Operator:

Good day, and welcome to the Enphase Energy's Second Quarter 2024 Financial Results Conference Call. All participants will be in a listen only-mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Zach Freedman. Please go ahead.

Badri Kothandaraman:

Good afternoon, and thanks for joining us today to discuss our second quarter 2024 results. We reported quarterly revenue of $303.5 million, shipped approximately 1.4 million microinverters and 120 megawatt hours of batteries, and generated free cash flow of $117.4 million. The end market demand for our products was approximately $396 million in Q2, and we reduced our channel inventory by approximately $92 million. Our overall channel inventory returned to normal levels as we exited Q2. For the second quarter, we delivered 47% gross margin, 27% operating expenses, and 20% operating income, all as a percentage of revenue on a non-GAAP basis and including the net IRA benefit. Mandy will go into our financials later in the call. Let's discuss how we are servicing customers. Our worldwide NPS was 79% in Q2, up from 78% in Q1. Our average call wait time was 2.5 minutes in Q2, compared to 1.9 minutes in Q1. We have several AI and machine learning initiatives to drive automation and further reduce wait times. Let's talk about operations. Our global capacity is around 7.25 million microinverters per quarter. 5 million units of those are in the US. In Q2, we shipped approximately 574,000 microinverters from our US contract manufacturing facilities that we booked for 45X production tax credits. We expect to ship approximately 1.1 million microinverters from our US facilities in Q3. Our US-made IQ8 Microinverters can help lease PPA and commercial asset owners qualify for the 10% domestic content ITC error. I'll discuss more on this later in the call. For batteries, our cell pack suppliers in China have sufficient capacity to support our ramp-up in 2024. We also plan to manufacture batteries in the US starting in Q4 with power conversion, battery management, and enclosures made domestically while using cell packs from China. Let's cover the regions. Our US and international revenue mix for Q2 was 65% and 35% respectively. For more visibility into our business, we are providing regional breakdown and sell-through dollar metrics for Q2. With our channel normalized, we will not provide -- we will not be providing detailed sell-through statistics going forward. In the US, our revenue increased 32% compared to Q1. The overall sell-through of our products in the US was up 8% in Q2 compared to Q1. Let's discuss the market trends in the US split by non-California states and California. For non-California states, our overall sell-through was up 7% in Q2 compared to Q1. The sell through for micro inverters was up 6% and the sell-through for batteries was up 10%. In California, our overall sell-through was up 7% in Q2 compared to Q1, indicating that our California business has stabilized. The sell-through of our microinverters was flat and the sell-through of our batteries was up 14% in Q2 due to the high NEM 3.0 battery attach rates. I'll provide more statistics on NEM 3.0 later in the call. In Europe our revenue was flat in Q2 compared to Q1. The overall sell-through of our products in Europe was up 3% in Q2 compared to Q1. The sell-through of our micro inverters was flat and the sell through of our batteries was up 18% in Q2. I'll provide color on some key markets in Europe, the Netherlands, France, and Germany. In the Netherlands, our overall sell-through was down 15% in Q2 compared to Q1. The country's solar demand continues to be challenged by regulatory uncertainty. However, we are beginning to see battery demand pickup. This is a trend we expect to continue. Especially as dynamic electricity rates become more prevalent in Netherlands. We launched our IQ energy management software in Netherlands during Q2 that will allow our installer to offer an Enphase system that can deliver healthy payback even without NEM. The modularity of our batteries allows homeowners to start either with a 3.5 or a 5 kilowatt hour battery along with their solar systems, making the economics work well. In France, the overall sell through in Q2 was flat compared to Q1. We recently launched our third generation battery in France and expect that solar plus storage system will become increasingly important for this market as the spread between retail electricity rates and feed-in and tariff rise. We expect to introduce IQ EV chargers and IQ energy management software in France later in the year. In Germany, our overall sell through in Q2 was up 7% compared to Q1, building on the growth we reported in the previous earnings call. In June at Intersolar Munich, we unveiled some exciting products. Our three phase battery backup solution for Germany, Austria and Switzerland that will increase our served available market. In addition, we showcased our IQ balcony solar kit, which will also increase our served available market in Germany by approximately 400 megawatts a year. We believe Enphase microinverters was -- are ideal for these small systems and we plan to roll out the balcony solutions throughout Europe in the coming quarters. A general comment about Europe. We are still underpenetrated in markets like the UK, Italy, Spain, Belgium, Luxembourg, Switzerland, Austria, Sweden and more. Each country has its own challenges and opportunities. But homeowners increasingly seek safety, high quality savings, and an all in one app experience from their home energy system, which aligns well with our strengths. We plan to introduce our entire product portfolio IQ Microinverters, Batteries, IQ EV chargers, IQ energy management software, and the Solargraf installer platform across more European countries and scale our sales and support accordingly. Let's come to Asia. We are making incremental progress in Asia. Our revenue in India, although small, has doubled from a year ago with introduction of IQ8 family of microinverters. We are gaining solid traction in Thailand and Philippines, where quality and safety are highly valued. In Brazil we have a good team in place. We work with approximately 600 long tail installers through the help of some good distribution partners. We are currently shipping our 480 watt IQ8P microinverters into these emerging residential markets to support newer high power panels. In Australia there is interest in our Enphase Energy System powered by IQ micro inverters and the third generation battery. We introduced this product approximately a year ago. Later this year, we will be introducing more products into Australia, including the IQ8X microinverters for higher DC input voltage panels and grid type batteries. Let me come to NEM 3 and provide some statistics there. As I said before, the end customer demand in California for us has stabilized in the second quarter. As of last week, 60% of our California installations were NEM 3.0. These systems have a high battery attach rate over 90% compared to NEM 2.0 systems, which have an attached rate of 15%. Our data also shows that half of our NEM 3 systems are using Enphase batteries, consistent with what I have reported in the last few earnings calls. Taking this data into account, our average revenue per NEM 3.0 system is approximately 1.5 times the average NEM 2.0 system. We believe this will contribute to stabilizing our California revenue in the back half of the year. Let me say a few words about market share. In the US, our microinverters and batteries have stable market share, according to both internal and third party data. As batteries become more common in California, there is some interest in centralized inverter solution. Our success continues to be driven by our unique AC coupled architecture, which offers significant advantages over legacy string inverter systems in terms of performance, reliability, and safety. We strongly believe in this value proposition. Our system will become even easier and faster to install for backup applications with further improvements we are making to our balancer system. They include our IQ meter collar, our fourth generation 10 kilowatt hour battery and the enhanced IQ combiner, which are all expected to be available in early 2025. Additionally, we believe our AI-based software is essential for helping homeowners maximize savings with a complex tariff structure like NEM 3. Let's come to our Q3 guidance. We are guiding revenue in the range of $370 million to $410 million. We expect to ship between 160 and 180 megawatt hours of IQ batteries. We anticipate incremental improvement in our US business and a seasonal slowdown in Europe. We are over 85% booked to the midpoint of our overall revenue guidance. This is the healthiest backlog position we have had in the last year. Let's talk about new products, starting with IQ batteries. Our third generation IQ batteries has been well received and we have almost converted to the third generation battery right now. It offers an industrial -- industry leading 15 year warranty with differentiated quality, serviceability, modularity, and power capability. We have expanded the IQ Battery 5P, our third generation battery, into more countries in North America and Europe. We recently started shipping to customers in Canada, Mexico, France, Netherlands and Luxembourg. We plan to pilot our fourth generation battery in the US later in the year and begin production in early 2025. This new battery will feature -- will feature a better cost structure and a smaller form factor thanks to its integrated battery management and power conversion architecture. Additionally, the meter collar and the enhanced IQ combiner will be introduced along with the fourth generation battery to reduce our balance of system cost. As previously mentioned, we have expanded into many new markets with the IQ8 family of micro inverters and are now present in 43 countries. We plan to enter many more new countries by the end of the year. We aim to further increase our served available market by simplifying installations of small solar systems and social housing and ruling out balcony solar solutions to more European countries, starting with Germany. The other variant of IQ8P microinverter with the new three-phase cabling system is well-suited for small commercial solar installation, ranging from 20 to 200 kilowatts. We launched this product in North America in December last year and have installed over 200 sites with an average of 45 kilowatts of solar per site. The feedback of this product has been quite positive, and we expect the growth to accelerate in the coming quarters. We recently began shipping IQ8P commercial microinverters from our contract manufacturing facility in Texas. We are now producing both residential and commercial microinverters from our US manufacturing facility. Some of our US-made microinverter skews, which, when paired with select US-made solar racking equipment, can allow lease PPA and commercial asset owners to qualify for the domestic content bonus credit. This credit is valuable for customers at 10% of the overall project cost. We think this will be a good opportunity for us on both microinverters and batteries. Let me provide an update on IQ9 microinverters with gallium nitride. The IQ9 family will support higher DC input currents up to 18 amperes and higher AC grid voltages, including 480 volts for the small commercial market, which is a brand new market for us. Using gallium nitride high-voltage transistors, these microinverters will deliver higher output power at lower cost. We are on track to launch this product in 2025. Let's discuss EV charging. We showcased our upcoming EV charger for Europe at Intersolar, Munich in June. The charger offers a 22-kilowatt three-phase option and 11-kilowatt single-phase option. It integrates seamlessly with Enphase solar and batteries, allowing homeowners to optimize cost by using excess solar energy. Green charging or charging from solar is what it's called. Other key features include dynamic phase switch-in from single-phase to three-phase and vice versa, and a MID meter for a few countries, ISO 15118 support to talk to the car, OCPP cloud software support, and 1-ampere fine-grained current control to maximize green charging. We plan to introduce this charger in many European countries later in the year. Additionally, we recently launched our most powerful CS-100 EV charger for commercial fleet electric vehicles in the US. Our team is developing a bi-directional EV charger that will enable V2H and V2G capabilities as part of the Enphase system. The charger will feature modular GaN-based bi-directional inverters, providing up to 11 kilowatts for single-phase applications and 22 kilowatts for three-phase applications. The charger will be compatible with both 400 volts and 800-volt electric vehicles. We are targeting to release this product in late 2025. Let's now cover our IQ Energy Management software. Our software is rapidly evolving to handle the growing complexity of energy markets by using AI and ML for forecasting and optimization. We train our AI models with data from over 4 million systems. In Q2, we launched our latest software in Netherlands and Belgium to manage dynamic electricity rates, helping homeowners maximize ROI and reduce payback periods as electricity prices fluctuate hourly. We see AI as a crucial technology to scale and enhance our products and services. Let's discuss our installer platform. We recently introduced Solargraf, our design, proposal, and permitting software platform to the Netherlands. With built-in support for dynamic electricity rates, Solargraf software delivers the financial calculations that address the complexities of energy markets in the Netherlands. Solargraf is also available to residential and commercial installers in the US, Canada, Brazil, Germany, and Austria, and we expect to release it to many countries in the coming quarters. Let me conclude. We remain dedicated to delivering best-in-class home energy systems with a strong focus on innovation, quality, and customer experience. Over the last year, we have significantly expanded our global reach and have an exciting pipeline of new products set to launch worldwide in the coming year. We have successfully normalized our channel inventory by the end of Q2. Our customer demand has increased by 5% in Q2 as compared to Q1. Our battery business is also doing very well with growth from quarter to quarter. Our bookings in Q3 are the healthiest that they have been in a year. Our early commitment to US manufacturing is positioning us well with leased PPA and commercial asset owners. We also expect the Fed to lower interest rates later in the year, improving solar economics for the US consumers. Our efforts to capture market share in Europe and other international regions are also promising. Despite continued macroeconomic challenges, we are confident in our revenue recovery and remain bullish about our long-term growth prospects. With that, I will turn the call over to Mandy for her review of our finance. Mandy?

