Nov 5, 2013
Executives
David Niederman - Director - The Blueshirt Group Paul Nahi - President, Chief Executive Officer Kris Sennesael - Chief Financial Officer
Analysts
Vishal Shah - Deutsche Bank Philip Shen - ROTH Capital Partners Andrew Hughes - Bank of America/Merrill Lynch Colin Rusch - Northland Capital Ryan Berney - Raymond James
Operator
Good day, ladies and gentlemen, and welcome to the Enphase Energy’s Third Quarter 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.
I’d now like to turn the call over to David Niederman, Investor Relations. You may begin.
David Niederman
Good afternoon and thank you for joining us on today's conference call to discuss Enphase Energy's fiscal third 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 third quarter ended September 30, 2013.
We’re providing an accompanying presentation with our earnings call that you can 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 certain financial measures we use on this call are expressed on a non-GAAP basis 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 on the call today.
The third quarter 2013 was a record breaking quarter for Enphase with highest ever revenue of $62 million and highest ever gross margin of 28.3%. Operating expenses which totaled $20.4 million were once again flat for the fourth consecutive quarter.
We are continuing to drive leverage in our model by focusing on operating expense control while making the necessary investments to sustain the growth of our business. Our financial discipline combined with our top line growth and improving gross margins enabled us to narrow our loss from operations and improved cash flow.
During the third quarter of 2013, Enphase shipped its 4 millionth microinverter representing approximately 885 megawatts of AC microinverter capacity. This marks yet another milestone for Enphase as the world’s leading microinverter systems provider.
Another important achievement is the introduction of the latest Enphase system which featured our M250 microinverter. You will recall last quarter we announced that we have shipped the first few thousands units of this fourth generation product.
During the third quarter, we offered our new M250 on a limited availability basis to our North American customers as we continue to ramp production and as our customers started the transition from our highly successful third generation product for our newest microinverter. During the third quarter, we shipped approximately 60,000 M250s which represented 15% of total unit shipped during the quarter.
The transition to our latest microinverter will continue over the next several quarters and we expect our fourth generation product will represent approximately 20% to 30% of total units shipped in the fourth quarter of 2013. Our latest microinverter system is an example of the step function improvement which accompanies each new product generation.
The M250 contains our most advanced custom semiconductor device which in addition to the latest power electronics technology incorporates our next generation communications technology. The M250 offers higher output power, increased conversion efficiency and a labor saving integrated ground feature.
Now along with our hardware product innovation, the Enlighten software platform also continues to evolve. We are now collecting over 200 gigabytes of data everyday, managing big data of this kind requires our proprietary analytics engine to turn this data into valuable information for Enphase system owners.
We just launched the second version of our Enlighten API or Application Programming Interface, which makes it even easier to integrate solar system production data from Enlighten into other custom applications. These can include fleet management tools, display kiosks, building management software, building integration and mobile apps.
This is just one more example of how we continue to utilize our unique position to provide system performance data that is used and valued by a broad range of constituents in the solar energy value chain. Our new system has been very well received by our customer base, including our direct customers, distributors, OEMS, installers and system owners.
And on October 21st at Solar Power International 2013, we announced the general availability of the fourth generation system in the North American market. Later in 2014, we plan to introduce the M250 in Europe and Australia as well.
Enphase continues to be the clear market leader in the U.S. residential market.
In addition, we are making a lot of progress in the commercial market which is a tremendous opportunity for Enphase as we look to accelerate our top line growth. We just announced the completion of 3-megawatt project for the San Diego Unified School District.
This is a 125-building distributed solar project using Enphase microinverters spread across 29 schools and two facilities buildings throughout the School District. Our microinverters allow the project developer to focus their installers on a single inverter technology to support 3 megawatts of arrays and more than 125 different systems each uniquely designed with different roof angles, orientation and sizes.
The challenging rooftop would have made array design logistically impractical with traditional inverters. This project was ideally suited to our microinverters which can be customized to fit both the smallest of arrays as well as megawatt scale systems.
