The largest U.S. solar manufacturer, First Solar (FSLR, Financial), reported a mixed set of numbers on November 6 when it released its third-quarter earnings which beat the market expectations on earnings but failed to exceed the revenue target set by the Street for the quarter. The company results led to the stock immediately moving to the negative territory that dropped 10% in early trading. The market was a bit shaken by the weak guidance given by the company for the future which makes the stock lose its luster sooner than expected. Let’s dive into the numbers and find out what the company shared during the earnings call which might prove profitable over the long term for the solar giant.
The volatile report card
The company numbers were subject to volatility as its core business of project development saw irregular revenue stream. For the quarter, the revenue rose by around 66% sequentially to $889 million, and that increase can be attributed to higher activity on the Desert Sunlight Project in California, which had faced delays in the past quarter. Net income also showed a remarkable improvement from just $4.5 million during the previous quarter to $88 million.
However, both the revenue and net income recorded declines if compared on a year-on-year basis. Earnings came in at $0.87 per share and booking year to date totaled 1.7 GW to just 1.1 GW, a strong book-to-bill ratio. Jim Hughes, CEO of First Solar, shared his thoughts:Â “Following the project delays experienced in the prior quarter, our third-quarter earnings have improved, and we continue to make progress towards our financial targets for the year. Our year to date book-to-bill ratio is well above our objective of a one-to-one ratio, and we are on track to meet or exceed our bookings goal for the year.”
The revenue earned during the quarter failed to match the Street expectations of $1.05 billion, and adjusted earnings that stood at $0.61 a share were $0.03 per share below expectations. Also, the company lowered its sales guidance for the fiscal year by $100 million to $3.6 billion to $3.9 billion disappointing the market that was expecting better news from the company’s desk.
In such a situations let’s try to assess some of the major takeaways from the quarter.
Bookings increase,
while manufacturing capacity expansion occurs
The company improved its total booking by around 100 MW sequentially to 3.3 GW. Through the first nine months of the year, the company recorded 1.6 GW of new bookings compared to the shipments of 1.1 GW – thus translating to a book-to-bill ratio of 1.5 that looks solid for the solar manufacturer.
The growth curve of new bookings is due to rampant growth in markets such as the U.S., Latin America and India. It is to be noted that more than half of the potential pipeline of the company comes from overseas.
In the U.S., the demand for solar panels is expected to be strong in the next two years, and First Solar looks ahead to capitalize this demand surge by expanding its panel manufacturing capacity by around 46% by 2015. Besides, the company is also restarting manufacturing at the Malaysian facility where to now most of the manufacturing lines were left idle.
Making the company extra competitive
As the company expects solar panels to sell like hotcakes in 2015 and 2016, it has planned the efficiency of its solar panels to make them more competitive in the market. Over this quarter, average panel efficiency stood at around 14.2%, up around 0.2% sequentially and 0.9% year over year. The company believes that better efficiencies will make it competitive in the rooftop market where higher energy density panels are highly valued. As per the company’s information, panel efficiencies are predicted to improve to above 19% by end of 2017.
So while the third quarter numbers were a bit mixed, investors might see jumps in the bottom line in the next two years.
No launch of YieldCo in the near term
First Solar has indicated in its earnings discussion that it’s not interested in YieldCo creation to hold its power plant assets, since it did not see opportunities to capture greater market share or higher margins by using such a structure. YieldCos are companies that own solar projects and pay investors a dividend from the project’s revenue stream. They are typically listed public entities that have long term power purchase agreements with utility companies.
Such a structure has become a common feature among renewable energy companies such as SunEdision (SUNE, Financial) and NRG Energy (NRG, Financial) that have spun off assets to reduce their funding costs. First Solar has indicated that it would hold such assets in its balance sheet through the commercial operation date while retaining an interest in the projects in certain cases. In fact, the lowered revenue guidance cropped up when the company decided to hold projects on its balance sheets to improve its margins in the long term.
Final word
The company has been showing fluctuations in the income stream for the past few quarters, and delays in large projects have further added to the company’s trouble. Investors have lost their interest in the stock when the news of the company not pursuing the registration of a YieldCo came to the limelight during this earnings call. Presently First Solar’s future does not look too bright, but the management is trying hard to bring in corrective measures to generate a regular stream of improved revenue and profits for the company in the coming quarters.
