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Suntech Power Holdings Company Ltd. announced preliminary financial results for the second quarter ended June 30, 2012.

In the reported quarter, greater demand from European markets, China, Japan and Australia drove sequential shipment growth. As a result, Suntech's shipments of photovoltaic (PV) products for the quarter increased by approximately 33% from the first quarter of 2012, higher than the previous guidance of a 20% increase in PV shipments. Revenues in the second quarter of 2012 were approximately $471 million, a sequential increase of 15%. However, this was below the Zacks Consensus Estimate of $505 million for the quarter.

In the reported quarter, approximately 93% of revenues were generated from the sale of PV modules, and 7% of revenues were generated from the sale of PV systems, cells, silicon wafers and production equipment.

Gross margin in the second quarter of 2012 was approximately negative 10%. Gross margin was impacted by a non-cash inventory provision of $76 million. The impact of the non-cash inventory provision on gross margin was 16%.  

In the second quarter of 2012, Suntech's operating expenses were approximately $133 million. Operating expenses were impacted by a $56 million non-cash provision related to a prepayment for a long-term supply contract, which Suntech is currently disputing. Suntech generated positive operating cash flow of approximately $5 million during the quarter.

Outlook

Wuxi, China-based Suntech is a leading solar energy company. The company designs, develops, manufactures and markets photovoltaic (PV) cells and modules.

In the third quarter of 2012, Suntech expects PV shipments to be relatively flat with the second quarter of 2012. The gross margin in the third quarter of 2012 is expected to be in the low single digits. Suntech now expects 2012 annual PV shipments to be in the range of 1.8GW to 2.0GW, compared to the previous guidance of 2.1GW to 2.5GW.

Suntech Power is one of the largest producers of PV solar modules under its proprietary Pluto technology with a geographically diversified customer base. Other positive factors for Suntech include ongoing expansion programs, higher conversion efficiency through its Pluto technology-enabled modules, subsidy program in China, and improving operating efficiencies. However, the positives are overshadowed by fears of tepid module demand in Europe, rising competition, the volatile Euro and the financial stability of its customers.

In the longer run, our ‘Neutral’ recommendation on the stock indicates that it would perform in sync with the broader market. In the near term, however, the Zacks #4 Ranked (Sell) Suntech Power will perform lower versus the market. This is in line with its peers JA Solar Holdings Co. Ltd. (JASO - Analyst Report) and Canadian Solar Inc. (CSIQ - Analyst Report).

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