The design diversity of this distributed– 3 megawatt system exemplifies the flexibility and adaptive nature of the Enphase technology. In addition, solar system safety was critical because Enphase microinverters are low voltage, the developer was able to install the system knowing that no dangerous high voltage wiring would be running through the schools.
And speaking of megawatt scale systems as a follow up to our earlier announcement, this quarter we completed a 2.3-megawatt solar installation for Vine Fresh Produce in Ontario, Canada. In contrast to the previous installation, this array was on a single unobstructed rooftop with no significant shading.
This three-phase commercial system is Ontario’s largest commercial rooftop solar PV array as part of the province’s Feed-in-Tariff program and utilizes over 9,000 Enphase microinverters. We were selected for this project in part because of our higher energy harvest, no single point of failure, ease of installation and the fact that Enphase systems are easier to maintain because of our module level monitoring.
Another example of our efforts around market expansion involves our participation in the Clinton Global Initiative Commitment to Action. Enphase is piloting an innovative solar energy microgrid system in Abuja, Nigeria.
This microgrid system will help address some of the energy challenges in Nigeria and reduce their dependency on expensive polluting, diesel generators by providing clean affordable and reliable alternative sources of energy. Another example of an Enphase microgrid application is our participation in the U.S.
Army’s SAGE pilot program, standing for Smart and Green Energy. This program seeks to reduce the quantity of liquid fuels required for electrical power generation for military base camps by employing PD systems, microgrid technologies and many energy efficiency measures.
The Enphase microinverter system is ideal in these types of applications. Longer term we expect opportunities for microgrid applications to increase in developed countries as well as grid stability and reliability continues to be a concern.
In summary, we are constantly evaluating new growth opportunities with several other initiatives underway and we will share updates with you as they progress. Our financial results for the third quarter of 2013 were marked by a strong performance from the domestic markets as business in the U.S.
was up 13% sequentially despite a reduction in inventory and the distribution channel and some weakness in the Hawaiian market. Business in Europe during the third quarter was rather soft mainly due to the summer holidays schedules resulting a schedule decline of approximately 25%.
Looking at the individual countries, the U.K. market is growing and our business there is developing nicely.
However, the market in France, Belgium and Netherlands where we now have a top-three market share position are softer as a result of substantial reductions or cancellations in FIT programs. We anticipate these conditions will persist in the near term tempering demand in these regions or encouraged as we gain share in Enphase market and believe they will have robust demand for solar in the coming years.
Our business in Australia is starting to ramp. In fact, we recently completed a 100-kilowatt system, our largest project to-date, now we continue to build our position and product offering in this attractive market.
We are also seeing signs of renewed activity in the Canadian market resulting from a new and stable FIT program and are pleased with our progress in this market. Looking at the 2014 and beyond, we continue to be extremely bullish on the industry and see potential for significant growth of Enphase's business particularly in the U.S., the U.K.
and Australia. A recent solar industry report by Deutsche Bank stated grid parity as a reality today in roughly 10 states in the U.S.
and as system prices continue to decline, they expect this number to increase. The combination of lower system prices, solar financing products and the reduction in some of the soft cost such as customer acquisition and permitting is creating a catalyst fueling the demand for solar over the next several years.
And with those comments, I will turn it over to Kris.
Kris Sennesael
Thank you, Paul. First, I will provide some more detail on our third quarter financial results before turning to the business outlook for the fourth quarter.
As a reminder, the financial measures that I’m going to provide are in non-GAAP basis unless otherwise noted. During the third quarter, we continued our track record of execution and improving top and bottom line as well as cash flow.
Revenue for the third quarter was a record $62 million up 7% sequentially and coming in at the upper end of the revenue guidance of $59 million to $63 million, During the third quarter of 2013, we shipped 426,000 microinverters representing 94 megawatts. Approximately 15% or 60,000 units were the Enphase fourth generation microinverter systems.
