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  • Burn Out: First Solar's No Growth Strategy 0 comments
    Jul 16, 2013 3:36 AM | about stocks: FSLR

    Most people following First Solar (NASDAQ:FSLR) understand that the company's strategy has transformed from selling modules to subsidized customers to building large-scale utility systems.

    This transformation began in late 2009 with the initial, large-scale (20-50MW), utility systems in Canada and California and accelerated during 2010 and 2011 with the very-large (50-500+MW) scale systems in CA, AZ, NM and Canada. This transformation can be seen clearly from the percent of revenue derived from system sales; going from 0% to 90+% in less than 3 years … with a small reversal in the last 2 quarters.

    First Solar Historical Revenue Split

    (click to enlarge)

    The strategy to balance system and third-party sales can provide financial stability and pricing resilience in the volatile solar marketplace, but since 2012 the company has articulated an "all systems" strategy focused only on unsubsidized markets (or "sustainable", if you prefer).

    With an "all systems" strategy, FSLR's valuation depends directly on the quality, size and refresh rate of the system pipeline.

    If you listened to the Q1 2013 earnings call, you may have been underwhelmed by FSLR's vague description of the go-forward pipeline. Digging through the last 4 years of FSLR SEC filings enables us to ascertain the speed of pipeline development, consumption and replenishment providing a clearer picture of FSLR's system pipeline status.

    In this article, we will review

    1) How fast First Solar generated its 3.6GW system pipeline.

    2) How fast First Solar is consuming its remaining 2.3GW system pipeline.

    3) First Solar's demonstrated pipeline replenishment speed.

    4) How fast First Solar needs to acquire new projects to have a sustainable pipeline.

    The results in the last 18 months are not promising for a sustainable pipeline and are terrible for a growth business.

    1) How fast First Solar generated its 3.6GW system pipeline

    First Solar describes its system pipeline in four categories. The definitions below have been consistent from Q2 2010 when they began reporting the system segment and pipeline by project. Gate Numbers are added for ease of understanding; the higher the Gate Number, the more mature the project.

    • Gate 1: "Projects in Development with Executed PPA (Power Purchase Agreement) or Awarded Projects - Not Sold/Contracted"

    • Gate 2: "Projects Permitted with Executed PPA or Awarded Projects - Not Sold/Contracted"

    • Gate 3: "Projects Sold/Under Contract"

    • Gate 4: "Substantially Complete (i.e. Revenue Recognized); they have dropped off the pipeline list and revenue is completely recognized"

    Using these gate definitions, FSLR's 3.6GW AC pipeline has been generated and completed since 2009 as follows:

     

    Enter Gate 1

    (MW AC)

    Exit
Gate 4
    (MW AC)

    2009

    41

    41

    2010

    2510

    143

    2011

    372

    97

    2012

    479

    260

    2013 (actual to-date)

    198

    0

    Remaining to Advance into Gate

     

    3059

    First Solar's forecast based on total project size:

     

    Gate 4 Forecast
(MW AC)

    2013

    604

    2014

    1556

    2015

    309

    2016

    590

    Key takeaways:

    a. Of 3059MW AC remaining to exit Gate 4 787MW AC has already been revenue recognized through March 31, 2013. Only 2272 MW AC remain for revenue value in the future.

    b. 50% of First Solar's pipeline exited Gate 1 in 2011 and will mostly exit Gate 4 in 2013 and 2014.

    c. Less than 700MW AC of pipeline has been added in the last 18 months.

    2) How fast First Solar is consuming its remaining 2.3GW system pipeline

    Consumption rates can vary depending on third party sales or revenue recognition. FSLR's pipeline also has some very large projects that can cause 'lumpiness' in the consumption rate. One method to bracket the variability is to look at low, medium and high consumption rates.

    Low Consumption Rate

    While it is difficult to discern from FSLR's financial disclosure how fast the pipeline is being built, a reasonable approximation is to average the AC pipeline already consumed plus forecast to be consumed over 3 years (2012-2014) = 818MW AC per year; roughly 1065MWdc for module shipment comparison.

    2013 Disclosed Consumption Rate

    First Solar disclosed that it intended to allocate 1400MWdc of module production in 2013 to systems, consuming roughly 1400MWdc/1.3 dc/AC = 1077MW AC per year.

    High Consumption Rate

    If First Solar chose to or had to be more aggressive at consuming its pipeline and dedicated 100% of its module production to the system pipeline, it would consume roughly 1600MWdc/1.3 dc/AC = 1230MW AC per year in 2013.

    In any case, all of these consumption rates are FAR higher than the replenishment rates in 2012 or 2013 annualized to-date.

    3) First Solar's demonstrated pipeline replenishment speed

    Pipeline Consumption Rate

    Consumption Rate (MW AC)

    Average Pipeline Added 2011-2013 annualized to-date (MW AC)

    Deficit per year
(MW AC)

    Low

    818

    410

    408

    2013 Disclosed

    1077

    410

    667

    High

    1230

    410

    820

    Is the system pipeline sustainable? No, not at the speed FSLR is currently adding projects, not even at the lowest consumption rate, and certainly not at the 2013 disclosed consumption rate.

    4) How fast First Solar needs to acquire new projects to have a sustainable pipeline

    In order to keep a sustained level of backlog, FSLR needs to add approximately 200-300 MW per quarter. From 2011 to 2013 FSLR has a demonstrated performance of ~100MW per quarter; well short of a sustainable refresh rate.

    For example, the Macho Springs project at 50MW AC was added to the pipeline in Q12013. While Macho Springs is a good addition, FSLR needs to add 3 to 5 more Macho Springs size projects each quarter to have a sustainable project pipeline.

    Conclusion

    First Solar has been and continues burning out its system pipeline in 2012, '13 and '14, that is an unsustainable business model with no growth.

    The replenishment shortfall size (100-200MW AC per quarter) and longevity (10 quarters and counting) is material. For reference, 100MW of pipeline translates to $200M to $250M in Revenue and $40 to $75M of Operating Margin. Closing the pipeline shortfall is required just to maintain its current backlog with no growth.

    If First Solar doesn't double or triple its replenishment rate, the entire system backlog will be effectively zero in 2015. This means FSLR will have to annually 'book and bill' roughly $3B/year of revenue from 2015 forward, and be a very volatile business.

    Further, First Solar really needs to increase its replenishment rate by 4 to 5 times to be a growth business with a sustainable and growing backlog.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: FSLR
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