First Solar Delivers Strong Q4, Difficult Times Ahead

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The leading player in the thin-film solar panel industry, First Solar, Inc. (NASDAQ: FSLR), has recently announced quarterly results that have beaten analysts’ estimates, but gave a disappointing outlook for the current quarter and failed to provide 2013 guidance as its stock plunged by 17% by the next day to a three-month low. The company has decided not to give 2013 guidance until the second quarter of the current year. Moreover, the company’s book-to-bill ratio has now slipped into the red zone as its pipeline diminishes.

The company’s net sales for the quarter ending December 31, 2012, increased by 62.79% to $1.075B from $660M in the same quarter last year as the business swung from a loss of $413M in 2011 to a profit of $154M in 2012. However, the sales were considerably lower than the analysts’ estimate of $1.32B, but its income has translated into adjusted earnings of $2.04 per share, significantly above analysts’ estimate of $1.75 per share, according to data provided by Thomson Reuters I/B/E/S. The 80.51% slump in operating expenses from $623M in Q4-2011 to just $121M in Q4-2012 caused the turn in the company’s fortune as it managed to significantly reduce all of its expense heads. However, First Solar also recorded $393M as goodwill impairment in Q4-2011, which formed 63% of its total operating expenses.

The significant increase in quarterly revenues is attributed to the massive utility-scale 550MW Topaz solar farm project and an increase in third-party module sales. Together, this was more than enough to offset the setbacks coming from project delays and cancellations.  The company has been increasing its focus on the solar subsidy free zones such as India, Chile and the Middle East. This year, the business made significant inroads into these emerging markets by acquiring Solar Chile earlier in January 2013. Solar Chile has significant exposure in utility-scale photovoltaic projects in different regions of Chile, including at Atacama Desert, the area which receives the highest solar irradiance in the world. First Solar has also established its subsidiaries in India, the Middle East, South Africa and Thailand.

During the quarter, First Solar’s production increased by 4.55% sequentially and dropped by 5.11% from the same quarter in 2011 to 512MW. The total cost per watt produced increased by $0.01 from the previous quarter and fell from $0.73 in Q4-2011 to $0.68 per watt. The company’s conversion efficiency for the quarter has reached 12.9%, up from 12.7% in the previous quarter and 12.2% in the year-ago quarter. Meanwhile, First Solar has also set a thin-film solar cell conversion efficiency record for cadmium-telluride (CdTe) cell by achieving efficiency of 18.7%. The test has also been confirmed by the U.S. Department of Energy’s National Renewable Energy Laboratory.

First Solar has been more profitable than some of the other leading players of the solar industry such as SunPower Corporation (NASDAQ:SPWR) or Trina Solar Limited (ADR) (NYSE:TSL). First Solar’s gross margin slipped from 28.4% in Q3-2012 and increased from 20.9% in Q4-2011 to 27.3%, which is significantly more than SunPower’s 18.73% and Trina Solar’s 1.86%. First Solar also generated far greater cash flow and has a positive net cash and investment (ex. debt).

However, the company’s inability to give 2013 guidance has raised several eyebrows.

Meanwhile, two of First Solar’s major planned projects, 300MW Stateline Solar Farm and the 250MW Silver State South projects, have still not received the necessary permits. Besides, the company is also awaiting some developments from two key cases: the dispute between EU and Chinese solar panel manufacturers and more recently, the U.S challenge at WTO against India’s National Solar Mission, which it believes discriminates against foreign players. These are the primary reasons that appear to be keeping First Solar from giving the annual guidance.  

However, the company did provide the Q1-2013 guidance, which disappointed investors. The business now expects to achieve net sales of $650M - $750M with a gross margin of 25% - 27%. This means that not only are the net sales going to witness a significant sequential decline, they are also well below Wall Street’s expectations of $822M. Moreover, the mid-point of the estimated Q1-2013 gross margin comes at 26%, which is 1.3 percentage points below its Q4-2012 margin.

What is even more significant is that the First Solar’s pipeline is shrinking as it is completing projects faster than it is getting new ones. The company had 3GW of projects in its pipeline in Q3-2012. By the end of Q4-2012, this shrank to 2.9GW, of which 2.2GW have not been recognized. For the full fiscal year, First Solar recorded 1.1GW of new bookings but had 1.4GW of shipments, which has taken its ratio of orders-received-to-units shipped ratio (also known as book-to-bill ratio), which should be at least 1:1, to 0.8.

On the conference call, Hughes said, “Looking at our business this way through an accounting lens if you will, we have over US$8 billion of expected revenue in the future. That is US$1.4 billion lower than at the start of the year.” The management’s priority is to get this back up to a more comfortable level of 1:1, but analysts, such as Ben Schuman of Pacific Crest Securities LLC, have identified that it is going to be a difficult task; it will be nothing short of a challenge to get new orders from some of the key emerging markets, such as India, due to increasing competition.