First Solar Q2 Preview: Production Cost Improvements And International Business In Focus

First Solar (NASDAQ:FSLR) is expected to release its Q1 2013 results on August 6. The company has had a positive year so far and the stock is up 55% since January, aided by a stable financial performance, upbeat annual guidance as well as promising technology and project related acquisitions. During the first quarter, revenues stood at around $755 million, up by around 51% year-over-year while operating income was around $61.2 million. Here are some of the factors we will watch when the company reports earnings Tuesday.

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Solar Power Systems Business: Order Book and International Projects

First Solar’s systems business has been the driving force behind the company’s performance over the last few quarters. During Q1, systems sales (including related modules) were around $562 million, up by around 31% since last year. The firm’s outlook for this business is also quite positive, expecting it to drive overall revenues to as high as $4.8 billion in 2015. However, around 50% of the firm’s guidance for 2014 and 2015 comes from uncommitted projects.  The company has been executing its systems contracts relatively quickly and much of its future performance could hinge on bagging new projects. As of Q1, the firm’s project pipeline (in terms of project-related module shipments) declined marginally from around 2.6 GW at the end of December to around 2.5 GW. However, the management mentioned that it had potential booking opportunities to the tune of 5.5 GW, for which more than 10% were in the mid-to-late stages. We will be closely watching the firm’s progress in signing new project contracts to increase its pipeline.

We will also closely watch the firm’s progress in further expanding the systems business into international markets and Latin America in particular. Earlier this year, First Solar acquired Solar Chile, a photovoltaic project developer with around 1.5 GW of early to mid-stage utility-scale power projects in Northern Chile. In June, it applied for permits for a $370 million, 162-megawatt project in Chile. Chile is viewed as an attractive market for unsubsidized solar power given the high cost of energy (as high as $0.25 per unit in 2012). ^[1]

Solar Modules Business: Production Costs In The Spotlight

First Solar’s modules business put up a strong showing during Q1 with third party module sales rising to around $193 million up from around $67 million last year. However, we are mildly concerned about the company’s  module technology since many silicon-based panels are now not only more efficient but are also sometimes cheaper than First Solar’s thin film panels. This makes it imperative for the company to cut production costs and make its panels more efficient. First Solar has been making some progress on this front with total module production costs decreasing from around $0.73 to around $0.69 over the past year while conversion efficiency has improved from around 12.4% to 12.9%. ^[2] We believe that overall costs could improve during this quarter as capacity is better utilized. The company has also taken a step towards diversifying its product portfolio, acquiring TetraSun Inc., a start-up company that is in advanced stages of developing high efficiency crystalline silicon technology and intends to begin manufacturing these panels towards the second half of 2014.

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