First Solar (NASDAQ:FSLR) came out with its earnings, reporting an 81% increase in profits despite the continuing weakness in the solar industry.  The profits were largely because the company recognized revenues from the sale of its projects in the last quarter. First Solar is shifting its focus from panel manufacturing to systems installations to minimize the impact of falling panel prices in the solar industry. Despite the rise in profits, First Solar will have to sustain its growth in project development to achieve growth in the systems business.
We have revised our price estimate for First Solar to $23, which is at a 50% premium to its current market price. Our revision reflects the increasing focus of the company on its systems business. The decline in our estimates are because of the continuing decline in panel prices, which is resulting in a negative impact on the company’s manufacturing business, which was tempered by an improvement in the company’s cash position in the last quarter.
First Solar reported a 79% rise in net sales in Q2 2012 over the same period last year as revenues jumped to $957 million. Operating profits increased to $139.6 million from $64.5 million in the same period last year as the company recognised revenues from the sale of is projects to utilities such as Exelon Corp and Enbridge. The projects were a among the 2.7 GW projects in the company’s development pipeline. Analysts say that the company is pulling forward future revenues and this could result in a risk to First Solar’s earnings in over the next few years if the company is not able to replenish its project pipeline. 
Solar companies are under pressure since governments in Europe started pulling back on subsidies. The declining demand and industry overcapacity is forcing players to cut panel prices. First Solar shifted its attention to systems development to lower the impact of the collapse in panel prices and had around 2.7 GW of projects in its development pipeline . Some of First Solar’s projects qualified for Department of Energy loans that make them attractive targets for utilities.
However, systems development activity in the U.S. could fall because of the expiry of tax incentives at the end of last year.  However, the impact of lower government support will be mitigated by increasing affordability of solar energy over the future. We estimate that First Solar should be able to grow its systems business over the next few years, and contribute to a bulk of our price estimate for the company.
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