Enphase Energy, Inc. (NASDAQ:ENPH)
Raymond James Institutional Investors Conference
March 5, 2013 11:00 AM ET
Kris Sennesael – CFO
Pavel Molchanov – Raymond James
Pavel Molchanov – Raymond James
All right. I appreciate it. Appreciate everyone coming back to the presentation for Enphase Energy. Enphase is a pretty interesting story in the solar domain that really is at the cross roads of solar and smart grid. With us today is Kris Sennesael, the CFO of the company. And the ticker as a reminder on this one is ENPH.
Thank you, Pavel [ph]. So I'm Kris Sennesael, I'm the CFO of Enphase. And I'll tell you a little bit more about Enphase. We are a leading supplier of micro inverters, and I'll tell you a little bit more about what a micro inverter is.
But the company was started in 2006. We are headquartered in Petaluma, just north of San Francisco. We have approximately 400 employees by now. We started shipping our first product, late 2008, and by now, we have shipped more than 3 million units of that.
The company went public in March, April of 2012, and we are listed on the NASDAQ.
So let me tell you a bit more about the micro inverter system. It's a really breakthrough disruptive technology in solar land where people used to convert DC to AC. We have a center [ph] of three inverters. And so our two founders came with this breakthrough disruptive technology of a micro inverter where you basically convert the DC to AC on a per panel basis so there is a micro inverter and you see a picture of that.
It's a size of a -- I call it a mini tablet, and it's a printed circuit board with 400 components on it, with the heart of a system is a chip, a semiconductor, a chip that we developed ourselves, and it has a metal enclosure on it, and it sits on the back of each module.
And so the big advantage of the micro inverter is that it deals, we have an issue of the central inverters. The power they generate is limited by the least producing module. And so when you have 20 panels, and one or two are going bad, or one or two are getting shaded, or get dust on it, the production of your string is reduced.
With the case of a micro inverter that is not the case. If you have one or two panels not working [ph] -- not so much, the others keep producing at full energy. And so there are all kind of studies out there that clearly demonstrate that with micro inverters, you can get up to 5%, 10%, sometimes, 15% more energy by using a micro inverter. Now, important to point out here is that, it's not only about the micro inverter itself. We provide a full ecosystem.
In addition to the micro inverter, we have our proprietary communication over the power line that goes through a central gateway, that is hooked up through your router, through the cloud, and so we have our cloud based data management system that visualizes your energy production that can find out and detect if there are issues and that will communicate back to the installer or to the home owner about all of that.
The value proposition is really unique, and as I said, we started shipping initially in the US in late 2008. By now, we have roughly 45% market share in US residential. So it has been really phenomenal how we have been able to convert the US residential market.
And the value proposition is very clear. The installers really love our product because it's much simpler to install compared to a central or string inverter.
You don't need to do your complicated string calculations, you just go up the roof, install the micro inverter to the rack, or snap it to the frame of your module, and put it on the roof, and then you have simple, low voltage AC cabling into the house.
As you know, with central string inverters, you deal with 600 fault DC cables which require specialized, certified installers to go and do that. You don't have that issue here with the micro inverter.
And as a result of that, it's a way for the installers to make way more money. Some installers actually install two, even in some cases, three roofs, three houses in one day, with a team of three people. And you obviously can't do that with a central string inverter.
And of course, the value proposition for the homeowners is clear as well, it generates way more energy and it's much safer because of the low voltage cabling, but specially the fact that we produce way more energy, is a clear value proposition for the home owner.
And so that really translate in the success. We basically own 100% of the micro inverter business, there's a couple of smaller competitors out there, but we really defined the space and owned this space, and we have been able to compete against central and string guys and gain up to 45% market share.
Roughly 90% of our revenue is coming from the US. In addition to US residential, we also play in small and medium commercial. Our largest installations go up to 1.3 megawatt, and 10% of our revenue is coming from outside the US, mainly Canada and Europe.
We do, last year, 2012, we did $217 million of revenue, and we actually play in a $7 billion market. So there is lots of room for us to grow. As I said like, mainly of the revenue is coming from the US today, so we have a tremendous opportunity to go and grow the business outside of the US.
And today, we mainly play in residential and small, medium commercial. So there is a tremendous opportunity for us to go and grow in that medium, large commercial, and eventually in utility scale as well.
