First Solar’s Results Look Light Despite Some Operational Improvements

Solar equipment major First Solar (NASDAQ:FSLR) released its third quarter earnings on Thursday. The company’s revenues fell sequentially by 12% due to reduced construction activity in utility scale projects. Net income also declined by about 21% due to certain restructuring charges. ^[1]

Although the results were slightly below our expectations, the company continues to outperform the broader solar industry, which has been struggling with steep losses.  Here are some of the key takeaways from the company’s earnings release and their strategic importance to the firm’s long-term growth.

Manufacturing Cost Control Critical To Long Term Profitability

First Solar uses thin-film technology to make panels which have traditionally been cheaper than silicon-based panels but offer lower conversion efficiency. However, given that polysilicon prices have been falling over the last year, silicon-based panel manufacturers are snapping at First Solar’s heels when it comes to pricing. In order to stay competitive, First Solar has been focusing on improving its operational efficiency to reduce costs. In Q3, the company reduced the cost per watt for its panels by around 5 cents to $0.67 while increasing its manufacturing utilization by around 20% sequentially. ^[2]

Sustainable Markets Progress

Developed economies in Europe and North America contribute a significant portion of First Solar’s revenues. For instance, over two-thirds of the contracts in First Solar’s 3 GW systems project pipeline are located in North America. To diversify its revenue stream, First Solar is banking on sustainable markets – markets where government support is low and solar power is competitive with other forms of electricity generation. In this quarter, the company bagged sizable contracts to construct solar projects in Indonesia, India and Dubai. To extend its global reach, the company opened new offices in Saudi Arabia, Thailand and Dubai.

Older, Higher Priced Contracts Drive Margins

The PV Systems business, which builds solar power plants, has been enjoying healthier profits than the modules business for two reasons: the PV Systems business does not face much competition from Chinese firms, and prices for these projects are negotiated in advance of construction.

Most of the projects for which the company is recognizing revenues currently were negotiated a few years ago when the solar sector was healthier and pricing power was still strong. However, we believe the company’s profitability in the future could be impacted by the current weak pricing environment as new contracts may not command similar attractive rates.

Guidance

First Solar reduced its revenue guidance for the year in the range of $3.5-$3.8 billion, a reduction of about $100 million from the number provided last quarter. The lower end of net income guidance was also reduced marginally. 

We are in the process of updating our price estimate for First Solar following the earnings release.

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1. First Solar Earnings Release [↩]
2. First Solar Q3 Earnings Presentation [↩]