- First Solar is expected to release Q4 earnings on February 26.
- Outperformed the broader solar sector over the last 2 quarters due to its focus on the profitable photovoltaic systems business. Systems business is likely to drive performance this quarter as well.
- Factors we are watching: panel manufacturing costs reductions, conversion efficiency improvement, progress of international expansion and margins for systems business
First Solar (NASDAQ:FSLR), the world’s largest thin-film panel manufacturer, is expected to release its fourth quarter earnings on February 26. The firm has largely outperformed the broader solar industry over the last two quarters, thanks to strong growth in the solar systems business. The key factors we will be watching in First Solar’s earnings release include its progress in cutting costs and boosting the conversion efficiency of its panels, its ability to sustain margins for the systems business and its progress in expanding the systems business internationally.
Reducing Cost of Panel Manufacturing: First Solar uses Cd-Te thin-film technology to manufacture its panels. These panels have traditionally been cheaper than silicon-based panels at the expense of lower conversion efficiency. However, over the last two years, falling polysilicon prices have meant that silicon-based panel manufacturers are snapping at First Solar’s heels when it comes to pricing while they still maintain an edge in terms of efficiency. For instance, as of Q3 2012, First Solar’s panels cost about $0.67 /watt to manufacture while Yingli Green Energy, a polycrystalline panel manufacturer based in China, produced panels at just over $0.70/watt [Yingli Q3 Earnings Presentation]. In order to improve competitiveness, especially in the standalone modules business, manufacturing costs will need to be improved.
Panel Efficiency Improvement : First Solar’s panels had an average efficiency of 12.7% in Q3, compared with polycrystalline panels that typically have efficiencies of around 15%. Given the narrowing price gap between polycrystalline panels and thin-film panels, it is imperative for the firm to boost efficiency. Over the past year, First Solar has been improvising its manufacturing process to produce higher performance panels. It recently introduced an updated laser scribing procedure, which it expects to deploy across its production lines by mid-2013. Last month, the firm collaborated with Intermolecular Inc., a research firm focused on the semiconductor and clean energy space, to jointly conduct research to improve panel efficiency.
Sustaining High Margins For Systems Business: The PV systems business accounted for around two-thirds of the firm’s revenue for the first nine months of 2012. Gross margins are also high at around 36% compared with slightly negative gross margins for the modules business. These high margins are due to two reasons: firstly, the systems business involves providing value-added services such as engineering, procurement and construction, and secondly, the prices for these projects are typically negotiated in advance to construction. Most of the projects for which the company has been recognizing revenues in the last few quarters were negotiated a few years ago when the solar sector was healthier and pricing power was still strong. However, we believe that profitability for this segment could be impacted going forward by the weak pricing environment which would reduce pricing for the firm’s current contracts.
International Expansion Of Systems Business: The systems business is heavily dependent on the North American market with nearly two-thirds of the contracts in the firm’s 3 GW systems project pipeline coming from the region. To diversify its revenue stream, First Solar is banking on sustainable markets - markets where government support is low and solar power is competitive with other forms of electricity generation. We will be watching the firm’s progress in markets like Australia, India, the Middle East and Africa.
Disclosure: No positions