First Solar: Huge drop in Q2 earnings, but expect a rebound

Here’s the bad news from thin-film solar leader First Solar (s FSLR): The company’s second-quarter net income dived 61.6 percent down to $61.1 million from $159 million in the same quarter a year ago. That led to earnings of $0.70 per share, down 63 percent from $1.84 per share a year ago. At the same time, sales dropped 9.4 percent to $532.8 million from $587.9 million during the same period.

But for those willing to wait it out, First Solar has some better news coming down the pipeline. The second half of 2011 is expected to show a rebound, thanks to construction of a few large solar farms in the U.S. getting going in earnest. And India is turning out to be a more fruitful market than what the company anticipated just a few months ago. Instead of shipping roughly 100 MW of solar panels to India in 2011, First Solar is now looking at around 200 MW or more.

”It was a challenging quarter for the PV industry and for First Solar,” said CEO Rob Gillette during the call. “But we are positioned for a better second half.”

Still, the company is lowering its 2011 sales guidance. First Solar now expects to post sales of $3.6 billion to $3.7 billion and earnings of $9 to $9.50 per share for 2011. Previously, it was aiming for sales of $3.7 billion to $3.8 billion and earnings of $9.25 to $9.75 per share.

Project development

The company makes solar panels and develops solar farms it then sells, and it sometimes ends up getting paid for operating and maintaining as well. It entered the project development business only in recent years and has focused primarily on North America.

The thinking is to build a project development business in an emerging and potentially large market in order to boost the sales of its solar panels. It’s a hedging strategy that seems to be working, especially given the declining importance of Europe as its main market.

First Solar is counting on the Agua Caliente project to start bringing in revenues in the third quarter of this year. The company is finalizing a $967 million loan guarantee with the federal government for the 290 MW project in Arizona. It also won offers for about $3.73 billion in loan guarantees for three other solar farms, but only the 230 MW Antelope Solar Valley Ranch project is likely “to be built this year”, said Mark Widmar, chief financial officer of First Solar.

Before discussing its earnings Thursday, the company announced it had secured a development agreement to build a 150MW farm in Nevada for Sempra Generation. Electricity from the project will go to Pacific Gas and Electric in California.

Hard market

Uncertainties over solar incentive policies in key markets such as Italy and France delayed solar project development and financing earlier this year and sucker-punched solar manufacturers around the world. Not only did many manufacturers see a fall in sales and profits, but they also had to contend with a buildup of inventories that further lowered the prices their panels could fetch during the second quarter.

In the past two weeks, companies such as SunPower (s SPWRA) have warned that they aren’t going to deliver any stellar second-quarter financial results.

First Solar is hunting for new markets to reduce its dependence on Europe. Aside from India and North America, First Solar is working on attracting buyers in China, Australia and the Middle East, Gillette said.

In 2010, Europe accounted for slightly over 80 percent of panels (in MW) shipped by the Arizona company, with Germany taking up roughly half that. In 2011, Europe will make up nearly 60 percent. North America and India will take up almost all the remaining share.

Efficiency breakthroughs

Selling its solar panels at a lower price wasn’t the only key reason for its lackluster earnings. First Solar said it also has had to spend more on technology research and development.

One result of that R&D focus was the recently announced world record efficiency for its cadmium-telluride solar cells. First Solar said it was able to produce cells that can squeeze 17.3 percent of sunlight into electricity, beating the previous record of 16.7 percent set in 2001.

The world record announcement is significant because the company is under pressure to compete more closely with rivals that use silicon in their panels. Demonstrating that it can push the limits of efficiencies in cells made by its production equipment is important for First Solar to compete for many more years to come.

Reducing costs

First Solar is known for producing solar panels more cheaply than anyone else. That makes its panels attractive to customers even though they aren’t as efficient as the more common silicon solar panels. Silicon solar panel prices have fallen by more than half in the past two years, however, and that puts a heavy pressure on First Solar to work harder to maintain its lead.

There are many ways to reduce manufacturing costs, which are measured in cost-per-watt. Improving solar panels’ efficiency is one way to do it. Efficiency is correlated with how much power a panel of a given size can produce – more power means higher efficiencies. If a company spends the same amount of money to produce panels with a higher power rating (in watts), then the panels cost-per-watt will be lower.

First Solar’s second-quarter manufacturing cost was $0.75 per watt, which remained unchanged from the previous quarter. Its solar panels’ efficiencies averaged 11.7 percent (solar panel efficiency is lower than cell efficiency), which also didn’t budge from the first quarter. Gillette said the company will see more efficiency improvements for its mass-produced solar panels before this year ends.

Photos courtesy of First Solar