First Solar downbeat in an upbeat market



First Solar reported fourth quarter and full-year 2013 results that failed to meet financial analyst’s expectations by a wide-margin, with it shares taking a big tumble.

The company reported net sales of US$768 million for the fourth quarter and US$3.3 billion for 2013. Analyst expectations were for sales in the quarter to be over US$900 million and annual sales ahead of 2012. Sales in the third quarter of 2013 had been US$1.3 billion.

However, management said in an earnings call, that was driven at high speed and lasted barely 30 minutes instead of the usual 60 minutes, that revenue was lower than forecast, due to several PV projects not completed in 2013. Revenue recognition would be in 2014, according to the company but management declined to answer questions on when those projects would be sold until its Analyst Day event, in mid-March. The company said it would provide better quarterly and full-year guidance at the forthcoming event.

The revenue shortfall was also said to be due lower than expected module sales to third-party customers.

CFO, Mark Widmar noted that net sales were down slightly to US$3.3 billion in 2013, from US$3.4 billion in 2012 and lower than guided in the previous conference call. First Solar had not updated the market about a possible guidance miss ahead of the fourth quarter earnings release.

The company reported gross margin in the fourth quarter of 24.6%, down from 28.8% in the prior quarter. On an annual basis, 2013 gross margin was 26.1%, slightly higher than 25.3% in 2012.

Management noted that this was primarily due to the lower average selling prices (ASPs) for CdTe thin-film module-only sales.

Several c-Si module suppliers such as SunPower and REC Solar ASA had recently reported stable ASPs in the fourth quarter.

The lower than expected module sales impacted inventory levels that increased by US$70 million in the quarter, but were also higher to support PV project activity in the first quarter of 2014, according to the company.

First Solar reported a fourth quarter net operating income of US$60 million, compared to US$208 million in the prior quarter. Full-year operating income was US$455 million, compared to US$487 million in 2012.

Management noted that it expected net sales in the first quarter of 2014 to be in the range of US$800 million to US$900 million, which was inline with some analysts expectations but the earnings per share in the range of US$0.50 to US$0.60 for the quarter, guided by management were at least US$0.24 less than analyst projections.

PV project business

Other than the surprise in the quarterly sales, the issue over replenishment of its PV project pipeline resurfaced. First Solar had been building projects at a faster pace than replacing them with new projects.

Management noted in the call that it had achieved bookings of 1.7GW in 2013 and potential opportunity pool around 10GW.

However, concerns were raised by analysts that much of the new pipeline would be converted to revenue beyond 2014, inferring the pipeline replenishment would have little benefit to earnings in the near-term.

Management is expected to provide further insight into the pipeline at its Analyst Day event.

Production update

First Solar reported module production in the fourth quarter reached 443.7MW (DC) a 4% increase on the previous quarter. Production increased sequentially throughout 2013, reaching a total of 1,628MW, down from total module production of 1,875MW in 2012. The almost 250MW decline was primarily due to falling third-party module sales.

However, management noted that the production decline was also due to the ongoing upgrades on manufacturing lines to further boost module conversion efficiencies and reduce manufacturing costs.

Utilisation rates were approximately 83% in the fourth quarter, up from around 80% in the prior quarter.

“We’ve made great progress toward achieving the efficiency and manufacturing cost targets that we provided during our analyst day in April [2013], noted CFO, Mark Widmar. “Module manufacturing costs per watt decreased to US$0.56 from US$0.59 last quarter, a US$0.03 per watt or 5% reduction quarter on quarter. This represents a combined decline of US$0.11 or 16% in the past two quarters, which has been driven by good balance of efficiency gains, throughput improvement, and variable cost reductions. For the full year, average module costs per watt decreased to US$0.63 from US$0.70 in 2012, a 10% reduction.”

Although management opened the earning call touting the new lab cell efficiency record of 20.4%, announced just before its financial results, the average conversion efficiency its CdTe modules across all production lines was 13.4% in the fourth quarter. The company noted that its best line, produced modules with an average efficiency of 13.9% in the quarter.

“We continue to make significant improvements in our module efficiencies with our best line, now running at 14.2% efficiency, which is 110 basis points higher than our lead line was running at this time last year. 110 basis points is one of the largest efficiency increases we have experienced in a 12-month period, and represents the momentum and R&D and operations team have in delivering against our efficiency improvement roadmap,” added Widmar.

A relative spike in efficiency gains should have been expected in response to equipment upgrades. On a longer historical basis, going back to the first quarter of 2007 through the fourth quarter of 2011, First Solar would achieve a 1% module efficiency improvement every nine quarters.

First Solar has shortened that time since the first quarter of 2012 through the second quarter of 2013, to seven quarters to achieve a 1% module efficiency gain.

Capital expenditure in the fourth quarter, which was primarily targeted at equipment and line upgrades topped US$56 million, down from US$69.5 million in the previous quarter. Capex was reduced every quarter in 2013 has the upgrade program continued. Total capex in 2013 was US$282.6 million, compared to US$378 million in 2012.

All the important 2014 data will be revealed at its Analyst Day event on March 19.

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