What Made Sunrun’s Costs Increase in 1Q16?



Segment-wise cost of revenue

Sunrun (RUN) reported the cost of operating leases and incentives as $38.1 million for 1Q16 compared to $21.4 million in 1Q15. The cost of solar energy systems and product sales came in at $57.5 million compared to $25.3 million in 1Q15.

The consolidated cost of revenue for 1Q16 was $95.6 million compared to $96.9 million in 4Q15 and $46.7 million in 1Q15. Sunrun, which is in its growth phase, is a rapidly growing company. Therefore, it’s reasonable to compare costs on a per-watt deployed basis rather than on a consolidated basis between two reporting periods.

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Sunrun’s creation cost per watt deployed

Sunrun’s cost performance can be determined by its key cost factor: creation cost per watt. This is the sum of the following:

  • installation
  • G&A (general and administrative) expenses per watt deployed
  • platform service margin
  • S&M (sales and marketing) costs per watt booked in a particular period after considering cancellations

For 1Q16, Sunrun’s creation cost per watt was $4.11 compared to $3.64 in 4Q15 and $4.36 in 1Q15. Its built install cost was $2.36 compared to $2.33 in 4Q15. Lower creation costs imply higher operational efficiency.

Why the increase?

The sequential increase in Sunrun’s creation cost per watt is mainly due to an increase in sales and marketing expenses per watt deployed. This is largely on account of lower volumes booked compared to 4Q15. For 1Q16, S&M expenses per watt came in at $0.90 compared to $0.77 in 1Q15 and $0.64 in 4Q15. This is nearly a 17% increase on a year-over-year basis and about a 41% increase sequentially.

According to company filings, the increase in S&M expense is primarily due to the following:

  • expansion of the company’s direct-to-consumer channel
  • an increase in hiring of sales and marketing personnel
  • internal lead generation costs for expanding its business in new markets

Sunrun also incurred $1.6 million in write-off costs related to its market exit from Nevada.

The elimination of the net metering system in Nevada led to the market exit of Sunrun and other downstream solar (TAN) companies such as SolarCity(SCTY) and Vivint Solar (VSLR). However, SunPower (SPWR) was an exception.

Next, we’ll look at Sunrun’s gross margins in 1Q16.


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