Summary:

Applied Materials had a blockbuster quarter in its solar business in the most recent quarter, but its dim market outlook points reflects changes that aren’t good for manufacturers but great for project developers.

solar panel

Chip giant Applied Materials just had a blockbuster quarter in terms of its solar business, but at the same time issued a dim market forecast that reflects changes that aren’t good for solar manufacturers in the near term, yet are actually great for solar project developers.

The solar equipment maker delivered a record revenue of $637 million during its fiscal second quarter ending May 1, compared with $166 million in the same quarter in 2010. But the Silicon Valley company is looking at a sales decline of 15-25 percent for the third fiscal quarter, said CFO George Davis. The company’s shares dipped about 2 percent in after-market trading.

Applied’s customers order and install equipment for making silicon wafers and solar cells, and these customers were beefing up their production capacities earlier this year when the market froze, a result of uncertainties about government subsidies in Italy and France. Italy, the second largest solar market in the world, took longer than expected to decide how much it would cut its solar subsidies. That prompted worries not just over the cuts themselves, but also over the possibility of applying the lower subsidies retroactively.

First Solar and SunPower both bemoaned sluggish sales in the early part of this year. SunPower even posted a first-quarter net loss.

Italy settled the subsidy issue earlier this month, and solar companies are now hopeful. But all that waiting has led to many solar panels sitting in warehouses. The global inventory of solar panels has reached 10 gigawatts, or about twice the normal level, said IMS Research on Tuesday. The glut, coupled with the lower subsidies, is driving down solar panel prices.

Applied’s customers are makers of silicon solar panels, and most of them are in China. Chinese manufactures were able to expand their factories quickly in the past two years despite the financial meltdown. Many secured loans from government-run banks. The expansion has allowed them to lower the prices of their solar panels and made it tougher for smaller players to compete. Applied’s Chinese customers include Yingli Green Energy and GCL-Poly Energy.

But the upside is that the cost of installing solar has come down significantly, so much so that some renewable energy project developers who weren’t thinking about using solar panels are doing the opposite now. Solar Trust of America, a solar thermal power plant developer, recently created a joint venture to develop projects using solar panels. SolarReserve did the same with GCL Solar Energy, a subsidiary of a Chinese company that produces silicon for making a solar panel component. NRG Energy has even replaced concentrating solar thermal technology, which uses mirrors to concentrate sunlight and produce steam for electricity generation, with solar panels for two projects.

Unlike solar thermal power plants, which make more economic sense if they are large, projects that use solar panels can be smaller and still deliver good returns, project developers say. Utilities like this flexibility.

“The cost of photovoltaic (projects) has come down so much that it’s so much more economical right now to look at small-scale projects of 10-15 MW,” said Pat Dinkel, vice president of resource planning at Arizona Public Service, during a conference call with reporters Tuesday. “You don’t have to go hundreds of megawatts to reach an economy of scale.”

Over the long run, lower costs should encourage more solar panel installations not only in the U.S. but also other newer markets. In the short term, however, equipment makers will have to weather slower sales.

Solar is just one of Applied’s businesses. The company makes more money from selling equipment to makers of chips and flat display panels. Overall, sales rose to $2.86 billion from $2.3 billion from the year-ago quarter for Applied. The company posted a net income of $489 million, or 37 cents per share, compared with $264 million, or 20 cents per share, from the second fiscal quarter of 2010.

Applied expects the third-quarter overall sales to fall between 3 percent and 10 percent from the second quarter. Earnings should hit 31 cents to 37 cents per share.

Photo courtesy of Dave Dugdale via Flickr

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