Enphase Energy, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company designs and sells solar microinverters and related solar, storage, and energy-management solutions. Financial statements are unaudited; amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $180.1 million | $78.0 million | $414.3 million | $223.9 million |
| Gross profit | $64.7 million | $25.3 million | $143.4 million | $66.3 million |
| Gross margin | 35.9% | 32.4% | 34.6% | 29.6% |
| Operating income (loss) | $33.7 million | $(0.4) million | $58.3 million | $(3.4) million |
| Net income (loss) | $31.1 million | $(3.5) million | $44.5 million | $(12.3) million |
| Diluted EPS | $0.23 | $(0.03) | $0.35 | $(0.13) |
- Revenue increased 131% year over year in Q3 and 85% for the nine-month period, mainly on higher unit volumes. Microinverter shipments were approximately 1.80 million in Q3 and 4.06 million year to date.
- Management attributed stronger gross margins to the lower-cost IQ 7 product family and pricing and cost-management efforts. IQ 7 products represented 99% of Q3 microinverter sales, versus 78% a year earlier.
- For the nine months, operating cash flow was $36.8 million, versus $14.3 million; investing cash outflow was $7.4 million, versus $11.4 million; and financing cash inflow was $67.8 million, versus $84.6 million. Operating cash generation included substantial working-capital outflows, especially a $56.1 million increase in receivables.
- At September 30, cash and equivalents were $203.0 million and working capital was $244.7 million. Current assets were $391.5 million and current liabilities $146.8 million.
- Debt carrying value was $104.1 million, including $3.1 million current and $101.0 million noncurrent. The company had $132.0 million principal amount of 2024 convertible notes and $5.0 million of 2023 notes outstanding, as well as $4.7 million of long-term financing receivables recorded as debt. The carrying value of the 2024 notes is reduced by unamortized discount and issuance costs.
Material changes versus comparable periods
- The company moved from losses to profitability, with revenue growth materially exceeding growth in operating expenses. Nine-month gross margin rose 5.0 percentage points year over year.
- Cash and equivalents increased from $106.2 million at December 31, 2018 to $203.0 million at September 30, 2019. Receivables and inventory also rose substantially, to $133.7 million and $30.2 million, respectively.
- Enphase repaid approximately $39.5 million of term-loan principal in January. In June, it exchanged or repurchased $60.0 million of 2023 notes for 10.8 million shares and $6.0 million cash, and issued $132.0 million of 1.0% convertible notes due 2024. It also purchased note hedges for $36.3 million and sold warrants for $29.8 million.
- Common shares outstanding increased to 122.3 million from 107.0 million at year-end 2018, reflecting, among other items, the 2023-note exchange and equity awards.
Outlook, commentary, and risks
- Management expected second-half 2019 revenue to benefit from customer purchases ahead of scheduled reductions in the federal solar investment tax credit, including purchases using IRS safe-harbor guidance. Such timing may pull demand forward; the filing does not provide quantitative revenue guidance.
- Management planned to begin shipping IQ 7A microinverters in North America in November 2019 and anticipated a phased introduction of its Ensemble storage system starting in Q4 2019. These are forward-looking plans, not reported results.
- Management stated that cash and expected operating cash flows should meet anticipated needs for at least 12 months. However, $71.0 million of purchase obligations were listed as due in the remaining three months of 2019; timing may vary with demand and economic conditions.
- Convertible notes may dilute shareholders, affect the share price, or require significant cash for repurchase or maturity. The 2024 notes’ conversion price was approximately $20.50 per share; related warrants have a $25.232 strike price. Note discounts also create non-cash interest expense.
- Warranty obligations totaled $34.6 million, up from $31.3 million at year-end 2018; changes in estimates contributed to the increase. Other risks include dependence on demand, product quality and supply management, and the possibility that tax-credit-related buying shifts sales between periods.
- The company reported no material pending legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls. It said market-risk exposures had not changed materially since year-end.
Important facts for investors to verify
- Whether revenue growth and the improved margins persist after any ITC-related customer pull-forward.
- Collections on the sharply higher accounts receivable balance, including $24.7 million due from SunPower, and the effect of working capital on cash generation.
- Actual timing and value of purchase commitments, product launches, and the Ensemble rollout.
- Potential dilution and cash obligations under the 2023 and 2024 convertible notes, hedges, and warrants.
- Assumptions underlying warranty reserves and whether rising warranty estimates or claims continue.