MEMC Earnings Disappoint

MEMC Electronic Materials sees higher revenue in the first quarter, but disappoints on earning per share and gross margin levels.
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(MEMC Electronic story updated for analyst comment, Friday pre-market loss)

SAINT PETERS, MO. (

TheStreet

) --

MEMC Electronic Materials

(WFR)

announced Thursday that it saw a first-quarter earnings-per-share loss of 4 cents, on revenue of $437.7 million.

The MEMC revenue figure was ahead of Street consensus of $390 million as the solar wafer maker saw increased sales from its new project-oriented business, SunEdison. However, the earnings loss of four cents was a disappointment in light of the Street consensus of a four-cent-per-share gain in the first quarter.

An additional disappointment in the MEMC Electronic Material results was a gross margin level that dipped in the first quarter to 13.5%, versus the 14.9% gross margin level in the fourth quarter.

The 13.5% gross margin level was a step backwards for a solar company that has been plagued by gross margin shortfalls that make the days of its 50% gross margin levels in 2008 seem more distant every day.

MEMC ended regular trading on Thursday up 4.5%, as the solar sector rallied on the strong earnings report and outlook from solar bellwether stock

First Solar

(FSLR) - Get Report

, which had been released after the market close on Wednesday.

However, MEMC shares were down 6% in after hours trading on Thursday, on the post-market release of its first quarter earnings. The slide in MEMC shares was continuing on Friday morning, with a much bigger decline in shares of more than 14%.

MEMC reaffirmed its revenue guidance for the full year, but the disappointments on earnings per share and gross margin may exact a toll in trading on Friday.

The MEMC earnings were the exact opposite of the First Solar report. Whereas First Solar lowered its revenue guidance while upping earnings per share guidance, MEMC sees higher revenue amid disappointing earnings per share.

Whereas First Solar showed gross margin improvement versus the fourth quarter -- as module sales drove its business and large-scale projects were pushed out to 2011 -- MEMC saw a greater percentage of net sales from its systems business, but lower gross margins and declined earnings.

Of course, in the end, First Solar and MEMC are very different solar animals, with First Solar shifting its business mix between to modules sales and away from module shipments into its own systems business in the first quarter, for example, while MEMC is not a module manufacturer, but a player in the semi and solar wafer space.

What's more, First Solar some some improvements in the first quarter related specifically to a higher percentage of lower margin systems sales in the fourth quarter 2009, versus the first quarter when it shifted more to module sales.

MEMC reported $60 million in sales from the SunEdison business, but its new project business showed only a minor impact on overall earnings, and Collins Stewart analyst Dan Ries said that the earnings profile of the SunEdison business does not appear likely to change in the near-term.

MEMC said higher wafering costs were among the reasons for the disappointment in the first quarter. MEMC was plagued in 2009 by problems at a processing plant that exacted a major toll on its gross margin levels.

In the afterhours MEMC conference call with analysts, the company management said that the gross margin shortfall occurred as a result of the huge demand led by Germany in the first quarter.

MEMC had agreements in place with wafer subcontractors, but these subcontractors raised the prices due to the unexpected level of demand. MEMC opted not to pass on the increase to customers in the first quarter, MEMC management said on the call.

However, MEMC indicated that this pricing negative will change in the second quarter, as the company has already told customers to expect price increases.

The Collins Stewart analyst said that the bottom line is that MEMC is still losing money and only showing modest improvements at a time when many solar firms are capitalizing on the huge demand ahead of the feed-in tariff cuts in Germany.

"Just because you miss out on the boom doesn't mean you won't get caught by the bust," Collins Stewart's Ries said. He explained that while MEMC has plans to close unprofitable semiconductor production facilities and begin its own solar wafer manufacturing, the solar wafer effort is slated for 2011 production, and that could be after the big demand rush in solar has ended.

"MEMC has a strategy to fix its problems, but the stock looks likely to remain in a lull for next few years," Ries said. Collins Stewart remains at a hold on MEMC shares, and Ries indicated that his preference is to play the solar demand cycle in module makers, such as First Solar, as opposed to wafer players.

On the outlook for the second half of 2010, MEMC was more cautious than other solar firms that have reported so far. First Solar upped its earnings guidance and more or less downplayed the risk from German policymakers still not having set in stone the level of feed-in tariff changes.

The fact that Germany is moving toward an elimination of agricultural land FITs, where First Solar is the biggest player, went from being a big issue coming into earnings to being a non-issue after First Solar's earning beat and huge gains on Thursday of approximately $20 in share price.

MEMC management was much more cautious about the outlook in Germany and the fact that the current huge level of demand in Germany could exert increased pressure on policymakers to take a harder line in the final FIT reductions. However, most solar analysts have predicted that the FIT changes will been seen through in German parliament as currently planned.

-- Reported by Eric Rosenbaum in New York.

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