Sonoma County: News and Notes

 

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!
 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

Sonoma County: News and Notes

Well, its earnings season and I am starting my posts with Calix.  I want more time with the 10-Q from Enphase but what I have to say about Calix is unequivocal.  Since reporting, the stock is up considerably.  This is due to the 4Q guidance, but what I have to say I think eclipses that.

Let's talk numbers first.  Revenue was $128M of which $106M was product.  The company with that lost $0.35 per share.  The guidance for Q4 was Revenue of between $140M - $145M and a loss of $0.10 - $0.15 per share.  The company lauded this set of results and predictions as substantially on track with their plan and how things should be.

I completely disagree.  If you look at the numbers, the Product Revenue was down year over year on a quarterly basis.  From my time in the industry, I know Q3 is a big quarter.  That represents a huge problem for me.  Secondarily, they have been increasing revenue year over year with services.  In this case, they are losing $6M on the services at Gross Margin.  This compares to essentially breakeven last year.  This means to get the business associated with these services that Calix had to give its customers a $6M discount.  Now, to complete this thought we need to come back to the R&D expenses.  Right now, if you ask Calix I am sure they would say they are spending about 25% of Revenue on R&D.  The reality is that this R&D has to do with product and not services.  That means that really that is more like 30%.  That is an extraordinarily high number for a company that is flat this year for Product Sales.  Add into that that they had to give a discount, you get real problems.  If you are building such great and valuable products with all of that R&D, why did you have to give your customers a discount?

Now the stock has done well post-announcement.  I see a completely different story than the one the company tried to sell.  The analysts were all over the service margin issue, but I don't believe that anybody tied it up in a bow for you like this.

My view is quite simple.  This is the third or fourth major growth initiative from Calix that has gone essentially nowhere.  That is a problem from not recognizing that strategic situation and dealing with it correctly.  To me that starts at the top and the Board of Directors should do something about it.  Yes, I think it is time for Carl Russo to go.  Look the company is substantial and not going away anytime soon.  But they clearly need a new path forward as the last several have not worked.  That is why you need a change of leadership.  They have turned over just about every other position in the leadership.  And yet the problem remains.  Now it is up to the Board to act.

Have a great day!
 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

Sonoma County: News and Notes

I want to close up my thoughts about the Fires that hit the North Bay before we move into Earnings Season.  BioMarin has already reported, and others will do so starting next week.  So, there will be plenty to talk about.

What I have noticed that the sense of shock has started to ease and people are getting back to their lives, even if they have changed.  Many companies have gotten a bit conservative through the rest of the year.  I expect things to loosen up next year as people begin to rebuild their homes and the money from that begins to flow through the community at large. 

But people will get nervous this time next year.  How do I know?  I lived in Florida for 15 years and lived in South Florida during Hurricane Andrew.  That was the last Class 5 Hurricane to hit the Mainland United States.  The incident and the events before and after are still clear in my mind.  I remember the anxiety before and during the storm.  I remember the sense of isolation.  Once a major Hurricane hits, you don't want to be out in it.  I remember the meeting with the Insurance Adjustor and getting our repairs done.  I recall the drives into the rubble that was Coral Gables and Homestead to check on property belonging to relatives.  We had 250,000 homeless overnight and the system was overwhelmed.

That experience made me appreciate how well organized the response was here once it got going.  The rebuild will take time.  It will take a lot more time than you will expect.  For South Florida, it took about 5 years.  So be patient with the rebuild.  There is a lot of information out there from both the city and the county.  Take advantage of that information.

Finally, my experience with being in a large natural disaster has taught me that this too shall pass.  Yes, there was loss.  But you will come out the other side stronger and better prepared. Don't assume this will be the last time you and your community are challenged.  This is the 3rd major natural disaster in my life.  I learned from all of them.

Have a great day!
 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

Sonoma County: News and Notes

I want to cover Keysight's Q3 results this week and finish our quarterly calls with Autodesk's next week.  Love to go out on a positive note.  For Keysight, Q3 saw Revenue of $832M and a Loss of $0.10 per share.  This latter was greatly impacted by some accounting changes associated with the Ixia Acquisition and without that this would have been a Profit of $0.61 per share.  Last year the Revenue was $718M and $0.63 per share.  This means there was growth in Revenue but not in Profit.  The Revenue Growth is associated with the Ixia Acquisition, which did just over $120M/quarter at the time of the purchase by Keysight.  The Q3-2017 Revenue was also impacted by some adjustments to the Deferred Revenue that Ixia had. 

