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Behind First Solar's Terrible Fourth Quarter

First Solar, Inc. (NASDAQ: FSLR) reported fourth-quarter earnings after the market closed on Thursday, and there wasn't a lot for investors to like. Revenue was weak, it reported a surprise loss, and even future bookings weren't what they seemed.

In a year that should be extremely bullish for the solar industry, amid strong demand and rising solar panel pricing, First Solar doesn't seem to be executing up to its own high standards.

Image source: First Solar.

Fourth-quarter figures

Let's start with the important numbers first. Net sales were $1.40 billion, gross profit was 23.8%, and net loss was $59.4 million, or $0.56 per share. This compares to year ago revenue of $691.2 million, gross profit of 14.2%, and net income of $52.1 million, or $0.49 per share. For the full year, revenue was $3.06 billion, compared to $2.24 billion a year ago, and loss per share was $1.09, versus a profit of $1.36 last year.

However, there was a $363.0 million litigation loss included in those numbers, so if that were pulled out, earnings would have been $1.48 per share.

The numbers don't look good on the surface, but they don't even come close to management's guidance as of October 24, 2019. At that time, they expected net sales for the year of $3.5 billion to $3.7 billion and earnings of $2.25 to $2.75 per share (this compares to the $1.48 non-GAAP number). So, performance late in the year was much worse than expected.

Systems development comes back to bite First Solar

The biggest reason fourth-quarter results didn't hit expectations was Typhoon Hagibis's impact on the Ishikawa, Miyagi, and Hanamizu projects in Japan. There doesn't currently appear to be significant damage to the projects themselves, but a road where the power line runs has received heavy damage. The sale should happen in 2020, but it's not clear exactly when.

A 40 megawatt (MW) project sale in India also did not take place as planned.

These two delays accounted for the earnings miss highlighted above. It's not unusual for project sales to be delayed, but it highlights the execution risk companies such as First Solar face in the systems development business.

Bookings aren't what they seem

When First Solar reports bookings each quarter, investors expect that figure to translate into future shipments and revenue. But during the fourth-quarter earnings call, management said that 1.7 GW of products were "de-booked," or came off of bookings in the backlog, in 2019 and 1.2 GW were de-booked in the fourth quarter.

There are a number of reasons for de-booking, but management said the financial distress of one customer led to 0.9 GW of de-bookings in the last quarter alone. The risk is that an economic downturn could lead to financial distress among a larger number of customers, leaving bookings at only a fraction of the 12.4 GW currently reported. Last quarter, we saw that bookings may not be exactly as safe as they appear to be.

What 2020 looks like

Finally, First Solar released 2020 guidance, which may have been a little underwhelming to investors. Management expects net sales of $2.7 billion to $2.9 billion, gross margin of 26% to 27%, and earnings per share of $3.25 to $3.75 on shipments of 5.8 GW to 6.0 GW. This compares to 2019 sales of $3.06 billion, a gross margin of 17.9%, and a net loss of $114.9 million on shipments of 5.4 GW.

According to Yahoo! Finance, analysts were expecting earnings of $3.56 per share on sales of $3.37 billion, so the top line is definitely lighter than expected.

Series 4 module production is also expected to be shut down in the second quarter in favor of Series 6, which is the company's next-generation product and makes up the majority of sales today. These upgrades were expected but will hurt sales and margins in 2020.

Management also said that it's evaluating what options it has for its systems development business. As you can see above, the volatility has hurt earnings recently, and the margins on system sales haven't been as consistent as hoped. That could eventually lead First Solar to sell its systems development business altogether.

First Solar is still a business in transition

Most companies in solar energy are making strategic changes today to focus on their core businesses, and First Solar is no different. A year from now, it will be much more focused on solar module manufacturing and technology, rather than systems development. For better or worse, specialization is the direction in which the renewable energy industry is trending.

Investors looking at First Solar today should expect a much smaller business going forward. The company expects to have 8 GW of manufacturing capacity by the end of 2021, but with solar panel sales averaging around $0.40 per watt (and falling), First Solar may generate $3.2 billion in solar panel sales at best. But exiting the solar systems business means high dollar revenue sales will go with it and First Solar's sales may not show much growth for the foreseeable future.

The hope is that the remaining sales will be high margin and lead to a more profitable business than it would be with systems development included. Still, earnings of $3.50 per share at the midpoint of next year's guidance may be the high end of what we can expect long term as competition increases and solar panel prices fall in the solar manufacturing business. And that's why shares are reacting negatively to the earnings result.

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Travis Hoium owns shares of First Solar. The Motley Fool recommends First Solar. The Motley Fool has a disclosure policy.


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