Let me explain a little bit more about the business model. It's really a very unique business model in the solar industry. And it's almost a Silicon Valley based model where we really rely on the technology, the IP that we develop and the semi conductor content in our box.
In terms of our manufacturing, we all outsource that, and we work with Flextronics. And so we really concentrate on our brand development -- in development of the go-to-market channels.
And I'll zoom in a little bit here, obviously, IP is very important. We have more than 100 patent families that has been issued or in process of being issued, and that cover as well, the power electronics, the semiconductor content of the micro inverter, as well as our proprietary communication link, and our cloud based services that we offer.
Important to note here, we are currently shipping our third generation of product. In 2008, we had the first generation, later on moved to the second generation and since mid 2011, we started shipping the third generation.
Today, we are 100% third generation now, and somewhere in 2013, we will come out with the fourth generation of our product.
By the way, the fifth generation is already up and running on some roofs as a trawl [ph], and we have the sixth generation of our product on the drawing board.
So it's all about innovating and staying ahead of the competition, and really providing a full ecosystem in order to avoid the risk of commoditization.
I already talked about manufacturing. We don't do that ourselves. It's a printed circuit board with 400 components and a metal enclosure.
We work together with Flextronics, they have a manufacturing location, a fully automated assembly line in their China factory, and that's the most cost effective way for us to deal with that. That means very low CapEx.
We spend less than $10 million of CapEx every year. We do invest in some test equipment, and quality and reliability, but that's most of it. I think it's a very typical Silicon Valley based model that is, again, unique for the solar industry because most of competitors in other place in the solar industry have their own manufacturing, but we love this very flexible relationship with Flextronics.
So last, but not least, that's where we really focus on, it's our brand development, and sales channels. And initially, when we started the market, we were very successful in what we call the long tail, the installers, there were thousands of installers who did, and still today, are installing our products.
But more recently, of course, you have the success of the third party financing players that now, in the US, own approximately 70% of the business. We have been very successful with those third party finance guys. We don't have all of them, but we do have most of them. And actually the ones that we have, most of them are 100% Enphase customers.
You see their names there, Astrom, Vibrant [ph] Energy, SENTRON [ph], CPF, and all of that. In some cases, we do sell directly to them, but in most cases, we sell through distribution and then distributors, they sell to those guys, or still to the installer community which is a long tail.
In addition to that, we continue to develop new go-to-market strategies. We work together with practically all of them, and not all of them has been announced, but we work with all the module guys in some type of AC module which could be all the way from back sheet attached to frame attached, or anything in between.
And we continue to work, we have a lot of other new players that are really anxious to go into this market. We mentioned one name there, [inaudible], but there are others there, home builders, and other distribution channels that we are exploring today.
Let's talk a little bit about the financial model and it's all about a balanced profitable growth strategy. Growing the top line, improving the gross margins, keeping the operating expenses as flat as possible and drive leverage in the model with very low CapEx model.
And I'll talk about each of them a little bit. Here you can see the success story in growing the revenue from roughly $20 million in 2009 to $60 million in 2010, to $150 million in 2011, to $217 million in 2012 which was actually up 45% compared to 2011. And as I said, at the same time, by gaining market share up to 45% in the US markets.
We believe we can continue to grow the business here, and we have our four growth engines here listed. The first one of course, to continue to grow our position in the US. By the way, the US market, we believe, and industry expert believe that in 2013, US residential will grow between 20% to 30%. And so we definitely want to participate in that market and continue to grow our market share in that market, as well in the cash market, as in the third party finance markets.
And of course, we want to grow our small and medium market as well. Our market share there, is estimated at 10% to 15%. And so we have a lot of room there to grow.
But it's not only about US, which is 90% of the revenue, 10% is outside of the US, and there, we have a tremendous growth opportunity.
We entered Canada a couple of years ago, and last year, we actually went into the European markets, and we have now, we sell into Italy, France, the UK, and the Benelux region.
Those markets has been, especially in the second half of 2012, been very challenging, there has been rate [ph] changes in those area, and the markets have to digest all of that. But we still, again, have a great opportunity there.
Market share probably is depending on which market you look between 5% to 10%, in some regions, 15% with less than a year, or maybe a year of activity. And so we feel really good about the growth potential we have in those markets.
We announced recently that we entered Australia which is a fantastic growth [ph] market as well for us, and we have a couple of other countries lined up that we haven't announced that we will enter during 2013.