Operator:

[Operator Instructions] Our first question today will come from Philip Shen with ROTH Capital Partners. Please go ahead.

Badri Kothandaraman:

Yeah, there is no destocking for Q3. And then on the -- you should always now think about us as achieving balance between sell-in and sell-through. In other words, we only need to report under-shipment or over-shipment if we do not have a balance. So now, going forward, the channel is balanced, and we are in good shape. So, answering your question on the $450 million, we are very optimistic. As you can see, our sell-in revenue in Q2 was $303.5 million. Our sell-in revenue at the midpoint of guidance for Q3 is $390 million. That's a good growth rate, and we are extremely optimistic. So, like what I talked about, we have successfully normalized our channel inventory. Our battery business is very healthy. We went from 75.5 million -- or 75.5 megawatt hours in Q1 to 120 megawatt hours in Q2. Now we are guiding 160 megawatt hours to 180 megawatt hours in Q3 and California is contributing to it in addition to the other regions. Like what I said, our customer demand in Q2 increased by 5% as compared to Q1. So we are building in a little bit of conservatism there and building in some potential risks into our guidance. That's why we gave you $370 million to $410 million. Our Q3 bookings are the healthiest they have been in a year. I told you about over 85% bookings and that too after removing a bunch of risks that we evaluate continuously on a worldwide basis. Our early commitment to US manufacturing is positioning us well with the lease, PPA and commercial asset owners. This is the definite bluebird for Q4. We expect the Fed to lower interest rates later in the year, so that will also be a tailwind improving solar economics for US consumers. Our efforts to capture market share in Europe, like what I said, Europe Q3, there is seasonality but like what I said, we are under penetrated in Europe. There are so many countries where we are making good progress. So we feel very optimistic about growth in Europe.

Mark Strouse:

Yes, good afternoon. Thank you very much for taking our questions. So your gross margins continued to be very resilient. I remember leading up to the micro manufacturing getting ready to scale, you gave guidance as far as kind of the split of the 45X tax credit that you thought you could keep. I'm curious on two things. On the battery side, as that gets ready for ramp in the US, if you can give us a split of what that credit might look like for you. And then also -- excuse me, with the domestic content ITC adder language being out there, if a customer is going to get an incremental $0.30 to $0.40 per watt how much of that do you think that Enphase could potentially keep versus passing on to the customer to stimulate demand? Just any pricing strategy comments would be helpful. Thank you.

Operator:

The next question will come from Brian Lee with Goldman Sachs. Please go ahead.

Badri Kothandaraman:

Got it. I'm going to give some detailed color on competitive situation and then Raghu will add more. For the people who did not listen to my prepared remarks, our installers are steadily ramping on NEM 3 and we are talking primarily about California here. The battery attached in California is increasing. Our numbers, like what I said, overall worldwide shipments were 75.5 megawatt hours in Q1, growing to 120 megawatt hours in Q2 and guiding 160 megawatt hours to 180 megawatt hours in Q3. So battery attach and a lot of it is coming from California indeed. California as of last week, 60% of our installations happening. So this is brand new data, fresh data, and we do a lot of installations per week. So this is important. 60% is NEM 3, 40% is NEM 2. Battery attach we are noticing is obviously very high for NEM 3, greater than 90% compared to NEM 2. Good news is half of our NEM 3 solar is still attached to Enphase batteries. This data has been consistent for the last two or three quarters. One more point for you to note is we provide a strong value proposition for grid type batteries and this data I did not say in the prepared remarks, but our NEM 3 batteries, over 70% are grid type and our grid type batteries are very easy to install. Many customers just prefer two five kilowatt hour batteries. No extra balance of system, no complexity. The existing combiner box can be used. We have something called Enphase power control software that will make sure that we can do a lot of things in software and do not need to add any more hardware than what is necessary. And no main panel upgrades are required because of Enphase power control software. And I talked to you about 24x7 support, easy serviceability, highest warranty in the industry, 15 year warranty. We are able to do that because of our architecture. We don't use fans, we have air cooling. No single point of failure. For backup. Backup is a little more complex. There is going to be more dollars the user has to shell out because the useful backup probably is about 20 kilowatt hours battery and for backup we are streamlining our balance of systems. We are going to have a new ten kilowatt hour battery and we are basically embedding the neutral. So we are eliminating the system controller and we are enhancing our combiner there. We are reducing the number of things they have to buy and basically we'll have a best in class solution there. On the PV side, I didn't explicitly say the advantages over a string inverter are numerous. First of all, obviously, high power production, enhanced power production could range anywhere from a couple of percent to 15% more. Safe AC architecture. No high voltage DC on your roof. That's the single most important factor, for example, that some people in Europe select our product. It's simply because no high voltage DC on the roof. Per panel monitoring. I was in Austria and Switzerland recently, per panel monitoring was they say, we want to see everything that is happening. For panel monitoring is very important for them. 25 year warranty versus inverters we may be talking about our ten year warranty. I mean 25 year warranty matters, and obviously the domestic content readiness. So domestic content readiness, of course, our competition will also be ready and we believe that we have a good solution there and we are going to make it even better for both microinverters and batteries. So we will be able to capture some value there. So those are all of the puts and takes on the competitive situation. I'll have Raghu qualify the competitive situation more, but I'll answer the other question. Battery, do we expect Q4 growth. At this point it's early for me to guide anything, but we do expect Q4 growth and domestic content. How much of the Q3 number includes domestic content? Little to zero. Domestic content is a conversation that we are having and we expect it to pan out in the fourth quarter. Raghu, talk about anything more?

Operator:

Our next question will come from Andrew Percoco of Morgan Stanley. Please go ahead.

