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SolarCity’s Revenues and Costs in Perspective

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Contribution to top line

Over the past five years, SolarCity’s two revenue streams—operating leases and solar energy system incentives, and solar energy systems and component sales—have seen both varying growth and varying costs of revenues. Whereas the solar energy system and components stream made up 70% of sales in 2010, it now makes up about 30%. This stream has also seen diminished growth in sales, along with a consistently high cost of revenues.

For solar energy system and components, sales to residential customers increased, but these sales were mostly offset by a decrease in sales to other end markets, such as government entities and commercial customers. This trend has continued for the past few years.

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Cost of revenues and gross margin

Revenues from operating leases and solar energy system incentives have increased, primarily due to successful installation and operation of solar energy systems. But the cost of these revenues, which is mostly attributable to the depreciation of leased systems and to maintenance costs, has also increased significantly. To offset some of these costs, the company receives US Treasury grants as a form of tax relief to incentivize renewable energy production.

SolarCity’s gross margin percentage decreased from 60% in 2013 to 46% in 2014. This decrease can be partially attributed to higher depreciation expenses, as more solar systems have come into service, and to a lower proportion of these expenses being offset by grants. In the future, the reduction of the US Treasury grant program may lead to lower margins, unless the firm decreases its cost of revenues.

The company’s cost of revenues for system and component sales, however, decreased in 2014, allowing overall losses to decrease and gross margin percentage to increase, from -13% to -3%. This figure includes costs related to both the installation and manufacture of components and the costs of engineering and design. Such reductions in costs indicate faster scaling—SolarCity was able to spread overhead costs over a larger number of megawatts installed—and an increase in residential projects have allowed higher margins than in government and commercial projects, which are generally larger. In 2013, larger projects caused margins to decrease to -13%, from -5% in 2012.

In the next part of this series, we’ll look more into SolarCity’s margins.

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