First Solar (NASDAQ:FSLR), one of North America’s largest solar panel manufacturers and project developers, reported a lackluster set of Q4 2013 earnings on February 25, weighed down by lower revenue recognition in its solar power systems business. ((First Solar Q4 2013 Earnings Call Transcript, Seeking Alpha, February 2014)) Quarterly revenues were down by around 29% year-over-year to $768 million, while operating income fell to about $60 million from around $172 million a year ago.  The company’s earnings miss, coupled with lower-than-expected guidance for Q1 2014, sent the stock down by over 9% in Tuesday’s trading. Given that First Solar’s quarterly financial results are always subject to some volatility due to its exposure to the large-scale projects space, this note will focus on some of the broader trends that will drive the company’s performance, going forward.
Trefis is currently updating its model and price estimate for First Solar to account for the earnings data.
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Project Order Book: Low Dollar Value Of Bookings A Concern
First Solar’s systems business accounts for over 85% of the company’s total revenues and remains the primary driver of the company’s financial performance. However, the company’s order book remains somewhat of a concern, since total bookings stood at about 2.7 gigawatts (GW) at the end of 2013, which is just 0.1 GW above the Q4 2012 number. On a dollar basis, total outstanding bookings fell from around $3.3 billion in Q4 2012 to around $2.8 billion. Although the decline is due to lower average selling prices for solar systems, it does raise some concerns about the division’s future growth prospects. However, the company has indicated that it holds potential booking opportunities of roughly 10.6 GWdc, out of which around 1.1 GW were from mid-to-late stage deals, with a high probability of materializing.
First Solar has banked on projects in the United States to drive its systems business over the last few years; but of late, the rate at which utility companies are signing new contracts, particularly for 200 MW plus plants, has been slowing down.  Considering this, the company will have to strengthen the presence of its utility business overseas, specifically in growth markets such as Latin America, the Middle East and Asia Pacific. The company has indicated that about 56% of its new opportunities (in terms of system capacity) come from overseas, and we will believe that its progress in converting these into project orders will be a key factor to watch in the near term.
Manufacturing Cost Improvements Are Encouraging
Although First Solar’s standalone panel sales are currently just a fraction of systems sales, the company’s panels remain an important factor in driving its competitiveness in the systems business, where it faces a mounting threat from Chinese suppliers. During the fourth quarter, the company reduced its core manufacturing costs to around $0.54 per watt down from around $0.57 in the previous quarter, cementing its position as the cost leader in the solar industry.  On a year-over-year basis, panel manufacturing costs have dropped by nearly 18%. The company’s average conversion efficiencies also rose by around 0.1% sequentially to around 13.4%.Notes: