FSLR – Leading Growth in Thin-Film Solar

First Solar, Inc. Announces 2007 Second Quarter Financial Results
(FLSR) is leading market growth in thin-film solar with revenues increasing 177% year/year.A day after the dust settles on FSLR’s earnings call, let’s look at what’s doing well and maybe not so well.

Revenues increased 177% y/y in Q2/07 demonstrating that FLSR has a leadership position in the emerging thin-film solar energy market. Thin-film solar panels cost significantly less than crystalline solar panels which makes thin-film feasible for large solar array projects such as for electric utilities.

Please review the following pdf file
FSLR Financial Analysis

FSLR reported earnings of $0.58 per share for Q2/07 with a one time tax treatment benefit of $0.51 per share. Wall Street was expecting earnings of $0.03, so even factoring out the extra $0.51 from the tax benefit, FSLR produced $0.07 which is still more than double what analysts were expecting.

FSLR is also giving investors comfort with its ability to collect on its accounts receivable balance. Accounts receivable declined from $27 million in December 2006 to $14 million in June 2007 which together with strong revenues, pushed Days Sales Outstanding (DSO) to a low of 16 days from 149 days for 2006. Low DSO provide a level of comfort for investors because faster collection of cash assures the sustainability of cash flows – the most important factor in a company’s valuation.

In the not so well area, or at least what some investors viewed as negative in taking the stock price down from over $120 before FSLR’s earnings release to $107.50 the day after the release, we see that gross margins are lower and the incremental revenues growth is lower. Investors become nervous over any perception of weaker financial performance especially stocks with high PE ratios.

FSLR’s gross margins in Q2/07 were 37% versus 48% in Q4/06 and 45% in Q1/07. FSLR is in the process of adding to its solar panel production capacity. Production facilities need to operate close to full capacity to lower cost per unit and thereby, achieve higher gross margins. FSLR is significantly adding to its production capacity which adds costs ahead of production and detracts from profit potential.

FSLR’s incremental quarter over quarter revenue growth was an increase of $10.3 million in Q2/07 over Q1/07. Incremental revenue growth was however, $14.3 million in Q1/07 and $14.2 million in Q2/06. Investor are willing to pay a high multiple for a stock with strong growth potential. Any sign of weakness and investors flee. Given the long lead times in solar projects there is variability in revenues on a quarterly basis. So why it may be important to look at incremental growth, the trend for solar is just emerging and should provide future growth opportunities.