First Solar (NASDAQ:FSLR) reported third quarter earnings after the market closed yesterday and by any measure the numbers were a blowout. Revenue jumped 51% to $1.27 billion, net income more than doubled to $195.0 million, and full-year earnings guidance was increased to $4.25 to $4.50 per share.
The big drivers of strong earnings was higher than expected revenue recognition from the sale of 50 MW of projects in Canada and the 550 MW Desert Sunlight Solar Farm in California along with an incredible $0.08 per watt reduction in cost since last quarter. Cost per was down to $0.59 per watt, helped by a 0.3% increase inefficiency to 13.3%.
First Solar's roadmap has the company increasing efficiency another step function to around 14.1% early next year and the roadmap projects approaching 17% efficiency by the end of 2016. On the surface, all is well at First Solar, but some of these figures need some context.
The good and bad at First Solar
When looking at First Solar's top line numbers we need to keep in mind that revenue recognition can be lumpy, so long-term trends are more important than quarter-to-quarter. Here's where I'm a bit concerned about the company's sales guidance reduction of $200 million for 2013 to $3.4 billion-$3.6 billion, which is due to some project revenue recognition slipping into next year. Win some this quarter, give some back next quarter.
It's also important that while backlog is up 100 MW to 2.7 GW this year, expected revenue is down $200 million to $7.8 billion. First Solar's new contracts are for a lower price per watt than what it's currently building, so if First Solar can't increase production its sales will slowly decline long-term. This is where it's concerning that plants are only running at 80% capacity. First Solar can't contract enough projects to fill its own capabilities, leaving potential revenue on the table. By contrast, SunPower (NASDAQ:SPWR) announced a 350 MW capacity expansion project earlier this week and is sold out of panels for over a year.
While I think the revenue from last quarter and the company's future projects needed some context, what's extremely impressive is the 28.8% gross margin generated last quarter. This compares to 19.1% at SunPower, proving First Solar's superior ability to maximize profits from its utility scale business. If cost reductions can keep up with price reductions the company will maintain high gross margins. That's what should have investors most excited today.
Also encouraging is raising earnings per share guidance for the full year to $4.25-$2.50 from $3.75-$4.25. Like revenue, a look at the full year takes some lumpiness out of earnings and increasing guidance is encouraging.
Foolish bottom line
There are definitely strong numbers for First Solar and an increasing backlog shows the company's staying power. Long term, these improvements may keep the company sternly profitable until it can improve efficiency in CdTe panels or transition to silicon panels, as its TetraSun acquisition would suggest.
The bigger question may be if First Solar can increase utilization going forward. If it can't, revenue will decline and earnings will as well. For me, that's the long-term concern about First Solar.