Sonoma County: News and Notes

This week I will cover the results for Enphase.  The company reported $74M in Revenue and a loss of $0.14 per share.  The results also included some interesting number changes.  The first is that the company grew total cash by $1M.  This was accomplished by a dramatic draw-down of inventory from $33M at the end of Q1 to almost $21M at the end of Q2.  This allowed for net cash to be positive as the company was selling products that it had paid for previously.

The other large event in the quarter was that the CEO Paul Nahi has resigned effectively immediately.  The company did not appoint a CEO but instead created an Office of the CEO to run things.  Paul’s seat on the Board of Directors was not mentioned.  My assumption is that he will serve out his term and then someone else will replace him.  There is supposed to be an internal and an external candidate for CEO.  The internal candidate seems very likely to be COO Badri Kothandaraman.  He would seem to be the default candidate as he clearly joined Enphase at the behest of investor TJ Rodgers.

What this led to is a very odd conference call and I want to focus this on the guidance for Q3.  This guidance was essentially flat from Q2.  That seems very odd to me because Enphase has been somewhat seasonal with Q3 generally being the best quarter for the year.  I think there are 2 primary factors for this and I do not buy the stated reason on the conference call at all (a component shortage).

Factor 1 is that Quarterly Conference Calls are a big deal.  They are the primary sales call that can be done by a company on a periodic basis for the stock.  I am used to a cycle of a month of script writing, reviewing, updates and practice before the call.  A CEO transition will make this quite complex as Paul was on the call, but out the door at the end of the day.  How they project next quarter’s guidance would be tricky as the voices in the room will still be settling out.

Factor 2 is that Enphase is in a complete product transition.  Not only do we have the transition to newer micro-inverters, we have the potential transition to the AC Modules.  That latter transition is not completely under the control of Enphase.  It has to work with LG and Jinko to try to make this work right.  New Product Introduction is always a sloppy process and there are slips what happens.  Having them both at the same time with a new management team is going to be hard.

I want to point out one more thing.  The Debt from Tennenbaum require that Cash + Inventory + Receivables is more than $75M.  There is also a requirement to have $10M of cash at all times.  At the end of next quarter, both of these will be within reach of not being met.  There should still be room.  But one can easily see a path in Q4 to missing one or both of the loan covenants.  I want to point out that breaching these covenants will be akin to bankruptcy for an equity holder.  So, I would expect yet another capital raise in Q3 after the new CEO is confirmed.

So, where does Enphase stand?  Well, it is on a knife’s edge.  The new products might not turn Enphase into a financial juggernaut.  They have the potential to bring the company to profitability and that would be enough to keep it alive and probably have the share price be somewhat higher.  However, there is the risk that these products fumble on introduction.  Not because they are bad, but because New Product Introduction is hard.

To me the real question for investors is a longer term path forward.  Despite the various fan boys on both sides, both Solar Edge and Enphase have solid working products.  At this time, Solar Edge is about 2x the Revenue of Enphase and has a much larger R&D budget.  This gives the company a big edge going forward.

Finally, I think about my friend Martin Fornage all the time.  This last couple of years can not have been a lot of fun for him and frankly he doesn’t need the money.  If the culture changes, maybe he exits stage left.  I don’t know what Enphase is without him.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Financing Your Business: Factoring

Factoring is a tool that a minority of Business Owners have heard of.  The ones that have are not enamored with it, but Factoring can be a good tool in a business that has issues with Cash Flow.
In particular, the best use of Factoring is covering the gap between expenses incurred on a project and being paid for a project.  Let me use Construction as an example.  Imagine you are going to do some renovations on a Commercial Office building.  In this case, let us say that the Building requires a new roof.  To get to the point where the job is complete, you need to buy and use materials.  On top of that you have one or more crews that need to get paid for their time.  After the job is complete, you send an invoice (maybe the net is due in 30 days or NET30).  But the business is a bit slow in paying and you get a check between 45 and 60 days.  Expenses for the project are likely to have started 90 – 120 days before you get paid.
Now, you will realize at this point that you are floating the customer a loan. Some industries (for example signage) often have down payments to cover materials but this is rarer than you might think.  Even if the roofing job is wildly profitable, you might run out of cash waiting to get paid.  So, how does factoring work and how does it help?
Well, factoring is a solution that is not a loan.  In fact, it is a form of selling an asset.  In this case, that asset is the Invoice that you are going to provide to the Customer.  A Factor buys that invoice from you at a price less than face value.  The Factor provides the cash to you up front and keeps a fee that represents the equivalent of Interest on the Invoice.  The good news is that the Business’ Credit Rating is not an issue, the customer’s is.  This means that a small company can get financing to deliver to a large customer.
In the long term, Factoring can be expensive.  But it is the lifeblood of many industries and companies and smooths over any Cash Flow gaps that exist.
Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning
Change Your Business – Change Your Life!

