From James LoGerfo, Michael Riedinger and Joe Berwind (Alternative Energy Investing) Evergreen Solar (ESLR) reported in-line results that demonstrated it could transition to chunk poly-silicon with no loss in output. The risk that Evergreen’s ramp could stall due to the transition to chunk poly silicon is off the table.
ESLR shares will likely see buying as shorts cover and long term investors gain limited exposure.
Cell efficiency gains were absent for the first time in several quarters calling into question the company’s ability to achieve a 180 watt module before year-end putting additional risk around the company’s financial estimates. The company continued to stress the need to achieve 15% cell efficiency before year-end as has been the plan from the beginning of the year.
Evergreen Solar’s thin ribbon technology utilizes poly silicon sparingly. This technology lies at the hart of the company’s joint-venture. Evergreen Solar’s ability to grow its share beyond the current plan effectively requires it to open manufacturing facilities independently of Q-Cells which it can not do as new partners with access to poly silicon simply do not exist and are not likely to appear until the end of 2008 at the earliest.
Evergreen Solar production ramp is progressing on-plan. The quarter was in-line, but expenses continue to increase putting pressure on the model. Higher expenses were not a surprise as the company had guided and continues to guide to increase spending associated with the company’s ramp.
Sales & Earnings: Evergreen Solar reported 2Q’06 sales of $22mm (+106%) from $10.7mm in 2Q’05 and up (+90%) from $11.6mm in 1Q’06. Sales were in-line with consensus estimates of $21.98mm. The company’s German joint-venture, EverQ, contributed $10.7mm in 2Q’06. The company recorded net a net income loss of ($7.5mm), or ($0.11) per share including $1.7mm of share losses associated with EverQ’s ramp. Earnings beat consensus estimates of ($0.14 I/B/E/S) and compares with a net loss of ($8.1mm), or ($0.13) per share in 1Q’06. The company recorded equity-based compensation expenses of approximately $1.8mm in 2Q’06.
Gross margin for 2Q’06 was +4.1% in 2Q’06, compared with (12.5%) in 1Q’06. The 16.6% improvement in gross margin came from increased revenue from EverQ. The company did not breakout gross margins for Marlboro in the quarter (8.9% in 1Q’06). Moreover, management will stop providing gross margin data for the Marlboro facility going forward (The company will not breakout ASPs and megawatts produced for the different plants going forward either!). We think this will ultimately be an unwise position given the potential for misunderstanding. For example, management disclosed that in the name of process improvement it “ripped out one line, taking a lot of capacity out of Marlboro for the first 3.5 weeks of July”. AEI recalls on the 1Q’06 conference call management said “if we saw an opportunity to accelerate Quad, we would be willing to sacrifice margins down to zero.”
Given the decision not to breakout margins for Marlboro and past comments demonstrating a willingness to completely ignore gross margins in past comments, we think the choice by management to provide less detail in the context of conflicting statements increases the risk investors may not adequately model the company in the coming quarters. Management continues to guide gross margins for 7% to 15% in Marlboro, as the company continues to use the facility as a test-bed for new technology initiatives. EverQ’s 2Q’06 gross margin was (3.3%), at the high end of management’s guidance of a negative 35% to 0%. The company continues to expect EverQ's gross margin to be in a range of 12% to 25% percent in 3Q’06 and to rise to a range of 30% to 35% in 4Q’06 (unchanged for two quarters running). Gross margin guidance for the combined company in 3Q’06 was not given explicitly. However, gross margin expectations for 4Q’06 were set at 10% to 15% -- the first full quarter during which results will be reported under the equity method of accounting. The Company's combined fourth quarter gross margin represents approximately one-third of EverQ's gross margin, plus 100% of the gross margin generated by its Marlboro factory. Gross margin guidance excludes the impact of any costs associated with planned start-up expenses for the new 50MW EverQ facility, which have yet to be fully estimated. The groundbreaking for EverQ2, a 50MW facility, is expected in August or September.
Guidance: The Company expects revenue generated from product purchased from EverQ to be between $16mm to $22mm and between $23mm to $25mm in 3Q’06 and 4Q’06, respectively. The company expects quarterly revenue from product manufactured at its Marlboro factory to continue in the $10mm to $12mm range for the balance of 2006. Total company guidance for 3Q’06 is between $26mm to $34mm. The company also reiterated 2006 sales guidance for the third quarter running.
EverQ is expected to be fully ramped end 3Q’06 (30MW). EverQ recorded a net profit for the month of June. The current ramp calls for the company to break-ground on EverQ-2, a 50MW facility in the current quarter bringing total capacity of EverQ to 80MW in 2007. Management also added a new goal for approximately 300MW by the second half of 2009 or early 2010. In the third-quarter, EverQ will begin the transition to thin-ribbon and expects to complete the transition by 4Q’06.
