Enphase eyes more M&A to build business beyond solar, CEO says

Enphase Energy Inc., which generated most of its record first-quarter revenues from its miniature solar panel power electronics, plans to continue exploring opportunities to expand its business through M&A, according to President and CEO Badri Kothandaraman.

"What we are continuously looking for is acquisitions that basically double down on our energy management strategy," Kothandaraman said in an interview following the company's April 26 earnings call. "What I see is I manage everything for the homeowner."

Beyond onsite solar, that includes managing battery storage and electric vehicle charging, areas where Enphase is increasingly active after acquiring EV charging company ClipperCreek Inc. and software specialists 365 Pronto Inc. and Sofdesk Inc. in 2021.

The California-based company is also eyeing "how can we get continuously better on batteries," the CEO said.

Enphase, which expects to supply between 130 MWh and 140 MWh of lithium-ion battery storage in the second quarter, up from 120 MWh in the first quarter, has so far leaned on lithium-iron-phosphate technology, allowing it to navigate around recent price hikes in materials that affect lithium-ion batteries relying on nickel and cobalt.

"So what is the next bet that I can take? Is [the] sodium-ion battery working? We are looking at that," Kothandaraman said, echoing broad interest in alternatives to lithium-ion batteries among investors and across the power sector.

"We also don't have an EV charger for Europe. How can I accelerate that? We also don't have a networking strategy outside the home. How can I accelerate that?" the executive added.

Enphase's M&A ambitions are buoyed by a strong position of nearly $1.1 billion in cash, cash equivalents and marketable securities entering the second quarter, though that is down $425.5 million from a year earlier due to prior acquisitions, investments, stock repurchases and other uses. "It's hard for me to say what company we will buy," Kothandaraman said, pointing to the likelihood that Enphase will focus on smaller enterprises and "mold them the way we want to."

'Massive uncertainty'

On the earnings call with investment analysts, the Enphase CEO flagged "massive uncertainty in the marketplace" in the wake of the U.S. Commerce Department's decision in late March to investigate whether certain solar module and cell producers used factories in Southeast Asia to navigate around U.S. tariffs on imports from China.

But Kothandaraman does not expect the residential solar business to bear the brunt of that uncertainty.

"What are the module suppliers going to do? They're going to prioritize their margins first," Kothandaraman said after the earnings call. "They're going to say, 'OK, we're going to supply the residential solar first.'"

Even as prices tick up, the CEO does not expect that to curtail demand given that monthly payments for financed solar arrays would be relatively small. Moreover, utility rates are also increasing and concerns over power outages in key markets such as California sparked strong demand for battery-backed solar.

"Energy independence is really the driver," Kothandaraman said.

At the same time, Enphase's moves into home energy management and virtual power plants, including through a new partnership with Swell Energy Inc. in California, Hawaii and New York, are designed to create new opportunities to offer grid services by using software to harness clusters of distributed energy assets.

Enphase is also positioning itself for expansion in Europe, where Ukraine's invasion of Russia has sent natural gas prices soaring and created urgency around alternatives. In early April, the company and its contract manufacturing partner Flex Ltd. announced plans to manufacture miniature solar panel power electronics, also known as microinverters, in Romania starting in the first quarter of 2023.

Enphase expects to boost revenues to between $490 million and $520 million in the second quarter, up from $441.3 million in the first quarter, which beat the S&P Capital IQ consensus estimate of $433.7 million. That anticipated growth comes despite ongoing logistical challenges affecting the supply of batteries and raw materials.

The company posted diluted earnings of 37 cents per share in the first quarter, missing the consensus estimate of 69 cents per share. In the second quarter, Enphase expects its non-GAAP gross profit margin to range between 38% and 41%, not including stock-based compensation and amortization related to acquisitions.

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