Aug 6, 2013
Executives
Paul Nahi - President & CEO Kris Sennesael – CFO David Niederman - IR, The Blueshirt Group
Analysts
Colin Rusch – Northland Capital Edwin Mok – Needham & Company Phillip Shen – Roth Capital Partners
Operator
Good day, ladies and gentlemen, and welcome to the Enphase Energy’s Second Quarter 2013 Financial Results Conference Call. At this time, all participants will be in a listen-only mode.
But later, there will be a question-and-answer session and instructions will be given at that time. (Operator Instructions) And as a reminder, today's conference is being recorded.
And now, I would like to turn the conference over to your host, David Niederman.
David Niederman
Good afternoon and thank you for joining us on today's conference call to discuss Enphase Energy's fiscal second quarter 2013 results. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of Enphase Energy's website at enphaseenergy.com.
With me on today's call are Paul Nahi, Enphase Energy's Chief Executive Officer and Kris Sennesael, Chief Financial Officer. After the market closed today, Enphase issued a press release announcing the results for its fiscal second quarter 2013.
We’re providing an accompanying presentation with our earnings call that you access on the Investor Relations portion of our website. During the course of this conference call, Enphase’s management will make forward-looking statements, including but not limited to statements related to Enphase Energy's financial performance, market demands for its microinverters, advantages of its technology, market trends and future financial performance.
These forward-looking statements are based on the company's current expectations and inherently involve significant risks and uncertainties. Enphase Energy's actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties.
Factors that could cause results to be different from these statements include factors that company describes in its press release of today, especially under the section entitled Forward-Looking Statements as well as those detailed in the section entitled Risk Factors of the company's reports on Form 10-K for the year ended December 31, 2012. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website.
Enphase Energy cautions you not to place undue reliance on forward-looking statements and undertakes no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in its expectations. Also please note that the financial measures we use on this call are expressed on a non-GAAP and have been adjusted to exclude certain charges.
We’ve provided reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release posted today which can also be found in the Investor Relations section of our website. Now, I would like to introduce Paul Nahi, Chief Executive Officer of Enphase Energy.
Paul?
Paul Nahi
Thanks David, and welcome to everyone joining us for our second quarter 2013 earnings call. This call will follow our normal format, I am going to start with an overview of our Q2 performance and provide an update on our progress and some of our key initiatives.
Kris will take us through the financials and next quarter guidance and then we will go to Q&A. The second quarter 2013 was another solid quarter for Enphase with great execution on our goals.
Revenue, gross margin and operating expenses are all inline or better than our guidance for the quarter. We have strong sequential top line growth of 28% with a revenue of $58.2 million.
We had another gross margin record at 28.1% and we kept our operating expenses flat for the third quarter in a row. We also made significant progress in reducing the negative cash flow from operations to $1 million.
So, on balance our second quarter financial performance was very strong and continues to reflect ongoing progress as we grow and move forward on our path to profitability and sustainable positive cash flows. Now, let’s talk about some of our other second quarter highlights.
In our last call, we told you, we’ll focus on and execute the key initiatives we believe are critical to our success. These include providing superior microinverter systems and services, reducing product and system costs to the customer while increasing gross margins through our semiconductor based business model, growing market share in our core market, seeking out new market opportunities, expanding our geographic footprint and continuing to tread our path to profitability and sustainable positive cash flows.
I’m pleased to able to share tangible evidence of progress we’re making in these areas, starting with the introduction of our fourth generation microinverter system featuring the new M250 microinverter. This is yet another example of driving stakeholder value through cutting edge, hardware and software technology development.
During the second quarter, we made our initial shipments of the M250 microinverter and new Enlighten software monitoring system with general availability in North America scheduled for September. Optimized for high power solar modules, the M250 microinverter produces 250 watts peak AC output power and pairs with modules up to 300 watts.
The M250 is rated at 96.5% CEC weighted efficiency, the highest efficiency in the industry for microinverters. In addition, the M250 has been built to withstand the most grueling environmental conditions.
It is NEMA 6 rated and has undergone over one million hours of testing in extreme temperature and humidity environments prior to launch. The M250 also supports a new integrated ground feature, again a first in the industry for microinverters.
