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Why First Solar’s Gross Margins Contracted in 2016

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Cost of sales

First Solar’s (FSLR) Components segment saw its cost of sales rise 6% to $1.1 billion in fiscal 2016, from $1.0 billion in fiscal 2015. On the other hand, despite higher volumes, the Systems segment’s cost of sales fell 29% to $1.1 billion in fiscal 2016 from $1.6 billion in fiscal 2015. Overall, the company’s cost of sales was down 16% to $2.3 billion in fiscal 2016 compared with $2.7 billion in fiscal 2015.

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Gross profit

First Solar’s gross profit margins narrowed to 23.9% in fiscal 2016 from 25.7% in fiscal 2015. On absolute terms, its gross profit in 2015 and 2016 was $919.3 million and $703.9 million, respectively. First Solar’s 2017 guidance for its gross profit margin is 17%–18%.

Adjusted earnings

In 2016, First Solar’s EBITDA (earnings before interest, tax, depreciation, and amortization) were $555.8 million, and its EBITDA margin was 18.8%, compared with EBITDA of $774.5 million and a 21.6% margin in 2015.

In fiscal 2016, solar power (TAN) peer SunPower Energy (SPWR) saw its adjusted EBITDA margin contract to 6.1% in fiscal 2016 from 16.7% in fiscal 2015, while Canadian Solar’s (CSIQ) contracted to 8.2% in 2016 from 10.0%. Meanwhile, Yingli Solar’s (YGE) adjusted EBITDA margin expanded to 6.6% in 2016 from 2.3% in 2015. In the next part, we’ll discuss First Solar’s net losses.

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