Exciting Times At Enphase

| About: Enphase Energy (ENPH)

Summary

Confidence as Enphase reports a solid Q2.

Enphase making up ground after price cutting, with Q1 and Q2 results gaining 6% to be ~30% of the US residential market; international market buoyant.

AC battery release in Australia and New Zealand much anticipated, especially on retrofits.

Enphase is working with utilities.

Lots of innovation, combined with cost cutting.

The Q&A session with analysts after quarterly reporting provides an opportunity to gauge how management feels about their company and also what institutional analysts are thinking about. I'm always encouraged when the discussion is open, knowledgeable and professional.

The recent analysis of Enphase Energy's (NASDAQ:ENPH) last quarter gave me an impression of a company on the front foot after some trying times recently.

Enphase Q2 results

The company performed pretty much as analysts expected, with Q2 EPS of -$0.30 (non-GAAP, missed by $0.03) and revenue of $79.18 million (beating estimates by $0.47 million). The bad news is that revenue was down 22.4% year on year in Q2, although it was up 24% on Q1.

Cash flow improved in Q2 to $7.3 million, largely due to inventory reduction of $6.3 million (but still at $39.3 million). Enphase started Q2 with $13 million cash and a $20 million draw on credit facility. The company paid down $7.5 million on the credit facility during the quarter, and ended the quarter with $8.2 million cash and a $12.5 million draw on the credit facility.

Financing

The $25 million 4-year term debt, borrowed and drawn fully in July, was described in positive terms ($25 million extra cash on the balance sheet) and as being in line with the market for this type of facility, with no warrants preferred or common shares or other equity rights attached to this loan. Note that this loan is on top of an up to $50 million working capital facility and a $25 million accordion feature.

The company believes current cash, the working capital facility and debt financing are sufficient to fund the growth of the business.

Comparing Q1 and Q2 and looking towards Q3

Perhaps year-on-year comparison isn't the best indicator of where Enphase is heading now. The Q&A was much more focused on the current business context and where things are headed. Shipments were up 30% compared with Q1. 796,00 fourth- and fifth-generation microinverters were shipped in Q2.

In the earnings report, there was a lot of comparison with Q1 results and good discussion about the next couple of quarters, which suggests the company might burn some cash in the second half of 2016 and be cash-positive in Q1 2017.

Projections are not straightforward, as there are significant new products just released or about to be released, including the storage battery offering. However, revenue is expected to be in the range $87-93 million in Q3, which will include some revenue from the AC battery product line. The battery revenues are expected to ramp up in Q4 2016 and beyond.

GAAP and non-GAAP margins are expected to be in the range of 17-20%.

Enphase recapturing lost market share and expanding internationally

CEO Paul Nahi was upbeat about the home energy solution, which now includes battery storage and more competitive pricing as key drivers for increasing market share not only internationally but also in the US. Nahi argued that simplicity, quality and a rich feature set, enhanced by competitive pricing, is winning new customers.

The thumbnail sketch of 500,000 Enphase systems in 100 countries is either encouraging that a lot of hard work has been done to establish markets, or perhaps that they might be thinly spread (glass half full/empty issues!). 12 million microinverters shipped since inception shows the company has a lot of product in the field.

Revenues were up 20% in the US in Q2 (in comparison with Q1), being a mix of existing customer expansions as well as new customers (serviced by new installers). Cheaper Chinese competition was not seen to be a serious threat in the US.

While the US is Enphase's major market, international markets comprise ~15% of total revenue, and this is growing (even though the US market is also growing). It seems like this might get distorted by early battery sales in Asia-Pacific.

Revenue was up 48% (compared with Q1) in Europe, with increased market share in France, the Netherlands and Switzerland. Enphase is building up distribution channels in this area.

Mexico, Puerto Rico and Latin America are other high-growth areas for the company.

Australia is up 43% (compared with Q1). Market share is growing here, and this is before the imminent storage battery launch (volume shipments this month) in Australia and New Zealand.

There has been an excellent response to multiple battery beta sites which have been operating for some time. Enphase's partner network has more than 1000 installers, so this is a good market for worldwide launch of the AC battery. The company claims 60,000 AC batteries have been pre-ordered in Australia and New Zealand for installation in the next 12 months.

Enphase expects to start European and US (starting with Hawaii) battery sales by the end of 2016.

Lowered costs with enhanced functionality

Costs have been reduced in three ways:

  1. Competitive pricing on the microinverter.
  2. Reduced operating costs for installers, with simpler designs, easier installation and inventory management.
  3. Superior communications technology supports installers to check the health of the system, reducing maintenance costs and giving customers attractive understanding of the system.

Innovation is a key feature of the company, and this goes to helping installers build a compelling sales proposition and for customers to understand the benefits of full integration, combining solar generation, storage, load control, consumption monitoring and an energy management system.

