Sonoma County: News and Notes

And now for the most controversial earnings post of the quarter. That for Enphase. I have had many people be highly critical of my posts on Enphase and will talk about that later in the article. So, let's start by going over the raw numbers. In Q3, Enphase did $88M in Revenue (down from $102M last year) and lost $0.40 cents per share. On top of that, the company used $20M Cash in Operations and left the quarter with a cash balance of $24M. During the quarter the company did a "Secondary Offering". This means that they sold more stock @ $1.20 per share. For existing shareholders, this means that the number of shares outstanding went from just over 50M to just over 60M shares. By doing this transaction the company gained about $14M.

Using the mid-point of the conference calls numbers for guidance, the company expects to have $95M in Revenue at 18% Gross Margin and $22.5M in Operating Expenses. This would imply a loss of $5.4M or about $0.09 per share. This would be a marked improvement from Q3 but not good enough. The good news is that if the company can maintain its $22.5M Operating Expense number then the break even moves down to $125M a quarter. A long way from where the company is but better than the $150M or so of earlier quarters.  A couple of notes here. First, there are some assumptions - like Operating Expenses being held flat. You can imagine this is going to be difficult in a company that is going to grow 50% in Revenue. On top of that, there are rumors of price cuts in the market. This could lead to additional pressure on Gross Margins. This is where the company is challenged in any case.

As I have said, and reiterate, I believe the right strategy for the company is to find a buyer. It has already executed two very painful financial maneuvers to keep the doors open. Shareholders should not expect a great premium if that happens because the company teeters on the brink.

But now let's get to the criticism of my views here. Basically, I think the company's products are too good. I know that sounds strange but Enphase has executed a strategy where it is delivering the best products on the market. The problem is that the market is not valuing the innovation performed by the company. I think the latest round of Sprint ads are know the ones where they characterize a 1% lower performance for 1/2 the price. And that is what I think Enphase is facing. The competitors are not as good, but are lower priced and have lower cost structures in the companies. Ongoing low energy prices will continue to damp broad demand and force pricing even lower. If you can heat your house for 1/2 of what you did a year ago, you can afford about 1/2 the amount to put solar on your house.

Having great products does not guarantee a great company to invest in. We shall see how this all ends up in the next year or so.

Jim Sackman
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