Tesla’s acquisition of SolarCity – Company press release

• Strategic rationale:
  • The acquisition of SolarCity will create the world’s only integrated sustainable energy company, from energy generation to storage to transportation.
  • Just as Tesla has demonstrated the superiority of electric vehicles, the solar roof and Powerwall 2 will transform energy generation and storage.
• Financial benefits:
  • The transaction is expected to be additive to Tesla’s cash balance. SolarCity increased its cash from Q2 to Q3 2016 and expects to increase it further in Q4 2016. We expect SolarCity to add more than half a billion dollars in cash to Tesla’s balance sheet over the next 3 years.
  • Continuing to transition to loans and cash transactions as opposed to leases will significantly improve SolarCity’s GAAP revenue and profitability.
  • More than half of SolarCity’s debt is project financing; this debt is non-recourse and is more than offset by the cash flows from customer payments.
  • SolarCity obtained about $1 billion in project financing since July 1, 2016, demonstrating the strength of its financial condition.
• Tesla’s execution:
  • With record quarterly production and deliveries, Tesla achieved GAAP profitability and generated positive free cash flow in Q3 2016, while remaining on track with Model 3 and Gigafactory development.
  • Tesla also paid down $422 million of convertible debt and expanded its third party leasing capacity by $675 million and its direct leasing capacity by $300 million.
  • With Tesla executing well on its existing goals, it can successfully integrate SolarCity and realize the financial benefits that come from the acquisition.

 

Our Mission, Our Vision, and Our Products

Record High CO₂ Levels

This year, CO₂ concentration levels permanently exceeded the alarming 400 parts per million threshold. Many climate scientists believe this level will have a catastrophic impact on the environment. According to NASA, 2016 had the warmest September in 136 years of modern record-keeping.

Tesla’s mission has always been to help solve this problem by accelerating the world’s transition to sustainable energy. To achieve this, energy needs to be sustainably generated, sustainable energy needs to be stored for later use, and sustainable energy needs to be used for transportation. And to be effective, the technology used for generation, storage and transportation all need to work together in an integrated way that makes the experience seamless.

Sustainable Energy Future

During last week’s live Powerwall 2 and solar roof launch event, we shared our vision for how we can create this integrated sustainable energy future. That vision consists of three pieces. First, there will be a solar roof that will generate sustainable energy from a rooftop that looks better and is more durable than a normal roof, that can be easily customized to fit the unique needs of each house, and that will lower costs to the consumer. Second, the Powerwall 2 storage system, which starts production this quarter at the Gigafactory, will take the energy that is generated by any source (whether from the solar roof, another solar power system, or even the grid) and use it when it’s most beneficial, such as during the night, during a power outage, or when the customer can make money by doing so. Third, sustainable energy needs to be used for transportation, which is why electric vehicles are so important.

With these products, our customers will have an entire sustainable energy ecosystem, comprised of products whose benefits go far beyond simply being sustainable. They will be products that like Model S and Model X, you want to show your friends and family because they are so much better than anything you ever had before.

This is our vision for the future – one that is sustainable, less expensive, and just better. We hope you agree that this is a future we should all want.

The Acquisition of SolarCity

Tesla’s acquisition of SolarCity is an important part of creating this future. The acquisition will enable us to transform into a truly integrated sustainable energy company capable of developing, producing, selling, installing, and servicing these products in the most seamless way possible.

Tesla has already shown through Model S and Model X, and with our unveiling of Model 3, that the future of automobiles is going to consist exclusively of electric vehicles. People doubted that when we first came out with the Roadster eight years ago, but given the success of Model S and Model X, the overwhelming interest in Model 3, and the fact that other car companies are finally starting electric vehicle programs of their own, no one should doubt that anymore. Every car will ultimately be electric.

Those same naysayers may have similar feelings about solar and storage, but it probably would be unwise to trust them again. Indeed, we are just as confident that the future of energy generation will overwhelmingly consist of solar paired with an integrated storage system.

This is where Tesla’s acquisition of SolarCity can make a huge difference. SolarCity is the #1 provider of residential and commercial solar. It maintains a vertically integrated supply chain for high efficiency module manufacturing, it has its own direct sales force, and it has the best installation team in the industry. Moreover, it has figured out how to offer innovative financing options to reduce its cost of capital and make solar energy more accessible and affordable to more customers. The ability to couple all of these advantages with Tesla’s design and manufacturing expertise, its global retail footprint, and its loyal customer following provides a unique combination that exceeds what any other company can offer.

The Business of SolarCity

SolarCity’s business is unfamiliar to some and its financials are often misinterpreted. As a result, it’s important to emphasize the financial health of SolarCity’s business.

The bottom line is that we expect the acquisition of SolarCity to bring significant financial benefits to the combined company. In Q4 2016 alone, we expect SolarCity to add to Tesla’s cash position. We also expect SolarCity to immediately account for 40% of the assets of the combined company on a historical cost basis, to contribute $1+ billion in revenue in 2017, and to add more than half a billion dollars in cash to Tesla’s balance sheet over the next 3 years.

