Enphase Energy's High IQ

Summary

• Enphase achieves profitability as promised.
• Enphase Q1 guidance above consensus.
• Strong insider buying by CEO.
• Why billionaire IQ invested in IQ.
• Enphase IQ competitiveness post-solar-tariff.

Wall Street gave a major vote of confidence to Enphase Energy (NASDAQ:ENPH) after a masterful performance on February 27th; as a shareholder since 2014, it was one of the best conference calls in memory, and even the analysts, with nobody absent this time, were more enthusiastic than past calls. CEO Badri Kothandaraman proclaimed that Enphase had reached a "milestone" by achieving profitability, earning $0.01 per share on a non-GAAP basis. Clearly, the new management, signaled by the arrival of TJ Rodgers and Kothandaraman, is applying strong operational control while steadily ramping up IQ and ACM's. Furthermore, the CEO made another large share purchase, exemplifying his confidence and belief in Enphase's success.

Enphase Q1 guidance of $65-70M came in at the high end of analyst estimates. Historically, Enphase revenue is strongly influenced by changes in A/R, therefore, a similar pattern can be expected for Q1-2018. In 2017, Enphase management focused on improving the cash conversion cycle which it has now reduced to just 67 days.

	( in thousands)	2017	2016	y-o-y days	q-o-q days
Q4	Revenue	79,674	90,601
	COGS	60,685	74,367
	A/R	65,346	61,019	80.6	75.8
	Inventory	25,999	31,960	46.0	38.1
	A/P	28,747	31,696	47.9	47.0
	Q4 CCC			78.6	66.9
	Q4 OC			126.6	113.9

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As mentioned during the conference call, Enphase management has a strong focus on the cash conversion cycle, but at the same time needs to maintain a balance between assets and liabilities, as well as meeting the term loan agreement which mandates A/R inventory being at least 1.5x the outstanding principal amount of $49.7M. The private placement of $20M enables Enphase to further improve their cash conversion cycle by bringing down A/R, as well as addressing liabilities in 1) warranty, 2) deferred revenue due to Trump's tax plan, and 3) debt. It is likely that the proceeds will also be used for the world-wide roll-out of Enphase's 7th-generation microinverter product suite (IQ7, IQ7+ and IQ7X).

At the conference call, co-founder Raghu Belur revealed that the IQ Battery is still very much a part of Enphase's energy solution, and a "new AC Battery configuration" is in the works. The promise of "configurable" storage solutions was touched on back in 2015 with a 275W/550W ACB. Now, with IQ technology and its patented position, a dual 600W/2.4kWh (4hr/0.25C, high-capacity/low-power) or 600W/1.2kWh (2hr/0.5C, high-power/low-capacity) solution is entirely possible to compete with companies like Sonnen. A "configurable" storage solution makes huge sense to cover peak use times and high rate periods, as well as standby loads that drain batteries when using a high-power inverter at very low power and efficiency. A mix of IQ Batteries capable of delivering for 2- and 4-hour durations, for example, makes sense; this is where decentralization wins and centralization loses, and where bigger is not better due to inefficiency, reserve capacity and shallow depth of discharge (DOD) for preserving cycle life. For a true storage solution, there must be batteries available for quick bursts of power, and then batteries available for slow trickle power; this need for duality can optimally be met using Enphase's DG topology products, but the promised ~$800kWh price-tag which includes inverter and battery, must also be met.

At SolarEdge's (SEDG) last conference call, CEO Guy Sella stated, "We would like to get on a Megawatt basis by the end of the year to 50-50 percent between commercial and residential. And I believe and hope we're in the right direction to get it. We are gaining fewer percentage, every - 1%, 2% every quarter". This revelation was insightful. If SolarEdge reaches 50-50 C/I to residential then revenue contribution is 30-70. So, at $0.24/W the C/I is 0.144 and residential is 0.336. With these projections, Enphase's IQ7+ is comfortably competitive in residential at $100, and Badri's 30-20-10 (p.13) is guaranteed for this year.

Isidoro Quiroga's $20M investment in Enphase on February 5th (mentioned above), is a clear bellwether for the gold nugget Enphase truly is in the renewable energy market. While Mr. Quiroga built his business on processing, transporting and trading water, the fact that Mr. Quiroga is associated with mining operations in the Lithium Triangle, as well as electric power generation, should pique shareholder interest. Cheap power - that is what is needed to get all the lithium mined, and solar and storage will play a huge part in that, especially off-grid solar. The fact that Mr. Quiroga invested in Enphase and not other inverter suppliers is a major vote of confidence. As Belur stated at the conference call, IQ8 is on the horizon, the Holy Grail of microinverters, and that means off-grid capabilities in remote regions of the world like Chile, Bolivia and Argentina. Consider that IQ8 will represent the arrival of "pop-up" microgrids that can be built, packaged, and transported where and when they are needed. Have rack and ACM, will travel!

The addition of a 96-cell IQ7X microinverter and the Panasonic 500MW deal allows for SAM expansion in the C/I arena. Recall that in 2017, Paul Nahi had stressed the unique advantages of the microinverter - that it could take advantage of module power like no other inverter could, and as module power increased, the cost of the inverter would decrease dramatically, practically in a linear fashion. With 72- and 96-cell modules used as the norm in C/I and utility-scale solar, Enphase's simple, reliable, safe and long-lasting IQ technology will only become more cost-competitive, especially when considering initial, BOS and O&M costs combined.

In summary, Enphase has reduced its reliance on the US market where its US to outside-US market ratio is now 70:30; it had been 80:20, so with respect to the Suniva tariff case, this is less damning news. Within the next month, Enphase is seeking an exemption from the tariff since clearly it does not make sense to tax the microinverter on an ACM. The Enphase free webinars have vastly improved, and attendance has soared to the point where each session is now being listened in by hundreds of participants, signaling heavy interest in the new products. And whatever IQ officially stands for, in the installer community, it is coined "Install Quickly", and that is insightful, for technology evolves in the direction of simplicity, never in the other direction.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s 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.

I live in the Sunshine State of Florida where a handful of monopolies still control 75% of the energy. I am a firm believer in decentralized power which Enphase represents. I believe wholeheartedly that the future of solar is the AC Module; Enphase will be a brand name for years to come; this is my 36th article promoting the company. I own a 20kW Enphase microinverter solution, and receive checks BACK from my utility company annually for the excess solar energy generated. Together, solar and storage, as well as other renewable energies, can defeat the trillion-dollar fossil fuel industry over the long term and bring about a green energy revolution.