SolarCity Corp (SCTY) Earnings Report: Q3 2015 … · SolarCity Corp (SCTY) Earnings Report: ......

CompanyName:SolarCityCorpCompanyTicker:SCT YSector:T echnologyIndustry:Electronics

EventDescription:Q32015EarningsCallMarketCapasofEventDate:3.69BPriceasofEventDate:38.07

©2014TheStreet,Inc.Al l R ightsReserved Page1of22

SolarCityCorp(SCTY)EarningsReport:Q32015ConferenceCallTranscriptThefollowingSolarCityCorpconferencecalltookplaceonOctober29,2015,05:00PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

AaronChew;SolarCityCorporation;IRLyndonRive;SolarCityCorporation;CEOBradBuss;SolarCityCorporation;CFOPeterRive;SolarCityCorporation;CTOTanguySerra;SolarCityCorporation;COO

OtherPart icipants

PatrickJobin;CreditSuisse;AnalystNoahKaye;Oppenheimer&Company;AnalystPhilipShen;RothCapitalPartners;AnalystBrianLee;GoldmanSachs;AnalystTylerFrank;RobertW.Baird&Company;AnalystJulienDumoulinSmith;UBS;AnalystKrishSankar;BofAMerrillLynch;AnalystStephenByrd;MorganStanley;AnalystGordonJohnson;AxiomCapitalManagement;AnalystJerimiahBooream;DeutscheBank;AnalystMichaelMorosi;AvondalePartners;AnalystEdwinMok;Needham&Company;AnalystPavelMolchanov;RaymondJames;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheSolarCitythird-quarters2015earningscall.

(OperatorInstructions)

Asareminder,thisconferenceisbeingrecordedit.

It'snowmypleasuretointroduceyourhostAaronChew.ThankyouMr.Chewyoumaybegin.

AaronChew(IR):

Thankyou.GoodafternoontoeveryonejoiningustodayforSolarCity'sthird-quarter2015earningsconferencecall.LeadingthepresentationtodaywillbeadiscussionfromourChiefExecutiveOfficerLyndonRive;ourChiefTechnologyOfficer,PeterRive;ourChiefOperatingOfficer,TanguySerra;aswellasourChiefFinancialOfficer,BradBuss,afterwhichpointintime,we'llopenupthecalltoquestions.

Asareminder,today'sdiscussionwillcontainforward-lookingstatementsthatinvolveourviewsasoftodaybasedoninformationcurrentlyavailabletous.Forward-lookingstatementshouldnotbe




consideredaguaranteeoffutureperformanceorresults,andreflectinformationthatmaychangeovertime.

PleaserefertoSolarCity'squarterlyshareholderletterissuedtoday,aswellastheslidesaccompanyingthispresentation,andourperiodicreportsfiledwiththeSecuritiesandExchangeCommissionforadiscussionofourforward-lookingstatementsandthefactorsandrisksthatcouldcauseourresultstodifferfromtheseforward-lookingstatements.Wedonotundertakeanyobligationtopubliclyupdateorreviseanyforward-lookingstatement.

Inaddition,duringthecourseofthiscall,we'lluseanumberofspeciallydefinedtermsrelatedourbusinessmetricsandfinancialresults,includingnon-GAAPfinancialmetrics.WerefertoallthedefinitionsofthesetermsandtherequiredreconciliationbetweenGAAPandnon-GAAPfinancialmetricsincludedintheshareholderletterissuedtoday,aswellastheslidesaccompanyingthispresentation,whichareavailableonourInvestorRelationswebsite,investors.SolarCity.comWiththatfinallybehindus,IwouldliketointroduceSolarCity'sChiefExecutiveOfficer,Mr.LyndonRive.

LyndonRive (CEO):

Thanks,Aaron.Thanks,everybodyforjoiningthecall.We'regoingtotryadifferentformatinthiscall.Insteadofgoingthroughtheslides,youhavetheaccesstotheslides,we'regoingtospendmostofthetimeaddressingquestions.Beforewegettothequestions,IwanttogooveraquickCompanyupdate,Bradwilljustdiscusssomeoftheupdatesonfinance,andPeterwillgetintoadiscussiononnetmetering.

QuickrecapforQ3.Weinstalled256megawatts,whichisanewrecord,butslightlylowerthanour260megawattforecast.I'mdisappointedinthisnumber,butjusttoputitinperspective,atourcurrentrateofinstallation,weinstallroughly2.5to3megawattsaday,sowemisseditby1.5daysorso.

Allthefundamentalsofthebusinessislookinggood.Costreductioniscomingdownnicely.Demandfortheproductisstrong,andtheeconomicvaluewecreatedthisquarterwas$239million.That'squiteanamazingnumber.Lookingatthelastnineyears,thestrategyoftheCompanyhasallbeenaboutgrowth.

Thereasonwhywehavefocusedongrowthisweneedtoachievescale.Theonlywayyoucanreducecostiswithscale.Thelastnineyears,wehavebeengrowingroughly80%to90%,butthereisthedownsideofgrowingat80%or90%isyouhavetomakeinvestmentsintotheinfrastructuretoday,whichyouonlyrecognizethebenefitofthatinvestmenttwotothreequarterslater,sothatthereisacosttothatscale.

Nowthatwe'veachievedscale,weasanexecutiveteamandaBoardhavedecidedtofocusoncostreductionandbeingcash-flowpositivebytheendof2016.Withthisnewfocus,wearegoingtoreduceourgrowthratetoroughly40%in2016.Foracompanyoursize,40%isstillaverybiggrowthrate,butthiswillenableustofocusonprofitableinstallations,themoreprofitableinstallations,aswellasreducingourcustomeracquisitioncost.

IfyoulookatourQ3installcosts,we'vealmostachieveda2017goalof$1.90awatt.Nowthatweinvestinglessintogrowth,we'regoingtobeupdatingour2017costgoals.Bythenextearningscall,expectupdatedcosttargetsfrom2017andexpectameaningfulreductiontoour$2.50awattby2017.

OnethingIwanttomakeclear,thatthischangeinfocusisnotalackofdemand.WeexpectinQ4bookingstobegreaterthanQ3bookings.Normally,Q4islowerthanQ3becauseoftheseasonality.Wehavelesssellingdays.Butthedemandisstrong.In2016,weexpectthedemandtobeverystrong.

Whenyouhaveanexpiringtaxcredit,ortaxcreditgonefrom30%downto10%,thecustomerisgoingtorushtogetintonotmisstheopportunity,soweexpectthedemandtobestrongin2016.Weareactually




goingtobeincreasingourpricinginQ1nextyear.Itwillbeasmallincrease;dependingonthestate,we'llincreaseroughly$0.025,to$0.01centakilowatthourinourleases[andTPAs].

Essentially,maxestheescalationoftheutilityrates.Overall,I'mveryexcitedaboutthebusiness,andthestrategychange.We'renowatthisinflectionpointwherewe'regoingtobecomecashflowpositivebytheendof2016,andhaveacoststructurewherethebusinesscanmaintaincashflowpositivein2017witha10%accuracy.I'mgoingtopassitontoBrad.

BradBuss (CFO):

Thanks,Lyndon.JustaquickcouplecommentsonQ3.Overall,wehadaverysuccessfulquarterwithgreatresultsandrecordsLyndontouchedon.Ijustwanttoemphasizeacouplethings.Therecommendvaluecreationof$239millionweachieved,thatwasup22%sequentially,withsolidIRRsof12%,andthat'swithfullyloadedcosts.Ifyoulookatitonaprojectbasislikemanycompetitorswhodo,it'smuchcloserto16%.

