Good day, ladies and gentlemen, and welcome to the Enphase Energy's first quarter 2013 financial results conference call. At this time, all participants are in a listen only mode. Later, we'll have a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. David Niederman. You may begin.
Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's fiscal first 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 www.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 first quarter ended March 31st, 2013. If you would like a copy of the release, you can access it online at the company's website. During the course of this conference call, Enphase 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 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 the 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 its Form 10-K for the year ended December 31st, 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. Please note that the financial measures we use on this call are expressed on a non-GAAP basis, unless otherwise noted, and have been adjusted to exclude certain charges. We've provided reconciliations 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'd like to introduce Paul Nahi, Chief Executive Officer of Enphase Energy. Paul.
Thanks, David, welcome to everyone joining us for our first quarter 2013 earnings call. I'm going to start with an overview of our Q1 performance and provide some industry commentary. Kris will take us through the financials and next quarter guidance, then we'll go to Q&A. Looking at the financial results for the first quarter, which is a typically seasonally soft quarter, Enphase executed well with healthy revenue growth and gross margin expansion on a year-over-year basis. We also continue to demonstrate financial discipline by keeping operating expenses flat on a sequential basis. First quarter revenue came in at the upper end of our guidance at $45.6 million. This is an increase of 7% compared to the first quarter of 2012, but keep in mind that during that quarter, we benefited from the expiring Section 1603 tax grant program, which clouds the year-over-year comparison.
In the first quarter of 2012, we recorded approximately $9 million of revenue associated with Section 1603 purchases. Excluding this, our year-over-year top line growth is actually 36%. Gross margin for the first quarter was 27%, which is also in line with guidance and up significantly on a year-over-year basis. Over the past three years, we've demonstrated consistent gross margin expansion from roughly 8% in the first quarter of 2010 to current levels, which are approaching 30%. As a reminder, we've stated previously that there are multiple factors which impact gross margin, and the expansion will not necessarily be linear on a quarter-to-quarter basis, but should continue to trend upward over time. Our operating expense for the first quarter of 2013 was $20.4 million, the same level as the fourth quarter of 2012.
For the balance of the year, we'll continue to maintain operating expenses as flat as possible, while at the same time ensuring we make appropriate investments to fuel growth. This is key as we continue our path to profitability and sustainable positive cash flows. Looking at the first quarter from a financial performance standpoint, it was a very good start to 2013. Now, let's spend a few minutes discussing the current industry dynamics and their impact on Enphase. The global demand for solar continues to grow. In 2012, 30 gigawatts were installed worldwide, up approximately 10% from 2011. The industry continues to benefit from a decrease in module prices. The excess capacity in the industry has resulted in module prices declining from approximately $3 per watt only a couple of years ago to around $0.75 per watt today. Currently, we're seeing pricing stabilize as the module industry consolidates.
From a market perspective, industry analysts expect the global PV market to grow to approximately 33 gigawatts in 2013, with strong growth in the U.S., Japan, Latin America, the Middle East, and Africa, partially offset by declining markets in Germany and Italy. Let's turn for a moment to our activities in Europe. Our initial investments have enabled us to establish beachheads in France, Italy, and the U.K. to serve those markets. To more fully leverage these investments and pursue broader market opportunities, we have realigned our European organizations under a single managing director who will oversee execution and expansion that will better utilize existing resources and relationships. In this way, we can increase our market presence in Europe in an efficient and scalable way by leveraging existing partnerships, as well as establishing new local ones.
As an example, in March, we announced that we began shipping in Switzerland through existing strategic partnerships with large PV suppliers. While we're encouraged by our progress in the European region, we anticipate the solar markets there will continue to face headwinds for the balance of 2013 as their economies recover and they transition to a lower FIT environment. Emerging markets such as Asia Pacific, Latin America, and the Middle East are coming up as well. These unfolding opportunities will help stabilize the global solar industry. To grow organically, companies must win share in new markets, which in our opinion, will require being nimble, selecting appropriate timing to enter into the right markets, offering global products, and having cost-effective market entry strategies that serve these new customers.
To close on my 2013 industry overview, we're looking forward to an exciting year with lots of opportunities and challenges in our core markets in the U.S. and other countries. Enphase will be dedicated to further strengthening our industry-leading position. This is an exciting time to be in the solar industry, as always, we're ready to seize the challenge. We will continue to focus on and execute the key initiatives we believe are critical to our success, which 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 markets, seeking out new market opportunities and expanding our geographic footprint, and continuing to chart our path to profitability and sustainable positive cash flows.