Badri Kothandaraman:

Right. So I think maybe you were not there in the prior -- when I answered a question a couple of questions ago. So let me go through those points. As you rightly said, we did not guide Q4, but we are very optimistic based upon what we are seeing. We have successfully normalized our channel inventory by the end of Q2. Our customer demand increased by 5% in Q2 as compared to Q1. Our battery business is doing phenomenally well, 75.5 megawatt hours in Q1, 120 megawatt hours in Q2, midpoint of guidance 170 megawatt hours in Q3. And we naturally expect it to do well. Our Q3 bookings are the healthiest that they have been in a year. These are the leading indicators for you. Our early commitment to US manufacturing is positioning us well with respect to the commercial asset owner, leads PPA and commercial asset owners. So that one is a huge opportunity for the commercial asset owners, and we expect to offer solutions to them there. And we expect them to be highly value-added solutions, which can drive demand. Additionally, we are hearing that the Fed will lower interest rates this year at least once, improving solar economics for US consumers. On the international side, I talked at length about Netherlands. I talked at length about France. I talked about Germany. And there I think in Netherlands we are going to -- we just introduced Solargraf software platform that enables the installers to sell effectively at the kitchen table, incorporating things like the dynamic tariffs in absence of NEM 3 -- I mean, absence of NEM. So we just introduced our 5 kilowatt hour battery, the latest and greatest battery, into Netherlands. We plan to introduce our EV chargers there towards the end of Q3 and early Q4. Coming to France, I mean, France is doing phenomenally well for us. Despite all of this, France has stayed very, very healthy. We just introduced our third generation battery in France. We are going to introduce solutions for IQ energy management, meaning software is what we said, for effectively managing, steering a hot water heater in France. We also expect to introduce the same IQ EV chargers there as well. In Germany, we are doing well. Our overall sell-through in Q2 was up compared to Q1. At the June Intersolar, Munich, we unveiled our three-phase battery backup. This is a three-phase solution with backup, and it's a highly differentiated solution. It's the smallest size battery with three-phase capability. In addition, that battery is going to have phenomenal round-trip efficiency because we are innovating on turning off the unused microinverters when the consumption of the user is pretty low that enhances the efficiency and avoids waste. So round-trip efficiency is going to be better than competition. So that battery is going to open up a nice tank in Germany, Austria, and Switzerland, where there are large homes and three-phase backup. Backup by the way is simply an emotional requirement. They really do not have outages, but it is a requirement because people are worried because of incidents like Ukraine. So additionally, we are launching balcony solar into Germany in Q3. And the IQ balcony solar product that we introduced at Intersolar in June, that was the hit of our show. That's what we consider the hit of our show because that one is a beautiful product. It produces -- there are two panels and this balcony gateway basically connects to those two panels and then you're allowed to export up to 800 watts into the wall socket in Germany. And people can even add, they can go from two to four panels, still only exporting 800 watts, but there is an auxiliary socket on the balcony gateway where you can plug in additional loads and make use of the extra solar. Furthermore, if there is a backup, meaning if there is a power outage, there is a relay in the gateway that will automatically open and disconnect the connection to the wall socket, but still maintains powering the appliance connected into the auxiliary socket. So sunlight backup is available for ultra-low cost there. So we expect balcony solar, that's a TAM of 400 megawatts. We're expecting 400 megawatts just in Germany. We expect to replicate that solution everywhere into Europe. So that's what we introduced at Intersolar. Of course, our EV charger, I talked about it. We are going to introduce our EV charger in all the countries there. And then I made a statement in my prepared remarks that we are strong in France, we are strong in Netherlands, we are strong in Germany, we are still under-penetrated in UK, Italy, Spain, Belgium, Luxembourg, Switzerland, Austria, Sweden and more. And we plan to introduce our entire product portfolio, the same things I talked about, microinverters, batteries, EV chargers, energy management software, balcony solar and Solargraf. And what do homeowners want? They want the same thing. They want safety, no high voltage DC. They want high quality system to work. They want savings because they have these dynamic rates. And they want an all-in-one experience, all-in-one app. They don't want one thing from one supplier, one thing from another supplier, and it doesn't work for them. They don't want to go to two apps, three apps, no. They want to do an all-in-one app. So, a lot of new products are coming. Many of them or some of them will be available in Q3. Some of them will be available in Q4. But like what I said, they are all going to propel us in the right direction.

Colin Rusch:

Thanks so much. Guys, can you talk about the guidance for the batteries? How much of that is for the growth from new geographies and channel fill and how much is coming from existing markets? And then, as you think about introducing the IQ9 and the evolution of module sizes and efficiency, can you speak to the product market fit and any potential headwinds you have for bringing that product to market?

Colin Rusch:

The product market fit, given the evolution of module efficiency, form factor, etc, any headwinds you're expecting as you bring that to market?

Raghu Belur:

Great product, market fit, right? I mean, you asked that question. You're seeing that the module power is continuing to go up and so our plans in fact, we have the platform already developed that can address for the foreseeable future any increase in power and uniquely benefits Enphase, because as the power continues to go up, you can build that same system with fewer number of modules you don't need. If you were doing it with 20 modules before, now you can do it with 18 modules as opposed to a big box inverter. It doesn't matter, a seven kilowatt inverter is a seven kilowatt inverter. So we have some unique benefits when it comes to the direction in which the modules are going and we have the platform now, both, in fact, with IQ8 and getting better with IQ9 to address any increase in module power.

James West:

Hey, good afternoon, Badri. A quick question about the countries that you've highlighted where you're under penetrating in Europe. What is the strategy to increase penetration? Is that the new products? Is it adding more sales and dollars? That's the first question. The second question is around the commercial products business and kind of what you see is the outlook there?

Operator:

And our next question will come from Julien Dumoulin-Smith with Jefferies. Please go ahead.

Badri Kothandaraman:

Yeah, thank you. So, first one, with respect to SunPower, we're not going to comment on customer specifics here, but as usual, what we do is when we give you guidance, we always take risks everywhere in the world, globally. And we have exactly done that in the guidance that we gave you. That's one. On the domestic content again, it is early to tell, but we like what we are seeing. We believe it's a, we'll start to see some output of the domestic content in Q4 that will be positive, hopefully for the industry because it is a large incentive, and that incentive can be used to propel demand to improve economics for the PPA providers, improve economics for the industry, making sure installers also their situation get robust. So I think it will benefit everybody in some way or the other. And we are happy to provide those solutions and we are, our product right now, we basically said certain select products that we have today, combined with racking, qualify even today for domestic content. We are making that better by increasing our domestic content, which is manufacturing enclosures for microinverters and getting that ready in the fourth quarter. So once that is in play, then we will be able to increase the percentage of domestic content available there and we will be able to service customers better. But I'm very excited by it. I think this, along with potentially the Fed rates, has got the potential to propel the market significantly in Q4.

Eric Stine:

Hey, thanks for sneaking me in here at the end. Just curious, you mentioned that 60% of your installs were or NEM 3. I mean, just curious how long you think it takes I know it's dragged on for some time. How long until you think you're through NEM 2. And then just thinking about the high attach rates, what do you think -- any way to ballpark where your energy storage volumes may be when that time comes?

Operator:

And our next question will come from Jordan Levy with Truist Securities. Please go ahead.

Badri Kothandaraman:

We think that -- of course, we don't control what happens there, right? So -- but we feel like we have a very sound business. Our value proposition of our product is excellent. And the business stands alone, independent of these incentives. So what -- now specifically talking about the IRA, obviously we have brought high technology manufacturing back to the US, and we are doing more of that now. We're creating jobs, we are making investments. And this, we believe, is something that is expected to be supported regardless of who is in the government. So we think we are doing all the right things. We share with you things like gross margin with and without the IRA. So it's giving you a lot of details about our business, regardless of incentives. So I think what happens? The outcome remains to be seen. It's not in our control. But I think we have done all the right things.

Badri Kothandaraman:

Yeah, I mean, those are reflective of the number of countries we are entering and the training that we are providing. We have a very active training department in worldwide, and we have an Enphase University. Of course, battery installations aren't simple, although the grid tide installations are getting there. So it does need some training, and we have a lot of installers getting trained both in the Europe -- in the US. The IQ battery 5P is a good product. It solved some of the earlier deficiencies that we had in terms of low power and wireless connectivity, etc. All of those are fixed. So it's being well received globally, not just the US. And now we are following it up with a three-phase battery to address the market. So that's what you're seeing. You're seeing that sort of strength training, not just big installers, focusing on all the installers. Like for example, when I was in Austria and Switzerland about a month ago, in Switzerland, I met about seven installers in a couple of days. And these are anywhere from 1 megawatt to 5 megawatts. Those are our installers. We celebrate them. We make sure that we provide them the correct guidance. We're not perfect many times. There are problems, but once we know, we solve the problems quickly. I think what you're seeing is this transformation from solar to energy, and I think you should expect this trend to continue. We have talked about it, but now it's really turning into a reality, where if you look at, number of markets have made this transition from solar to solar, plus battery, plus EV charger, plus heat pump. And so you can see how our products are aligning with that transformation. We are doing everything from continuing on an inverter side, going IQ8 to IQ9 to match module power increases. You're looking what we are doing on our battery with 5T battery and then the next generation 10 kilowatt hour battery, introducing the three phase battery for backup, introducing EV chargers, introducing all of the software. So you're seeing that the training that we now need to do to get people more comfortable with selling systems is also on the increase. And all of this is good for us because this is what our DNA is, building hardware software systems, building software systems that are software defined. And this is a unique advantage for us.

Christine Cho:

Thank you for taking -- for squeezing me in. In California, I think you said your customers who are getting your inverters are attaching your battery 50% of the time. Is this that different in California versus the rest of the US? I think you said 70% of your batteries are grid-tied and is great for NEM 3.0, the rate arbitrage. But outside California, I would think batteries are primarily used for backup and not for rate arbitrage. So I'm curious if you find that your market share for batteries is higher in California versus the rest of the US.

Christine Cho:

Okay. And then, I know you gave your sell-through numbers quarter-over-quarter, but would we be able to get your sell-through for storage in megawatt hours for 2Q? And I know that you said the channel is clear in general, but would you say that the weeks of inventory for batteries is also currently your standard eight to 10 weeks?

Operator:

And our next question will come from Praneeth Satish with Wells Fargo. Please go ahead.

