Wednesday, June 13, 2012

Enphase Energy (ENPH) -- Hoping Good Things Come From Small Package

Enphase Energy, Inc. (Nasdaq: ENPH $7.00) is the leading provider of microinverters for solar arrays. Unlike traditional central inverters, which collect energy from all of the panels in an array, the microinverters are attached individually to each panel. The microinverters monitor panel performance more closely and quickly than central inverters. It can take up to a month to detect issues on some central inverters. Traditional inverters also require more complex installations, and, damaged inverters not only are expensive to fix, but also can start fires due to the high voltage passing through them. 

Enphase has shipped 1.7 million units since the microinverters launched in 2008. The majority of sales have been made to the U.S., where the product is installed in some capacity in all 50 states. Canada makes up roughly 12% of sales, and Enphase’s products reached Europe in the fourth quarter 2011. The company primarily sells to distributors, who resell the microinverters to solar installation companies. However, some sales are made directly to installers; sales to OEMs and strategic partners make up the remainder.  

Revenues have soared 640% from 2009 ($20.2 million) to 2011 ($149.5 million). The increased revenues have failed to translate into earnings however, though the company has inched closer to profitability. But Enphase likely won’t turn a profit until 2013 at the earliest. The company was about $14 million in debt, with $5,437,000 short term and $8,619,000 long term. April’s IPO raised $60 million to improve the company’s financial condition.
Enphase has no direct competition, which should help it survive in the solar market. North American companies are beginning to embrace the technology, and the company’s penetration into Europe should yield more opportunities, even as subsidies are diminishing and disappearing. The microinverters can capture and utilize solar power more efficiently than central inverters; installing the microinverters could soften the blow of decreased government assistance. Solar energy would become viable without government assistance if prices dropped below $2 per watt peak (Wp). As of March, average prices were $2.29/Wp in the U.S., and $2.71 (€2.17)/Wp in Europe.

The company does have stiff competition from central inverter manufacturers though, so treading water in 2012 will not be easy. Central inverters have been in use for 20 years, and that technology also continues to improve. The microinverters can cost more than central inverters, but are cheaper to install, which could funnel more business their way as installers attempt to limit expenses. Each microinverter retails between $145-$200. A residential installation typically uses 5-50 inverters ($725-$10,000); a commercial operation installs 50-500 ($7,250-$100,000). The high ends of these costs would be substantially higher than central inverters, but the microinverters promise better yield and longer functionality which would make up the costs over the long term. Also, residential installation could be significantly cheaper than a central inverter. A customer could get 10 high quality microinverters for about half the price of a top of the line central inverter, and about the same price as the lowest cost central inverters. Enphase’s inverters also come with a 25 year warranty, compared to 5-10 years for central inverters. Solar arrays tend to last about 30 years before replacement is necessary.

It doesn’t appear that the stock price will change much in 2012. Despite growing revenues, margins are negative, and share losses, while expected to be less severe than in the two past years, are still losses. The high revenues come with a high cost, leaving no room for profit. Either costs must decline in total or in relation to revenue for Enphase to post earnings. Operating expenses in first quarter 2012 were 44% of revenues ($18,587). The gross margin of 22% was the second highest quarter in Enphase history.  For the full year, we project revenues of $210 million. Predicting cost of revenues of 78% and operating expenses of 44%, net loss will total -$46.2 million. In this scenario, loss per share would be $0.97 for the year, a marked improvement over losses of $15.66 per share in 2011. Revenues look ready to make another big leap in 2013, and we estimate Enphase will post earnings in 2013 of around $0.05 per share.

Enphase is located in Petaluma, CA.

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