These are milestones you can use to gauge our performance and progress, we'll be talking about them regularly. Looking further ahead, we progress through 2013 with optimism and are extremely bullish on the future of the solar industry. Inexpensive modules and new strategies that lower customer acquisition costs are creating a foundation for explosive growth as the cost of solar continues to decrease. New financing vehicles are taking solar mainstream and have made the choice to install solar motivated by economic considerations rather than just environmental responsibility. These factors have contributed to making solar PV the fastest-growing technology in the U.S. energy sector now and for the next several years. The market potential for solar is enormous. Illustratively, in the U.S. alone, there are approximately 250,000 solar homes.
Yet there are over 70 million owner-occupied homes in total, with projections of roughly 1 million new homes to be built in 2013. With the cost of solar coming down and new financing tools available to consumers, the proposition for installing solar is increasingly compelling. This is not just a U.S. phenomenon, but a global one. Escalating energy prices, along with an increasing awareness of the environmental impact of burning fossil fuels, will result in increasing global demand for alternative energy solutions, including solar. What is also exciting to me is the fact that advanced features, in addition to price, are becoming more important considerations in the decision-making process of the purchase of a solar system. Reliability, increased power generation, system performance, module-level monitoring for operations and maintenance, and the ability to provide data and analytics are beginning to influence purchase decisions. These features are core strengths of Enphase.
From inception, our vision has been to build intelligent, data-rich microinverter systems while applying a high-tech semiconductor business model. With over 3.3 million units in the field, we're seeing validation of the value proposition offered by Enphase's microinverter system. In summary, the future of the solar industry holds great promise for Enphase, and we believe we're in a position to be a clear winner when this promise manifests itself. With those comments, I'll turn it over to Kris to go over the financial results for the first quarter.
Thank you, Paul. First, I will start by providing some more detail on the financial results for the first quarter of 2013, I will turn to the business outlook for the second quarter. As a reminder, the financial measures that I'm going to provide are on a non-GAAP basis, unless otherwise noted. As Paul mentioned, total revenue for the first quarter was $45.6 million, which is at the high end of our revenue guidance of $43 million-$46 million. This is an increase of 7% year-over-year, if we normalize for the 1603 related revenue at the beginning of 2012, it is up 36% year-over-year. On a sequential basis, revenue was down 21% from the fourth quarter, which is in line with our normal seasonal pattern. During the first quarter of 2013, we shipped 315,000 microinverters or 68 megawatts.
Approximately 85% of the revenue was in the U.S. and 15% outside of the U.S., mainly in Canada, France, the Benelux, U.K., and Italy. This is an increase over the fourth quarter of 2012, where revenue outside of the U.S. was roughly 10% of total revenue. Recently, we have seen some improvements in those markets, the growth is starting to resume as those markets are stabilizing after the FIT reductions in 2012 and as we continue to gain market share in those countries. Gross margin in the first quarter was 27%, an improvement of 510 basis points compared to the 21.9% in the first quarter of 2012. The gross margin is down 100 basis points from our record gross margin in the fourth quarter of 2012. Mainly as a result of a reduction in volume during our seasonally slowest quarter of the year.
However, we continue to make good progress with our ongoing cost reduction efforts and experienced a relatively stable pricing environment for the Enphase microinverter systems during the first quarter of 2013. Operating expenses in the first quarter of 2013 were flat compared to the operating expenses in the fourth quarter of 2012, at $20.4 million, as we continue to maintain tight control on our operating expenses. R&D came in at $8.5 million, sales and marketing at $6.3 million, and G&A at $5.6 million. These non-GAAP operating expenses did not include $1.3 million in stock-based compensation expenses and $150,000 in severance costs. We ended the first quarter with 382 employees, which is the same level as at the end of 2012. Again, going forward, we will continue to focus on keeping our operating expenses as flat as possible and driving leverage in our business model.
For the first quarter of 2013, net loss was $8.7 million, or a loss of $0.21 per share. On a GAAP basis, the net loss was $10.4 million or $0.25 per share. Cash flow from operations during the first quarter of 2013 was, as expected, a negative $7 million, and net cash flow was negative $8.9 million, which is in line with normal seasonal trends. As a result, the company exited the quarter with a total cash balance of $36.4 million. We did not draw on our $66 million debt facilities, but we did repay approximately $600,000 on our existing term debts. Accounts receivable at the end of the first quarter of 2013 were $24.9 million or 49 days sales outstanding, slightly up from the 44 days last quarter.