Badri Kothandaraman:

Yeah. Number one question -- first question is, right now, our guidance doesn't comprehend any domestic content for Q3, but you're right, it could be that, some of them may use what is already available. I don't know, but our guidance doesn't comprehend that yet. For Q4 all of our competitors will probably come with their own domestic content. So we need to continue to offer right value to our customers. And for us, the way we see it is MLPE we have the opportunity to climb up in domestic content quite a bit by making sure our enclosures are also made in the US. And so that can take us to a good number where you only need less percentage from racking or elsewhere. So we're focused on getting that out by the end of Q3 and early Q4, and then we expect the demand to go up there.

Kashy Harrison:

Good evening, everybody, and thanks for taking the questions. Badri, just maybe following up on your commentary that the global channel is normal exiting 2Q. You flagged in a prior question that batteries are less than eight weeks. And so I was just wondering if you could help us think through are there any other notable geographic differences between US and micros for -- sorry, US and Europe for micros and storage that we should be thinking through? Just trying to understand the health of the channel by product, by geography?

Operator:

And our next question will come from Dylan Nassano with Wolfe Research. Please go ahead.

Badri Kothandaraman:

We don't really give numbers there, but we are talking about Q3 bookings, not Q2. Q3 bookings are over 85% and that's a healthy number. And that too after considering some puts and takes and considering the risk number is a good number, we do not have the visibility for Q4 right now because our lead time is of the order of eight weeks. So by definition, distributors will only book within that lead time.

Ameet Thakkar:

Hi. Good afternoon. I just had one quick question on thinking about the balance sheet longer term. You guys have, like, I think, $730 million of convertible debt that will come to you, kind of call it over the next 20 months. You obviously have a very advantageous liquidity position. Can you just talk to us a little bit about how you think about the balance sheet longer term? You're buying back shares now? I mean, in terms of kind of, would you just plan on kind of delevering the business, or are you thinking about maybe accessing the traditional corporate bond market or some bank debt? Things?

Mandy Yang:

Yeah. In terms of debt maturities, right. We only have about $102 million of principal amount due March next year, and that we could easily pay off out of our own cash, right. The 2026 convert, that is $632 million, still 20 months away. So we have a lot of optionalities there a year from now, right. Whether we pay off or partially refinance the current rate environment, we are not going to do anything earlier than that.

Jonathan Kees:

Oh, great. Thanks for working me in. Great to [indiscernible] I wanted to ask two things. One is the high level and second is the more housekeeping. Badri, if you can help me understand you're bullish in terms of your prospects. You're quite encouraged in terms of your markets that you talked about, France, Germany, Netherlands, and under penetrated countries, and that they're very promising I guess I'm trying to tie that in with. You have a peer in Europe who brought down the numbers for the year and cited a reduction in demand, specifically residential and for commercial and industrial utility was fine. And this is back in June. And then your MLPE peer a couple of months back, it said things are still looking kind of gloomy, in Europe, and yeah, since announced another forced reduction that's important for their staff, their employees there. So I know these are peers, but I guess I'm trying to tie in your outlook there. Your bullish outlook with what's happening with these data points is that the market just take off and in terms of last couple months? Did it really improve? Was this like a hockey thing? Did it just take off there? Or are you just doing something different from everybody else?

Operator:

And our next question will come from Maheep Mandloi with Mizuho. Please go ahead.

Badri Kothandaraman:

Yeah. I mean, on IQ9, we think it will be in the second half of the year and not too much beyond Q2 though. That's what we think. And then, on the other one, pricing comment, no, we are not planning to do. We don't have any plans today to change our pricing.

Dimple Gosal:

Thank you. Appreciate you taking the time. Can you just elaborate on that, please? I think on the last call, Badri, I think you guys spoke about being open to price concessions, if needed. And I think the market from what we're hearing from our peers is becoming increasingly promotional. So just how your strategy might differ between the two markets, US and Europe on ASP strategy?

Operator:

And our next question will come from Austin Moeller with Canaccord Genuity. Please go ahead.

Badri Kothandaraman:

Yeah. To answer, we are a little late on the battery manufacturing. We only expect it to begin in Q4, and that is because we are doing -- we are changing our approach on -- due to the domestic content guidance from the treasury, there are a few more things we have to manufacture in the US. They're already going to do power conversion, battery management in the US. We need to pull in the enclosure and the chassis also, which we are working on. So that's going to take us to the fourth quarter. And regarding your question on the $30 million to $33 million, yes, it includes IQ8P, true, and it does not include -- I mean it does include the microinverters for the batteries as well.

Graham Price:

Hi, good afternoon. Just one quick one for me on the Netherlands. Sell-through was down 15% quarter-over-quarter. You mentioned Europe overall was up 3%. So just wondering what impact does the slowdown in the Netherlands have on your normalized overall EU revenue?

Operator:

And our next question will come from Tom Curran with Seaport Partners. Please go ahead.

Badri Kothandaraman:

Yeah. I think we talked about it, but let me clarify. Gross margin on batteries is, we don't really break the gross margin between batteries and inverters. But our battery margins are doing healthy. Cell pack pricing is coming down rapidly. Our serviceability is increasing, that means service costs, warranty costs are going down. Then we will we have some benefit from the IRA where we make microinverters for the batteries in the U.S. So those three contribute towards very good GM, improving GM on the battery sequentially quarter-over-quarter. And then, we do have architecturally fourth generation battery, where we are cutting down the form factor by doing some deep integration of battery management and power conversion, and we are cutting the number of goods on that from the third generation to the fourth generation significantly. And so that one also helps us architecturally. So that will continuously improve our gross margin. And then, to answer the other question, we cannot name who is the other 50%. But that 50% attach for Enphase to NEM 3.0 solar systems has remained steady, like what I reported in the last two or three quarters. It's been steady, and I cannot confirm the rival names. I can say one thing. Our plan is to -- we talked about our plans. Today, we are 70% -- over 70% of those installations are grid tied, and we are going to be introducing a brand-new battery, meter collar and an enhanced system controller. The battery will be 10-kilowatt hours. So that means the modularity will be 10-kilowatt hours and not 5. Also the battery will have a neutral in it, which means that we are eliminating the system controller in fewer boxes. And we are enhancing the combiner to have a lot of bells and whistles. So the installer feedback is taken and they can connect even EV chargers, it's just enhanced functionality there. So I think we are well on our way there. We expect to introduce our fourth generation system, which is the battery, the collar, enhanced combiner in the first quarter of 2025, and we expect that to do well.

Badri Kothandaraman:

Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter.

Operator:

Good day, and welcome to the Enphase Energy First Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please also note, today's event is being recorded. I would now like to turn the conference over to Zach Freedman. Please go ahead.

Badri Kothandaraman:

