No. of Recommendations: 1
Hi everyone,

Slide deck:

Expectations were $249.85 MM in revenue and $0.12 EPS. Power-One delivered $322 MM revenue and $0.30 EPS, way ahead of the consensus from 17 analysts. It also guided revenue for Q3 of $260 MM to $280 MM, well ahead of what consensus was ($220 MM, I believe). It's amusing to see that in the past 7 days, 16 analysts have increased their EPS estimates and revenue expectation is now $269.9 MM, smack dab in the middle of guidance. Go figure.

The company shipped 1.26 GW of inverters, a record and almost double what it did in Q1.

The strong results came, partially, from its new TRIO line of inverters. These are smaller (20 MW and 27.5 MW) and contributed 1/3 of renewable energy segment sales of $255 MM. These address the market for commercial rooftop installations and have proved to be very popular. They have higher wattage and are easy to install, making them quite economical and popular.

Further innovation comes from a new line of micro-inverters. This is a small market relatively speaking, but the company is addressing it, as well. It's also going to launch a new line of utility-grade inverters called Ultra. These are liquid cooled and offer several advantages (including lower costs for materials and assembly) over existing systems.

As a result, the company increased its market share from 11% at the end of 2011 to 14% at the end of this past quarter. That's incredible. Even better, it gained market share in Germany, home of the #1 company.

With the slow down in economies all over the world, you'd think that demand for solar would drop, as well. It is slowing down a bit, but not nearly as many, I believe, fear. For instance, Germany is expected to grow only by 33% (from 6 GW at the end of 2011 to 8 GW by the end of 2012). North America is expected to grow by 11% and Asia by 80% (mostly China and Japan). Solar is not going away and, as costs continue to come down, it's becoming a viable alternative to other ways of generating electricity. Part of this, of course, is being driven by Japan's and Germany's moves away from nuclear (which was a large components of each country's electrical generation). Power-One is in talks and tests to move into the Japanese market.

An interesting slide is #5 that shows shifting demand for solar around the world. Europe is falling, while North America and Asia is rising. Not as obvious from a first glance, however, is that demand is rising elsewhere in the world faster than it's falling in Europe. +10.3 GW vs. -2.0 GW.

The manufacturing plant at Phoenix hadn't been working as well as management had hoped. From comments in the call, I believe senior management basically fired and replaced the operating managers at that plant. Early indications, according to comments, are that the personnel changes have been bearing fruit operationally. Hopefully this problem is now fixed and the plant can ramp up to capacity fairly quickly.

Price declines
Part of what's been hurting this company is that inverter prices have been coming down over the past year or two. That seems to be part and parcel with this industry and is a reflection of the lowering prices for the wafers and films that actually generate the electricity. However, management is now saying that prices won't decline as much this year as originally thought -- low teens percentage wise instead of high teens.

This company is kicking butt and taking names. It's debt-free, is building cash (currently at $1.66 / diluted share) and is again FCF positive, having generated $148 MM TTM. My basic 5-10-terminal DCF has the company priced at $8.09 per share with 0% growth in FCF forever. The catalyst is that, as demonstrated, it will grow as solar demand continues to grow, despite bad economies and despite losses of feed-in tariffs.

Thus, I'll be adding more shares to once again make it one of the high-conviction holdings in the MUE ports.

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