The M250 microinverter no longer needs a separate Grounding Electrode Conductor to each microinverter. This improvement creates a more streamlined and cost effective installation process by reducing installation time and decreasing materials costs.
The fourth generation Enphase system also introduces enhancements to our intelligent software platform Enlighten. Enlighten is a critical tool for both installers and owners of the solar system to best serve the different needs of both the solar professionals and system owners, Enlighten is now available in two different versions.
For solar professionals, Enlighten Manager offers increasingly sophisticated backend web based tools to monitor and manage multiple installations, further streamlining the operations and maintenance process. For solar energy system owners, MyEnlighten offers an engaging interface to view and easily share production and environmental benefit of solar energy with friends and colleagues through seeing with integrated social media connections.
Recognizing the two software interfaces allows us to increase the functionality for each user; we see this evolution in our software platform opening yet again new avenues for value creation. In addition, well the new M250 microinverter brings increased value for our customers and end users as with each new generation of our product, we continue to reduce product costs and improve gross margins.
We expect to see the gradual benefit in our financials as we phase in the new product, which typically takes around four quarters. Next, in addition to being the technology leader, we are recognized as the number one residential inverter supplier in the America for 2012 by IHS Research with 53.5% share of revenue and the number one power electronic PV monitoring provider globally by number of sites in 2012.
Surpassing traditional inverters was an important milestone for us and further validates the microinverter technology for rooftop solar applications. Turning to our international business, we had substantial growth in revenue generated from outside of the U.S.
in the second quarter as it surpassed 20% of total revenue. In Europe our performance was particularly strong in France, which is up over a 150% year-over-year and in the U.K.
which has grown to our second largest European market behind France. These results reflect the early benefits of the realignment of our European organization which we announced last quarter.
We continue to increase our market share and presence in Europe by leveraging existing partnerships and developing new ones. As an example, during the second quarter working with our distribution and installation partner we became involved in a new project in the U.K.
putting solar on 600 homes. This will be our largest project to-date in the U.K.
with an average size of 3 kilowatts per home. Installations for this project have begun and ongoing.
It’s also important to note our growth in Europe is against the backdrop of a challenging market with reductions and feed interrupts in several countries and uncertainty related to potential import duties on Chinese modules. Today, we are making great progress and we’ve learned a lot from our expansion at the Europe.
To capitalize on this experience, we’ve recently deployed a team to more fully evaluate the things that we did well, amplify our performance and identify the things we can improve as we looked at further international expansion. This is creating a systematic and repeatable process that will allow us to more seamlessly move into other target markets.
Finally, closing on international, we are beginning to see signs of recovery in the Canadian market as demand is improving. We are also starting to gain some early traction in Australia and are signing up new distribution progress.
In addition, we just participated in our first trade show Clean Energy Week 2013, which is Australia’s biggest event for the renewal energy industry. Our presence at the event helped us significantly build our profile in the Australian market as we met with hundreds of installers and perspective customers.
In fact, at the show we received an order for a 100 kilowatt system, which will be our largest to-date in Australia. Turning to expansion of our core market, we are making progress with our work in the commercial and new housing set market segments.
As an example of the tracks that we are gaining in the commercial segment, a two megawatt project using Enphase inverter has just came online. This is the largest project and this is the largest commercial project using microinverters and is a great example of our product being successfully deployed in a large commercial installation.
We’ll be sharing more about this project in the coming weeks in a formal announcement. In addition to this success story, we recently announced a new commercial initiative for the European market to help feel the momentum of commercial solar; we are now providing our installers with a full solution to meet the demands for small commercial projects.
Our Enphase system offers installers and owners a technology solution with a modular architecture, integrated intelligence, lower level like cost of energy and increased project profitability. It includes the M250 microinverter both three phase and single phase engaged cabling, our onboard gateway, the Enlighten monitoring platform along with training and project design support.
This offering will enable us to address the fast growing market of small commercial systems up to 100 kilowatts with our microinverter system. Next, I’d like to update you on our efforts to address the new home market.
We’ve recently formed a strategic relationship with one of the leading U.S. homebuilders Lenoir through its newly created subsidiary Sunstreet Energy Group.
