On the surface, the first quarter of 2015 was one of First Solar's (NASDAQ:FSLR) worst quarters in years. Net sales fell 51% from a year ago to $469 million, gross margins plunged from 24.9% last year to 8.3%, which led to a loss of $62 million, or $0.62 per share. That's when analysts were expecting $599.5 million in revenue and a loss of just $0.29 per share.
So, is First Solar dead in the water? Let me explain why I think this is the best quarterly report First Solar has had in years.
Forget the headlines
The most significant number First Solar reported was 16.3%. That's the conversion efficiency of its best line at the end of April. Why is that significant?
How efficiently a solar panel converts the sun's energy into electricity will determine how large a solar installation will be, how much wiring it will take, how much labor costs will be, the list goes on and on. The more energy you pack into a smaller space the lower your overall costs will be, provided you don't have an extremely expensive panel (which I'll get to below).
A 16.3% conversion efficiency actually puts First Solar's efficiency ahead of most Chinese solar manufacturers like Trina Solar, Yingli Green Energy, and Canadian Solar. These companies are making panels that are 14%-16% efficient and that level hasn't changed much in years. As recently as a quarter ago, First Solar's best efficiency was 14.8%, meaning it was at best competitive with commodity panels. Now, the company has made a huge leap forward, surpassing commodity products.
First Solar has said efficiency will be improving, but I for one have taken a skeptical "prove it" approach. Consider their technical capability proven.
The biggest news from the earnings conference call wasn't that efficiency has hit 16.3%, it was that, at that efficiency, it can make panels for $0.40 per watt. So, the best project builder in the world now has above average efficiency and below average costs! That's a huge turnaround from a weak competitive position just a few quarters ago.
I can't overstate how important the efficiency improvement is for First Solar long term. Now, instead of cutting capacity because it couldn't keep plants running at full utilization, management said it has basically sold out for 2015 and it is ramping up capacity to meet future demand. That's huge for First Solar.
Caterpillar to the rescue
The other big announcement coinciding with the company's earnings release was a new partnership with Caterpillar (NYSE:CAT) to sell microgrid systems through Caterpillar's dealer network. Caterpillar will include generator sets and energy storage and include First Solar panels under the Caterpillar brand. The idea is to sell a turnkey energy solution to mines, oil drilling locations, and remote towns or businesses.
I think microgrids are a huge opportunity long term and this is at least a way for First Solar to test the market. It's beholden to Caterpillar's sales team to make the partnership a success and don't have a lot of upside because it's just selling modules, but the learning could lead to more mocrogrid solutions in the future.
Don't forget the YieldCo
First Solar's sales and earnings were disappointing in the quarter, but the biggest reason for the disappointing results is a byproduct of the proposed yieldco First Solar is forming with SunPower (NASDAQ:SPWR), called 8point3 Energy. To create the yieldco, First Solar and SunPower are both building projects on their balance sheets instead of selling them to third parties, as they've done in the past. This will create more long-term value for both companies, but the short-term impact is lower revenue and earnings while the projects sit on the balance sheet.
SunPower has been building projects on the balance sheet for some time but First Solar has only started to do so recently, making it hard to predict how much revenue or earnings it would have this quarter. It's this confusion that caused Wall Street to be way off with its earnings guess, not a bad quarter by First Solar.
Set up for the future
I've been cautiously optimistic that First Solar could improve its technology enough to become more competitive with commodity solar technologies. In the first quarter, First Solar provided it can and that's the kind of progress investors should really be looking at.
Forget whether or not First Solar hit or missed Wall Street's guess at earnings, look at whether or not First Solar is improving or deteriorating versus competitors. On that front, it's clearly getting stronger and long term that should make for great performance once the full value of those improvements are realized.