Enphase Energy (ENPH) has been making all the right moves, and this past month is no exception. The company continues merrily down the yellow brick road by 1) reducing expenses, 2) deferring debt, and 3) focusing on core product optimization and advancement of its microinverter. In the words of CEO Badri Kothandaraman, Enphase is laser-focused on its direction, but more importantly, the promise of profitability to the investors is being kept.
Enphase has ~350 employees now; reducing the roster from ~500 was a costly strategic move; Enphase incurred $3.6M for restructuring expenses in Q3-2017 and $2.1M in Q4-2017. According to CFO Bert Garcia at the Q3-2017 conference call, Enphase does not expect to incur significant restructuring expense beyond Q4-2017. Furthermore, in not so much as an expense reduction but more as a synergetic creation, Enphase made policy changes that tie employee compensation to company performance, a true sign of fiscal conservatism.
On March 5th, Garcia made a financial move deferring approximately $765K of principal repayment per month, or $7.65M for the full 10 months remaining of 2018. This deferment gives Enphase more flexibility as it rolls out its latest microinverter product the IQ7. Hopefully, the spike in revenue will be a blip on the radar screen, especially with the tailwinds currently behind Enphase. In reality, a small dilution at current SP could alleviate the term loan once and for all, but with the July-2020 maturity date still a ways off, it’s not a dire issue.
Enphases 7th-generation microinverter was released in Q1; it produces 4% more power, is 19% lighter, and 17% smaller than previous microinverter models. Revealed at the recent Roth Conference, further production cost decreases (p. 7) show the real important moves Enphase is making reducing OpEx. The “single SKU” advantage touted by this release is that instead of having S230 and S270 models in Australia, S280 model in the US, and basically having to support multiple models of the same product in different regions around the world, there will now be just 3 models worldwide IQ7, IQ7+ and IQ7X; this simplification optimizes inventory management, service and support. Furthermore, the semiconductor optimization increased by ~36% from the previous generation, and maximum DC power increased to 420-Watts. Remember what was said at Enphase’s last keynote as panel wattage increased, cost of the microinverter would decrease dramatically, almost in a linear fashion.
The AC Module continues to be integral to Enphases product portfolio. The ACM partnerships give Enphase access to existing distributor networks and increase marketing muscle. These joint ventures truly reflect what the Enphase Energized partner branding is all about; it may take years for a company to build a brand in a given country, so if Enphase can produce an AC Module in partnership, then that is the easiest way to get their foot in the proverbial door to new markets. LG (OTC:LGEAF), Jinko Solar (NYSE:JKS), Waaree Energies and Panasonic (OTC:PCRFY) are major partners with Enphase, and depending upon what happens with SolarWorlds (OTCPK:SRWRF) restructuring, they, too, are still a potential. Enphase recently hired a legal firm to seek an exception from the solar tariff since taxing the microinverter attached to the solar panel is unfair, especially since First Solar (FSLR) was exempted altogether. Enphase co-founder Raghu Belur stated at the last conference call that an appeal would be filed within 30 days with a response expected shortly thereafter. Regardless of the tariff, the ACM will continue to optimize and increase the “consignment stock” warehouse model for Enphase, since shipments go directly to module suppliers and not distributors; this will shorten the cash-conversion cycle.
In 2016, Enphase promised a competitive $838/kWh price-tag for its AC Battery product which included both storage and inverter; however, the pricing never materialized, and companies like BYD, Sonnen, Tesla (TSLA), LG and others were able to undercut with a ~$500/kWh price-tag for just the storage. Enphases contract with Eliiy is expiring at the end of this month, so pricing on the ACB should be changing soon. Regardless, there are other storage players out there, so new partnerships could always be struck, especially considering that Enphases AC Battery technology, in the words of co-founder Raghu Belur, is battery agnostic.
If you’ve ever watched the documentary Who Killed the Electric Car, you come away with a feeling that the monopolies killed something great for humanity, which they did for a brief timespan. Analogous to that, the DC optimizer has allowed the central string inverter to have a few more years of venerability in the solar MLPE arena, but it is starting to become clear that microinverters are the true contender. Feedback from installers and solar companies involved with the AC Module technology is proof, and AC Modules are microinverters 2.0., and in the words of Enphase’s partners, “the future of rooftop solar is the AC Module”. Consider that SunPower (SPWR), a rival of Enphase’s, has switched over to almost a completely AC Module-based product line for its residential solar portfolio in the last 2 years.
The battle for MLPE domination is still being waged, but I would estimate that we are only in the 4th inning M250, S280, IQ6 and IQ7. The 5th (IQ8) and 6th (IQ9) innings are coming, and they will be game changers. If you’re considering an investment in Enphase, ask yourself why so many successful entrepreneurs like TJ Rodgers, John Doerr, and Isidoro Quiroga have invested in Enphase and not SolarEdge (SEDG). The crux is the core technology decentralized, low-voltage AC versus centralized, high-voltage DC and which one is better on your home; when purchasing a solar PV system, you want reliability, safety and longevity which decentralized, low-voltage AC systems like Enphase’s can provide. Furthermore, the system that is the simplest and fastest to install offers increased productivity to the installers with a much wider technical audience; technology always evolves in the direction of simplicity, never in the other direction, and AC Modules are the simplest and fastest-installing solar PV solution on the market today. Enphase is the leader of microinverter technology, with SunPower’s SolarBridge Technologies being a distant second, but more importantly, Enphase now has the superior management, and that’s a winning combination.
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.
Additional disclosure: 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 and that Enphase will be a brand name for years to come; this is my 37th article promoting Enphase. I built and own a 20kW Enphase microinverter solution, and receive a check 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.
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