Q2 Results Add Confidence to First Solar Strategy

Net sales for the company were $957M, a $460M sequential increase from Q1 and up $425M from Q2 in 2011.

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If there is a single ray of sunshine for solar companies in the Q2 results, it could be that First Solar, Inc. (NASDAQ:FSLR) is not the only one to steal all the glitter. Perhaps the other candidate to share the sunlight is Canadian Solar (NASDAQ: CSIQ), by upholding the other day its Q2 guidance with a fractional reduction of shipments, but also boosting its gross margins. There is a simple reason, which offers the comfort of First Solar’s success in expectation of Canadian Solar’s results. Both companies have an aggressive strategy of building growth on EPC projects. This is the only growth factor left for solar companies these days. The profitless pursuit of manufacturing cost reductions is clearly a losing race against the ASP drops. While 80% of solar cell manufacturing is based in China, the selling pricing is completely out of control, and nobody really knows how to control this mechanism. A paradox arises when considering that selling below the gross margin leads to bankruptcy.

While Trina Solar (NYSE: TSL) disappointed one more time by lowering its shipment guidance and lowering its gross margins, warning about the provisions due to the US levies and inventory market impairments, First Solar seems to be operating, at least this quarter, in a different market dimension.

Net sales for the company were $957M, a $460M sequential increase from Q1 and up $425M from Q2 in 2011. The company confirmed that increases were due to a number of sizable projects meeting the revenue recognition criteria.  First Solar went further and increased is guidance for revenue by $100M for each end of the guidance and the EPS for the year by $0.20, when excluding restructuring costs and impairment charges.  While the company is booming in the EPC sector, its manufacturing is slowing down, which is not unexpected upon reviewing this year’s strategy.  In Q2 production went 27% down and capacity utilization is down by 22% versus Q1. Financial costs of manufacturing were at $0.72 per watt, but excluding onetime charges of underutilization and upgrades it moved down to $0.64.  Conversion has also increased slightly to 12.6%. While the company is competing with c-Si conversion factors, if excluding all extra costs, the core is around $0.53 per watt, again toe-to-toe with the Chinese manufacturing costs. While the company presented its competitiveness against mono –c-Si modules showing cost improvements in hot and cold climates, there was still a ghost of restructuring charges and certain costs in excess of the normal warrant costs taken in the quarter in the amount of the $36M, suggesting that some issues with quality are dragging on.

While Chinese companies like Suntech Power Holdings Co., Ltd. (NYSE: STP) and LDK Solar (NYSE: LDK) are becoming critically wounded by their financial conditions, First Solar seems to beaming with $300M of free cash flow in the quarter, increasing its cash on hand and reducing its long-term debt by 40% in comparison to Q1.  First Solar’s net-cash-to-debt calculation is the only one in the industry in the positive territory. 

Currently, First Solar’s pipeline has 2.9GW of projects, including markets in Australia (an estimated 30% of PV market projects), China and India, where First Solar has 20% of the market share.  First Solar may be seeing the most benefit from having almost exclusive access to the US markets, receiving financing not only due to own balance sheet strength, but essentially being one of only a couple of meaningful operators left in the country.

While in Q1 Chinese companies were setting expectations about increase of revenues and gross margins by moving onto EPC projects in China, the current tone of the feedback is that the second half of the year will bring more disappointment in this area. While investors are awaiting results from the rest of the top players, lack of particular EPC announcements by major players like Suntech and Yingli Green Energy Hold. Co. Ltd (NYSE: YGE) extends the concern that the overall slump will include tier-one enterprises.