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Haircut in First Solar seems a bit silly + Notes from the conference call

October 29th, 2009 · No Comments

More of a timing issue..

Profit beat expectations, but revenues didn’t. The reason, a project in Canada had some delay so $58M in revenue won’t be recognized until the next (fourth) quarter. For additional reassurance, the company reiterates it’s full-year guidance and argued the revenue shortfall is truly a timing issue.

One could even argue it’s bullish, as they were able to beat profit forecast on considerably less revenue.

That’s not the way analyst houses Wedbush Morgan and Caris & Company took it, they downgraded FSLR this morning. And here you’ll see that downgrading is what a lot of analysts have done this year..

There has been a rather persistent rumor of accounting issues, so we’ll expect the devil to be in the details..

So we read the earnings call transcript.

  • The rebate program was administered throughout the quarter and had some downward effect on our gross margins although as you can see gross margins remain at a relatively strong level, slightly over 50%.
  • manufacturing cost reduction to $0.85 a watt. So that is down 2% quarter-over-quarter, 21% year-over-year.
  • We made significant progress in Q3 building our pipeline of business for the future in new markets. We signed power purchase agreement that totaled 550 megawatt AC, so right around 656, 60 megawatt DC, with Southern California out of them. We announced the MOU with the city Ordos in China to develop 2 gigawatts of the plant, which I will talk about here in a minute. We signed at 55 megawatt AC PPA agreement with LADWP. We sold the Sarnia project as I mentioned, the 20 megawatt project to Enbridge. The added significance there is that Enbridge is a major player in the natural gas business in Canada and the U.S. and we believe we will be an ongoing customer for First Solar in a very significant model.
  • The significances of that is really twofold. The positive significance one, inventories have reduced as a consequence not only for First Solar, but for our customers and really for the industry, and the ability now to go into Q1 with normalized very low inventories I think they are very significant positive factor.
  • I guess on the negative side, we would say crystalline silicon module pricing in 2010 and therefore to some extent our module pricing remains unclear and certainly add to a number of dynamics that we can talk about.
  • And as reported, as everybody I think knows there has been an election in Germany, it potentially for a reduction in the feeding tariff rates sooner than might have been anticipated, have the election gone another way. We think it’s really difficult to handicap where that’s going to come out in terms of stroke and timing. So it looms with an uncertainty that we have to plan around.
  • Net sales for the third quarter were $480.9 million. The decline of $45 million compared to the second quarter of 2009. The decline was driven by increased module shipments to EPC sites most notably to Sarnia, the reduction in pricing driven by our rebate program, the lower blend of foreign exchange rate of approximately $11 million, and the fact that the second quarter benefitted from $27 million of deferred revenues for the Lieberose project.
  • Gross margin for the third quarter was 50.9% down 5.8 percentage points over the prior quarter mostly due to the effect of the more competitive pricing environment, customer mix and foreign exchange rates modestly offset by lower cost per watt.
  • For the third quarter free cash flow was positive at 114 million driven by operating cash flows of $179 million. Due-to-date free cash flow reached $51 million after financing $210 million of capital expenditures and $290 million of Accounts Receivables due to our revised payment terms. We expect free cash flow to remain positive during the fourth quarter.
  • Cash and all other marketable securities increased by $53 million quarter-over-quarter to $830 million in the third quarter principally due to the improved freer cash flow offset by debt repayment of $49 million for the financing of our Frankfurt/Oder manufacturing site.
  • This brings me to our guidance for 2009, which is raised to the higher end of the previous guidance.
  • CapEx for the year is expected to be 260 million to 275 million.
  • We expect our Q4 tax rate to be 10%. Year-and 2009 fully diluted share count guidance is estimated again at 86 million to 87 million.
  • That [rebate] budget has gone up, so we have seen a higher degree of rebate consumption that higher degree of rebate consumption today, we’re estimating just for the surfed water probably approximately close to 50 million euro impact that was driven by much higher demand in the German market. So, we saw a lot more volume gravitating due to the strong seasonal pattern that we’ve seen into German demand.
  • We [shareholdersunite] would like to add the possibility here that although rebates were up due to higher demand especially from Germany, you might want to consider the possible effects on the outcome of the German election could have on demand from that important market.
  • we have not offered our rebate program outside of Germany.
  • [On the possibilities of cuts in the German ground mounted (that is, non-rooftop) market] I mean, generally historically and I think the current activity I don’t think deviates on the trend swap there have been about 50% to 60% of the shipments that have gone on to the German market have found installation in the free field market. So, which means approximately 40% to 50% are on rooftops. So, if there is pressure with respect to the free field markets, the question will be a, by how much would additional digression happening and was that in par long-term viability or by ours, we don’t know that today, but we believe also and I think is to reassure on what we have with compelling offering on the rooftops that are in the European and general market.
  • the EPC business is not a profit centre, it’s a throughput enabler of our module business.
  • Our interest in China really starts with market opportunity and the ability to engage around the Chinese market as the program that they have been working on has ruled out. So, there really isn’t, has not been much in the market in China. So the downstream channel are not well developed, there is not a lot of capacity to deploy significant volumes. So, we sort of start with the structure of the Ordos project in the way we faced it, really is designed to get a start here in the next few months build 30 megawatts, engage with local installers and suppliers and begin to get traction and then expand that in an orderly fashion and hopefully leverage off of that into a number of other projects. Somewhere during the course of this work, we are going to be looking at manufacturing sites. So we will address the IP issue you raised, and some of the other manufacturability issues are going to come to the table. The deal is not structured to require that we manufacture prior to getting started on the market, and so it would be our intention, you know priority wise to really work this first 30 megawatt phase, but I do think if we can address the same issues on manufacturing we would attach to any market. If we can address that, get into production there is a good opportunity for low-cost manufacturing in China, and the rest of the value chain, I think there is significant cost reduction possibilities and we’ve got teams put together now, we are just starting to repeat, do the drill down.
  • [on pricing, considering that silicon based panels have come down rapidly in cost and are more efficient with regard to energy convergence] So I mean obviously we’ve certain market share goals, and we defend our market share pricing as its function of supply and demand. I mean maybe we take you next time to one of our customer meetings if they tell you there is no reason to cut any prices or increase prices and that obviously always help. So I mean we price to clear the product, and that can be on a case-by-case basis. We are the industry leader doesn’t mean that we have to be the price leader on each and everyone occasion. I don’t know whether that would be flat right. We want to turn our production and maintain market share in our core markets and that guides our pricing decisions.

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Conclusions

  • These “accounting issues” didn’t seem to worry any analist
  • Some risk in the German market
  • Some concerns about margins, but not manifest yet, despite the rather large price cut in the silicon based products
  • So we think the sell-off is overdone.

Tags: Alternative energy · FSLR · Solar sector