How First Solar Intends To Tackle The Panel Pricing Slump

First Solar (NASDAQ:FSLR) published its Q3 2016 results on Wednesday, reporting on a tough quarter that saw solar panel pricing and contracting activity decline significantly. While the company was able to beat earnings expectations, leveraging its legacy projects and cost improvements, the near-term outlook appears somewhat challenging. That said, we continue to believe that First Solar is the best positioned to whether the current industry downturn, given its strong financial position and its impressive technology improvements and road map.

Trefis has a $50 price estimate for First Solar, which is roughly 25% ahead of the current market price.

See our complete analysis for First Solar

Plummeting Panel Prices And Weak Contracting Activity

The price of solar panels has been on a downtrend this year, driven primarily by weaker demand from China, which has been slowing its installations over H2 2016. Global solar manufacturing capacity has also been expanding, resulting in oversupply and growing inventory in the market. According to First Solar, prices for crystalline silicon panels have declined by roughly 29% this year to around $0.40 per watt, with ASPs falling by close to 15% over August and September alone. While prices stabilized slightly towards the end of the quarter, the current environment does not bode very well for First Solar’s near-term margins and profitability.

First Solar’s progress on the booking front has been relatively weak, in keeping with market trends. The firm added just about 250 MW of bookings this quarter, with third-party modules accounting for about 200 MW. First Solar’s overall shipments backlog (systems + third-party module) has declined from 4.2 GW at the end of 2015 to about 3.6 GW. The firm’s revenue backlog also declined from about $6.9 billion at the end of last year to roughly $5.5 billion as of November 2. Things could remain challenging in the near term, as competition for systems projects has been mounting, while customers have also delayed signing contracts in anticipation of further pricing declines.

Rethinking The Panel Road Map And Boosting Efficiencies

First Solar has been foregoing some module supply opportunities that do not make sense from a cost perspective, while also noting that it was looking very closely at its manufacturing capacity plans. The firm is also revisiting its product road-map on account of the recent pricing developments. First Solar announced earlier this year that it would migrate from its current Series 4 module to two new module formats dubbed the Series 5 (which uses three Series 4 modules mounted on a joint rail) in 2017, while eventually launching a larger format Series 6 module (which uses new formats of glass). However, as the current market conditions don’t bode well for the margins of the Series 5 modules, the firm noted that it might accelerate the timeline for the roll-out of its Series 6 modules, which have lower manufacturing costs.

First Solar has also been focusing on improving its Cd-Te manufacturing technology, and its progress during Q3 was solid, with average fleet wide module conversion efficiencies improving by 30 bps sequentially and 70 bps year-over-year to 16.5%. The firm’s best production line exited the quarter with a 16.9% efficiency, setting the stage for further near-term improvements to fleet efficiencies. The higher efficiencies will help First Solar differentiate itself against silicon-based panels, while also allowing it to cut down on manufacturing costs. These improvements are becoming increasingly important, as the firm increasingly relies on module-only sales.

Guidance Cut For 2016

First Solar cut its revenue guidance for the year to $2.8 billion-$2.9 billion from $3.8 billion-$4 billion, as it pushed the sale of its California Flats and Moapa projects to next year. However, as both these projects have lower margins, the delay helped the firm boost gross margins guidance for the full year. First Solar’s 2017 guidance – which will be a key factor to watch given the current headwinds and weak backlog – is expected to be provided on Nov. 16.

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