First Solar Earnings Chatter - A View from 33,000 Feet

First Solar's (FSLR) earnings report has hit the Street, and with it, the buzz and the volume has been cranked up on it's ramifications for not just First Solar, but Solar and Renewable Energy as a viable industry. I wanted to bring some "boots-on-the-ground" perspective to the conversation, and hopefully both add some insight into the discourse, as well as debunk some truths being espoused as absolutes.

First, let's address First Solar:

1. Market Reaction to the Q3 Earnings Release - The stock plunge after the Q3 earnings release is simply common knee-jerk reaction to headlines in a real-time world. It's common, and frankly if I held a substantial position in First Solar, would inspire not much more than a yawn. Earnings and revenue are up substantially. The sell-off was due to First Solar not being able to recognize revenue attributable to a specific project until Q4 (Note: In a balance-sheet world, I would be up someone's tail if I were the CEO, a gifted CFO always ensures you don't miss earnings based on revenue recognition GAAP rules - I'm not saying I would pursue something illegal, quite the opposite, there are times GAAP simply doesn't reflect the true fiscal situation of a corporation, ESPECIALLY a fast-growing technology firm). When examined, the project is absolutely solid, and First Solar will have to post the revenue in Q4. Nothing we tech sector veterans have not seen a million times.

2. Company Performance and Trends - Late Wednesday, the company reported a 55 percent leap in third-quarter earnings on a 38 percent increase in revenue. But sales of $480.9 million missed the average analyst estimate of $528.8 million, as measured by a Thomson Reuters survey. This is a timing issue based on revenue recognition, not a revelation of weakness within the company or the solar sector. "This is truly a timing issue," Chairman Mike Ahearn said on a conference call with analysts. "That project has been sold, the contract wasn't signed until early in the fourth quarter. We remain on track for annual guidance." First Solar has some fantastic fundamentals in a sector that is prime to explode for the macro-reasons I list later in this posting. Bottom line: First Solar should remain the low-cost industry leader for the foreseeable future and will likely gain share value in large-scale projects.

3. Market Penetration - If First Solar navigates current conditions effectively, they will still have tremendous upside with their first-to-market (FTM) leadership position in residential rooftop installations in the U.S. - in technology sectors, never discount the critical FTM factor. Many inferior models have thrived simply based on this factor alone.

Second, let's quickly take a look at the solar industry from cruise altitude, so we can factor industry trends into any analysis of solar-related investments:

1. The Truth About Germany - German feed-in tariffs and other incentives indeed spurred the acceleration of solar energy projects in that nation, and they have a large number of roof-installed solar systems. Critics are always so fast to glance at a number or article and then convey them not as opinions, but as absolutes. But I suggest to be sure to do your due-diligence. Germany has horrid solar generation conditions, averaging only four sun-hours per day. So yes, it is not going to displace other traditional forms of energy generation. But be careful to state it has failed, because that was never the point. Germany made a strategic move in investing a lot of capital in solar energy generation - to attain industry leadership. Germany now possesses the intellectual property and the manufacturing and export capacity that is expected to make it one of the three dominant global players in an industry that will be worth tens of billion dollars a year. Even today, it already has over 50,000 employees in the solar industry.

2. Rooftop Solar Energy Generation Systems - I continually hear, "We are not going to make any dent with only rooftop installments. We will only displace a couple of coal power plants, at best." I have irrefutable evidence to the opposite - I personally have dozens of rooftop installation projects I can share with anyone, anytime, that have eliminated a homeowner's entire energy bill. These installations were in Arizona and California, primarily in desert regions, where averages of 7-8 sun-hours per day are common. So to take the above often-repeated statement-of-fact further, indeed if we extrapolated that on a much larger scale, and there are several hundred thousand homes in the Phoenix metro area with rooftop installations that are 100% offsetting their energy bills, we can displace more than a "couple of coal power plants at best." So that is indeed not an absolute fact - it's actually very much incorrect.

3. End-User Return-on-Investment - As far as overall return-on-investment, we have a program in place with realtors and have executed several successful case studies in Phoenix and Palm Springs that are clear in showing it has a significant ROI on a homeowners capital investment - better returns than most places you could deploy that capital in this economy. When you combine government subsidies that help offset a significant portion of the homeowners out-of-pocket up-front costs with the lift on property values in this real estate market (with 20-year warranties on the balance-of-systems, you are selling a home that does not have an electricity bill attached to it - a powerful hedge against future energy and inflation cost increases), the resultant ROI is powerfully conclusive in these markets that residential solar installations are absolutely viable.

