First Solar’s Earnings Indicate That It’s Well Poised To Cope In The Post-ITC Era

First Solar (NASDAQ:FSLR), the largest U.S. solar manufacturer, published a stronger than expected set of preliminary financial results for Q3 2015, driven by the sale of a majority interest in one of its partially completed utility solar projects. However, the most notable takeaway from the earnings release was the company’s progress in building its U.S. utility project pipeline beyond 2016 – a period when the crucial Solar Investment Tax Credit (ITC) is slated to decline. Separately, the company also continues to execute well on its ambitious technology and conversion efficiency roadmap. Here’s a quick summary of the important takeaways from First Solar’s earnings and what to expect going forward.

Our $60 price estimate for First Solar represents a 5% premium over the current market price.

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U.S. Bookings Provide Confidence And Visibility For Post-ITC Era

First Solar made good progress on the booking front, with year-to-date bookings standing at 3.1 GW, ahead of its projected full year shipments of 2.9 GW. The company said that it added 1.7 GW of bookings since its last earnings call, with roughly 60% (or over 1 GW DC) of these projects located in the U.S. with a commercial operation date of after 2016. ^[1] This is encouraging, as U.S. utility solar developers have faced challenges in building up pipelines for 2017 and beyond, given the expected decline of the Solar Investment Tax Credit. The ITC – which has been the primary federal incentive mechanism for solar – is slated to fall from 30% to 10% for utility scale projects, causing companies to focus on bringing contracted projects online before the end of 2016 to avail the entire 30% credit. The Solar Energy Industries Association estimates that the share of utility solar in the U.S. solar mix will drop by roughly half in 2017, compared to 2015 levels. ^[2] First Solar’s recent contracting activity does provide a degree of confidence that it can keep its U.S. utility solar business humming along post 2016, as it seeks to build a greater number of international projects.

Executing On The Panel Roadmap

First Solar continues to make solid improvements to its Cadmium-Telluride based module technology. The company’s full fleet average efficiency stood at 15.8%, versus about 15.4% in Q2 2015, indicating that it is well on its way towards achieving its target of 16.2% fleet wide exit efficiency for 2015. ^[3] However, lead line efficiency improvements were more modest, expanding 20 basis points sequentially to about 16.4%, but the company noted that this was an due to an intentional and temporary pause in new technology implementation, as it rolls out technology upgrades across the entire fleet. Overall, the efficiency improvements are crucial to First Solar, since they bring down manufacturing and installation costs for solar panels, helping to improve project economics at a time when government incentives are trending lower globally. Moreover, better efficiencies will lead to an improvement in manufacturing capacity – given the higher energy density and rated capacity of panels. This could prove to be an important incentive, since the company is already sold out of module capacity for 2015 and most of 2016.

Snapshot Of Results

First Solar’s revenues grew by roughly 43% year-over-year to about $1.27 billion, while net income grew almost three-fold to $346 million. Much of the growth came from initial revenue recognition on the Desert Stateline project. About 45% of the project’s total revenue was recognized in Q3. Gross margins grew by 16.8% to 38.1% driven by the project sale as well as improvements in system project costs and a $70 million benefit stemming from a decrease in module collection and recycling obligations. First Solar noted that it would be publishing finalized results on Nov. 9 after it analyzes “a discrete income tax matter related to a foreign jurisdiction.” The matter could negatively impact its results by up to $40 million.

FY 2015 Guidance Updates

• Net sales guidance reiterated at $3.5 billion to $3.6 billion ^[4]
• Gross margins guidance raised to 24% to 25%, from previous levels of 21% to 22%
• EPS guidance raised to $4.30 to $4.50 from a previous estimate of $3.30 to $3.60
• Capital expenditures of $175 million to $200 million
• Shipments of 2.8 GW to 2.9 GW

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1. First Solar (FSLR) James Alton Hughes on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, October 2015 [↩]
2. Solar Market Insight Report 2015 Q2, SEIA [↩]
3. First Solar Q3 2015 Earnings Slides [↩]
4. First Solar Q3 2015 Press Release [↩]