Good afternoon, and thank you for joining us today to discuss our first quarter 2024 financial results. We reported quarterly revenue of $263.3 million, shipped approximately 1.4 million microinverters and 75.5 megawatt hours of batteries, and generated free cash flow of $41.8 million. We reduced our channel inventory by approximately $113 million in Q1, slightly less than anticipated because of softer demand. For the first quarter, we delivered 46% gross margin, 31% operating expenses, and 15% operating income, all as a percentage of revenue on non-GAAP basis, including the IRA benefit. Mandy will go into our financials later in the call. Let's now discuss how we are servicing customers. Our worldwide NPS was 78% in Q1 compared to 77% in Q4. Our average call wait time was 1.9 minutes in Q1 compared to 1 minute in Q4. We are adding data scientists, enhancing our analytics to identify problems proactively, and fixing them automatically through software. Our field engineers and technicians are assisting installers on complex installations, while bringing back learning to our development teams, enabling continuous improvement. Let's cover operations. We shipped approximately 506,000 microinverters in Q1 from our US contract manufacturing facilities that qualified for 45X production tax credits. Once fully ramped, we expect to have a global capacity of approximately 7.25 million microinverters per quarter, of which 5 million capacity will be in the US. We expect to ship approximately 0.5 million microinverters to customers from our US manufacturing facilities in Q2. The number is a little less than what we would like, but our top priority is to reduce our factory inventory. We anticipate resuming a higher level of shipments in the second half of the year. For IQ Batteries, we have two cell pack suppliers, both in China, which have sufficient manufacturing capacity to support our ramp in 2024. As previously discussed, we expect to add battery manufacturing capability in the US during the third quarter of 2024. Let's now cover the regions. Our US and international revenue mix for Q1 was 57% and 43%, respectively. For more visibility into our business, we are providing regional breakdowns and sell-through dollar metrics by region. In the US, our revenue decreased 34% sequentially as we under-shipped to end customer demand. The overall sell-through of our microinverters and batteries in the US was down 23% in Q1 compared to Q4. Let's discuss the market trends we are seeing in the US, split by non-California states and California. For non-California states, our overall sell-through was 21% down in Q1 compared to Q4. The sell-through was similarly down for both microinverters and batteries due to seasonality. In California, our overall sell-through was down 30% -- down by 30% in Q1 compared to Q4. Sell-through of our microinverters was down 37% and sell-through of our batteries was down 18% in Q1 due to seasonality and the NEM 3 transition. I'll provide more statistics and color on NEM 3 later in the call. In Europe, our revenue increased 70% sequentially as channel inventory improved and we introduced new products. The overall sell-through of our microinverters and batteries was up 7% in Q1 compared to Q4. The sell-through of our microinverters was up 3%, while the sell-through of our batteries was up 28% in Q1. I'll provide some color on key markets in Europe, particularly Netherlands, France and Germany. In the Netherlands, our overall sell-through in Q1 was down 4% compared to Q4. The market stabilized during Q1 and we are encouraged by the demand signals we see after seeing the government's decision to support NEM for the foreseeable future. We expect to see the sell-through of microinverters pick up in Q2 as a result of this decision. We continue to believe solar plus batteries are going to become the norm as dynamic tariffs and grid services become more prevalent. In France, our overall sell-through in Q1 was up 13% compared to Q4. We have been encouraged by the continued strength in this market, supported by higher utility rates. Solar penetration in France is still small and we see potential for the country to grow and evolve into a significant solar plus battery market for Enphase. In Germany, our overall sell-through in Q1 was up 28% compared to Q4. We are going from strength to strength in this market. We plan to launch our three-phase battery solution in the country later this year, along with additional software. We are leveraging AI and ML to enhance our home energy management software and expand grid services participation. We are continuing to launch our IQ8 Microinverters and IQ Batteries into many new countries across Europe. Notably, we started shipping IQ Batteries into Italy in the first quarter. Our sell-through in the new countries is beginning to ramp and we anticipate steady growth throughout 2024. In Australia, our Enphase Energy systems are powered by IQ8 Microinverters and IQ Battery 5P, our third generation battery, which we introduced in June last year. We expect higher battery attachment rates in Australia during the second half of this year. In Brazil, we are making good progress in building our installer base. In Mexico and India, we are shipping our highest-powered microinverters, IQ8P, to support high-power panels. We just started shipping the same microinverters into Thailand and Philippines in Q1. As a reminder, IQ8P is the high-powered microinverter at 480 watts AC for both residential and commercial applications. Let me say a few words about our market share. In the US, we see stable share for our microinverters and batteries based on both internal and third-party data. There have been several changes in the market over the last year, including a shift away from loans and towards lease and PPAs. Our continued strong market share is a testament towards our installer relationships and the differentiated value proposition we provide them with our products. We are fully focused on enhancing our product portfolio, solving installer pain points, and deepening our relationships. In Europe, we are using the same strategy to grow market share. Let me provide some color on NEM 3.0. In the last three to four weeks, I've been on the road. We have visited over 25 installers in California to really understand how their businesses are doing. Many reported that their businesses are down by 50% or more from last year's high, and they have all adjusted by becoming much leaner. They are getting better at selling NEM 3.0. They can clearly articulate what works and what doesn't. They are hungry for high-quality leads. They are also becoming adept at selling batteries, either a grid-tied battery or a backup battery with every install. They are becoming flexible in the financing options they offer to the homeowners. If the loans don't work, they aren't afraid to switch over to leases or PPAs, which are becoming increasingly available to the [indiscernible]. Most of them reported stronger sales in March of this year compared to January and February. I came away feeling that we are beginning to climb out of the bottom and we should get back to growth shortly. Let's cover some NEM 3.0 statistics, which haven't changed that much from our last call. In Q1, 50% of our California installs were NEM 3.0 systems. These systems have a very high battery attach rate, over 90%, compared to NEM 2 systems which have an attach rate of 15%. Our data also shows that half of our NEM 3 systems are using Enphase batteries. Taking this data into account, our average revenue per NEM 3.0 system is approximately 1.5 times our average NEM 2.0 system. We believe this will contribute to stabilizing and increasing our California revenue in the second half. Let's come to our Q2 guidance. We are guiding revenue in the range of $290 million to $330 million. We expect to ship 100 megawatt hours to 120 megawatt hours of IQ Batteries. We expect sell-through demand of our products to be approximately $400 million in Q2, up from $376 million in Q1, due to seasonal strength in Europe and non-California states, offset by some decline in California. We plan to under-ship to the end market demand for our products by approximately $90 million in Q2. We expect the channel to normalize by the end of Q2 on microinverters as we previously forecasted. Our channel is almost normal on batteries already. Let's talk about products, starting with IQ Battery. Our third-generation battery called IQ Battery 5P has been very well received. It delivers the best power specs and commissioning times of any Enphase battery till date at an industry-leading 15-year warranty. Battery adoption rates are on the rise globally and we are well-positioned to grow our sales in 2024. As we discussed last quarter, we expect our gross margins on batteries to continuously improve throughout the year. There are three factors

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Colin Rusch with Oppenheimer. Please go ahead.

Badri Kothandaraman:

Yeah. Could you please repeat that question, Colin? I didn't follow that properly.

Badri Kothandaraman:

Not much really, because the new markets are just ramping for us. For example, we introduced storage into Italy in Q1. So, really that's the only one where we introduced into a new market. Prior to that, if you see, we introduced into a few European countries. Prior to that, we introduced in UK. In fact, our storage is -- the channel is very healthy. We are actually normalized as we speak on storage. That's what I said. We are there on storage. In fact, I'll give you a data that I didn't talk about in the call. Sell-through, our sell-through of batteries in Q4 overall worldwide was 140 megawatt hours. While the sell-through of batteries in Q1 was 128 megawatt hours, only 8% down. It's a much better than the seasonality of 20% that we are seeing on the other products. And so, batteries are doing well in general, yet despite the 128 megawatt hours of sell-through, we had the discipline to only ship 75.5 megawatt hours. That means we took 43 megawatt hours out of the channel. The channel is quite lean for storage. That's why you see we are increasing the guidance. When I guided for Q1, I guided 70 megawatt hours to 90 megawatt hours. Now, I'm guiding for Q2, I'm guiding 100 megawatt hours to 120 megawatt hours on storage. So, storage is a good story. We expect it to continue. We expect over the long term, every market to transition to solar plus storage. We talked about the color on some of our markets. Netherlands, we talked about. France, we talked about. Germany is already there. California will get there soon. So, in general, storage is a good story for us.

Badri Kothandaraman:

Right. And we measure something called ASP variance and we measure something called customer variance. A customer variance means how much pricing did you drop at a particular customer quarter-to-quarter. And ASP variance is simply a function of how your mix did. For example, if you have a lower pricing for a particular customer and his volume went up, it will show up as an overall reduction in ASP. Really the measure of effectiveness in pricing comes from customer ASP variance. Are you dropping pricing at a particular customer? And the answer is we are very disciplined there. So, what you are seeing is a result of mix, but we are extremely disciplined when it comes to -- you talked about, in order to move inventory, do you need to lower pricing? No, we don't do -- we don't play games like that. So, we are disciplined. We will be disciplined. We sell on value and what you're seeing is purely a product mix issue.

Operator:

Thank you. And our next question today comes from Brian Lee at Goldman Sachs. Please go ahead.

Badri Kothandaraman:

Got it. So, Brian, in Q1, our sell-through demand, which is end customer demand was $376 million, in Q1, and we reported revenue of $263.3 million. Therefore, you can do the math, $376 minus $263 million is $113 million of under-shipment. Now in Q2, I guided $290 million to $330 million, midpoint of guidance is $310 million. And now, I said my estimated sell-through in Q2, which is reflective of end customer demand is $400 million. So, the difference between the two, $310 million minus $400 million or the other way, $400 million minus $310 million is the $90 million of under-shipment. Now, what could that $400 million be in the second half of the year? That's where we are talking about the markets. We expect Europe, for example, to continuously improve. Netherlands government has approved net metering for the foreseeable future. We are starting to see the lead generation much higher in the Netherlands. That should start to result in -- resulting in increased sell-through and increased activations in Netherlands, which is a big deal. Next one is France. France, the utility rates are helping us. So, you can see despite this environment, we expect France to be strong. Third one is Germany. We reported sell-through of 28% higher in Q1 from Q4. And once again, there the cost of electricity is high and we expect solar and storage or solar and batteries to continuously grow. On top of it, I talked about our product introductions. In the last year, we have set ourselves up nice by introducing IQ8 and batteries everywhere. We are now in 24 countries. Even in Q1, we introduced batteries into Italy. Prior to that, we introduced into UK, then we introduced Sweden, Denmark, et cetera prior to that. I'm not going to list everything. So, we are attacking new markets in both Asia as well as Europe. And now let's come back to the US. In the US, the dynamics are non-California states and California states. I mean, yeah, in California. So, non-California states, there are multiple data points for us to tell you that things are improving. In the last few weeks, enough -- in the last few weeks, let's say, last four weeks, we are seeing better sell-through numbers compared to what we saw prior to that. That's the first data point. The second one is we have our internal Solargraf software, which is now being used by over 1,000-plus installers, and therefore we can look at sales, proposals, contracts we can see those numbers are continuously going up in March. The numbers are up in March versus February. Numbers are up in April versus March. So that's a good sign. Then, of course, it is anecdotal. My interactions with customers in California in the last four weeks, all of them universally said March is a much better sales month than February. The last one is you do see third-party analytics reports like that talk about permitting and you can see the -- in general, the permits for non-California as well as California are up in the month of March versus February. By the way, the trends that I told you are valid for both non-California as well as California in the last few weeks. So, we are cautiously optimistic that things are turning and that's why I said Q1 is the bottom quarter. That's why we are raising our guidance to $290 million to $330 million for Q2. That's why we said the sell-through is going up from $376 million to $400 million. And we expect with these growth trends, we expect a sell-through to continuously go up. And the last one, the point which I wanted to talk about was interest rates. We now hear that there are going to be likely two interest rates, two cuts instead of maybe three or four planned before. So anytime that there is a cut that is going to expand the non-California states even further, meaning the demand further. So, those all could come into play.

