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. 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. Sir, you may begin.
Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's fiscal Q1 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 atwww.enphaseenergy.com. With me on today's call are Paul Naughey, Enphase Energy's Chief Executive Officer and Chris Senesel, Chief Financial Officer. After the market closed today, Enphase issued a press release announcing the results for its fiscal Q1 ended March 31, 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 entirely 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 the company described in its press release of today, especially under the section entitled Forward Looking Statements as well as those detailed in the section entitled Factors of the company's reports on its Form 10 ks 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. Please note that 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 Naughey, Chief Executive Officer of Enphase Energy. Paul?
Thanks, David, and welcome to everyone joining us for our Q1 2013 earnings call. I'm going to start with an overview of our Q1 performance and provide some industry commentary. Chris will take us through the financials and next quarter guidance and then we'll go to Q and A. Looking at the financial results for the Q1, 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.
1st quarter revenue came in at the upper end of our guidance at $45,600,000 This is an increase of 7% compared to the Q1 of 2012, but keep in mind that during that quarter we benefited from the expiring 1603 tax grant program, which clouds the year over year comparison. In the Q1 of 2012, we recorded approximately $9,000,000 of revenue associated with 16 0 3 purchases. Excluding this, our year over year top line growth is actually 36%. Gross margin for the Q1 was 27%, which is also in line with guidance and up significantly on a year over year basis. Over the past 3 years, we've demonstrated consistent gross margin expansion from roughly 8% in the Q1 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 Q1 of 2013 was $20,400,000 the same level as the Q4 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. So looking at the Q1 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 United States, Japan, Latin America, the Middle East and Africa, partially offset by declining markets in Germany and Italy. So 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 and 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 and we'll be talking about them regularly.
Looking further ahead, we progressed 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 70,000,000 owner occupied homes in total with projections of roughly 1,000,000 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. And this is not just a U. S. Phenomena, 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.
Now, with over 3,300,000 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. Now with those comments, I'll turn it over to Chris to go over the financial results for the Q1.
Thank you, Paul. First, I will start by providing some more detail on the financial results for the Q1 of 2013 and then I will turn to the business outlook for the Q2. 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 Q1 was $45,600,000 which is at the high end of our revenue guidance of $43,000,000 to $46,000,000 This is an increase of 7% year over year, but 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 4th quarter, which is in line with our normal seasonal pattern.
During the Q1 of 2013, we shipped 315,000 microinverters or 68 Megawatts. Approximately 85% of the revenue was in the United States and 15% outside of the United States, mainly in Canada, France, the Benelux, UK and Italy. This is an increase over the Q4 of 2012 where revenue outside of the U. S. Was roughly 10% of total revenue.
Recently, we have seen some improvements in those markets and the growth is starting to resume as those markets are stabilizing after the faith reductions in 2012 and as we continue to gain market share in those countries. Gross margin in the Q1 was 27%, an improvement of 510 basis points compared to the 21.9% in the Q1 of 2012. The gross margin is down 100 basis points from our record gross margin in the Q4 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 relative stable pricing environment for the Enphase microinverter systems during the Q1 of 2013. Operating expenses in the Q1 of 2013 were flat compared to the operating expenses in the Q4 of 2012 at $20,400,000 as we continue to maintain tight control on our operating expenses.
R and D came in at $8,500,000 sales and marketing at $6,300,000 and G and A at $5,600,000 These non GAAP operating expenses did not include $1,300,000 in stock based compensation expenses and $150,000 in severance costs. We ended the Q1 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 Q1 of 2013, net loss was $8,700,000 or a loss of $0.21 per share. On a GAAP basis, the net loss was $10,400,000 or $0.25 per share.
Cash flow from operations during the Q1 of 2013 was as expected a negative $7,000,000 and net cash flow was negative $8,900,000 which is in line with normal seasonal trends. As a result, the company exited the quarter with a total cash balance of $36,400,000 We did not draw on our $66,000,000 debt facilities, but we did repay approximately $600,000 on our existing term debt. Accounts receivable at the end of the Q1 of 2013 were $24,900,000 or 49 days sales outstanding, slightly up from the 44 days last quarter. The revenue for the Q1 was back end loaded with a seasonally weak January February resulting in an increased DSO. Inventory turns are at 6 times with inventory at the end of the Q1 at $22,300,000 slightly up from the $19,800,000 at the end of the 4th quarter as we prepare for the ramp of the business into the 2nd quarter.
