MEMC Misses 3Q Expectations - Analyst Blog

MEMC Electronic Materials Inc. (WFR) reported third-quarter 2010 adjusted net income per share of 11 cents, which missed the Zacks Consensus Estimate of 13 cents. Subsequently, shares dipped 6.24% in the after hours.

The adjusted figure excludes the impact of restructuring charges, warrant adjustments and non-controlling interests but includes amounts related to direct sales and lease-back from the Solar Energy segment.

According to the analysts, weak demand in the semiconductor market may offset the positive growth trends in Solar. Moreover, they think that significant contribution from the SunEdison business is doubtful in the near term.

Revenues

On a GAAP basis, MEMC reported third-quarter revenues of $503.1 million, up 62.3% from $310.0 million in the year-earlier quarter, but below the Zacks Consensus Estimate of $528.0 million. The quarter's performance may be traced to outperformance in both the Semiconductor and Solar Materials segments.

Including $47.7 million related to direct sales from the Solar Energy segment and lease-back transactions, non-GAAP revenue came in at $550.8 million.

By segments, revenue from Semiconductor Materials increased 49.8% year over year to $261.1 million and was 51.9% of the total revenue. MEMC witnessed strong wafer volume growth, as well as higher average selling prices (ASPs).

Solar Materials revenue shot up 62.5% year over year to $220.5 million and contributed 43.8% to the total revenue. The improvement was due to strong solar wafer volume growth, which was partially offset by lower ASPs.

The SunEdison business (acquired in November 2009), which is currently the company's Solar Energy segment, contributed $21.5 million or 2.3% to total revenue. Revenues decreased sequentially, possibly due to the limited volume of direct sales in the quarter.

Operating Results

On a GAAP basis, gross margin was 16.9%, up from 6.6% in the year-ago quarter. The increase in wafer volumes in a favorable pricing environment coupled with lower cost of sales led to the higher gross margin. On a non-GAAP basis, gross margin in the quarter stood at 15.4%.

Operating margin on a GAAP basis was 2.0%, compared to (22.5%) in the year-ago quarter. However, excluding restructuring charges and including adjustments from the Solar Energy segment, non-GAAP operating margin in the third quarter was 3.3%. Marketing and administration expenses decreased 18.2% year over year to $59.4 million. However, research and development expenses surged 21.7% year over year to $14.0 million.

Reported net income was $17.6 million or 8 cents per share, compared to a net loss of $64.6 million or 29 cents in the comparable quarter last year. However, adjusted net income was $24.3 million, or 11 cents, compared to a loss of $16.4 million, or 7 cents in the year-ago quarter.

Balance Sheet & Cash Flow

MEMC ended the quarter with cash, cash equivalents, short-term investments and restricted cash of $643.7 million, down from $736.6 million in the previous quarter due to construction-related payments for Rovigo and other new projects. Receivables in the quarter were $251.9 million. Cash generated from operations was $52.3 million versus $11.8 million in the year-earlier quarter. The improvement in cash flow was attributable to favorable accounts payable terms and higher deferred revenue from the Solar Energy segment.

Long-term debt and capital leases in the quarter were $494.8 million, compared to $459.3 million in the previous quarter.

Guidance

As a result of MEMC's financial performance so far in 2010 and the lack of clarity in GAAP profit recognition from the Rovigo sale and other SunEdison direct sale project deals, management has refrained from giving any earnings per share guidance for 2010.

For fiscal 2011, MEMC expects the ramp-up in commercial production of several solar energy projects to boost results. Moreover, the opening of lower-cost fabs in Malaysia is expected to be accretive to margins.

Conclusion

MEMC's third quarter missed Zacks Consensus Estimates, both in terms of top and bottom lines, but the company has maintained a positive trend on a year-over-year basis. Going forward, we expect MEMC to leverage the lower cost structure of Solaicx to capture the monocrystalline silicon market, which according to sources, is expected to grow at a compound annual growth rate of about 50% during the next three years. We look forward to positive contribution from Solaicx, which is expected to be accretive to 2011 earnings per share.

We are encouraged by SunEdison's solar initiatives and believe that the completion of the pending solar projects will draw additional stream of revenues. However, analysts' concerns related to lackluster semiconductor demand, which could pressure earnings estimates keep us cautious on the stock. Additionally, the company has a huge debt burden, which increases investor risks.

Currently, MEMC has a short-term Hold recommendation, as indicated by the Zacks #3 Rank.

 
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