First Solar's (NASDAQ:FSLR) transformation over the last few years has been nothing short of astounding when you consider that it is replacing nearly all of its manufacturing lines. Series 4 solar panels, which used to drive the business, have been almost entirely replaced by Series 6 panel production, and the company is reaching record levels of output. 

The progress hasn't made its way to the bottom line this year, but given a little more time, it looks like First Solar will be well positioned to compete in the solar business. 

Workers installing solar panels at a new solar farm.

Image source: First Solar.

First Solar: The raw numbers

Metric Q2 2019 Q2 2018 Change
Sales $585.0 million $309.3 million  89.1% 
Net income ($18.5 million)  ($48.5 million)  N/A 
Diluted EPS ($0.18)  ($0.46)  N/A

Data source: First Solar Q2 2019 earnings release. 

What happened with First Solar this quarter? 

The headline numbers are mixed, but it's really the progress on upgrading to Series 6 that investors should be concerned with. And on that front, the business is doing quite well. 

  • Manufacturing is progressing well, with megawatts produced up 16% sequentially, utilization up 12 points, and watts per module up 3 watts. 
  • Production increased from 557.2 MW a year ago to 1,376.0 MW, due to Series 6 production coming on line. 
  • Bookings in the first half of the year were 2.2 gigawatts, equaling shipments so far this year -- 2.1 GW of bookings were added so far in the third quarter for a total backlog of 12.9 GW. 
  • Management said that 98% of the rest of 2019's production has been booked, 95% of 2020's 5.0 to 5.5 GW of production is booked, and first-half 2021 production is more than 80% booked. The company expects to produce about 6.5 GW of solar panels in 2021, and that's when revenue could peak given the current manufacturing plans. 
  • Cash provided by operations was $13.5 million and cash on the balance sheet was $2.14 billion at the end of the second quarter, offset by $481.3 million of debt. 

What management had to say

The strong results and bookings are particularly impressive given a recent decision to allow bifacial solar panels into the U.S. without tariffs. These panels are based on the same crystalline silicon technology that commodity panels are, so they'll be easy to expand. CEO Mark Widmar explained the decision and First Solar's impact like this

We are particularly pleased with the strength of the bookings in the quarter despite the decision in June of the Office of the U.S. Trade Representative to exempt bifacial panels from Section 201 tariffs. While we were able to contract through this headwind, it's important to note that the disappointing decision, which in our view has the effect of undermining the Administration's efforts to secure a level playing field for U.S. solar manufacturing, introduces a new source of uncertainty going forward.

The uncertainty he's referring to is a new environment in which First Solar isn't partially protected from competition by tariffs. Now, it'll have to compete in a tariff-free environment sooner than expected, which may lower margins in the next three years -- the duration of the current tariffs. 

Looking forward

Solar energy results can be volatile quarter to quarter based on the timing of project sales or big shipments, so full-year results are often the best benchmark to look at. In 2019, management is increasing their guidance slightly, increasing gross margin guidance by 50 basis points to 18.5% to 19.5%, lowering operating expense guidance by $10 million to $360 million-$380 million, and increasing operating income by $30 million to a range of $290 million-$340 million. Revenue is still expected to be $3.5 billion to $3.7 billion with earnings of $2.25 to $2.75 per share. 

With more products getting exemptions from tariffs, First Solar may have more competition than it hoped, but it's holding up well and is still one of the most profitable companies in the industry.