Badri Kothandaraman:

Yeah, I think what you said is correct. Meaning, once the channel is normalized, sell-in and sell-out should be balanced. So, that's right. So, for example, we do expect the sell-through in Q3 to be higher, but if you were to say it is -- sell-through remains around, let's say, $400 million level, our sell-in would remain similar because now we have taken all the inventory out. We don't need to do any under-shipment any longer. So, our sell-in and sell-out are balanced at that time. But like what I said, there are several vectors for that sell-through to improve in Q3, which I highlighted, all of the things in Europe, all of the new products we are introducing, non-California states, which are improving, California installers learning to do NEM 3.0, more financing options being available to the installers in general than before in the US, and us starting to ramp on small commercial products. So, all of that you know make me optimistic that sell-through would start to become higher in Q3 and beyond.

Operator:

Thank you. And our next question comes from Kashy Harrison with Piper Sandler. Please go ahead.

Badri Kothandaraman:

Right. In general, we are not perfect. We forecast based on the seasonality. We were right in most places. And as I reported, the California numbers were a little bit worse and you can see that. The sell-through in California was about 30% lower, 37% on microinverters, and about, I think, 18% or 19% on batteries. So, I think California was the wildcard, which I did mention in the prior quarter. And I think we are getting though increasing confidence on California. I outlined everything which we discussed with the California installers. So, we are confident in our forecast right now and the first few weeks of the quarter seem to be trending in that direction.

Badri Kothandaraman:

Yeah. IQ9, first of all, we were going to -- we are working on two flavors. One is a 427 watt microinverter and the other is a 548 watt microinverter. The 427 watt microinverter would be what I would consider the bread and butter for the US in probably a year from today, which is right in the timeframe that we are introducing. And I would say that typically an introduction in the ramp for a new product like that would be four to six quarters based upon our experience with IQ8. So, two flavors, 427 watts and 548 watts. In the 548 watts, things get a lot more interesting. We are now going to have the 548 watts for three-phase, 208 volts as well as 480 volts small commercial installs. So, that'll be good. The principal thing about IQ9 is it uses gallium nitride. Gallium Nitride enables a high -- much higher power with similar form factor. It's got a good efficiency and it doesn't dissipate as much heat. So, when we are using it in our -- both the AC as well as DC FETs, we are able to get -- we don't need to blow up the microinverter form factor. And the other advantage with gallium nitride is it allows us to operate at a higher frequency. Earlier, we used to operate at -- or today in IQ8, we are operating at 100 kilohertz. With gallium nitride, we can go up to a megahertz and we need to -- we are working on our ASIC in order to get to that capability of a megahertz. But once you get to a megahertz, then what happens is you can basically get rid of your big transformers. And the transformer sizes can all go down. And anyone who knows about inverters know that there is a lot of dollars going in there. So, in terms of form factor, things will get a lot more tighter, so that now since they get tighter, you're not talking about blowing up the area due to higher power because one of the concerns always is efficiency. When you have higher power, if you operate at your same efficiency, you're dissipating a lot of heat. Like for example, at 548 watts, you have let's say, 97% efficiency, that means 548 watts times 3% that's 16 watts of power and 16 watts of heat. But with the gallium nitride FETs, we are able to operate them with good efficiency. And so, we don't need to blow up the inverter and we can keep it with an elegant form factor. For installers, we can look at bringing the dollars per watt continuously down. Because for us, the more compact we make the microinverter, the more integration we achieve, the better it is. And just as FYI, where there are four silicon FETs before on the AC side, we will only need two silicon FETs or transistors because we got something called as a bidirectional switch for GaN. It can operate both ways. So, just zooming back to a higher level, GaN will allow us to operate at higher power, lower efficiency with the same form factor thereby dropping the dollar per watt because you're increasing your power a lot.

Operator:

Thank you. And our next question today comes from Mark Strouse at JPMorgan. Please go ahead.

Badri Kothandaraman:

Yeah, there what I was talking on the question from Colin, which was microinverters was installer mix. That's correct. But this question that you are asking, the 39% meaning, we guided 39% to 42% for non-GAAP gross margin without IRA in Q2. Your question is why? And yes, we increased our battery guidance by 30 megawatt hours. As you can see, Q1 guidance was 70 megawatt hours to 90 megawatt hours. We increased 100 megawatt hours to 120 megawatt hours. That means we are -- the battery to microinverter ratio is increasing from before. We are getting a -- we are getting better and better and better on the gross margin of batteries, and you'll see those numbers continuously improve. On batteries specifically, I called out three factors. I said the cell pack costs are continuing to come down rapidly. We are beginning to manufacture now our microinverters, which are used in the battery. We are beginning to manufacture them in the US. Those will provide us with the production tax credit, which is exactly the intention that we need to produce that product in the US, the inverter is made in the battery. And then, the last one, which is exciting one is where we are moving to a more integrated architecture for power conversion and battery management. And basically, what's going to happen is our third-generation battery, the Y direction is going to almost get cut by 40%, and instead of six microinverters that we have in the third-generation battery, we will now have two microinverters, one on each side of the fourth-generation battery significantly cutting down the form factor. So, we expect that to bring in another big level of improvement in gross margin. So, those are the gross margin puts and takes on our batteries.

Badri Kothandaraman:

No. What happens is, there is a few things that happen there. It depends upon the power of the microinverters that we are building. Sometimes we may build a 384 watt microinverter, you do the $0.11 per watt math there or we may build a 640 watt microinverter that is used inside the battery. So, it's a function of that and purely a function of that. So, it just falls out. The higher power we make, the more advantage we have, which is why we are beginning to -- I told you that we are beginning to make our small commercial IQ8P microinverters starting in Q2 as well from the US. So those are 480 watts, so $0.11 a watt is $53 gross benefit, gross production tax credit there.

Badri Kothandaraman:

Thank you.

Praneeth Satish:

Thanks. Maybe just staying on the battery, so looking out to the fourth-gen battery, it seems like there's a very large cost reduction coming. I guess, how do you think about keeping these cost savings versus passing it on to customers? I guess, specifically, I'm thinking about this in the context of Tesla Powerwall 3. Today, you can buy a Tesla Powerwall 3 with its integrated inverter and that's going to be cheaper than an Enphase battery, an inverter solution. And I know it's apples-to-oranges because they're using a string inverter. But I guess with the fourth-generation battery, you have the ability to close that gap while still earning more margin. So, I guess, I'm just trying to see how you think about that opportunity next year with that new battery.

Praneeth Satish:

Got it. No, thank you for that very expansive answer. Maybe just one more quick one, again on batteries. So, you said that the channel is normal for batteries. You are at battery sell-through of 128 megawatt hours in Q1 for seasonally weak quarter. The guidance for Q2 has battery shipments at 100 megawatt hours to 120 megawatt hours, and I'm assuming there that sell-in equals sell-through in Q2. So, maybe if you could just talk about what's driving that slight decrease from 128 megawatt hours to the guidance of 110 megawatt hours? Is that conservatism or are there other factors? Because it seems like there's a lot of tailwinds in the battery business.

Praneeth Satish:

Got it. Thank you.

Philip Shen:

Hi, everyone. Thanks for taking my questions. Back to Brian's question earlier on the timing of normalized revenue, Badri, I think you said on the last call, the $475 million would come in the back half of this year. Are we still on track for that? So, the $475 million could be in either Q3 or Q4? And can you walk us through -- is it more likely Q4 or Q3, or if there's a chance that that gets pushed out to Q1? Thanks.

Philip Shen:

Great. Okay. So, very much still on path, but there might be a little bit of risk, but you definitely see a path, it sounds like.

Philip Shen:

Great. Okay. Thank you. Shifting gears to maybe data that might be even ahead of sell-through, our channel work suggests in this challenging US resi time, you guys are gaining a healthy amount of share, whether it's 5% from one source versus a recent poll that we did, you might be gaining 11% share with 5% of the market, that's pretty healthy and potentially can make a big difference. And so, wanted to see if you can help us understand what is the activation implied revenue that you might be seeing versus sell-through and obviously compared to the sell-in. So, do you track that in a way that you can articulate what was the activation implied revenue for maybe Q1, maybe what you see for Q2 and beyond? Thanks.

Philip Shen:

Okay. Thanks very much, Badri. I'll pass it on.

Operator:

And the next question comes from Christine Cho with Barclays. Please go ahead.

Badri Kothandaraman:

Yeah, so let me answer all of them. We expect -- I mean, Europe as well as the US have healthy growth vectors for us. We do expect 50-50 from North America and Europe. Your other question was...

Badri Kothandaraman:

Tell me again. Micro versus...

Badri Kothandaraman:

Battery. Yeah, micro versus battery. I would say considering that non-California states, the battery attach isn't high. So, micro versus battery, I would still say 60-40 on micros, micros versus battery is what I would say. And the last one you asked is that eight to 10 weeks. The way we measure our weeks on hand is typically backward looking is what we say is over the quarter, this was the sell-through rate, this is the inventory you have on hand today, divide the inventory by the sell-through rate, you get the weeks on hand. One of the interesting ways that I would expect distributors will measure it will be forward-looking weeks of inventory, which is, if the demand, for example, in the last two or three weeks shows a significant uptick, that weeks on hand would be existing amount they have in front of them divided by that increased rate in the last two to four weeks. And so, those numbers, in good times, the forward-looking inventory weeks on hand will be lower than the backward looking weeks on hand. And so, for us, we are consistent in the way we measure it. We always look at -- whenever I tell you weeks on hand, I will tell you that, okay, this is the sell-through for the quarter that what happened in, for example, Q1, this is what happened in Q1. This was the inventory at the end of Q1. That inventory, channel inventory, divided by the sell-through gives the weeks on hand. And our number rule of thumb or our general number has been always eight to 10 weeks. If you're on the upswing, forward-looking weeks on hand could be smaller than that.

