A global slowdown in solar demand has hit First Solar, Inc. (FSLR 1.59%) just as the company is expanding its own supply of solar panels. The result wasn't a bad quarter in the third quarter of 2018, but bookings of future sales have slowed dramatically, and management has cut guidance, which raises lots of questions about the future.
There are both positive and negative signs for First Solar right now, so let's dig into the results and what investors should be looking at in last quarter's numbers.
First Solar, Inc.: The raw numbers
|Metric||Q3 2018||Q3 2017||Change (YOY)|
|Sales||$676.2 million||$1,087.0 million||(38%)|
|Net income||$57.8 million||$205.7 million||(71.9%)|
What happened with First Solar, Inc. this quarter?
Sales and earnings numbers can swing wildly for First Solar, depending on the quarter, so some context is needed for the numbers above.
- The drop in sales and earnings that you see above is due to fewer project sales in the quarter. This is part of a long-term strategy of reducing reliance on solar projects, so this shouldn't be a shock to investors.
- Average solar panel conversion efficiency was flat versus a year ago at 17%. As manufacturing of Series 6 solar panels ramps up, look for this number to increase slightly.
- Throughput is beginning to pick up, with Ohio output up to 90% of capacity from 60% three months ago. Vietnam has also increased to 35% of capacity from full shutdown three months ago.
- Bookings between July 26, 2018, and October 25, 2018, were 1,100 MW, an increased pace from 800 MW booked in the previous three months. The current pace of bookings is keeping up with supply, but keep in mind that First Solar is increasing supply to 7,400 MW annually at the end of 2018. Since solar panels are often booked a year or more in advance, investors should expect about 1,850 MW or more in bookings per quarter to keep pace with supply.
- On the plus side, First Solar ended the quarter with $2.3 billion of net cash on hand and expects to end the year with $2.0 billion to $2.3 billion of net cash, a huge advantage over competitors.
The biggest surprise may be that management reduced full-year 2018 guidance pretty substantially. Sales guidance was reduced by $200 million to a range of $2.3 billion to $2.4 billion, and gross margin will be 200 basis points lower than expected, at 18.5% to 19.5%. Lower sales were primarily due to fewer solar module sales to third parties, and the lower margin is due to higher-than-expected manufacturing ramp costs.
Demand and sale prices are the two biggest concerns investors should have today, and it looks like both are trending negative for First Solar, as they are for the entire industry. First Solar is in a stronger position than most solar manufacturers, but it can't escape the macro trends in the industry.
What management had to say
Management tried to focus most of the conference call on progress in manufacturing rather than the demand questions that will affect the business long term. CEO Mark Widmar said, "with the start of Series 6 production at our Vietnam factory we now have three locations manufacturing our most advanced product."
Widmar did say that the bookings that took place in the third quarter were at about a 10% lower price than the previous quarter. That's money directly off the top line, so expect margins to take a hit as pricing pressure makes its way to First Solar's future sales.
First Solar already reduced guidance for the full year, so investors are starting to see the impact of the global solar slowdown. What will be most interesting in the next few months is guidance for 2019. First Solar has a large percentage of production booked, but the remaining sales may be low margin, and that could make it tough to turn a big profit for the year.