The deal between Cyan and Ciena is now closed and so I will no longer be reporting on their earnings. I have decide to replace Cyan with Autodesk. They are headquartered in Marin County and I think they will be great to review. I wish my friends at Cyan good luck! I know that I have been sharply critical of management there as it comes out through earnings. They finally did what I suggested a long time ago and sold the company. I will have more to say about this and why I said it when I get a break from earnings. For former Cyan employees, I posted a bit of a survival guide to being acquired and you can find it HERE. If there are other public North Bay companies that you want me to review, just let me know.
This week we have a good news story at Enphase. They reported yesterday with revenue of $102M and a GAAP net loss of $603K or about $0.01 per share. Excluding one time items this became a profit of $0.06 per share. Revenue was up both sequentially (Q2 was up over Q1) and year over year (Q2 of 2015 was up over Q2 of 2015). Gross Margins were stable year over year and that is good news in their market. As I have said before, it is apparent from the outside that they are adjusting expenses to match revenues. They are in what is called a “land grab” time in their market. The goal is for the company to rapidly expand without losing too much money or in this case essentially break even. The stock is trading up today and the overall story is very good. I want to explore the upside and then talk about potential future challenges.
The upside in Enphase comes in 3 buckets: International, Commercial, and Storage. Each of these is independent but can be linked in the longer term. The core of the Enphase market is the US Residential Solar Industry. By expanding into International, Enphase has been able to grow its Total Available Market (TAM). On top of that revenue from International continues to expand as Enphase enters new markets (compare this to my commentary last week on Calix). Commercial is a different sale and selling proposition than Residential. Here too Enphase is expanding its TAM an revenues. In both cases, the company is growing rapidly so that these new opportunities are not much greater than in the past as a percentage. But Enphase expanded about 25% over last year, so all segments are exhibiting growth. Then we come to Storage. This is a completely new market for Enphase and I would say that things look promising but this ship has not landed yet. One interesting note from the call is that the Enphase Storage solution can be added to 3rd party Solar Systems. This means that it has a much larger potential market than if it was proprietary to Enphase. This would be particularly true outside the US and we should keep an eye on this in the future.
One of the great chunks of news out of all of this is diversity. Enphase lost a major portion of the revenue it was getting from Vivent. Vivent had been Enphase’s largest customer and shipments are expected to be down 75% Year over Year. In the face of this decline, Enphase continues to grow. Compare this to what happened to Cyan when Windstream slowed down its purchases. This shows that the Enphase solution is winning in the market at an excellent rate overall. Vivent decided to multi-source their business and that makes a lot of sense from their standpoint. But the ability to keep winning in a very competitive space, shows that the company has staying power. However, we should keep an eye on troubles with major partners. This could show a weakness in Major Account Management if it happens again.
Finally, the long term challenge here is gross margin. There are tax credits expiring in the US next year and I would think this would depress demand in the US. You have probably all seen the decline in Oil Prices. In general, Energy is getting cheaper and there are many other clean technologies like Solar that will come in the future (bio generated fuels, cleaner fossil fuel plants, etc.). The downward pressure on energy pricing means that Enphase needs to keep innovating to stay in front of the curve. It has done so in the past. But if I were an investor in the company (and I own no shares directly in any of these companies – I have no idea if my mutual funds do), I would watch the Gross Margin line all the time. A decline in Gross Margin could represent a problem in the business.
Have a great day!
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