The revenue for the first quarter was back-end loaded with a seasonally weak January and February, resulting in an increased DSO. Inventory turns are at six times, with inventory at the end of the first quarter at $22.3 million, slightly up from the $19.8 million at the end of the fourth quarter, as we prepare for the ramp of the business into the second quarter. Capital expenditures during the first quarter were $1.7 million, and depreciation and amortization was also $1.7 million. Now, I would like to turn to our guidance for the second quarter of 2013. After a seasonally slower first quarter, we expect strong sequential increase in our top line, with revenue for the second quarter to be in the range of $56 million-$60 million. At the midpoint of the guidance, this is up 27% sequentially.
Also, at the midpoint of the guidance, this is up 4% year-over-year. If we exclude approximately $19 million of 1603 related revenue during the second quarter of 2012, the midpoint of the guidance is up more than 50% on a year-over-year basis. To be fair, if there was no 1603 grant expiration, some of the $19 million revenue would have been recognized during the second quarter of 2012, but it's really hard to estimate the exact amounts. Regarding gross margin, we expect the gross margin to be within a range of 26%-28%. We also expect the non-GAAP operating expenses to be roughly flat compared to the first quarter. Now, I will open the line for questions.
Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, if you have a question, please press star then one. Our first question comes from Sanjay Shrestha from Lazard. Your line is open.
Great. Thank you. Good afternoon, guys. Great gross margin here. First, before I come to the gross margin, one big picture question in terms of what's happening in the industry, I guess. Paul, how do you think about this recent acquisition that happened, which seemed like a pretty high EBITDA multiple on 13, certainly suggesting the growth-type acquisition rather than really anything else? How do you see that changing the overall industry dynamics and, maybe even for the one that actually is in the process of being acquired, does that even potentially end up slowing their focus on microinverter and just even making it better for you guys? Can you talk about a bit, what's your expectation? What does it mean for the industry and for you guys?
Sure. I think it's probably best to start off by indicating that ABB's interest, a company the size and scale of ABB, their interest in solar, I think, is a validation that the solar industry is set to grow in a very big way, both domestically and internationally.
It takes companies like ABB to recognize this and validate it for the rest of the industry.
Indeed.
In reference to the multiples and the valuations that are being seen today as a result of that, I think I would leave that to investors to
Sure
to draw their own conclusions there.
No, no, that's fair.
I think it does validate and does recognize the potential for the solar market and for the companies that have the right business model
That can generate positive sustainable cash flows and generate profitability through the growth of this industry.
Okay. Any comment on what you think it probably means because these guys are going after the big-ticket item, and does this potentially end up giving you even a better opportunity on the microinverter side as they have to focus now on acquisition integration and things like that? Any sense there?
It could. It's very hard to predict the outcome of an acquisition. I think we've all seen them go well, and some go not so well.
Yeah.
I think importantly for Enphase, we are very focused on the execution of our current business model and our current plan. We've got new products in the pipeline that we are very excited about introducing, both on the hardware and the software side. We're continuing to expand both domestically and internationally.
Yeah.
I think our success is really very dependent on our ability to continue the quality of execution that we've demonstrated to date.
Okay. Fair enough. Two quick questions for me then, guys. One, in terms of the gross margin here in Q1, which is obviously pretty impressive, huge improvement year-over-year, and the sequential decline from Q4 to Q1, was that all related to pricing, or how should we think about that, right? So 100 basis points decline sequentially. Was there any more cost improvement versus what the pricing decline was, or did the cost per watt go down on a sequential basis? KT, can you comment on that a bit?
Sure. I will take that question here. We were definitely very pleased with the gross margin coming in at 27%, being down 100 basis points from our record gross margin.
Sure
which was 28% at the fourth quarter. The main driver for that 100 basis points drop was the much lower volume that we experienced in the first quarter being a seasonally softer quarter. From a pricing point of view, we really experienced relative stable pricing during the first quarter compared to the price level at the fourth quarter.
Perfect. Final question then for me, guys. In terms of Q2, you guys have given the guidance, right? For the second half 2013, how should we think about that as to the revenue ramp if any qualitative comment you can provide on that would be very helpful, market mix and how should we think about the second half 2013?
Sure. Well, Sanjay, as you know, we only guide to the current quarter.
Exactly.
What I would do is perhaps direct your attention towards our historical numbers, which definitely show an uptick in the Q3 and Q4 timeframe, and that is not unique to Enphase. That is symptomatic, I think, of the entire industry and represents the seasonality associated with weather and the ease of installation.
