First Solar, Inc. (NASDAQ:FSLR) reported quarterly earnings this morning. EPS was positive for 4Q12 on solid systems margins, despite weaker-than-expected revenues and higher module manufacturing costs. Pricing pressure took a bite out of the company’s bookings in the quarter leading to missed business, declining project pipeline and lower expected revenue backlog. The project timing and booking uncertainty for 2H13 that was already discussed on the 3Q12 call has now carried over to the beginning of 2013, and this is raising questions on the execution risk on some of the projects in the pipeline, as well as on cost structure to compete for the new unsubsidized systems business.

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While First Solar, Inc. (NASDAQ:FSLR) 2013 EPS outlook maybe impacted by timing of revenue recognition of a few projects,  medium/longer term outlook has really not changed. Execution on new bookings front remains strong (company expects book-to bill of 1.0 in 2013) and the company appears to be ahead of cost/efficiency targets.

Q4 Results/Q1 Outlook Below Consensus

Q4 non-GAAP revs/EPS were $1.075B/$2.04 vs. consensus estimates of $1.339B/$1.75. Opex (ex-restructuring) declined to $96.7M, down 10% q/q. Management expects Q1 revs between $650M and $750M (below $822M consensus) and EPS between $0.70 and $0.90 (vs consensus of $0.88).

Key Points:

Positives for First Solar, Inc. (NASDAQ:FSLR):

  1. Company expects book-to-bill of more than 1.0 in 2013 or new bookings of at least 1.5GW vs 1.1GW in 2012. The company is working on several systems level projects in new markets and is in final stages of closure on a few of them;
  2. Cost reduction, efficiency improvement on track/ahead of plan. Opex run-rate decreased to below $100M in Q4, Avg systems costs declined to $1.39/W ecluding the $0.20/W development costs. The company announced that it has a new record for thin film conversion efficiency of 18.7%;
  3. Although investors are likely to question the rationale of 2013 guidance delay (now to be provided during the April Analyst day due to 2H project/3rd party module bookings uncertainties). Some of the timing uncertainty appears to be related to Indian module sales (given March fiscal year end, several contracts get negotiated in March/April). Company suggested that relative to a few months ago, the state of global solar market has improved.

Concerns for First Solar, Inc. (NASDAQ:FSLR):

  1. Q4 bookings weakness was due to 1 contract cancellation and 1 customer loss;
  2. Company suggested that 25% of 2013 order book has still not been filled and 2H profitability/earnings could be lower than 1H earnings, creating some risk to 2013 EPS outlook.

While 4Q12 operating cash flow of $333m ($290m free cash flow) helped boost cash to >$1b, operating cash flow guidance of $0-$100m—in part due to bonuses—is disconcerting. Even as FSLR expects $2.8b from its sold pipeline, some analysts expect investment in new PPAs and projects to absorb much of that.