AlsoattheendofQ3,hadrecordgrossretainedvalueof$4.4billionandnetretainedvalueof$3.3billion,whichisapproximately$33peroutstandingshare.AsfarasourPowerCoavailablecash,whichweintroducedinQ2,Ijustwanttoexplainacoupleoftimingdifferencesthatwetendtoseeandthatyouwillcontinuetoseegoingforward.

IfyoulookatjusttheQ3number,ourPowerCorevenuewas$95million,andthatwasduetoincreasetheassetsandservice,aswellasstrongsystemperformancebecauseQ3tendstobeourextremelysunnyperiod.Thefinal[PACforadjusting]inQ3was$19million.Again,thatwasduemainlyfromthetimingofcertainpaymentsfordebtandinterestthattypicallyhappenatahigherlevelinQ1andQ3andthesamethingforhigherdistributionstoourtaxequitypartners.

Ifyounowlookatthingsonatrailing12-monthperiod,whichwereviewonthebestmeasuretoseehowPACismovingonanannualbasis,thePowerCorevenueincreased17%sequentially,andthenetPACfromoperationsandpriortoanydistributionstoourtaxequitypartnersand/ordebtserviceincluded7%sequentially.ThefinalPACwas$112million,anditdown2%,butagainthatwasreallyduetothetimingofthepayments,wherereallyit'sadebttaxequityandinterestasImentioned,andyou'llcontinuetoseethosefluctuationsinQ1andQ3.

Iwanttojusttouchbrieflyonourfinancingstrategy.There'salwaysbeenalotofturmoilonthesolarindustryasoflateandalotofquestionsrelatedtofinancingcomingup.Wewenttogreatlengthsinourshareholdersletter,aswellastheearningsdeck,toexplainthatourfinancingstructurefortheourmainproducts,whichareleases,PPA,andMyPowerloansareverydifferentfromsomeofourpeersandobviouslyverydifferentthansomeofthecurrentchallengesthatcertainyieldcostsarefacing.

Thebottomlineisthatoursolarassetfinancingstrategyisverysoundanditfocusedontaxequity,aggregationfacilities,andABS.Wehaveampleroomonourmaintaxequityandagfacilities,whichreallyprovidethebulkofouryearonecash.Inaddition,asmostofyouknow,wecompletedourfinancing,withthetakeoutviatheABSmarketinAugust,andIexpecttohavearegularcadencefromhereon.

AllofourguidanceisdetailedintheearningsdeckforQ4,aswellas2016.Butjusttoensurethatwe'reallonthesamepage,Iwanttoletyouknowthatthecashflowbreak-eventhatLyndontalkedabout,andhowwe'regoingtodefinethat.Allofthatwillcomerightoffofourquarterlyfinancials.

Theformulathatwe'reusingisthenetincreaseincashandinvestments,whichobviouslyincludessecurities,etcetera,lessnetcashprovidedbyequityissuancesthatcomesoffthecashflowisgoingtobegreaterthanorequaltozero.SoI'lljustwrapupthereandI'llnowturnitovertoPetetocoveroneof




ourfavoritesubjects.

PeterRive (CTO):

Andbyfavoritesubjects,hemeansnetmetering.Utilityoppositiontorooftopsolarisgettingalotofairplay,soIwouldliketogiveyouourtakeonthesituation.Despiteutilityefforts,regulatorsarerejectingproposalstounfairlypenalizesolarcustomersasevidencedbyrecentlyfailedattemptsinColorado,NewMexico,andKansas.

Additionally,netmeteringcapswererecentlyextendedinNewJersey,NewYork,andtheNevadaPUCextendeditsprogramthroughyear-endwhileitevaluatesthebenefitsofrooftopsolar.It'simportanttonotethatapreviousstudyconductedinNevadashowedthebenefitsoutweightherevenueshift.

InArizona,thisweekweachievedanothervictoryagainstutilitiesattemptingtoabusetheirmonopolypositions.InourcaseagainstSRP,ajudgeruledthattheutilitymustanswerincourtfortheunfairandanti-competitivepenaltiesitisimposingonsolarcustomers.

InHawaii,whichisaveryspecialcase,withdoublethemarketpenetrationandextremelyhighelectricityprices,thePUCissuedanewsolartariff,whichhadsomegoodandsomebadcomponentstoit.Badwasthelackofdueprocessandtheabruptwayinwhichitwouldtakeeffect.

Butgoodinthatitprovides[xleaded]andmandatoryinterconnectionforsolarsystemsthatdonotbackfeedontothegrid,whichiswheythey'rereferringtoasaself-supplytariff.We'reworkingonaself-supplysolutionthatcouldrestoreHawaiitoahigh-growthmarketforusatsomepoint.

ThenmovingtoCalifornia,theCaliforniaPublicUtilitiesCommissionisexpectedtoreleasetheirnewnetmeteringtariffsinthecomingmonths,andthisisanimportantoneforus.Ingeneral,we'rehopefulofagoodoutcomefortworeasons.First,webelievethebenefitsofrooftopsolararegreaterthantherevenueshift,andbybenefitsImeantheabilitytoavoiddistributionandtransmissionexpensesandsoon.

Andthensecondly,adecisionthatensurescontinuedgrowthofrooftopsolarisrequiredbylaw.I'mgoingtoquotedirectlyfromAssemblyBill327,andthisisinreferenceto[anMTOdoe].Thiscommissionshalldoallofthefollowing,andthenfirstpointis,ensurethatthestandardcontractortariffmadeavailabletoeligiblecustomergeneratorsensuresthatcustomer-sitedrenewabledistributedgenerationcontinuestogrowsustainably.Iwanttoreemphasizethatitisrequiredbylawthat,thathappens.

Sothen,ifwethinkaboutis,it'simportantthatthe[discussions]aregoingtogoaway.Foreverthattheutilitieswilltrytoimposepenaltiesonrooftopsolar.Overtimethere'sgoingtobegiveandtakesonbothsides,butwe'reoptimisticthatinthefaceofclimatechangeandthebenefits,aswellaspopularityofsolarpower,thatstateagencieswillclosepoliciesthatslowdownsolaradoption.Andwiththat,Iwouldliketomovetothequestion-and-answerspartofthecall.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

Thankyou.OurfirstquestioncomesfromPatrickJobinofCreditSuisse.Pleasegoahead.

PatrickJobin (Analyst-CreditSuisse):

Hi,thanksfortakingthequestion.Firstquestionon2016guidance,maybesomeofthethoughtprocessthatyouguyswentthroughtoformthe40%growth,fromourperspective,ameaningfuldeceleration.




Wasthatguidanceimpactedbyanymarketdemandconstraints,policyuncertainty,conservatismbuildingouttheOrganizationalcapacitytoavoidanyunderutilizedcapacityin2017,capitalcapacityconstraints,Organizationalconstraintsoranycompetitivepressures?Ijustwanttobetterunderstandsomeofthemotivatingfactors?Thanks.

LyndonRive (CEO):

Yes,reallygoodquestion.There'sacoupleofareas.First,ifyoulookatourcurrentacquisitioncost,it'saround$0.64awatt.Growingat80%to90%,thatlastpushforthoselastcustomers,they'rereallyexpensive,sowewanttoreduceouracquisitioncosts,sobyslowingitdown,thenwecanreduceouracquisitioncostings.

