First Solar Inc (NASDAQ: FSLR) is already the biggest beneficiary of the threat of solar tariffs on imports coming into the U.S. and the windfall continued to come in third-quarter earnings results. Revenue of $1.09 billion and net income of $209.7 million, or $1.95 per share, was enough to crush analyst estimates and cause another outlook increase.
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Utilities and project developers are concerned they'll have to buy solar panels subject to import tariffs in 2018 and 2019, so they're turning to First Solar, whose thin-film panels (likely) won't be subject to tariffs. That's led to tremendous demand and given First Solar the incentive to increase production in both 2017 and 2018. Here are the key takeaways from the quarter.
Q3 was driven by project sales
First Solar's results can be volatile quarter to quarter depending on project sales, and in the third quarter, sales timing worked in its favor. You can see below that year-over-year results look incredibly strong, despite the fact that solar panel production was down 32.3% to 527.3 MW.
|Metric||Q3 2017 Actuals||Q3 2016 Actuals||Change|
|Revenue||$1.09 billion||$681.3 million||59.6%|
|Net income||$205.7 million||$150.5 million||36.7%|
Sales of the California Flats and Cuyama projects were the big driver of growth and likely accounted for around half of revenue in the quarter.
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Guidance goes up again
Management said that 2017 revenue would still be $3.0 billion to $3.1 billion, but increased earnings-per-share guidance from $1.55-$2.20 to a new range of $2.05-$2.30. On a non-GAAP basis, management increased earnings guidance from $2.00-$2.50 up to $2.40-$2.60 per share.
What's notable is that the strong results of the last two quarters won't extend to the fourth quarter. Guidance implies less than $500 million in sales and a loss of about $0.35 per share given the fact that there are no major project sales taking place.
2018 could be better than expected
First Solar's ability to offer stable pricing has also led to a lot of bookings in 2017. In the third quarter alone, the company booked 4.5 GW of panel and other component sales, bringing yearly bookings to 6.7 GW. This compares to expected panel production of 2.6 GW to 2.7 GW in 2017 and a max of about 4.0 GW of production capacity in late 2019 when Series 6 production is fully operational.
Management did say there was the potential to delay upgrading an additional 1 GW of Series 4 production in 2018, which would partially delay Series 6 upgrade. But if First Solar can generate high panel prices because it's the only manufacturer able to offer tariff-free solar panels, it may be worth the trade-off for near-term revenue.
Based on management's comments, it's unlikely they would make the decision to increase Series 4 output in 2018 unless solar tariffs give the company higher-margin sales than it would have under normal competition. Expect a final decision from President Donald Trump early in 2018, which is when I would expect First Solar to decide if it's going to expand Series 4 output in 2018 or move forward with its Series 6 upgrade.
A lot riding on the tariff case
The rapid bookings pace is directly related to the pending solar tariff case before the International Trade Commission. If high tariffs are put in place, as proposed, First Solar could see extremely strong demand for at least the next four years, the length tariffs can be put in place. But if tariffs aren't imposed, or are very low, First Solar will be facing stiff competition again.
The upside is that tariffs could give First Solar incentive to expand manufacturing beyond the 4 GW currently in the works. On the conference call, management said that could mean a new factory or an expansion at an existing facility.
On the downside, no, or low, tariffs could mean cheap Chinese solar panels will continue flooding into the U.S. It's no coincidence that management is booking future sales as quickly as possible right now. It lowers risk long-term in the case of a low tariff scenario and is a golden opportunity to lock up years' worth of sales.
2017 has been far better than expected, but it's likely that 2018 will look very different. First Solar doesn't have as many projects to sell in 2018 and 2019 as it transitions to primarily a component sales model. And solar panel production will be disrupted as equipment is upgraded from Series 4 to Series 6.
The good news is that First Solar still has the best balance sheet in the solar industry. Management expects to have between $2.1 billion and $2.3 billion of net cash on the balance sheet at the end of 2017, or nearly half its market cap. Combined with the growing backlog of panel sales, First Solar is taking full advantage of its current position as the only major thin-film solar manufacturer in the world.
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