German Jamison: Enphase Presents Q2 Earnings as a ‘Different Company’

Enphase continued to experience a financial turnaround last quarter, according to strong earnings numbers released this week.

Enphase reported Q2 revenue at about $75.9 million, up 2 percent year-over-year, and a third consecutive quarter of positive non-GAAP operating income during a Q2 earnings call this week. It reported GAAP gross margin at 29.5 percent and non-GAAP at 30.5 percent, achieving its target two quarters ahead of its goal.

The microinverter company’s current financial position signals a comeback. President and CEO Badri Kothandaraman called it “a reasonable quarter” (last quarter’s adjective was “decent”) and said the company was excited to be back in a comfortable spot.

“Our top priority in 2017 was to build a solid financial foundation,” said Kothandaraman. “We focused on operational excellence and we transformed the company.”

In 2018 the CEO said Enphase is focusing on topline growth, using tangible vectors of success that include regional expansion of its IQ7 series, work on distribution of its higher-powered IQ7x product — which started shipping to U.S. customers this quarter — a focus on its AC-module partnerships, and development of its latest technology, IQ8 Ensemble.

But not all industry watchers are so confident in the company’s rebound.

A report published last week claims that the “seemingly overnight turnaround is nothing but a sham.” Short-seller Prescience Point Capital Management alleged that Enphase had “materially inflated” its revenue in the past two quarters and engaged in “manipulative, and potentially improper, accounting practices” under Kothandaraman, who was installed as CEO in September. Last year, the investment firm settled with Amira Nature after the food distributor sued over what it said was false information in its reports.

During the earnings call, Kothandaraman acknowledged the report and said it had “aggravated and enraged” the company with its “baseless and wrong” allegations. He challenged the findings, and noted that Enphase values logic, reason and accurate data.

“We hold ourselves to the highest standards of ethics and integrity,” he said with a conviction that broke from the dry tone of most earnings calls. “We tell the truth and don’t tolerate excuses.”

Contrary to the allegations that Enphase is “fudging the books,” as Kothandaraman put it, the CEO attributed the boomerang financials to the hard work Enphase has put in to becoming what he said is now “a different company.”

“We are laser-focused on our number one priority: improving profitability quarter-on-quarter,” he said.

Kothandaraman noted that innovations such as more conservative inventory practices, optimizing labels and manuals and eliminating unnecessary components “even if it means a fraction of a cent at the time” helped nudge Enphase into the black.

While the company said it would remain committed to its topline in the second half of the year, Enphase’s newfound comfort also has it looking ahead.

“When our balance sheet is healthy we can do a lot of things,” said Kothandaraman.

Kothandaraman noted the company is now signing long-term supply contracts to cope with component shortages Enphase and other industry players have experienced over the past year. While the company is currently expediting the delivery raw materials and finished goods, Kothandaraman said investing in longer-range supply plans should help alleviate the issue by mid-2019.

Enphase is also pushing ahead on its partnership with SunPower to become the exclusive microinverter supplier for the company’s residential U.S. business after purchasing SunPower’s microinverter business in June. That partnership should add $60 to $70 million of annualized revenue in the second half of 2019, with business ramping in Q1 2019 and fully ramped in Q2 of that year.

The company also began rolling out its IQ8 Ensemble in Q4 and a grid-independent version in 2019.

“One of solar’s biggest challenges is that it is grid-tied,” said Kothandaraman. “With the IQ8 system you have a solution that will continuously provide energy regardless of the presence or absence of the grid. That is solar during the day and storage at night.”

The IQ8 technology has been under development as part of a joint-development agreement with an unspecified partner that asked Enphase to customize Ensemble for off-grid applications outside the U.S. Kothandaraman declined to offer specific details on the partner, but he did say it was a “very strong, go-to-market partner.” He said the project is in “a place where the grid is weak or the grid is nonexistent, and the opportunity is huge.”

So far, the agreement has brought in $2 million for project milestones in the second quarter, and the company expects $4 million more in coming quarters.

“We do recognize that we are just getting started on profitable topline growth,” said Kothandaraman. But, he added, “we feel very good.”