Ever have to do a chore that you hate? Well, welcome to my post today – my review of Enphase’s Q1 2016 Earnings call. I have many folks I consider friends there and I really hate to say mean things about them. But the truth is that I am not talking about them. I will provide an analysis of the numbers and some thoughts about their stated strategy.
Revenue for Q1 was about $64M or off around 20% year over year. The company lost $0.41 a share compared to $0.14 per share a year ago. This is all related to price cuts that Enphase announced last year. It has driven Gross Margins for the company from the range of around 30% to around 18%. On top of that there is a revenue decline because of the price cuts. In absolute terms, Gross Margin dollars went from $28M in Q1 2015 to $11M in Q1 2016. Operating Expenses were down from $33M in Q1 2015 to $30M in Q1 2016. So, there is real trouble here.
Let me start with a break-even analysis. Right now the company is just below 20% Gross Margin and has a target to get back to 25% Gross Margin. If Opex is held flat, that means that you would need $120M (25% GM) to $150M (20% GM) to break even. Given that you can not expect to double revenues and spend no new dollars, the $150M mark is much more likely for a realistic break even. I can’t model their Opex growth against revenue, so this is just an approximation. To take a step back, the best quarter that Enphase ever had was just over $100M. That means that revenue has to grow about 50% from its maximum and over 100% from today. All of this has to happen when new competitors are coming online from China and Oil prices are very low.
So, what changes did the company announce in its strategy to close the gap? Actually, it announced none. The CEO (Paul Nahi) said they are staying the course. The problem is that this course is not working. They can have wonderful products but they clearly are not extracting additional dollars for all Enphase’s great technology. Right now they are spending about 20% of revenue in R&D (are you listening here Calix). They are not able to turn those dollars into profits. Which is the whole point of spending money in R&D. They are talking about cost reduction plans, but to get to break-even in a cost reduction you would need to get margins to 46% to get to break even. Even the expansion to 25% or 30% will not get you there as I showed above in the break even analysis.
What can they do? Well, Enphase has the additional problem of at some point being out of cash. They will continue to burn it, but I am not going to predict when they will run out at the moment as I want to see some reduction in inventories before we go there. The only thing to do is to sell the company before it gets that far. The company has lost most of its value over the last 12 months as the stock went from over $10/share to around $2/share. If the business goes through restructuring, then the current equity holders lose. The best way to help them recover from an 80% loss is to get more money for the stock which means selling the company. One only wishes that this was done over a year ago.
Have a great day!
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