Vivint Solar Inc. (NYSE: VSLR) is going through the biggest transition of its short life as a company, changing from a focus on solar leases to an increasing percentage of solar system sales. The move differentiates it from residential solar market leader Sunrun, and it should reduce Vivint Solar's financial risk.
Recently released fourth-quarter results show some of the progress Vivint Solar is making in building a new, more profitable business model. Here are the highlights from the quarter.
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Growth in all the right places
Installations for Vivint Solar have been essentially flat the last five quarters, and they were down slightly from 47.1 MW in the fourth quarter of 2016 to 44.6 MW in Q4 2017. What's notable about the chart below is that system sales rose from 7.3 MW to 11.7 MW, and leases dropped from 39.8 MW to 32.9 MW.
Overall, revenue was up 60% in the quarter to $66.8 million, highlighted by a 116% jump in solar system revenue to $35.6 million. Gross margin on those sales also increased from 24% to 29%, an impressive expansion of margins. Given upcoming solar tariffs, it's likely margins will be squeezed slightly in 2018, but a gross margin in the mid-20s is impressive nonetheless.
On top of the growth in system sales, operating expenses were down 4.6% to $30.6 million in the quarter. Operating expenses like sales and marketing have long been a thorn in the side of residential solar companies, because once early adopters have installed solar, making incremental sales becomes more expensive. The fact that operating expenses are trending lower is a good sign overall.
What does the future look like for Vivint Solar?
If we take the revenue per watt of $3.04 from system sales, and project it across all installations, the company has the potential for about $135.7 million in revenue from 44.6 MW of installations. Assuming a 29% gross margin, gross income would be about $39 million.
That's barely enough to cover the $30.6 million in operating expenses Vivint Solar had last quarter, but you can see where the company is going. If gross margin creeps slightly higher and operating expenses continue to trend lower, Vivint Solar can be solidly profitable given its current level of installations per quarter.
On top of solar systems, Vivint Solar should start to see more energy-storage sales in 2018. This will bring incrementally more revenue and margin per sale, and any growth that leverages existing expenses would also help increment profit.
Headed in the right direction
I think residential solar installers that are transitioning to system sales are making the right move, offloading the interest rate and default risk that have plagued them in the past. The strategy is starting to pay off in Vivint Solar's financials and if the trend continues the company could be a long-term winner for investors. But there's a long road ahead and a fast-moving solar market, so keep an eye on revenue and margin trends in 2018.
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