FSLR’s 3Q peek: Softness and questions

First Solar offered an initial peek at its 3Q11 financial results, revealing some softer numbers, planned capex reductions, and a need to “refocus our strategy and commit our resources.” Analysts offer their take on what FSLR’s serving up.

October 26, 2011 – First Solar offered an initial peek at its 3Q11 financial results, revealing some softer numbers, planned capex reductions, and a need to “refocus our strategy and commit our resources.” The full results won’t be released until November 3, accompanied by the usual follow-up conference call — which should be plenty interesting this time.

FSLR’s 3Q numbers released today:
Net sales: $1B, up 88% from 2Q11 and 26% from 3Q10
Net income/share (diluted): $2.25, up significantly from $0.70 in 2Q11 and $2.04 in 3Q10
Cash/securities: $795M, up 54% Q/Q

But FSLR’s new 2011 expectations are noticeably weaker, compared with its outlook on Aug. 4:
Net sales: $3.0B-$3.3B (was $3.6B-$3.7B)
Operating income: $650M-$760M (was $900M-$960M)
EPS, diluted: $6.50-$7.50 (was $9.00-$9.50)
Expenses: $35M for manufacturing startup (was $35M-$40M), and $10M-$12M for factory ramp (was $8M-$10M)

Although FSLR has been able to navigate the sector’s turbulence so far, newly named interim CEO Mike Ahearn stated that “our goal is not just to survive the current environment, but to transcend it” through expansion that does not rely upon subsidies, and “this requires that we re-focus our strategy and commit our resources.” The company also indicated it will reduce capex and seek to “reallocate overhead expenses” (three months ago FSLR’s stated 2011 capex was $800M-$900M). Presumably this move is in response to its 3Q11 slashed operating income/higher opex costs.

Following yesterday’s terse acknowledgement of the departure of CEO Rob Gillette, FSLR offered a terse follow-up: “We thank Rob for his service, but the board of directors believes First Solar needed a leadership change to navigate through the industry turmoil and achieve our long-term goals.” Expect a slew of questions to expand on this in next week’s conference call.

After yesterday’s -25% slump on the CEO news, investors seem temporarily calmed by the 3Q11 numbers; FSLR stock is up about 6% in early trading after an initial opening spike. Nevertheless, “we still see some downward pressure until there is further clarity on the new strategic direction for the company,” said Vishal Shah from Deutsche Bank in a research note. Note the widened EPS estimate for 2011, which likely indicates uncertainty about module pricing, he adds. And while the terse reasoning behind the CEO’s departure might make sense, the timing (hours before quarterly numbers are laid out) is still unnerving.

In fact a number of previous such assumptions, he fears, are now cast in doubt thanks to the change in top leadership:

— Maximizing 100% utilization
— Executing on cost roadmap ($0.55/W)
— Systems pipeline cash value based on “attractive economics” on projects
— ~25% market share

Here’s a short list of things FSLR needs to clear up, in Shah’s view:

Management: Was Gillette’s because of operational, strategic, or accounting issues? Since he replaced many of the company’s senior management and has ties to the new appointees, what’s to stop them leaving too?

Strategy: How does the company keep pushing toward $0.55/W costs, 14% module efficiency, execute its current systems project pipeline, and find new US utility projects? What’s the plan to grow outside of Europe/US, and the status of its China utility project?

CdTe: What’s the future for CdTe in a world where poly-Si costs are approaching $20-$25/kg? Can CdTe be sold at or below ?70 c/W and still be profitable?

Market: If FSLR is facing challenges re: declining poly-Si prices, how bad are things for everyone else in CdTe? And where does FSLR stand on contentious issues of DoE/Ex-Im support, and US-China solar trade disputes?

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