Tesla, Inc. (TSLA) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the SolarCity Third Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Aaron Chew. Thank you, Mr. Chew. You may begin.

Thank you and good afternoon to everyone joining us today for SolarCity's third quarter 2015 earnings conference call. Leading the presentation today will be a discussion from our Chief Executive Officer, Lyndon Rive, our Chief Technology Officer, Peter Rive, our Chief Operating Officer, Tanguy Serra, as well as our Chief Financial Officer, Brad Buss, after which point in time we will open it up 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 as guarantee of future performance or results and reflects information that may change over time. Please refer to SolarCity's quarterly shareholder letter issued today, as well as the slides accompanying this presentation and our periodic reports filed with the Securities and Exchange Commission for a discussion of forward-looking statements and the factors and risks that could cause our actual results to differ from these forward-looking statements. We do not undertake any obligation to publicly update or revise any forward-looking statement. 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 the definitions of these terms and the required reconciliation between GAAP and non-GAAP financial metrics included in the shareholder letter issued today as well as the slides accompanying this presentation which are available on our Investor Relations website investors.solarcity.com. With that finally behind us, I would like to introduce SolarCity's Chief Executive Officer, Mr. Lyndon Rive.

Thanks, Aaron. So thanks everybody for joining the call. We are going to try a different format in this call. Instead of going through the slides, you have the access to slides. We're going to spend most of the time addressing questions. Before we get to the questions, I want to give a quick company update, and Brad will just discuss some of the updates on finance and Peter will get into discussion on net metering. A quick recap for Q3, we installed 256 megawatts, which is a new record, but slightly lower than our 260 megawatts forecast. Now I'm disappointed in this number, but just to put it in perspective, at our current rate of installation, we installed roughly 2.5 to 3 megawatts a day, so we missed it by 1.5 day or so. All the fundamentals of the business are looking good. Cost reduction is coming down nicely, demand for the products is strong and the economic value we've created this quarter was $239 million, that's quite an amazing number. Looking at the last nine years, the strategy of the company has all been about growth. The reason why we focused on growth is the need to achieve scale. We don't know why you can reduce cost is the scale. For the last nine years, we've been growing roughly 80% to 90% that is the downside of growing at 80% or 90%, if you have to make investments into the infrastructure today which you'll only recognize the benefit of that investment two to three quarters later. So that needs a cost to that scale. Now that we've achieved scale, we as an executive team and the board have decided to focus on cost reduction and being cash flow positive by the end of 2016. With this new focus, we're going to reduce our growth rates to roughly 40% in 2016. Now for company [indiscernible] 40% is still a very big growth rate, but this will enable us to focus on profitable installation, the more profitable installations as well as reducing our customer acquisition costs. If you look at our Q3 installed costs, we almost achieved our 2017 goal of $90 a watt, but now that we're investing less into growth, we're going to be updating our 2017 cost goals by the next earnings call, we expect updated cost targets for 2017 and expect a meaningful reduction to our $2.50 a watt by 2017. One thing I want to make clear is this changing focus is not a lack demand. We expect in Q4 bookings to be greater than Q3 bookings. Normally Q4 is lower than Q3 because of the seasonality you have less selling days, but the demand is strong. And in 2016, we expect the demand to be very strong. When you have an aspiring tax credit or a tax credit going from 30% down from 10%, the customers are going to rush to get in to not miss the opportunity, so we expect demand to be strong in 2016. Now we are actually going to be increasing our pricing in Q1 next year, but we have small increase depending on [stakes], we'll increase roughly $0.25 to $0.01 a kilowatt hour in our leases and PPAs, and essentially matches the escalation of the utility rates. Overall, I'm very excited about the business and the strategy change. We now at some inflection point, but we're going to become cash flow positive by the end of 2016 and have a cost structure with the business to maintain cash flow positive in 2017 with a 10% [accuracy]. I'm going to pass it over to Brad.