Badri Kothandaraman:

That's right, load shifting is a significant fraction of our installs. That's right. And then, the second is, when is the meter collar coming out? So, just for the benefit of the audience, basically California has something called meter main combos. These meter main combos have both the meter and the main panel integrate into one structure. And when you have to insert backup, everybody knows you have to do ugly things like ripping your loads apart. You have to put a backup switch in between. Therefore, there's a lot of labor that is actually spent in doing that. Typically, a day or two is spent in relocating all of those loads and then putting a system controller in between the meter and the main load center. With the meter collar, it's a very elegant way where you have that switch at the meter. It's a device that comes around the meter. It's got the MID, which is the microgrid interconnect switch relay, right there at the meter, at the collar, and that basically means you don't spend any labor relocating those loads. Our version of the meter collar is coming out shortly. It will be piloting by the end of the year.

James West:

Hey, Badri. Real quick one for me. Based on your conversations in California over the last three or four weeks as you met with the installer base and you talked about how they -- you talked earlier about how they cut costs pretty significantly, is there any concern at all about if growth does come back as you see it, that their ability to respond to that growth?

James West:

Got it. That's very helpful. Thanks, Badri.

Operator:

And our next question today comes from Moses Sutton at BNP Paribas. Please go ahead.

Badri Kothandaraman:

I would basically expect that it is roughly in the ratio that we shipped, which is I would say two-thirds US and a third Europe.

Operator:

And our next question today comes from Jordan Levy with Truist Securities. Please go ahead.

Badri Kothandaraman:

The question is, is there any update on SunPower? SunPower has new management, as everybody knows, and we know Tom Werner well. I've been talking to Tom. Right now, it's a business as usual for us. We have a very strong relationship. We are supporting SunPower well and vice versa. And when we sign such a contract, we will let you know.

Badri Kothandaraman:

Yeah, we're having a hard time hearing you, but I think I got the question. This is, replacement for your Chief Commercial Officer I guess the question. Yes, we've already finalized that.

Badri Kothandaraman:

Yeah, we've already finalized that. We have two very experienced executives that I have put in charge, because Europe is so important for us. I wanted a very experienced executive to live in Europe, somebody who understands the headquarters properly. And so, one of our executive staff, meaning the one that report to me, his name is Sabbas Daniel, he is going to be running all of Europe and South Africa sales. So, basically, he is actually relocating to Europe in order to manage that team. And then, the team in the rest of the world, I call it, Americas, Australia, India, Asia, both Americas, North as well as South, that's -- especially North American team is a very seasoned team. We have Ken Fong runs our North American team, while Mehran is the Senior Vice President who is going to manage Rest of the World sales, and Ken Fong will report to him. And Mehran has got a lot of experience in batteries. He's the one who actually created the battery business unit at Enphase and ramped it to high revenue. So, both the executive Sabbas as well as Mehran have lots of experience, and they'll be able to pay a lot more attention to these regions, and we expect it to be incrementally positive for us.

Operator:

And our next question today comes from Andrew Percoco with Morgan Stanley. Please go ahead.

Badri Kothandaraman:

Right. So, I mean, the answer is somewhat simple. It is to basically get a hold on the metrics of the front end, which is, leads get converted into proposals, converted into contracts, converted into permits, and then the installs happen, then you have activations. So, we have to get into the front end. And getting into the front end, we have Solargraf. Solargraf is a platform for us which helps us because we provide the design and proposal software. And therefore, that gives us the entire visibility on -- it doesn't need to give us the customer -- what every customer is doing, but the broad trends and broad strokes are what we are interested saying, this month what happened in this particular region? What is the statistics of leads versus contracts signed? And then, we do have third-party reports for permits. And of course, we do have our own Enlighten software for activations. And of course, in between we have sell-through, which is when the distributors sell our products to installers from the channel. So, what we are doing is to essentially tighten up that entire chain by putting in metrics at every point there. And by having more and more and more revenue coverage for Solargraf design and proposal tools so that as many installers possible are on that particular tool. So, then we have a lot more statistics. We'll continue to get aggregate reports from third parties as much as they are available. And putting all of these together to create a regression model, maybe even with the help of some sophisticated machine learning. And then, the key is for us to then make decisions on sell-in into how much do we sell into the channel? What are the guard bands of selling into the channel at the end of the day? Like don't get -- don't succumb to irrational exuberance. That is, you think everything is going to be great, therefore you ship a lot more into the channel than the sell-through, do not ever succumb to that. Go always by -- my ex-boss used to call it as mass balance. Mass balance means, whatever you ship out of the channel, you ship into the channel. So, we are putting in all of those statistical process control in place. And we are already better for it. Our weekly ship review every Wednesday, we have exactly the graph, how much is our sell-through? How much is our sell-in? Should we really do so much of sell-in? Are we going to stay within the guardrails, which is eight to 10 weeks? Anytime somebody goes above 10 weeks, we question saying, "Why do it?" And it helps us -- it's starting to help us in many ways. Because then we focus on the real growth, which is, you then start focusing on training installers to increase sell-through. You start understanding which of the installers aren't doing enough volume with you. Sales guys are focused on the right things versus pushing in stuff into the channel. So, I think companies have gotten a lot better in this front during the last year.

Badri Kothandaraman:

Thank you.

Q – David Benjamin:

Hi, this is David Benjamin in from Maheep. I've got a question and then a follow-up. Can you please give us some insights on your thoughts on the Solargraf market share or penetration with installers within the US? Just trying to get some visibility with sales leads in the market.

David Benjamin:

Okay. Great. Thanks very much. And then a follow-up. Just on the gallium nitride, can you talk a little bit about, like, where you plan to source the materials? Is that going to be concentrated mostly from China or other markets? And lastly, any thoughts on impact from [indiscernible] AD/CVD on the US solar demand or thoughts on the NEM 3 challenge in the California courts?

Raghu Belur:

Yeah. NEM 3, we are aware of the challenge, where it was -- there was an -- it had gone into appeals court because they actually lost the case in the lower court. It remains to be seen. The fact is that I think it's going to be difficult to overturn, but if they do, obviously, the market will react differently. But for now, for us, business as usual, we are going out there. We recognize that in the long term solar plus batteries is the way to go. And we are really working towards making sure that our battery solution -- solar plus battery solution is best in class, and that's what we are doing right now. But the courts will take their time, they'll do their thing, but it's not something that we are really focused on.

Operator:

Thank you. And our next question comes from Austin Moeller with Canaccord. Please go ahead.

Badri Kothandaraman:

Yeah, Raghu will take it.

Austin Moeller:

Great. And just to follow-up, what do you see as that key growth driver in demand for Europe and Germany in particular? Is it primarily current utility rates? And do you see changes to tax credits in countries like Italy as a potential impediment to that?

Operator:

Thank you. And our next question today comes from Dylan Nassano with Wolfe Research. Please go ahead.

Badri Kothandaraman:

Yeah, I'll add some color and then Mandy can add more. We did approximately a similar amount in both quarters, but I'll explain the nuance. In Q4, we did -- we bought back shares for $100 million. While in Q1 what we did was we did a combination, which is we bought back shares for about $40 million-odd, and we -- some of our stock options, which basically were actually vesting, those stock options, essentially, Mandy didn't allow them to dilute the market. So, we basically spent about $60 million as anti-dilution there. So, in a sense, we spent the same money, $100 million; $40 million for buying back shares out of the market, $60 million for preventing shares into the market. We did that and we continue to -- I mean, you should expect us to continue to do a similar amount as long as the stock is attractive, which it is right now.

Operator:

Thank you. And our next question comes from Dushyant Ailani with Jefferies. Please go ahead.

Badri Kothandaraman:

Yeah, I mean that's an interesting question. All our conversations with installers -- there was one installer who had a backlog of nine months, and there are installers with a backlog of three months. So, we don't really know what the answer is. Like you, we were surprised that the number is still 50%, NEM 2. But installers are learning on NEM 3 rapidly. They are depleting through their NEM 2 backlog. I'm not sure. I can't forecast the number. But I'm sure that within six months, it will dwindle down.

Operator:

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Badri Kothandaraman for any closing remarks.

Operator:

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Operator:

Good afternoon, and welcome to the Enphase Energy Fourth Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Zach Freedman. Please go ahead.

