IPO Look: Enphase

Based in Petaluma, California, Enphase Energy (proposed ENPH) scheduled an $80 million IPO with a market capitalization of $375 million at a price range mid-point of $11 for Friday, March 30, 2012. Managers: Morgan Stanley; BofA; Deutsche.Note: as this went to press ENPH cut the mid-point of its price range 40% to $6.50. Price range is now $6-$7.

ENPH is one of nine new IPOs scheduled for the week of March 26. For a summary see the IPO Calendar.

SUMMARY
ENPH developed a semiconductor 'inverter' based approach to converting direct current produced from solar energy devices to alternating current, used to distribute electricity to homes & most businesses.

ENPH is currently an industry leader but is not making money, and doesn't expect to make money in 2012.

ENPH was founded in 2006 and to far has pretty much had its market to itself. However, competition is coming.

SMA Solar Technology AG, Power-One (PWER) and SunPower (SPWR) - leading inverter vendors serving the residential and small commercial inverter markets - are expected to introduce microinverter products in 2012. In addition, several new entrants to the microinverter market, including some of ENPH's OEM customers and partners, have recently announced plans to ship or have already shipped products.

Even though the market for solar power is projected to increase going forward, it ran into a bump in 2011. Because a most solar power funding is based on government sources, and because governments are running low on resources, future growth of the solar market is not as bright as it was several years ago.

It appears that ENPH had a market window of opportunity and may not have gotten through it time to profitability.

CONCLUSION
ENPH is generating admirable top line quarterly revenue increases, gross profit is increasing but even so EHPN has not yet had a breakeven quarter.

Therefore, given the industry trends noted above, we would pass on the ENPH IPO.

BUSINESS
ENPH has pioneered a fundamentally new inverter technology for the solar industry that increases energy production, simplifies design and installation, improves system uptime and reliability, reduces fire safety risk and provides a platform for intelligent energy management.

To date, the solar industry has relied on the traditional central inverter approach to power conversion that has largely remained unchanged for the past two decades.

ENPH has built from the ground up a semiconductor-based microinverter system that converts energy at the individual solar module level and, combined with proprietary networking and software technologies, provides advanced energy monitoring and control.

ENPH's unique approach is vastly different than the central inverter approach that can only convert energy of the entire array of solar modules from a single high voltage electrical unit, and lacks intelligence about the energy producing capacity of the solar array.

To date the solar industry has relied on the traditional central inverter approach that has largely remained unchanged for the past two decades.

MARKET GROWTH
In 2010, 99% of the gigawatts ("GW") volume of solar inverters deployed were traditional central inverters. The worldwide market for inverter technology in 2011 was almost 27 GW, or $6.8 billion, and the market is expected to grow to 46 GW, or $10.1 billion, by 2015, according to IMS Research.

MARKET ISSUES
The solar photo voltaic ("PV") installation market grew strongly in 2011 and new installations reached an estimated 25 GW, up 39% from 18 GW in 2010 according to IHS iSuppli.

However, several European countries experienced a slowdown in new installations in 2011, as national governments revised solar tariffs and subsidies. This slowdown was offset by strong growth in other regions, including the United States.

Given current budget difficulties, several governments are expected to revise solar tariffs and reduce support for solar PV installations in 2012. In addition, oversupply for solar modules and increasing competition from low cost Chinese module manufacturers weigh on the sector. Some of these challenges are expected to continue in 2012, with global solar PV installations expected to decline 7% to 23 GW, according to IHS iSuppli.

Beyond 2012, growth is expected to remain robust with new solar installations expected to reach 48 GW by 2015, according to IHS iSuppli.

DC to AC INVERTER INDUSTRY
(direct current to alternating current)
Since the beginning of solar photo voltaic (PV) industry, traditional central inverters have continued to use high-voltage analog technologies to convert DC to AC requiring complex design and string calculations to ensure safe and reliable system operation.

Historically, traditional central inverters have been the only inverter technology used for solar PV installations. In an installation consisting of a traditional central inverter, the solar PV modules are connected in series strings.

In a large installation, there are multiple series strings connected in parallel. The aggregated voltage from each of these strings is then fed into a large central inverter. The central inverter performs two key functions: (i) it establishes a maximum power point tracking, or MPPT, operating point for the system and (ii) converts power from high-voltage DC to grid-complaint AC.

PRODUCT BENEFITS
ENPH delivers microinverter technology for the solar industry that increases energy production, simplifies design and installation, improves system uptime and reliability, reduces fire safety risk and provides a platform for intelligent energy management.

ENPH is the market leader in the microinverter category and has grown rapidly since its first commercial shipment in mid-2008, with over 1,550,000 microinverter units sold as of December 31, 2011, representing over an estimated 40,000 system installations.

