First Solar, Inc. (NASDAQ:FSLR) had a better than expected 2017, driven by higher than expected demand for solar overall and the threat of solar tariffs, which First Solar had a unique exemption from.
Fourth quarter earnings ended the year on a bit of a financial weak note after some project sales were delayed, and guidance was a little underwhelming for investors. Below is a look at a few comments from CEO Mark Widmar that put the year into perspective. (Transcript via Seeking Alpha)
2017 was an outstanding year
2017 was a record year with net bookings of 7.7 gigawatts DC, with Series 6 representing 2.6 gigawatts DC of the bookings. -- CEO Mark Widmar
The 7.7 GW booking figure was well reported, but there were also 1.3 GW of bookings in the first two months of 2018. The Series 6 figure is what I find even more telling. Series 6 production will be about 1 GW in 2018 and close to 4 GW in 2019. Those 2.6 GW of bookings mean First Solar is sold out through the middle of 2019, assuming bookings are front-loaded.
This is important, because First Solar's competitive advantage from tariff-free solar panels in the U.S. will last for a limited time. By early 2020, tariffs will only be 20% on panel imports, and new capacity from JinkoSolar (NYSE:JKS) and anyone else adding capacity will likely be online. It'll be important to see Series 6 -- not Series 4 -- bookings pickup in 2018, with the significant new supply coming online over the next few years.
The U.S.-dominated bookings
In addition to strong bookings in the U.S., we saw strength in international markets led by Australia, Japan, India and Europe, where we booked over 1.7 gigawatts. -- Widmar
It's hard to overstate how important the threat, and now the reality, of solar tariffs has been for First Solar over the past year. A vast majority of the 7.7 GW of bookings in 2017 were in the U.S. because competitors couldn't guarantee tariff-free pricing.
Where this becomes important for investors is in a post-tariff world. If First Solar's sales and margins in 2018 and 2019 are artificially inflated because of tariffs, there could be a sharp drop in both as tariffs decline and are eventually eliminated in 2022. The fact that only 22% of 2017 bookings were in key markets like Australia, Japan, India, and Europe could be a sign that demand outside of the U.S. market isn't as strong as it may appear.
Building an ancillary business
O&M bookings were also strong last year as we added nearly 2.9 gigawatts of projects, bringing our total O&M fleet under contract to 8.5 gigawatts. Notably, nearly two-thirds of the megawatts booked were in projects where we were not the developer. Successfully winning O&M on projects not developed by First Solar opens our addressable market, which helps create scale for O&M business and thereby enhances our competitive position. -- Widmar
Operating and maintenance may not seem like a big deal for solar companies, but it's really the only recurring revenue they have once solar components are sold. The steady stream of cash at a gross margin in-line with what modules can be sold for will be a positive and First Solar will be able to tack those recurring services onto component sales in the future.
The balance sheet is still First Solar's advantage
With over $1.3 billion in operating cash flow generated and an ending net cash balance of $2.6 billion, we further enhanced our industry best balance sheet. -- Widmar
There is no company in solar that can match First Solar's balance sheet, which gives the company a lot of flexibility long-term. It could acquire another manufacturer, invest in expanding its own capacity, or acquire positions in adjacent markets like inverters and racking if it wanted to. Most major solar companies are just trying to survive the year, First Solar has the financial flexibility to invest strategically, which is a huge advantage in solar.
Series 6 production is progressing rapidly
Our Ohio Series 6 line is now fully integrated and manufacturing modules for extensive testing and evaluation is ongoing. The line performance thus far is consistent with our expectations for this stage of the start-up and our next major milestone is the start of high volume manufacturing, which is scheduled to begin in the second quarter. In Malaysia, where our first equipment began arriving last October, we now have over 90% of the front-end tools installed and we are targeting the first complete module at this location in Q2. In Vietnam, the first factory is ready for tool installation and we've reached a key milestone in January when the coder arrived on site. -- Widmar
This is a high-level outline of how Series 6 production upgrades are going. Ohio is online and will begin production at scale soon, while Malaysia is ramping quickly, with Vietnam's two large factories expected to come online between Q4 2018 and Q2 2019.
There will still be two Series 4 production lines running in Malaysia until at least mid-2019, but by then most of the company's production will be Series 6.
Prepping for a transitional 2018
All in all, 2017 was a year of tremendous progress for First Solar and it got a huge boost from the threat of solar tariffs. In 2018, we'll see how the production of the new module does and get a better picture of the company's finances now that it's building fewer projects and focusing primarily on solar component sales. Margins should improve short-term; the question is whether or not sales and margins will grow long-term with the new strategy, especially once the tariff windfall is gone.