First Solar (NASDAQ:FSLR) released its fourth quarter earnings yesterday, displaying a good set of numbers. Quarterly revenues grew by around 60% year-over-year to $1.1 billion while net income came in at $154 million compared to a net loss of $480 million last year. The improved performance was largely due to the focus on the systems business and a sequential improvement in third party module sales. Despite the relatively strong results, the stock fell by almost 11% in after hours trading as the firm’s revenue guidance for Q1 2013 failed to meet market expectations.
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Solar panel prices have fallen by an average of 30% over the last year, but First Solar has been relatively isolated from this decline since it has been focusing on building large solar power plants. While the firm did not disclose segment revenues in its press release, it is safe to assume that the PV systems business was the primary driver of the results for this quarter as well. The PV systems business accounted for around two-thirds of the firm’s revenues for the first nine months of 2012.
Can The Systems Business Sustain Growth?
Despite the business segment’s success over the past few quarters, there are two primary concerns that we have as to whether the firm can sustain the momentum. Firstly, the firm has been executing its systems contracts relatively quickly and much of the firm’s future performance hinges on bagging new projects and replenishing the project pipeline. Going by recent trends, progress has been a little slow. Over 2012, the firm had a book-to-bill ratio of 0.8, which means that the firm sold more contracts than it added.  The firm’s current project pipeline to build around 2,900 MW of solar farms is expected to be complete by around 2015. The firm will have to bag more new projects through 2013 to keep its factories running profitably.
Another concern is that most of the projects for which the company has been recognizing revenues for over the last year were negotiated a few years ago when the solar sector was healthier and pricing power was still strong. However, we believe that profitability could be impacted going forward by the currently weak solar power market which could reduce the pricing on new contracts that the firm signs.
Cost Per Watt And Efficiency Steadily Improving
First Solar’s Cd-Te thin film panels compete with polycrystalline panels which have better efficiencies and have seen their manufacturing costs fall significantly over the past year. While this does not pose much of a threat to the firm’s systems business, costs and efficiencies are critical for sales to third parties. Over the past year, First Solar’s average panel efficiency has improved from around 12.4% to around 12.9%. Typical polycrystalline panels that have efficiencies of around 14%-15%. Cost per watt has declined from around $0.73 in Q1 to around $0.68. Polycrystalline panels manufactured by Chinese firms had manufacturing costs of around $0.70 in Q3.Notes: