Enphase Energy Inc (ENPH) reported second quarter earnings on August 8th. Revenues and gross margins were below the midpoint of management’s forecasts at $74.7 and 18.1 % respectively. Unrestricted cash at June 30th was $20.95 million (net of $10 million in restricted cash) but that was the result of ENPH slashing its CapEx, Inventory and R&D in a desperate attempt to conserve cash (see below). The forecast for Q3 was disappointing with the midpoint of the revenue forecast at $76 (same as Q1) and a gross margin range of 18% to 21% (up slightly from Q1’s range of 17% to 20%). The financial situation of ENPH continues to deteriorate and the Q3 forecast means that ENPH still needs to raise significant capital to survive beyond Q4. This is a brief overview of the results. I will update my model in a later article.
Paul Nahi announced his resignation on the conference call after discussing Q2 earnings. It is always a red flag when the CEO of a financially troubled company quits. There are a number of possible reasons for his resignation. One is that Rogers and Doerr were disappointed with the results and the Q3 forecast and they want to bring in a new CEO before either contributing more of their own capital or going out to the market to raise more capital. ENPH needs to demonstrate that it can grow revenue and breakeven on a Cash Flow From Operations basis. Q3 estimates suggest that ENPH will fall $5 to 6 million short of that goal before additional Note fees due in July ($880K), CapEx (unlikely to stay at near $0 for another quarter), and cash outlays on previously expensed restructuring costs.
Cash Balance @ June 30th
For a financially troubled company, this is the most important number reported. At June 30th, ENPH’s unrestricted cash (net of the $10 million securing the $50 million in Notes outstanding) was $20.95 million, an increase of $1 million from Q1’s unrestricted cash of $19.95. After adjusting for non cash expenses, ENPH’s cash loss was approximately ($5.25) million for Q2, a difference of almost $6.25 million. Rather than decrease quarter to quarter, ENPH had a slight increase in cash because it slashed (or burned off) inventory by $13 million from Q1 to Q2 in a desperate attempt to maximize cash during the quarter. In addition to burning off its inventory, ENPH reduced its CapEx from $3.47 million in Q1 to $49k in Q2.
Burning off Inventory and slashing CapEx to nothing are sensible steps for a financially troubled company since it buys as much time as possible to turn the company around. Between those two measures, ENPH saved $16.5 million in cash during Q2. The Company ended the quarter with $20.95 million in unrestricted cash, so if it had not taken these steps, its discretionary cash would have been approximately $4.4 million. But these cash management strategies are not sustainable over more than a quarter or two. ENPH literally cannot slash CapEx any further during Q3. It has to be questioned whether ENPH can keep it at $0 for another quarter without damaging the company. At $20 million in inventory on a quarterly cost of sales figure of $61.15 million (obviously this figure includes labor and overhead), ENPH has probably cut inventory as far as it can without impacting production.
ENPH has enough unrestricted cash to survive well into Q4 2017, when it will have another bite at the apple to demonstrate it can grow revenues. The disappointing forecast indicates that ENPH will suffer additional cash earnings losses during Q3 since revenue and margins are forecast to be flat as are cash expenses (ENPH is currently forecasting a midrange of cash expenses for Q3 of $17.5 million compared with $17.775 million for Q2). It will not have the inventory burn off card to play again.
Just a quick point on R&D expenses. ENPH reduced R&D expenses by 17% from Q1 to Q2 2017 and by almost 40% year over year. Probably not a great idea over the intermediate term (12 to 18 months) for a company that depends on innovation to remain competitive in a hyper competitive sector.
I will update my model in my next article. Briefly, I forecasted unrestricted cash at $3.26 million (adding back the Note fee due in July) at a $75 million in revenue run rate for Q2. My model assumed $3.5 million in CapEx and did not anticipate an inventory drawdown of $13 million. Adjusting for these two items, the unrestricted cash would have been $19.7 million. There were other items within the model where I was a bit high and a bit low but they essentially washed out.
ENPH’s was forced to resort to aggressive cash management techniques during Q2 to maximize its cash at quarter end, but it only increased unrestricted cash by $1 million from Q1 to Q2. These techniques will not be available to ENPH during Q3, so its unrestricted cash will resume its downward trend. ENPH has one last bite at the apple during Q4 to grow revenues and try to reach breakeven on a Cash Flow From Operations basis. It looks unlikely at this point.
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