First Solar's Ups and Downs Continue

Q4 earnings weren't what investors expected, but bookings are picking up again.

Travis Hoium
Travis Hoium
Feb 25, 2019 at 7:54AM
Energy, Materials, and Utilities

First Solar (NASDAQ:FSLR) continues to see pressure from an oversupplied solar market and relatively weak demand, particularly in the U.S. and Asia. Fourth-quarter 2018 earnings results released on Thursday showed margin pressure and a disappointing bottom-line result

Early in 2019, the company's focus will be on the continued production ramp-up of Series 6 solar modules, and cost reductions expected from the new product. But global solar demand is out of First Solar's hands, and so are the commodity-priced products it competes against, so it'll likely be another volatile year for the solar stock. 

Large solar installation in the desert.

Image source: First Solar.

First Solar: The raw numbers

Metric Q4 2018 Q4 2017 Year-Over-Year Change
Sales $691.2 million $676.2 million  (2.2%) 
Net income $52.1 million  $57.8 million  (9.8%) 
Diluted EPS $0.49  $0.54  (9.3%) 

Data source: First Solar Q4 2018 earnings release. 

What happened this quarter? 

After a rough third quarter, First Solar underperformed its own expectations for Q4. But the headline numbers don't quite tell the story. 

  • Earnings per share fell below the $0.53 to $0.73 forecast range. Management said the miss was due to unexpected project costs and the need to air-deliver some raw materials to factories. First Solar has a long history of setting expectations at a level it can beat each quarter, so the earnings miss is a bit concerning, especially given the already weak outlook for 2019. 
  • First Solar did book 1.7 gigawatts (GW) since its last earnings report on Oct. 28. That's above what it needs to book each quarter, based on the current 5.4 GW to 5.6 GW production guidance range for 2019. 
  • In the last three months, Series 6 production increased 65%, yield was up 7%, and watts per module rose 10 watts. Hitting these milestones was key to making First Solar more competitive in 2019 and beyond. 
  • The company ended 2018 with $2.1 billion of cash on hand. 
  • Its pipeline of mid- to late-stage projects is 7.3 GW, about three-quarters of which are being installed domestically. First Solar continues to be reliant on the U.S. for most of its demand, something investors should keep an eye on heading into 2019, when tariffs that have provided a tailwind for the company over the last two years will start to decline. 

Check out the latest First Solar earnings call transcript.

What management had to say

One area investors will want to keep an eye on is corporate demand for First Solar's products. The company doesn't deliver the type of rooftop solar panels that are normally associated with commercial solar projects, but larger installations off-site are becoming more common. CEO Mark Widmar has this to say: 

We expect corporate demand for solar projects to continue to grow in coming years and we believe that our strong reputation and ability to offer turnkey solutions will position us to compete effectively for future opportunities. 

Commercial solar is one area where First Solar's stable balance sheet and long history of delivering projects could help it differentiate itself from competitors that manufacture more commodity products. Any areas where the company can add value and charge a premium will be welcome news in 2019. 

Looking forward

Management slightly changed its guidance for 2019 from the forecast it gave on Dec. 11, but still expects sales to be between $3.25 billion and $3.45 billion, with earnings per share in the $2.25 to $2.75 range. The changes were a half percentage point reduction in the gross margin guidance range to 19.5% to 20.5%, and a $15 million reduction in operating expenses to $375 million to $395 million. Management said those changes reflect a shift from production start-up expenses to production ramp-up expenses. 

The bottom line is that a lot of operational trends that will impact First Solar's business remain out of its hands. Solar panel prices dropped by about one-third in 2018, and if there's a similar drop off this year, the company will experience more margin pressure. First Solar has navigated such waters before, but conditions aren't getting any easier in 2019.