Canadian Solar Shipments Up, Margins Down

NEW YORK (TheStreet) -- Chinese solar company Canadian Solar (CSIQ) reported a much larger than expected quarterly loss on Wednesday after the market close, with earnings of 13 cents per share well below the average analyst estimate of 41-cent earnings in the first quarter -- though it was a one-time foreign exchange charge that caused the big miss.

Canadian Solar had a $17.2 million foreign exchange loss. This is not the first quarter during which Canadian Solar earnings have been marred by the foreign exchange hedge issue. Without the foreign exchange charge, Canadian Solar would have exceeded the average analyst estimate of 41 cents, with a 44-cent earnings per share in the first quarter.

Gross margin might be a larger, and lingering, issue for Canadian Solar. Gross margin also came in lower than expected and Canadian Solar guided to similar gross margin in the second quarter.

Andrew Chen, Canadian Solar CFO, commented in the earnings release, "First quarter gross margin of 14.7% was in line with prior guidance, with ASP declines in line with expectations and macro trends. The benefits of our ongoing cost reduction program were offset by higher-than-forecasted wafer prices on the spot market, higher polysilicon prices and higher non-silicon materials costs, including silver paste. We continue to pursue cost efficiencies across our operations, with a focus on reducing wafer, cell and module manufacturing costs."

"If you are worried about oversupply later in the year, with mid-teen gross margin, you might be concerned about what might happen with additional price pressure, since the low-cost leaders in the Chinese solar sector are at high 20% to low-30% gross margin," said Wedbush Securities analyst Christine Hersey.

Gross margin declined from 17% in the fourth quarter to 14.7% in the first quarter 2011, due to "due to lower average selling prices, relatively high raw material costs and costs associated with normal holiday-related factory shutdowns," the company said in its earnings.

Canadian Solar expects to generate gross margin between 13% and 15% in the second quarter.

There were a few key positives in the Canadian Solar. The Chinese solar company reported a better-than-expected shipment level, up 59 megawatts over the fourth quarter. Canadian Solar topped the top-line expectation, too, with revenue of $443 million surpassing the Wall Street consensus of $423 million. In this respect, Canadian Solar reported a better first quarter than some of the top Chinese solar companies. Overcapacity and pricing pressure fears in solar have lead to arguments favoring the lowest-cost, "tier 1" Chinese vendors Trina and Yingli, but it's Canadian Solar and Jinko Solar (JKS) that met shipment expectations in the first quarter, while Trina and Yingli pre-reported disappointing shipment levels.

Outlook has been key for solar companies, and most solar companies have been very cautious about 2011. There has been a recent spate of first quarter negative earningspre-reports from Chinese solar companies, including the Yingli Green Energy (YGE) and Trina Solar (TSL) shipment declines from the past two days.

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