Theotheristhebesttimetoplanfora10%ITCandoptimizetheCompanyfora10%ITCisnotwhenyou'reinthe10%ITCworld,it'swhenyou'reinthe30%ITCworld.That'swhenyouwanttomakethechange.

Ifwemakethisfocusin2017,it'sgoingtobealothardertodoitthenthanitistodoitnow.That'sanotherreasonwhywedecidedtodoitearlier.Wewanttoshowthemarketthatwecanhaveanextremelylowcostandalsobecashflowpositiveandmaintaincashflowpositivein2017.

TheotherpointIwanttoemphasizeiswhenyou'regrowingat80%,beyondthehighacquisitioncost,theonlywayyoucanmaintainan80%growthrate,youhavetomakebig,biginvestments,butyou'reonlygoingtoseetheresultsofthoseinvestmentstwotothreequarterslater.

Sodoingthatwhenyouknowthatyouhavetogettoacoststructurewherewewanttostrivetobecashflowpositivein2017,areallthereasonswhywedecidedtoreducethegrowthrate.AndIdowanttofollow-upwithfindcompaniesthat[areatthepointof]infrastructurethathave14,000employeesthataregrowingat40%.

PeterRive (CTO):

Andthat'smainlywhat'sthepoint,intermsofrevenuegrowth,it'sgoingtobeinexcessof70%.

LyndonRive (CEO):

Exactly.Soitisnotourstandard80%growth,butnotthat40%isalowgrowthnumber,justwantedtoemphasizethat.


Gotit.Thensojusttofollowup,whenyouthinkaboutsalescosts,howwidewasthatdifferentialbetweenthatfirst40%forgrowthandthat--thelastfewcustomerstogetyoutothat80%,90%growthlevel.Howvaryingisthatincrementalsales-relatedcostorhowwideisthatrange?

T anguySerra(COO):

Hey,Patrick,it'sTanguy,I'lltakethat.Thatrangeisactuallyquitewide.Ifyouthinkaboutitourbestformofacquisitionisreferralsbydefinition.Referrals,thoseareourcheapestcustomerstoacquireandsomeofour--becausewe'rethemostgratefulfor.

Thenyouwalk[thecostslackup].Directenergyisaphenomenalcostacquisitionchannel.Thenasyoucontinuewalkingyour[slack]up,whenyouhavetopayforleadsandthenclosingcosts,thecostsarehigher.Sothespreadis--don'twanttogivethespreadsnumbertoowidelyoutbecausethenwediscloseourcoststructurebychannel,butit'samaterialspreadifyou'repayingforaleadorifyou'renotpayingforalead.





Thankyou.

Operator :

ThenextquestionisfromNoahKayeofOppenheimer&Company.Pleasegoahead.

NoahKaye (Analyst-Oppenheimer&Company):

Thankyou.Firstmaybewanttostartoffwiththepolicyfront.Canyougiveusanideaofwhatyou'reactuallyseemingforNEM2.0,howsoonyouexpectthedecisiontobe,andofwhatyourbaselineassumptionsare,andmaybepositive,negativerisearoundthat,andhowthatmightinfluenceyouroutlookfornextyear?

PeterRive (CTO):

We'reexpectingsomethingoutofPUCinthenexttwomonthsorso.Igottosaythatit'snoteasyforustobuildinspecificassumptionsintoplanningforCalifornia.Again,whatgivesusgreatcomfortisthefactthatAB327says,bylawthatthetariffthatthePCcomesupwithmustensurethatrooftopsolarcontinuestogrowsustainably.Itwouldjustbespeculatingatthispoint,andI'drathernotdothat.


Okay.That'sonlyfair.Ifwecanturntothefinancing,sosuccessfullyclosingtheABS,Ibelievethiswasthefirsttimeitwasanewfinancingstructureforyouguysthatunderpinnedthoseleases.Canyoutalkalittlebitabout--expandalittlebitmoreonthecadenceoffutureABSs,andinparticular,whereyouexpectloan-to-valuetotrend?

BradBuss (CFO):

Thankyou.Youhitakeypoint.AllofourleasestructuresforourleasesandPPAsarenowrated,whichisgreat,andtheyallhaveaninvestment-graderating.ButthenextthingthatwouldendupcomingupactuallywillbetheMyPowerloans,andthenreallyallofourproductsaretotallyrated.Sofromacadencestandpoint,remember,sincewehavetaxequityfundsunderlyingthese,webasicallyfillafundup.

Onceafundisfilledup,andwehavesomefairlylargefundsthattendtohavebeenayearinlength,sothatoncethey'redone,we'llputthemrightoutintotheABSmarketsrightaway,sohencewedidhavealittlebitofalull,asyounoticedinthisyear,butyou'llseethecadence.Assoonasthesefundsaredone,they'llbecomingoutthedoor.

You'llseemuchmorefrequentissuancesgoingforward.Andasfarastheadvanceandalltherates,theyreallyjustdependatthetime,themarketstructure,butIwouldexpecttheadvancedratesforleasesandPPAstobefairlystabletowhatwehaveseen,andprobablybeasgoodorbetterwhenwegetintotheMyPowersituationsinceit'saverydifferentproductwithnoITCinit.


Right.Okay.Thankyou,I'llturnitbackovertoyou.

LyndonRive (CEO):

Yes,thankyou.

Operator :




ThenextquestioncomesfromPhillipShenofRoth.Pleasegoahead.

PhilipShen (Analyst-RothCapitalPartners):

Hey,guys,thanksfortakingmyquestions.Inthelastquarter,youguystalkedaboutnormalizedPAC,orpowerflowcashflow,ofbeingcloserto$166million.WiththevariabilitythatwesawinQ3,whatdoyouthinkthenormalizedPACoughttobeonagoforwardbasis?

BradBuss (CFO):

Again,thenormalized,thatreflectedthetaxequitydistributionsaddedback,justsowe'reallonthesamepage.AsIwentthroughhere,andintheletter,andhopefullypeopleunderstandthethatvariabilitybetweenQ1andQ3,there'sverydifferenttimingforallofthosepayments.

Weshowyoubyquartersoyoucanseethat.Asweaddmoredebt,thatobviouslygoesintothenumberandyourpaymentsthere,buttherevenuewillmoveaccordingly.We'renotinapositiontogiveyouaguidanceonitatthispoint,butIwouldsay,year-on-year,it'sgoingtocontinuetogrowsubstantially.


Great,thanks,Brad.Youguysdidagreatjobonexpandingcommercialinthequarter.Canyougiveussomemorecoloronthiscommercialstrength.Isitthesmallcommercialsegmentthat'sdrivinggrowth,asyouguysreferredtointhelastquarterandwhatkindofmixofcommercialcouldweseeinQ4andaswegothrough2016?

LyndonRive (CEO):

Yes,appreciatethequestiononcommercial.It'sagoodtopicforus.Thecommercial,whatwehavedone,ifyouremember,wehaveinsourcedtheconstructioncostsofcommercialusingourowncrews.That'sbeenmassivelysuccessfulbeyondourexpectations,candidly.

Sowhatwehavedoneiswe'vedramaticallyreducedthecoststructureofcommercialinaplacewhereI'mactuallyreallyexcitedaboutourcommercialcostsonago-forwardbasis.Whatthathasdoneisthathasenabledustobuildgroundmounts,largegroundmounts,aswellasrooftopsatalowcost,whichbydefinition,wecanbidreasonablyattractive,veryattractive,higherpricestoourendcustomers.