Thanks, Lyndon. Just a quick couple comments on Q3. Overall I think we had a very successful quarter with some great results and records that Lyndon touched on, and I just want to emphasize a couple things. The record economic value creation of $239 million we achieved that was up 22% sequentially with solid IRRs of 12% and that's what fully loaded costs. If you look at it on project basis like many competitors do, it's much closer to 16%. Also at the end of Q3, we had record gross retained value of $4.4 billion and net retained value of $3.3 billion which is approximately $33 per outstanding share. As far as our PowerCo Available Cash which we introduced in Q2, I just want to explain a couple of timing differences that we tend to see and that you will continue to see going forward. So if you look at just the Q3 number, our PowerCo revenue was a record $95 million and that was due to increased assets in service as well as strong system performance as Q3 tends to be our extremely sunny period. The final PAC just again in Q3 was 19 million, and again that was due mainly from the timing of certain payments for debt and interest that typically happen at a higher level in Q1 and Q3 and the same thing for higher distributions to our tax equity partners. If you now look at things on a trailing 12 months period which we really view as the best measure to see how PACs moving on an annual basis, the PowerCo revenue increased 17% sequentially and the net PAC from operations and prior to any distributions to our tax equity partners and/or debt service increased 7% sequentially. The final PAC was $112 million and it was down 2%, but again that was really due to the timing of the payments related to debt, tax equity and interest as I mentioned and you'll continue to see those fluctuations in Q1 and Q3. I want to just touch real briefly on our financing strategy. I mean there's always been a lot of turmoil on the solar industry as of late and a lot of questions related to financing come up. I think we went to great lengths in our shareholders who have letter as well as the earnings deck to explain that our financing structure for our main products which are leases, PPAs and MyPower loans are very different from some of our peers and obviously very different than some of the current challenges that certain yield curves are facing. The bottom line is that our solar asset financing strategy is very sound and it's focused on tax equity, aggregation facilities and ABS. We have ample room on our main tax equity in [eight] facilities which really provide the bulk of our year-one cash. In addition, I think as most of you know, we completed our financing with a take up via the ABS market in August and I expect to have a regular cadence from here on. All of our guidance is detailed in the earnings deck for Q4 as well as 2016, but just to ensure that we're all on the same page, I want to let you know that the cash flow breakeven that Lyndon talked about and how we're going to define that. So all of that will come right off of our quarterly financials, and the formula that we're using is the net increase in cash and investments which obviously included securities, etcetera, less net cash provided by equity issuances that comes up the cash well is going to be greater than or equal to zero. So I'll just wrap up there and I'll now turn it over to Pete to cover one of our favorite subjects.

And by favorite subjects, you mean net metering?

Correct.

[Utilities are positioned] to reach out solar is getting a lot of airplay, so I'd like to give you our take on the situation. So despite utility efforts regulators are rejecting proposals to unfairly penalizing solar customers as evidenced by recent sales with Samsung Colorado, New Mexico, and Kansas. Additionally, net metering caps recently extended in New Jersey, New York and the Nevada PUC extended its program through year-end while it will validate the benefits of rooftop solar. It's important to note that a previous study conducted in Nevada showed that the benefit outweigh the revenue shifts. In Arizona, this week we achieved another victory against utilities attempting to have viewed their monopoly positions. In our case against SRP, a judge rule that utility must answer in court for the unfair and anticompetitive penalties that it's imposing on solar customers. In Hawaii, which is a very special case with double-digit market penetration and extremely high electricity prices, the PUC issued a new solar tariff which has some good and some bad components to it. Bad was the lack of due process [indiscernible] take effects, but good in that it provides expedited and mandatory interconnection for sources and not back feed on to the grid which is whatever breaks as self supply there. But working on a self supply solution that could restore Hawaii, it's a high growth market for us at some point. And then maybe in California, California Public Utilities Commission is expected to release their new net metering tariffs in the coming months and this is a very important one for us. In general, we're hopeful of a good outcome for two reasons. First, we believe the benefits of rooftop solar are greater than the revenue shift and by benefits I mean the ability to avoid distribution and transmission expenses and so on. And then secondly, a decision that ensures continued growth of rooftop solar is required by law. I'm going to quote directly from Assembly Bill 327 and this is in reference to [Minnesota]. The commission shall do all of the following and then the first points is ensure that the standard contract or tariff made available to eligible customer generators, ensure that customer side of renewable distributed generation continues to grow sustainably. I just want to reemphasize that it is required by law that that happens. So then like I think that if we think about this, it's important that business is not going to go away forever I think that the utilities will try to impose and going to stop selling it. And over time, it's going to be give and take on both sides. So we are optimistic that in the phase of climate change and the benefits as well as popularity of solar power that their agencies imposed policies that slowed down solar adoption. And with that I'd like move to the questions and answers of the call.

Operator, can we open it up?

Yes, thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Thank you. Our first question comes from Patrick Jobin of Credit Suisse. Please go ahead.

Hey, thanks for taking the question. I guess first question on 2016 guidance. I guess maybe some of the thought process that you guys went through to form the 40% growth from my perspective a meaningful deceleration. Was that guidance impacted by any market demand constraints policy uncertainty conservatism building out the organizational capacity, I guess to avoid any underutilized capacity in '17, capital constraints organizational constraints or any competitive pressures? I just want to better understand some of the motivating factors. Thanks.

Yeah, it's a really good question. Due to couple of areas, first if you look at our current acquisition costs it's around [$0.64] a watt, growing at 80% to 90% is that last portion of lost customers, they are really expensive, so we want to reduce acquisition costs so by slowing it down then we can reduce our acquisition costs. The other is the best time to plan for a 10% ITC and optimize the company for a 10% ITC, it's not when you in the 10% ITC, well it's when you in the 30% ITC, that's when you want to make the change. If we make this focus in 2017, it's going to be a lot harder to do it then than it is to do it now, so that's another reason why we decided to do it earlier, when we saw the market that we can have at a similar cost and it has to be cash flow positive, a maintained cash flow positive in 2017. And the other point I want to emphasize is, when you're growing at 80% beyond the high acquisition costs, the only way to maintain an 80% growth rate, you have to make big, big investments, but you're only going to see the results of those investments as two to three quarters later, and so doing that when you know that you have to get to a cost structure where we want strive to be cash flow positive in 2017 of all the reasons why we decided to reduce the growth rate. And I do want to follow-up with, find companies that are deploying an infrastructure that has 14,000 employees that are growing at 40%.