Q-Cells AG of Germany (FSE: QCE) and Renewable Energy Corporation AS of Norway (OSEAX: REC.OL) have not yet executed signed definitive agreements for the EverQ expansion but are expected to in the current quarter. All three partners will share equally in the net income generated by the joint venture. Evergreen will receive royalty payments from EverQ for its thin-ribbon technology in lieu of sales and marketing fees. The company expects to receive its first license fees in 1Q’07. Evergreen Solar expects to account for its share of EverQ's financial results under the equity method of accounting subsequent to the execution of the definitive agreements for the EverQ expansion. Evergreen purchases all solar modules manufactured by EverQ. The Company expects revenue generated from product purchased from EverQ to be between $16mm to $22mm and between $23mm to $25mm in 3Q’06 and 4Q’06, respectively. EverQ product revenue was characterized as “in line with our guidance”
Evergreen’s Marlboro factory is running 100% percent on thin wafer. The company expects quarterly revenue from product manufactured at its Marlboro factory to continue in the $10mm to $12mm range for the balance of 2006. The company mentioned that margins would fluctuate in a range of 7% to 15%, and that in the current quarter initiatives were began to yields across all process steps as the total yield of thin wafers in Marlboro are not yet to the same level as the yields for thick wafers. In particular, new wafer cutting and saw metallization techniques have begun early in 3Q’06. Should these initiatives be successful, Evergreen will transfer these process improvements to EverQ late in the quarter or 4Q’06.
Utilization & Efficiency - "Separate, But Equally Important": Wafer yield for about 6 grams currently to about 5 grams per watt by the end of this year. Poly silicon efficiency is critical for its ability to produce more cells with less precious (in shortage) poly silicon, but without cell efficiency improvements ESLR will get trapped. It must increase cell efficiency AND reduce poly silicon usage to achieve its financial targets. Expectations are for a 180 watt standard panel (up from 120 watt introduced recently) by year-end. This is a critical benchmark investors can use to judge how well the company it progressing along its technology curve.
Current cell efficiency is 14% with the current manufacturing process and our goal is to demonstrate a 15% process by year end 2006 and 16% to 18% achievable in the next two years. Management’s comments on previous conference calls put cell efficiencies of 15% in the lab by year end. Recall, cell efficiencies were averaging 13% to 13.5% in 3Q’05 and increased to 13.5% to 14% in 4Q’05 which because the primary drivers of better than expected sales and gross margins. Improved cell efficiency in 4Q’05 allowed ESLR to produce 120 watt solar panels with the same physical dimensions of the existing 110 and 115 watt panels, and therefore more revenues. It is critical to acknowledge that a stalled program to increase cell efficiency would cap Evergreen’s efforts to improve their results and would very likely lead to missed estimates.
Quad-Ribbon: Management disclosed it has all eight next-generation furnaces operating and growing ribbons. Quad ribbon is the next technology hurdle for the company. Quad ribbon is a reference to a new furnace design based on proprietary technology for pulling four ribbons instead of two. Quad ribbon represents the next doubling of capacity per furnace, offering the promise of additional cost savings and moving the company to 35% to 40% margins --quad ribbon also offers the potential for virtually lights-out processing (i.e. fully-automated). The company is currently running the full pilot and test results are expected before the end of 3Q’06. That said, the company continued to estimate the commercial roll out of quad ribbon for late 2007. AEI is cautious about the prospect for earlier than expected success in implementing quad ribbon, and we caution subscribers to view the development independently from the flawless success the company has seen implementing thin ribbon.
Research revenue rose to $354,000 in 2Q’06, was $0 in Q2’05 and $325,000 1Q’06. Management guided research revenue to $150,000 to $300,000 per quarter throughout 2006.
Expenses: R&D expenses were $4mm in 2Q’06 was $2.6mm in 2Q’05 and $4.2mm in Q1’06. The increase year-over-year reflects the incremental R&D activity both internally and for EverQ, and includes cost for salaries, materials and supplies and expense of independent contractors. These expenditures are primarily focused on improving cell efficiency, development of the quad furnace platform and other process cost and productivity improvements. The company guided to slightly higher R&D spending for the remainder of the year. These expenses for R&D are a source of interest and of particular note should they chage significantly.
SG&A expenses were $6.4mm in 2Q’06 compared to $3mm in 2Q’05 and $4.4mm in Q1’06. The company guided to slightly higher SG&A spending for the remainder of the year. This is consistent with previous guidance and in-line with the company's ramp.
Cash and near cash was $95.5mm in 2Q’06 compared to $116.2mm 4Q’05. The cash balance decreased due to the consolidated net loss of $15.6mm, capital spending of $39.6mm and working capital requirements of $8.4mm offset by increases in debt of $26.3mm that worked primarily at EverQ and proceeds from warrants and option exercise of $13.2mm. Total debt excluding the $19mm of convertible notes increased to $36mm as of July 1st of 2006, reflecting EverQ loans from external banks and others.
Accounts receivable rose sharply to $18.4mm in 2Q’06 with DSO increasing to 75 days, up from $4.1 million in 4Q’05, 41 days in 2Q’05 and 45 days in 1Q’06. AEI notes the shipments very late in the quarter but does not see any evidence of games as shipment patterns will vary greatly as the company ramps and sales increase.