Enphase Energy: Great Expectations

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About: Enphase Energy, Inc. (ENPH), Includes: ABB, BLK, GNRC, RUN, SEDG, SMTGF, SPWR, TOT, TSLA, VSLR
by: TJ Roberts
Summary

BlackRock stands behind Enphase.

Potential industry-leading, high-performance CCC for Q4.

Distributors see IQ market share increase.

IQ7 generates more revenue.

IQ8 burst mode like no other inverter on the market.

In all the years of following Enphase Energy (ENPH), their upcoming earnings call should be one of the most exciting, especially considering recent events. Many loyalists are eagerly anticipating news of Enphase’s 8th-generation “IQ8 Ensemble.” This revolutionary new product suite will give solar systems “battery-less” microgrid capability and true grid-agnostic, energy freedom; it will further provide the impetus to upgrade for millions of customers whose aging solar PV systems do not have that capability.

Enphase’s latest product roadmap suggests management may be adhering to a tick-tock strategy so as not to Osborne their high-volume, affordable, and best revenue-generating Heron-3 platform which the entire IQ7 product portfolio is built on. With Enphase’s latest IQ7A microinverter, their product portfolio will now cover the entire panel spectrum - low- (IQ7), mid- (IQ7+), and high-end (IQ7X, IQ7A); this will give feature-rich IQ8 a premium entry point, allowing Enphase to achieve even greater revenue from this new product.

The Enphase IQ7 product portfolio, recently awarded top brand in Europe and endorsed by FEMA, will become the high-volume microinverters for 2019 and have the lowest incremental production-cost the company has ever had. Finally, the best news going into the call is Enphase’s retiring of the last albatross left from previous management, the Tennenbaum $50M “Term Loan.” Let’s discuss further some of the latest insights on Enphase Energy, and the great expectations shareholders have for them in the near future.

Enphase Energy Leader in Solar Distributed Generation

• Current share price reflects shareholder confidence…

The Enphase share price rose considerably on news of the $50M Tennenbaum loan repayment. Enphase followers since the days of the former management know that the “Term Loan” (p.18) was truly one of the last white elephants left for the new management to deal with, and the repayment news hit at a perfect time just before this upcoming earnings call on Tuesday, February 26th. Refinancing was likely an option, but the fact Enphase chose to wipe the entire slate clean exemplifies the company’s return to true fiscal conservatism.

Interestingly enough, the largest institutional shareholder of Enphase stock is now BlackRock (BLK), the same company that acquired Tennenbaum Capital Partners to whom the loan was repaid. In the past year, BlackRock has increased its stake in Enphase by over 650% to ~5.6M shares and now owns ~5.3% of the company stock. As a result of the loan repayment, analysts at HC Wainwright have given Enphase a $9 share price valuation.

• Distributors see IQ market share increase...

Reputable sources from various distributors around the globe hint that Enphase is gaining market share with its IQ products. IQ's plug-n-play installation and appeal to a much wider audience due to its product simplicity is gaining traction. Enphase's jump from 4-wire M-/S-series to 2-wire IQ in early 2017 was a huge risk, but it appears to be paying off, for simple beats complex. Renvu's marketing director, Tatyana Grinenko, had this to say:

Looking at sales volume, the M-series was incredibly popular, but when the IQ-series came out, the sales volume was nearly 60% higher than for the M-series. The number of sales for the IQs continued increasing throughout 2018 with the addition of the IQ7's and AC Module's, and had it not been for the shortage, there would have been even more sales.

In addition to distributor testimonials, Goldman Sachs (GS) added weight to this assessment with their recent equity research report on February 11th entitled "Americas Clean Technology: Solar" where they stated:

...distributors suggest Enphase has seen some marketshare momentum of late.

• Enphase Q4 potential returns…

Enphase has given Q4 estimates for 1) revenue of $80-90M, 2) GAAP and non-GAAP gross margins between 31-34%, and 3) GAAP OpEx between $25-28M including- and non-GAAP OpEx between $18.5-20.5M excluding - approximately $7.2 million of stock-based compensation, additional restructuring, and acquisition-related expenses and amortization, respectively. The Street is looking for $85.2M revenue with ~$6M non-GAAP operating income or ~6 cents per share.

The CEO stated in the last earnings call that Q4 sales were "fully booked" with at least a month left in Q3 which is positive news. Tariffs and component shortages could affect revenue margin, and restructuring costs from the Fremont and Flex Mexico moves could weigh on GAAP OpEx; in addition, Enphase has to pay a final $2.45M interest charge (Q3-2018 10Q p.19) on the term loan, as well as $10M to complete the Solarbridge acquisition which was booked as an accrued liability (Q3-10Q p.24); this $12.45M has to be paid via assets, cash, cash flow from A/R & inventory, or unspecified prepaid expenses.