Sonoma County: News and Notes

This week both Calix and Enphase released their earnings.  I need to spend a bit more time on the 10-Q from Enphase (that is the formal report by the company filed every quarter with the SEC).  So, I will be reviewing the numbers and call from Calix.  Revenue came in at $126M with $107M of that being Product Revenue.  Losses were $0.38 per share.  In general, it was a bit more of the same as Q1.  The revenue growth year-over-year was from the service sector.  Unfortunately, this sector had negative gross margin (in other words they lost money on selling the services).  Operating Expenses were up $6M over last year with an $8M increase in Research and Development.  Over the last 6 months the company has burned $13M in cash and is about 9 months away from insolvency on that standpoint.  I don’t think that will be an issue anytime soon, but the company does need to figure out how to become profitable on a regular basis.

The company forecasted Q3 numbers as $126M – $130M in Revenue, 36% to 39% Gross Margin, and Losses of between $0.21 and $0.27 cents a share.  Since that time, the stock has tanked over $1 per share (over 20%) and is as of the moment $5.25 per share.

There is one other thing is that Calix announced the signing of a deal for NG-PON2 at a North American Tier 1 for Trials and Early Deployment.  This can only be at Verizon and there has been much talk about it for a very long time.  This is not going to replace FiOS.  There are too many units of FiOS installed and the pricing on those units were a total of about $100/customer.  It is not reasonable to have NG-PON2 priced that way otherwise there would be massive losses.  However, a deal would Verizon would have to be at much less than corporate gross margins overall.  They might be able to get good margins out of the CO units (and thus early shipments) but not out of a fully deployed system.  On the other hand, this could be a significant Revenue opportunity.

So, I think what investors see is two things.  All the growth of any substantial amount has been at very low gross margins.  There is concern that this will be true with the Verizon deal as well.  At today’s Operating Expense (OPEX) levels Calix will have to have Revenue of $181M per Quarter to break even.  If this is simply an addition of the Verizon deal, this implies that $60M a quarter or $240M per year would come from Verizon.  This is not outlandish at one level.  FiOS was about $600M a year for its equivalent.  But how many endpoints of NG-PON2 will be deployed.  For BPON, we did 3.5M.  If NG-PON2 is significantly smaller (used for Business and Cellular Services), then the Revenue will not be there.  Until we see how Verizon rolls this out we will not know.

And I think it is that uncertainty as well as the ongoing losses that are causing investors to sell Calix stock.  Right now to break even the company would need to reduce OPEX by about 33% and I see no indication of that coming in Q3.  So if you think there is something important going on with Verizon, this stock is a lot cheaper than it used to be.  One thing to point out is that business at Verizon could lead to a sale of Calix, but the number of companies who would be buyers can be counted on less than 1 hand.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Financing Your Debt:  Early Stage Venture Debt

Venture Debt is a rather complex topic, so I need to break this down into two different parts.  This is the first of those parts and has to do with Valuation.  Now, as I have said the actual valuation of a startup is a problem.  There is little to no revenue and there will be ongoing losses for some time.  Uniqueness and IP Value are in the eye of the beholder, so one way out is a form of Venture Debt.  The point of this post is actually to help you get a handle on some other terms, so our financial example is going to be pretty simple.

Now let us imagine a company where you have been able to pull together a modest amount of Friends and Family money.  You are on your way, but struggle to raise Angel money because their is a disconnect on valuation.  If you don’t get some money pretty quick, you will need to stop or nearly stop the company.  This loss of momentum is bad and most times is unrecoverable.

