Energy Freedom from the Sun - Enphase

Enphase netted over $92M in revenue in Q4, after guiding between $80-90M, and Q1 guidance was even better at $90-95M. The fact that 84% and 7% of microinverter sales were Heron-3 and Heron-2, respectively, exemplifies the “strong customer demand” Enphase is experiencing; Heron-3 is the codename for Enphase’s lowest-cost microinverter platform ever produced, with predecessor Heron-2 not far behind. With a ~91% IQ transition level in Q4, and partners, SunPower, Solaria and Panasonic all having IQ7-integrated AC Module availability, Enphase’s quarterly microinverter sales were the highest ever at 820k. With this growth surprise, let’s explore how Enphase Energy (ENPH) is bursting with energy!

Enphase’s numbers this past quarter suggest the company could achieve 40% growth for 2019; this potential is mainly attributable to SunPower (SPWR), one of Enphase’s partners. In Q4, SunPower did 75MW of solar which was on par with Tesla’s (SolarCity) Q4 resi and C/I business; at 40MW, that’s ~125k IQ7X micros from SunPower. SunPower also had 15% y-o-y growth, adding 40k customers in 2018, and demand for their “loan product” grew 4x compared to Q4-17. Enphase’s run-rate was 25k customers per quarter or 100k annually, business which they captured without the help of any partners. SunPower’s 40k represents 40% of Enphase’s annual run-rate. SunPower projected 100MW of NGT deployment for SPES during 2019, and if their new A-series 66-cell NGT ACM with integrated IQ7A-66 are competitive on price, then SunPower and Enphase will have a serious ~400W contender on the market. The Maxeon Gen-5 line upon which these panels will be built, was just completed and is projected to expand capacity to over 250MW; furthermore, SunPower is “in active discussions with…parties regarding funding to complete the full conversion [to] Maxeon Gen 5 [with] approximately 1.8GW” capacity total, a ~700% increase. Like SolarEdge riding on SolarCity’s coattails in 2014, Enphase is mimicking that but with multiple partners, so the effect should be much greater. With EMEA (Europe Middle East & Africa) growing by 26% q-o-q, Enphase has 2 major regions moving towards the 40% growth mark. Enphase’s APAC (Asia-Pacific) will likely pick up after the planned inventory correction, leaving LA (Latin America) and NA (North America) as mostly supply-constrained until Flex Mexico comes online in Q2.

Other revenue factors to consider are Enphase India where 20-30% of a 26GW market was recently mandated by the Indian government. Revenue from accessories also continues to rise q-o-q, and ACB 1.5 has been released. All of these channels can help Enphase reach that level of growth.

Also worth noting is how Enphase’s service OpEx continues to be optimized with the entire line of past micros now replaceable by low-cost Heron-3’s; for example, this means that for the hundreds of thousands of M215’s out there, customers may actually be able to upgrade to an IQ7-based S230 to achieve even better performance and take part in an IQ8 microgrid. No other inverter company has the level of service optimization that Enphase currently has; furthermore, achieving a Net Promoter Score (NPS) of 51% and closing in on their long-term objective of 60% is also highly beneficial for Enphase.

IQ8 has the technical attributes to catapult Enphase ahead of storage competitors LG (OTC:LGEAF), Sonnen (RDS.A) and Tesla (TSLA); some of these attributes have not been widely discussed, nor are people aware of how significant they truly are. There are 2 versions of IQ8, an offgrid version which was released in Q4 and is currently ramping up, and a grid-connected “grid-agnostic” version which is “always on” regardless of the utility grid status and is due Q4-19. The IQ8 is built on a new platform code named “Swift-1” which is comparable in cost to “Heron-3”; future microinverter generations such as IQ9 are slated to use the “Swift-2” platform and will have even lower production costs than Heron-3.

Enphase Energy IQ8 Ensemble Building Block(Enphase’s Zimmanck/Berdner presentation at Sandia Natl. Labs, April 2018, p.23)

Enphase’s microinverters are superior to their competitors’ string inverters in terms of safety, reliability and longevity, but there’s another important attribute that IQ8 will add called “burst power”. When devices start up, they need more electricity than required to remain operational; think of A/C’s, refrigerators, pool pumps, vacuum cleaners, etc.; these devices need a “burst” of power initially, and then their power needs subside. An energy solution must have the capability to provide a huge amount of power instantaneously at any given point in time, and that attribute separates the contenders from the wannabes.

According to Raghu Belur, Enphase’s Cofounder and Chief Products Officer, they’ve “cracked the code” with their 8th-gen IQ8 microinverters because they now have the burst power (48’20”) capability such that a combined force of microinverters can easily provide. If you look below, Enphase’s Encharge ACB will have 4 integrated IQ8 microinverters, each having 50% burst power capability.