I think that's making [indiscernible] some point in terms of revenue growth. I mean it's going to be in excess of 70%?

Exactly. So it is not a standard 80% growth, but note that 40% is a low growth number, just I wanted to emphasize that.

Got it. And then so just a follow-up, when you think about the sales costs, how wide was that differential between, I guess, that first 40% for growth and the last few customers to get you to that 80%, 90% growth level, how varying is that incremental sales related cost or how wide is that range?

Hey Patrick, it's Tanguy. I think that's still -- that is actually quite wide. If you think about it right, our best form of acquisition is referrals by definition, so referrals is our cheapest customers required in some of our customers who are the most grateful for us, and then you walk to cost stack up. Direct energy is a phenomenal cost acquisition channel, and then as you continue walking your stack up when you have to pay for leads and then closing costs, their costs are higher. The spread is, we only get spreads number two, too widely [acts] on disclosure or cost structure by channel, but it is a mature spread if you're paying for a leader, if you are not paying for a leader.

Thank you.

The next question is from Noah Kaye of Oppenheimer & Co. Please go ahead.

Thank you. So first maybe I want to start off with the positive front. Can you give us an idea of what you're actually assuming for NEM 2.0, how soon do you expect the decision to be -- what your baseline assumptions are positive and negative surprise around that, and how that might influence your outlook for next year?

So, I think that we expected something out of the PUC in the next two months or so. I got to say that it's not easy for us to build in specific assumptions into planning for [indiscernible]. I think again what gives us great comfort is the fact that AB 327 says, okay, by law the tariffs that the PUC comes up with must ensure that with top solar continues to grow sustainably. So we're just be speculating at this point and I'd rather not do that.

Okay, that's certainly fair. If we can turn to the financing, so successfully closing the ABS, I believe this was the first time as a new financing structure for you guys underpin those leases. Can you talk a little bit about -- expand a little bit more on the cadence of future ABS is and in particular where you expect loan to value to trend? Thanks.

Yeah, thank you. So you hit a key point right, so all of our lease structures were leases and PPAs are now weighted which is great and they all have an investment grade rating. The next thing it was end up coming up now truly will be the MyPower loans, and then really all of our products are totally rated. So from a cadence standpoint, remember, so since we have tax equity funds underlying these, we basically still a fund up, so once a fund is build up then we have some fairly large funds that tend to have been a year in length. So once they are done, we'll put them right out into the ABS markets right away, so hence we did have a little bit of low, I think as you noticed in this year, but I think you'll see the cadence as soon as these funds are down, they will be coming out the doors. So you'll see much more frequent issuances going forward. And as far as the advance in all [rates], they really just depend at the time than market structure, but I would expect the advance rates for leases and PPAs to be fairly stable to what we've seen and probably be getting better when we get into the MyPower situation, since it's a very different chronic with no ITC in it.

Okay, thank you. I'll return back in queue.

Yeah, thank you.

The next question comes from Philip Shen of Roth. Please go ahead.

Hey guys, thanks for taking my questions. In the last quarter, you guys talked about normalized PAC or PowerCo cash flow of being closer to $166 million. With the variability that we saw in Q3, what do you think the normalized PAC ought to be on a go forward basis?

So again the normalized, I think that reflected the tax equity distributions added back, right, just a [roll] on the same page. And I think as I went through hearing in the letter and hopefully people understand that the variability between Q1 and Q3, there is very different timing for all of those payments, right. And we kind of show you by quarter, so you can see that. So I think as we add more debt that obviously goes into the number and your payment still there, but the revenue will move accordingly. So we are not in a position to give you a guidance on it at this point, but I would say, year-on-year it's going to continue to grow substantially.

Great, thanks Brad. You guys did a great job on expanding commercial in the quarter. Can you give us some more color on this commercial strength? Is it the small commercial segment that's driving growth as you guys refer to in the last quarter and what kind of mix of commercial can we see in Q4 and as we go through 2016?

I appreciate, you question on commercial. It's a good topic for us. So in commercial, what we have done is, remember, we've in-sourced the construction costs of commercial using our own crews, and that's been massively successful sort of beyond our expectations candidly and so what we've done is we dramatically reduced the cost structure of commercial in a place where -- I'm actually really excited about our commercial costs on a go forward basis, and so what that has done is that, that has enabled us to build [gram ounce], large gram ounce as well as rooftops at a low cost which by definition we can bid reasonably attractive, very attractive power prices to our end-customers, that is really, really good. The mix is -- it's mostly -- there is no average by definition but there is a probably 1 megawatt gram ounce, pretty standard, 500 kilowatts rooftops, pretty standard and them some smaller cardboards in particular for schools in California.

I guess the mix I was referring to is, and so far as you can share of the guidance for Q4, 290 megawatts, how much of that could be commercial?

I'm looking at Brad and making sure that I'll let him answer the question, so he is saying, yes. So the mix will be somewhere between 70 megawatts and 90 megawatts of commercial in Q4 of installs.

Great, very helpful.

The next question is from Brian Lee of Goldman Sachs. Please go ahead.

Hey guys. Thanks for taking the questions. I had several actually, maybe a simple one. How should we be thinking about 2017, I guess in the context of this new pivoting strategy, what is it mean for targeting growth beyond the ITC?

Yeah, I still expect to see a growth in 2017, and it would be a cash flow positive, so that's the whole pivot I'd add to that, and this is the reason why we're pivoting right now. So we can have a cost structure that we have growth [theater] in 2017.

Okay, fair enough. I guess since that's a good segue into the next set of questions that I had. On that positive cash flow that you're [blending], if I use your installed targets, it seems like you'd have to be down to about 230 per watt of oil and gas by the end of 2016 to get to breakeven based on the cumulative capacity that you're targeting in. So I'm wondering if that's the right read here first of all, and then I had a follow-up on that.

Brain, you know your math is so well, but I don't want to give guidance to see it on the cost.

That you are good at math.

That you are good at math.

So I'm not giving guidance on it as you're good at math.

Okay, thank you for the compliment. Maybe I'll hop back to volumes then. On the 2015 outlook, in the shareholder letter you're mentioning some uncertainty around commercial installs in December. So are you actually expecting things to slip into 2016 because I would have figured if all goes according to plan, your original outlook even if it's at the low end, I would have remained intact. So is there anything else that might be falling out here as growth simply to slower than you might have thought?

We just don't want to push too hard on the growth, and once again that's higher costs. To maintain this 80% growth in terms of installation had extra costs, so we just wondered that we did that, and then combined with that Tanguy just mentioned on the megawatt strength, you're looking at 20 megawatts swings there on the commercial.

Yeah, very late in a year with weather holidays -- I mean there are just a lot of challenges, right.

Yeah, I mean especially with the production around [indiscernible] of winter in California.

Okay. Fair enough. I'm going to try to squeeze one last one and then I'll jump back in. And back to cash flow when I do the…

[indiscernible] one thing, because this is important to me. This is not a demand channels like Q4 bookings is going to be higher than Q3 bookings and that normally does not happen in Q4 because you just less selling days, so it's normally harder to do that.

Okay, no thanks for that clarification, that's good point. Going back to cash flow from the last question and then I'll hop off. You're implying that the breakeven cash flow is at 3.35 gigawatts of cumulative capacity again based on my math which I hope is somewhat accurate. I would imply every gigawatt above that get see to something around $200 million or $250 million positive EBITDA assumingly that's your cost targets or a even a bit below or so. I'm not asking you to endorse those numbers, but can you give us a sense of not only what breakeven is which you're articulating here for the first time, but essentially what the EBITDA growth could look like as we scale out in the out years because obviously that's what you're trying to position here for?

Yeah, I think as we complete the cost and everything else, we are deep in our planning process right now, we'll consider that, but there is nothing we're looking to give out right now.

I would use actually as the definition of EBITDA basically the economic value creation of the business which would starting at $39 million in this quarter, alright. So again like when you seem like EBITDA is represented by free cash flow in the periods, but remember simultaneously generating hundreds of millions of dollars in economic value.

Okay. Thanks guys.

Yeah, just take the EBC and replace it with some of the Brian math on the cost, you can do a lot of modeling there.

I've been trying that. Thank you.

The next question comes from the Tyler Frank of Robert W. Baird. Please go ahead.

Hey guys, thanks for taking the question. What sort of financing do you need to complete? The mood to become cash flow positive, is that to avoid future equity raises or should we plan on an equity raise at any point here in the near future?

Yeah, so I think as far as to your point on completing, if you look at the financing of the [fuller] systems, right, it's ABS and its aggregation. So I think I went through great pains in the letter basically showing you that P&L of the tax equity is a little different. It is really a tax offer type advice that we've had very strong demand. We've already got the next some months covered and I would expect by the end of the year, we'll have the balance of the year complete and then the aggregates of these are very flexible. So we can help them, we move them as we go to take that as an ABS, that I mentioned we don't actually do much more on this, this coming year, but we would be able to then recycle that back through, so I think those are still at ease are fine. And then from a working capital perspective, we intended to be using the revolvers and the solar bonds.

Got it. And then is there capacity to potentially due higher megawatt to plan in next year or have you guys essentially calculated this is where we want to be this level of growth heading into 2017, so you can better look at the market and judge what you can do about the prevailing dynamics?

