First Solar’s Q2 Earnings Could Trend Lower On Less Favorable Revenue Mix

First Solar (NASDAQ:FSLR), the largest U.S. solar equipment manufacturer, is expected to publish its Q2 2016 results over the next few weeks. We expect the company’s adjusted earnings to trend lower on a year-over-year basis, amid a lower mix of project sales and potentially higher module sales, which have lower margins. Below, we take a look at some of the key factors to watch when the company reports earnings.

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Earnings Could Trend Lower On Weaker Project Revenues, Higher Mix Of Panel Shipments

First Solar had about 1.56 GW of systems projects on which it was recognizing revenues as of Q1’16. For this quarter, it’s likely that projects such as the 250 MW Silver State South and 175 MW Astoria project in California could drive revenues. First Solar also had about 2.045 GW of projects which were not sold or contracted as of the end of Q1, and it’s unlikely that they will contribute to revenues for this quarter. First Solar’s gross margins could come under some pressure, as the company’s current projects have lower margins as compared to its legacy projects and also because module-only sales are likely to account for a growing part of its revenue mix for the quarter.

Contracting Activity In Focus

While First Solar has a reasonably strong backlog (systems+modules) of about 4 GW, contracting activity for utility-scale projects in the U.S. could be slowing down. The Obama Administration’s Clean Power Plan, which aims to cut carbon emissions from the power sector, was stayed in the federal courts earlier this year, creating some uncertainty in the outlook for renewable energy projects. Separately, solar installations in the U.S. are projected to fall from 16 GW this year to about 10 GW in 2017, amid a project build-up in anticipation of the expiry of the U.S. solar investment tax credit. ^[1] The weaker contracting was evident during Q1, when a bulk of First Solar’s new bookings (total 600 MW) came from module supply contracts. We will be watching First Solar’s progress in the business development front this quarter.

Conversion Efficiency Improvement

First Solar’s efficiency improvements for its Cd-Te panels will also be a key factor to watch. The company’s average fleet conversion efficiency improved by about 10 bps sequentially during Q1 to about 16.2%. These improvements are becoming more important to First Solar, as it has abandoned its bet on silicon-based panels, instead choosing to focus on its bread-and-butter Cd-Te technology, which has seen solid efficiency improvements over the last two years. Secondly, solar panel prices are trending downwards globally, amid strong manufacturing capacity expansions and weaker projected demand from China. First Solar will need to keep up its efficiency gains in order to cut costs and improve the competitiveness of its panels.

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1. US Solar Market Set to Grow 119% in 2016, Installations to Reach 16GW, GTM, March 2016 [↩]