Lenoir chose Enphase in part because of our leadership in the industry and because the microinverter provides the most flexible and productive technology for the new home market. In addition, you’ll recall last November we were selected as an exclusive inverter partner of CertainTeed, one of the nation’s largest building materials manufacturers, in combination these relationships provide an ecosystem to deliver high quality interactive solar solution that benefits a builder and homeowner with Enphase as the technology of choice for modern solar living.
We view this as an important step and providing us additional access to the new home market, you’ll recall the last quarter, I mentioned there are only approximately 250,000 solar homes in the U.S., but there are more than 70 million homes in total and industry analyst expecting over 1 million new homes be built in 2013. Our strategic relationships with Lenoir and CertainTeed are an important step in developing a channel to address this growing market opportunity.
In summary, our efforts are very improved. In addition to being named the number one residential PV inverter supplier in the Americas and the number one global power electronic PV monitoring provider in 2012, we recently achieved an important milestone surpassing over one terawatt hour of clean energy production from systems reporting to Enlighten.
We are extremely proud to have reached this milestone and to be acknowledged as the industry leader, but our work is far from complete. We aspire to be the number one rooftop PD inverter supplier worldwide, expand our share in the commercial segment and further distance ourselves from the competition in the use of data provided by our intelligence monitoring systems.
Now before turning over to Kris to go over the financials, I want to close with some industry comments. We are extremely pleased with our progress in the first half of 2013.
We continue to see strong POS or sell out by our channel partners and demand from installers and end users continues to increase. However, as a end phase in the broader U.S.
solar industry continue to grow, it is now without challenges and we are seeing a stronger focus on working capital management within the industry. Consequently, our channel partners are starting to pair back their inventory level.
In addition, as we transition from the third to the fourth generation microinverter system, certain distribution partners are reducing inventory levels of the third generation product as well. Well, our guidance for Q3 reflects the impact of this temporary channel correction, the fundamentals of Enphase and the broader industry are stronger than ever and we will continue to execute on our strategy which has proven to be a winning approach.
And with those comments, I will turn it over to Kris.
Kris Sennesael
Thank you, Paul. First I will go over the financial results in more detail for the second quarter of 2013 and then I will turn to the business outlook for the third quarter.
As a reminder the financial measures that I am going to provide are on a non-GAAP basis unless otherwise noted. As Paul indicated, we are pleased to have the solid performance of the company during the second quarter of 2013.
Total revenue for the second quarter was $58.2 million slightly above the midpoint of the revenue guidance of $56 million to $60 million. This is a strong sequential increase of 28% and an increase of 4% on year-over-year basis.
However, the second quarter of 2012 included approximately $19 million of 1603 related revenue. If we normalize for the 1603 related revenue, the second quarter of 2013 is up more than 58% on a year-over-year basis.
During the second quarter of 2013, we shipped 399,000 micro microinverters or 86 megawatts. The sequential revenue growth was strong on both domestic and international fronts.
We’ve approximately 80% of the revenue coming from the U.S. and 20% comprised by our international markets, mainly from Canada, France, U.K., Belgium, the Netherlands and Australia.
We are especially pleased with the progress that we are making in our international business which has shown steady growth increasing from approximately 10% of our total revenue in Q4 of 2012, to 15% in the first quarter of 2013, and now further improving to 20% of total revenue. We will continue to focus on our international expansion as a key driver of our top line growth.
In addition to the strong sequential revenue growth, we continue on our path of improving gross margins. We set another company gross margin record.
In the second quarter we have the gross margin at 28.1%, an increase of 360 basis points, compared to the 24.5% in the second quarter of 2012, and an improvement of 110 basis points from the first quarter of 2013. The second quarter gross margin is particularly impressive when taken into consideration a price reduction within the quarter and almost no benefit from the launch of our fourth generation product as we only began shipments during the second quarter.
Gross margins have steadily improved over the last couple of years from approximately 10% in 2010 to approximately 20% in 2011 and 25% in 2012. We have a new record now in the second quarter at 28.1% and so we are well on our way towards our long-term target gross margin of 35% to 40%.