Now if the company was more advanced you would go to a Venture Capitalist (VC) or 12 and raise what is called a Series A Round (aka an A Round).  The problem is that the company may not be mature enough for this to happen.  In today’s world, a software application needs to have a somewhat functional prototype to get this money.  It is different in hardware or bio technology, but all of them have some points to get started.

So, is there a solution to bridge this situation?  Well, yes there is.  It is a strange form of Convertible Debt with step-up preferences.  The notion here is that a lender provides some cash (in this case let us say this is $250,000).  There are two points going forward:  the company either gets to an A Round or it does not.  If the company does, then the Debt can be converted to equity or paid off in the A round with a Step Up.  This is a percentage that the loan gets as a fixed “interest” payment.  It works something like this.  Let us say you gave the lender a 10% Step Up.  That means that the investment is counted as $275,000 instead of $250,000 when the A round gets completed.  Remember the Creditor here is taking on significant risk.  The company may not reach an A Round, at which point all the money is lost.  So, you can expect these to have a significantly higher value to the Lender than a Bank Loan.

This Loan will also have a preference to it.  That means that it gets dealt with first over everybody else.  They provided funding when nobody else would so that is fair.  The other good news for the Lender is that he/she has a relatively early liquidity event.  They can get paid off if the company is successful in raising an A Round or they can get an extra bump to the money that they put in.  And this is true regardless of the Valuation of the company in the A Round.  Thus, they get significant risk reduction for providing very early stage capital.

Have a great day!

Jim Sackman

Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Sonoma County: News and Notes

Well, next week will start the Earnings season as Q2 results come out.  As you readers know, I publish Earnings Analyses of Enphase, Autodesk, Calix and Keysight.  If there are other public companies that are of interest in the North Bay, please let me know.  I have significant experience in the quarterly call language, the public market language and mergers and acquisitions.  I try to make my review of the numbers and the dialogue make sense to the lay person.

Real Estate continues to be a big story here in Sonoma County.  A number of properties that were in the rental space are being taken off the market and sold.  These were typically property owners who did not really want to be landlords but could not afford to sell these homes until recently.  This small inventory has not shifted the pricing down, but has helped put some inventory into the market.  The Commercial Real Estate world is tight as well.  The Cannabis market is causing significant amount of warehouse and similar space to be moved to becom grow houses.  This has caused some significant dislocation for local businesses.  I personally know of 3 automotive repair and service businesses that have had to relocate or go out of business because of this shift.  I have heard some rather challenging pricing for this kind of space at the moment.

It has been all quiet on the water front this year given all the rain we had.  The grape harvest forecast is in the “normal” range at the moment and is likely to hit its stride a couple of weeks later than last year.  Call it sometime in early to mid-September.  Somewhat lower yields are expected to be offset by higher quality, but there can still be slips twixt cup and lip.

This weekend is the Santa Rosa Ironman event.  There are significant Road Closures to support the event.  Take a look at the Press Democrat Website for details on that.  Also the Sonoma County Fair starts August 3rd, so remember that there will be increased traffic around the Fairgrounds.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Financing Your Business: Valuation

I have dabbled in this topic a bit.  But we need to talk about Business Valuation when we talk about Equity.  That is the key to understanding Equity Investments and Equity Investors.

There are 4 basic types of Investors in the Public Market:

1 – Value Investors:  These people look at the numbers associated with the Operational Part of the Business as well as other Financial Metrics.
2 – Growth Investors:  These people look at the Market and Market position of the company to evaluate the potential for future growth.
3 – Technical Investor:  These people study metrics around the stock price and recent price trends to look for positive and negative signs in the price of stock.
4 – Day Trader:  These people look to trade regularly for small variations in the stock price to be able to extract value.

These last two will not be part of our conversation today.  They require the public market and its open nature to work.  You can’t use these techniques to invest in private companies.

Everyone else is a combination of the other two.  Private Market transactions will have a significant weight on Financial Metrics of the company, especially for established businesses.  Startup businesses will depend more on the Growth that is envisioned and thus the future of improved Valuation to be able to establish a price.

