First Solar Adds to Solar Investors' Concerns

Its looking like the solar industry may be heading back into a not-so-sunny period, at least as far as corporate earnings are concerned.

First, SunPower indicated last week that its 2009 revenue would be weaker than many investors had expected, sparking a selloff that has since stripped 24 percent from the stock’s market value. Then Germany, whose subsidies have been crucial for growth at SunPower and First Solar, indicated it may be softening its solar-friendly stance. Now First Solar has added to the sense of disappointment, saying that not only was revenue in the third quarter weaker than expected, but profit margins would continue to deteriorate.

In after hours trading, First Solar’s stock was down 16 percent at $128, its lowest level since early September. Despite a $1.79 a share net profit, which beat the Street’s expectations of a $1.74 a share profit, revenue came in at $481 million, significantly short of the $529 million that analysts had been looking for. As outgoing CEO Mike Ahearn explained, the Sarnia solar project in Canada wasn’t completed in the third quarter, delaying the recognition of some revenue.

Although we shipped all of the modules we produced in the quarter, we were unable to recognize revenue on shipments into our Sarnia project in Canada that represented about $58 million of revenue. This is truly a timing issue. That project has been sold, the contract wasn’t signed until early in the fourth quarter.

More disconcerting to investors was the decline in gross margins to 50.9 percent in the third quarter from 56.7 percent in the second, thanks to rebates that First Solar is offering in Germany. The rebates, announced a quarter ago, are now expected to pull gross profits further down – to between 41 percent and 44 percent of revenue this quarter. Operating income also shrank in the last quarter to 33.9 percent of revenue from 38.8 percent.

Other metrics offered some encouragement, but not enough to overcome the declining margins. Annualized capacity per line grew 2.5 percent in the quarter to 53 megawatts and overall production gained 1 percent to 292 megawatts. Efficiency increased 11 percent in the quarter, and manufacturing cost dropped to 85 cents per watt, a decline of two cents.

First Solar also has also seen some positive developments outside of Germany recently, including a 550-megawatt contract with Southern California Edison and a deal to build the world’s largest solar farm in China.

Still, the overall picture is that solar companies aren’t completely out of the woods yet. While the mood among solar investors is nowhere near as bleak as it was a year ago, when a global credit crunch threatened to curtail demand for solar panels just as a supply glut was developing, the outlook on solar installations remains discouragingly uncertain, especially concerning subsidies from European governments.

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