First Solar (FSLR 0.79%) recently reported first quarter earnings and it gave us our first look at where solar companies may be headed in 2016. The solar industry's fortunes are looking up at the start of the year, but the road ahead requires a little more explanation than looking at the revenue and earnings numbers. Here are five important statements from the first quarter 2016 earnings call to give you key insights into how the year may shape up.
Jim Hughes' reason for leaving now
We are transitioning from one strategic plan that we satisfied and we're embarking upon a second division 2020 plan. We have a lot of big fundamental decisions, they are good decisions, they are how we are going to best capitalize on our opportunities. And I think the board and I found like that this was the right time to let a new management team colorless around those decisions. So they don't have my heavy hand hanging over them and they reflect the views, thoughts and the beliefs of that team because obviously both I and the board want that team to be accountable for meeting the results that are promised. -- James Hughes, CEO
CEO transitions can be challenging for any company, but I think Hughes laid out why both now is the time and why Mark Widmar was the right man to secede him. The hard work of turning around First Solar's technology is done and now it's time to lay out plans to make the company competitive for the next decade. And Widmar will lead the charge of making those plans.
As for why Widmar, he has intimate knowledge with valuing solar projects, making him a perfect person to lead a company that's increasingly making big decisions about how much to bid for projects. I think this makes for a smooth transition into First Solar's future and the company will continue to incrementally improve its position in the marketplace.
The ITC extension is great, but not today
In the U.S. the ITC extension has led to an increase in overall opportunity but customers continue to work through revisions to project timing which has led to some temporary delays in new contracted bookings.-- James Hughes, CEO
When the solar investment tax credit (ITC) was extended, many investors thought it would lead to a boom in solar demand. And over the next 5-10 years that will be true. But it affects projects that will be built in 2017 and beyond, so for First Solar 2016 isn't going to see much, if any, ITC benefit. Maybe that's shaping the market's disappointment with earnings, but it's important to know that the ITC isn't going to help 2016, it'll help solar companies in the years after that.
SunEdison is a huge unknown for the solar industry
So I think everybody is going to get a bit of an education on the bankruptcy proms so over the next six to nine months. The bankruptcy court has broad powers to deal with contracts and entered into. And utilities will not be able to terminate those contracts even if they have the right to do so without the approval of the bankruptcy court. So I think what we will see happen is there will be a long period of uncertainty and I personally don't think we're going to see a lot of progress or a lot of definition around their project for certainly the next three to four months and probably closer to six months. -- James Hughes, CEO
When SunEdison filed for bankruptcy it created a potential opportunity for First Solar. Not only was a competitor out of the picture, contracts SunEdison signed could potentially be bought for pennies on the dollar in bankruptcy. But First Solar doesn't know what opportunities might arise or whether there will even be assets to buy.
Efficiency improvements continue
As indicated at the recent Analyst Day, efficiency improvements are expected to pick up later in the year as we are targeting a full year average and lead line efficiency exit of 16.7% and 17% respectively. -- Mark Widmar, CFO
Between the end of 2015 and the end of the first quarter, First Solar's panel efficiency for its top line was flat after increasing from 15.6% to 16.4% in the previous three quarters. But the efficiency improvements should pick up again as the year goes on, ending at 17%. That would make it slightly more efficient than commodity silicon panels, which is a big win for the company from a competitive standpoint.
2016 will be more profitable than expected
we are increasing our growth margin guidance range by a 100 basis points to a revise range of 18% to 19%. The gross margin improvement is a result of the amendment to the original Stateline project sale which result a movement of profit from equity in earnings to gross margin. In addition, the cost improvements in the first quarter have benefited gross margin and are reflected in the updated range. -- Mark Widmar, CFO
Margins are really the key figure to watch with solar companies today. They show pricing power, or lack thereof, and over time one can see how a company's position in the industry changes. First Solar saw years of declining margins as commodity panels became more cost effective, but now it's beginning to generate higher margins and even a small improvement in 2016 margin guidance is positive news for the company.