October 28, 2010 / 11:27 PM / 9 years ago

UPDATE 3-First Solar profit up, but margins weaken

* Q3 EPS ex-items of $2.21 vs Wall St view of $1.95

* Revenue rises 66 percent to $798 million

* Gross margin fell to 40.3 pct from 50.9 pct yr ago

* Shares drop 6.7 pct in post-market trade

By Matt Daily

NEW YORK, Oct 28 (Reuters) - First Solar (FSLR.O), the top photovoltaic solar maker, posted a 16 percent increase in third-quarter profit and raised its full-year profit forecast, but weaker margins and rising costs pushed its shares down more than 6 percent.

Sales at solar companies have surged this year, driven by strong demand globally and especially in Germany, which consumes more than half the world’s supply of the modules that turn sunlight into electricity.

But declining subsidies in Germany and other European countries threaten to compress profit margins as solar companies cut prices for their products.

The company said it intends to trim its module prices in the coming months in key markets in a bid to keep sales growing.

“They’re talking about the need to price (low) in order to move volume, which is not a bullish sign,” said Christine Hersey, an analyst at Wedbush Morgan.

First Solar, the largest solar company by market value and the industry’s lowest cost producer, said its gross margin fell to 40.3 percent in the quarter from 48.3 percent in the second quarter and 50.9 percent in the year-earlier quarter.

That decline appeared to be driven by the increase in its business that build solar power plants as well as slightly higher manufacturing costs of 75 cents per watt from 74 cents in the second quarter.

Net profit for the third quarter climbed to $177 million, or $2.04 per share, from $153 million, or $1.79 per share, a year ago.

Excluding one-time items, First Solar earned $2.21 per share, topping analysts’ average forecast of $1.95, according to Thomson Reuters I/B/E/S.

Revenue rose 66 percent to $798 million, topping the $779 million analysts had expected.

It also raised its full-year profit forecast to $7.50 to $7.65 per share from a previous range of $7.00 to $7.40 per share.

On Wednesday, Norwegian solar group REC posted an 84 percent increase in quarterly profit to 827 million crowns ($142.5 million). [ID:nLDE69P1J9]

OUTPUT GROWTH

Under Chief Executive Rob Gillette, who took the helm a year ago, First Solar has moved aggressively to boost its production, and said earlier this month it would build new plants in the United States and Vietnam, bringing its capacity to 2.7 gigawatts (2,700 megawatts) in 2012.

To create an outlet to help sell those solar modules, the company has expanded into building the power plants, and currently has a pipeline of projects totaling more than 2 gigawatts. One gigawatt is about the same output capacity as a nuclear reactor.

That business made up about 22 percent of its total quarterly sales, up from 15 percent in the second quarter.

First Solar had steadily trimmed its production costs on modules over the previous several quarters, and the increase in the third quarter came as the company implemented new processes to help improve efficiencies.

“(That) becomes somewhat of a challenge and affected us in terms of yields and our equipment uptime to do the implementations,” Bruce Sohn, the company president, told a conference call.

Shares in First Solar, which were up 11.6 percent year-to-date at the close of trade on Thursday, fell 6.7 percent in after-market trading to $141.00 on the Nasdaq. (Additional reporting by Sarah McBride in Los Angeles)

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