We also continue to deliver on our operating expense management strategy and the ability to leverage the infrastructure that has been put in place. We have kept our operating expenses flat for three quarters in a row and well below the level of the third quarter in 2012, which was $23.1 million.
Total operating expenses for the second quarter were $20.4 million with R&D at $8 million, Sales & Marketing at $7 million and G&A at $5.4 million. Sales & Marketing expenses are slightly up from the first quarter driven by our international expansion efforts, but offset by a slight reduction in R&D and G&A expenses.
These non-GAAP operating expenses did not include $1.4 million in stock based compensation expenses. We ended the first quarter with 384 employees slab compared to the last three quarters.
As a result of the sequential top line growth, record gross margin and flat operating expenses, we continue to reduce our operating losses and net loss as we chart our path to profitability. For the second quarter of 2013, net loss was $4.8 million or a loss of $0.12 per share.
On a GAAP basis, the net loss was $6.4 million or $0.15 per share. Finally, I want to point out a significant progress we’re making towards our goal of sustainable positive cash flows.
We improved the cash flow from operations by $6 million over the first quarter of 2013, closing the second quarter with negative cash flow from operations of $1 million and a negative net cash flow of $2.5 million. As a result, the company exited the quarter with total cash balance of $34 million.
We did not draw on our available debt facilities and we did repay approximately $600,000 on our existing term debt. Working capital improvements were mainly driven by an increase in the inventory turns from 6 to 9 times, we have inventory at the end of the second quarter at $17.9 million down $4.4 million from the first quarter.
It is a result of stronger focus on inventory management, overall business planning and our logistic processes. Capital expenditures during the first quarter were $1.8 million and depreciation and amortization was $1.7 million.
Now, I would like to turn to our guidance for the third quarter of 2013. We expect the revenue for the third quarter to be in the range of $59 million to $63 million.
This takes into account an anticipated reduction of the inventory levels within our distribution partially as a result of the transition from the third to fourth generation microinverter system and the ongoing rationalization of inventory levels within the industry. Regarding gross margin, we expect the gross margin to be within a range of 27% to 29%.
We expect to see the benefit of the higher gross margins on the fourth generation product to start improving our overall gross margin overtime as we start ramping the sales of our new microinverter system. We also expect non-GAAP operating expenses to be roughly flat compared to the second quarter.
And now, I will open the line for questions.
Operator
(Operator Instructions) So, we will go with our first question from the Vishal Shah from Deutsche Bank. Vishal, please go ahead.
Unidentified Analyst
Hi guys, this is Jeremiah (ph) calling in for Vishal. I was just hoping you could touch on the outlook for how margins might look like once you have completed the transition to the fourth generation microinverter?
Paul Nahi
So, obviously we are not guiding to forward-looking margins beyond this quarter, but what I can say is that we expect to see similar improvement in gross margin with the gen four as we have in previous generations. What I would remind you of is that that doesn’t necessarily happen right away.
We will introduce a next generation product, and then over the lifetime of that product, we will continue to reduce cost. So, it's throughout the lifetime of that product that you will see the increase in gross margin.
Unidentified Analyst
Okay, that's helpful. And maybe just, I mean, I know you are only giving official third quarter guidance.
But, how should we think about fourth quarter in the next year? Are we going to see those inventory rationalizations start to turnaround or how should we think about that?
Paul Nahi
So, the inventory rationalizations that we are seeing in this quarter are unique and we believe will be contained to this quarter. At the same time, we will be introducing our fourth generation product and that transition will take a couple of quarters.
So, we definitely think that the rationalization that we are talking about now is limited to Q3 and we expect to continue growth both in 2013 as well as 2014.
Unidentified Analyst
All right that’s very helpful, thanks Guys.
Operator
Okay, thank you. And our next question is from Colin Rusch from Northland Capital.
Colin, please go ahead.
Colin Rusch - Northland Capital
Hey guys! You talked about basically four quarter ramp for the 1040 product.
So, you can talk about why you think this channel inventory is only going to take a quarter to work its way through and why only it take, why won’t it be over multiple quarters?
