Enphase Energy: The Inflection Point

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About: Enphase Energy Inc. (ENPH), Includes: ABB, CY, JKS, LGEAF, SMTGF, SOL, SPWR, SRWRF
by: TJ Roberts
Summary

Enphase Adds $18M Savings in 2017, Targets $15M/Qtr OpEx Run-rate

Enphase R&D Expenses Completed for 2018-19 Product Introductions

Jinko Solar, LG, SolarWorld-USA, Tindo Solar — Who’s Next?

Enphase Director’s Proxy Victory is a Win for Enphase

At Enphase Energy’s (ENPH) last Analyst Day, the event summed up a very positive future for the company. At the very beginning of the presentation, Enphase boldly stated that their reduction in module-level costs by 50%, equating to $0.10/Watt costs, is now just 3 quarters away. The new COO confidently reported Enphase’s cost-of-revenue reduction efforts totaling $18M for the remainder of 2017, with a target goal of $15M-per-quarter OpEx run-rate. For all Enphase loyalists out there, this is positive news; the mismanagement of Enphase’s past is now behind them, and having legendary CEO TJ Rodgers in the active director seat, along with COO Badri Kothandaraman, gives Enphase new blood, new life and a very exciting future. Remember, CFO Bert Garcia stated that all of Enphase’s R&D is paid for over the company’s next growth cycle — 2018-19, so going forward, this cost is not going to be a thorn in Enphase’s side. All-in-all, the complete waterfall of margin contributions was devised to achieve a “30-20-10” goal — 30% margin, 20% OpEx, and 10% operating income; hence, it can be deduced that Enphase plans to be profitable at a $75M revenue run-rate

Enphase’s new IQ microinverters are the company’s sixth major generation of product; this latest generation’s technology is much different from previous microinverter releases, and took 5 years to develop. According to a very prominent, Enphase veteran engineer, the IQ technology is now truly scalable in terms of power handling. This attribute of flexibility will allow Enphase to compete on a much wider spectrum. With IQ, Enphase can now scale power handling quite seamlessly, in part by digital and further by selecting the right-sized power transistor, rather than completely overhauling the architecture, digital controls, etc; this should allow cost-effective scaling to pair with today’s complete line-up of solar panels from 250-Watts up through newer generations 440-Watts and beyond. Basically, for Enphase to increase the power of their IQ microinverter now, the increase will only cost them half of what it once did — this is very powerful indeed from a production cost perspective.

Teff Reed, Enphase’s Senior Director of Microinverters, doesn’t even see MLPE as a market — simple, more reliable, all-in-one AC Modules are the true evolution of solar not power optimizers, separate solar panels and a bulky central string inverter with its single point-of-failure; for over 30 years, installers have used this venerable technology, but a simpler, easier way is now being discovered.

To further emphasize the magnitude of this 6th-gen microinverter release is the hard, cold fact that major solar panel makers like Jinko Solar (JKS), LG (OTC:OTC:LGEAF) and SolarWorld-USA (OTCPK:OTCPK:SRWRF) have partnered with Enphase. This AC Module release is unlike any other — Enphase’s ACM is detachable and is designed for optimized cooling and service. Other partners like Tindo Solar are waiting for permits to be passed in order to start using the IQ technology in Australia.

In Bloomberg’s New Energy Finance (BNEF) PV Module Maker Tier-1 List for Q4-2016, Jinko Solar was estimated at 6,500-Megawatts, SunPower at 1,800MW, SolarWorld at 1,500MW and LG Solar at 1,100MW. Given that SunPower’s Q4-2016 and Q1-2017 quarterly results showed ACM’s accounting for 67% and 80% of all new residential product orders, respectively, then applying that to Jinko Solar, LG, SolarWorld and others combined would equate to quite a lot of Enphase IQ-based AC Modules being sold in the near future in the residential and possibly C/I markets. Simplicity trumps complexity, and it includes a much wider installer audience than the venerable optimized-string solution, and that is what the AC Modules mean to the solar PV industry.

In 2014, SunPower (SPWR) acquired SolarBridge Technologies for an undisclosed sum; this gave SunPower access to microinverter technology. In 2016, SunPower released its Equinox™ line of AC Modules. A very insightful but not widely circulated research document produced by SolarBridge Technologies, as well as a YouTube video, demonstrated the superiority of AC Modules over optimized-string solutions. A recent research report puts microinverters at a $2B market by 2026, and of the microinverter key players in the industry, Enphase Energy is clearly a dominant one when compared to ABB Ltd (ABB), SMA Solar Technology AG (OTCPK:OTCPK:SMTGF), SunPower Corporation, Altenergy Power System, Inc., Northern Electric & Power Company, Darfon Electronics Corporation and Chilicon Power. Renvu.com recently stopped selling 1) Renesola (SOL) because of too many problems, 2) SMA because the company decided to take the power optimizer MLPE route, and 3) ABB because ABB just stopped selling the product. What we are witnessing here is the rise of AC Modules which is being driven by increasing MLPE demand and installer productivity, and it is a clear consolidation of the market — Enphase and SunPower are the true contenders.

Another consideration for Enphase shareholders is that Enphase’s active director, TJ Rodgers, has just won his long-fought proxy battle at Cypress Semiconductor (CY). TJ’s victory is actually a small victory for Enphase, because now, he can work "full-time” on turning Enphase Energy around, along with helping 2 other companies achieve greatness. It is interesting to note that 1 of those companies is a battery technology company which has the potential to become the next evolution for lithium-ion batteries; the company, Enovix, is using silicon rather than graphite as a raw material in the battery, resulting in a major increase in battery storage density. With Enphase’s electronics, this could well be a future AC Battery in the making. As an Enphase shareholder, I am inspired by the fact that TJ is now available for Enphase and can now perform “hands-on” and “engaged” leadership, something he is famous for.

Lastly, Enphase has received an SEC notice that share price has been below the $1 minimum for 30-trading days, so risks still remain until the company can truly prove it has passed its own “inflection point” with growing revenues, margin and demonstrating sustained profitability. Nevertheless, shareholders should remain confident, for with the $18M cost savings (see page 45) by assuming $3M (Q2), $6M(Q3), $9M(Q4) ladder-margin-contributions, with revenue of $76M (Q2), $86M (Q3) and $96M (Q4), a 4%-, 7%-, and 9%-margin contribution can be expected, and likely a 7-8% structural margin improvement can be realized going forward; this analysis was outlined in Enphase’s cost and revenue management specifications (see page 44) on Analyst Day, and it clearly shows a management change at the top differing greatly from the Nahi-Sennesael days of old.

So, has an inflection point been crossed in MLPE such that microinverters are regaining lost marketshare to the optimized-string solutions? SunPower’s quarterly numbers would suggest that is exactly what is happening. With some of the technical superiorities that Enphase is now reaching with 1) their new AC Modules with detachable IQ microinverters, simpler plug-n-play cabling halving wiring costs, allowing for faster installs with easier serviceability, and 2) their new microgrid-backup capable “Ensemble” alluded to on Analysts Day by co-founder Raghu Belur, the company’s outlook looks very promising.

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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