Yesterday I went to a breakfast sponsored by the Santa Rosa Chamber of Commerce. The President of my BNI Chapter Letitia Hanke-Ryzhkov (CEO of ARS Roofing) was a winner of one of the Spirit Awards presented! I would like to add my congratulation to her and ARS.
The headlining speaker at the event was Lieutenant Governer Gavin Newsom. He spoke eloquently. I would say that allow I did not agree with every thing he said, I saw that he believed in his message. His concept was that we need to return California to the methods that worked during the post-WWII boom times. In particular, he was talking about long term investments in Education, Infrastructure and Green Technology. I want to comment on the first two of these – I will talk about the 3rd in conjunction with Enphase.
Infrastructure is a tough problem. We already built the road system. When Sacramento (or Washington) talks about Infrastructure improvements, what they are really talking about is incremental investment in repair and upgrade of existing facilities. That means we will not get the same Return on Investment as we have on the original projects. We do need to do this incremental work at some level, but the gains will be minor.
Education is a tough nut. We seem to want to fail. Let me use my favorite example. Much education is on-line now. Yet, we seem to still want to run massive lecture halls for English 1A. Why not do that class online with a “Lab” that is once a week to work with students on more interactive issues? It would seem to me that we could offer MORE classes with about 1/4th of the staff. Which is my challenge in Education. We seem to have no view to change of the system, instead we just want to push more of what we have. Just FYI, test scores in California have increased as we have cut funding over the last few years. Not a great indicator that I should want to pour more money into the system as its constructed.
Now onto Enphase. If I said Calix was neutral and Cyan was a disaster, then Enphase is a mild bright spot in the North Bay Tech economy. Revenue was down sequentially (from Q4 to Q1) as expected, but was up year over year. It seems that Enphase has had some modest success in expanding outside the US. Now the company is essentially break even at the moment, an investor should look to how the company is going to get more profit out of its business. There is ongoing cost reduction efforts that are spoke of. The main issue at question is: “Will scaling revenue be more profitable than the current business?” If you listen to what they talk about Australia on the conference call, you have to judge whether the incremental revenue will add profit to the bottom line. The cost to open and operate an office in country means that the cost to turn up a new territory is significant and ongoing. That implies that the primary leverage is in G&A spending and potentially re-use of some R&D. Tight but not undoable.
Now for my comments on Green Tech. Let’s be clear. The only reason the Solar Market is growing is government intervention. The ROI does not make sense economically. Someday it may get there, but today Solar and many alternative energy strategies are a LOT more expensive than Fossil Fuels. This is going to get worse in the near term as the US has become a Net Energy Exporter and cleaner (sometimes much cleaner) Fossil Fuel Technology comes online over the next 20 years. From a business standpoint, it means keep your eyes open. Don’t assume you know the technology answers, let the market have a say in your thoughts. One of the great classic examples is Vacuum Tubes versus Semiconductors. In the early 60s, there was a huge debate about which technology would win. The Soviet Union went all in on Vacuum Tubes. And that is why Russia produces the best Tubes available today. Outside of audiophiles, nobody cares. So, don’t assume Photovolatic Solar or any other technology is the exclusive answer. There will be many choices along the way.
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