First Solar (NASDAQ:FSLR) reports earnings after the market closes on Thursday, July 26 and it will be a key quarter for the company. We're moving past the days when First Solar was selling solar panels as fast as it could in a tariff-fueled demand surge from developers, which drove the stock higher over the past year.

It's back to business as usual for First Solar in the second quarter of 2018 and investors will want to watch operating metrics like gross margins and operating expenses. But it'll be key to see if the flood of orders that left it with 10,600 megawatts (MW) of backlog in late April has come to a halt.

Large solar installation in the desert.

Image source: First Solar.

What will First Solar's operations look like

First Solar has said its gross margins will be 21.1% to 22.5% in 2018, and after reporting a 30.5% gross margin in the first quarter, it's likely we'll see gross margin slip in the first quarter. Investors should watch closely what management has to say about costs and margins for the new Series 6 solar panels that are early in production. They have targeted a gross margin over 20% on the Series 6 product, so this will be the first indication we get as to actual performance.

The other important number is operating expenses, which management said would be $400 million to $410 million in 2018. In the first quarter, operating expenses were $98.5 million, so the company is on the right path. But with manufacturing upgrades taking place and research and development costs going towards new development, it's important to keep costs under control.

Why orders are so important

Over the last year, First Solar has decided to nearly double its manufacturing capacity to 7,600 MW. The move could drive growth if the company can continue to get good prices for future sales, but that's no guarantee. 

The first thing I want to see is how much future production was booked in the last three months. First Solar needs to book about 2,000 MW per quarter to keep up with production and has about 12,000 MW to book before early 2022 when its solar import tariffs expire, eliminating a key competitive advantage. 

From a price standpoint, the last three months probably weren't good for First Solar. China cut its subsidies, which will sap demand in the world's largest solar market. Roth Capital estimates the solar market will be oversupplied by 34,000 MW in 2018, and as a result panel prices will decline 32% to 36%. That'll directly impact First Solar's sale prices as commodity solar panels have become more competitive.

Expect management to give investors an indication of how China's moves have impacted sales volumes and pricing. This should be a big topic on the conference call and will likely be the most important factor for investors.

A lot of questions for First Solar 

First Solar was the biggest beneficiary of President Donald Trump's solar tariffs earlier this year, booking an abnormally high volume of sales over the past nine months as developers scrambled to find tariff-free supply. But the winds of the industry have changed and First Solar is now facing more pricing pressure than ever from commodity solar manufacturers that are in an oversupplied market. That could hurt First Solar's long-term results and keep the stock from rebounding in 2018. 

Travis Hoium owns shares of First Solar. The Motley Fool recommends First Solar. The Motley Fool has a disclosure policy.