However, Enphase has many skewers in the fire these days, so it’s difficult to estimate cash flow based on historical patterns. In the past, Enphase has managed to reduce A/R in Q4 by ~$3M and given the production constraints, it's likely that inventory got reduced by ~$3M as well, allowing the company to run super-lean into 2019. If Enphase managed to reduce both A/R and serve its customers from inventory, then their cash conversion cycle could be as short as 40 days which would reflect an industry-leading, high-performance CCC for a distributor-based business model that is normally A/R heavy.

• IQ7 Heron-3 will now cover full range of panels on market…

Recent news on Enphase's technological front is the UL-approval of IQ7A, the newest microinverter in the IQ7 product portfolio, one which will pair perfectly with SunPower’s NGT panels, LG’s BiFacials and any other high-powered panels.

With IQ7A, consider that for the millions spent on R&D, management is ensuring that it receives an excellent return on investment. IQ8 will become a reality eventually, but IQ7A is an easier and faster way for Enphase to specifically serve NGT, BiFacials, and high-powered panels. As these panel wattages increase, the value of the microinverter increases in a linear fashion, so in the near term, Enphase stands to make a boatload of cash with its entire IQ7 line built upon its lowest production-cost, Heron-3 platform.

Instead of quickly jumping to the new Swift IQ8 platform with design costs, manufacturing reworks, et cetera, Enphase appears to be squeezing every dollar of revenue possible out of “Heron” before making the flight to “Swift.” Consider that IQ7 transition (below) should hit 100% for Q4, so that is another positive revenue factor going into this call.

Qtr/Year Revenue MegaWatts # micros % IQ CEO/CFO

Q3-2018

$78.0M 204MW DC 665k 78% IQ7

Kothandaraman/Branderiz

Q2-2018

$75.9M 203MW DC 675k 72% IQ7

Kothandaraman/Branderiz

Q1-2018

$70.0M 180MW DC 611k 67% IQ6/7

Kothandaraman/Garcia

Q4-2017

$79.7M 221MW DC 755k 73% IQ6

Kothandaraman/Garcia

Q3-2017 $77.0M 231MW DC 790k 26% IQ6

Kothandaraman/Garcia

Q2-2017 $74.7M 193MW AC 775k 20% IQ6

Nahi/Kothandaraman/Garcia

Q1-2017 $54.8M 138MW AC 573k IQ6 started Nahi/Garcia

IQ7A will allow Enphase to outgrow its Served Available Market in the Total Available Market shown below from 2018 Analyst Day (p.14):

Enphase Energy SAM/TAM Analyst Day 2018 Using Google Trends also shows how Enphase’s partnership with SunPower (SPWR) will increase their SAM, and why IQ7A is such an important addition to Enphase’s product portfolio before the arrival of IQ8.

Enphase Energy SunPower Google Trends

• ACB gets IQ7 upgrade...

There was also news of an AC Battery with integrated IQ7 being approved in Australia which could usher in lower-priced ACBs. With an "uptick in AC battery sales every quarter," as was mentioned by the CEO in the Q1-2018 earnings call, this is also good news which adds to the bottom line as the Encharge 3.3kWh product is awaited.

• The SunPower-Total-Saft connection…

With the SunPower partnership, Enphase is now a part of SunPower’s ecosystem, which also makes them part of Total S.A.’s (TOT) to some extent, and Total owns 100% of Saft, a battery storage company whose slogan is “We energize the world!” If Total wins on its recent Eneco utility bid, that could be a win for Enphase indirectly with potential connections to multimillion-dollar deals. Eneco has the largest renewable energy portfolio in Europe, and they also use Enphase’s IQ products.

• IQ8 off-grid advantage…

There will be 2 models of IQ8, one for off-grid and one for grid-connection; it is the off-grid version which the "mystery [$6M] partner" is associated with (see Q2-2018 earnings call).

With moves from Total aforementioned, it’s only a matter of time before other utility bids, for example, on Tesla (NASDAQ:TSLA) supercharging stations (using DC “fast” charging technology) are made; the charging stations symbolize a better mousetrap, where customers pay for convenience, with a power purchase on par or below that of gasoline, and where Enphase's IQ8 off-grid could play an integral part with SunPower-Enphase AC Modules on the roofs of all the Total charging stations.

