SAN FRANCISCO and WUXI, China ( TheStreet) -- Suntech Power Holdings ( STP) delivered the gross margin improvement that the street and solar investors were looking for in the fourth quarter.

Suntech's gross margins in its wafer business improved to 26.3%, from 20% in the third quarter, and its consolidated gross margin level of 23.8% in the fourth quarter easily beat its 17.8% gross margin number from the previous quarter.

Suntech Power shares are up by more than 6% in the pre-market on Thursday.

It's a good thing Suntech Power delivered gross margin improvement. Gross margins have been a key factor driving the market reaction to solar earnings so far in this fourth quarter earnings season.

First Solar ( FSLR) suffered mightily after its earnings for showing the type of gross margin deterioration that solar investors have feared will be a long-term trend for the bellwether solar stock. Trina Solar ( TSL) even amid record earnings, was slapped by the market for conservative gross margin guidance for 2010. Trina Solar delivered a record quarter, but when it guided first quarter 2010 gross margins to be down down from a record level in the fourth quarter, its shares sank on earnings day. Suntech has, in effect, given the same lower gross margin guidance, however, the 20% target will remain the key, and not the fourth quarter gross margin outperformance.

Suntech Power did guide lower in 2010, with gross margin expectations of 18% to 20% in the first quarter. While the shares are up early, 18% might not cut it long-term, with investors.

The first quarter of 2010 is expected to be another good one for solar companies, while the second half of 2010 remains uncertain. Therefore, if Suntech comes in at the low-end of its gross margin guidance in the first quarter, that could result in renewed questions about its ability to hit the 20% gross margin bogey. Analysts may continue to zero in on Suntech hitting the 20% high-end of its guidance range in 2010.

Adam Krop, an analyst with Ardour Capital Management, said Suntech has always talked about a 20% target in gross margin, and it underperformance in 2009 was a disappointment. Krop had expected gross margins to improve in the fourth quarter.

Suntech beat the Street on the main earnings estimate numbers also. Suntech reported earnings per share of 27 cents, versus an estimate of 11 cents per share, and had fourth-quarter revenues of $583 million, well above a street consensus of $468 million.

Ardour Capital's Krop said the gross margin improvement was one key factor for Suntech, but another big issue would be outlook from the company about growth opportunity in China and the U.S., as the German market comes under pressure in the second-half of 2010.

"If they comment on the U.S. and China, and their strategy for getting into these markets, investors will look on it favorably," Krop said. He added that the biggest concern is when a national feed-in tariff will be announced in China, and some indications from China are that it won't come until mid-2010 at earliest.

Suntech did not provide any guidance about the U.S. or China in the earnings release, only reiterating the business developments from 2009 related to both markets.

Editor's Note: This story will be updated with any commentary from the conference call about China and the U.S. Return to TheStreet for updates later in the day.

Suntech provided general guidance for first-quarter 2010 shipments to increase by 5% to 10%, compared to the fourth quarter of 2009. Suntech expects to ship more than 1.25 GW of PV products in the full-year 2010.

Suntech reiterated target expansion to 1.4 GW of PV cell and module production capacity by the middle of 2010, of which 450 MW will be Pluto-enabled.

Suntech's new Pluto-enabled solar cells were highlighted again in the earnings, and the company expects to ship 30 MW of Pluto cells in the first half of 2010 and 150 MW of Pluto-enabled cells in the second half of the year. There is pressure on the solar companies to get out to market with more efficient solar technology, as pressure on average sales price continues to mount.

With an expectation of 1.25 GW of shipments in 2010, the 150 MW expected to be Pluto-enabled may not move the needle in terms of heading off reductions in average sales price in the second half of the year.

Operating expenses for the fourth quarter of 2009 were up to $51.7 million, compared to $39.3 million in the third quarter of 2009, or approximately 8.7% of sales. Ardour Capital's Krop said that Suntech's operating expenses have been hovering in the 8% range before the fourth quarter.

-- Reported by Eric Rosenbaum in New York.

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