An innovative solar company started planning for the downturn nearly 3 years ago—and its stock is up 41% this year

“It’s all about analyzing your business and planning ahead,” Enphase Energy CFO Mandy Yang told me when I asked how the solar company is managing growth in 2022. “It’s not just what we did this year to respond to the turbulent markets. We started looking ahead two to three years ago.”

Enphase’s stock has gained 41% this year, the second-best performance outside of the petrochemical sector. The Fremont, Calif.-based maker of solar and storage products for homes and businesses has beaten estimates for the past 14 quarters, maintaining steady growth throughout the COVID-19 era with all its supply shocks, inflationary pressures and economic turmoil. It’s also managed to avoid the hiring freezes of other tech companies.

Like most companies, Enphase runs scenario planning that start from a base case and builds on more conservative and aggressive outcomes. But in addition to setting an annual operating plan, Enphase anticipates trends a few years out, adjusting its longer-term outlook as conditions evolve. “You can react to adversities, but what makes a management superior to others is how they see the market changing in the next year or so,” Yang says.

Of course, few executives predicted the impact of a global pandemic and the supply-chain disruptions and surging prices it brought about. And unlike most companies, Enphase is benefiting from rising demand for solar power as gas and oil prices surged. But Enphase’s advance planning helped it develop strategies to keep it agile in the face of uncertain times.

For example, Enphase worked to minimize the long-term fixed costs many manufacturers face by building their own plants by leaning on contract manufactures. To avoid having to pay extra to secure manufacturing contracts, Enphase keeps track of which contractors have available capacity. “We also began qualifying additional suppliers for key components a few years ago,” Yang says, ensuring the company had multiple sources for each key component to guard against any disruptions.

Rising demand for solar power has left Enphase with a regular backlog of orders, which the company tracks to give manufacturing priority to regions with the greatest demand. Contractors in Mexico, China, and India are positioned to address shifting demands in their geographic regions, and Enphase sourced another contractor in Romania to meet rising demand in Europe.

To maintain a competitive edge in a crowded industry, the company also designed more reliable microconverters—devices that convert solar energy to a current that can power a home. Many homes use a single, centralized converter; if it fails, the whole system goes down. Enphase’s microconverters are distributed onto each solar panel, so if one panel fails, the others will still deliver power. Newer products can create battery-free “microgrids” that can seamlessly provide backup power using only sunlight during grid outages.

“Our failure rates have been low, but we learn from the products that have failed,” Yang says. “We ask the customer to send them back, and we analyze what triggered the failure and use that data analysis in our next product design.”

And while M&A activity has slowed significantly this year, Enphase has expanded with several strategic acquisitions, including two in 2022: SolarLeadFactory in March and GreenCom Networks in August. Yang says a corporate-development team regularly scours potential candidates according to a few key criteria.

“The question is how to deploy capital and create the most shareholder return,” Yang says. “We have weekly meetings where the M&A team talks about companies they’ve evaluated. There are certain areas that we look at: Do they fit into our strategy? What’s the return on investment? How can they increase our offerings to our customers?”

Like many companies these days, Enphase has built up a globally distributed workforce, with three in five workers located in India. To align overseas workers with management’s goals, the company offers bonuses tied to the company’s financial performance and structures meetings around core values such as product quality and solving customer issues.

“We have a mindset of continuous improvement that translates into our financial performance,” Yang says. “We are a metric-driven organization. Each department will have its own key performance indicators that they will review with the management on a weekly, monthly, and quarterly basis to make sure that that the team in India delivers to the expectation.”

Thanks for reading. Sheryl will be back tomorrow.

Kevin Kelleher
@kpkelleher

Big deal

A little-known indicator tracking the vulnerability of corporate finances is flashing an early warning sign. S&P Global said last week that its Financial Fragility Indicator for non-financial companies “spiked above zero to 0.06 in the second-quarter of 2022 from -0.92 in the first quarter, breaching the historical average and advancing closer to vulnerability territory." The zero level marks the indicator's historical average. Negative values point to less financial vulnerability, while a move into positive territory suggests more fragility. “While the private sector is still in relatively healthy territory, the speed in which it reached its historic mean is worrisome,” S&P Global said in a research brief.

Courtesy of S&P Global Market Intelligence

Going deeper

It’s not just you. Corporate executives in every industry are encountering greater unpredictability, complexity, and volatility these days. An essay in the Harvard Business Review by Michael Mankins, a partner in Bain & Co.’s strategy practice, identifies two drivers of unpredictability: the rising number of change vectors and the increasing interconnectedness among them. Mankins outlines tools that can help—including “consideration of extreme, but plausible scenarios; the pursuit of strategic options and hedges; and the identification of trigger points and signposts"—and urges executives to shift from a static plan to an adjustable “living strategy.” He concludes: “Strategies must be dynamic and evergreen—just like the business environment on which they are intended to capitalize.”

Leaderboard

Chip Zint was named CFO and senior vice president at Deluxe (NYSE: DLX), effective Oct. 17. Deluxe invented the checkbook a century ago and has since expanded into digital payments and business technology. Zint, who joined the company in 2020 as vice president of corporate finance, will succeed Scott Bomar, who is stepping down to take on a senior role at a former employer. Before joining Deluxe, Zint worked for nearly 14 years at NCR Corp.

Donna Wong, who has served since September 2020 as CFO at Reunion Neuroscience (NASDAQ: REUN), a developer of antidepressants and other pharmaceuticals, was named the company’s corporate secretary, effective Oct. 7. Wong has also as the CFO of Field Trip Health. She replaces Paula Amy Hewitt as corporate secretary.

Overheard

“The directors and the companies are trying to find common ground with the activists. You even have directors now who meet with investors. So I would tell you that it’s not a bad thing, and it’s one of those things where you engage…You have to, as a director, have management think through all of the different types of activists and questions that you could get from them. You need to understand, as a director, who owns the stock and why they own the stock—and therefore, what types of questions you are going to get related to the strategy and how it’s being executed.”

—Maria Castañón Moats, Governance Insights Center leader with PricewaterhouseCoopers, in a Fortune story addressing how boards can respond to activist investors.