Enphase Energy ( Nasdaq - ENPH ) -- Price Pressure Persists

Enphase Energy (ENPH $3.75) appears on track to report unexceptional Q4 results.  Enphase is the leading provider of microinverters that convert DC power generated by solar panels into AC electrical current.  Most of the solar industry uses string converters.  Those are large units that sit on the ground and convert an entire string of panels.  Microinverters are attached to each individual panel.  The string units are less expensive.  And their prices are declining quickly in response to engineering improvements and relentless competition.  Microinverters generate more electricity output, typically 10%-15% more.  String converters are limited by their worst performing panel.  If a single panel becomes impaired -- for instance by leaves, shadows, or debris --the entire system is affected.  Microinverteers enable each panel to produce at maximum output.  New financing arrangements in the U.S. residential solar market are encouraging system installers to emphasize price more than output.  Those schemes are cutting into Enphase's potential market, thwarting the company from growing as rapidly as it might.

A next generation product line could open up the commercial sector.  To date Enphase has serviced the residential market.  New systems slated for introduction early in 2013 promise to address the small commercial area.  Even larger units are planned for 2014.  Commercial building owners are likely to be more alert to the energy savings Enphase devices produce.  So even though lower initial prices for string converters will remain a competitive issue, acceptance could prove high.

Expansion outside the U.S. offers further potential.  Enphase concentrates on the U.S. market presently.  More than 90% of sales are to domestic customers.  Much of the rest is made in Canada.  New distribution channels are being developed to enter Europe and Asia.  The European market contracted markedly in 2012 due to the economic crisis, which caused subsidies to vanish.  Asian demand is picking up, although tariffs are on the rise to prevent imports.  Enphase is beginning from virtually a zero base, though, so at least some incremental benefit is likely.

We estimate 2012 earnings finished around minus $.80 a share.  Next year margins could improve as fixed costs are spread over a broader base, and direct costs are reduced consistent with selling price declines.  Our estimate is a loss of $.25 a share.  A move to profitability could occur in 2014.  The long term outlook remains uncertain.  U.S. tax subsidies equal to 30%-40% of a solar system's cost are scheduled to disappear in one fell swoop in 2016.  Further improvements in solar technology are likely to offset some of that.  But unless regulatory costs are brought down and electric utilities are given incentives to embrace solar, profitability might remain challenged well into the decade.

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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). 

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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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