Sometimes the market's reaction to earnings in the solar industry can leave you scratching your head. That's the case today with First Solar (FSLR 10.78%), which is down 5% after beating earnings estimates and raising guidance.

To sort through the noise, let's go over what we learned and what we still don't know about First Solar.

Workers build a utility scale solar project for First Solar. Source: First Solar.

A world-class project builder
What's clear about First Solar is that it's a world-class solar project builder. That's evident by the fact that it produces a lower efficiency panel than competitors, yet can build projects with a 24.9% gross margin last quarter. That's pretty consistent with what we've seen over the past year.  

It also generates more in bottom-line profits than competitors. First-quarter profit was up 14% from a year ago to $101.8 million, or $1.10 per share, higher than any other major player in solar.

Large projects account for most of First Solar's revenue and profits. Source: First Solar.

It's project success that led management to increase gross margin guidance for 2014 to 17%-18% from a previous range of 16%-18%. Earnings range also jumped $0.20 to $2.40-$2.80, and operating cash flow is now expected to be $300-$500 million.  

On the long-term front, First Solar also increased bookings by 400 MW in the first quarter and now has 2.8 GW in expected shipments, up 100 MW from the end of 2013. But here's where the challenge for First Solar lies. Overall bookings were up on a MW basis, but expected revenue from those projects has fallen $400 million since the end of 2013 to $7.1 billion.

The challenge ahead for First Solar
For First Solar to maintain high margins and grow revenue long term, it's going to have to increase efficiency by leaps and bounds, just to keep up with competition that already has higher efficiency and is cutting costs to match First Solar.

Management says it has a technology plan in place that will increase efficiency from 13.4% to 14.9% by the end of this year and 16.5% by the end of 2015. Efficiency only increased to 13.5% in Q1 but they said that by this time in the second quarter, the plants are running in excess of 14%.

Execution on the technology plan will be absolutely essential if First Solar is going to stay in the module manufacturing business. Otherwise, it's a world class project builder, which isn't a bad position to be in either.

Should you be worried today?
It appears investors are selling off First Solar's stock because investors are concerned that second-quarter numbers won't hit expectations, which is ridiculous when you consider that full-year results are going to be higher than expected.  

What we need to understand with First Solar, and any solar company that builds projects, is that results will be lumpy quarter to quarter. What we want to see is consistent improvement in profitability and, in the case of First Solar, panel efficiency. We saw both in the first quarter, and I think the sell-off is another illogical reaction from short-term investors.

The solar market is only going to grow, and First Solar is a world-class project builder that leads the utility scale market. At the end of the day, that will drive long-term value to shareholders, whether results are above or below expectations in any one quarter.