For an established business, most of the time it will be pretty simple.  There is a multiple of cash flow and an addition for excess capital on the balance sheet.  The cash flow multiple is specific to certain industries and there will often be comparable transactions that can be used to set the multiple.  The biggest single issue is the state of the financials in most small companies.  Small businesses are captured financially to maximize the tax benefits to the owners.  In general, that means that the company is actually making more money than is stated by the P&L.  There are expenses that the company takes that are benefit to both the business and the business owner outside the business.  In a large, public company these expenses are not allowed, but often pollute the value of smaller companies.  What is required is that what is handed to investors are Generally Accepted Accounting Practice (GAAP) financials.  In the case of a private company transaction, there may need to be a reconciliation of the normal books to GAAP Books to ensure that things are clear.

This is also true for the Balance Sheet.  I often look at Internet Service Providers in my Consulting Business.  These companies tend to have extensive Capital Investment where a normal business may own its building.  These investments are great on the Balance Sheet and are depreciated over the life cycle of the asset.  Here too there are tax accounting considerations.  Small Capital Investments are often expensed as Cost of Goods Sold (COGS) and not depreciated.  This accelerates their tax benefit, by lowering earnings.  But since we are looking at a multiple of Cash Flow, this needs to be dealt with properly.

There can be additional issues with expenses, particularly the use of cash versus accrued accounting.  In most smaller business, this will tend to have a smaller impact but can be important.  As can the amortization of expenses over the year.  The important part of both styles is that expenses are taken in the same year that they are used and that they are smoothed so that Cash Flow is as consistent as possible over the year.

Now let’s take a look at the Growth side of the equation.  Here what we are really talking about is setting a floor for value or a higher than normal multiple of cash flow based on what business you are in.  Alternately, this can be also a strategic set of customers that the business has.  The challenge for most smaller businesses is that they are small.  Most strategies involve larger moves…things that move the financial needle.  So, here what you need to think about is what is so invaluable that a competitor would have to spend a lot of money to get at.  This is a lot less deterministic and thus there are a lot more disagreements on this front.  This is particularly true for Startup businesses.  So next week we will talk about a solution to this called Venture Debt.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Net Neutrality Thursday

I had a couple of people forward me these emails to speak out about Net Neutrality.  Since I do that and have done that, well here is another post on that topic.  I want to start with that everybody that comments on this has an agenda.  So do I.  My agenda is to try to change the primary issue to Universal Broadband Access and away from Net Neutrality.

I want to change this for 2 reasons:

– No Tier 1 has been shown to violate Net Neutrality (Comcast – Netflix was shown to be a problem with Cogent; a Netflix vendor)
– We still have a divide and no plan to provide escalting bandwidth and our existing methodologies have failed

This lack of broadband exists in some city neighborhoods and some rural areas but is generally not a problem in smaller cities and suburbs.  The problem I have with our current version of Net Neutrality is more technical and comes from two places as well.

First, I think we ought to redo our rules around residential service to make them common for all Service Providers independent of last mile technology.  The basic services are converging.  It seems silly to me to have multiple paradigms to regulate this under.  By having a common code, we have a more level playing field.

Second, I think we need to take a closer look at services and spectrum allocation.  Right now all of our broadband technologies support at least 2 and sometimes 3 services.  Many of these have multiple streams running in different bandwidth allocations over the same infrastructure.  For example, Cable Modems occupy 1 or more of the modulation groups on the cable.  The others are occupied by Linear TV and Pay-Per-View services that are not available for broadband.  The thing is that all of our networks would benefit from a retirement of older technologies and using a unified method of deploying services.  That way we can more flexibly allocate bandwidth and provide better service.

My proposal would be 100% penetration and conversion to IP delivery by 2025.  We could use the USF and other support mechanisms to make this happen.  This is the kind of infrastructure investment that we require for the 21st Century.  I would also add into this a requirement that all lines support 100 Mb/s symmetrical service at 2025 and that we have a plan to grow this over time with new numbers set in either 5 or 10 year increments.

This would spur massive investment in the US communications industry and make our network the envy of the world.  So if I were in charge, that is where my focus would be.  There is nothing wrong with making sure we have common carriage for most services.  But we need investment, and this is where it should go.

Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!