The weakness in the solar industry has dragged another player into the whirlpool of weak quarterly results. JA Solar Holdings (Nasdaq: JASO ) , which makes solar panels, reported a worse-than-expected quarterly loss and trimmed its full-year revenue view, sending its shares off more than 5%.
Let’s take a look at the challenges that lie ahead for the company.
A look at the quarter
Revenues for the quarter jumped 12% to $413 million from $368 million last year, but declined 27% on a sequential-quarter basis. The rise in sales was powered by an increase in shipments by 29% on a year-over-year basis, but failed to meet Street estimates of $418.6 million. The company reported an operating loss of $31.3 million compared with an operating profit of $56.2 million a year ago as subsidy cuts in Germany and Europe led to an oversupply in the industry and pulled down the average selling prices of solar products.
The oversupply may be causing a piling up of inventories, which surged 122% from last year. This means that the inventories have been gathering rust in the warehouses as JA Solar tries to overcome the weakness in the market.
Industry downturn
2011 has been a disastrous year for the industry as subsidy cuts in Germany and Italy, the two largest markets for solar products, has led to a fall in prices. Companies have been forced to create provisions to write down inventory costs to mirror the fall in prices, thereby creating a negative impact on margins. Players in the industry haven’t been able to cope with rising costs as is the case with Evergreen Solar, which has filed for bankruptcy. Even a bigger player like SunPower (Nasdaq: SPWRA ) reported wide losses of $147.9 million in the quarter.
JA Solar’s earnings come as no surprise amid the weakness that the industry is currently experiencing.
The silver lining
Although the company is suffering due to tepid demand in Europe, it is expanding its base in Japan, Australia, the U.S., Canada, India, and most important, China. JA Solar is setting up a production factory in China that will have a production capacity of 3,000 megawatts upon completion. China is a rapidly growing market for solar power and these steps are expected to hold the company in good stead once it emerges from the present slump.
The Foolish bottom line
Although the company has taken measures to expand, it has swung to a quarterly loss as it grapples with the slowdown in the industry. We may have to wait at least until the next quarterly results to have a clearer picture, but for now, I’m worried about JA Solar.
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