How SolarCity Generates Revenue and Manages Costs

SolarCity finances equipment and construction based on customer payments – much like other subscription-based businesses like regional utilities and cable or voice service providers – and receives a steady stream of contracted cash as a result. Historically, it incurred GAAP losses because, for solar panels financed under leases and power purchase agreements (PPAs), it is required to recognize far more cost in the period a solar system is installed as compared to the revenue, which is recognized gradually over the total contracted period. While this means it has reported GAAP losses, the economic reality is that its customer payments exceed the cost to build the systems, which fundamentally creates a solid foundation for the company.

Regardless, SolarCity is now no longer as reliant on leasing. Its customers are increasingly choosing to opt for cash purchases and loans, which creates a healthier mix of upfront and recurring revenue. In May, SolarCity rolled out a new loan offering and in each subsequent month the percentage of its business derived from purchases – cash and loans – has increased significantly. Nearly one-third of SolarCity’s residential bookings in September were purchases, an approximately four-fold increase over the percentage in Q1. As a combined company, we expect this percentage to continue to increase in 2017.

Increasing the percentage of loans and cash purchases has a significant, positive impact on GAAP revenue and profitability, as SolarCity recognizes revenue from cash and loan systems upfront. Historically, SolarCity’s revenue has grown significantly each year, and the migration to cash and loan transactions will accelerate revenue growth even faster. Every 300MW of purchased residential systems generates approximately $1 billion in additional revenue.

On the cost side, SolarCity has steadily brought down the cost of deploying solar assets over time by focusing on reducing sales, installation and overhead costs per installed watt. The acquisition by Tesla of SolarCity would accelerate that progress.

Significant Revenue and Cost Synergies Will Come From This Acquisition

Cost Synergies

$150mm of direct cost synergies expected to be achieved in first full year after closing

Cost synergies driven by:

• Sales and marketing efficiencies enabled though cross-selling
• Significant corporate and overhead savings

Additional potential cost savings:

• Lowering hardware costs and total cost of ownership (TCO)
• Reducing installation and service costs
• Improving manufacturing efficiency
• Reducing customer acquisition costs through combined sales channels
• Optimizing capital expenditure costs

 

Revenue Synergies

• Leverage Tesla’s footprint to drive solar sales leads and consumer trust
• Increase solar leads from foot traffic in Tesla stores – customers have overlapping product interest
• Global reach of Tesla’s 190+ stores and brand as solar product expands internationally
• Simplifying the install process for vehicle charging, solar, and storage products
• Single ordering experience, installation, and service contract

We’ve already stated that we believe we can realize more than $150 million of direct cost synergies within the first full year after closing. These savings are from sales and marketing efficiencies through cross-selling, the elimination of overlapping R&D and product development efforts, and reduced overhead costs.

Additionally, revenue synergies will be achieved by leveraging Tesla’s global retail footprint to drive solar sales and because we can create much more transformative and integrated products as a combined company than we possibly can separately. It also helps that the customer bases of both companies have an overlapping interest in the products that each of us offers. This will create a significant competitive benefit.

The revenue synergies are further enhanced in that SolarCity almost exclusively generates revenue from 22 states in the U.S. whereas Tesla has a national and global reach that continues to expand as we enter new markets. Furthermore, as a combined company, we will be able to greatly simplify the installation process for vehicle charging, solar and storage products. Through all of these cost and revenue synergies, Tesla intends to apply the same strict cost discipline that has been successful for Tesla in the past and that we believe will result in a reduced cost structure for the combined company.

Conclusion

SolarCity provides nearly one out of every three new residential solar power systems in the U.S., and now has more than 300,000 installed residential and commercial customers across the country. By combining SolarCity with Tesla, we expect to significantly expand our total addressable market to include a solar market that generates $12 billion in the U.S. alone, and that is expected to grow at a compounded annual growth rate of between 15-20% in the next 5 years. Additionally, with the new products that we have shown, we expect that solar’s share of the nation’s $400 billion in annual retail electricity sales will increase more than anyone currently expects. And by pairing storage with solar, we can capture a market for our batteries that goes way beyond the market for our cars, thus maximizing the scale and potential of the Gigafactory, where we are developing the world’s leading battery technology.

Tesla and SolarCity have a tremendous opportunity to create a vertically integrated sustainable energy company offering end-to-end clean energy products. Leveraging the core competencies of each company, consumers can look forward to deploying and consuming energy in an efficient and sustainable way, with SolarCity’s existing solar power systems and ultimately with a solar roof, a Powerwall 2 that maximizes the benefits of the combined system, and a Model S, Model X or Model 3, all while lowering costs and minimizing dependence on fossil fuels and the utility grid.