In its recent S-1, Solyndra (SOLY) reported $36 million of revenue for its most recent quarter, with a gross profit of minus $16 million. Yet this revenue level was just under the $40 million and $52 million First Solar (FSLR) reported in the 3rd and 4th quarters of 2006, when that company was profitable. In looking at why Solyndra has minus 40% gross margins at nearly the same sales level at which First Solar was producing operating profits, four key points stand out:
- R&D costs are exceptionally high
- Solyndra is not getting any financial benefit for its higher conversion efficiencies
- Materials costs are getting trumped by Manufacturing Overhead
- Asset utilization is exceptionally low
Most solar manufacturers have extremely low recurring operating costs, with total R&D and SG&A costs under 20% of revenue. Suntech (STP), for example, reports total SG&As and R&D at under 10% of revenue, while Sunpower (SPWRA), Evergreen Solar (ESLR), and First Solar are right around 15%. Solyndra meanwhile reported an R&D/Revenue ratio of over 45%. While this does not impact gross margins, and is likely to drop as the company grows, this cost is way out of line with its peers. And not just based on competitors' current manufacturing levels. This R&D outlay is far higher than the 6% R&D/revenue ratio First Solar reported when it was at comparable revenue and production levels over three years ago.
Solyndra reported conversion efficiencies of 11 to 14%, higher than the 9.5% First Solar reported in 2006. While this suggests it is getting some technology returns on it high R&D investments, it is not getting much financially for it. It has paid a high cost to achieve higher conversion efficiencies.
Manufacturing Productivity and Overhead
Two financial measures that are sometimes overlooked in this sector are manufacturing productivity and overhead. It is far more exciting for the trade press to write about advances in materials, and for venture capitalists to fund exotic deposition techniques and panel surfaces than it is to examine mundane topics like manufacturing overhead, but the latter is more important for profitability, especially when thin film panels, whether a-Si, CIGS, or CdTe, all retail for around the same price, about $3-$4 per watt, as their crystalline silicon counterparts. Kyocera's KD135GX panel, for example, can be purchased now for around $3.10 per watt, which is lower than many thin film products and most of Evergreen Solar's string ribbon products. Moreover, if materials costs were such a dire concern, First Solar would not have been able to increase its gross margins six points to 40% in 2006, when the cost of tellurium, used in its CdTe modules, had tripled over the prior three years.
In terms of manufacturing productivity, Solyndra is doing reasonably well with $144 million of annualized revenue and 368 manufacturing employees, or just under $400,000 per manufacturing worker. In 2006, when First Solar ended the year at a $208 million revenue run rate, it had 525 manufacturing employees, a comparable productivity level. However, in addition to over 200 hundred contractors, Solyndra has 383 employees outside of manufacturing. First Solar had almost exactly half that amount, 195, outside of manufacturing, when it was at its somewhat higher revenue level three years ago.
The big item that stands out for Solyndra though is its asset utilization. Its $144 million of annualized revenue is coming on a depreciating, in-service PP&E base of $257 million. First Solar in contrast had just $93 million of in-service PP&E when its annualized revenue was passing $200 million. This 2:1 Revenue/PP&E ratio has held reasonably constant for that company's history, even though its manufacturing productivity has nearly doubled since then, and is common among other publicly traded solar manufacturers, which also typically have Revenue/PP&E ratios between 2 and 3.
While Solyndra will get a near-term boost as it adds 65 MW to complete its first production facility, Fab 1, at a projected cost of just under $1 per incremental watt, it will nonetheless need all 500 MW of Fab 2 to get anywhere close to a Revenue/PP&E ratio of 2, and will not have the operating cash flow cushion First Solar and other manufacturers have to withstand more price drops and subsidy cuts.
Disclosure: No positions