First Solar: Was This Bad Quarter An Exception?

| About: First Solar, (FSLR)

On Tuesday evening, First Solar (NASDAQ:FSLR) announced disappointing results for the fourth quarter and full-year of 2013 and this led to a sell-off in the after-hours, which is likely to continue for the rest of the week. The company posted revenues of $768.4 million for the fourth quarter, down 39% from last quarter's $1.27 billion and down 29% from last year's $1.08 billion. Furthermore, the company posted a net profit of $65.3 million, which is sharply down from the $207.9 million from the previous quarter and the $154.2 million in the same quarter a year ago. Many analysts and investors were hoping for much better results.

The company's revenue was down sharply because several of the projects did not finish on time and the company could not get paid for those projects. In fact, according to the conference call, some of the projects that were supposed to be finished by the end of 2013 will not be finished until well into 2014. The total size of these delayed projects was around $400 million and adding this figure to the announced quarterly revenue would have given us a revenue figure of $1.17 billion, which would have been slightly better than last year's and slightly worse than last quarter's revenue. Keep in mind that according to GAAP, a company can fully recognize revenues of a project when that project is completed (or when a leased product's lease term is finished).

First Solar's gross profit for the fourth quarter was 24.6%, which is the second lowest in the last 5 quarters. This compares poorly with third quarter's gross margin of 28.8% and last year's gross margin of 27.3%. If we look at the company's operating costs, research and development costs are up 10% sequentially and 22% year-to-year while selling and administration costs are up 3% sequentially and 4% year-to-year. As a result, First Solar's operating margin fell from 16% (from both last quarter and last year) to 7.85%. Again, part of the blame goes to several projects that were supposed to be finished in 2013 but had to be delayed for a variety of reasons.

Production in MW (443.7 MW) was up 4% sequentially (426.0 MW) and down 13% from last year (512.1 MW). Meanwhile, First Solar's cost per each produced watt was down from last year's 66 cents to 54 cents (this also compares nicely with last quarter's 57 cents). This was one of the few positive points from First Solar's earnings release.

Year-to-year, First Solar's total cash rose from $1.01 billion to $1.76 billion (it was $1.53 billion by the end of last quarter), which shows that the company is still cash flow positive even though there is a sharp decline in its cash flow generation compared to the past quarters. During the last quarter, First Solar generated $192.2 million of cash flow from its operations, down from last quarter's $375.1 million and last year's $327.6 million.

During the quarter, First Solar achieved the CdTe cell efficiency of 20.4%, which beat the previous record of 19.6% and became the highest ever. Keep in mind that the previous record belonged to the GE's (NYSE:GE) solar energy department and it was achieved in 2013, shortly before First Solar entered into a partnership with GE and acquired the latter's CdTe solar intellectual assets. Apart from the acquisition, there is an ongoing partnership between the research and development teams of both companies in order to accelerate improvements in efficiency. In the near future, this should result in bigger gains for First Solar.

The company's backlog (or bookings) increased from 2.6 GW to 2.7 GW as it delivered 1.6 GW and received 1.7 GW in new bookings. The company's goal was to have a 1 to 1 ratio of deliveries to new bookings and it slightly passed this goal, which means that First Solar is not seeing much trouble as much as demand generation goes. Roughly 150 MW of the new bookings came from an AC solar power plant to be built in California. Apart from this project, the company has another 40 MW to build in a separate project in California and another 22 MW to build in Texas. The plant in Texas will be initially owned and operated by First Solar but it will probably change hands later on.

Currently, the potential booking opportunities in early and mid-stages of development stand at 10.6 GW, which is an all-time high for the company. If the company can take advantage of these opportunities and deliver on them, there is a lot of money to be made here. One particular market for First Solar is Japan where there is a huge movement for clean energy as the company sits in an earthquake zone and it doesn't want its power plants to create more trouble in the future earthquakes, so there is a sense of urgency in Japan. Roughly half of the potential booking opportunities are in North America while the rest are distributed across the world. For example, the Middle East, North Africa, India and Latin America are some of the biggest markets in terms of booking potential.

For the first quarter of 2014, First Solar expects to generate between $800 million to $900 million in revenues and $0.50 to $0.60 per share in net income. The company hasn't provided guidance for the full-year, and it is expected to give such guidance on March 19 during the analyst conference.

Until now, First Solar was performing greatly and the company was clearly the cheapest stock in the entire solar industry with a single digit P/E excluding cash. Now, we don't know if the company is simply having a rough quarter or two or if this is the new trend for First Solar. If this is just a show term trouble, I wouldn't worry too much, but if this is how things will look in the future, many investors will be selling their shares, because a decline of earnings will affect the company's valuation negatively.

During the sales call, some analysts asked questions regarding the company's short-to-medium term guidance but the management simply said that more information would be coming next month during the analyst day. We will just have to wait and see how the company guides for the rest of 2014. Last year's analyst call was full of surprises and maybe (and hopefully) this year's will be too.

Disclosure: I am long FSLR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.