Yeah, so our focus is going to be on cost reduction and cash flow positives. If we have the opportunity to grow more and it still needs us to primarily goals we will, but the primary focus is cost reduction and being cash flow positive.

We had comment on it and it's important to understand which is we don't build our capacity to build ahead of time, alright, because now we'd have idle capacity, so we size our capacities for the build megawatt of that month of that quarter. So the way we do that is we've got the SolarCity University and so we're able to onboard and train installers and SolarCity professionals to be able to grow for demand. So the capacity point if we want to grow more we will be able to deploy that capacity on a real-time basis without incurring [indiscernible].

On the financing, right I mean to Lyndon's point if there is something that's opportunistic or the ITC clarity gets better whatever we will have extra financing, just in case anybody is wanted to go with that.

Great. And then just one last question, in terms of the manufacturing facility, where do you guys stand today for the construction and what sort of milestone should we be looking out for?

We opened our California centre in Fremont, where we have the 100 megawatts line, we feel very, very good about that. We're excited about what we're seeing coming out of that line. Some of the numbers are ahead of what we thought, something is really, really good. So on the technology, front we feel very, very good about where we at. And then on the scaling up of manufacturing, the Buffalo facility is on track so far and we continue to be expecting to be ramping up there in first half of next year.

Whatever it is, we are happy, we're very, very happy with the technology there.

Great, thank you.

The next question is from Julien Dumoulin-Smith of UBS. Please go ahead.

Hey good afternoon. Perhaps could you elaborate a little bit on the regional dynamic playing out here with the execution just is it really a northeast spend or just broadly speaking what's drove 3Q and 2016 expectations? Yeah, I'll leave it there for now.

I'm not sure, I understand the question.

Yeah, I mean just, could you go state-by-state, in terms of the execution on getting the megawatts built out, how is it looking? I mean is it really weighted one state versus another?

Our East Coast states are all doing real -- they all grow in really nice stay. California is our number one state.

California is still number one, the East Coast is rolling quicker, but obviously at a smaller base, so it's a nice number too after California.

Right. But in terms of the sort of the backlog the time to get these things done, is there any differentiation of one lagging more than the other in terms of getting them off the ground?

Yeah, so the average time to install across the portfolio is about 60 days. It's a little bit less in California, a little bit longer in the East Coast, but there are no capacity constraints or anything like that on the East Coast.

We really like the East Coast. Maryland is one of our best markets. If you look at whether it's volume or costs, the East Coast markets are really good for us.

Got it. And just a little bit cutting back to the 2017 number, I don't want to put words too much in your mouth, but you can still have this 1 million customer target. How backend weighted is that to hit that number at this point?

The 1 million customer goal is definitely something that we consider when we're looking at this new focus of absolute cost reduction and being cash flow positive. So I'd say cost reduction and cash flow positive is a higher priority than the 1 million customer goal. Not giving up on the 1 million customer goal, but that's the first priority and then we'll see how things go in '17 and '18 to what we have to do to accelerate to meet the 1 million customer goal, but the focus is cost reduction and cash flow positive.

Alright. And then a better within that, is there an international piece that you're thinking for 1 million customer, I just want to clarify that?

No, no, absolutely the international customers will be counting towards the 1 million customer goal.

Great. And any expectations on where that scaling through to for your '17 growth etcetera, just as you think about that mix?

So Julien, I have to take that. So as you know we brought up in Mexico that's trending exactly as per plan, build costs of Mexico are significantly lower than they were in the U.S. just because the part of the reason is the cost of panels, there is tariff, so the cost of panel is cheaper. The build funds are great. Mexico is on track. And we're continuing to evaluate new markets and we got a couple operators where we think are attractive, which are doing a lot of work upfront, not close to what anything but liking our international place.

Yeah, one other point I'll make on that is, when we look at international markets, for the most markets, we're going to create the market. We're going to look at our favorable policies that have to have good sun and high cost of energy. But there is no market we can just go in and get gigawatts worth of capacity to build it. When you're building residential, you're doubling small numbers, then those numbers become bigger and bigger and stop becoming really big. So in terms of customer count, it will be adding to the million, but majority of that will be in the U.S.

Great, excellent. Thank you guys.

The next question is from Krish Sankar of Bank of America-Merrill Lynch. Please go ahead.

Hey, thanks for taking my questions. I had a couple of them. First, it's very nice to see your focus on cost cuts and the cash flow positiveness. Just curious on the 2016 guidance, would any extension or change in language on the ITC step down change your view on the guidance for next year?

Yeah, just to make it absolute, yeah. This focus is streaming that there is no ITC extension, so this is why we focus on it. If there is an ITC extension, we'll have to relook at the outcome.

Yes, we'll likely to increase volume.

And actually for us it's nice to think it's going to get extended. I think it's a greater probability that it will get extended, but we have to plan for the fact that it doesn't get extended, and if it does get extended, we just have a much healthier business than any of our competitors to capitalize on that extension.

