First Solar Earnings: All Eyes On Cost Control And Utility Projects

First Solar (NASDAQ:FSLR) is set to release its third quarter earnings on 31 October. The company reported a set of strong numbers in the second quarter with revenues and gross profit margins growing sequentially by around 93% and 10%, respectively. We expect First Solar to report revenues and margin growth in the third quarter as well. Here are some of the factors that we believe will drive the company’s performance.

Cost Control

First solar has traditionally enjoyed a cost advantage since its panels are manufactured using a cheaper thin-film technology. However, that began to change last year due to fast declining polysilicon prices which have given crystalline silicon-based panel manufacturers plenty of room to reduce pricing. Given that polysilicon based panels provide comparably better efficiency, it is imperative for First Solar to control its panel manufacturing costs to remain competitive. In Q2, First Solar saw its cost per watt increase by 2 cents sequentially to 0.72 cents due to poor plant utilization and the resulting manufacturing inefficiency. ^[1]

We expect the company to improve on this metric in Q3 due to growth in panel demand which should help improve utilization levels and bring down costs. In addition, the company has also been taking steps to restructure its manufacturing operations. Earlier this year, it reported that it will close its German operations and idle some production lines in Malaysia and Ohio.

Performance In Under-penetrated Markets

To temper the effects of subsidy cutbacks in key markets like Europe, First Solar has been focusing on countries where subsidies continue to be attractive and solar generated electricity is fundamentally more viable. Over the last quarter, the company made significant progress in securing contracts in the Indian and Australian markets. The Australian utility market has been largely under-capitalized compared to the country’s rooftop solar market. However, that is beginning to change with government support for utility scale projects. During this quarter, First Solar completed work on Australia’s first large scale solar power plant and has orders in the pipeline for another 159 MW project in the country.

Progress In The US Utility-Scale Market

The company has been forward-integrating its operations over the last few years, moving from being a panel supplier to a builder of large-scale solar power projects. Large-scale projects are attractive to the company for two reasons: they allow for economies of scale in manufacturing and long-term contracts allow for better production planning and lower exposure to volatile module prices.

The photovoltaic (PV) systems business accounts for around 48% of the Trefis price estimate for First Solar. The company’s thin-film technology is often preferred over polysilicon for utility scale projects due to its lower cost and versatile performance in a variety of lighting conditions. At the end of the second quarter, the company had around 2.9 GW of PV systems projects in its pipeline, of which over 2 GW are in the United States.

Going forward, First Solar is also expected to get a boost from the Obama Administration’s recently approved solar roadmap, which provides swaths of public land and a streamlined permitting process for large-scale solar projects. Earlier this month, the government also affirmed the imposition of tariffs on Chinese solar manufacturers, which will raise prices of Chinese imports by up to 40%,  making US firms like First Solar more price competitive.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. First Solar Q2 Conference Call Transcripts, Seeking Alpha [↩]