Thatfeelsreally,reallygood.Themixis,it'smostly,there'snoaveragebydefinition,butthere's,callit,1megawattgroundmount,it'sprettystandard,500-kilowattroof,it'sprettystandards,andthensomesmallercarports,inparticular,forschoolsinCalifornia.


ThemixIwasreferringtoisinsofarasyoucanshare,oftheguidanceforQ4,290megawatts,howmuchofthatcouldbecommercial?

LyndonRive (CEO):

I'mlookingatBrad,makingsureI'mansweryourquestion(laughter).He'ssayingyes.Themixwillbesomewherebetween70and90megawattsofcommercialinQ4ofinstalls.


Great.Veryhelpful.

Operator :




ThenextquestionisfromBrianLeeofGoldmanSachs,pleasegoahead.

BrianLee (Analyst-GoldmanSachs):

Hey,guys,thanksfortakingthequestions.Ihadseveral,actually.Maybeasimpleone.Howshouldwebethinkingabout2017inthecontextofthisnewpivotandstrategy?WhatdoesitmeanfortargetinggrowthbeyondtheITC?

LyndonRive (CEO):

Istillexpecttoseeagrowthin2017anditwillbeacashflowpositive.That'sthewholepivotonit.Thisisthereasonwhywearepivotingrightnow,issothatwehaveacoststructure,thatwehaveagrowthyearin2017.


Okay.Fairenough.Since--that'sagoodsegueintothenextsetofquestionsIhad.Onthatpositivecashflowmetric,Lyndon,ifIuseyourinstalltargets,itseemsyouwouldhavetobedownto$2.30perwattofall-incostbytheendof2016togettobreak-evenbasedonthecumulativecapacitythatyou'retargetinghere,sowonderingifthat'stherightreadhere,firstofall,andthenIhavetofollowuponthat?

LyndonRive (CEO):

Brad,Iwanttosay,yourmath,youknowyour[motorfuel]well,butIdon'twanttogiveguidancejustyetonthecosts.Butyou'regoodatmath(laughter)soI'mnotgivingguidanceonthat.Butyou'regoodatmath.


Okay.Thankyouforthecompliment.MaybeI'llhopbacktovolumesthen.Onthe2015outlook,intheshareholderletter,you'rementioningsomeuncertaintyaroundcommercialinstallsinDecember.Soareyouactuallyexpectingthingstoslipinto2016,becauseIwouldhavefiguredifallgoesaccordingtoplan,youroriginaloutlook,evenit'sthelowend,wouldhaveremainedintact.Isthereanythingthatmightbefallingouthereorisgrowthsimplyjustslowerthanyoumighthavethought?

LyndonRive (CEO):

Wejustdon'twanttopushtoohardonthegrowth,asonceagain,that'sahighercost.Somaintainingthis80%growth,intermsofinstallation,hadextracosts.Wejustwanttoreducethat,andthencombinedwiththe[ton]youjustmentionedonthemegawattstrings,you'relookingat20-megawattstringsthereonthecommercial.

BradBuss (CFO):

Yes,verylateintheyear,withweather,holidays,there'sjustalotofchallenges.

T anguySerra(COO):

Yes.EspeciallywiththepredictionaroundanElNinowinterinCalifornia.


Okay.Fairenough.I'mgoingtotrytosqueezeonelastonein,andthenI'lljumpbackin.Andbacktocashflow.

LyndonRive (CEO):




[It'sjustrest]tohighlightonethingbecausethisisimportant[tome].Thisisnotademandchallenge.Q4bookingsisgoingtobehigherthanQ3bookingsandthatnormallydoesnothappeninQ4becauseyoujusthavelesssellingdays,sothat'snormallyhardertodothat.


Okay.No.Thanksforthatclarification.That'sagoodpoint.GoingbacktocashflowformylastquestionandthenI'llhopoff.You'reimplyingthatthebreak-evencashflowisat3.25gigawattsofcumulativecapacity.Again,basedonmymath,whichIhopeissomewhataccurate,itwouldimplyeverygigawattabovethatgetsyoutosomethingaround$200millionor$250millionofpositiveEBITDA,assumingyougettoyourcosttargetsorevenabitbelow.

Notaskingyoutoendorsethosenumbers,butcanyougiveusasenseofnotonlywhatbreak-evenis,whichyou'rearticulatinghereforthefirsttime,butasenseofwhattheEBITDAgrowthcouldlikeasyouscaleoutintheoutyears,becauseobviouslythat'swhatyou'retryingtopositionherefor?

BradBuss (CFO):

Aswecompletethecostsandeverythingelse,we'redeepinourplanningprocessrightnow,we'llconsiderthat.Butthere'snothingwe'relookingtogiveoutrightnow.


Okay.

PeterRive (CTO):

Iwoulduse,actually,thedefinitionofEBITDA,basicallytheeconomicvaluecreationofthebusiness,whichwas$239millioninthisquarter,right?Again,whenyouusetermslikeEBITDA,itis[repensued]byfreecashflowintheperiod,butremember,whilesimultaneouslygeneratinghundredsofmillionsofdollarsineconomicvalue.


Okay.Thanks,guys.

BradBuss (CFO):

Yes,justtaketheEVC,replaceitwithsomeoftheBrianmathonthecost.Youcandoyourownmodeling.


I'vebeentryingthat,thankyou(laughter).

BradBuss (CFO):

Ifyouneedsomehelp,we'llhelp.

Operator :

ThenextquestioncomesfromTylerFrankofRobertW.Baird.Pleasegoahead.

T ylerFrank(Analyst-RobertW.Baird&Company):

Higuys.Thanksfortakingthequestion.Whatfinancingdoyouneedtocompleteandisthemoodtobecomecashflowpositive,isthattoavoidfutureequityraisesorshouldweplanonanequityraiseat




anypointhereinthenearfuture?

BradBuss (CFO):

Asfaras,toyourpointoncompleting,ifyoulookatthefinancingofthesolarsystems,it'sABS,andit'saggregation.Iwentthroughgreatpainsintheletter,basicallyshowingyouthatthetaxequityisalittledifferent.There'sreallyatax[opifIdevisethat].

We'vegotverystrongdemand.We'vealreadygotthenext7monthscoveredandIwouldexpectbytheendoftheyearwe'llhavethebalanceoftheyearcompleteandthentheagfacilitiesareveryflexible.Wecouldupthem.WemovethemaswedotakeoutsinABS,we'dobviouslydomuchmorethiscomingyear.

Butwewouldbeabletothenrecyclethatbackthrough.Sothosefacilitiesarethawing.Andthenfromaworkingcapitalperspective,wetendtobeusingtherevolversandthesolarbonds.


Gotit.Andthenisthereacapacitytopotentiallydohighermegawattdeploymentnextyearoris--haveyouguysessentiallycalculatedthatthisiswherewewanttobe,thislevelofgrowthheadinginto2017,sothatyoucanbetterlookatthemarketandjudgewhatyouneedtodobytheprevailingdynamics?

LyndonRive (CEO):

Yes,ourfocusisgoingtobeoncostreductionandcastflowpositive.Ifwehavetheopportunitytogrowmore,butstillmeetthosetwoprimarygoals,wewill,buttheprimaryfocusiscostreductionandbeingcashflowpositive.Letmeaddacommentonthat,whichisimportanttounderstand,whichiswedon'tbuildourcapacitytobuildaheadoftime,becauseifnotwewouldhaveidlecapacity,sowesizeourcapacityforthebuildmegawattofthatmonthorthatquarter.Thewaywedothat,iswe'vegottheSolarCityUniversityandwe'reabletoonboardandtraininstallersandsalesprofessionalstobeabletogrowfordemand.Sothecapacitypoint,ifwewanttogrowmore,wewillbeableto,anddeploythatcapacityonareal-timebasiswithoutincurring(inaudible).


Great,andthenjustoneotherquestion.

BradBuss (CFO):

Onthefinancing,toLyndon'spoint,ifthere'ssomethingthat'sopportunisticortheITCclaritygetsbetter,whatever,wewillhaveextrafinancing,justincaseanybodyisworriedaboutthat.


Great.Thenjustonelastquestion,intermsofthemanufacturingfacility,wheredoyouguysstandtodayfortheconstructionandwhatmilestonesshouldwebelookingoutfor?

LyndonRive (CEO):

We'vegotthe--weopenedourCaliforniacenterinFremont,wherewehave100-megawattline.Wefeelvery,verygoodaboutthat.We'reexcitedaboutwhatwe'reseeingcomingoutofthatline.Someofthenumbersareaheadofwhatwethought.

Thatfeelsreally,reallygood.Soonthetechnologyfront,wefeelvery,verygoodaboutwherewe'reat.Onthescalingupandmanufacturing,theBuffalofacilityisontracksofar,andwecontinuetobe




expectingtoberampingupthereinthefirsthalfofnextyear.


Okay.

LyndonRive (CEO):

Rampingup.

T anguySerra(COO):

Yes,yes.


Great,thankyou.

LyndonRive (CEO):

Soinotherwords,we'rehappy.Thingsare--we'revery,veryhappywiththetechnologythere.


Great.Thankyou.

Operator :

ThenextquestionisfromJulienDumoulinSmithofUBS,pleasegoahead.

JulienDumoulinSmith (Analyst-UBS):

Hi,goodafternoon.

LyndonRive (CEO):

Hi.


Hey,perhapscouldyouelaboratealittlebitontheregionaldynamicplayingoutherewiththeexecution?Justisitreallyanortheastthingorjustbroadlyspeaking,whatdrove3Qand2016expectations?I'llleaveittherefornow.

LyndonRive (CEO):

I'mnotsureIunderstandthequestion.


Couldyougostate-by-state,intermsoftheexecutionongettingthemegawattsbuiltout,howisitlooking?Isitreallyweightedonestateversusanother?

LyndonRive (CEO):

No,oureastcoaststatesarealldoingreallywell.They'reallgrowingreallynicely.Californiaisournumberonestate.




BradBuss (CFO):

Californiaisstillnumberone.Theeastcoastisgrowingquicker,butobviouslyoffasmallerbase,soit'sanicenumbertoooutinCalifornia.


Right.Yes,butintermsofthebacklog,thetimetogetthesethingsdone,isthereanydifferentiation,isonelaggingmorethantheotherintermsofgettingthemofftheground?

LyndonRive (CEO):

Okay.Sorry.Theaveragetimetoinstallacrosstheportfolioisabout60days.It'salittlebitlessinCalifornia,alittlebitlongerontheeastcoast,butthere'snocapacityconstraintsoranythinglikethatontheeastcoast.Wereally,reallyliketheeastcoast.Marylandisoneofthebestmarkets.Ifyoulookat,whetherit'svolumeorcosts,theeastcoastmarketsarereallygoodforus.


Gotit.Andjustalittlebitcuttingbacktothe2017number.Idon'twanttoputwordstoomuchinyourmouth.Butyoustillgotthis1millioncustomertarget,howdoyouthinkaboutthe,howback-endweightedisthat,tohitthatnumberatthispoint?

LyndonRive (CEO):

Yes,the1millioncustomergoalisdefinitelysomethingthatweconsideredwhenwewerelookingatthisnewfocusofabsolutecostreduction,andbeingcashflowpositive.I'dsaycashreductionandcashflowpositiveisahigherprioritythanthe1millioncustomergoal.

Notgivinguponthemillioncustomergoal,butthat'sthefirstpriority.Thenwe'llseehowthingsgoin2017and2018towhatwehavetodotoacceleratetomeetthe1millioncustomergoal,butthefocusiscostreductionandcashflowpositive.


Right.Andthenembeddedwithinthat,isthereaninternationalpiecethatyou'rethinkingforthe1millioncustomer,justwanttoclarifythat?

LyndonRive (CEO):

No,no,absolutely.Theinternationalcustomerwillbecountingtowardthe1millioncustomergoal.


Great.Andanyexpectationsonwherethat'sscalingto,foryour2017growth,etcetera,justasyouthinkaboutthatmix?

LyndonRive (CEO):

Yes.

T anguySerra(COO):

Icantakethat.Asyouknow,weboughtinNewMexico.That'strendingexactlyasperplan.BillcostsinMexicoaresignificantlylowerthantheyareintheUS,justbecausethepartofthereasonisthecostofpanels,there'snotariff,andsothecostperpanelischeaper.




Thebillplansaregreat.Mexicoisdoingontrack,andwe'recontinuetogoevaluatenewmarkets.Wehavegotacoupleinthe[hopper]thatwethinkareattractive.We'restreamingalotofworkupfront.Notclosetoanything,butlikingourinternationalplays.

LyndonRive (CEO):

OneotherpointI'llmakeonthatiswhenwelookatinternationalmarkets,formostmarkets,we'regoingtocreatethemarket.We'regoingtolookatfavorablepolicies,ithastohavenetmetering,ithastohavegoodsunandhighcostofenergy.Butthere'snomarketwecanjustgoinandgetgigawattsworthofcapacityimmediately.Wehavetobuildit.

Andwhenyou'rebuildingresidential,you'redoublingsmallnumbersatfirst,andthenthosenumbersbecomebiggerandbiggerandstartbecomingreallybig.Intermsofcustomeraccount,itwillbeaddingtothe1million,butthemajorityofthatwillbeintheUS.


Great,excellent,thankyou,guys.

LyndonRive (CEO):

Thankyou,Julien.

Operator :

ThenextquestionisfromKrishSankarofBankofAmericaMerrillLynch.Pleasegoahead.

KrishSankar (Analyst-BofAMerrillLynch):

Thanksfortakingmyquestion.Ihadacoupleofthem.Firstit'sverynicetoseeyourfocusoncostcutsandthecashflowpositiveness.I'mjustcurious,onthe2016guidance,wouldanyextensionorchangeinlanguageontheITCstepdownchangeyourviewontheguidancefornextyear?

LyndonRive (CEO):

Justtomakeitabsolutelyclear,thisfocusisassumingthatthereisnoITCextension.Thisiswhywe'refocusing.IfthereisanITCextension,we'llhavere-lookattheoutcome.

T anguySerra(COO):

We'lllikelyincreasevolumeif--

BradBuss (CFO):

Yes,bigtime.

LyndonRive (CEO):

Andactually,personally,Ithinkit'sgoingtogetextended.It'sagreaterprobabilitythatitwillgetextended,butwehavetoplanforthefactthatitdoesn'tgetextended.Andifitdoesgetextended,we'rejustamuchhealthierbusinessthananyofourcompetitorstocapitalizeonthatextension.

BradBuss (CFO):

That'sarealkeybecauselikeLyndonsaid,theabilitytorampupsalesandoperations,it'snotlikeyou'rebringingupamanufacturingplantthatyouhaveidled.They'llbeabletobringthingsupveryquickly.I'm




notthatconcernedthatwewouldn'tbeabletoscalebackuponthat.


Gotit.Gotit.Allright,andthenafollow-upquestion,doyouanticipateearninglevelatIRRsinprojectsdeployednextyearin2016,ordoyouexpecttocontinuetoraiseahigherleveloftaxequityandsecuritizationrelativetoyourcost?Alongthesamepath,ifnot,in2016,whatleveredreturnsdoyouexpectoncethetaxcreditstepsdown?

BradBuss (CFO):

Ifyoujustlookat2016andassumesomelowercost,andthenasLyndonmentioned,pricingbeingstabletoprobablytrendingupasmidge,thosearebothverybeneficialtotheinfluxofthatIRR.Sothey'reonlygoingtogetbetter.And2017,it'salittletooearlytocommentonthat.

LyndonRive (CEO):

Oneyearatatime.


Allright.Thanks,guys.

Operator :

ThenextquestionisfromStephenByrdofMorganStanley.Pleasegoahead.

StephenByrd (Analyst-MorganStanley):

Hi,goodafternoon.Iwantedtojustfast-forward--Iappreciateallyourhelponthis--to2017,andjustthinkingaboutthecompetitiveplayingfieldin2017,iftheITCisnotextended,justcuriousyourtakeonwhatthatreallydoesforthesmallercompetitorsandwherethatputsyourelativetoyourcompetitors?

LyndonRive (CEO):

There'salittlebitofbackgroundnoisecomingfromyourspeakers,buttheshortansweriswecurrentlyhavethebestcoststructureintheindustry.We'regoingtohaveanevenbettercoststructure,andifyoudon'thavereallylowcostsaftertheITCexpires,youcan'tbearound.

SooncetheITCexpires,thecompetitivelandscapeisgoingtobecompletelydifferent,andwe'retakingactionnowtomakesurethatwecontinuetobethemarketleaderatthatpoint.There'sjustnowayitcouldworkifyoudon'thavealowcoststructurein2017.

BradBuss (CFO):

Alotofpeoplearegoingtobeextremelychallengedtogetfinancediftheydon'thavethestructuretobeginwith,nevermindtheavailabilityofthatfinancing.


Understood.Andcouldthatleadtothepotentialacquisitionopportunitiesordoyouthinkjuststickingwithorganicgrowthandfocusingonyourcorebusinessistherightwaytogo,eveninthatperiodwherethereisshake-out?

LyndonRive (CEO):

It'sactuallyoneoftheprimaryreasonswhyIthink2017willbeagrowthyearforus.We'regoingtohave




thelowestcoststructureandhavethebestproductsocustomerswillcometous.

T anguySerra(COO):

[Wedon'tneedtomakeanyacquisition.]It'snotpartofourplantomakeanyacquisitionswiththestates.

LyndonRive (CEO):

WithintheUS,yes.

BradBuss (CFO):

NobodyelsehasenoughscaleandthecostandbaggagetotrytointegrateitversusHayesandTanguyjustscalingup,hiring100or200peoplethatquitefranklywouldprobablycomefromthosecompaniesanyway.It'smuchsimpler,cheaper,andlessrisktodo.


Understood.Andthenjustseparatelyonacreditandanumberofquestionshavecomeupaboutcredit,butyoulaidouttheFICOscoresprettyclearly.Anytrendsintermsof,asyourbusinessgrowslarger,intermsofcreditquality,creditstrengthofcustomers,defaultrates,etcetera?Anycommentaryonthat?

BradBuss (CFO):

No,thetrendshavebeenextremelyconsistentovertheeightyears,andobviously,wehavedonemoreandmorebusinessinthelastfewyears.It'sanextremelyrigorousprocessaspartoftheunderwritingintheABS.Youcanimaginewhatwemustgothroughthere,soIdon'tseethatchangingatall.

Wewouldliketobroadenthecustomerreachandthatwillalljustdependonthefinancingthatgoeswithit.Andthenaswegointernational,obviously,that'sadifferentanimal,butIdon'tthinkwe'llchangethefocusofwhatwedobeingthelargerrooftopsandcommercial.

LyndonRive (CEO):

Yes,theunderlyingprincipleofourdeploymentisthatwechargethecustomerlessthantheyarecurrentlypayingforenergy,sodefaultrates,sincetheylowerthem,theyhavethechoiceofpayingusorpayingtheutilitymoredon'thaveelectricity.Giventhosethreechoices,ourcustomerspaythebills.


Verymuchunderstood.Thankyouverymuch.

LyndonRive (CEO):

Thankyou.

Operator :

ThenextquestioncomesfromGordonJohnsonofAxiomCapitolManagement.Pleasegoahead.

GordonJohnson (Analyst-AxiomCapitalManagement):

Thanksfortakingmyquestion,guys.

LyndonRive (CEO):




Sure.


Nextyear,justwithrespecttoyourbacklog,iftheITCdoesindeedend,assumingittakesroughlyfourmonthstoputsystemsonrooftops,couldweseeasignificantfall-offinthebacklogaheadoftheITCending?

LyndonRive (CEO):

Whatwewouldexpecttodoisforcommercialsystems,probablystartingasearlyasQ2,we'regoingtostartpricingina10%ITC,sothatthecustomerknowswherethey'regoingtobe,anddependingonthescheduleforPTO,forthe[utilityinterconnection],soitcouldbeasearlyasQ2.

Forresidential,we'llstartseeingthatimpactprobablyhappeninQ4,butitwon'tslowdowninstores,it'sjustgoingtobe--we'llpriceitcorrectly,aswewillhavethecoststructuretobeabletodothat,atthatpoint.


Okay.That'sextremelyhelpful.Thenthere'sbeensomerecentdiscussionaroundsomeofthelendingpractices.I'msureyouguyshaveheardthis,withrespecttotheleasingprogramswithrespecttosolarrooftop.Haveyouguysseenanypushbackwithrespecttosomeoftheseconclusionsarounditaffectinghomevalues,beingmoreexpensiveversusoutrightowning,haveyouguysseenanypushbackfromcustomersorareyounotseeingthat?

LyndonRive (CEO):

No,rightnow,atthesizewearerightnow,wehaveprobablyabout20to30customersmoveeverysingleday.Wehaven'tseen--notonehasfailedintransferringtheleaseofthePPA,andoftentherehasbeenanadditionalvaluetoit,tothehouse,andthenewhomeownerlikesit.Sowehaven'tseenthat.

IntermsofcashsalesversusleasesandPPAs,it'sstayingroughlyflatforus,sooursales,mypowerisaround10%to15%.It'sbeenhoveringaroundthatnumberforafewquartersnow,sowehaven'tseenabigmovementinthedifferencesbetweenthetwo.


Okay.That'shelpful.Andjustlastly,internationally,youguyshavetalkedaboutexpandinginternationally,forgivemeifyouhavealreadybeenaskedthisquestion.Iwasalittlelatetothecall.Canyougiveusanyupdatesonexpansioninternationallyandwhatyourplansarethere?

LyndonRive (CEO):

Yes.

T anguySerra(COO):

Asyouknow,wehavebusinessMexico,thatcontinuestodowell,aspertheplan.BillcostsinMexicoarelowerthantheyareintheUS.Thatfeelsgood,andwe'relookingatacouplemoremarkets.We'redoingalotofworkupfrontandfiguringoutwhatmarketswewanttobein.

AsLyndonmentionedearlier,wewanttobemarketswherewecanhavearesidentialorcommercialplatformatleastandnotjustinonevertical,sowe'redoingalotofworkupfront.There'sacouplemarketsthatwelikebutwe'renotcommittedtoanythingatthisstage.