Storage Solutions Comparison - Encharge IQ8 - Burst Power

The Encharge 3.3kWh ACB has a level of fault-tolerance that competitor products don’t have; if their inverter fails, then the storage product fails, but not with Encharge; if an inverter failure occurs with Encharge, the remaining inverters will allow the storage product to continue operating. Encharge 10- and 13.2-kWh ACB’s will basically be blocks of 3.3kWh units, so they’ll have triple or quadruple the number of IQ8 microinverters a 3.3kWh model has, respectively. Furthermore, if IQ8 “Swift” fulfills the role of a BMS (Battery Management System), then that will be potentially disruptive; even at the utility scale, since all battery cells could be hooked up to 3-phase 480V via IQ8’s and become hot-swappable units. Thus, IQ8’s IP vis-à-vis the Enphase “black-startpatent could compete with hybrid battery string inverter and DC-DC charge controller storage solutions.

Tesla Powerwall, Sonnen eco and LG RESU at 10-years warranty is also unattractive given their weight, 276-, 622- and 210-pounds, respectively; at just 10-years, who wants to hire a team of service personnel to move a dead elephant out of their home and replace with a new one in? Furthermore, active cooling solutions from Tesla and Sonnen introduce service-related issues such as fan failures which cause entire storage unit failures. Encharge passive cooling is a much more elegant solution, and 1-less service call to worry about.

Another key attribute when differentiating between storage solutions is knowing both the power it provides when grid-power is available and unavailable; when grid-power is unavailable, that is referred to as backup or offgrid mode, and some storage solutions provide much less power during this mode of operation; the superiority of Encharge ACB is that it will provide the same amount of power in either mode, and that explains why it is called a “grid-agnostic” solution. Storage solutions which can operate under both modes have what is called a “black-start” capability, where they can start when grid-power is unavailable. Enphase, Sonnen and Tesla all have this capability, but SolarEdge’s StorEdge doesn’t; this means that when grid-power fails with SolarEdge, whatever power is stored in the LG RESU battery is what’s left for offgrid mode; it’s a 1-time usage deal, so the solution is truly meant for load-balancing and not offgrid.

DC-coupled 400-Volt solar-storage solutions require high-voltage, high-power DC-DC conversion, and for hybrid string inverters to last even 10 years, that is doubtful given the 16-20 hours of daily operation; Enphase’s AC-coupled storage solution can easily provide a 20+ year longevity because of the low- power working environment of the microinverter. Instead of a high-powered, lone string inverter, Enphase decentralizes the power among its “army” of micros; and most importantly, with this “army” of 8th-gen IQ8’s, Enphase will be able to deliver any combination of active and reactive power; in fact, IQ8’s will be able to absorb reactive power and convert into DC, so it will be able to absorb noise from the grid. No lone string inverter can do that, because they’re either producing or absorbing, whereas an “army” will be able to produce clean power and absorb dirty power simultaneously. Really, there is nothing that can compete with this, and for utility-level mass deployment there is only one solution that stands out. If the ZolaInfinityconnection is truly Enphase Energized™, then this proving ground may pave the way in “ultra dirty” electricity environments globally. Given the technological superiority of Enphase’s IQ8 technology, they will compete well even at a 10-20% premium. By 2020, it’s “game over” for plain, vanilla string inverters, because price will no longer be the deciding factor, and string will be too rigid for utility-level mass deployment. Safety, reliability, longevity and performance of product, as well as, simplicity, flexibility and intelligence of solution will dominate in DG where Enphase is a contender.

Enphase’s 8th-generation IQ8 microinverter has undergone rigorous field-testing for more than a year now, and the offgrid version is now shipping. Consider that the IQ7 Heron-3 platform makes Enphase the most revenue, so the delay of the IQ8 “grid-agnostic” version should help Enphase make more money, plus it makes sense that management would not want to Osborne their golden goose prematurely. IQ8 will be a premium product for Enphase, so it still might make more sense for installers to build out 80-90% of systems with lower-costing IQ7’s now and add IQ8 later. With Encharge IQ8-integrated storage verified as capable of forming a microgrid, a few ACB’s might be all that is needed to provide true energy freedom to existing IQ customers.

The IQ8 storage features are significant, but it cannot be underestimated what “grid-agnostic” IQ8 will offer for the millions of existing “anti-islanding” solar PV systems out there. After polling tens of solar companies, it is quite evident that the “Long Tail” is anxiously awaiting IQ8. IQ8 will give the impetus for many to upgrade their solar systems to achieve microgrid capability. With Flex Mexico coming online this year, Q4-2019 for IQ8’s release in N.A. should be good timing considering it is the last full year of 30% tax credit. In preparation of the coming release, Enphase will have a presence at upcoming solar and microgrid events in the US (NA), Europe (EMEA), and Australia (APAC).