Okay. We should expect that this year as well. Okay. That's all I had. Great. Thank you so much, guys.
Thank you.
Thank you. Our next question comes from Vishal Shah from Deutsche Bank. Your line is open.
Yeah. Hi. Thanks for taking my question. Your second quarter gross margin guidance midpoint is flat, yet you're seeing nice volume growth. Is it all just because of some pricing change in the second quarter, or is there anything else going on?
That's basically correct. As you know, in 2012, we've experienced roughly 8%-10% price reduction as we pass on some of our cost reductions to our customer. Looking forward in 2013, there will be some price actions, including some of the actions that we already took in the second quarter. Again, given the price actions that we already took, we do expect the gross margins to come in in that 26%-28% gross margin level for the second quarter, which we're very pleased with that as well.
Okay. A similar 8%-10% price reduction for this year?
We don't provide any specific guidance on a full year basis. Historically, it has been around 8%-10%.
Okay. That's helpful. The mix of megawatts or revenues, international versus U.S., you think it's going to be the same sort of 85/15, or are you going to slowly start seeing the international mix improve to more like 20%-25%?
Well, clearly, we've seen it already improve from 10% last quarter to 15% this quarter. I would say that we're very early in our international expansion. As you know, we have offices in France, U.K., Italy, Australia, and we continue to expand into new countries. I think as far as the long-term trend is concerned, we would fully expect the percentage of rest-of-world sales to continue to increase.
Okay, great. That's helpful. One other question just on the OPEX front. You mentioned you're going to keep your OPEX flat, and you're talking about expansion internationally. How are you going to manage that? Are you trying to take some costs out in the U.S., or what are some of the other things that you're doing? What percentage of your OPEX is related to some of these international markets? Thank you.
Sure. I'll take the first part of that question. One of the things that we have just mentioned is that we are changing our European infrastructure to more of a Pan-European infrastructure to better leverage the existing resources we have. In the past, where we were more country-focused, we are more now regionally focused. This allows us to leverage the existing resources we have without materially increasing or affecting the OPEX, but allowing us to enter yet again more countries. We'll continue to exercise this strategy going forward in Europe, and in other parts of the world as well.
Yeah. From an OPEX point of view, our OPEX, U.S. versus international, reflects more or less the revenue split. That's pretty much in line with each other.
I'll just finish this out by saying that we have said it several times in the past, that we had used 2011, 2012 to build out a significant infrastructure, not just in the U.S., but globally. We are right now in the process of leveraging that infrastructure.
That's very helpful. Thank you so much.
Thank you. Our next question comes from Andrew Hughes from Bank of America. Your line is open.
Hi, guys, thanks for taking my question. Congrats on the quarter. One additional quick one on pricing. You mentioned, we've all seen the stabilization in module prices. I know you're passing some of the cost improvement along to your customers, are you seeing developers or distributors lean on you any more on the pricing front now that module prices have ceased the rate of decline that we're accustomed to seeing in 2012?
We're not seeing anything different now than we've seen before. I think just in general, all of the constituents of a solar system, whether it's the module provider, the BOS, the inverter, even the installer, has seen a trend towards lower pricing. In terms of the health of the industry, I think that's a very good thing. We continue to see what we have seen, nothing exceptional occurring, we fully expect to be able to meet the demand for a slow and nuanced reduction in ASPs over time.
Got you. Just one more. In the press release, you mentioned the extension of the Vivint partnership for another year, which is great. I was just wondering if you could talk generally about if that's a typical supplier relationship, how that works on a year-to-year contract, and just generally how those relationships are progressing in the U.S. and maybe abroad as well.
Without getting into the specifics of the Vivint deal, in general, there are a broad array of agreements that we have with multiple different installers and PPA and lease providers. Vivint is a fantastic customer, and we enjoy a very solid relationship with them. It's actually one where not only are they purchasing the microinverter itself, but they're actually leveraging the Enlighten software for O&M and for billing purposes also. We have more and more customers that are leveraging Enlighten and our software to further integrate into their business models, whether it's on the front end for installation, whether it's to help close a sale, or whether it's on the back end to support operations and maintenance.
Of course, we have, as I mentioned, a variety of different types of engagements, some more involving software than others, but I think the general value proposition of creating a simpler business model for the installer while providing more energy and reliability for the owner continues to resonate.
Great. That's it for me.
Thank you. Once again, if you have a question, please press star then one. Our next question comes from Pavel Molchanov from Raymond James. Your line is open.
