increase in sales productivity during the back half of 2016. Also, the company is banking on a huge Q4, 315 to 415 MW, to make its yearly forecast. While the company is trying to reduce costs, the current infrastructure was built for 1.25 GW in annual installations, and the business is well below that run rate.

Another item to watch moving forward is the average FICO score of the company's customers in its residential segment. At the end of Q2, the number was down to 744, down 2 points sequentially. Just nine months earlier, the company boasted that the average exceeded 750. While this is not a troublesome data point quite yet, the company is expanding its business to consumers with worse credit, which eventually could pose a problem.

Finally, the company's operations burned through another $196 million, and that was before capital expenditures of $25 million. While cash has risen $70 million since the end of Q2, SolarCity is down to about $215 million, while total recourse debt is over $1.5 billion. The company expects its cash balance to rise by the end of the year as it executes a third cash equity transaction and takes on more debt, but operations will likely burn through some of those proceeds.

So while the headline numbers showed a beat for SolarCity, there were plenty of issues with this report. Q3 guidance was well below estimates, and the company again took down its yearly installation forecast. GAAP losses soared over the year-ago period and cash burn was quite high. If it were not for the pending buyout by Tesla Motors (NASDAQ:TSLA), SolarCity's shares would likely be heading lower. If the deal falls through and SolarCity starts trading on results again, look out below, because the recent drop in short interest to a new yearly low will quickly reverse.

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