Enphase Energy, Inc. — Q2 2019 Form 10-Q
Period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. Enphase designs, manufactures and sells solar PV solutions, including microinverters, storage and energy-management products.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $134.1 million | $75.9 million | $234.2 million | $145.9 million |
| Gross profit / margin | $45.3 million / 33.8% | $22.7 million / 29.9% | $78.7 million / 33.6% | $41.0 million / 28.1% |
| Operating income (loss) | $17.4 million | $(0.6) million | $24.6 million | $(3.0) million |
| Net income (loss) | $10.6 million | $(3.7) million | $13.4 million | $(8.9) million |
| Diluted EPS | $0.08 | $(0.04) | $0.11 | $(0.09) |
| Operating cash flow | — | $31.8 million | $7.4 million |
- Q2 revenue rose 77% year over year, primarily on higher unit volume: approximately 1.284 million microinverters sold versus 675,000. Six-month unit sales were 2.260 million versus 1.287 million.
- Gross margin improved 3.9 percentage points in Q2 and 5.5 points for the six-month period. Management cited the lower cost of the IQ 7 product family and pricing and cost-management efforts; expedited freight partly offset the benefit.
- Six-month investing cash outflow was $3.2 million and financing cash inflow was $71.0 million. Cash and cash equivalents increased to $206.0 million from $106.2 million at year-end 2018. Working capital was $206.2 million.
- At June 30, total assets were $481.5 million and total liabilities $364.2 million; stockholders’ equity was $117.3 million. Current assets were $349.9 million against current liabilities of $143.6 million.
- Debt carrying amount was $102.9 million, including $92.9 million for the 2024 notes, $4.8 million for the remaining 2023 notes and $5.2 million of financing receivables recorded as debt. The company had repaid its term loan in January.
Material changes versus the prior comparable period
- Growth in sales volume drove revenue expansion and a return to operating and net income from losses in Q2 2018. U.S. revenue was $99.9 million in Q2 2019 versus $50.3 million a year earlier.
- Operating expenses increased to $27.9 million from $23.3 million in Q2, including higher sales and marketing and general and administrative costs and $0.6 million of restructuring charges.
- Other expense increased to $6.2 million in Q2, principally reflecting $6.0 million of fees associated with the 2023 note exchange; lower interest expense partly offset the increase.
- In June, Enphase issued $132.0 million of 1.0% convertible notes due 2024, receiving approximately $128.0 million net proceeds, and spent $36.3 million on note hedges while receiving $29.8 million from warrant sales. It also exchanged $60.0 million principal of 4.0% notes due 2023 for 10.8 million common shares and $6.0 million cash; $5.0 million principal remained outstanding.
- Common shares issued and outstanding increased to 121.950 million at June 30 from 107.035 million at December 31, largely reflecting the 2023-note exchange.
Outlook, risks and unusual items
- Management said existing cash and expected operating cash flows should meet anticipated cash needs for at least the next 12 months. No specific revenue or earnings guidance is provided in the supplied filing text.
- Management anticipated a phased introduction of the grid-agnostic IQ 8/Ensemble system beginning in Q4 2019. The company reported limited Q2 shipments of IQ 7A and significant IQ 7AS shipments to SunPower.
- The 2018 restructuring plan was expected to be completed in 2019; it includes workforce reorganization, discontinuation of certain non-core projects and facility consolidation.
- Risks highlighted include potential dilution and share-price pressure from convertible notes and warrants, and the possibility that cash flow or financing may be insufficient to service debt or fund required repurchases at a fundamental change or repayment at maturity.
- Purchase obligations totaled $55.5 million, shown as due in the remaining six months of 2019; the filing notes timing may vary with demand and economic conditions. Warranty obligations totaled $33.0 million, including $14.9 million measured using Level 3 fair-value assumptions.
- SunPower, a related party and holder of 7.5 million Enphase shares, accounted for $16.7 million of Q2 revenue under the supply agreement; Enphase had $14.3 million receivable from SunPower at quarter-end. The filing reports no current material legal proceedings.
- The company maintained a full valuation allowance on deferred tax assets but said continued profitability could provide evidence to release some or all of it within 12 months. Such a release would reduce tax expense, but none was assured.
Investor verification priorities
- Assess whether rising sales volumes and improved IQ 7 margins are sustainable, including the effects of expedited freight and product pricing.
- Review the 2024 notes’ conversion, cash-settlement and dilution terms alongside the hedge and warrant exposure.
- Track operating cash conversion, receivables, inventory, purchase commitments and the company’s ability to meet debt obligations and contractual payments.
- Monitor SunPower-related sales and receivables, warranty estimates, and the timing and market adoption of the Ensemble product launch.