LyndonRive (CEO):

I'dcharacterizeourinternationalplansasbeingdepthfirst,notbreadthfirst.Meaningthatwe'regoingtogointhemarkets,executewellinthatmarket,andwhenit'shumming,movetothenext.It'snotlikewe'regoingtojustopenawholebunchofmarketsspeculatively,andburnawholebunchofcash,andseewhatsticks.We'regoingtogointoitinaverydisciplinedway.We'regoingtopickamarket,executewellthere,andthenmovetothenext.

T anguySerra(COO):

We'velaunchednextyearfocusesoncommercial,nextwillberesidential,andthencontinuefromthere.

BradBuss (CFO):

Andagain,toputit--Mexicowasa$10millionacquisition,sowe'renotlookingtodoanythingmassiveandcrazyjusttodrivescale.Wehavescaleandourfocusisgoingtobeonreallygoodreturns,goodmarkets,andplaceswecantakeourmodel,whichisextremelyefficient,andpairitwithverygoodlocalpeoplethatknowthemarketsandworkwellwithusinourculture.

LyndonRive (CEO):

Butitwouldbedisappointingifwedidn'topeninanothercountrybeforetheendofnextyear.


Excellent.Thanksagainforthequestionsguys.

LyndonRive (CEO):

Thankyou.

Operator :

ThenextquestioncomesfromVishalShahofDeutscheBank.Pleasegoahead.

JerimiahBooream(Analyst-DeutscheBank):

ThereisJerimiahBooreamonthelineforVish.IapologizeifthishasbeenaskedalreadybutI'mjusttryingtounderstandthecostleversthatyouhavetopullhere.Iknowyoutalkedalittlebitaboutcustomeracquisitioncosts,butwhatelsedoyouseethatcouldhelpbringdownthecostsgoinginto2017?

LyndonRive (CEO):

Forthetotalcosts,obviously,wehavegotanumberofthingswewanttodoonthecustomer[of]acquisitiontoreducethecoststhere.Ontheopscosts,there'salotofthingswe'regoingtodo.First,we'regoingtorolloutanewproduct,outofZep,that'sgoingtomakeourcrewsmoreefficient.Sothatisreallygoodandwe'll[continue]that.

We'vegotpanelpriceshavebeenroughlyflatforthelasteight,ninequarters.Wethinkpricingwillstartdeclining.That'sgoingtoreducecosts.Samethingoninverterprices.Thenoutofour80orsowarehouses,bydefinition,there'satop50thpercentiletile,andabottom50thpercentile.

Thewarehousesthatareslightlymoreexpensivearebecausetheyareeithernewerortheyhaven'trampedup,andsowhenyoutakethemoreexpensivewarehousestoclosertotheaverage,allthosethingsaregoingtocontinuetoreducecosts.We'regoingtocontinuereducingcostsontheopsideof




thehouseprettyaggressively.Andpluswhatyoumentionedearlieristheverticalintegrationofthecommercial.

T anguySerra(COO):

Andthenoncommercial,weusedtobebuildingcostsforprojectsforwellnorthof$2.Onsomeofourcoreprojects,we'resignificantly,significantlybelowthat.Bradwillmaybegiveyouthenumber,butwe'rereally,reallywellbelowthat.

BradBuss (CFO):

Beautiful.Andagain,justsowe'reclear,theabsoluteoperatingdollarsaregoingtocontinuetoincrease.It'snotlikewe'recuttingOpExdollarsfromheredown.They'regoingtogrowatamuchslowerratethantheinstall,sothatthecostperwattisdropping.Iknowthere'sbeensomeconfusioninafewarticlesIhaveseen.

Idon'twanttoleavepeoplewiththethoughtthatwe'redoingsomemassivecostreductionovernight.We'regoingatthisinaveryspecificmannerandusingourleverageandourscaletogetthatcostperwattdown.Areaslikeoverhead,alotofthegrowththereinsystems,andfunctionsanddepartmentsbeganascomingtoanearanend.

Itwillgrowmuchlowerthanthemegawatts,sopleasekeepinthatmindasyoustartlookingatyourmodelsandstartbuildingoutyourguidanceandmakingsurethatyou'relookatitonacostperwatt,andthenbackinandintothedollars.That'sveryimportant.Idon'twanttodisconnectthere.


Great.That'sveryhelpful.Thenjustoneotherquestionontheinternationalfront.Asyouexpandintonewmarkets,andobviouslytheOpExassociatedwiththat,wouldyouexpecttoreinvestallcashflowsorareyouhavingtothinkaboutactualhedgesasidefromreinvestmentinthosemarkets?

BradBuss (CFO):

Thevastmajoritywillgetreinvestedbetweenthegrowthandthefinanceintothebusiness.


Great,thanks,guys.

Operator :

ThenextquestionisfromMichaelMorosiofAvondalePartners.Pleasegoahead.

MichaelMorosi(Analyst-AvondalePartners):

Hi,guys.Thanksfortakingthequestion.At350to400megawattquarterrunrate,yoursalesteaminbookingsarerunningprettysolidlyaheadofyourabilitytodeploythesystems.Areyouatallconcernedthatsomeofthosesalescouldchurnoffthebacklog,andisthereanythingthatyoucandointheneartermtoclearwhatappearstobeabuildingbacklog?

LyndonRive (CEO):

Yes,sothisisthe--one,wearerampingupourinstallations,sothatwillcatchuptothem.ThisisthepartImentionedearlier,iswe'regoingtofocusnowontheloweracquisitioncosts.We'regoingtofocusontheprofitablecustomersandsoyou'llseethebookingsandinstallsgettingclosertooneanother,buttherewillstillbeadeltabecauseata40%growthrate,youstillhavetohaveadelta,butyou'llsee




thosetwolinesgettingclosertooneanother.


Okay.Andthentotheextentthatyou'rebeginningtooptimizetheoverallOrganizationandthecoststructure,forapost-30%ITCworld,haveyouthoughtatallaboutwhatasustainablerunratelookslikein2017andbeyond?Isitcloseto2016ordoyouthinkthere'sroomformaterialgrowthtotheOrganizationbeyondthat.

LyndonRive (CEO):

JustmakesureIunderstandthequestion.DoIthinkthegrowthratewouldbehigherthan40%in2017.


No,justtheabilitytodelivergrowthfromthatlevel.Whatdoyouthinkisasustainablelevelofannualinstalls?

LyndonRive (CEO):

Yes,it'salittleearlytogiveyoutheactualpercentageofgrowth,butI'mhighlyconfidentthatitwillbeagrowthyearover2016.


Okay.Andthenjustfinally,asitrelatestoSilevo,howareyouthinkingaboutthepotentialimpacttocostperwatt,lookingoutinto2017?Itdoesn'tseemlikeit'sgoingtofactorintoomuchin2016,butisthatgoingtobeanotherlevertopullintermsofreducingoverallcoststhere,andbywhatfactor?

T anguySerra(COO):

Yes,absolutely.AsLyndonsaid,we'llwaituntilnextquartertogivebetterguidanceoncosts,butathighlevel,ifyouhave250-wattpanelversusa350-wattpanel,youjustneedwaylesspanelsonagivenhouseoragivenrooftop,andasaconsequence,yourlaborcostsgodownproportionately,yourhardwarecostsgodownproportionately,yourwiringcostsgodownproportionately,sotherippleeffectofahigherefficiencypanelthroughthesystemismassive.