4. Long-Term Outlook for Solar - The longer-term outlook is cloudier, but trends positive. Government funding, as well as funding from the private sector, has been flowing strong into the solar industry. That is a leading indicator - "follow the flow,", as we say in Silicon Valley. But that isn't sustainable long-term - the key metric to follow is the LCOE (Levelized Cost-of-Energy), or LEC (Levelized Energy Cost), two different names for the exact same thing. It is an economic assessment of the cost the energy-generating system including all the costs over its lifetime: initial investment, operations and maintenance, cost of fuel, cost of capital. A net present value calculation is performed and solved in such a way that for the value of the LEC chosen, the project's net present value becomes zero. Typically LECs are calculated over 20 year lifetimes, and are given in the units of currency per kilowatt-hour, for example USD/kWh or EUR/kWh or per megawatt-hour. Solar's LEC must come down to the level of other, traditional energy generation sources for it to truly gain critical mass and the accelerated investment and deployment that comes with it.

5. The Green Culture Cannot be Discounted - Another powerful force isn't a quantifiable metric but must be factored when forecasting the solar industry, which is the cultural and societal push to renewable Energy, both domestic and internationally. The United States has been effectively put in the position of either taking over the leadership of the GreenTech sector, and the climate debate, as only the U.S. can do, or find ourselves behind Europe and Asia in a technology sector absolutely critical to the economy. And effectively there is no choice - whether you believe in global warming or Renewable Energy, we are jumping on the train because we must.

6. The Smart Grid Impact - The Smart Grid's evolution and the corresponding innovations will have a dramatic effect on Solar's LEC. The Smart Grid is in its infancy, so we will see its impact on Renewable Energy sources and their net efficiencies over the next 5-10 years start to be realized. I cannot stress enough how critical a factor the Smart Grid will have on the entire energy industry, and the result of its impact simply cannot be forecasted yet - by the Smart Grid's very nature, there are too many variables to accurately analyze and draw a clear conclusion.

7. Solar Component Oversupply Issue - The oversupply of solar panel units does indeed have an impact on First Solar, but it is a net-positive for the industry as a whole for obvious reasons. Case-in-point, China's Solar production capacity has increased substantially (both qualitative and quantitative, I have seen impressive bench test results from very low costs panels as compared to expensive established brands, and the build quality is impressive), and the impact of a downward pressure of solar panel components will continue to effect LEC in a positive manner for the solar industry as a whole.

8. The Federal Government Impact - Finally, at least in the near-term, we have an Administration and Congressional body that, right, wrong or indifferent, is dedicated to continue investment substantial sums into the GreenTech industry, solar very much included. And the investment is coming both directly and in the form of subsidies and tax-credits. It's stunningly substantial when I can eliminate 75% of a homeowner's out-of-pocket initial costs of a rooftop solar energy system. That cannot be discounted, again in the near-term.

Just some insights to consider when you look at the solar landscape from a macro-level. I hope it is helpful!

Disclosure: No holdings in any of the companies referenced in this article.

Bye, Bye Love: Leaving My iPhone for Droid

You never forget your first love. Even harder is breaking up when you love the whole family that surrounds your love. But, as Gordon Lightfoot once sang, "I don't know where we went wrong, but the feelings gone and I just can't get it back..."

The iPhone has finally lost my heart. It was a wonderful relationship, one I'll always have cherished memories of. I own a ton of Apple (APPL) products, and I have been extremely happy with all of them. But I have to move on from the iPhone. Otherwise, I am either going to lose my mind, or my life from a stress-induced heart attack. So fitting: I literally just dropped yet another call on my iPhone as I type these words. Enough is enough. It's time to pen a farewell, and look forward to the hot new smart phone in town that has all the guys attention: Droid.

I'm hoping Droid isn't another one of those sleek smart phones that charges into town, gets everyone excited, and then lets us down. But from both the reports I am reading, and a few industry insiders that have actually gotten their hands on working models I've spoken to, the Droid should be a contender. I think a lot of the rhetoric is overheated - this won't "bury the iPhone," as a noted technology columnist breathlessly wrote last week. But I think this is the device that will finally give the iPhone a competitor. I know one thing - I am just overwhelmed with excitement at the thought of calls not dropping at mind-boggling regularity.

