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Power-One (PWER): Q2 Update

On July 26, Power-One reported earnings and beat on almost all regards. The company reported revenue of $321M and EPS of $0.30 vs. estimates of $250M and $0.12. Operating margins were up sequentially to 19%, cash flow was up to $59M, and the company bought back 1.1M shares. Finally, nearly 1.3GW worth of inverters were shipped vs. ~650MW in 1Q2012 and only 2.9GW for full-year 2011. By any means these numbers were phenomenal, however the stock lost over 5% during next day trading. This was on a day when the markets traded up across the board with a new wave of European confidence. The problems were conveyed on the conference call and were focused on the Phoenix plant ramp up and lack of traction in China.

This quarter's strength was attributable to strong European demand. FiTs in both Italy and Germany were up for revision, and passed on June 30, so consumers were racing to bring new capacity online. The first wave of legislation will take effect in Italy on August 27. They will see subsidy cuts of 25%+ and Power-One will feel this immediately as a bulk of their revenue is originated in Italy. The German subsidies cuts will be felt as well because the market made up 26% of Power-One's revenue. The effect of these cuts is portrayed in management's 3Q guidance, $260-$280M. This number is above analyst expectations and is slightly higher year over year, but will be down significantly sequentially.

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Asian demand for the quarter was rather weak, which management attributed to Chinese indigenous biases. The company is addressing this issue by trying to strike deals directly with EPCs and utility companies. It has also increased its sales team on the ground. China will remain the key in the Asian market, especially given the government mandated capacity build out of 45GW of additional production by 2020. Australia has been a strong market for it and it is making good headway in Japan, but I do not feel comfortable forecasting major growth in these markets without seeing more extensive demand data.

North America has been the lead weight holding the company back. Unfortunately it had a litany of problems at its Phoenix plant, which prohibited it from improving penetration. Management has been forthcoming about the problems, which is encouraging to me. They have appointed a new team to turn the plant around and supposedly the company is already seeing results. I think you have to take these early fixes with skepticism because the company wants to paint a positive picture, but I do believe it is moving in the right direction. By admitting to the problem, calling attention to the importance of the facility, and taking steps to address the issue it is doing all the right things. Management says that it will see significant improvement in 2H2012. I would say that any improvement would be significant, but to return to the revenue levels and market share it should be at will likely take longer. With the "Fiscal Cliff" approaching fast and the upcoming presidential elections companies in the U.S. have been hesitant to embark on any big new builds. Fortunately solar subsidies aren't set to expire at the end of the year so the company will have time. Also on a positive note, end consumers have said they will return to Power-One when the company can fix its production and deliverability.

A few more things of note, the company's Trio product line has been well received in the market and is already the largest selling product. Their microinverters are currently in testing at 300 sites and are set to hit the market over the next two quarters. The Ultra product line will begin shipments this quarter with a robust program launch continuing through 1Q2013.

The stock has traded down significantly on fears of European dependence, but I believe that the company is making all the right moves. The third quarter will be rough with European subsidies going offline and the continued effect of slow penetration in the Chinese and American markets. The balance sheet looks stronger than ever and I feel very confident with the position that the company has put itself in.

For a more detailed analysis of the company see my earlier write up, Power-One: The Solar Lynchpin.

Source: Power-One: Q2 Update