SolarCity lays out its path to make a profit

SolarCity (s SCTY), which has recently significantly boosted its sales and new customer numbers, on Thursday revealed a cost breakdown to show investors how it will reduce expenses and reach targets that can then lead to a profit.

The California solar installer completed 107 MW of projects during the second quarter this year, a 102 percent jump from the same quarter last year. It booked 218 MW of contracts, a 216 percent growth in the same year-over-year comparison. It signed up 30,000 new customers, a 218 percent increase.

SolarCity is a company to watch if you follow the development of the still young solar market in the U.S. The company, founded in 2006, went public in December 2012 and is the largest residential solar installer in the country (it also serves business customers). Most of its rivals, such as Vivint, Sungevity and Verengo, are private.

The fact that SolarCity is public gives us a peek  into the cost of growing a solar retail service company and what it takes to compete in a market that is now attracting traditional energy companies, such as NRG Energy, that have made the bulk of their fortunes selling electricity from fossil fuel power plants.

SolarCity panels on a Walmart, courtesy of SolarCity.

SolarCity panels on a Walmart, courtesy of SolarCity.

SolarCity’s chief operating officer, Tanguy Serra, gave a breakdown of three major areas of cost — installation, sales and administration/overhead — during an earnings call with analysts on Thursday. The total cost that combined all three areas reached $3.03 per watt during the second quarter, with installation accounting (including engineering, equipment and labor) for $2.29 per watt.

The sales costs were $0.48 per watt during the second quarter while the overhead was $0.26 per watt. Serra didn’t give a comparison to previous costs for these three areas except that the installation cost was $3.16 per watt when the company went public.

The company plans to lower that installation cost to $1.90 per watt by 2017 partly by using solar panels from its factory, which it has yet to build. SolarCity is the process of buying venture-backed Silevo and taking over Silevo’s plan to build a factory in New York. By 2017, it expects to both use its own solar panels and those from other manufacturers.

“As we ramp up manufacturing, the cost will come down,” said Lyndon Rive, SolarCity’s CEO.

Showing that it has a plan to lower its costs is particularly important now because the 30 percent federal investment tax credit will fall to 10 percent after 2016. The tax credit, which offsets the cost of each installation for solar project owners, has played a big role in the growth of the solar market.

The plan to become a solar panel manufacturer, announced in June, was surprising given that the solar industry is climbing out of a period of oversupply that pushed dozens of companies in the U.S., Europe and Asia into bankruptcy. Many large manufacturers have branched out to become project developers because they weren’t making enough money selling only solar panels.

But SolarCity executives believe they need better control over the quantity and quality of solar panels in order to grow at the pace they want. The philosophy sounds reasonable in its own and especially so when you consider who chairs the company’s board of directors.

That would be Elon Musk, who has been championing the virtues of building giant lithium-ion batteries in order to support his electric car company’s growth.

SolarCity panels, image courtesy of SolarCity.

SolarCity panels, image courtesy of SolarCity.

SolarCity generates sales by signing up customers who agree to pay a monthly fee for the electricity produced by the solar panels on their roof. They don’t own the equipment, though. That honor goes to the banks and other investors who finance those installations in exchange for the 30 percent federal investment tax credit that comes with each project. Those contracts typically last 20 years, and SolarCity figures that those contracts are adding to about $3.3 billion in payments over their lifetime.

SolarCity also is looking at offering loans since market surveys show that homeowners are increasingly interested in owning the equipment because the price for it has come down significantly in recent years. Plus, some of SolarCity’s chief competitors are starting to offer loans. Rive declined to say much more about the company’s loan product when asked by analysts during the earnings call.

Even though SolarCity has lowered its installation costs, it’s also investing more money on sales and technology development, which would include software for managing its operations. That increasing expenses means the company has yet to turn a profit.

The company increased its sales to $61.3 million in the second quarter, up 62 percent from $37.9 million from the year-ago period. But the company posted $47.7 million in losses, or $0.52 per share, for the second quarter, compared with $39.5 million in losses, or $0.52 per share from a year ago.

SolarCity expects to install 500-550 megawatts during 2014 and 900-1,000 megawatts in 2015.