In addition to growing the US, and growing outside of the US, we are working on end market expansion. And so this is really moving from, not only focusing on residential, but moving into a small, medium commercial.
And as we will continue to work and innovate our products with fifth, sixth and seventh generation, we continue to move into the larger commercial, and eventually utility scale as well.
And then the last grow engine, is really expanding our go-to-markets, expanding our distribution network, expanding the installer network that we work with, creating partnerships with the panel guys, and exploring a new and innovative ways, how solar will be brought to the big public. And we are heavily participating in developing those new go-to-market channels.
So that was about the top line gross margin -- is very important of course. I feel really bad for some of the module guys who are selling their product for zero, or negative gross margin. It's definitely something we don't want to participate in, and we really have a very differentiated, unique product offering here. And we do want to get paid for that.
And you see here, we have been able to substantially increase the gross margins from roughly, call it 10% in 2010, doubling it to 20% in 2011, getting to 25% in 2012. Again, we're probably one of the only players in the solar space that can demonstrate this gross margin improvement.
We exited the year in Q4 2012 with 28% gross margin. Long-term, we target to get to 30% to 40%. And that will require a couple of years and a lot of hard work and continue to again, innovate, and get our next generation products out there, to improve the gross margin.
In the mean time of course, we continue to work, and it's the normal tackling and blocking. We shipped last year, roughly 1.5 million units, and so a lot of volume helps to negotiate with the component manufactures, we of course drive down the cost of our working with Flextronics on the assembly side through automation, and we continue to reduce test time which help to reduce test cost.
And so scale and volume definitely helps, but every generation we have come out, we have been able to drive down the cost specially if you think about cost per watt because every generation, we were able to increase the power output.
First generation was 170 watt, second generation was 190, third generation was 215, and the fourth generation has not been announced, but will be a similar step function in increasing the power output while driving down the cost. We're a semi conductor based company, and so every generation, we incorporate more the components into the chip, reducing the component count making the box smaller, and making the box cheaper. And so that's our part how we reduce gross margins and how we believe we will be able to continue to improve the gross margins despite the fact to raise [ph] on ASP erosion.
Last year, it was in the order of magnitude of 8% to 10% year-over-year ASP erosion, and we expect that to continue going forward.
But we believe we have an action program to drive down the cost way faster than the ASP erosion that we encounter into the markets.
So improving top line, expanding the gross margin, operating expense, the company, all the way until third quarter of 2012, has a track record of increasing OPEX. And that was absolutely the right thing to do because we had to build out the infrastructure.
But at the end of the third quarter, we made a promise to the investor community and said, from now on, we feel good about our operating expense, we're going to keep them as flat as possible, and even try to trim them down a little bit where we can.
And actually in the fourth quarter, we were able to reduce the operating expense for the first time in the history of the company with 12% sequentially. And so we again, made that promise now, from now on, we're going to try to keep these operating expenses as flat as possible.
It's not that we are no longer a growth company because we again, we want to continue to grow the company, but we feel good about the infrastructure that we did with employees. We actually, if you think about engineering, we have two hardware teams. One is working on fourth generation, one is working on the fifth generation.
As soon as the fourth generation comes out, that one team that works on the fourth generation will start working on the sixth generation.
We have a software team, we have a semiconductor development team, we made a lot of investment in marketing and sales, we do have our [inaudible] in Europe, now, actually we have three teams, one in the UK, one in France, and one in Italy, and they will spread out into the other countries in Europe.
And we did a lot of investments in our corporate functions, we are a public company now, and obviously that comes with a cost, but we have them all behind us. From now on, we're going to keep the OpEx flat as possible, and drive the leverage in the model.
From a balance sheet point of view, I feel good about that, we have $45 million of cash, and $11 million of debt, but I feel good about the cash balance that we have. Actually, last quarter in the fourth quarter, we were cash flow positive, not yet on a sustainable basis, but we do have line of sight to positive cash flows in the near future.
In addition to the $45 million, we have up to $50 million working capital facility, and a $16 million grow term debt [ph] facility with Hercules.
So I don't foresee in the future actually that we are going to tap in any of those facilities. Just -- they are as a back stop. And I do not believe that we will need to go and have another equity round or anything like that. So I feel pretty good about the balance sheet.
And this is actually our long-term business model here. You see the fourth quarter, we need $57.6 million of revenue, 28% gross margin, we're still losing money at that level of revenue, but we do have line of sight to profitability, and we do have line of sight to sustainable positive cash flows.