Domestic revenue comprised 84% of third quarter total revenue, while the international revenue made up 16%. As Paul mentioned, our international revenue was down sequentially mainly driven by weak seasonal business environment due to the summer holidays and various regulatory actions impacting the solar industry incentives.
In the third quarter, we set another gross margin record at 28.3% which is an increase of 140 basis points compared to 26.9% in the third quarter of 2012, an increase of 20 basis points compared to our previous gross margin record in the second quarter of 2013. The third quarter gross margin improvement is driven by relatively stable average selling prices, ongoing cost reduction efforts and the benefit of the higher margin on our fourth generation system.
During the third quarter, we continue to focus on our financial discipline delivering on our operating expense management strategy and leveraging the infrastructure that has been put in place. Operating expenses for the third quarter were $20.4 million, this is the fourth consecutive quarter we have maintained our spending at this level.
R&D was $7.7 million, sales and marketing was $7.6 million and G&A was $5.1 million. Sales and marketing expenses were up slightly from the prior quarter but were offset by reductions in R&D and G&A.
These non-GAAP operating expenses did not include approximately $2 million in stock-based compensation expenses and $400,000 in severance cost. Our top line growth, record gross margins and flat operating expenses enabled us to further reduce our operating loss and net losses.
For the third quarter of 2013, we recorded an operating loss of $2.9 million and a net loss of $3.7 million or a loss of $0.09 per share. On a GAAP basis, the net loss was $6.3 million or $0.15 per share.
Now let’s talk about our continued improvement in cash flow. Third quarter negative operating cash flow was reduced to $500,000 and net cash flow was a negative $2.2 million.
As our improved financial performance and focus on working capital management moves us closer to positive cash flows. We exited the quarter with a total cash balance of $31.8 million.
And once again, we did not draw on our available debt facilities. During the quarter, we repaid approximately $600,000 on our existing term debt.
Turning to working capital, we ended the third quarter with inventory at $24.4 million up $6.5 million from the second quarter. The higher inventory levels are associated primarily with our current product transition.
We expect to reduce inventory levels in the fourth quarter in advance of our seasonally softer first quarter. We ended the quarter with accounts receivable of $34.7 million up slightly from the $32 million in the second quarter inline with the sequential revenue increase.
Capital expenditures during the third quarter were $1.4 million and depreciation and amortization was $1.8 million. Now I would like to turn to our guidance for the fourth quarter of 2013.
We expect revenue for the fourth quarter to be in the range of $62 million to $65 million, which is an increase of 8% to 13% on a year-over-year basis. Regarding gross margin, we expect gross margin to be within a range of 29% to 32% as we continue to drive down product cost and benefit from the product transition.
We also expect non-GAAP operating expenses to be roughly flat compared to the third quarter. And now, I will open the line for questions.
Operator
(Operator Instructions) Our first question comes from Vishal Shah of Deutsche Bank. Your line is open.
Vishal Shah - Deutsche Bank
Hi, thanks for taking my question. Paul, I wanted just talk a little bit about how you can improve your gross margin going forward, is it going to be a function of overall product mix as you start selling more of these higher margin products or is it also going to be a function of volumes and just talk a little bit about what’s your profitability looks like sort of what kind of breakeven levels are you looking at now?
Thank you.
Paul Nahi
Sure. Currently our gross margins have been affected by three specific factors.
One, clearly is technology and our ability to integrate more of our device on to a single asset and thereby reducing the part count and reducing the size of the inverter. Another element certainly is volume and the scale associated with that.
Another is simply just the growing size of the inverter, the fact that modules are becoming more powerful and attendant microinverters that’s also equally powerful. Going forward, we see those three main factors still at play.
There is a lot of technology in front of us, a lot of technology development that’s going to help continue to reduce the cost. We have seen that in every subsequent generation of our product and we don’t see that slowing down.