LyndonRive (CEO):

ThenumberthatIhavebeenusingisrelativetotoday'scosts,it'sabouta$0.25awattadvantage.


That'shelpful.Thanksguys.

Operator :

ThenextquestioncomesfromEdwinMokofNeedham&Company.Pleasegoahead.

EdwinMok(Analyst-Needham&Company):

Hey,guys.ThanksforsqueezingmeinandIcaughtinalittlelateiftherewastouchedalreadyaboutthis,but[thislevel]--haveyouguystalkedabouthowlongyouthinkitwilltakeforyoutorampupto1gigawattfullcapacity?Andalsothemarketis[ableto]sustainamuchhigherpricewiththishighefficiencymodule,haveyouguysthoughtaboutselling[modulerod]andusingthem(inaudible)ininstallation?




T anguySerra(COO):

Sowe'rehopingforearly2017tobefullyrampedat1gigawattcapacityinBuffalo.Yes,there'sgoingtobealotofincrediblydifferentiatingthings,alotofdifferentiatingthingsaboutSolarCity'sproductsandserviceswhenwehaveSilevo.SothatwillfurtherourcompetitiveedgewhenwehavewhatIbelievetobethebestmoduleontheplanet.

LyndonRive (CEO):

Yes,butkeepthatmarginwithintothe--getthebenefitwithourinstallationtokeepthehighefficiencyforourselves.Thegigawattfacilitywon'tevenbeabletosupplyourownneeds.


Isee.Focusissmallforinternalconsumption.Okay.That'shelpful.Andthenonthesecuritizationfront,itsoundslikeyouguysarebuildinguptheMyPowerloans.Anywayyoucanhelpusthinkabout,intermsofyourviewofthemarket,howmuchyouneedorhowmanyloancontractsyouneedbeforeyoucanreallyaccessthesecuritizationmarketusingthoseproducts,oristhereawaytothinkaboutit,maybegivearangeofnumberofcontractyouneedorsomethinglikethat?

BradBuss (CFO):

LikeIsaidbefore,it'sreallyafunctionofhavingacompletetaxequityfundtoputinthere.Youreallycan'tsplititinchunks,soasthefundsgetdown,likeIsaid,they'llgoin.IfyoulookatitfromtheendABSmarket,anditwasagreatthing,whenwedidthatlastABS,itwasinthebeginningofthesolarturmoil.Ididitpostmortem,postmeetingwithsomeofourlendersinthebanks,andthebiggestcomplainttheyhadiswewantbiggeronesandwewantitmorefrequent.

Thosearegreatproblemstohave.Thenicethingis,withthebacklogofthefinancingreceivablethatwehave,that'sexactlywhatwe'llbedeliveringgoingforward.Sowe'reinagoodposition,thoughthey'llprobablytendtogetbiggerthanwhatwe'vehistoricallydone,becauseourfundsaretechnicallygettingbigger,sotheywillbebigger,andagain,likeIsaid,morefrequent.


Haveyouthoughtaboutbeingtheunderwriteronitandjustsecuritize[onlyyour]products,actuallysecuritizeotherpeople'sproducts,aswell,givenyoursuccessinthesecuritizationversustherestoftheindustry?

BradBuss (CFO):

We'vegotourhandsfullwithourownstuff.Ifyoulookatit,we'vegotaverygoodteamthatspendsthetimeonthestructuringsothatwecouldstructurethesethings,getthemtomarketquicker,andmanagethefeesandthecreditenhancementsthattendtogowiththat.Sowe'regoingtostayveryfocusedthereforquiteawhile.

LyndonRive (CEO):

Andoneofthebenefitsofverticalintegrationisyouhaveeverything--alltheinteractionwiththecustomer,youhavealltheinformationaboutthecustomer,youhaveallyourcoststructures,everythingisavailable.Youhavealltheproduction.Thisisthereasonwe'rethefirstCompanytoreallysucceedatsecuritization,sotakingonthatforsomeofotherassetswouldbeabigundertaking,andwejusthavethisstreamlinedsystemwithinourCompany.

BradBuss (CFO):




Andremember,itstartswiththattaxequityfund,right,That'stherootofallevilbecausethatdealswiththe[IA]allthewaythroughtotheABS.Wehavetohaveateamthatworksinconcertinthisfinancingfactorytomakesureallofthesefitsmoothly,andtotrytopickupsomeoneelse'swackystructureorfundorsomethinganddoitisreallyhard.

That'swhyyou'renotseeingotherpeoplebeingabletodotheABSslikewehave,orbesuccessfulatthem,becauseit'sadog'sbreakfast,maybebetweentheassetsand/orthestructuresthatmakesitveryhardtosecuritize.Sowe'llcontinuetoleadpackandpavetheway.


Yes,Iagreethatisdifferentiationforyouguys.LastquestionIhaveoncommercial,maybeyouguystouchedonitalready,butoffthenewguidance1.25gigawatt,haveyoutalkedabouthowmuchofthatwillbecommercial?

BradBuss (CFO):

WehaveNot.Nextquestionplease.


Thequestioniscanyoutellusroughlywhatlevelofthatwouldbecommercialversusresidential?

T anguySerra(COO):

It'sreasonabletoexpectthatit'saboutthesamemixaswhatwehavedoneinQ3,giveortake.


Isee.Okay.Similartowhatwehave.Okay,great.That'sallIhave,thankyou.

Operator :

ThenextquestioncomesfromPavelMolchanovofRaymondJames.Pleasegoahead.

PavelMolchanov(Analyst-RaymondJames):

Hey,guys.SinceI'mtowardstheendofthecall,I'llaskahighlevelone,ifImay.Ayearago,thestockwastradingat3timesretainedvalue.Todayit'stradingat1timesretainedvalue.Whatdoyouthinkwentwrong?

BradBuss (CFO):

Youmeannetretainedvalue?Netretainedvalue?


Netretainedvalue,indeed.What'sthemarketnotgetting?

LyndonRive (CEO):

IfIfigurethatout--wecreate,andit'sjustnoteventhenetretainedvalue,lookatoureconomicvaluethatwecreatedtheEVCslide.TheCompanythislastquartergenerated$239millionofvalue.It'sveryclosetogenerating--it'sveryclosetoa$1billionrunrate.

Forittobewhereitisrightnow,Idon'tknow.Sothisiswhywe'refocusingoncost.Maybethemarketdoesn'tthinkthatwehaveacoststructurethatcanworkin2017.Thisiswhywefocusonthis.We'llprove




itoutin2016.Hopefullythathelps.


Okay.Giventhepivottoamorerefocusedinstallationmodel,doesitstillmakesenseforyoutobein19states,becausethatnumberhasbeenprettyconsistentlyincreasingalmosteveryquarter?

LyndonRive (CEO):

Yes,wewilloptimizeourcoststructuretomakesurethatevery[location]isaddingcashtothebusiness,soyes,we'llabsolutelylookatthat.Wemostlikelywouldn'tbeexpandingtomanymorestatesrightnow,butwe'lllookattheexistingstatestoseearetheyaddingcashtothebusiness,andforthemostpart,theyallare.


Okay.That'sgoodtohear.Appreciateit.

Operator :

Therearenofurtherquestionsatthistime.Thisconcludestoday'steleconference.Youmaydisconnectyourlinesatthistime.Thankyouforyourparticipation.

BradBuss (CFO):

Thankyou.

LyndonRive (CEO):

Thankyou,everybody.

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