After a dozen years, Enphase Energy could be on the brink of making money

For eager technology investors who paid $6 a share for nearly 9 million shares of Enphase Energy stock when the company went public in March 2012 and held on, it has been a long, agonizing six years. Last week the company’s shares traded on NASDAQ for less than $4, down a third from the IPO price.

In the company’s recent fourth quarter, based on the earnings report filed Feb. 27, it squeaked by with a $2.1 million loss. The company had about $29 million of cash on hand to fund operations.

The share-price trajectory has been wincing for long-term investors, who saw prices climb to a rooftop peak of almost $17 in Sept. 2014 then tumble to less than 80 cents in summer 2017 before recovering to current levels.

Profitability has eluded the Petaluma-based energy company that makes micro-inverters which attach to the back of individual solar panels to turn their direct current into alternating current - the kind used by most households and businesses. Enphase had full-year 2017 revenue of $286 million, down some 11 percent from 2016 revenue of $323 million.

Enphase endured two major rounds of sharp layoffs from nearly 500 positions to current staffing at 350.

Last year, Enphase Energy’s longtime CEO Paul Nahi resigned. Nahi took Enphase from its early days to revenue of nearly $300 million a year.

Nahi was replaced in September by Badri Kothandaraman. North Bay Business Journal interviewed Kothandaraman six months after he took the reins. Kathandaraman came to Enphase after Thurman John Rodgers plunked $5 million into Enphase stock in January 2017.

Rodgers, who earned a Ph.D. in electrical engineering at Stanford University, innovated with silicon chips, founded Cypress Semiconductor in San Jose in 1982 and ran it until he was ousted by its board in 2016. Cypress had 2017 revenue of about $2.3 billion. Since 2016 Rodgers has battled as a shareholder to resist Chinese equity control of the company he launched. Kothandaraman worked at Cypress Semiconductor from 1995 to 2016.

“I worked with him for a long time,” Kothandaraman said of Rodgers. “He doesn’t make emotional decisions. He gives people a long runway.” Even if company leaders falter, “as long as there’s understanding why the results are bad and a clear path to fix them going forward, that’s what he wants,” Kothandaraman said.

“The business is becoming a lot more global than local,” Kothandaraman said. Enphase sales went from 90 percent in North America to 70 percent. Most international growth for Enphase is in Europe and India, where Kothandaraman placed a research facility in 2017. Germany and Austria present growth opportunities for Enphase in Europe.

“India solar is growing very fast,” he said. “They want to be 40 gigawatts in the commercial and industrial market by 2022. That’s huge.” Now India’s installed solar capacity is below 10 gigawatts, Kothandaraman said. Most Enphase revenue from India so far has come from commercial and industrial rooftop installations.

“We expect to start seeing residential,” he said. “Where Enphases can win is in making high-performance micro-inverters that are suited for India’s harsh and dusty conditions,” and to withstand the country’s five-month monsoon season.

Germany has about 40 gigawatts of installed solar capacity, but the country sees little sunlight during winter. India is “the right place for us to set up an office,” he said, where about 50 Enphase employees work.

Enphase micro-inverters attach to individual solar panels. If shading kills output of one panel, the Enphase micro-inverter shuts off that panel’s functioning in the rooftop array. Inverters with traditional technology - string inverters - typically cannot isolate a failing panel unless equipped with optimizer technology.

Enphase competes with SolarEdge Technologies, based in Israel and with U.S. offices in Fremont, which has revenue nearly $600 million. SolarEdge makes string inverters with optimizer technology, used with panels wired in series and with breakers for safety.

With Enphase micro-inverters attached to solar panels, rooftop energy produced can be changed from direct current to alternating current immediately, adding a safety factor to the array, Kothandaraman said. The AC output allows panels to be wired in parallel, which can be safer, he said.

As Enphase refines its technology, it expects to shrink the size of each micro-inverter to the point where it can fit inside the junction box on the back of a solar module, Kothandaraman said. “We will be selling to the panel maker,” he said. “Everybody will be selling an AC panel - very, very safe.”

The seventh generation of Enphase Energy micro-inverter is about 20 percent smaller than generation six. Each micro-inverter has about 300 components. “We would like to reduce the number of components and the size,” he said. “We are going more and more toward semiconductor technology.”

The next generation of Enphase micro-inverters will manage independent electricity generation from panels using batteries or with an intertie to the power grid. Independence will be highly useful in countries such as India, where the grid is unreliable, or in Puerto Rico, where parts of the grid remain down after hurricane damage. “If the grid is not available, it can function anyway,” Kothandaraman said. Africa and South America also have large areas with no grid.

The company also sells a micro-inverter-equipped battery-storage pack that can be used to create independent energy systems. “When we think about unplugging homes from the grid, solar plus storage will be a central element of our strategy,” he said.

About five years after its 2006 founding, Enphase struggled with quality problems in its micro-inverters. “We didn’t get our act together on quality at that time,” Kothandaraman said. “What we learned from that is unbelievable,” pushing further into quality.

The most difficult aspect of instilling quality into a company is cultural, Kothandaraman said. “The CEO has to prioritize quality ahead of revenue,” refusing to ship products that don’t meet stringent quality standards. “We need to understand our failures,” he said. “That is the kind of thinking we’re trying to get into our employees. It’s a process - root-cause corrective action.”

Enphase measures quality in part by the number of returns from customers. “We have a weekly dashboard that we monitor,” Kothandaraman said. “Out of a million units we ship, we get back about 500,” he said, a rate of about one failure out of 2,000. “That’s a great number,” he said. “But why cannot we get it down to 5? Almost all failures are supplier-related. We are dealing with 1,000 suppliers. We have zero tolerance. Something is wrong, shut them down. Stop buying today. That’s part of containment,” he said.

“The name of the game for us is consistent profitability,” said Kothandaraman. He recently bought 40,000 shares of Enphase Energy, and has a total of about 80,000 shares.

Kothandaraman seeks 30 percent gross margin on micro-inverters, 20 percent operating expenses and 10 percent profits by the end of 2018. “We are on track to do that,” he said. “Business exists to make money. That’s what we’re trying to do in 2018, become consistently profitable.”

James Dunn covers technology, ?biotech, law, the food industry, and banking and finance. Reach him at: james.dunn@busjrnl.com or 707-521-4257.