First Solar Earnings Preview: Solar Project Pipeline, Efficiencies In Focus

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First Solar

First Solar (NASDAQ:FSLR), the largest U.S. solar manufacturer, is expected to publish its Q2 earnings on August 4. We expect earnings to improve sequentially driven by better project sales, although they could trend lower on a year-over-year basis, owing to retention of certain projects on the company’s balance sheet as it geared up for the formation of 8point3 Energy Partners, its joint venture yieldco with SunPower (NASDAQ:SPWR) that was listed in June. During Q1, revenues fell by 51% year-over-year to about $469 million, while net losses stood at $62 million, compared to a profit of about $112 million a year ago. For this quarter, we will primarily be watching the company’s progress in executing its U.S. projects while scaling up its international projects. We will also be watching its progress in improving panel efficiencies and ramping up production of its TetraSun panels, as it looks to cash in on the increasingly lucrative distributed solar market.

Our $65 price estimate for First Solar represents a significant premium over the current market price. We will be revisiting our estimates following the company’s earnings release.

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Projects: Sequential Improvement Expected, Watching International Bookings 

In Q1, First Solar’s projects revenues declined to about to $368 million from about $909 million a year ago, as it faced some project delays and held on to projects for transfer into the yieldco. However, the company should benefit from better sales this quarter, as the delayed project revenues are recognized. As of the end of March, the company was developing a total of 1,677 MW of projects that were sold or contracted. These projects are expected to be the primary revenue drivers through 2015-16. Key projects include the McCoy Solar Energy Project (250 MW) in California and the State South project in Nevada (250 MW). The company is also developing 1,640 MW of projects that are not sold or contracted, and continue to be carried on its books. [1] Some of these projects are likely to be sold to the yieldco under the initial Right of First Offer (ROFO) agreement.

First Solar faces some challenges in sustaining its margins as it winds down on its lucrative legacy projects in the United States. The U.S. utility scale market could see slower growth (it contracted in Q1) going forward, as utilities have been increasingly meeting (or have projects in the pipeline to meet) their mandated renewable capacity requirements. While the U.S. is likely to remain the mainstay of First Solar’s revenue mix in the medium term, we believe that international projects are also going to be more important for the company. Per the firm’s Q1 earnings release, potential booking opportunities grew to about 14 GW, with close to 60% of the opportunities coming from overseas. We will be watching the company’s progress in bolstering its project bookings and expanding its international project pipeline.

Panel Efficiency Improvements, TetraSun Ramp

The residential solar market and the broader rooftop solar market are likely to be biggest levers of the global solar industry in the long-term. During Q1, the U.S residential solar market grew by 76%, installing 437 MW of capacity.((Fueled by Growth in the Residential Segment, U.S. Installs 1.3 GW of PV in Q1 2015, SEIA, June 2015)) While First Solar has generally neglected the rooftop solar market due to its historical conversion efficiency handicap, the firm has undertaken some initiatives to improve its competitiveness in recent quarters. The company has made good progress on the energy density front, with efficiency gains of its Cd-Te panels having outpaced the broader industry. Their average conversion efficiency stood at 14.7% during Q1, marking a 1.2% year-over-year improvement, while best line efficiency grew to 16.3%, edging ahead of some polycrystalline panels. We will be watching the firm’s progress in bolstering efficiencies further this quarter.

First Solar is also hedging its bets by developing polycrystalline panels based on high-efficiency (over 20% at the cell level) process that it acquired from start-up TetraSun in 2013. (related: First Solar’s Acquisition Of TetraSun Highlights A More Diversified Strategy) The company expects to produce about 50 MW of TetraSun panels this year and the panels are expected to be available in the market in the next few quarters. The combination of improved Cd-Te panels and new high-efficiency polycrystalline panels could help the company to become a more serious contender in the rooftop solar space.

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Notes:
  1. First Solar Form 10-Q []