Yeah, thanks for taking my question. Just first one on the competitive landscape. I think one of the earlier questions alluded to the recent M&A. Above and beyond that, any legacy players that you're seeing starting or accelerating shipment of microinverters and any startups that perhaps might be getting into the marketplace in a more meaningful way?
We haven't seen any significant change in the startup environment. While there are some companies out there, none are providing any significant competition. There are some legacy players who've been actually selling and marketing very aggressively a new product for them, a microinverter for them. There has been no real impact in the marketplace for us.
Okay. I guess as we look out into the second half of the year, given the diversification of your revenue mix, as you mentioned, into other geographies outside the U.S., are pricing strategies that you guys are following essentially on par with what you've traditionally done in the U.S., or do you have to sell at a discount or offer rebates to encourage adoption overseas?
No, our pricing strategy overseas is very similar to what we do and how we do it in the U.S. There's no fundamental change. Really what motivates adoption and what we've seen in the U.S., what we've seen in France, in Benelux, in multiple other regions, is really more about training. Training and getting people accustomed to doing business with a microinverter. Teaching them how the software can help them close a sale, showing them how the Enlighten software can help on the back end O&M, and then showing them what a microinverter means to their current operations and how it can save the installer money and build a more profitable and more efficient business. That's really where we spend most of our time as we enter new countries. We have been doing that for quite some time now and continue to do that.
Thanks. Just last question from me. In 2013, will there be a new generation rolling out?
We have indicated that we are going to be introducing our fourth-generation product in 2014. We're actually very excited about the launch. It's a brilliant new product. In addition to that, we will be introducing new software in 2013. Of course, our fifth-generation is up and running in the lab, is on roofs, and it'll be introduced sometime after that. I think what you're seeing is a very steady and consistent investment in research and development to ensure that Enphase always has the latest, the greatest microinverter technology on the hardware front and software front, as we're going to see more and more entrants try to compete in this space.
All right. Appreciate it, guys.
Thank you. Our next question comes from Colin Rusch from Northland Capital. Your line is open.
Hey, guys. Can you talk a little bit about the impact of that new product on demand in the second quarter? Are you seeing any folks who are waiting for the new product until the third or fourth quarter to make purchase decisions?
Sure. This is actually, obviously, as a 4th-generation product, this is something we've done in the past, which is to manage the introduction of a new product, while we're currently selling an existing generation product. I think we understand what it takes. We know how to manage the process of introducing a new product. We do not believe that the introduction of our 4th-generation product will adversely affect the sales of our 3rd-generation product. Clearly, the two will coexist for some time, and we're managing that, and developing plans for that as we speak. We don't expect the transition to be sudden or dramatic, but we'll be rolling out the new product in conjunction with the old, and then managing that transition over several quarters.
Okay, great. Just on the competitive front, obviously Power-One's warranty is different than what you've seen. Are you having to work with any sort of rebates or manage expectations around a warranty at all right now, as folks are making purchase decisions and choosing between the two products?
If I understand your question correctly, Colin, I think the answer is no, we're not doing anything different, as a result of anybody else's competitive products. Our warranty is a reflection of the quality we've built into the product, a quality that's taken us five years of building and selling microinverters to develop. We believe that's a very important part of our value proposition, and we'll continue to emphasize it. At the same time, we think that as we move forward, the warranty, while an important element of the overall value proposition, will be just a small portion of the total system value, which includes the quality of the microinverter itself and all the system-level software.
Right. To be implemented. Is there any sort of remaining overhang out there?
Colin, I'm sorry, you broke up during the first part of your question. Could you repeat it, please?
Sure. Are you seeing any overhang from the 1603 buy-ins from last year? Is there any remaining inventory out in the market that still needs to be worked through?
There is still some 1603-related inventory out there. Probably more than half has been sold through. Our customers continue to use those 1603 units. They blend them in with new purchases that they make, and we expect that process to continue for the next couple of quarters, maybe even the next, whatever, four, six quarters out there.
Perfect. Thanks so much, guys.
Thank you. I show no further questions and would like to turn the conference back to Mr. Paul Nahi for closing remarks.
Thank you. We're off to a great start for 2013. With the close of the first quarter, we now have five quarters in the books as a public company. During this time, we've established a track record of executing our strategy and delivering results as we strive to grow the company, provide industry-leading products and services, and create shareholder value. Thanks, everyone, for joining us today, and we look forward to speaking with you again next quarter.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect.