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MEMC Incurs Loss on Low Chip Demand

Zacks Equity Research

MEMC Electronic Materials Inc. (WFR) reported fourth-quarter 2011 adjusted net loss per share of 9 cents, which was better than the Zacks Consensus Estimate of 14 cents loss per share. The loss was due to lower wafer volume and pricing as well as restructuring charges. The ongoing weakness in semiconductor and solar chip demand is taking a toll on the quarter’s results.

The adjusted figure excludes the impact of restructuring charges, goodwill impairment charges and other non-operating items, but includes direct sales and lease-back from the Solar Energy segment.

Revenues

On a GAAP basis, MEMC reported fourth-quarter revenues of $717.8 million, down 15.6% from $850.1 million in the year-earlier quarter. The deceleration was due to broad-based weakness in Semiconductor Materials and Solar Materials, partially offset by a solid contribution from Solar Energy.

Including direct sales from the Solar Energy segment and lease-back transactions, non-GAAP revenue came in at $772.1 million, which decreased 18.7% from the year-ago quarter.

Segment wise, revenue from Semiconductor Materials fell 13.2% year over year to $268.4 million and was 44.1% of the total revenue. MEMC witnessed lower wafer volume growth and average selling prices (ASPs). The semiconductor industry is going through a cyclical downturn and hence softer demand for the same adversely affected shipments and pricing.

Solar Materials revenue plummeted 61.2% year over year to $108.6 million and contributed 21.0% to total revenue. The disappointment was because of significantly weaker wafer pricing and volume growth.

SunEdison, which is currently the company’s Solar Energy segment, accounted for 73.9% of the total revenue. The segment generated revenue of $381.3 million, up 24.0% year over year.

Projects interconnected during the fourth quarter represented 161 megawatts (MW). During the quarter, SunEdison's project pipeline remained flat with the prior quarter at 3.0 GW, but was up over 100% year over year.

Operating Results

Reported gross loss was $58.8 million, as against gross profit of $116.0 million in the year-ago quarter. Gross margin was (8.2%), compared to 13.6% in the year-ago quarter.

Operating loss was $1.25 billion, compared to operating income of $23.2 million in the earlier-year quarter. Operating margin was (173.9%), compared to 2.7% in the year-ago quarter.

Operating expenses subsequently increased from the year-ago quarter with marketing and administration expenses increasing 12.6% and research and development expenses rising 17.9%. However, MEMC recorded huge one-time items in the form of restructuring and amortization expenses, which emerged from the company’s recent restructuring initiatives announced in December 2011.

Reported net loss was $1.48 billion or $6.44 per share, compared to net income of $12.6 million or 5 cents in the prior-year quarter. However, adjusted net loss was 9 cents per share.

Balance Sheet & Cash Flow

MEMC ended the quarter with cash, cash equivalents and restricted cash of $711.0 million, down from $900.4 million in the previous quarter, primarily due to the delayed sales of solar energy projects. Long-term debt and capital leases were $571.4 million, compared to $647.3 million in the previous quarter.

MEMC used $176.6 million cash in operations, compared to cash generation of $187.7 million in the preceding quarter. Negative operating cash flow was primarily because of increased working capital necessary to fund the construction of solar energy projects, including those held for sale. Capital expenditure was $58.5 million, down from $85.9 million in the previous quarter.

Guidance

Keeping in mind the ongoing uncertainty in the semiconductor and solar markets, MEMC refrained from providing any quantitative guidance for the first quarter and fiscal 2012.

MEMC believes that the cyclical downturn hurting semiconductor industry will likely bottom out by the next quarter. Though first quarter revenues could be 10.0–15.0% lower sequentially, order growth could ramp by the second quarter of 2012. Moreover, the company believes that revenue in second half 2012 could be stronger than in the first half.

In addition, the company expects first quarter 2012 non-GAAP EPS to be roughly in line with the prior quarter.

Conclusion

Though MEMC’s fourth quarter loss per share was better than the Zacks Consensus Estimate, we are concerned about the overall results. The continuous fall in the polysilicon prices and solar chips are affecting MEMC miserably.

But there is some hope of a turnaround in the poly prices based on the news that production has been curbed by a major 30.0% in China, the major polysilicon supplier for the solar-panel manufacturers worldwide. The unanimous decision to reduce the production level (until there are improvements in pricing) would help to improve the ongoing oversupply position.

Apart from this, we see MEMC’s solar energy initiatives as a key driver for the long term. The company recently tied up with key players such as Flextronics International Ltd. (FLEX) and Jusung Engineering Co. Ltd. to make its solar ventures efficient and profitable.

But the recent cessation of a solar wafer supply agreement with Suntech Power Holding Co. Ltd. (STP), only because of a persistent fall in polysilicon prices, was alarming. Though we are unaware of any exact financial impact, we believe MEMC’s revenues and margins will be affected.

Moreover, there are risks of cuts in feed-in tariffs, which could affect solar deployments.

Currently, MEMC has a Zacks #3 Rank, implying a short-term Hold recommendation.

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