This week I get to my review of Enphase. This is long delayed due to other business activities for me as well as the Thanksgiving Holiday.
The company reported $77M of revenue and a non-GaaP loss of $0.01 a share. This is a significant gain over past quarters and was based around a nearly 3.5% gain in Gross Margin. This has been a troubling metric for the company as it is still in the low 20% range. The response of the stock has been almost explosively positive with today the stock being $2.90. The stock was hovering below $1 a share not too long ago.
There are three things that I would like to say about this very positive result for the company.
First, I want readers to note the ongoing R&D spend that the company has. This number is about 10% of Revenue. Nowhere near the numbers that I decry in Calix’s results, but the company needs to continue to invest in cost reduction activity. There is a balancing act in the R&D plan between reducing cost and opening markets. As the CEO notes throughout the call, there is a 7-10% annual price reduction in the market. R&D must keep lowering costs or Enphase will fall back below 20% Gross Margins. At the same time, the company needs to expand Sales. Right now the projection for Q4 is flat again. Without Sales Growth, the company will need to manage itself very tightly.
Second, this was the first time we got to hear the new CEO (Badri Kothandaraman) on the call. I know that many will regard these results as his success. The thing is that as he points out this result started when the IQ6 started shipping. The plan to get to today was before his tenure as CEO. Essentially, we now see the outcome of Paul Nahi’s plan. The next couple of years will tell us all about Badri as a CEO. In particular, he talked about caution on pricing. This will limit upside Sales at least in the near term. So, you will want to monitor the control of Operating Expenses and Gross Margins over the next several quarters.
Finally, we will have a shifting competitive landscape over the next few quarters. Beyond the Sunviva ruling, there will be competitive response to the products announced on the call for 2019. Because Enphase is ASIC based, it takes a longer development cycle to build new products (you have to design and prove your silicon AND design and prove your circuit boards). It also means that non-ASIC based solutions can be available with less time from the start of development. There is also this notion of pushing into India and Africa. I think India is a more likely place, as the Chinese have little to no influence there. However, caution needs to be applied to Africa. Many if not most countries in Africa are in bed with the Chinese. It will be interesting if a company like Huawei, which is already huge in these markets becomes a factor.
Those notes aside, this was a very positive quarter. Have a great day!
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