For Solar "Startup,' An Operating Profit Took Four Decades; Finally, Future Looking Bright; Energy Conversion Devices finding the spotlight with well-placed tech know-how

Energy Conversion Devices has stepped out of the shadows of the red-hot solar sector.

The maker of flexible solar panels on Thursday reported what it called the first quarterly operating profit since it went public -- in 1969.

The results for the quarter ended March 31 crushed analyst estimates, after it failed to meet views for the five previous quarters.

"This is . . . a game-changing performance," said Sanjay Shrestha, a Lazard Capital Markets analyst.

The stock rocketed 43% on Thursday to an almost two-year high. The stock gave back some gains on Friday, falling 4.4% to 47.74.

Analysts say the turnaround began last year when its new management team put more focus on the solar business, cutting costs and targeting new markets. It helps a lot that Energy Conversion Devices uses an unusual key material in its panels, where most rivals use a material that's now in short supply.

"The reason the stock is up so much is because of their execution," said Brion Tanous, an analyst with Merriman Curhan Ford & Co. "The Street is now giving them the respect that they've given other solar companies because they've seen the turnaround in place."

Leading the turnaround is Mark Morelli, who was named president and chief executive in September. Morelli came from United Technologies, where he had positions that required him to focus on improving profitability, building teams and reorganizing businesses on a global scale.

Morelli, 44, called the profitable quarter a "milestone" for Rochester Hills, Mich.-based Energy Conversion.

"We're in this for the long run," he said in an interview.

Analysts say Morelli has put the focus on profitability and growth.

"The company has always been great with scientists, but not good operators," said Jesse Pichel, an analyst with Piper Jaffray.

Shrestha says Morelli helped free Energy Conversion from its laboratory-centric approach to business.

"In the past it has been sort of run as a publicly funded R&D (research and development) company," Shrestha said. "One of the key areas of growth has always been solar, though it probably wasn't getting the attention it needed to get."

It is now. Morelli says he made "painful" cuts to get the company focused on solar. He cut 160 engineers from the company's ranks, leaving only 100.

None of the cuts came from the solar business. Instead, he scaled back R&D in several areas, including fuel cells and a way to tap computing power called "cognitive computing."

Big Rise In Gross Margin

Solar now commands more than 90% of sales, up from roughly three-fourths at the start of 2006.

In its fiscal third quarter ended March 31, the gross profit margin jumped to 30.7% from 19.2% in the previous quarter.

The improvement comes in part from a more efficient manufacturing operation, Morelli says. For example, a majority of its solar product supplies came from a single vendor in the past. Energy Conversion has broadened its base of suppliers, helping it get better prices.

Morelli's also shaken up the sales structure. He has focused on long-term contracts that help the company ensure future profit and growth.

Analyst Shrestha says the company has orders in place that already equate to its total expected revenue for the fiscal year ending in June. He says it already has orders for 90% of the next fiscal year's expected sales, as well as half of the following fiscal year sales.

These contracts, says Shrestha, aren't typical. They're "take or pay" agreements, which ensure the company gets its money whether the buyer cancels or not.

A More Flexible Product

Morelli sees big opportunities for his company's solar business. Solar has been expanding rapidly as governments around the world roll out financial incentives to fuel the growth of the environmentally friendly energy source.

Unlike many of its rivals, Energy Conversion Devices uses a material called amorphous silicon. The more popular material, polysilicon, is in severe shortage, climbing in price from $30 or $40 per kilogram roughly five years ago to $350 per kilogram or more today, Pichel says.

And Energy Conversion's system is more lighter than rival products, so it works well on rooftops. It's also flexible and can be easily combined with roofing material.

Also, Energy Conversion uses a technology that it says improves the way solar modules convert the sun's rays. It can convert rays into energy even when not in direct sunlight, Morelli says.

"We will be producing energy very early in the morning," he said.

The rooftop market is lucrative. Some countries, including France and Italy, give more generous financial incentives to these kind of roofing solar products than to ground-based solar cells.

"We did the market research," Morelli said. "We're confident this space (will grow). We're not just dabbling here."