Sunrun Inc. (RUN, Financial) published its first quarter update on April 6. In the first quarter, the solar panel installer deployed 97.4 megawatts, a significant miss from expectations. Sunrun pulled its annual guidance in light of complications from the novel coronavirus (Covid-19) pandemic.
Faced with massive disruption to its business, Sunrun has promised significant cost reductions to navigate the economic downturn. While these represent a good start, cash burn is likely to remain a persistent problem for the solar energy firm, in my opinion.
Cutting costs amid coronavirus
With the coronavirus effectively shutting down large swathes of the economy, Sunrun was bound to be impacted significantly. The company has taken steps to reduce its operating costs during the crisis. According to its latest update, it can reduce its cost overhead by a substantial margin:
“We have already taken actions to significantly lower our expenses, primarily from various labor-related cost actions that reduce these quarterly costs by $30 million compared to Q1 levels. We believe these cost actions strike an appropriate balance that considers the welfare of our employees, protecting the business against possible downside scenarios, and preserving our ability to grow quickly as the situation stabilizes. Following these expense reductions, the Company estimates that in a reasonable downside scenario where volumes decline by approximately 50% compared to the prior year for two quarters, consumption of cash would be limited to $30 million per quarter or less, without any capital market activities.”
This implies a reduction in operating expenses by about 30%. Laying off workers and cutting back on other variable costs can certainly help. However, the extent of the claimed savings seems suspect to me.
Cash burn conundrum
Sunrun claims that it will be able to reduce its quarterly cash burn to $30 million or less. That sounds extremely optimistic to me, because in 2019, the company reported $1.05 billion in negative cash flow. How, then, could a 30% reduction in operating expenses possibly result in a mere $30 million in cash burn per quarter?
The answer lies in the way Sunrun defines cash burn. Conventionally, cash burn is a measure of cash outflows from operations. Sunrun, however, uses the all-too-common accounting trick of including cash from financing activities. Sunrun brought in more than $1 billion through debt issuance in 2019. Hence, it reported in its fourth quarter earnings update that "Cash Generation was $102 million in 2019," despite actual cash flow being negative. CVC Research highlighted this point in an April 6 post:
“They issued over $1B of debt in 2019, which is how they got to a positive Cash Generation number (issuance of debt is Cash Generation in their insane world). They have never generated positive CFFO.”
Cash crunch continues
At the end of the first quarter, Sunrun had $366 million in cash on its books, of which $286 million was unrestricted. If Sunrun’s quarterly cash burn could truly be held to $30 million, that would imply about a dozen quarters of cash runway, but that is far lower than Sunrun’s actual long-time burn rate.
The company had more than $1 billion in real cash outflows from operations last year. If it had not engaged in significant debt issuance during 2019, it would have run out of cash by the fourth quarter at the latest. Even if one assumes a halving of cash burn in 2020, Sunrun is still on track to run out of cash before the end of the year. It will likely have to turn to capital markets once again before mid-year if it intends to stay in business.
Verdict
The coronavirus may have compounded Sunrun’s problems, but it did not cause them. The solar installer has been losing money for years, and there is still no end in sight. Bulls seem to believe there may be some sort of technology or software-as-a-service (SaaS) play on the name, but I have yet to see evidence of this coming to be. As legendary short seller Jim Chanos (Trades, Portfolio) pointed out on April 7, Sunrun is ultimately little more than an overleveraged roofing company:
“It’s a roofing contractor that holds a crappy second mortgage portfolio secured by solar panels that won’t be repossessed. It’s not a solar technology company, nor some kind of a SaaS play. It’s a leveraged roofing contractor.”
Investors hoping for sunnier days ahead should probably think again, in my view. After the coronavirus storm clouds subside, the underlying business will still be out in the cold.
Disclosure: No positions.
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