Yeah, and that's a real key. It's like [27], the ability to ramp up sales and operations, it's not like you are bringing a manufacturing plant that you've idled. I mean we'll be able to bring things up very quickly. So I'm not that concerned that we wouldn't be able to sail back up on that.

Got it, alright. And then a follow-up question, do you anticipate earning level IRRs on projects deployed next year in 2016 or do you expect to raise the higher level of tax equity in securitization relative to your costs? And along the same path, if not in 2016, what kind of levered returns you expect once the tax rate steps down?

I mean, if you just look at '16 and assume some lower costs, alright, and then as Lyndon mentioned, pricing being stable to probably trending up as much, those are [both sign of test]. They are very beneficial to [inflect] to that IRR, so they're only going to get better. And for '17, it's real too early to comment on that.

One year at a time.

Alright. Thanks guys.

The next question is from Stephen Byrd of Morgan Stanley. Please go ahead.

Alright. Good afternoon. I wanted to [indiscernible] to 2017 and just thinking about the competitive playing field in 2017. If the ITC has not extended, just curious your take on what that really does for the smaller competitors?

I mean I think a short answer to that we currently have the best cost structure in the industry, we're going to have an even better cost structure, and if you don't have really low cost offer that you see expire, you can't be around. So I think that or one that I see expire is a competitive landscape, and it's going to be completely different and we're taking actions now to make sure that we continue to be the market leader at that point.

If you don't have a low cost structure in 2017?

A lot of people are going to be extremely challenged to get financed if they don't have the structure to begin with, never mind the availability of that financing.

Understood. And could that lead to potential acquisition opportunities or do you think just sticking with organic growth and focusing on your core businesses is the right way to go even in that period where you shake out?

It's actually one of the primary reasons why I think that 2017 will be a growth year for us, as just we're going to have the lowest cost structure and the best product, so the customers will come to us.

I don't think we need to make any acquisitions. It's not part of our plan to make any acquisitions within the states.

Yeah, within the U.S., yes.

Nobody else has enough scale and the cost and baggage to try to integrate it versus [indiscernible] just scaling acquiring 100 or 200 people that quite frankly would probably come from those companies anyway. It's much simpler, cheaper and less risk to do.

Understood. And then just separately on number of questions come about credit, but I think you laid out the FICA scores pretty clearly. Any trends in terms of as your business grows larger in terms of your credit quality, credit strength of customers, default rates, etcetera, any commentary on that?

I mean, the trends have been extremely consistent over the eight years and obviously we've done more and more business in the last few years. It's been extremely rigorous process as part of the underwriting in the ABS. You can imagine what we must go through there. So I don't see that changing at all. I mean we would like to broaden the customer reach and that will all just depend on the financing that goes with it. And then as we go international, obviously, that's a different animal, but I don't we'll change the focus of what we do being the larger rooftops and commercial.

Just the underlying principle of our deployment is that which are the customers list in the country paying for energy, so default rates, since they are low and then we have the choice of the other things, as we're paying [indiscernible] more, we don't have electricity, so giving us the choices, our customers pay the bills.

Very much understood. Thank you very much.

The next question comes from Gordon Johnson of Axiom Capital Management. Please go ahead.

Thanks for taking my question, guys.

Sure.

I guess next year, just with respect to your backlog, if the ITC does indeed end, assuming it takes roughly four months to puts these things on rooftops. Could we see a significant fall off in the backlog ahead of the ITC ending?

So what we would expect to do is for commercial systems, we're probably starting as early as Q2, we're going to start pricing in a 10% ITC, so that the customers know where they are going to be in depending on the schedule for PTO for the utility in connection, so it could be as early as Q2. For residential, we'll stop seeing that impact probably happen in Q4, but at one slowdown installs, is this going to be priced, and we'll price it correctly as we will have the cost structure to be able to do that at that point.

Okay that's extremely helpful. And then there has been some recent discussion around some of the lending practices, I'm sure you guys have heard this, with respect to the leasing, with respect to solar rooftop. Have you guys seen any pushback with respect to some of these, I guess, conclusions around it affecting home values being more expensive versus outright owning, have you guys seen any pushback from customers or are you not seeing that?

At the size we are right now, we have probably about 20 to 30 customers move every single day. We haven't seen not one has failed in transferring the lease of the PPA, and often as being an additional value to it, to the house and the new homeowner likes it, so we haven't seen that. In terms of cash sales versus leases and PPAs, they are staying roughly flat for us, so our cash sales on MyPower is around 10% to 15%, it's been hovering around that number for few quarters now. So we haven't seen a big movement in the differences between the two.

Okay that's helpful. And then just lastly, internationally, you guys talked about expanding internationally. Forgive me, if you have already been answered this question, I was a little late to the call. Can you give us any updates on expansion internationally and what your plans are there?

Tanguy.

Sure. Hey, Gordon. As you know we have business in Mexico that continues to do well as per the plan, build costs in Mexico lower than they are in the U.S. that feels good. And we are looking at a couple more markets. We're doing a lot of work upfront and figuring out which markets you want to be in. And as Lyndon mentioned earlier, we want to be in markets where we can have a residential or commercial platform at least and not just in one vertical. Including a lot of work upfront, there is a couple markets that we like, but we are not committed to anything at this stage.

I'd characterize our international plans as being debts versus not credits versus, meaning that we are going to go into markets, execute well in that markets and when it is coming move to the next. It's not like we're going to just open up a whole bunch of markets speculatively and we're got a whole bunch of cash and see what [it takes], like we're going to into it in a very disciplined way, we're going to pick a market execute well there and then move to the next.

Next focus is on commercial, next will be residential and then continue from that.

And again Mexico was a $10 million acquisition, alright, so we're not looking to do anything massive and crazy just to guard scale. We have scale and our focus is going to be on really good returns, good markets and faces we can take our model which is extremely efficient and pairs with very good local people that know the markets and work well with us and our culture.

But then it would be disciplined for another country before the end of next year.

Excellent. Thanks again for the questions, guys.

Thank you.

The next question comes from Vishal Shah of Deutsche Bank. Please go ahead.

Hey guys this is [Jamie Berman] on the line for Vishal. I apologize if this has been asked already, but I'm just trying to understand the cost levers that you have to pull here. I know you talked a little bit about customer acquisition costs, but what else do you see that could help bring down the costs going in 2017?

Sure, it's Tanguy. For the total costs, obviously, we got a number of things we want to do on the customer acquisition to use the cost there. On the Ops costs, there is lot of that we're going to do. So first there is, we've been rolling out a new product out of Zep that's going to make our [indiscernible] being more efficient that is really going and producing that. We've got panel prices have been roughly flat for the last eight, nine quarters, we think panel pricing would start declining that's going to produce costs, same thing on inverter prices, and then out of our 80 or so warehouses by definition there is a top 50th percentile and bottom 50th percentile. The warehouses that are slightly more expensive are because they are either newer or they having ramp up yet, and so when you take the more expensive warehouses to close to the average all those things continue to reduce costs. We're going to reducing costs on OP side of house pretty [westerly].

And a tough situation really is the vertical integration of the commercial.

And then on commercial, we used to be building costs for projects with well north of $2 on some of our core projects we're significantly, significantly below that, that won't let me give you the number, but really, really well below that.

Again just somewhat clear, the absolute operating dollars are going to continue to increase. It's not like we're cutting OpEx dollars from here down. They are going to grow at a much slower rate in the installs so that the cost per watt is dropping. And I know there has been some confusion in a few articles, I have seen, I don't' want to leave people with the thought that we're doing some massive cost reduction over night. We're going at this in a very specific manner and using our leverage and our scale to get back cost per watt down. And areas like overhead, a lot of the growth variance systems and function the departments again is coming to newer end, so it will grow much lower than the megawatts, right. So please keep in that mind if you start looking at your models and start building out your guidance and making sure that you're looking at it on a cost per watt and then backing it into the dollars, that's very important outlook for next year.

Great and that's very helpful. And then just one other question on the international front, as you expand into new markets and obviously the OpEx associated with that. Would you expect to reinvest all cash flows or are you having to think about actual hedges aside from reinvestment in those markets?

The vast majority of it got reinvested between the growth and the financing of the business.

Great. Thanks guys.

The next question is from Michael Morosi of Avondale Partners. Please go ahead.

Hey guys, thanks for taking the question. At a 350 to 400 megawatt quarter run rate, your sales team and bookings are running pretty solidly ahead of your ability to deploy the systems. Are at all concerned that some of those sales could churn off the backlog and is there anything that you can do in the near-term to clear what appears to be a building backlog?

So this is the one and all ramping up our installations, [so that they still catch up with them], this is the part I mentioned earlier and we're going to focus now on the lower acquisition costs, we're going to focus on the profitable customers, so you'll see the bookings and installs that didn't closer to one another, but they will still be a delta because at a 40% growth rate you still have to have a delta, but you will see the other two lines getting closer to one another.

Okay. And then to the extent that you're beginning to optimize the overall organization and the cost structure for a post-30% ITC world. Have you thought at all about what a sustainable run rate looks like in '17 and beyond? Is it close to '16 or do you think there is room for material growth to the organization beyond that?

I think I understood your question. Do I think the growth rate to be higher than 40% in '17?

No, I mean, just the ability to deliver growth from that level. What do you think is a sustainable level of annual installs?

Yeah, it's little early to give you the actual percentage of growth, but I'm highly confident that there would be a growth in 2016.

Okay. Alright. And then just finally as it relates to [Silevo], how are you thinking about the potential impact to cost per watt looking out into 2017? It doesn't seem like it's going to factor in too much in '16, but is that going to be another lever to pull in terms of reducing overall cost there and by what factor?

