Earnings releases can be a great way to get a snapshot of how a business is doing in a quarter, but they don't usually give a lot of insight into operations. The conference call is where investors can learn a lot about how a company is performing and what it's going to do in the future.
In a fast-changing industry like solar energy, the conference call is particularly important. On its call, First Solar's (NASDAQ:FSLR) management gave some insight into what its future looks like. Here were my biggest takeaways from the third-quarter conference call (quotes via Seeking Alpha transcript).
Series 6 is coming along
The biggest investment First Solar is making in 2017 is in an upgrade from Series 4 solar panels to Series 6. The $1 billion project will take nearly two years to complete, and the company is about halfway through the process. CEO Mark Widmar gave this update:
At our Ohio factory, the front end of our Series 6 line is now almost completely installed and most of the equipment is operational and in various phases of acceptance testing. We are also beginning the significant milestone as we run glass through the core semiconductor equipment including the coater. At our Malaysia factory yesterday, our first vapor transport deposition coater arrived on site.
Management expects to begin production in the second quarter of 2018 in Ohio and in the third or fourth quarter in Malaysia. The transition should make First Solar's panels more competitive with commodity solar panels today.
Demand has been high
First Solar is only going to produce about 2 GW of solar panels next year, but that hasn't stopped it from selling panels like crazy. Customers are desperate to lock up panel supply that won't be subject to import tariffs, and as the one company with significant supply to meet that demand First Solar is taking advantage. Here's how Widmar outlined the bookings:
We have booked in excess of 5 gigawatts since our last earnings call and netted against this volume is approximately 500 megawatts previously booked with customers under framework agreement which has [sic] now been terminated. The net result of this quarterly bookings are 4.5 gigawatts DC which, after deducting year-to-date shipments through September of 2.1 gigawatts, brings our total remaining expected module shipments to approximately 7.4 gigawatts. As of note, the delivery timing of these bookings stretches over the next several years and includes volumes planned for shipment into 2020.
If tariffs are indeed placed on solar imports, we could even see First Solar expand production. But don't expect that decision before management knows the tariff landscape.
Expanding production could begin next year
Here's Widmar's quote outlining how production could be increased as early as 2018:
...we have been evaluating options that could extend Series 4 production beyond our current operating plan. These options could add up to 1 gigawatt of additional Series 4 supply in 2018. As we said previously, any decision to extend Series 4 production would not impact our previously announced Series 6 rollout plans. We intend to make a decision on this later this year
First Solar is using an unused plant in Vietnam for the Series 6 upgrade, but needs to decide when to shut down Series 4 facilities in Malaysia. If it can sell panels profitably to the U.S., it may be worthwhile keeping the plant running in 2018.
Project sales have been a windfall
Profitability in solar can often depend on when projects are sold, and that's certainly the case for First Solar this year. Widmar said:
Gross margin improved to 27% in the third quarter from 18% in Q2. This increase results primarily from the higher gross margin on the California Flats and Cuyama projects in Q3. The gross margin of our components segment improved slightly to 18% in Q3 versus 17% in the prior quarter.
The 18% margin number is worth noting for investors because this is more indicative of the company's long-term business. First Solar is transitioning from building a large number of projects to selling about three-fourths of its panels in component sales. This lowers business risk long-term, but can also reduce the windfall profits First Solar has experienced the last two quarters because of project sales.
Q4 doesn't look very good
The ups and downs of the project business will naturally lead to some bad quarters. First Solar thinks Q4 will be one of those quarters. CFO Alex Bradley put it this way:
Relative to our non-GAAP EPS of $2.86 for the nine months ending September 30, the $2.50 midpoint of our full-year guidance implies a loss in the fourth quarter of around $0.35. There are several factors impacting the fourth quarter which account for this loss. Firstly, plant start-up levels in Q4 will be much higher than in Q3; and while this expense is necessary to ramp up Series 6, it does present a transitional impact. Secondly, as mentioned previously, we expect minimal systems business in Q4 due to project timing and as we optimize projects for Series 6.
A loss in the fourth quarter isn't something to worry about because it's part of the business cycle for First Solar, but it's worth noting. Investors have been spoiled with the phenomenal performance the last two quarters, and the trend may not continue next quarter. That's part of the ups and downs of owning solar stocks.