Capital expenditures during the Q1 were $1,700,000 and depreciation and amortization was also $1,700,000 Now I would like to turn to our guidance for the Q2 of 2013. After a seasonally slower Q1, we expect strong sequential increase in our top line with revenue for the Q2 to be in the range of $56,000,000 to $60,000,000 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, but if we exclude approximately $19,000,000 of 1603 related revenue during the Q2 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 expiration, some of the $19,000,000 revenue would have been recognized during the Q2 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% to 28%.
We also expect the non GAAP operating expenses to be roughly flat compared to the Q1. And now I will open the line for questions.
And our first question comes from Sanjay Srestha 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.
So, Paul, how do you sort of think about this recent acquisition that happened, which seemed like a pretty high EBITDA multiple on 13, certainly you're 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 a 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.
Indicating that the ABB's interest accompany 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. And it takes companies like ABB to sort of 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 draw their own conclusions there. But I think it does validate and does recognize the potential for the solar market and for the companies that have the right business models that can generate positive sustainable cash flows and generate profitability throughout the through the growth of this district.
Okay. So do you any comment on what do you think it probably means because these guys are going off with a big ticket item and does this sort of potentially end up giving you even a better opportunity on the microinverter side as they sort of 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. And 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. 1, 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 declined 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? And KK, can you comment on that a bit?
Sure. And 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. Was 28% at the 4th quarter. And the main driver for that 100 basis point drop was the much lower volume that we experienced in the Q1 being a seasonally softer quarter.
So from a pricing point of view, we really experienced relative stable pricing during the Q1 compared to the price level at the 4th quarter. Perfect. Final question then for me guys. So in terms of Q2,
you guys have given the guidance, right? But for the second half 2013, how should we think about that as to sort of the revenue ramp? And so if any qualitative comment you can provide that would be very helpful market mix and how should we sort of think about the second half twenty thirteen?
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. So 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.
Yes. Hi. Thanks for taking my question. Your second quarter gross margin guidance midpoint is flat, yet you're seeing nice volume growth. So 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% to 10% price reduction as we pass on some of our cost reductions to our customer. And looking forward in 2013, there will be some price actions, including some of the actions that we already took in the Q2. But again, given the price actions that we already took, we do expect the gross margins to come in, in that 26% to 28% gross margin level for the Q2, which we're very pleased with that as well.
Okay. So a similar eight to 10% price reduction for this year?
[SPEAKER JEAN FRANCOIS
PRUNEAU:] We don't provide any specific guidance on a full year basis. But historically it has been around 8% to 10%.
Okay. That's helpful. And the mix of megawatts or what are 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. And 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.
So 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. And one other question just on the OpEx front. You mentioned you're going to keep your OpEx flat. You're talking about expansion internationally.
So 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? And what percentage of your OpEx is related to some of these international markets?
Thank you.
Sure. So 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. So 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.
Yes. And from an OpEx point of view, our OpEx U. S. Versus international reflects more or less the revenue split. So 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, and thanks for taking my question. Congrats on the quarter. One additional quick one on pricing. You mentioned and we've all seen the stabilization in module prices. I know you're passing some of the cost improvement along to your customers, but 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. Continue to see what we have seen, nothing exceptional occurring and we fully expect to be able to meet the demand for a slow and nuanced reduction in ASPs over time. Got you.
And just one more on 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 how those 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?
So the without getting into the specifics of the Vivint deal, sort of 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 and M and the Enlighten software for O and M and for billing purposes also. We have more and more customers that are leveraging Enlighten in 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. And 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. Our next question comes from Pavel Molchanov from Raymond James. Your line is open.
Thanks for taking my question. Just first one on the competitive landscape.
I think
one of the earlier
questions alluded to the recent M and A.
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 light?
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. But there has been no real impact in the marketplace for us.
Okay. And I guess as we look at 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. We're not 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 and 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 Enlightened software can help on the back end O and M, and then showing them what it means 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. And then just last question for me. In 2013, 13, will there be a new generation rolling out?
We have indicated that we are going to be introducing our 4th 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. And of course, our 5th generation is up and running in the lab, it's on roofs and it will 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 Interface 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 waiting for new products until the 3rd or Q4 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 2 will coexist for some time and we're managing that and developing plans for that as we speak. But we don't so 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. And then just on the competitive front, obviously, PowerOne's warranty is different than what you've seen. Are you having to work with any sort of rebates or manage expectations around warranty at all right now as folks are making purchase decisions and choosing between the two products?
If I understand you correctly 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, quality that's taken us 5 years of building and selling microinverters to develop, but 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, it's not 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. And 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 buying 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 like the next whatever 4, 6 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 Nahee for closing remarks.
Thank you. So we're off to a great start for 2013. With the close of the Q1, we now have 5 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 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