First Solar Q4 Preview: Solar Gen 2 Sale Will Drive Results As Legacy Projects Wind Down

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First Solar

First Solar (NASDAQ:FSLR) is expected to report its Q4 2014 earnings on February 24, reporting on a quarter that saw the company wind down construction on its two large legacy U.S. projects  – the 550 MW Desert Sunlight and the 550 MW Topaz – which have been key earnings drivers for the company. For this quarter, we expect revenues to see a sequential bump, owing to the sale of the company’s 150 MW Solar Gen 2 project, although gross margins could be lower sequentially owing to a smaller contribution from the two lucrative mega-projects. During Q3, revenues rose by around 66% sequentially to $889 million while net income rose to $88 million from around $4.5 million. [1] Here is a brief look at the what to expect and what we will be watching when the company reports earnings Tuesday.

Trefis has a $64 price estimate for First Solar, which is about 30% ahead of the current market price.

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Q4 Earnings Will Be Driven By Sale Of Solar Gen 2 Project

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First Solar’s high-margin Desert Sunlight and Topaz projects were completed or were approaching completion during the fourth quarter. However, the decline in revenues from these high-margin projects will be more than offset by the sale of the company’s self-developed 150 MW Solar Gen 2 power plant to the Southern Company. [2] The company has been self-developing some projects, meaning that it holds the projects on its balance sheet through substantial completion (or commercial operations) rather than selling them while they are under development. Although these projects reduce the company’s cash position in the near term, they allow the company to capture maximum value when they are sold, given that there is less risk involved for the buyer, who would be purchasing a fully functional power plant with proven energy production capabilities. While we think it is unlikely that these projects will be able to generate the same levels of gross margins compared to the company’s legacy projects, they should provide a cushion for margins. The company recently raised its FY 2014 gross margin guidance by 1 percentage point to 19% to 20% reflecting the improved pricing environment for its self-developed projects.

Watching For Panel Conversion Efficiency Improvements

Although First Solar’s panels trail silicon-based panels in terms of conversion efficiency, the company’s efficiency gains have been outpacing the broader industry. For the third quarter, average panel efficiency stood at around 14.2%, marking a 0.9% improvement year-over-year.  The  Cd-Te thin film technology that the company deploys has a higher theoretical upper limit for efficiency compared to silicon-based panels and we see this as providing a competitive advantage for the company in the long term. Per the company’s efficiency roadmap, its panel efficiency is expected to equal that of polycrystalline modules by the end of this year, with efficiencies touted to improve to above 19% by 2017. Higher efficiencies benefit the company in two ways. Firstly, it would make panels more competitive in the rooftop market, where higher energy density panels are valued due to space constraints. Secondly, it could help to prune down manufacturing costs, since higher efficiency panels are likely to require a smaller amount of consumables and raw materials to produce each watt of capacity. First Solar is likely to have lost its position as the industry cost leader to Chinese panel manufacturers, who had benefited from plummeting prices for polysilicon – a key raw material for silicon based solar cells. However, polysilicon prices appear to be flattening off at levels of around $20 per kilogram and this could cause their cost trajectory to level out. As First Solar improves panel efficiency, it could regain its position as a cost leader in the solar market.

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Notes:
  1. Key Quarterly Financial Data, First Solar, November 2014 []
  2. First Solar’s (FSLR) CEO Jim Hughes on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, November 2014 []