First Solar Cuts Costs And Alters Its Product Roadmap To Navigate Downturn

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FSLR: First Solar logo
FSLR
First Solar

Trefis has revised the price estimate for First Solar (NASDAQ:FSLR) from $50 per share to about $40 per share, amid a global oversupply of solar modules, lackluster pricing for utility solar power purchase agreements and the prospect of a considerably less favorable regulatory environment for renewables in the United States. The firm recently published its financial guidance for 2017, projecting a significant decline in adjusted earnings for the year, while also indicating that it would lay off roughly 25% of its workforce as it adjusts to the new market conditions. Below we provide a brief overview of First Solar’s updated guidance and what the firm is doing to adjust to the current market conditions.

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Tough Market Conditions And Potentially Unfavorable Regulatory Environment 

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The solar industry has been contending with weakening demand, amid a decline in installations in China after the reduction of feed-in-tariffs in June. Things have been challenging on the supply side as well, as over 20 GW of module capacity was added during 2016. The price of solar panels have declined by roughly 30% in the international markets this year, and the decline in the U.S. has been steeper. First Solar expects ASPs to fall by another 9% next year. The market for utility-scale solar has also been weak, amid competition and weak PPA pricing. First Solar just has three projects due for substantial completion next year. The longer-term picture also looks challenging for the U.S. solar market, given that the incoming U.S. Presidential administration could undo key environment legislation and agreements, reducing the urgency to deploy renewables, while potentially repealing key incentives such as the U.S. solar investment tax credit. (related:Trump Presidency Could Mean A Rough Road Ahead For Solar Stocks)

FSLR_2017_Guidance_1

First Solar Downsizes And Alters Its Product Roadmap 

First Solar revised its product roadmap to adjust for the weaker market conditions. The company has decided to cancel the new Series 5 module that it was slated to roll out next year, instead accelerating development of its next generation Series 6 module, which it now expects to be available by 2018. The Series 5 module, which essentially combines three of the firm’s current generation Series 4 modules, would not have been competitive under current market conditions. However, Series 6 utilizes a new production methodology and is projected to have a cost per watt that is roughly 40% lower compared to Series 4 modules. [1] Conversion efficiencies for Series 6 are also expected to stand at over 18% at launch, well ahead of the 16.5% efficiencies offered by current modules.

First Solar will scale down its module production for 2017 to roughly 2.2 GW, compared to 3 GW this year, as it takes high-cost production offline and adjusts to lower demand. The company intends to lay off roughly 25% of its workforce, while taking a total of between $500 to $700 million in charges ($70 to $100 million in cash) primarily relating to asset impairments for its Series 4 and Series 5 module equipment. A bulk of the charges will be taken this year. The firm will also reduce its 2017 operating expenditures by over 20% compared to 2016, to a mid-point of $290 million. While First Solar expects module production to remain almost flat in 2018, it will ramp up Series 6 production (the product could account for roughly 40% of production). Series 6 production is expected to ramp up to 3 GW by 2019, accounting for 100% of the firm’s product mix.

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Notes:
  1. First Solar Presentation []