First Solar, Inc. (NASDAQ:FSLR) announced 2019 guidance after the market closed on Tuesday, and it gave us a peek into how the company sees its new Series 6 solar panels performing in the market. The last two years have been all about manufacturing upgrades to Series 6, but 2019 will see the ramp-up of most of the company's production to its best-performing product.
Some of the projections were expected, like production of 5,400 megawatts (NW) to 5,600 MW in 2019, or capital expenditures of $650 million to $750 million to complete Series 6 upgrades. But operationally, we're getting a peek at how the product is performing, and there are good and bad signs long term.
One of the first things I noticed in the release was management's expectation for 20% to 21% gross margin, down slightly from the 20.5% to 21.5% gross margin guidance given in July. I've used an older 2018 guidance, which has since been reduced by 200 basis points, because it should be a better comparison. 2018 guidance was reduced in part because the high-margin Ishikawa project sale in Japan was moved into 2019. If it weren't for this project boosting 2019 margins and reducing 2018 margins, gross margin would likely be down from 2018 to 2019.
This is notable because First Solar's Series 6 solar panel should come with higher margins than the older Series 4. And it's increasing Series 6 production from less than one-quarter of modules in 2018 to about two-thirds in 2019, but that isn't manifesting with higher margins next year.
I would also expect 2019 to include a lot of high-margin solar panel sales that were booked in late 2017, when solar tariffs were imminent. First Solar was one of the only suppliers with tariff-free capacity, and it booked billions of dollars in sales as developers looked to lock in product rather than face tariff uncertainty.
Gross margin is not trending upward the way I would expect in 2019, and it will be something to keep a close eye on long term.
Upgrades are going as planned
On the volume side, First Solar is doing very well. Production is expected to increase from between 2,600 MW and 2,700 MW in 2018 to 5,400 MW to 5,600 MW in 2019. The 1,200 MW Ohio factory is expected to come online late in the year, and both Malaysia factories, which are still producing Series 4 panels, will likely get upgrades beginning in 2020.
Cash is king
The other notable guidance number was First Solar's expectation of having $1.6 billion to $1.8 billion in net cash on the balance sheet at the end of the year, down from $2.0 billion to $2.2 billion at the end of 2018. But that's all while spending $650 million to $750 million on capital expenditures.
First Solar is going to be generating positive cash flow, excluding capex, to the tune of around $300 million. That's great news in a world where solar panel prices are depressed and companies around the world are having trouble breaking even.
First Solar may not be generating the margins I would have expected in 2019, but it's still the cash king of the industry, and that's worth a lot in solar energy today.