For a microcosm example, imagine a drive from Denver to Vegas, and in some remote area of I-70, halfway between Grand Junction and St. George, in the middle of no man’s land, you pull into a charging station, charge your EV and take it for granted that the station is truly a modern-day technical marvel with no utility lines and poles connecting it to a central power source; instead, it is just a simple, modular solar-storage station with ACMs on the roof, batteries in a storage room with some comm boxes, and a few EV-charging bays. This is but one of the IQ8 off-grid applications which could make sense economically, but it might take an Exxon (NYSE:XOM), Shell (NYSE:RDS.A) (NYSE:RDS.B), Chevron (NYSE:CVX), BP (NYSE:BP) or Total to make it happen.

Enphase Energy IQ8 Grid-independent Energy System

• IQ8 attractive to big solar outfits…

IQ8 with built-in microgrid capability will give Enphase negotiating leverage, possibly luring big residential solar outfits like Vivint (VSLR) (54MW Q3, est. 74MW Q4) or Sunrun (RUN) (100MW in Q3, est. 130MW Q4). With LONGi supplying ~25% of SunRun’s panels, and Enphase’s partnership with LONGi, the potential for a deal involving IQ8 is even greater. Enphase’s AC-coupled technology could even lure Tesla with their 76MW Q4 solar footprint, much like it did for SunPower giving their residential portfolio and worldwide ACM footprint a 3% CEC efficiency boost. Enphase and Tesla are both in Fremont, so there’s potential synergy there, and much like SunPower was able to reduce OpEx by unloading SolarBridge, Tesla might want to do the same with SolarCity’s OpEx since they’re tight on cash with weak demand for their EVs.

• IQ8 burst mode like no other product on the market…

Recently in a 53-minute interview of the Cofounder and Chief Products Officer of Enphase, Raghu Belur, it was mentioned that the IQ8 will have a 50% burst mode capability (48’20”); optimized-string solutions from SolarEdge (SEDG), ABB (ABB), SMA (OTCPK:SMTGF), et cetera, cannot offer this. This capability is integral to both IQ8 off-grid and IQ8 grid-connected versions of the product, for this is the power you need to get devices started — a refrigerator compressor motor, a pool pump, a vacuum cleaner, etc.

If we speculate a 320W IQ8, then that’s 480W burst power, and from the Encharge 3.3kWh specs, that’s 1.92kW burst power, 5.76kW for the Encharge 10kWh, and 7.68kW for the Encharge 13.2kWh model. Compared to the 7.2kW peak for the Tesla Powerwall2, that will make Encharge a competitive storage product. From a purely speculative standpoint, IQ8 could give Tesla an immediate performance boost, plus they wouldn’t have to spend the cash they don’t have for product R&D. Furthermore, with the Enphase brand name, that would put the Powerwall2 on steroids and be a win-win for both companies.

Enphase 425W 500W IQ8 Microinverters • IQ8 built-in charge controller advantage…

IQ8 with its built-in charge controller will allow Enphase to enter vertical markets like the solar water pump market in India which uses inverters combined with 12V lead-acid batteries; Enphase could tap into the incentive program and be competitive. With 425W and 500W models mentioned in the 2018 Analyst Day (p.21 & above), these microinverters will allow Enphase to not only compete in this market, but to also enter the dual-inverter market with competitors APS and Hoymiles combining cheap 250­-275W polycrystalline panels. In multi-panel mode, IQ8 will compete better than IQ7 in $/Watt cost.

• Possible IQ8 exhibition and debut…

IQ8 microgrid was last witnessed during the InterSolar San Francisco 2018 event, and more reports have surfaced of IQ8 being field-tested successfully around the globe, so IQ8 could possibly surface at the Smart Energy Conference & Exhibition in April where Enphase has a booth. Pramac, a wholly-owned subsidiary of Enphase partner, Generac, (GNRC) will also be there. Then, there is Intersolar Europe in May which could also be an IQ8 debut possibility.

• Epilogue…

In summary, the company that Enphase just paid off is now its biggest institutional shareholder which says a lot. Some of the expenses facing Enphase this quarter are simply non-recurring road bumps preluding the silk road which lies ahead. Enphase's new UL-approved microinverter will now cover the complete spectrum of panels available and coming on the market, and even ACB will sport an integrated IQ7. IQ8 is forthcoming, and even if late, that’s far better than to have it arrive early with problems. As panel wattages increase and IQ gains market share, the string inverter market will continue to deteriorate. With the right management in place and superior technology, 2019 is going to be another year of great expectations for Enphase. Good luck.

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.