Yeah, absolutely. As Lyndon said, I think we'll wait till next quarter to give better guidance cost, but a high level look, if you have a 251 watt panel versus 351 watt panel. You just need way less panels on a given house or on a given rooftop. And as a consequence, your labor costs go down proportionally. Your hardware costs go down proportionally. Your wiring costs go down proportionally. So the ripple effect of a high efficiency panel through the system is massive. The number that I have been using is relative to today's costs and it's about a $0.25 [a watt of panel].

That's helpful. Thanks guys.

The next question comes from Edwin Mok of Needham & Co. Please go ahead.

Hey guys, thanks for squeezing me in. And I caught a little late if you all have touched already about it, but in terms of [Silevo] let me just talk about how long you think it will take for you to ramp up 1 gigawatt your full capacity. And then also if market sustain at much higher price with these high efficiency module, have you guys thought about selling [larger rods] and using them in the installation?

So we're hoping for early 2017 to be fully ramped up and then think about capacity. And yeah three is going to be a lot of incredibly differentiating things, a lot of differentiating things about SolarCity's products and services and we have [Silevo]. So I think that will further our competitive edge when we have what I believe to be the best module on the frontend.

But we want to keep that margin was into the -- get the benefit with our installation to keep the high efficiency for ourselves. The gigawatt facility won't even be able to supply our own needs.

I see sort of focus is small for internal consumption, okay. That's helpful. And then on the securitization front, it sounds like that you guys are building up the MyPower loans, right. Anything can help us think about in terms of your view to market, how much do you need or how many loan contracts you need before you can really go exit the securitization market using those products? Is there a way to kind of think about it and maybe give a range of number of contracts you need or something like that?

Like I said before, it's really a function of having a compete tax equity fund, if you put in there you really can't split like in chunks, so as the funds get and it sounds like settled and go in. If you look at it from the end ABS market and it was a great thing actually. When we did that last ABS, it was in the beginning of the solar turmoil and I did a postmortem post that meeting with some of our vendors and the banks. And the biggest complaint they had is we want bigger ones and we want more frequent, and those are great problems to have. And a nice thing is, with the backlog of the financing receivable that we have that's exactly what we'll be delivering going forward. So I think we're in a good position, so we'll probably tend to get bigger than what we've historically done because our funds are technically getting bigger, so they will be bigger, and again like I said more frequent.

Have you thought about being under radar in just securitize our home loan product and actually securitize other people's product as well, given that you also set prioritization versus the rest of the industry?

I think if you look at it, we've got a very good team that spends the time on the structuring, so that we could structure these things, get them to market quicker and manage the fees and the credit enhancements that tend to go with that. So we're going to stay very focused for quite a while.

One other [indiscernible] of political integration, is that you have everything all the interaction with customers, you have all the information about the customer and you have all of your cost structure, everything is available and you have all the production, so this is the reason we are the first company to be succeeded as securitization. And so taking on that some of other assets would be a big undertaking, and we just have this streamlining system within our company.

And remember it starts with that tax equity fund, right, that's the root of all of evil because that deals all the way through to the ABS, so we have to have a team that works in concert in this financing factor to make sure all of these fits smoothly. And to try to pickup someone else's wacky structure or fund or something and do it, it's really hard, and that's why you're not seeing other people being able to do the ABSs like we have or be successful at it because it's the dog's breakfast maybe between the assets and/or the structures that makes it very hard for securitize. So we will continue to leak the pack and pave the way.

Yeah, for now I agree that there was a huge differentiation for you guys. Last question I had on commercial. Maybe you had touched on it earlier, but new guidance that you provide 1.25 gigawatts. Have you talked about how much of that will be commercial?

We have not. Next question, please.

Yeah, I have some questions. Can you tell us roughly at what level of that would be commercial versus residential?

I mean it's reasonable to expect that it's across the same mix as what we've done in Q3 give or take.

I see, okay, similar to what we have. Thank you.

The next question comes from Pavel Molchanov of Raymond James. Please go ahead.

Hey guys. Since I'm towards the end of the call, I'll ask kind of a high level one, if I may. A year ago the stock was trading at three times retained value. Today it's trading at one times retained value. What do you think went wrong?

I think you mean net retained value?

Net retained value indeed. What's the market not getting?

I'll handle that. It's Peter Rive. It's not even net retained value, look at our economic value that we traded the EVC slide. The company this last quarter generated $239 million of value and it's very close to $1 billion run rate. For it to be where it is right now, I don't know, this is why we'd be focusing on cost, maybe the market doesn't think that we have a cost structure that can work in 2017. This why we focus in this, we'll prove it out in 2016. I hope that helps.

Okay. Given the pivot to a more refocused installation model, does it still make sense for you to be in 19 states, because that number has been pretty consistently increasing almost every quarter?

Yes, so we will optimize our cost structure to make sure that every location is adding cash to the business, and so we'll absolutely look at that. And we most likely wouldn't be expanding too [Mainland] states right now, but we'll look at the existing states to see, are they adding cash to the business and for the most part they all are.

Okay. That's good to hear, appreciated.

There are no further questions at this time. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Thank you.

Thank you everybody.