Paul Nahi
The bulk of it will happen upfront for obvious reasons. As we introduce a new product, people are going to want to make way for it, but at the same time, we have to remember that the M215 will continue to be sold for many quarters from now and the transition as we move to a higher and higher concentration of the M250s will result in a lower concentration of the M215s, so the effect of dwindling M215s over time will be less pronounced.
I think what you are going to see is a bulk of the effect coming upfront and maybe not all of it in Q3, but a good chunk of it and then it dwindling off rapidly after that.
Colin Rusch - Northland Capital
Okay. And, can you talk about the magnitude of the impact on 3Q, I mean, are we thinking about something as much as 20% or 30% of revenue will be impacted by this channel inventory?
Paul Nahi
So, it’s hard to quantify exactly, what I’d say is that we are, the rationalization is probably in the neighborhood of a couple of weeks of inventory and that would probably account for it.
Colin Rusch - Northland Capital
Okay. And then, the last one is just on the cost structure, you guys have done a very nice job of winding up the overhead, is there more to do on the R&D side or on the G&A side or should we expect to see those things kind of flatten out or start to roll going forward?
Paul Nahi
We feel that we’ve made multiple investments early on, this is going back to 2011 and 2012 even early in 2013, we feel punctual with where we are today, I don’t see necessarily a significant reduction in those expenses, we are still investing in R&D, we do have our fifth generation product that’s well underway in development, in fact it’s up and running in the lab, we are continuing to invest in products and technologies and services to keep us well ahead of the competition. But, even if there is a modest increase it will be commensurate with sales.
So, I don’t want to expect to see any spike up or down.
Colin Rusch - Northland Capital
Perfect. Thanks a lot.
Paul Nahi
Thank you.
Operator
(Operator Instructions) We’ll take our next question from Edwin Mok from Needham & Company. Edwin, please go ahead.
Edwin Mok – Needham & Company
Hey, thanks for taking my question. Well, I guess, just come back to the channel inventory, anything specific to like any specific distributor or any regional that you might see more that inventory worked out or is it more across the board or across the state there?
Paul Nahi
In generally, it was across the board, it was, it definitely is contained to the U.S., this is definitely North American challenge, but nothing more specific in that.
Edwin Mok – Needham & Company
Okay, that’s helpful. And then, you mentioned that part of it was due to, to call it ramp down the third generation inverter, anyway you can quantify how much of the channel inventories currently third generation and how much do you think that would change by the end of this quarter?
Paul Nahi
It would be very difficult quantify or sort of breakout the effects of both the ramp down on the 215 as well as the rationalization of the channel itself. What I will say is that, I think what we are seeing this quarter is really the confluence of both of those events, the combination of the channel wanting to engage and perhaps more effective cash management, coupled with the fact that they have an opportunity to leverage the fact that we’re transitioning to the M250 and so they are going to want to be very careful on the volume of M215s that they hold.
That combination I think is what you are seeing this quarter but breaking them out would be a little bit difficult.
Edwin Mok – Needham & Company
Okay. That’s fair.
My question, I have on international, you mentioned UK as, you highlighted UK as one of the market that is strong, I understand that market actually has a pre – somewhere your competitor is always selling to that market, did that actually help you penetrate market faster because customers already gone, used to seeing microinverter or even the optimizer solution, do you see that part of market that already have microinverter or these optimizers as potential market that can grow faster in the near term?
Paul Nahi
So let’s talk about U.K. specifically.
While there were an entrant or two, their market penetration was really so low as to not have much of an effect for us. Unfortunately, it wasn’t as if the microinverter concept had been well understood and widely used.
So, our competition continues to be the central string inverters and today, that’s who we spend most of our time competing within the U.K., and as we mentioned, we are making tremendous progress in there. There are very few countries that have any real experience with the microinverter.
The more countries we enter and the more experience we get. We recognize that we are not just introducing Enphase, but we are also introducing the concept of microinverters across the world.
This is both good and bad, but I would say on balance, it’s definitely more good. We are able to communicate our vision, the value and the benefit of the Enphase microinverter.
They are able to start off with the highest reliability microinverter in the world, which we think all in all benefits Enphase and the industry.
Edwin Mok – Needham & Company
Okay, great. One last question, can you remind us what would be your breakeven revenue level and what kind of margin are you targeting based on that?