So, all of this makes it hard to give one an accurate picture of what is going on.  The company declared a great quarter with good year over year growth.  However, I can not see how this is really a gain of 3% in Revenue year over year and slightly down in profitability.  The next quarter looks to be a bit better year over year, but we will need to see it in practice.  This more favorable Q4 guidance is what looks to have moved the stock from something in the $36-$38 range to the $39 - $41 range.

I want to talk about some of the things that are going on with why there are these changes in Deferred Revenue and Amortization.  Companies often have policies around how things are accounted for.  Though you would think accounting would have very strict rules, there are many places where their are rules that are really handled through policies.  For example, when does a significant purchase count as an Expense and when as Capital Equipment.  In that latter case, the Equipment is depreciated on a schedule.  That schedule itself can be varied based on policy.  All of this is well within the bounds of legal accounting practices.  Often times companies have different policies and if they combine there are adjustments that need to be made to have their finances run under a single policy.  That is one reason you might hear about "1 Time Charges".  These adjustments often flow through the Income Statement, but have little or nothing to do with the actual Cash or Profitability of a Company.

The other thing here is that the Company is clear that it is going to attempt to return the profit to the shareholders through acquisition.  That can be a challenge for shareholders as many acquisitions don't work over the long haul.  The jury is still out on Anite and Ixia.  The company has spent around $2B in these acquisitions.  At the moment, the best I can say is that they definitely fill in gaps in the company.  The question is whether they will be worth it over just giving the money back through a dividend.  I suggested about 2 years ago that the company start a $0.25/quarter dividend.  If that had been pursued, then $2 a share would have been given back so far.  Think about that.

Have a great day!
 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

Sonoma County: News and Notes

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!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

Sonoma County: News and Notes

This week both Calix and Enphase released their earnings.  I need to spend a bit more time on the 10-Q from Enphase (that is the formal report by the company filed every quarter with the SEC).  So, I will be reviewing the numbers and call from Calix.  Revenue came in at $126M with $107M of that being Product Revenue.  Losses were $0.38 per share.  In general, it was a bit more of the same as Q1.  The revenue growth year-over-year was from the service sector.  Unfortunately, this sector had negative gross margin (in other words they lost money on selling the services).  Operating Expenses were up $6M over last year with an $8M increase in Research and Development.  Over the last 6 months the company has burned $13M in cash and is about 9 months away from insolvency on that standpoint.  I don't think that will be an issue anytime soon, but the company does need to figure out how to become profitable on a regular basis.

The company forecasted Q3 numbers as $126M - $130M in Revenue, 36% to 39% Gross Margin, and Losses of between $0.21 and $0.27 cents a share.  Since that time, the stock has tanked over $1 per share (over 20%) and is as of the moment $5.25 per share.

There is one other thing is that Calix announced the signing of a deal for NG-PON2 at a North American Tier 1 for Trials and Early Deployment.  This can only be at Verizon and there has been much talk about it for a very long time.  This is not going to replace FiOS.  There are too many units of FiOS installed and the pricing on those units were a total of about $100/customer.  It is not reasonable to have NG-PON2 priced that way otherwise there would be massive losses.  However, a deal would Verizon would have to be at much less than corporate gross margins overall.  They might be able to get good margins out of the CO units (and thus early shipments) but not out of a fully deployed system.  On the other hand, this could be a significant Revenue opportunity.

So, I think what investors see is two things.  All the growth of any substantial amount has been at very low gross margins.  There is concern that this will be true with the Verizon deal as well.  At today's Operating Expense (OPEX) levels Calix will have to have Revenue of $181M per Quarter to break even.  If this is simply an addition of the Verizon deal, this implies that $60M a quarter or $240M per year would come from Verizon.  This is not outlandish at one level.  FiOS was about $600M a year for its equivalent.  But how many endpoints of NG-PON2 will be deployed.  For BPON, we did 3.5M.  If NG-PON2 is significantly smaller (used for Business and Cellular Services), then the Revenue will not be there.  Until we see how Verizon rolls this out we will not know.

And I think it is that uncertainty as well as the ongoing losses that are causing investors to sell Calix stock.  Right now to break even the company would need to reduce OPEX by about 33% and I see no indication of that coming in Q3.  So if you think there is something important going on with Verizon, this stock is a lot cheaper than it used to be.  One thing to point out is that business at Verizon could lead to a sale of Calix, but the number of companies who would be buyers can be counted on less than 1 hand.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!