What’s Driving First Solar’s Weaker Than Expected Margin Guidance?

by Trefis Team
First Solar
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2019 could prove to be an interesting year for First Solar (NASDAQ:FSLR), the largest U.S. solar panel manufacturer, as it scales up production of its much anticipated Series 6 panels. Production of the next-generation panel is likely to grow to between 3 GW and 3.2 GW this year, accounting for about two-thirds of the company’s output. However, despite the transition, First Solar’s margin guidance for 2019 was relatively lackluster. In this note, we take a look at some of the factors impacting the company’s weaker-than-expected margin outlook, and why we believe things could pick up from 2020 onwards.

We have also created an interactive dashboard analysis on What’s the outlook for First Solar in 2019? You can modify the various drivers to arrive at your own forecasts for the company’s 2019 revenue and EPS.

First Solar’s Gross Margin Guidance

First Solar has guided for gross margins of 20% to 21% for 2019. While this is ahead of the 18.5% to 19.5% margins projected for 2018, the markets were expecting better margins, on account of an increasing mix of Series 6 modules and also because a high-margin project sale in Japan was moved from 2018 to 2019.  However, First Solar has noted that there are multiple factors influencing the weaker than expected margins.

Why Aren’t Margins Ramping Up Meaningfully Yet?

Firstly, the company’s systems business – which is expected to account for 55% to 60% of its net sales –  is likely to dilute overall gross margins. While margins for EPC projects are expected to come in at about 15%, self-developed projects could have margins of as much as 20%. This is well below the margins projections for the company’s panel-only sales. Moreover, the company will continue to ship its Series 4 modules over 2019 (about 2 GW planned production). These panels are likely to have weaker margins, as they are likely less competitive in the current marketplace, considering their lower power ratings. Additionally, efficiency ratings for Series 6 over the early part of the year could remain low, as production facilities ramp up to capacity, and this could also hurt gross margins.

Full Impact of Series 6 Could Be Seen In 2019

That said, it’s possible that First Solar could see a bump in margins starting in 2020 and 2021, as it is expected to stop production of Series 4 panels next year. Moreover, as its Series 6 manufacturing process gains maturity, costs could come down and conversion efficiencies could rise with factory utilization rates also improving. The new panels have a significantly higher rated capacity compared to its legacy Series 4 panels, with manufacturing costs also estimated to be as much as 40% lower.


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