Enphase Energy, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Enphase designs and sells microinverter-based solar energy systems and related monitoring and storage products. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net revenue | $70.0 million | $54.8 million; up 28% |
| Gross profit / margin | $18.3 million / 26.2% | $7.0 million / 12.9% |
| Operating loss | $2.5 million | $22.1 million loss |
| Net loss | $5.1 million; $0.06 per share | $23.3 million; $0.30 per share |
| Operating cash flow | $3.4 million provided | $24.5 million used |
| Cash and cash equivalents | $53.3 million at March 31 | $29.1 million at December 31, 2017 |
| Working capital | $44.2 million | At March 31, 2018 |
| Debt | $50.7 million carrying amount; $49.2 million term-loan principal | Debt carrying amount was $49.8 million at December 31, 2017 |
Revenue growth reflected higher microinverter shipment volume and higher average system selling prices: 611,000 units shipped versus 573,000, and average revenue per system rose approximately 16%. Management attributed gross-margin improvement to higher selling prices, lower average system costs, and better fixed-cost and warranty-cost absorption. Component shortages also increased expedite fees. The 2017 comparison included $7.2 million of restructuring charges; none were recorded in Q1 2018. General and administrative expense rose 19%, principally due to a $1.8 million supplier-dispute reserve.
Operating cash flow improved substantially, supported by the net loss add-backs and working-capital movements, including lower receivables and inventory; reductions in payables and other liabilities partly offset those inflows. Investing activities used $1.0 million. Financing activities provided $21.7 million, including approximately $20.0 million net stock-issuance proceeds and $2.3 million from receivables financing. Cash increased by $24.1 million during the quarter. Stockholders’ deficit was $31.2 million.
Material changes and accounting
- Enphase adopted revenue-recognition standard Topic 606 on January 1, 2018 using the modified retrospective method. It recorded a $38.9 million reduction to opening equity. Adoption increased Q1 reported revenue by $0.4 million and reduced the reported net loss by approximately $0.2 million; prior-year results were not restated.
- Topic 606 defers revenue for the combined Envoy gateway and Enlighten service over an estimated 6.5-year service period. Deferred revenue was $115.7 million at quarter-end, including $37.4 million current and $78.3 million noncurrent.
- In February, Enphase raised $20.0 million gross through a private placement of common stock. It also amended its term loans to reduce scheduled 2018 principal repayments by 50%; prepayment during the specified period requires lender consent.
- At March 31, term-loan principal payments were scheduled to total $7.1 million in the remainder of 2018, $25.2 million in 2019, and $16.9 million in 2020. The loans bear interest at the greater of 10.3125% or three-month LIBOR plus 9.25%, are secured by substantially all company assets, and mature July 1, 2020. Enphase reported compliance with financial covenants.
Outlook, commentary, risks, and unusual items
- No numerical quarterly or full-year financial guidance is provided in the filing. Management said existing cash, available credit facilities, and operating cash flows were expected to cover anticipated cash needs for at least the next 12 months, while noting that additional capital may be needed for strategic plans.
- Enphase began shipping its seventh-generation IQ 7 microinverters to U.S. distributors in Q1 and planned a phased international rollout during 2018. It expected to introduce IQ 8, based on Ensemble technology, in 2019.
- Management expects average system selling prices generally to decline, putting pressure on revenue and margins. Results are also exposed to competition, solar-market demand and incentives, tariffs on solar equipment, distributor ordering and seasonality, component shortages, outsourced manufacturing, and product quality and long-term warranty costs.
- A supplier dispute concerns alleged purchase-volume commitments. Enphase recorded a $1.8 million charge and contingent liability in Q1 and made a settlement offer in April. It says the supplier’s claims lack merit; if the offer is rejected, the company says it will defend itself. The ultimate outcome is uncertain.
- Enphase reported a $1.45 million increase in warranty estimates during Q1; total warranty obligations were $30.6 million, of which $11.7 million was measured at fair value using significant unobservable inputs.
- The company continued to report a history of losses and an accumulated deficit of $339.8 million. Its CFO had informed the board of his resignation effective June 30, 2018. Management said disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth, unit shipments, and gross-margin gains persist as selling prices decline and competition and component costs evolve.
- How Topic 606 affects comparisons, deferred revenue, and future recognition of remaining performance obligations.
- Cash generation and funding needs against the secured, high-interest debt, scheduled principal repayments, and financial covenants.
- The resolution and potential exposure from the supplier dispute, and whether the recorded $1.8 million reserve is adequate.
- Effects of U.S. solar tariffs, policy and incentive changes, supply constraints, warranty experience, and the CFO transition.