First Solar Explains Itself
When a publicly-traded company issues a curt press release – just in advance of a quarterly earnings report – saying “Effective immediately, [insert name] is no longer serving as Chief Executive Officer, and the Board of Directors thanks him for his service to the company,” shareholders may fear that something unfortunate is happening.
If that company is a solar firm, shareholders may even worry that their firm will be the next [insert name of bankrupt solar firm]. But it turns out that is not the case at thin-film solar biggie First Solar. The Arizona firm has replaced recently departed CEO Rob Gillette with interim chief Mike Ahearn. Ahearn, in a conference call with investors and analysts, said it was due only to a lack of fit, and not due to anything improper. Ahearn has been closely connected to the firm for years – serving as CEO from August 2000 to September 2009 and board chairman from October 2009 to December 2010.
The firm even released its earnings statement a few days early to help keep down panic. The results, and the remarks from executives, show that the scary stuff going on at First Solar is the same scary stuff happening across the industry – namely inventory overhang due to subsidy cuts in Europe, and sharply declining prices from crystalline silicon producers in China. First Solar built its business – making thin film cadmium telluride modules – on low cost. But pricing competitiveness is now squeezing the firm’s margins.
First Solar is still making money. In the third quarter it racked up a bit over $1 billion in revenues – up 26% year over year, and it had $197 million in net income, an 11% increase from last year’s third quarter. But, the inventory problems and cost competition has led the firm to lower its EPS outlook for the year by $2.20 to $6.50-$7.50 per share.
More interestingly for solar-watchers was a change of strategy outlined by Ahearn. Previously the firm had been deploying a graph showing how it planned to rapidly expand production – including with a new facility in Vietnam. But now the firm will be redirecting that spending toward R&D (to decrease its modules cost per watt) and toward opening new markets – such as in India, the Middle East, North Africa, and China – and away from a dependence on European markets where changing/shrinking subsidies can make or break a solar company.
One dig on First Solar’s products has been that the thin film modules are slightly less efficient than competing cyrstalline silicon. In the past, First Solar’s cost advantage more than made up the difference, but to keep that edge, the company will have to move rapidly to roll out efficiency improvements across all of its production lines. So far in the fourth quarter, the firm says its average efficiency has reached 12%, while its best lines are up to 12.4%. The average cost per watt is creeping down only slowly – to 74 cents per watt. The firm made a bold claim that it would reach the mid 60s by the end of 2012.
Nevertheless, it is clear from listening to First Solar’s plans for 2012 that severe price competition in the solar space will be much like death and taxes for some time to come. One interesting way the firm is capturing growth is by taking on project work for utility-scale solar installations. In fact, its excess inventory in the fourth quarter will likely be totally absorbed by two new projects the firm is working on now.
I haven’t drilled down to try and figure out how much profit is captured in these projects, but on a sales basis, the firm booked $800 million of its $3 billion or so 2011 revenue from project work. Analysts were keen to learn how much revenue projects would bring in 2012, but executives weren’t ready to make any projections. I mentioned this turn in strategy for First Solar in a recent story on the rise in solar installations in the U.S.