Enphase Energy, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited results are for the company’s microinverter and related energy-management business. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $78.0 | $77.0 | $223.9 | $206.5 |
| Gross profit / margin | $25.3 / 32.4% | $16.5 / 21.4% | $66.3 / 29.6% | $37.1 / 17.9% |
| Operating loss | $(0.4) | $(5.9) | $(3.4) | $(37.2) |
| Net loss | $(3.5) | $(6.9) | $(12.3) | $(42.3) |
| Diluted loss per share | $(0.03) | $(0.08) | $(0.13) | $(0.52) |
- Cash flow: For the first nine months, operating activities generated $14.3, versus $26.5 used in the prior-year period. Investing used $11.4, including $9.0 for the SunPower transaction; financing provided $84.6. Cash rose by $87.0 to $116.2.
- Balance sheet at September 30: Cash and equivalents were $116.2; working capital was $74.9. Debt carrying value was $112.0, including $24.1 current and $87.9 noncurrent. Stockholders’ equity was $4.2, compared with a $9.1 deficit at year-end 2017.
- Other metrics: Warranty obligations were $32.2. Accumulated deficit was $347.0. The company reported no off-balance-sheet arrangements.
Changes versus comparable periods
- Q3 revenue increased 1%; nine-month revenue rose 8%. Q3 microinverter shipments fell to 665,000 from 790,000, while average selling price per inverter increased about 15%. For nine months, shipments were 2.0 million versus 2.1 million.
- Gross margin improved substantially: by 11.0 percentage points in Q3 and 11.7 points for nine months. Management attributed the improvement chiefly to IQ 7 product mix and lower product costs.
- Losses narrowed, with nine-month operating loss down to $3.4 from $37.2 and net loss down to $12.3 from $42.3. Operating expenses included a new $2.6 restructuring charge in 2018; the prior-year nine-month period included $14.9 of restructuring charges.
- Comparative revenue is not fully like-for-like: the company adopted Topic 606 on January 1, 2018 using the modified retrospective method and did not restate prior periods. Adoption increased reported nine-month revenue by $2.8 and reduced opening equity by $38.9.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no specific numerical revenue or earnings guidance. Management said existing cash and expected operating cash flows should cover anticipated needs for at least 12 months. IQ 8 commercialization was ongoing; an off-grid solution was expected in Q4 2018, with a grid-agnostic solution expected in 2019.
- Tariffs: U.S. tariffs of 10% on the company’s China-manufactured microinverters and related accessories began September 24, 2018; the filing said they were expected to increase to 25% on January 1, 2019. Management warned tariffs could raise costs and weaken demand.
- SunPower acquisition: Completed August 9 for consideration valued at $57.3, comprising $25.0 cash and 7.5 million Enphase shares; a further $10.0 cash payment was due December 10, 2018. The related five-year agreement makes Enphase the exclusive U.S. residential MLPE supplier to SunPower. Acquired-business contributions through September 30 were not material.
- Restructuring and other items: The 2018 plan began in Q3 to reduce operating expenses through workforce changes, ending non-core projects, and facility consolidation; completion was expected in 2019, with further near-term charges anticipated. Q3 charges included $1.6 asset impairment, $0.6 employee costs, and $0.3 lease reserves. A supplier dispute was settled for about $1.8 in Q2.
- Financing and dilution: In August, Enphase issued $65.0 principal of 4.0% convertible notes due 2023, receiving $62.4 net proceeds. Initial conversion price was approximately $5.56 per share. The company also issued common shares in a February private placement for $20.0 gross proceeds and issued shares as part of the SunPower acquisition.
- Principal risks: Continued losses and dependence on raising capital; tariff and policy uncertainty; competition, solar-market demand and pricing pressure; product quality and long-duration warranty estimates; customer and supplier concentration, component shortages, and demand forecasting; and execution, integration, and potential conflicts related to the SunPower transaction. Management reported compliance with term-loan covenants and effective disclosure controls. No material legal proceedings were reported.
Investor verification priorities
- Assess whether higher IQ 7 pricing and cost reductions can offset lower shipment volumes and sustain gross-margin gains.
- Verify the actual tariff burden, any mitigation or exemptions, and the effect of the scheduled tariff increase on costs and demand.
- Track cash generation against debt service, the $10.0 SunPower payment, liquidity needs, and the secured term-loan covenants.
- Monitor SunPower supply-agreement execution, acquisition integration, share-sale restrictions and potential dilution from convertible notes and equity awards.
- Review Topic 606’s impact on deferred revenue, contract assets, reported growth, and comparisons with periods not restated under the new standard.
- Check restructuring costs and savings, warranty-estimate changes, and progress toward profitability; the company had a $347.0 accumulated deficit and remained loss-making.