First Solar: Germany will not be center of its universe


As 2010 draws to a close, however, skepticism has bubbled up among some investors about its ability to stay a front-runner next year and beyond. The American company actually beat Wall Street’s expectations with its just-announced third quarter numbers: its quarterly net income rose to USD$176.87 million, or $2.04 per share, from $153. 34 million, or $1.79 per share, from the year-ago quarter. Sales surged to $797.9 million from $480.9 million.

But it also reported numbers that raised alarms. Its gross margin dropped to 40.3 percent in the third quarter from 48.3 percent in the previous quarter. Its project development business, which yielded a lower gross margin, accounted for a greater percentage of the sales. Its manufacturing cost inched up by $0.01 to $0.77 per watt quarter over quarter, because it tinkered with its production process to improve its factories’ output and module efficiencies, said First Solar’s president, Bruce Sohn, during a conference call with financial analysts last week. The company’s average module efficiency moved up from 11.2 percent to 11.3 percent.

The analysts were keen to know what First Solar’s attack plan is for the coming year, when feed-in tariffs in its largest market, Germany, are set to fall by 13 percent. Its Chinese competitors are adding factory capacities like crazy; some are boosting their modules’ efficiencies by licensed technologies. First Solar executives raised their sales forecast for 2010, but declined to discuss numbers for 2011.

First Solar’s shares dipped nine percent a day after it reported the earnings. That has prompted a flurry of speculations about how investors view the company’s short- and long-term prospects.

The solar industry is young and unpredictable, both because, and despite, of its heavy reliance on government incentives. The dramatic switch of the incentive policy in Spain showed that solar companies can’t always count on public subsidies to stick around. Germany’s approach to feed-in tariff, on the other hand, has given much clearer signals to manufacturers and project developers about incentive declines and how they should adjust their strategies accordingly.

First Solar has made no secrets about its efforts to diversify its market reach beyond Germany, which it believes will account for about 25-30 percent of its sales in 2011, versus nearly 50 percent in 2010. Company executives said they plan to do three things in the coming years to grow its business: keeping its module prices low to target new markets; using its project development business to counter any fall in solar panel sales; and near-doubling its factory capacities from now until 2012.

While some of the fellow Chinese competitors have raised the selling prices of their modules to cash in on the rush to install projects in Germany, First Solar hasn’t done the same, according to its CEO, Rob Gillette. Gillette told analysts that the company has set prices and inked contracts for most of the modules it plans to churn out in 2011, including about one gigawatt of modules destined for Europe. The company’s goal is to keep prices low to encourage its customers to set anchors in new markets.

"We don’t pay attention to near-term or week-to-week pricing,” Gillette said. “Our focus is to drive down the (levelized cost of energy) so that we can compete with traditional sources” of electricity."

The company has previously announced plans to build power projects and even a factory in China. News reports emerged this week that the company has gotten the go-ahead to start the development work on a 30-megawatt power plant in Inner Mongolia. It has also set its sight on India and expects customers to start installing its modules there next year. Middle East and Africa represent a new frontier, though the company has only begun to explore that region, Gillette said.

North America will grow in importance to First Solar. The company has invested heavily to build a project development business in the United States and Canada. It bought NextLight Renewable Power for about $297 million this summer. NextLight is First Solar’s fourth acquisition of project development firms since 2007. All these acquisitions have given First Solar 2.2 gigawatts worth of projects with power-sales agreements in place in North America. Through these projects First Solar has created deep channels of sales for its modules.

To meet anticipated demand, the company plans to expand its factory capacities from 1.4 gigawatts in 2010 to 2.7 gigawatts in 2012. It recently announced plans to build one factory in Vietnam and another one in the United States, where it already has a plant in Ohio. The company also is putting in production lines in Germany, Malaysia and France. Expanding its fleet of production centers will help it to lower its manufacturing costs over time. The company has said it aims to reach $0.52-$0.63 per watt in 2014.

In the meantime, the company expects to generate more sales in 2010 than it previously thought. Sales should reach $2.58 billion to $2.61 billion this year, up from its previous forecast of $2.5 billion to $2.6 billion, the company said. Earnings should climb to $7.50 to $7.65 per share for the year instead of $7 to $7.40 per share.

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