The breakeven model, is around $80 million a quarter with 30% gross margin and 30% operating expense to get to a breakeven non-GAAP operating income.
Obviously, we're not going to be happy with 0% operating income, our long-term model cost for 15% to 25%. And I know that's still a wide range, but it really want to send a message here that we are a high-tech differentiated, full ecosystem product offering there. And so that's where we need to go to those 15% to 25% operating margins with gross margin in the 35%, 40% range.
This is just like last week, Tuesday, we announced our fourth quarter, and this were the highlights but I already touched on most of them. Revenue $57.6 million which was actually higher than the high end of our guidance range, record gross margins of 28% which was up 510 basis points on a year-over-year basis.
It was the first quarter that we were able to decline the operating expense, and we were positive cash flow during that quarter. Unfortunately, not on a sustainable basis yet, we guided the revenue for the first quarter, of $43 million to $46 million which is a normal decline. It's a normal seasonal decline due to weather and other seasonal trends.
So in line seasonal decline guidance there. Obviously, we're going to still burn some cash at that revenue level, but as the growth will resume in the second quarter, again, we feel really good about line of sight to profitability, and line of sight to positive cash flows.
With that, I just want to wrap it up. I'm really excited about the company and its future. It's a fast growing company in a fast growing sector. And we are the clear leader in that space. We were actually the player that defined the space of the micro inverter.
We're shipping now third generation, soon, fourth generation, and with clear line of sight to profitability and positive cash flows, and we have a long term target of 15% to 25% operating income.
Pavel Molchanov – Raymond James
It's time for a few questions. And I'll start by asking Kris. You alluded to the panel manufacturers with zero margins. What are the differences between the inverter market and the panel market and what confidence do you have that margins for inverters will not have to take a compression at the commodity panel [inaudible].
Right, and you used exactly the right word. Unfortunately panels became a commodity, and there's not a lot of differentiation there. And obviously, there was a lot of over capacity versus demand. And that's not a good fact [ph] pattern.
But the micro inverter again, is a completely different animal. It's not just a box, it's a full ecosystem, it's a different product offering, it's based on complicated semiconductor development.
And as a result of that, I don't think the inverter will get commoditized. We'll have to keep fighting for that, and we'll have to keep innovating and develop new generations after generations. But it's not a commodity.
Pavel Molchanov – Raymond James
Any questions? Yes.
Right. Actually, the quarterly revenue trend is a little convoluted because of 1603, and I'm not sure how familiar you are with 1603, but at the end of 2011, there was cash grants. And the cash grant expired at the end of 2011.
But it's a complicated way how it expired. It's actually, if the installers were putting in orders to a certain percentage of the equipment and we're really committed of those projects, I think they have time to finalize them all the way until 2016.
And so at the end of Q4, and actually in the first quarter, in the second quarter of 2012, there was a lot of accelerated buying of inverters. And actually, they really like the inverters to do that because now, they can go and blend them in and spread them over multiple projects, and still qualify for that 30% cash grant.
And so if the 1603 did not expire at the end of Q4 of 2011, some of those unit volumes would have been sold during 2012, and maybe into 2013. And that's why the quarterly trend is a little convoluted by the 1603.
Right, so we have roughly 100 patent families. Some of them are issued, some of them are still an application, so the number is roughly 100.
How many actual patents do you have?
I believe 25 issued, and 75 under application. We roughly have 400 employees. R&D is roughly 150, 1-5-0. And maybe, let me talk about competition. When we came out with the micro inverter, competition was really very negative about the micro inverter and this is like, this thing is not going to work.
After a couple of years and while we were increasing our market share, they were changing their minds and they said, we will come out with a micro inverter as well.
And so far, one of the two large competitors, did come out with a micro inverter towards the end of 2012. We have not seen any major impact on our revenue for that.
I think it's a good product. And it really, I think it's almost like -- we are convinced that three, five years from here, US residential will be 100% micro inverter.
And the big competitors there, they really understood that, and they started acting against that now, as well. Now, again, this is way different product than a central or string inverter which is a big box, more like industrial size kind of manufacturing.
This is a very differentiated product offering based on semiconductor development. And it will take a couple of generations until they, I think are at the same level than we are in terms of differentiated product offering.
Pavel Molchanov – Raymond James
We'll need to cut it off. We'll have a break out right after this. Join me in thanking Kris.
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