ENPH was the first company to commercially ship microinverter systems in volume. ENPH products have been installed in all 50 U.S. states and eight Canadian provinces, and ENPH is rapidly taking market share from traditional central inverter manufacturers.

HISTORY
ENPH was founded in March 2006 and began generating revenue in June 2008. From inception to December 31, 2011, ENPH raised over $115.2 million in net proceeds from the private placements of convertible preferred stock and convertible debt.

Product development and sales and marketing milestones
• From inception to the second quarter of fiscal 2008, ENPH's efforts focused on developing a complete microinverter solution for the solar PV industry;
• In the second quarter of 2008, ENPH began selling its first generation microinverter along with our Envoy communications gateway device and our Enlighten web-based monitoring service;
• In the first half of 2009, ENPH focused on the development of second generation microinverter and migrated contract manufacturing to Flextronics, which provided ENPH access to commercial scale manufacturing and logistics services;
• In the third quarter of 2009, ENPH began selling a second generation microinverter in volume;
• In 2010, ENPH invested in the sales and marketing organization to increase market penetration, continued design innovations for second generation microinverter, sold more than 400,000 units and commenced development of third generation microinverter;
• In the second quarter of 2011, ENPH began selling a third generation microinverter;
• In the fourth quarter of 2011, ENPH began selling products in France, Italy and the Benelux region; and
• During 2011, sold more than 1,000,000 microinverters.

DISTRIBUTION
ENPH sells microinverter systems primarily to distributors who resell them to solar installers. Over 3,400 installers in North America have installed ENPH microinverters through December 31, 2011, and this number is increasing by 100 new installers per month. ENPH also sells directly to large installers and through OEMs and strategic partners.

A substantial majority of revenue has been generated by sales within the United States. Sales to customers in Canada commenced in 2009 and accounted for approximately 3%, 13% and 12% of net revenues in 2009, 2010 and 2011, respectively.

ENPH anticipates that the majority of 2012 revenues will continue to come from the United States, with the balance from Canada and Europe.

EXPECTATIONS
ENPH expects to incur a net loss in 2012 and may continue to incur net losses in future years as it continues to invest substantial resources to support the growth of the business.

However, over time, ENPH believes the significant investments it is making to scale the business will allow ENPH to achieve an increasingly efficient operating cost structure.

ENPH believes that this, combined with the differentiated value proposition of its microinverter solution including product cost reductions through further semiconductor integration, will allow ENPH to improve gross profit and reduce operating expenses as a percentage of revenue.

MANUFACTURING
ENPH outsources its manufacturing to third-party manufacturers and negotiates product pricing on a quarterly basis. In addition, a contract manufacturer also serves as the logistics provider by warehousing and delivering products in the United States and Canada.

ENPH believes its contract manufacturing partners have sufficient production capacity to meet the growing demand for ENPH products for the foreseeable future. However, shortages in the supply of certain key raw materials could adversely affect ENPH's ability to meet customer demand for our products.

WEB-BASED MANAGEMENT REPLACES
Tradition big-box Direct Current to Alternating Current converter
ENPH's microinverter solution brings a system-based, high technology approach to solar energy generation leveraging ENPH's design expertise across power electronics, semiconductors, networking, and embedded and web-based software technologies.

ENPH's microinverter system consists of the following hardware and service components: Enphase microinverter; Envoy communications gateway; and Enlighten web-based software service. Since inception approximately 99% of ENPH's net revenues have been derived from the sale of hardware products.

INTELLECTUAL PROPERTY
As of March 1, 2012, ENPH had 15 issued U.S. patents, two issued non-U.S. patents, 52 pending U.S. patent applications and 111 pending non-U.S. counterpart patent applications.

EMPLOYEES
313 as of March 1, 2012.

COMPETITION
Currently, competitors in the inverter market range from large, international companies such as Solar Technology AG, Fronius International GmbH and Power-One, Inc. to emerging companies offering alternative microinverter or other solar electronics products.

ENPH principally competes with large, incumbent solar inverter companies because traditional central inverter solutions can be used as alternatives to ENPH's microinverter solution.

ENPH believes, however, that its microinverter solutions offer significant advantages and competitive differentiation relative to traditional central inverter technology, even when traditional central inverter technology is supplemented by DC-to-DC optimizers.

SMA Solar Technology AG, Power-One and SunPower , leading inverter vendors serving the residential and small commercial inverter markets, are expected to introduce microinverter products in 2012. In addition, several new entrants to the microinverter market, including some of ENPH's OEM customers and partners, have recently announced plans to ship or have already shipped products.

USE OF PROCEEDS
ENPH expects to net $71 million from the IPO at the range mid-point. IPO funds are allocated primarily for general corporate purposes.