First Solar Earnings Takeaways: Solid Tech And Cost Improvements Projected

First Solar (NASDAQ:FSLR) had a well rounded second quarter, beating consensus estimates on earnings and revenues. ((First Solar Form 10-Q)) While the operational results and updated guidance were solid, the most important takeaway from the earnings release was the firm’s manufacturing and technology improvements. Best line panel manufacturing costs have fallen to below $0.40/watt and average conversion efficiencies are poised to rise to 16.2% by the end of this year, allowing the firm to beat polysilicon panels in terms of key performance metrics. ((First Solar (FSLR) James Alton Hughes on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, August 2015)) This marks an important turnaround of sorts for First Solar, since the company appeared to be falling behind the technology and cost curve as recently as two years ago. Below, we take a look at some of the progress First Solar is making on the technology front and how it is likely to help the company in the long term, as well as the company’s Q2 results.

We remain bullish on First Solar, reiterating our $60/share fair value estimate for the company. This is over 15% ahead of the current market price.

See Our Complete Analysis For Solar Stocks First Solar|Trina Solar| Yingli Green Energy| SunPower

2015 Exit Efficiencies Poised To Soar To 16% 

First Solar’s average panel efficiency grew by 70 basis points sequentially to 15.4% during Q2, while best line efficiencies jumped to about 16.2%. Notably, the company is now looking to upgrade all its manufacturing lines to produce 16.2% efficient panels by the end of this year, allowing for an impressive 180 basis point jump over average efficiencies in Q4 2014. ^[1] This is likely to put the company ahead of many Chinese polycrystalline panels in terms efficiencies. For example, Trina Solar’s popular PC05 multi-crystalline module offers efficiencies of roughly 15%. The firm says that it is able to produce these modules at costs of under $0.40/watt (excluding selling costs), which is should put it in the ballpark of some of the best Chinese solar manufacturers.

Technology Has Still More Room To Evolve

The company’s technology seems to have a lot more room to grow, since its cadmium-telluride panels have a higher theoretical upper limit for conversion efficiencies compared to silicon. For instance, the company’s panel roadmap targets efficiencies of over 19.5% by 2017. In contrast, most silicon-based manufacturers have stopped reporting their progress on efficiency improvement altogether – a sign that their gains are likely slowing down. Moreover, First Solar’s Cd-Te panels have typically performed better compared to silicon based panels under hot and humid conditions, making First Solar’s panels more competitive in terms of overall energy density and yield. For instance, the company expects its Cd-Te panels to record energy densities that are about 18% ahead of multi crystalline silicon panels by 2017 (assuming conditions in the Southeastern United States).

Balancing Upgrades and Production

There is going to be a small (and transitory) trade-off in bolstering efficiencies, since the company will need to upgrade its factories in the United States and Malaysia by the end of 2015 in order to achieve the 16% target. This could require a limited amount of production downtime and may also delay some other planned manufacturing changes. This is going to require a balancing act by the company, since solar demand is expected to remain robust through this year as installers seek to cash in on the U.S. Investment Tax Credit, which is slated to end in December 2016. However, this is going to be a net positive trade-off for First Solar, since the company could recoup any potential losses quickly via potentially better ASPs, lower costs and the passive manufacturing capacity gains that come with higher efficiencies (each module will deliver a higher rated capacity as efficiency improves). Moreover, the higher efficiency panels should open the doors for First Solar into the rapidly growing rooftop solar market, which it has long neglected on account of its historical efficiency handicap. (related: How Making A Dent In Rooftop Solar And China Could Result In A Significant Upside For First Solar)

Earnings Takeaways

• Net sales grew 64% y-o-y to $896 million
• Operating income grew to $57.1 million from about $1.9 million a year ago.
• Cash and marketable securities of $1.8 billion, net cash of $1.5 billion
• 537 MWDC of new bookings. Year-to-date bookings of 1.4 GWDC
• 1,527 MW systems pipeline under contact and 1,812 MW with executed PPA, but not sold or contracted.
• Potential booking opportunities grew to 16.7 GWDC, 62% from overseas.

FY2015 Guidance:

• Net Sales $3.5 billion to $3.6 billion
• Gross Margins 21% to 22%
• EPS $3.30 to $3.60

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1. First Solar Q2 Earnings Call Supplementary Presentation [↩]