Highlights From FSLR's Q3 Conference Call: Revenues Fall $45 Million From Last Quarter, Guides In-line for FY

October 29, 2009 10:49 AM EDT

First Solar, Inc. (NASDAQ: FSLR) reports Q3 EPS of $1.79, 6 cents better than the analyst estimate of $1.73. Revenue for the quarter was $480 million, which compares to the estimate of $528.78 million. Shares are being cripled, down over 16% this morning.

Highlights From FSLR's Q3 Conference Call:

• Sees FY09 Revs of $1.975 - $2.025 billion, versus $2 billion consensus.
  
• (CEO) Net sales were $480.9 million that drove net income of $153.3 million and diluted earnings per share of $1.79.
  
• The rebate program was administered throughout the quarter and had some downward effect on our gross margins, although gross margins remained at a relatively strong level slightly over 50%.
  
• We were unable to recognize revenue on shipments into our Sarnia project in Canada that represented about $58 million of revenue. This is purely a timing issue. That project has been sold.
  
• Operationally, production was 292 megawatts, slightly above that, up 1% quarter-over-quarter.
  
• Our annualized capacity per line grew to 53 megawatts. That's up 2.5% over the quarter. Efficiency was up 11% or was at 11% on average, up 0.1%.
  
• And the combination of higher watt throughput and a number of other operational improvements drove manufacturing cost reduction to $0.85 a watt, that's down 2% quarter-over-quarter, 21% year-over-year.
  
• We made significant progress in Q3 building our pipeline of business for the future in new markets. We signed power purchase agreements that totaled 550 megawatts AC, so right around 650, 660 megawatts DC with Southern California Edison.
  
• In terms of market environment, I think our impressions are generally consistent with a lot of the analyst reports that have been published over the past several weeks. We're seeing strong demand in Germany. That's triggered mainly by the impending digression rate for feed-in tariffs as of January 1 that's unlocked a lot of activity.
  
• I guess on the negative side, we would say crystalline silicon module pricing in 2010, and therefore to some extent our module pricing remains unclear subject to a number of dynamics that we can talk about.
  
• The market demand is seasonally stronger. Inventories have been reduced. We and our customers will enter 2010 in a healthy position from a balance sheet perspective. The rebate program combined with the market dynamics is facilitating throughput. It's been successful from our standpoint. And the fact that we've maintained fairly strong gross margins, we view that as significant.
  
• Overall, our efficiency costs and throughput improvements are in line with the mid-year targets that we've laid out. We feel good about that. And we're progressing with the development of our project pipelines for the future both with respect to North America and China.
  
• (CFO) While we shipped our entire production to customers and project sites, revenues of approximately $58 million were not recognized during the quarter as the revenue recognition criteria for the Sarnia project had not yet been met.
  
• The Ohio line expansion remains on plan to ramp in the first quarter of 2010. The 53 megawatt run rate brings our total existing and announced capacity to 1.4 gigawatts per year.
  
• Gross margin for the third quarter was 50.9%, down 5.8 percentage points over the prior quarter, mostly due to the effect of the more competitive pricing environment, customer mix, and foreign exchange rates, modestly offset by lower cost per watt.
  
• The third quarter gross margin is primarily reflective of our PV module business since system business revenues were not material in the third quarter.
  
• Operating expenses declined by $11.9 million sequentially. SG&A was down 18.9 million due to the non-recurring items reported on our Q2 earnings call that burned operating expenses by $9.1 million and the fact that we recorded one-time benefits of approximately $9.6 million during the third quarter. Net of these effects, SG&A would have been approximately flat.
  
• R&D expense increased $5.5 million per quarter over the prior quarter driven by continued execution of our technology roadmap to improve efficiency and lower overall production cost.
  
• Operating expenses were unfavorably impacted by a rise in plant startup cost of 1.6 million related to our Perrysburg expansion.
  
• Operating income for the third quarter was 162.8 million, or 33.9% of net sales compared to 204 million or 38.8% during the prior quarter and included 22.2 million of stock-based compensation expenses.
  
• Net income for the quarter was 153.3 million or $1.79 per share on a fully diluted basis. The effective tax rate for the third quarter was 7%.
  
• For the third quarter, free cash flow was positive at $114 million driven by operating cash flows of $179 million.
  
• Cash and all other marketable securities increased by $53 million quarter-over-quarter to $830 million in the third quarter, principally due to the improved free cash flow, offset by debt repayments of $49 million for the financing of our Frankfurt Oder manufacturing site.
  
• Our debt to equity ratio improved from 10% to 8% during the third quarter leaving the balance sheet largely unleveraged. Rolling fourth quarter RONA was 28.2%, down from 29.4% in the prior quarter.
  
• During the third quarter, First Solar secured a $300 million revolving credit facility from nine leading banks, led by JP Morgan Securities and Bank of America Merrill Lynch. The agreement grants us the right to increase the facility to $400 million over time as needed.
  
• First, for Q4 80% of our expected net sales are hedged at an average exchange rate of $1.36 per euro.
  
• In addition, our natural hedge brings the net income hedge ratio to 97% for the fourth quarter. We assume on average the exchange rate of $1.45 per euro for the unhedged portion of our guidance, bringing the average euro exchange rate to $1.38 per euro for the quarter. As of today, a $0.01 Euro fluctuation impacts our 2009 net sales by about $500,000.
  
• Our guidance assumes about 15 to 25% of our first quarter net sales to be driven by systems revenues. We expect the one-time Q4 SG&A charge of approximately of $11.5 million for the recording of the previously announced CEO compensation expenses.
  
• Finally, 8.2 million of capitalized project assets related to the OptiSolar acquisition will be amortized in the fourth quarter with the Sarnia project sale.
  
• Now, to our 2009 guidance, we are raising our previous net sales guidance to a range of 1.975 to $2.025 billion. We expect plant startup cost of $14 million. Stock-based compensation is estimated at $85 million, with approximately 20% allocated to cost of goods sold.
  
• We expect our 2009 tax rate to be seven to 8%. Year-end 2009 fully diluted share count guidance is an estimated 86 to 87 million shares. CapEx for the year is expected to be 260 to 275 million.
  
• Fourth quarter, you can look at slide 31, which shows that the net sales guidance range of 550 to $600 million for the fourth quarter in the low and high case.
  
• We expect our Q4 tax rate to be 10%. Year-end 2009 fully diluted share count guidance is estimated again at 86 to 87 million. CapEx is expected to be 50 to $65 million for Q4.
  
• Module margins are expected to remain flat compared to the third quarter at between 50 to 51%.
  
• (Q&A) Just a first question, how should we be thinking about the system business gross margin going forward? Are there some metrics you can kind of give us on this? (A)I would say, Steve, I think the best guidance we have around the impact of the EPC portion of our business on the overall consolidated margins can be found in our analysts slide deck that we presented to you back in June.
  
• Just a quick point, I want to make sure I'm doing the math right. So, based on the crystalline module ASPs in Q3 and based on what you guys said your shift versus your revenue recognition, it seems like there is still about $0.35 per watt kind of a difference the pricing. When do you guys think of that you start to get a benefit for higher yield on the rated KW basis for you guys? And is that sort f a rough number that we should use for 2010 in terms of regardless of what the crystalline price is, that should be the difference between you guys versus the general crystalline module prices? (A)I would those are probably two questions, and I would say question number one is, we highlight the Sarnia system. We shipped actually module versions to other EPC sites, predominantly the Blythe site, okay. However, since we haven't signed a contract as of to date, I don't think, we don't believe it's appropriate to call that out as a reconciliation for the third quarter revenues. It certainly accounted for demand of modules.As it relates to your second question, is there an opportunity to benefit from better product performance and to see better energy yields, we believe the answer to that is yes. We actually will see that these cases are built in, in many cases, into the financing cases as we have seen in Europe.
  
• I wonder if you have any preliminary comments on your thinking about capacity beyond the Ohio expansion. (A)Yes, so our look at capacity is predominantly strengthening our view of how the markets develop over time. Certainly our ongoing work with efficiency and line run rate afford us the ability to continue to expand output, even in the absence of bricks and mortar construction. We continue to evaluate the timing and prepare ourselves for additional growth as we see fit, and we'll look to feature the December meeting to make any future decisions on that. (A)So I think, Rob, our guidance that we are giving for 2010 would certainly comprehend any type of capacity decisions when we talk about CapEx, startup costs, et cetera.
  
• Could you talk about how often you found you had to use the rebate during the quarter and where the benchmark price was competitively, and if you still believe there is about a 40 to $60 million second half hit to revenue from them? (A)So the rebate was issued broadly into the market segments, so the rebate is not functioning in a case-by-case basis. So the rebate was offered broadly when certain criteria are met. Generally, we don't like to compare our pricing as a benchmark to crystalline silicon price for the simple reason that this has gotten a much more competitive pricing environment. And then I think open broad reconciliation of pricing probably doesn't help our competitive position nor does it help the industry. Generally the original estimate that we gave, which was in the range of about 35 to 50 million when we estimated the 40 to 60 at our spot market assumption, that budget has gone up, so we have seen a higher degree of rebate consumption. That higher degree of rebate consumption today we're estimating just for the third quarter probably approximately close to 50 million impact, and it was driven by a much higher demand in the German market. So we saw a lot more volume gravitating due to the strong seasonal pattern that we've seen into the German demand. Obviously our margin performance in this quarter reflects that. We gauge to actually this time guidance on our modular margins for the fourth quarter. You see that unchanged, so we can't expect similar dynamics for the fourth quarter.

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