This week we look at the results from Enphase. Clearly they are doing the best of the 3 companies that I review each quarter. But let's take a bit of a deeper look at the company. First off, the comparisons that they used on the Conference Call are Year over Year comparisons. The reasons for this are both good and bad. Given the nature of the Solar Power industry, there is a natural seasonality to the business. That is the good reason. The bad reason is that the results are not greatly better than Q2. They are better, but not a linear increase. I don't view this as a problem as I think the right way to study Enphase is a calendar year at a time. This year will be much better on the top line than past years.
The bottom line is where Enphase has its challenges and where I will spend the bulk of this review. To start, you need to think about the corporate Gross Margin at 33%. It has come up rather nicely from almost 20% in 2011. The stated goal is to reach somewhere in the 40%+ range. This means that the company has over 7% more to add. This increase gets tougher to make over time, and it will be interesting to see if the margin expansion continues at a reasonable pace next year.
Operating Expenses (OPEX) was fairly well controlled and the company made a small profit. The conference call is archived on the Enphase Website and I think offers a rare view into how management of a company actually works. If you have 45 minutes sometime, I would take a listen. In particular, there is a Question asked about 2/3rds the way through the Q&A portion (the 2nd half of the call). In this case, the question was about pricing and was the company using price reductions to drive volume growth.
The answer from the CEO was one of the most powerful and thoughtful that you are likely to hear. He talked about Balance. In this case, how do you maintain growth while staying profitable. This is a hard line to draw in any company. It is extremely hard in a market like what Enphase faces. There is price pressure and you have to be anticipate where markets are heading. I do not envy them on facing these challenges, but it does give me a chance to make a point to you about investing. I invest with Management Teams. To me, a company's top Leadership makes or breaks the long term success of a business. I suggest before you invest in a stock to look at the track record of Management. If the Management changes, it is time to take a look at a company again. Think of it like Coaching in sports. A bad coach can wreck a team. They hire a bad staff and don't put their players in a position to win.
Enphase also introduced some new products in the quarter, but they seem like they are longer term revenue possibilities. I think it is important to track these initiatives. Right now, Enphase is heavily dependent on US residential solar. They need to diversify both into new product areas and new markets. The company has been doing so. It is our job as an investor to see how they do. Remember all companies (and products) go through Life Cycles. You need more than one to build a sustainable company.
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