First Solar’s Q2 Results Disappoint But The Recent Deals Look Good

First Solar (NASDAQ:FSLR) released its Q2 2013 results on August 6, reporting a set of numbers that missed market expectations due to lower revenue recognition on the company’s systems projects and lower third-party modules sales. Quarterly revenues came in at around $519.7 million down from around $755 million in Q1 2013 while net income was around $33.6 million, down from around $59 million in the last quarter. ^[1] The company also cut its  guidance for the year citing delays in the construction on a large solar project and a decision to sell two of its other projects only after they are complete. ^[2]

However, looking beyond the quarterly performance and guidance cuts, there was something to cheer about. The company announced a technology and commercial partnership with GE, under which First Solar will acquire GE’s cadmium telluride (Cd-Te) solar intellectual property in return for around 1.75 million First Solar shares. ^[3] The firm also announced that it had acquired a 1.5 gigawatt (GW) pipeline of development assets from Element Power which would give it an entry into the Mexican utility scale market and add to its U.S. project pipeline. ^[4]

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Overview of Quarterly Results

First Solar’s quarterly revenues took a hit due to slower execution on its Antelope Valley Solar Ranch project because of delays in approvals from the local county relating to some of the materials used in the project. Revenues from the Imperial Valley project were also sequentially lower as the project is currently in the completion stage. Despite the lower revenues, operating cash flows were strong at around $222 million, compared to $66 million in Q1 2013. Gross margins also increased to around 27% from around 22% last quarter due to lower standalone module sales (modules have lower margins compared to projects) as well as well as lower manufacturing costs. Module manufacturing costs fell by around $0.02 sequentially to around $0.67 per watt, while conversion efficiency also saw some incremental improvement to about 13%. We believe that there is still more scope for reducing the manufacturing cost per watt, given that the company is currently operating its plants at just about 75% utilization and costs are likely to be better allocated as utilization rates improve. ^[5]

Outstanding Bookings Fall, But Acquisition of Element Power’s Projects Provides New Opportunity

The firm’s new bookings for this year have trailed shipments, causing the total outstanding bookings to fall from about 2.6 GW to 2.2 GW year-to-date. However, the company’s outlook for new project bookings is quite positive, as it  says that it is pursuing around 1.3 GW in potential bookings over the next six months. ((Seeking Alpha)) First Solar has also acquired a 1.5 GW portfolio of solar projects in the U.S. and Mexico from Element Power, a renewable energy developer. The acquisition will mark First Solar’s entry into the Mexican market and will also help the company gain some ground in emerging solar markets within the United States such as Texas, Georgia, North Carolina, Colorado and Illinois. Element’s projects are in different stages of development and include projects with various interconnection queue positions and environmental screening and permitting stages. We believe that these acquisitions will allow First Solar to ramp-up its project portfolio without having to originate and build projects from scratch. The company said that its total potential bookings have increased to 8 GW following the Element acquisition.

GE Deal Could Help To Improve Technology And Drive More Module Sales

First Solar has signed a new partnership with GE under which it will acquire GE’s global cadmium telluride solar intellectual property. (See Also: A Comparison Of Solar Technologies And What They Mean For Companies) In return, GE will receive around 1.75 million shares of First Solar. This would translate to a stake of around 2%, making GE one of First Solar’s largest shareholders.

The technology acquisition could be promising for First Solar. GE holds a world record in lab-based efficiency for Cd-Te, with its research cells offering about 19.6% efficiency, while First Solar has only been able to achieve an efficiency of around 18.7%. The two companies will also work together to further develop Cd-Te Technology and First Solar will being to incorporate GE’s solar technology into some of its products. With this deal, GE will discontinue building its Aurora, Colorado panel manufacturing facilities and instead source GE-branded panels from First Solar. We see this as an attractive avenue for First Solar to further its panels business since GE is the world’s largest supplier of power equipment and has relationships with major power plant developers and electric utilities across the world. First Solar is also likely to benefit from access to GE’s vast sales force. GE on the other hand stands to benefit as it can sell more of its balance of systems equipment such as inverters to solar power plants without having to worry about manufacturing panels and exposing itself to the rather volatile solar panel industry.

2013 Guidance Cuts

First Solar has reduced its revenue guidance for the year to between $3.6 billion to $3.8 billion from the previous guidance figure of between $3.8 billion to $4 billion as it has decided to delay the sales of its Solar Gen and Macho Spring projects, since it expects to see better overall project economics by selling them after the entire construction is complete. ^[6] EPS is now expected to be $3.75 to $4.25 (excluding the impact of stock offering and GE shares) versus the $4.00 to $4.50 guidance provided in April. EPS considering the equity offering and shares issued to GE is expected to be between $3.50 to $4.00.

While the weak quarterly results and revised guidance sent First Solar’s stock price down by as much as 9% in extended hours trading, we don’t think there is any cause for concern since most of First Solar’s business is now largely project-oriented and revenue recognition in this space is usually subject to some volatility. In our view, the key catalysts for the stock in the near term include the company’s ability to bag new bookings and further reduce its manufacturing costs while improving the efficiency of its panels.

Understand how a company’s products impact its stock price on Trefis

1. First Solar Earnings Press Release [↩]
2. Reuters [↩]
3. GE, First Solar Announce Solar Technology And Commercial Partnership, First Solar [↩]
4. First Solar Acquires U.S. and Mexico Portfolio From Element Power, First Solar [↩]
5. Q2 Earnings Presentation [↩]
6. Seeking Alpha [↩]