If the initial reports we are hearing are accurate, this will provide the Google (GOOG) Android OS platform the traction we have all been waiting to see. I have used the iPhone since it was introduced, and have always immediately upgraded when the new versions have been released since. I have owned too many Macs to recall, and I have the Apple TV, the Time Capsule - suffice it to say, I like Apple products. But my iPhone actually hit the wall last Thursday after the 11th - I am not exaggerating, the 11th - drop on a VERY important call conference call. Now, I am fairly even-tempered, and have always chalked up the iPhone's dropped calls and terrible reception problem as one to live with in exchange for what I feel is the technology invention of the decade.

But eleven dropped calls over the course of an hour? And it wasn't like I was in a parking garage, or driving down a desert road through the mountains. I was in Los Angeles, on the fourth floor of a building. No one else on the call in the same office had a single drop. I hear and read it everywhere - it's AT&T (T), it's the iPhone, it's almost solved, etc. But now, I am actually doing the unthinkable - I am going to give the Droid a try.

Reasons Beyond the Dropped Calls Issue for Migrating to Droid

There are a few reasons for the switch to Droid, which is a major deal for an Apple guy like myself. Lately, I have been utilizing a lot more of Google's products, and have had a very positive experience with them. I am using Google Wave, a truly revolutionary product that, once a lot of bugs are worked out (it's complex new technology in early, early beta, but even so....wow, it's a game-changer), is going to go vertical quickly. I am in the GreenTech industry, and knowing a few senior executives at Google (who were the guys that finally convinced me to give all their products a test drive, and now I'm using a lot of them full-time), Google's PowerMeter is just a a tippy-toe of their plans for the Smart Grid. I started using Google Docs - solid, cloud-based solution, not as sleek as Apple's iWorks software products, but perfectly fine for day-to-day documents. Google Voice is my next trial, and I hear great things - including fantastic synergistic ability with the Droid.

So, all-in-all, Google continues to impress me. And if Droid truly does gain the critical mass the pundits are predicting, I am expecting a lot of these Google products will have some special integration abilities or applications to optimize their use on Android OS mobile devices. And, yes, mobile application programmers will begin to really push Android mobile apps out, I know many mobile app firms, and for a year, I have heard "once Android has enough market share..." way too many times. It won't be the landslide overheated pundits are breathlessly proclaiming. But will finally begin to see that acceleration compression point in Android application development needed to make the Droid a viable contender to the iPhone.

This leads me to a few final conclusions:

1. Droid is not an "iPhone Killer" - Droid won't be what is considered "Disruptive Technology," but could be a "Disruptive Innovation," and perhaps accelerate the pace of mobile smart-device adoption rates. But until we actually see the phone, and it has a few months on the market, the rhetoric needs to cool down (I was at CES when the PalmPre was debuted there, and people were exclaiming the iPhone was dead - neat device, but the iPhone keeps on trucking).

2. Clear and Present Danger to Apple is the iPhones Phone Feature - I love the statement, "I love everything about the iPhone except the phone feature. I don't know if it's the phone's design, if it's AT&T (I have never used another device on the AT&T network), if it's all of AT&T's bandwidth being swallowed by data-transfer overload - and I don't care anymore. I am trying the Droid, but will keep my iPhone, and by Christmas I will decide on the winner. I will not go into 2010 having daily dropped calls. I travel quite a bit, and I can find no geographical sense to it - my iPhone drops calls everywhere, my friend's iPhones drop calls...I am a devoted Apple fan, but something must be done. If a MacHead has had it, I must assume many are frustrated as well. I hear great things about Verizon (VZ) - I know I was using T-Mobile (DT) and a Blackberry prior to iPhone's arrival, and I never had a major issue with dropped calls.

3. Droid Will Hit Other Smart Phone Devices Harder Than it Hits iPhone - My strong opinion is, if Droid is everything we are hearing, and if the pricing news I hear is correct, Research in Motion (RIMM), Palm (PALM), Nokia (NOK)and others will feel Droid's debut harder than Apple. The iPhone may experience a slowing of their growth in the 30+ demographic, but all the data I have seen regarding smart phone devices suggests it's the 30+ users that are ripe and ready to be picked by Motorola (MOT).

4. Do Not Discount the Advantage Apple's Brand and Marketing Has Over Droid - Which phone will attract more first-time smart phone users remains to be seen. Apple's marketing (brilliant, and their agency, TBWA/Chiat/Day (OMC), are the absolute kings of "return fire messaging" - their new spots (Broken Promises is my favorite) mocking Windows 7 are fantastic creative), their overwhelming market share lead, the seamless integration with iTunes, the "cool" factor directly related to the iPhone's core demo (younger, affluent, hipsters, Gen Y and X, creative, etc) and finally, Apple's ability to innovate like no other consumer technology company on the planet, leads me to think Droid has it's work cut out for it to "bury" the iPhone. Also, the Apple brand is powerful - in The Centre for Brand Analysis' 2009 "CoolBrands" Study, Apple just absolutely dominated for the 5th straight year: iPhone was #1, Apple #3, and iPod #4. And while Google was a strong #8, they are starting to take a beating as they have grown so large - America loves the underdog, and Google is evolving into "The Evil Empire", taking that crown from Microsoft (MSFT). Additionally, many marketing surveys are showing consumers are not linking the Google, Android and Droid brands together - I can tell you I have had way too many people ask me what in the world that Droid spot was selling. The Droid spots are a classic example of very clever creative, winning rave reviews from many inside the advertising industry - but leaving consumers wondering what the hell was that all about?

5. The iPhone is a Gaming Device - An important factor often overlooked as we try to predict future market share in the smart phone category is Apple's tight relationship with the gaming industry. Games are predicted to make up 25% of all iPhone applications by next year, and a recent DFC Intelligence report has predicted the iPhone will overtake BOTH Nintendo (NTDOY.PK) and Sony (SNE) for the lead in portable gaming device sales by 2014. Apple is well aware of this, and has heartily embraced gaming companies. I am also aware from insiders Apple is fully consulting with major gaming players in regards to future generation iPhones. Gaming is a fantastic sector to be part of, and will continue growing. Droid, and the Android OS, has an almost insurmountable disadvantage, being so late to the game, and leaving application developers the difficult task of programming games for an operating system deployed on multiple hardware executions (a game that rocks on Droid may be terrible on the MyTouch, for example). And again, back to branding - Android doesn't mean anything to a gamer, nor does Motorola or Verizon - and none of these brands are even close to Apple in terms of the buzz factor, important to the primary gamer demographic profile.

No One on the Corner Has Swagger Like Apple

When asked about the new competition, Tim Cook, Apple's COO, responded, "“I think they’re trying to catch up with the first iPhone that we released two years ago, and we’ve long since moved beyond that." That is swagger Jay-Z would be proud of.

And the facts back that up: In Apple's latest earnings statement, "iPhone sales grew 7 percent from the same period last year. During the entire fiscal year, Apple sold about 21 million iPhones, a 78 percent increase from the previous year." That number may have been even higher, but the company had some trouble meeting the demand. And Apple didn't take advantage of the new GAAP accounting rule changes as they apply to iPhone and accounting of future subscription earnings, which would have lifted the numbers even higher. Although the changes won't affect Apple's actual cash flow, they will see large benefits from a technical and sentiment perspective, and their corresponding lift on the company's stock price and valuation. Key benefits from the changes:

1. Inflows from quant driven strategies and retail investors as AAPL shares will screen cheaper on “New” GAAP consensus estimates vs. “Current” GAAP (19x vs. 23x)
2. Likelihood of larger earnings surprises given analysts have consistently underestimated iPhone gross margins which have ranged between 50-60% over the last year

The bottom line is that the new rules allow Apple to recognize the majority of the revenue and direct costs of an iPhone upfront (estimated 95%), shifting value from the balance sheet to the income statement.

Overall, it's much too early to make any serious statements about an "iPhone Killer." Yeah, I am excited, I will get one the first day, and I am going to give it until Christmas before I official stop using my iPhone. I do think it's great for the mobile space as a whole that Android is finally getting the traction it needs, and I was a devoted Motorola guy WAY back in the day - it would be great to see Droid be the beginning of their comeback.

One thing for sure, I am excited to get my hands on it and see if Droid lives up to the hyper-buzz!!!

Disclosure: No holdings in any of the companies referenced in this article.