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!
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