MEMC Beats, But Shares Slump

| About: SunEdison, Inc. (SUNEQ)
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MEMC Electronic Materials Inc. (WFR) has reported third-quarter 2011 adjusted net income per share of 34 cents, strongly beating the Zacks Consensus Estimate of 10 cents. Despite the outperformance, the share price plunged 11.76% in after-hours trading. The market possibly was not enthused by the decline in solar materials sales and lowered earnings guidance for fiscal 2011.

The adjusted figure excludes the impact of restructuring charges, goodwill impairment charges and other non-operating items, but includes direct sales and lease-back from the Solar Energy segment.


On a GAAP basis, MEMC reported third-quarter revenues of $516.2 million, up only 2.6% from $503.1 million in the year-earlier quarter. The growth was much less than the double-digit growth rates witnessed in the past few quarters. The sequential revenue decrease was due to the $149.4 million Suntech contract resolution in the preceding quarter.

Including $191.7 million related to direct sales from the Solar Energy segment and $151.1 million from lease-back transactions, non-GAAP revenue came in at $859.0 million, which shot up 56.0% from the year-ago quarter.

Segment wise, revenue from Semiconductor Materials grew 2.8% year over year to $268.4 million and was 52.0% of the total revenue. MEMC witnessed decent wafer volume growth, as well as higher average selling prices (ASPs).

Solar Materials revenue fell 9.6% year over year to $199.4 million and contributed 38.6% to total revenue. The disappointment was because of strong solar wafer volume growth that was more than offset by lower ASP.

SunEdison, which is currently the company’s Solar Energy segment, accounted for 9.4% of total revenue. The segment generated revenue of $48.4 million, up 125.1% year over year.

Projects interconnected during the third quarter represented 85 megawatts (MW), including 49 MW of direct sales projects, 35 MW of sale-leaseback projects, and 1 MW of debt financed projects. During the quarter, SunEdison’s project pipeline grew to 3.0 gigawatt, reflecting the fourth consecutive quarter of growth.

Operating Results

On a GAAP basis, gross profit dropped 31.0% year over year to $58.6 million. Gross margin decreased 550 basis points year over year to 11.4%. On a non-GAAP basis (including direct sales and lease-back transactions from the Solar Energy segment), the quarter’s gross margin was 14.5%, compared to 16.6% in the year-earlier quarter.

On a GAAP basis, operating loss was $103.8 million, compared to operating income of $9.9 million in the earlier-year quarter. Operating margin on a GAAP basis was a negative 20.1%, compared to 2.0% in the year-ago quarter.

The non-GAAP operating margin was negative 7.3%. Marketing and administration expenses increased 41.1% year over year to $83.8 million and research and development expenses rose 59.3% year over year to $22.3 million.

Reported net loss was $94.4 million or 41 cents per share, compared to net income of $17.6 million or 8 cents in the comparable prior-year quarter. However, adjusted net income was 34 cents.

Balance Sheet & Cash Flow

MEMC ended the quarter with cash, cash equivalents and restricted cash of $900.4 million, up from $690.0 million in the previous quarter. Long-term debt and capital leases were $647.3 million, compared to $652.2 million in the previous quarter.

MEMC generated $187.7 million in operations, compared to $198.7 million in the preceding quarter. Capital expenditure was $82.3 million, down from $102.7 million in the previous quarter.


For fiscal 2011, MEMC continues to expect revenue in the range of $3.3–$3.6 billion (reiterated) on a non-GAAP basis and $2.7–$3.0 billion (reiterated) on a GAAP basis.

The projected non-GAAP and GAAP earnings per share are in the bands of 16 cents to 36 cents (previously 80 cents to $1.30) and (55) cents to (35) cents (previously 10 cents to 30 cents), respectively. According to the company, the guidance reflects the downturn in the solar supply chain and the softening of semiconductor demand.

Keeping in mind the ongoing pricing weakness in solar wafer markets and softening of underlying semiconductor demand, management asserted that it will take up cost reduction measures across all segments. Moreover, it will be proactive in making more efficient and economic use of the existing assets.


MEMC’s third quarter surpassed the Zacks Consensus Estimate. Solar material and Semiconductor material growth was badly affected by the demand and supply mismatch. The guidance too was disappointing.

We see MEMC’s solar energy initiatives as a key driver for the long term. The company recently tied up with key players such as Flextronics International Ltd. (NASDAQ:FLEX) and Jusung Engineering Co. Ltd. to make its solar ventures efficient and profitable.

But the recent cessation of a solar wafer supply agreement with Suntech Power Holding Co. Ltd. (NYSE:STP), only because of a persistent fall in polysilicon prices, was alarming. Though we are unaware of any exact financial impact, we believe that MEMC’s revenues and margins will be affected.

Moreover, there are risks of cuts in feed-in tariffs, which could affect solar deployments.

Currently, MEMC has a Zacks #3 Rank, implying a short-term Hold recommendation.

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