Kris Sennesael
We have a breakeven model. We have $80 million of quarterly revenue and 30% gross margin and 30% OpEx, that makes it breakeven.
Now keep in mind, that 30% OpEx on $80 million is $24 million of OpEx. Currently we are tracking well below that $24 million.
As you see, last quarter was $20.4 million and we intend to keep that as flat as possible.
Edwin Mok – Needham & Company
Great, that’s all I have. Thank you.
Paul Nahi
Thank you.
Operator
Okay, thank you. And we’ll take our next question from Colin Rusch from Northland Capital.
Please go ahead. So, Colin you may want to check your mute button.
Okay we will go into our next question for Phillip Shen from Roth Capital Partners. Phillip please go ahead.
And Colin your line is open as well. Would you check your mute button?
Phillip Shen – Roth Capital Partners
Hello.
Paul Nahi
Hello, please go ahead.
Phillip Shen – Roth Capital Partners
Hi, this is Phil, can you hear me.
Paul Nahi
Yes, we can Phil.
Phillip Shen – Roth Capital Partners
Okay great. In your prepared remarks you discussed the number of international markets, can you give us a sense for what your megawatts or market share targets might be in Australia and in U.K., and perhaps what timeframe?
Paul Nahi
So the way I would characterize that is to say you that both the UK and Australia are viewed as core markets for us and a core market by definition means that our goal is to be number one and number two in that space. So, we have a lost gold in those areas, but based on the traction that we have had and the reception that we are receiving, we feel very confident that we can achieve those goals.
Phillip Shen – Roth Capital Partners
Okay. And in terms of the timeframe, any thoughts on that at all?
Paul Nahi
Nothing that specific enough to be able to share what we have learned in the process of going, in the process of globalization is that it does take time to setup shop to get all the logistics prepared and then to educate and train the installers as we did in the U.S. The good news for us is that we have a blueprint for success.
We know what it takes and we are able to duplicate that in various international markets, but is something that's really measured in quarters or years, it's not something that happens necessarily overnight.
Phillip Shen – Roth Capital Partners
Okay, great. And then, I know you talked about the phasing of the 250 taking four quarters or so, can you talk about your expectations of product mix between M215 and M250 over those next quarters, these coming four quarters?
Paul Nahi
I would look at it as sliding scale that initially you’re going to see more M215 and M250 as we ramp up on the M250 and then that balance will shift over four quarters to be more 250 than 215. Clearly, the 250 has a lot of advantages and that it's able to support higher power modules.
It has higher efficiency, it has integrated ground, these are all tremendous attributes, but at the same time there are modules out there, lower power modules for which the M215 maybe more appropriate from the power perspective. So, we are going to see a continuation of the M215 for a while and the market migration away from the M215 to the M250, as we see more and more predominant of higher power modules.
Phillip Shen – Roth Capital Partners
Okay, thanks Paul. One last one and I’ll jump back in queue.
Perhaps you could talk in general about how the reception of the M250 has been among customers. Have there been any challenges at all or any hiccups at all?
And if not, then perhaps you can just talk about the overall reception?
Paul Nahi
Sure. The reception has been extremely strong, in fact today, demand out-served supply.
We are sold out of everything we can make. As we introduce a new product, we like to ramp manufacturing in a very steady manner to maintain the quality and the processes that we feel are necessary for the reliability of the unit, and as a result we are limited in supply initially, but basically everything we can make right now, we are selling and the response has been tremendous.
Phillip Shen – Roth Capital Partners
Great, thanks again Paul.
Paul Nahi
Thank you.
Operator
Okay, so I am showing no further questions in the queue. I’d like to turn it back to your host for any concluding remarks.
Paul Nahi
Thank you, and thanks for joining us for today’s call and your interest in Enphase. Our second quarter was one of significant achievement as demonstrated by our results.
We are very pleased with our ability to execute well on our strategy, progress on many of our key initiatives, and solidify our position as the industry leader in our market segment. Of course, none of this could have been accomplished without the collective efforts of the entire Enphase team, who is doing a fantastic job.
We look forward to speaking with you again next quarter.
Operator
Okay ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.