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Author: TMFGebinr Big gold star, 5000 posts Top Recommended Fools Old School Fool Supernova Phoenix 1
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Subject: PWER - Q4 2010 - my thoughts Date: 2/4/2011 2:01 PM
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Hi everyone,

Release: http://sec.gov/Archives/edgar/data/1042825/00011046591100483...

Wow. Down 22% right now and down as much as 24% earlier. All in a single day. And all, as far as I can tell, because revenue guidance of $260 million to $290 million for Q1 was lower than the $294 million consensus expectations had.

Wow.

Highlights:
EPS:
    For Q4: $0.49 (after backing out a true one-time charge), well ahead of Street estimates of $0.40.
    For 2010: $1.10 (same back out), well ahead of $1.02 estimated.
Rev:
    For Q4: $366 million, well ahead of estimates of $352.5 million.
    For 2010: $1.05 billion, slightly ahead of $1.05 billion estimates.

Projections:
For Q1: Revenue of $260 million to $290 million, shy of desired $294 million.
For 2011: Revenue of $1.1 to $1.3 billion, barely meeting at the top end of desired $1.3 billion.

This is where they got punished. As I was listening to the call, it was extremely obvious to me that the analysts asking questions were very concerned about Q1 and a bit concerned about the full year of 2011. I guess their models had more revenue growth baked in and when Power-One didn't comply, everybody freaked.

Except at the midpoint, that's still an 80% growth YoY over 2010. And CEO Richard Thompson did remind people that 2010 was an extraordinary year. Apparently that reminder fell on deaf ears. We humans do like to take recent results and project them out into the future on a straight line, so when the company predicted "only" 80% growth in revenue, instead of a more aggressive 150% or something, Power-One became plain Cinderella at midnight.

Comments on inventory levels:
The company also got punished for this. Last year, the industry delivered 20 GW of inverters when 17.4 GW actually got used. That means there's a glut in the system (largely in Germany) and that traditionally means two things. First, unit sales going forward will be less. Second, those unit sales are going to be at lower price points. The combined result of this is an expected reduction in revenue.

According to Thompson, IMS Research projects a 15% drop in average selling prices for 2011. This is probably a result of that inventory glut along with the raised prices many manufacturers put through in 2010.

Thompson claims that of the 2.6 GW extra, only abut 0.3 GW of it (11.5%) is from Power-One, as the company didn't participate in the channel stuffing. Power-One also didn't participate in the industry practice of raising prices. So, management expects "only" an 8% - 10% drop in average selling price this year.

Germany and Italy:
In 2010, Germany and Italy installed about 7 GW and 2.5 - 3 GW, respectively. For this year, management projects about 5.5 GW for Germany and 3+ GW for Italy. That's about a 15% drop between those two markets. And, if you take, say, 1.5 to 2 GW of the 2.6 GW inventory glut and say that's Germany's portion (see above), that means Germany would only need to buy about 3.5 to 4 GW of new capacity.

But consider this: Power-One has a 50% market share in Italy and 13% globally. The market leader (at about 40% share, globally) is SMA Solar, a German company, and its primary market is Germany with 64% of 2009's revenue coming from their home country (last available data). Who do you think is going to be hurt worse by a slow down in Germany? Yeah, Power-One is going to feel a bit of pain over Germany, but as I wrote in the original buy article (http://www.fool.com/investing/small-cap/2010/11/15/rising-st...), one country does not make or break the market.

Growth around the world:
The company expects to ship between 1 and 2 GW in North America (from the conference call, I think I'm reading that right) and also a significant amount in China. They just opened a new manufacturing plant in Phoenix, AZ and the new Chinese plant will begin production just after Chinese New Year. India is also a significant new market, though it's behind China at the moment. Over the next couple of years, Power-One will become much less reliant on Europe than it has been over the past couple of years.

IMS Research is predicting a flat market. Power-One doesn't agree. Here's Thompson:

---begin---
Yes, basically, Jessie, the flat market is from IMS. We have a little bit of different view and that's why we have strength in our numbers and strength in the guidance we're giving. So as we look across the world, Germany's going to be down. Gee, that's no secret to anyone. We think will Italy will continue to be strong.
 
We're making progress, certainly, in China, Australia. We're making progress in the Middle East, which is not surprising to us, but it was a lot of long, hard salesmanship.
 
So we see a lot of opportunities across the globe and we believe that this will be a reasonable year. It's just you're coming from a hyper year in 2010, as everyone knows.
---end---

Power Solutions business unit:
Thompson decided not to throw away this section of the company and that's turned out to be the right decision. In Q4, it turned an operating profit (if I remember correctly, the first time that's happened in quite a while) as the supply chain straightened out and it was able to clear a lot of the backlog and get product to its customers. For the year, it expects revenue of about $300 million from this unit (which leaves $800 million to $1 billion for the Renewable Energy Solutions unit).

Concluding thoughts:
Have to wrap this up as we have a guest speaker in just a couple of minutes.

Overall, Power-One is growing faster than the market is growing, gaining market share. It is expanding geographically to lessen its reliance on Germany and Italy, and it is turning its original business unit around. I believe the market reaction of down 22% is harsh and very short-sighted, focusing on Q1 rather than 2011 and beyond. Don't be surprised if I add to the MUE portfolio's position.

Cheers,
Jim
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