Welcome back to Earnings Season. I know many of you are waiting for my review of Cyan but they have yet to report. But yesterday, Enphase reported a very good Q4 and a rosy outlook for 2015. Business is at the top line roughly 50% year over year. The company showed a non-GAAP profit for the entire year and the GAAP reconciliation does not dampen any of this. The thing is that the company is up slightly today in a slightly down market. Given the quality of earnings, the question is why?
To do this, I need to talk about what Enphase does a bit. They are (today) in the Power Converter Business for the Solar Marketplace. The bulk of their revenue is from the Residential Market in North America (primarily the US). They are moving more into International Markets and Commercial Solar applications. This is all about expanding the Total Available Market (TAM). To do this, Enphase is increasing their Operating Expenses (OPEX) to help make this growth happened. Enphase coins this “Profitable Growth”, but essentially it means that earnings are somewhat muted to fund future growth. They are consistent about this and so there the investment community has built it into their model.
On the Conference Call, Enphase received praise for a great quarter and then some rather pointed questions. Given the quality of the results, the questions might seem rather tough minded. But here is unspoken thinking, “Hey you are doing great now, but what about the future?” So, analysts are probing for any potential weakness in Enphase and its story. The reason is pretty simple. At today’s stock price, Enphase is worth right around $600M. That is a lot of money and the investors want to make sure that the future for the company is as bright as being portrayed. Any hiccup in the future means that the company might have problems acheiving its objectives.
So, where are these pressure points:
– Price Pressure: There are many competitors in the market place and pricing is under pressure (something akin to a 10% price decline per year). This means that Enphase has to cost reduce to stay ahead of the curve. If they don’t then profitability declines quickly.
– OPEX Pressure: The concern is that expansion can get ahead of the market and thus again Enphase could use profitability.
– Market Saturation: The concern is that Enphase has captured a lot of market share and may not be able to capture more.
– Regulatory Changes: Most of the major markets provide a subsidy for Solar Deployment. What if this changes?
The company provided answers to all of these items. In particular, it seems to be doing well against Price Pressure. The newer products are aimed at new segments of the market to address and the market itself is expanding. An example of the UK market showed that changing subsidies may not be an issue. But expect the analysts to keep an eye on Enphase until the growth slows and profitability expands.
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