In our First Solar deep dive and Q123 earnings preview, we pointed out that post Q1 may provide a better entry point mainly due to the timing of the IRATC recognition. In Q4, management had guided that the IRATC will only begin to make a meaningful impact after Q1.
Despite First Solar’s timing guidance, consensus expectations were elevated going into the first quarter and was disappointed by the amount of the Q1 IRATC recognition. Taking the high end of $710 million in IRATC 2023 guidance, First Solar recognized $70m or about 10%. They expect to recognize 25% in 1H and the rest in the 2nd half of the year. This equates to $108m in Q2 and $532m in Q3/Q4, respectively.
Importantly, First Solar did not change their 2023 guidance. However, it does indicate that earnings will be heavily weighed toward the 2nd half.
Key earnings highlights
- Q123 sales were $583 million, up 49% y/y and down 45% sequentially. Sales missed consensus expectations of $713
- Q123 eps was $0.47, vs a loss of $0.41 in 2022. EPS missed consensus expectations of $0.86
The lower than expected sales was mainly due to the timing of module sales and higher logistics costs that were partly offset by higher ASPs. Gross margins were 20% vs 25% in Q1 2022.
Reviewing the key points we were looking for going into Q1.
1. Any revisions to the treatment, timing or total amount of the 2023 IRATC?
First Solar reiterated full year sales of $3.5b and IRATC amount of $660-710 and $0.17 IRATC per watt. For the first time, they shared the IRATC timing recognition – 25% in the first half and 75% in the second half.
From a timing perspective, First Solar is still mainly selling inventory that was made in 2022 and not eligible for the full IRATC in 1H23. As the year progresses, they will start to sell more inventory made in 2023 and the amount of the IRATC recognized will increase accordingly.
From a legislative perspective, there is still a tug-of-war to finalize the details of the IRA bill between the Treasury and Congress. It comes down to Assembled vs Made in the USA. The former relates to companies that apply for waivers to procure certain components overseas, assemble the final product domestically and then attempt to qualify for the IRATC.
This is how First Solar characterized it:
“I would like to take a moment to discuss the policy environment in our key markets. In the United States, with respect to the Inflation Reduction Act, we continue to await guidance related to the domestic content bonus provision.
We believe it is imperative that the United States Treasury Department issued guidance consistent with the Congressional intent of the IRA, which is to nurture true domestic solar manufacturing, ensuring a robust domestic supply chain for American made solar modules. It is critical to guidance recognized that to qualify for the bonus. At a minimum, the manufacturing of solar cells must occur in the United States. This is not only consistent with clear objective of the IRA, but is also supported by the legal framework under the Buy America Act Regulations expressly referenced by Congress in the enactment.
While the intent of the IRA and regulations governed and are clear, it is unfortunate that sections of the industry are advocating that treasury grant some form of waiver that would allow bonus credits for solar panels assembled using 4 subcomponents, such as solar cells. We believe that any such waiver runs contrary to the letter of the law and Congressional intent. The purpose of the bonus credit is to incentivize domestic manufacturing and the creation of a domestic solar supply chain and not to create an entitlement simply to support foreign manufacturers.”
An outcome closer to the Congressional intent rather than the Treasury will enhance First Solar’s competitive position due to its vertically integrated US operations.
2. On track to meet production targets and update on contracted backlog?
First Solar’s contract backlog grew from 61.4GW in Q4 to 71.6 GW in Q1. The current backlog is about 6x 2023 production capacity. They’re sold out through 2026, ex-India. Volume sold targets remained unchanged at about 12 GW. US capacity expansion plans in Ohio and Alabama are on track.
3. Update on capex plans and related financing
First Solar finished Q1 with cash and equivalents of $2.3 billion vs $320m in debt. First Solar expects the year to end at about 1.35 billion after capex. Q123 capex was $371m and fcf was negative $336m.
Typically, First Solar requires 20% of the contract upfront to secure it. Given their sold out orderbook through 2026, First solar is requesting that a greater portion of 20% deposit in in cash, which is reflected as deferred revenue on the balance sheet. Currently, this stands at $1.2 billion. This provides a significant portion of the financing required for expansion.
First solar confirmed it does not rely on super regional banks for banking services nor financing. They did not indicate that any of their clients, mainly large utilities, are experiencing difficulties either.
4. ASP per watt?
Since the beginning of 2023, pricing dynamics are trending higher. First Solar ended 2022 with a contracted backlog of 61.4GW at an average ASP of $0.288 per watt.
In Q1, it ended with a contracted backlog of 69.4 GW, at an avg ASP of $0.295 per watt. New bookings since the Q4 earnings call, totaled 4.4GW at an average price of $0.318 per watt. Management was constructive on overall ASP in the future. One driver is that large utility clients are looking to secure multiple year agreements and it appears First Solar has greater pricing power in those situations.
“And generally, we see much higher volumes and larger agree purchasing power and a multiple-year agreement. You may see ASPs more aggressively into that situation. So I wouldn't attribute the increase to any one lever. But what I would say is that we're still very happy with the market and the opportunity and the ASP that we're receiving”
Meanwhile, adjusters are a potential source of earnings upside starting in Q2.
“So we are currently processing additional amendments associated with providing U.S. manufactured product, which will be reflected in our Q2 contracted revenue backlog when reported. As we previously addressed, a substantial portion of our overall backlog includes the opportunity to increase the base ASP through our application of adjusters, we're able to realize achievements within our technology road map as of the required timing for delivery of the product.”
5. Any improvement in logistics costs that was a significant drag on 2022 earnings?
Logistics continue to be a drag on gross margins. Management stated the following:
“Although logistics costs decreased during the quarter, they continue to remain elevated relative to pre-pandemic levels. During the first quarter, they reduced gross margin by 15 percentage points. As we look to the second half of the year, we expect to see a reduction in logistics costs.”
First Solar’s Q1 gross margins ended at 20%, which demonstrates how much logistic costs detracted from profitability. To provide a recent historical context, logistics costs reduced gross margins by 19 percentage points in 2022, 11 percentage points in 2021 and 6 percentage points in 2020. So they are off the peak but still have not returned to pre-pandemic levels. A return of somewhere between 2020 and 2021 levels will be a source of positive upside to gross margins.
6. 2023 earnings expectations
It’s helpful to take a step back and examine reported 1Q23 eps vs management guidance and consensus expectations. At the end of q422, First Solar guided for a 2023 eps of between $7-8. They provided no 1Q23 guidance except that the IRATC benefit will be seen after Q1. Consensus forecasted $0.86 Q1 eps or 11% of the midpoint of First Solar’s 2023 eps guidance.
First Solar reported an actual Q1 eps of $0.41, less than consensus, and 5% of their 2023 guidance. First Solar maintained their FY 2023 guidance of $7-8. Put another way, whether they met or missed, Q1 was not expected to be significant quarter in 2023 by management nor consensus.
Rather Q1 was more of a transition quarter in a post-IRATC world. Consensus likely overestimated the impact of the IRATC and underestimated logistic costs still being a drag on gross margins.
Conclusion
In the Q1 call, management stated the following:
“I would like to reiterate that from an earnings payment perspective, as previously noted on our February earnings guidance call, we anticipate our earnings profile will be higher in the second half of the year due to contractual delivery schedules, timing of first sales of our Series 7 products and the timing of recognition of Section 45X benefits, driven by both the timing of volumes sold as well as the inventory lag where our product sold in the early part of 2023 may have been manufactured in 2022.
We are maintaining our 2023 guidance in full, including full year earnings diluted share of $7 to $8.”
Objectively speaking, First Solar was straightforward in the q4 call on its 2023 earnings cadence and how short-term inventory timing and continued normalization of logistic costs through 2023 meant earnings would be 2nd half weighted.
Meanwhile, First Solar’s 2023 IRATC and EPS guidance before Q1 also painted a compelling earnings picture in 2024 and 2025 which led to positive earnings revisions. However, the market’s expectations got a bit ahead of itself in Q123. It is why we felt post Q1 could offer a better entry point.
The fundamental story in terms of order book growth, contracted backlog, and increasing ASPs supported by important legislation are still in place. The team believes that First Solar is one of the “national champions” of the IRA bill, so for now we are willing to look through Q1 and give credibility to their 2023 guidance.
However, First Solar will have to show in Q2 that Q1 was in fact just a transition period into a post IRATC world. If they do, this will give more support to their 2nd half forecasts which indicate significant earnings power not just in 2023 but possibly through 2025.
Post Q1, consensus is forecasting $1.17, $2.49 and $3.18 for Q2, Q3, and Q4 respectively. Which would equate to $1.64 in H1 and $5.67 in H2 for a total of $7.31.
Based on consensus eps 2024 $13.44 and 2025 $20.14 estimates, the valuation is not demanding.
Recommended Reading:
First Solar – What to look for in Q1
Enphase – Post Q123 takeaways
Inflation Reduction Act – How and which companies will benefit? First Solar Deep Dive
Enphase Q4 Earnings: A Perfect 10
Solar Stocks: Enphase, Stem and First Solar
Solar Stocks Lead The Market This Year As Energy Crisis Heats Up