FSLR: Mixed results, cost/W takes another dive

by James Montgomery, news editor

July 30, 2010 - Quick hits from thin-film CdTe giant First Solar's 2Q10 results, conference call, and analyst reactions:

- Revenues: $587.9M, up >3% Q/Q and 15% Y/Y. Increased production volumes and systems revenue were partially offset by pricing and the soft euro. Sales vs. 1Q10 were up primarily on higher turnkey system sales.

- Margins: (gross) 48.3%, 52.2% for modules alone; 1Q10 was 49.7%. (operating) 30.7%; 1Q10 was 33.6%.

- Net income: $159.0M, down -7.7% Q/Q and -12% Y/Y. FSLR mainly attributed this decline to lower module prices, and higher operating expenses, partly due to a module replacement program (pegged in the conference call as costing ~$23.4M). And partially offset by higher module output and lower module cost/W.

- Module manufacturing cost/W: $0.76, down 6% ($0.05) from 1Q, thanks to improvements in throughput, material cost reductions, and foreign exchange rates. Cost/W is down 13% from a year ago. Follow the trendline:

- Throughput per line 59MW, up 6% Q/Q -- 344MWp (up 6.8% Q/Q) across now 24 lines -- which adds about 100MW to the company's planned operating capacity by 2012 (to 2.2GW). The company intends to push cost/W down to a somewhat vague, yet astonishing $0.52-$0.63W by 2014. And the company also aims to reduce balance-of-system costs to sub-$1/W by 2014.

- Outlook: FY10: $2.5B-$2.6B, which reflects some reallocation of module capacity from its systems business to meet European demand. Gross margin: 44%-45% (49%-51% for modules), operating margins 27%-29% . EPS: $7.00-$7.40, which includes a reduction of up to $0.23 for foreign currency exchanges (read: soft Euro). 3Q gross margins sinking to ~40%. The company projects 500-700MW of systems projects in 2011, up from 175MW in 2010.

- Project update: Its 80MW "Sarnia" site in Ontario, Canada, owned by Enbridge, is at about 50% power production (40W); Phase 2 to achieve 100% is expected to be completed by September. Other projects continue in Nevada ("Copper Mountain," a 48MW expansion of a 10MW site in NV) and New Mexico ("Cimarron," a 30MW site sold to Southern Co.), and others from its NextLight acquisition in AZ and NV.

Reactions to FSLR's 2Q results were mixed. Its stock is off >8% on the lower profit announcement; the full-year profitability out wasn't what investors had hoped (closer to $7.50).

Nevertheless, the 6% cost/W reduction is quite a big stepdown from the previous quarters (1%-3%). "The company deserves credit for the sharp reduction in cost/watt," notes Satya Kumar of Credit Suisse, in a research note.

Flexing its cost/W muscles means FSLR "has far more latitude than c-Si competitors" to adjust pricing and manufacturing utilization, notes Steve O'Rourke from Deutsche Bank, especially given what he believes is a coming c-Si module oversupply in 2011. "With this cost/ASP advantage and the most solid project pipeline in the industry, we would anticipate First Solar may well accelerate capacity expansion plans out through 2011."

FLSR current and announced capacity, based on 4Q run-rates (2010-2012 based on 2Q10 run-rate). (Source: First Solar)

O'Rourke adds that the continued move into module capacity from systems business not only takes advantage of current demand, it also pushes more systems business into 2011, which could be shrewd if module supplies overbuild.

Ultimately in the solar industry "the winners will be the low-cost producers, particularly those with strong captive project pipelines," he writes. "First Solar may be the only company that truly fits this profile."

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