Enphase (NASDAQ:ENPH) is becoming one of the stars of the decarbonization story as everything gets electrified. With outstanding technology, it struggled in the early days to manage technology development and getting its products to market. However, with new management and a relentless customer focus, it has become a model company producing spectacular and profitable growth, new product innovations, plus recent global expansion beyond its US home market. Here I review recent developments at Enphase and consider what investors might make of a company whose share price is Tesla-like (TSLA). I think this comparison makes sense.
Enphase Q2 2022 report was outstanding
Enphase has developed a reputation for exceeding estimates and Q2 earnings were no exception. What is more remarkable is that Enphase CEO Badri Kothandaraman has already foreshadowed substantial outperformance on the next quarterly earnings. This kind of reporting gives confidence that the business is in great shape and that there is a lot of room for outperformance, even in very challenging times.
Enphase ended Q2 with outperformance compared with its own targets on three key metrics : ~42% gross margin (goal 35%), 13% operating expenses (goal 15%) and 29% operating income (goal 20%). Revenue was a record $530.2 million and free cash flow $192 million for the quarter; the company ended Q2 with $1.25 billion cash.
The uptake of the new, transforming IQ product (IQ8) was 37% of Q2 microinverter shipments. This product is proving to be company defining as the IQ8 product is largely responsible for improved non-GAAP gross margin. Some have criticised delays in release of the IQ8 product but getting right means that the improved gross margin from this product reflects Enphase’s focus on quality and profitability in its new products. This is an important part of why the company is improving its status in the industry. The IQ8 has 3 key new features : i) sunlight backup i.e. power continues from solar PV when the grid is down; ii) there is no limit on solar to storage ratio i.e. you can have a lot of solar and small (or no) storage; iii) sunlight jumpstart i.e. if you drain the battery overnight, the IQ8 can reboot the battery system from solar PV. These features allow Enphase to have value-based pricing (more profitable) and IQ8 is increasing the gross margins. The amazing claim about IQ8 is that Enphase expects 90% of its microinverter shipments will be IQ8 in Q2 2023!
The guidance outlook for Q3 was very bullish, mid-point $610 million revenue, a ~15% increase on Q2, even as the company struggles to satisfy demand for its products.
Amazingly for these times, Enphase supply chain situation is stable because of careful supplier management and sourcing alternate suppliers. Microinverter manufacturing capacity is 5 million across all facilities. An additional 1 million inverter capacity will be on line in Q1 2023 when manufacture in Flex’s (FLEX) factory in Timisoara, Romania starts. And it was stated that should Romania’s output need to double, this just requires an additional full automated line. This is fast to achieve and in the Q&A it was clear that this is already being planned to be implemented once the initial production commences in Q1 2023. Note that Flex Romania is largely for the European market. Enphase has Indian manufacture in Salcomp’s Chennai facility (5 million inverters since 2020), as well as manufacture in Flex’s Guadalajara Mexico and …….