Our volume continues to increase and that is also having a very significant effect. Now I would only caution you that as we have seen in the past, we have reduced ASPs anywhere between 6% and 12% year-on-year and we certainly see a similar trend in the future.
So there is going to be some downward pressure as a result of normal ASP trend. But the continuing upward momentum on gross margin as a result of technology volume and inverter size will continue.
Vishal Shah - Deutsche Bank
Okay. And when should we start – what kind of breakeven levels are we looking at and when do we start looking at profitability at bottom line?
Kris Sennesael
Right. We have a breakeven model with revenue at $80 million per quarter, 30% gross margin and 30% OpEx which is $24 million of OpEx.
However, as you have seen in our financials we have been able to keep our operating expenses well below the $24 million level, it’s currently at $20.4 million, $20.5 million. So as a result of that our breakeven model is actually currently below the $80 million per quarter.
Vishal Shah - Deutsche Bank
Okay. Appreciate that.
Thank you.
Operator
Our next question comes from Philip Shen of ROTH Capital Partners. Your line is open.
Philip Shen - ROTH Capital Partners
Hi, guys. Thanks for taking my questions.
Paul Nahi
Sure.
Philip Shen - ROTH Capital Partners
Hey, first one is on, the revenue guidance came up a bit short versus consensus, but it seems like your better than expected gross margin guide may completely offset that. So if we use the upper end of your guidance range there appears to even be a touch of upside to Q4 EPS estimates.
And you may possibly even reach breakeven on a non-GAAP basis. Can you talk to us about how confident you are in the upper end of your guidance range and what the potential may be to exceed that range in Q4?
Kris Sennesael
So Phil you are absolutely correct and just mathematically, if we hit the upper end of the guidance, we have $65 million of revenue and 32% gross margin. We have operating expenses flat at $20.5 million range; we would hit profitability from a non-GAAP operating income point of view.
However, having said that we provide guidance within a range and so the range is 62 to 65 for revenue and 29% to 32%. There is no commitment or indication as of today that we will hit the high end of the guidance or even do better than that.
Phil?
Operator
Our next question comes from Krish Sankar of Bank of America/Merrill Lynch. Your line is open.
Andrew Hughes - Bank of America/Merrill Lynch
Hi, guys. This is Andrew Hughes on for Krish.
One question on competition, just who you are seeing in the U.S. residential market specifically not really in terms of micros because it’s not something that we have seen but any new competitive threats among some of the new string offerings and just comment on that and perhaps our market share as well?
Paul Nahi
Sure. So starting with your last question first, we are seeing our market share in the U.S.
hold steady, if anything it may be slightly trending up but let’s call it holding steady for now. In terms of competition you are exactly right about micros, in fact at this point all the largest inverter manufacturers have announced that they are currently selling micros.
We have not seen any appreciable effect in our market as a result of that. Clearly our competition today is coming more from traditional string and central inverters.
And there all I would say is that we are not seeing any change in the fundamental landscape. The players are not really changing there, the market shares are staying relatively constant, one versus the other.
So I don’t think we are seeing anything dramatic occurring in that area.
Andrew Hughes - Bank of America/Merrill Lynch
Great. And then just one more and in terms of hitting $80 million revenue target whether or not that’s breakeven or not, does your level of confidence and your ability to do that while keeping OpEx where it is now and where you are going to – where you see most of that additional revenue coming from.
Is it U.S. market or is it primarily internationally focused?
Thanks.
Paul Nahi
Sure. So we are actually growing in a number of new markets.
As we mentioned in the prepared remarks, the U.K. and Australia are tremendous residential markets for Enphase and we are just beginning there.
In fact, those markets individually while not quite as big as U.S. market or close to the same size.
And our market share in both of those cases is relatively small simple because we’re new entrants in those markets. So there is a potential – there is a tremendous amount of growth potential in those new markets.
There is also growth potential in the U.S. commercial market which we’re continuing to do well in.
