First Solar (Nasdaq: FSLR) just can't seem to do anything to make investors happy these days. Every quarterly report, something gets picked apart and points to its loss of dominance in the solar sector. So what really happened in First Solar's third quarter?

The good
In the third quarter, revenues popped 66% to $798 million, and adjusted earnings per share of $2.21 beat estimates of $1.95 handily. Free cash flow of $213 million in the quarter left the company with $997 million of cash on hand, larger than the market cap of Solarfun (Nasdaq: SOLF) and Evergreen Solar (Nasdaq: ESLR) combined.

Solid North American demand in 2011 leaves the company sold out for the entire year, with less reliance on Germany than in years past. The company also went over announced plans to nearly double capacity to 2.74 GW by the end of 2012. Should be a great quarter, right?

The bad
Module cost per watt increased to $0.77/watt from $0.76/watt last quarter. This is a huge deal if Yingli Green Energy (NYSE: YGE) and Trina Solar (NYSE: TSL) continue to lower costs on their more efficient panels this quarter.

Higher costs were explained by equipment downtime caused by upgrades that will lower costs and improve efficiency. The problem is, management continually dodged questions on how much efficiency would be improved past its current 11.3%. Are we talking 11.5%? 12%? Who knows?

The ugly
On to the real reason investors have knocked shares down 7% in early trading is concerns about margins. Gross margins were down to 40.3% from 48.3% last quarter, a huge drop.

Now, before we put First Solar on life support, let me say that a large portion of the margin drop was because system sales overall accounted for a higher percentage of sales. This can put a huge damper on the margin number, since system sales come in closer to a (much lower) 20% figure, but it's alarming nonetheless.

The Foolish bottom line
First Solar is still king of the solar mountain, but we need to keep a close eye on margins and cost per watt next quarter to make sure these were one-time events and not long-term trends. We have seen this panic before, over a year ago, when the company announced a rebate program in Germany, and margins came back after that.

Keep in mind, the company did increase sales and was incredibly profitable this quarter. It also has plenty of cash to make acquisitions if competitors are overtaking its thin film product, so I'm not panicking yet. But I'm also not rushing out to buy shares today.

Interested in reading more about First Solar? Click here to add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

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Fool contributor Travis Hoium owns shares of First Solar. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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