First Solar Q4’16 Results – What do the Numbers Mean?

First Solar (NASDAQ:FSLR), the largest thin film maker in the U.S. recently announced its Q4 2016 results. Though the solar industry is breaking records each day to become one of the mainstay sources of power in the near future, the solar companies are having a hard time.

The Numbers

First Solar (NASDAQ:FSLR) the largest solar company in the U.S. reported pro forma earnings of $1.24 per share in the fourth quarter. Module ASPs started declining in July last year with average selling price of 55 cents per watt. Net sales were $480 million, a decrease of $208 million compared to the prior quarter. The decrease in net sales resulted from the lower projects revenue in Q4. For the full year 2016 sales declined to $3 billion versus $3.6 billion in the prior year. Gross margin for the fourth quarter was 13% compared to 27% in the prior quarter adversely affected by $25 million non-cash impairment of Barilla Solar Project in Texas and lower third-party module ASPs.

Total booking for 2016 calendar year was 1.8 GW, driven by encouraging progress in the Asia-Pacific region, Turkey, Europe and Australia. US continues to be a major market for the company. During the quarter, First Solar closed its first non-recourse syndicated project financing led by Mizuho Bank, one of the largest financial institutions in Japan. India remains a potential market for First Solar with higher profitability opportunities and many early-stage projects. Most of the projects are mid-to-late stage opportunities with half in late-stage negotiations. Most of these opportunities are in the U.S. across both development and module sales. This provides clarity for the cash flows coming from mid to late stages from the developed US market.

Transition to Series 6

The company recently transitioned to producing series 6 modules and skipping the entire Series 5 production, which I think was a good idea to cut the costs. First Solar is smartly using the same core technology that was being used in the production of Series 4 panels. As such, the core technology risks involved in the transition is low. This will cause some short term pain as the company will not produce solar panels in the expected quantity, resulting in lower production and sales in 2017. The company is confident that it will come out with a 425 watt solar panel at 40% lower costs by 2017 end.

Once fully ramped the Malaysian factory is expected to have 1.1 GW of Series 6 capacity by Q1 of 2019. The Ohio plant is also expected to have a nameplate capacity of 550 MW when fully ramped by Q4’18.

In my opinion, First Solar will have a huge market at these prices even if it does lose out to the Chinese manufacturing juggernaut.

Cost & Efficiency

As per First Solar’s Q4’16 transcripts, module cost per watt better than expected and much lower than 45 cents per watt as hinted in the call. The company beat the 2016 cost goal and the cost per watt decreased by 16%, when compared to full-year 2015. In terms of efficiency, First Solar’s (NASDAQ:FSLR) 2016 full fleet efficiency was 16.4%, which was a 80 basis point improvement versus 2015 and 320 basis point improvement since 2013. Its full fleet exited the year at 16.7% and its conversion efficiency stood at 16.6%, which was again a 50 bps improvement than Q4’15.

The company has made rapid strides in terms of efficiency and targets to reach more than 18% in the future period through increases the active area of glass relative to the total area, changes to electrical design of a panel and improvement in certain process tools.

The only way to survive in the cut-throat industry is through improving efficiency and First Solar has improved panel efficiencies at 250% the standard industry improvement rates.

Cash & Debt

First Solar exited the year with a stronger balance sheet and cash position. Total debt was $188 million in the fourth quarter, a decrease of $599 million from the prior quarter. Cash flows from operations were $268 million in Q4 compared to cash flows used in operations of $84 million in the prior quarter. A strong balance sheet is a definite added attribute for a solar company especially in 2017. Shipment prediction and ASPs are low and going forward system sales will also be on a decline, hence in my view the company needs a sound financial position to stay afloat.

Guidance

The company expects a tough first half of 2017 with a loss of $0.10-$0.15 per share in Q1’17 and lower module shipments in the first half. However, earnings and shipments are expected to improve in the second half of the year.  Over the longer term, the company plans a shift towards module-only sales. System business will reflect ~1 GW of the annual volume with the balance of ~2.5 GW being module-only (based on 2019 anticipated production). For 2017, non-GAAP EPS upto $0.50 is expected.

Valuation

Though the shares were down 50% in the last year, they have already returned over 7.5% since the beginning of 2017. NASDAQ was up 9% during the same time. The shares are currently trading at almost 50% discount from its 52 week high price and it should be a good investment time for the strong hearted and ardent believers of the potential solar industry.

Conclusion

Overall the company had a good financial year with net sales of $3 billion and non-GAAP EPS of $5.17, exceeding the high end of its guidance and ending the year with $1.8 billion of net cash. The module efficiency for the year was impressive with a full fleet average of 16.4% and best line efficiency running at 16.9%. First Solar should continue to have healthy bookings prospects with over 400 MW booked so far in 2017 and 2.2 GW of mid-to-late stage opportunities.

I think the company is playing its cards well and is being very diligent about costs, efficiencies and cash. First Solar can emerge as a winner if its stays put on its plans. Though there are uncertainties about U.S. tax reforms under Trump, but the potential of solar remains strong. Solar has already become the largest source of installed energy for U.S in 2016 beating wind, coal and gas, with solar jobs now exceeding coal jobs in the U.S. Moreover, First Solar end electricity prices are already competitive in the U.S.