So our overall, growth trajectory, I think is going to be very healthy in 2014 and beyond, we see a lot of room both domestically and internationally for growth. When you look at Enphase in the scheme of all the solar, even all of DG, you will find that we are still in the very early innings of this game and we have a lot of headroom in front of us.
Operator
Our next question comes from Colin Rusch of Northland Capital. Your line is open.
Colin Rusch - Northland Capital
Hey, guys. Can you talk a little bit about the cost reduction performance in the Gen4 product so far, historically you have seen, if I recall correctly about 35% or 40% cost reduction on the generational shift.
Are you seeing what you had hoped to see at this point in the ramp?
Paul Nahi
So you are right. Every subsequent product that we introduced does see a significant cost reduction.
And as we said in the past, you don’t necessarily see all of those cost reductions on day one often times in fact almost in every case, you will some cost reduction immediately. But then, through the course of that product life time, we will continue to reduce cost through a variety of different means.
We have seen what we have expected to see from the fourth generation product, primarily as a result of technology and specifically semiconductor design. But, we also expect to see continued cost reduction throughout the – its life time as well.
Again, that is good news on cost reduction, good news on gross margin, should be tempered with what we have fully expect to being a normal definition ASPs as we have seen in the past.
Colin Rusch - Northland Capital
Okay. And as we look at the gross margin guide from 3Q to 4Q was that a ton of revenue increase.
How of much that is being driven mixed shift and how much of that is being driven by management or the supply chain?
Kris Sennesael
Yes. So part of that is driven by an increase of the fourth generation as we mentioned during the call.
In the third quarter roughly 15% was fourth generation, we expect in the fourth quarter that to increase to 20% to 30% of overall shipments. So that is definitely helping us.
Now in addition to that we will continue to drive down the cost on our third generation product and made further improvements across the board. And so that all together gives us a view to 29% to 32% gross margin for the fourth quarter.
Colin Rusch - Northland Capital
Great. And then just one final one for me.
Can you talk about the ramp in Australia and the potential entrance into Japan, obviously, those [indiscernible] very strong markets particularly for applications you guys said well? Love to understand how you see that playing out over the next couple of years?
Paul Nahi
So the team is being built in Australia as we speak. We really do believe it could be a very strong potential market for Enphase.
The dynamics of that market are very healthy. It is effectively while not entirely, it is effectively an unsubsidized market right now in roof top PG, which we believe to be a very positive trend.
The initial indication has been extremely positive, our product has been very well-received and again we are just starting, so we feel very comfortable about our current position and our ability to grow that market. Japan is a little more complicated for a variety of different reasons.
We are actively engaged with several potential strategic partners. Japan has both some marketing challenges as well, some technical challenges which needs to be over come, all of which are eminently doable but its just a question of resource and time.
We do view Japan as a strong market for Enphase, not exactly should sure when we are going to enter that market.
Colin Rusch - Northland Capital
Great. Thanks so much.
Paul Nahi
Thank you.
Operator
Our next question comes from Pavel Molchanov of Raymond James. Your line is open.
Ryan Berney - Raymond James
Hi, guys. This is Ryan Berney in for Pavel.
I just wanted to ask last quarter you alluded to some excess [indiscernible] channel, as that subsided over the past three months and also have you been able to identify the reasons for that original issue?
Paul Nahi
So the answer to the question is, yes, we feel that we have done what we had set out to do which is reduce the inventory in the supply chain. And the reason for that as we talked about in the past, it’s in large part due to the transition from the third to the fourth generation product.
And I think part of it is just normal course of business, throughout the year. Inventory levels will fluctuate and because we have very clear visibility on our -- not just ourselves in data but out data its very important for us to maintain a healthy level of inventory in the channel, which means that we need to manage it from time to time.
Ryan Berney - Raymond James
All right. Thank you very much.
Operator
Our next question comes from Edwin Mok of Needham & Company. Your line is open.
Edwin Mok - Needham & Company
Thanks for taking my question. So on the gross margin, if we think about the fourth generation product let’s say you ramped up to 400% of your shipment and you will get growth you are expecting and let’s say 10% price decline that you are thinking about on a year-over-year basis, right?
