Enphase (Nasdaq - ENPH) -- Q2 Earnings Produce Skepticism

Enphase (ENPH $4.90) posted second quarter results that indicate the company is moving along toward profitability. Revenues of $55.7 million were up 88% over $20.6 million in the second quarter of 2011, and were up 31% sequentially, from $42.6 million. Revenues for the first half of 2012 totaled $98.3 million, up 106% over $47.7 million in the same period in 2011. Loss per share was $.23. Gross margins improved to 24.4% for the quarter, up from 21.8% in Q1. Most of the increase is attributable to Enphase’s ongoing cost reductions.

Despite the improvements, investors look wary. The stock price fell from $6.70 to $4.90 the day after earnings were reported. Enphase suggested guidance for the third quarter that looks soft. Couple this with the company’s announcement that CFO Sanjeev Kumar is stepping down at the end of the year, and there is reason for some skepticism. 

The company’s market-leading microinverters continue to win favor among solar installers. The majority of the sales were made within the U.S., but Enphase is seeing increased interest in Europe. France and the Benelux region were the primary buyers, with a few sales to Italy. However, the looming regulatory adjustments in Europe will likely keep sales there scarce until the picture becomes clearer. Enphase recently opened an office in London though, and the company sees a similarity between European interest for the microinverters and the way American companies reacted when the product was first introduced, which is a good sign. An even better sign: Enphase’s microinverters were a hit at the Intersolar Europe trade show in Germany this past June. 

Sales to Canada dwindled as a result of regulations. In 2011, Canada represented 11% of sales; this past quarter the country accounted for only “low single digits.” The Ontario Power Authority is currently accepting applications for its “microFIT 2.0” program, which will award 50 MW of tariff savings to small installations (under 500 kW or less). The feed-in-tariff program for larger, commercial level installations has yet to be announced. Enphase believes it should see increased sales once the OPA resumes the tariffs. The U.S., where tariff programs and government assistance are still strong, remains Enphase’s primary focus in the short term.

Enphase announced several new offerings that will improve system integration. The Array Gun syncs up with the company’s Enlighten software to help installers and owners easily manage solar arrays. The Bluetooth-enabled device scans the barcodes on microinverters, sending the serial number and position in the array to the software. Users will know which microinverter is where, and how each is performing. The Enlighten software has also been upgraded. Energy collection output readings are now more precise both for individual panels and for the system as a whole. Also, the program records historical data for comparative use. 

Third quarter revenue might not reach its potential due to the downturns in Europe and Canada. Enphase suggests Q3 revenue between $59 million and $63 million. For the year, we think a loss per share of $1.10 is still reasonable (Note: $5.01 loss in Q1 used pre-IPO share count). 

( Click on Table to Enlarge )

Advanced Energy (Nasdaq - AEIS) -- Straying From Semiconductors

Advanced Energy, Inc. (Nasdaq: AEIS $12.00) announced second quarter 2012 results that were in line with our expectations. Revenues of $115.7 million were up 9.4% sequentially, from $105.7, but dipped 16.2% year-to-year ($138.2 million). Gross margins should improve from this point, though, as the company completed a series of cost cutting measures to eliminate roughly $30 million of operating expenses annually. Advanced Energy hopes to slash another $15 million to $20 million in manufacturing costs over the next year.

The company is de-emphasizing its semiconductor segment. Thin films accounted for 70% of sales in the second quarter of 2011; in 2012, thin films comprised 56% of sales in the quarter. Thin film sales were down 33% from the previous year, from $97,331 in 2011 to $64,843 in 2012. Non-semiconductor thin film sales (architectural glass, displays) advanced. Thin film revenues were up 7% sequentially from $60.4 million in the first quarter of 2012. They were up 19% from $54.4 million in Q4 2011. Semiconductor sales suffered due to an oversaturated market. The segment will still be important, but AE thinks more opportunities exist in its solar inverters and non-semi thin films.

Solar sales improved 24% year-to-year. Revenues totaled $50.8 million for the second quarter, compared to $40.8 the year before. It was also a sequential improvement of 12% over last quarter ($45.4 million). The solar segment should continue to perform well the rest of the year, as the third and fourth quarters tend to be the strongest. Advanced Energy is trying to level out the cyclicality in its sales, but that might prove tough considering solar tends to slow in the first quarter, when winter weather limits installations in the United States and Canada, where the company primarily operates.

The company seems more concerned with reducing costs than it does with increasing sales. This is kind of concerning given the stiff competition AE faces in both thin films and solar. Their products are praised by their customers, but the company cannot rest on its meager laurels in this environment. The non-semi thin films are performing adequately, and the solar backlog is the largest in company history. One wonders if the cost reductions in manufacturing will affect the quality of the products. Obviously, that remains to be seen. The company’s backlog could be larger, but AE only goes “for the business we want to go for,” according to CEO Garry Rogerson. Other companies have begun introducing microinverters, which are generating lots of buzz and claim to be more efficient than central inverters. Advanced Energy is content (for now) to continue with central inverters. While they may be of the highest quality, it won’t matter if there’s better technology out there.

( Click on Table to Enlarge )