Enphase battery in the Australian context

There are still lots of unknowns about the special Australian situation that has just about every home battery supplier looking for a slice of an emerging market, especially in NSW.

For starters, the size of the market and how quickly customers will commit is still unclear.

Indeed, a story on the Australian battery market on Tuesday wondered if the market size has been drastically underestimated. This was based on July 2016 surveys by Energy Consumers Australia (ECA) of renewable energy use and intentions in Australia among 2200 consumers and 500 small businesses. ECA was established in 2015 and is funded through energy market participant fees collected by the Australian Energy Market Operator. So, the group is not some fly-by-night survey company.

Some of the findings of the research were as expected. For example, 65% reported that they already have energy efficient light globes, and 24% indicated they are considering purchase, while 47% have energy-efficient appliances and a further 40% are considering purchase. A total of 16% indicated they have rooftop solar panels (~ national average), and 48% are considering purchase.

The astonishing numbers were that while just 2% of small business consumers have purchased battery storage, 45% are considering battery purchase. 53% of people with solar panels are considering battery storage, while 59% of people considering getting solar panels are also considering battery purchase! If these numbers stack up and generalize, the market is huge.

Another article compared 28 home storage battery offerings and came to the conclusion that they are all still too expensive at a median capital cost of $A1,800 per usable kWh ($A0.39/ kWh delivered and likely to fall 20% annually), and that Tesla (NASDAQ:TSLA) is in the middle of the pack, with the Enphase battery looking attractive and relatively cheap.

The above article indicated that the near-term market comprised 5000 grid connected systems, but then says it will explode in the next 18 months to 50,000 based on Enphase orders alone. The 50,000 (actually 60,000) Enphase batteries quoted might overestimate the number of premises, as it seems likely that many households will install 3 or 4 of the modular Enphase batteries. Asking around produced a number of 2,000-5,000 battery systems already installed, but these numbers are not based on any reliable research.

So, it is anybody's guess how many home storage batteries will be sold in Australia over the next 12 months, but it begins to look as if just about everybody is underestimating the market... well, maybe not the 28 companies with products for sale.

Some things that will have positive consequences for Enphase

I like to look for qualitative factors that might have an impact on future business success. Enphase seems to be fertile ground for transforming developments.

i) The Enphase battery system is well suited for retrofitting to existing systems, and the system fits with local regulatory requirements. Enphase argues that its battery is particularly suited for easy retrofits, and that this is not the case for a number of other battery systems. Given a very large number of existing system owners are considering battery purchase (see above), this could be a crucial edge for the company.

A 4-battery (4 x 1.2 kWh batteries) Enphase system involving 4.8 kWh storage can be retrofitted or fitted as a new installation in less than an hour by one person. Enphase claims no other product offers this installation simplicity, which is based on the company's latest microinverter technology.

ii) Enphase is working with several (unnamed) utilities all over the US, with a recent program with PG&E (NYSE:PCG) in California on integrating and optimizing microinverters into the grid for grid management and voltage optimization of distributed solar power. This opens up an ongoing service opportunity.

Paul Nahi made the point that the company has not set up adversarial positions with utilities, and has sought to work a number of utilities. His point is that utilities need to participate in the solar market for Enphase to continue to grow, so new business models to accommodate both the solar industry and utilities need to get sorted out. This involves utilities beyond the US, especially in Asia-Pacific.

iii) There is a lot of innovation in the pipeline and a focus on cost reduction, with the 6th-generation higher performance and advanced features cost reduction program on target by the end of 2016; the 2017 cost reduction targets are in train. The 6th-generation product is already in long-term quality and reliability testing.

In 2018, the company will introduce its 7th-generation product, which will be ~50% cheaper than where it was at the end of 2015 (and a much more sophisticated product). There is a shift to higher power microinverters, which favors Enphase.

iv) Integration is a big feature of the Enphase product portfolio, and while the battery offering involves other parties, there is a lot of Enphase technology inside it. The point was also made that acquisition of a battery means more sophisticated data monitoring and control is needed, so the company benefits with more of its products sold.

Enphase collects 2-3 terabytes of data every day, and these analytics are all cloud-based. The company is very confident about its heavily used (API). It is a competitive advantage.

Conclusion

The above shows lots of evidence of commitment to the long game, but also acknowledgement that one needs to stay in business long enough for the long game to play out. After being unsettled by negative reporting about the recent $25 million loan, I confess to being more confident about Enphase's future after the recent call. Things seem to be in good shape.

Of course, there are impatient investors saying the company needs to become profitable, but that now seems possible.

I'm long ENPH, so please consider this when reading the above. Do your own research, but I think this company is worth looking at.

Disclosure: I am/we are long ENPH.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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