What kind of gross margin, do you think you can achieve with that product fully ramped?
Kris Sennesael
So Ed, now our long-term gross margin target is 35% to 40% and so we are well on our way to achieve that. I cannot guarantee however that we will achieve that.
We have 100% of four generation shipments. A lot of that will depend as you pointed out what will happen from a pricing point of view.
Competitive pricing and how we react to that with our pricing. And so that will be a key driver but yes, long-term 35%, 40%, we do have line of site to achieve that over time.
Edwin Mok - Needham & Company
Okay. That’s fair.
And then on the U.S. side market looks like it’s been strong this quarter.
Can you quantify how much of that come from commercial versus residential. And as you look long-term maybe look at 2014, how do you think that makes [ph] mixed shift?
Paul Nahi
So sure, today approximately 15% to 20% of our shipments are commercial, most of that is in the U.S. Going forward, we expect that to increase, we have already seen a tremendous trend and there are examples of that which we shared with you on the prepared remarks on several multi-megawatt site.
So we do expect the percentage of commercial to increase, while we increase the residential and we expect that trend to be not just U.S. but also international.
Edwin Mok - Needham & Company
Last question, I have regarding [indiscernible]. What is roughly the timing at least based on your current plan the timing for fifth generation inverter?
Paul Nahi
We have not announced the fifth generation inverter, the timing for the release of the fifth generation. What we said in the past is that traditionally if you look at historically what we have done and if you look at Silicon Valley tech companies in general, from generation to generation can be anywhere approximately 18 to 24 months.
Having said that I will note that the fifth generation as you all know is well underway it’s actually operating, its on rooftops. We have actually just started the sixth generation as well.
So we continue to invest heavily both in hardware and in software to increase our lead.
Edwin Mok - Needham & Company
Great. That’s very helpful.
Thank you.
Operator
Our next question comes from Philip Shen of ROTH Capital Partners. Your line is open.
Philip Shen - ROTH Capital Partners
Hey, guys. Don’t know what happened earlier but I got cut off.
Just a quick follow up here. In this quarter you guys had about 16% of your revenues exposed to international sales 20% in Q2.
As you look out ahead, what kind of international revenue mix do you expect transferred all 2014?
Paul Nahi
So we can’t speak specifically to 2014. We don’t guide to that level of specificity but what we can say is that the – we are continuing to gain share in just about every international markets we are in.
The adoption of the product, the reception to the microinverter technology has been fantastic. We are seeing the exact same level of response there that we did in the U.S.
maybe back in 2008, 2009 which gives us a great deal of confidence that we are going to be able to achieve internationally what we have achieved in the U.S. Having said that of course, there are logistics issues, there are operational issues, having to build teams in those countries, establish sales, customer support, training and all the rest.
We are well on our way to doing that in the core countries that we are focused on right now. So I would say long-term we expect the percentage of sales to come from rest of the world to increase very dramatically from where it is right now.
And we are very confident we are going to able to achieve that.
Kris Sennesael
Phil just to add the U.K. residential solar market as well as the Australian residential solar market, each of them is approximately the same size as the U.S.
residential solar market. So it’s a really large market and we have only started our adventures there.
And so we have a tremendous opportunity to go and take share in that market grow our share and grow our business.
Philip Shen - ROTH Capital Partners
Great. Thanks Kris.
Thank you, Paul as well.
Paul Nahi
Thank you.
Operator
I’m showing no further questions. At this time, I’d like to turn the call back over to Paul Nahi for any further remarks.
Paul Nahi
Thank you for joining us on today’s call. The third quarter 2013 was a record breaking quarter with strong execution on our strategic initiatives and solidifying our position as the industry leader.
We look forward to speaking with you beginning of next year as we report on our fourth quarter and full year 2013 accomplishments.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program.
And you may all disconnect. Everyone have a great day.