Note: the post script is an important part of this story. My original blog post was too hasty in making an assumption about third-party module sales.
The Trina Solar press release updating guidance has me utterly perplexed (and I follow this stock closely).
Here is the key text:
The Company estimates its solar module shipments in the third quarter of 2011 to be in the range of 372 MW to 375 MW, compared to the Company's previous guidance of 480 MW to 520 MW for the reasons discussed below. Additionally, for the third quarter of 2011, the Company estimates:
* Gross margin relating to its in-house wafer production and module production to be in the range of 18% to 19%, in line with the Company's previous guidance of high teens in percentage terms; and
* Overall gross margin to be in the range of 10% to 11%, which includes a non-cash inventory write down of approximately $19 million, compared to the Company's previous guidance of mid to high teens in percentage terms.This had me reaching for my calculator. Shipments of 372-375 MW - lets call it 374 MW as a reasonable average. Gross margin of 18% to 19% from wafer production - so lets call it 18.5 percent and in-line with their guidance. Gross margin of 10% to 11% - lets call it 10.5% - after an inventory write down of approximately $19 million (which compares to the old high-teens margin).
So by simple subtraction we estimate that 8 percentage points of margin represents $19 million. This suggests that the total revenue is = $19 million /.08 = $237.5 million.
But that is the revenue from 374 MW - so revenue per watt = $237.5 million/ 374 million watts = $0.635 per watt.
The lowest solar panel price mentioned in any analyst report I have seen is $1.08 per watt.
Under 64 cents per watt is either a catastrophe inconsistent with any observable solar panel price or there is a significant charge the company is not disclosing.
Which is it?
Post script. Some people have observed the typical 3 percent difference between IN HOUSE wafer production and END GROSS MARGIN - the difference being third party panels they buy in and then distribute.
They then calculate 5.5 percent margin difference - implying ASP in the 90s. Plausible - but still a disaster.
I had discounted this. Reason: I did not think there would be many third-party product sales when they are storing their own stuff in warehouse and can't sell it and are cutting production. That was a guess only. Their own production cut is so severe that third-party sales through their channel just look unlikely.
But maybe there really are large third party sales remaining. There might be a few reasons - but I am open to suggestion. Here goes for some thoughts:
(a). They are contractually obliged to sell for third parties and they have contractual expenses larger than they are telling us, or
(b). They still sell for third parties because the third parties can deliver cheaper than their marginal manufacturing cost, or
(c). The third party stuff is higher quality, or
(d). The collapse in volume was so total that there were third party sales in the beginning of the quarter but not in the end - so third party sales were a realistic part of the story but will not be next quarter, or
(e). Something I can't think of.
I was thinking - falsely perhaps - with the disastrous delivery numbers - that the third party distribution would be cut to zero. I should have put that assumption in my note.