Enphase’s microinverters are truly the optimization of low-voltage, low-power domain, DC-to-AC conversion, and this results in the superior product longevity, better than string inverters could ever achieve; as panel wattages continue to increase, the value of the microinverter continues to rise, and that signals the death knell for the venerable string inverter. Enphase’s IQ microinverters should continue to gain marketshare every quarter in 2019. Their chief competitor, SolarEdge, cannot afford to drop prices since they have to 1) fund their diversification projects while maintaining blended pricing and 2) service their ballooning warranty (see below). SolarEdge new business has 0% margin with OpEx that equals revenue, dropping their income to 10% of revenue, which is about the same as Enphase; however, Enphase’s warranty settlements have stabilized since the M190 was the crux of their problems.

SolarEdge-Enphase Warranty Expense Settlement Trend

Enphase Q1 revenue guidance mimics Q4; they’re already sold out for Q1. SolarEdge guided 1-2% higher for Q1, and in their 10K, they had 1,737 full-time employees; in 2017, SolarEdge had 1,007 employees, so they’ve almost doubled in size but with only 50% revenue expansion. Enphase, on the other hand will have half the sales of SolarEdge in 2019 but with just a quarter of the employees; this means that with half the employees SolarEdge has, Enphase could produce the same revenue as SolarEdge, so that says a lot about the improvements at Enphase. Consider that Apple does not have the highest marketshare, and they’re certainly not in a cost-sensitive market, yet they are one of the most profitable companies in history. In the solar arena, consumers have a choice, and Enphase is becoming the Apple (AAPL) of that arena.

With regards to Solaredge, consider the difficulty of a foreign national trying to manage a recently-acquired Korean storage company like Kokam; the acquisition sort of throws LG Chem under the bus, upsetting one of the largest companies in Korea and possibly SunRun, their best partner, too. It’s doubtful RESU will continue forward with Kokam long-term. Albatrosses like these in the SolarEdge camp could translate into unicorns for Enphase. LG has a track record of choosing stable partners, hence their relationship with SolarEdge. Besides the tariffs, LG may have held off on IQ7 to see how Enphase would fare under new management; unlike Enphase’s financial situation in 2017 when ACM’s were first announced, Enphase is now much healthier with $106.2M cash. Clearly, Enphase has now proven to LG, as well as the rest of the world, that they are past the dark days of 2017, and can now be a formidable partner into the future.

SunPower’s ACM’s went from 0-90% of their resi portfolio in a year; the same was expected to happen with LG’s ACe. Although being the first Enphase partner to market an AC Module with IQ6+, the product is now EOL. However, LG’s Huntsville 500MW solar plant extension was just recently finished, so a resurrection of the NeON-2 ACe is possible. LG’s USA operations favor Enphase microinverters, especially considering SunPower’s move from SolarBridge which gave their product a 3% CEC efficiency boost.

Enphase’s partners are starting to evolve into 2 distinct camps, Enphase Energized™ solutions from SunPower mimicking Intel Inside™ from decades ago, and Enphase-branded solutions like Solaria’s PowerXT ACM’s with optional ACB storage. SunPower just released their new A-series, 66-cell NGT panels with IQ7A-66 micros, and they already have a relationship with Sonnen, so their branded solution is ideal for both SunPower and Enphase, albeit no name-brand recognition for Enphase. With LG, their Enphase partnership could become LG-branded since they have RESU storage and EnerVu. Likewise, Panasonic has Pika Energy, so they could go Panasonic-branded, and with Tesla (SolarCity) business plummeting, an Enphase partnership makes good sense for them to pair with their ACM’s. That leaves (JKS) Jinko Solar and LONGi who most likely would take Solaria’s Enphase-branded route. The Jinko Jacksonville 400MW plant just came online with 72-cell panels being produced; 60-cell panels should be following and then, Jinko HC-series Eagle AC Modules could arrive. LONGi is still expected to produce both 60- and 72-cell AC Modules. As these partnerships evolve, other entities will surely come onboard; even Tesla could pull a SunPower move to gain the extra efficiency and brand-appeal which Enphase’s IQ is now generating for SunPower, especially if they decide to shed SolarCity for cash.

Enphase could have financed more than tenfold in 2015 at $17 instead of what they did at $1.20 and $1.21 in 2016, as they came to the edge of the abyss. With investments by TJ Rodgers, John Doerr, and Isidoro Quiroga, and the entry of veteran Cypress management, Enphase regained footing and is now experiencing a major turnaround, booking their first-ever net-profit and stock market positive vote. If you consider the SolarBridge acquisition where Enphase had wisely fortified the balance sheet enough to where they were at ~$4.50, that demonstrates operational excellence; then in February, the decision was made to pay off the TCP loan; management probably saw that move as the safest route to be able to reach 10% operating income in 2019; the loan had been at 9.25% + LIBOR, so paying it off guaranteed a ~10% return, and with a phenomenal 35-day CCC last quarter, not much cash is needed now to maintain profitable operations going forward. Even with Enphase only firing on 3 out of 4 profitable top-line growth “levers”, analysts are estimating $410M at $0.38 EPS for 2019. All Enphase needs to do now is continue booking IQ7 sales and educating the world on how best to prepare for IQ8 when it bursts on the scene later this year.

Disclosure: I am/we are long ENPH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.


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