Badri Kothandaraman:

Good afternoon, and thanks for joining us today to discuss our fourth quarter 2023 financial results. We reported quarterly revenue of $302.6 million, shipped approximately 1.6 million microinverters and 80.7 megawatt hours of battery and generated free cash flow of $15.4 million. On our last earnings call, we said we would reduce channel inventory by approximately $150 million. We achieved a reduction of $147 million in Q4. For the fourth quarter, we delivered 50% gross margin, 29% operating expenses and 22% operating income, all as a percentage of revenue on a non-GAAP basis and including the IRA benefit. Mandy will go into our financials later in the call. Let's now discuss how we are servicing customers. Our worldwide NPS was 77% in Q4, the same as Q3. Our average call wait time was one minute compared to 1.3 minutes in Q3. We have made good progress on solving customer issues by focusing on both automation as well as expanding our field service teams globally. Let's talk about operations. The overall supply environment for microinverters and batteries is quite stable. Let's come to microinverters. We shipped approximately 913,000 microinverters to customers in Q4 from our contract manufacturing facilities in the U.S. We announced in December that we are seizing operations at our contract manufacturing locations in Romania and Wisconsin. We will manufacture microinverters in the U.S. with our two existing partners in South Carolina and Texas. The equipment currently located in Romania and Wisconsin will be redeployed for use at other facilities. Once our restructuring actions are complete in the first half of the year, we expect to have a global capacity of approximately 7.25 million microinverters per quarter of which 5 million will be in the U.S. We expect to ship approximately 500,000 microinverters to customers from our U.S. manufacturing facilities in Q1. We expect that our shipments from U.S. facilities will be lower in the first half of the year as we reduce both factory as well as channel inventory. We anticipate a higher level of shipments in the second half of the year. For IQ batteries, we have two cell pack suppliers, both in China which have sufficient manufacturing capacity to support our ramp in 2024. In addition, we will have the capability to manufacture IQ batteries in the U.S. in the third quarter of 2024. Let's now cover the regions. Our U.S. and international revenue mix for Q4 was 75% and 25%, respectively. For more visibility into our business, we are providing you regional breakdowns and sell-through dollar metrics by region until the channel is healthy. In the U.S., our revenue decreased 35% sequentially as we undershipped to the end customer demand. The overall sell-through of our micro inverters and batteries in the U.S. was down 9% in Q4 compared to Q3. Let's discuss market trends we are seeing in the U.S. split by non-California states and California. For non-California states, our overall sell-through was only down 1% in Q4 compared to Q3. The sell-through of our microinverters was flat and the sell-through of our batteries was down 8% in Q4. In California, our overall sell-through was down by 7% in Q4 compared to Q3. The sell-through of our microinverters was down 27% in Q4 primarily due to the NEM 3.0 transition. However, the sell-through of our batteries increased by 58% in Q4 due to the high attach rate of NEM 3.0 systems as expected. As we discussed on our last earnings call, it will take a few quarters for our installers to fully transition the NEM 3.0 and normalized sales. I'll provide more statistics on NEM 3.0 later in the call. In Europe, our revenue decreased 70% sequentially as we under ship to the end customer demand. The overall sell-through of our microinverters and batteries in Europe was down 20% in Q4 compared to Q3. The sell-through of our microinverters was down 23%, and sell-through of batteries was down 2% in Q4 compared to Q3. I'll provide some color on our key markets in Europe, Netherlands, France and Germany. In Netherlands, our overall sell-through in Q4 was down 37% compared to Q3. Customers are fearing an export penalty for solar, and there is confusion about the ending of net metering. We kicked off the New Year with the Solar Next event in Netherlands, where we hosted 800-plus installers across the country, promoting a comprehensive solution with Solar Plus batteries and energy management software that will unlock the full potential of the Dutch energy market. We believe Solar Plus batteries are going to become the norm as dynamic tariffs and grid services become more prevalent. We are already seeing a steady ramp in batteries in the region and expect the trend to accelerate in 2024. In France, our overall sell-through in Q4 was only down 1% compared to Q3. We see a lot of potential for this market to grow and evolve into a Solar Plus battery market as utility rates have moved higher and are expected to increase even more in 2024. In Germany, our overall sell-through in Q4 was down 32% compared to Q3. However, we saw sequential growth in activations for both solar and batteries as we continue to gain traction in the region. We are introducing our products into more countries in Europe. In the last few months, we have entered U.K., Sweden, Denmark, Greece, Switzerland, Austria, Italy and Belgium markets with our IQ8 microinverters and IQ batteries. In Australia, we are seeing growth for our Enphase Energy systems powered by IQ8, microinverters and IQ Battery 5P, latest third-generation battery, which we introduced in June of 2023. In Brazil, our sell-through is stabilizing nicely as we focus on building the installer base. In India, we are starting to ship our IQ8HC and IQ8P microinverters to support high-power panels. In Mexico, we just recently started shipping IQ8P microinverters for residential applications. As a reminder, IQ8P is our highest power microinverter at 480 watts AC for both residential and commercial applications. Let me say a few words about our U.S. market share. We see stable share for our microinverters and batteries based on both internal as well as third-party data. We have a large and diverse customer base. Our value proposition is to provide installers the easiest installation process with high quality and best-in-class service. We also have tools like Solargraf, design, proposal and permitting software and lead generation through solar lead factory at our disposal to help our installers. As a result, our partnerships go even deeper during the downturn. Let's cover some NEM 3.0 statistics in California. Third-party data shows that the battery attach rate for NEM 3.0 systems is over 80%. Based on our system activations in January last month, approximately half of our solar installations in California were NEM 3.0. Of our NEM 3.0 solar installations, about half of them use Enphase batteries. Our revenue per NEM 3.0 system is approximately 1.5x our average NEM 2.0 system. The transition to NEM 3.0 has been a little slower than what we anticipated. Installers are still installing NEM 2.0 systems, and this has caused a delay for some of them to sell NEM 3.0 systems. The ones who started are finding the sales process a little more difficult given the complexity of the tariff structure, the added cost of batteries upfront and high interest rates. One particular challenge we hear is their lack of confidence in the payback of the systems they are selling. This is where Solargraf software, our design and proposal software with NEM 3.0 support is critical because of its advanced modeling capability. In addition, installers are still coming up the learning curve on installing batteries. We are addressing this by making a lot of products improvement for ease of installation commissioning, serviceability and continue to offer in-person training and webinars on Solargraf software. Let's now come to our Q1 guidance. We are guiding revenue in the range of $260 million to $300 million. We expect the sell-through of our products to be seasonally down in Q1. We plan to undership to the end market demand for our products by approximately $130 million in Q1. We are forecasting to undership in Q2 as well, although at a much reduced level, and expect the channel to be normalized by the end of Q2. Let's talk about new products, starting with IQ batteries. Our sell-through for batteries has been increasing steadily over the last few quarters. Our third-generation battery delivers the best power specs and commissioning times of any Enphase battery today at a 15-year industry-leading warranty. The battery adoption rates are on the rise globally and we are well positioned to grow our battery sales in 2024. Also, we expect our margins on batteries to get better throughout 2024. There are three factors in play here. Cell pack costs, which are coming down, microinverter costs, which are coming down for us due to U.S. manufacturing and other cost -- product costs coming down due to improved architecture on our fourth-generation batteries causing the lower bill of material. We are working on entering more countries in Europe and Asia with our third generation battery. We expect to introduce our new three-phase battery with backup for Germany during the year. We plan to pilot our fourth-generation battery later in the year. This battery will have a great cost structure and elegant form factor due to the integrated battery management and power conversion architectures. As previously discussed, we have entered many new markets with IQ8 family of microinverters and are now in 21 countries. We plan to enter many more new countries in Europe and Asia throughout 2024 with our microinverters. And we plan to increase our served available market by introducing social housing and balcony solar solutions to European countries during the year. Let's also talk about our latest microinverter for the Residential segment. I already mentioned IQ8P, which delivers 480 watts of AC power, supporting panels up to 650-watt DC. We are currently shipping that product into Brazil, India, South Africa, Mexico and Vietnam. We are on track to ship into France and Spain followed by emerging markets in 2024. The other variant of the IQ8P microinverter with the new three-phase cabling system is well suited for small commercial solar installations, ranging from 20 to 200 kilowatts. We launched this product in North America in December and are seeing strong early adoption. We are very excited about this product and look forward to manufacturing all the flavors of IQ8P microinverters at our U.S. facilities shortly, further reducing our cost structure. Let's discuss EV charging. We shipped over 3,700 chargers in Q4 compared to over 3,500 chargers in Q3. We launched our IQ smart EV chargers in U.S. and Canada in Q4. The Wi-Fi enabled charger is now integrated to the Enphase Energy system. This enables use cases such as self-consumption and green charging and allows homeowners complete visibility into the operation of their system through the app. We are developing IQ smart EV chargers for many countries in Europe as well and expect to introduce them during the year. The team is also working on bidirectional EV charger, which will unlock use cases such as V2G and V2H as part of the Enphase Energy System. The charger will have GaN-based bidirectional inverters, which will interface with EVs, which have high voltage, high DC voltages. I've so far discussed our hardware products. Let's cover our energy management software. The importance of this software to deliver a superior customer experience cannot be overstated. The Enphase Energy System is becoming more sophisticated with the addition of solar, batteries, EV chargers, heat pumps, et cetera. In addition, the utility tariffs, which were once fixed rates are now becoming increasingly complex with time of use rates, NEM 3.0, demand charges, dynamic tariffs and our software is evolving to manage this complexity by leveraging artificial intelligence and machine learning for forecasting and optimization. We see this as an area of differentiation for us and are developing core IP towards that objective. We expect to release this software beginning in Q2, adding several features throughout the year. Let's now discuss our installer platform. We released new features in Solargraf during Q4. We introduced electrical design and single-line diagram features while continuing to offer NEM 3.0 functionality for solar and battery systems in California. The software platform is now current -- is now available to installers in U.S., Brazil, Germany and Austria, and we expect to release it to more countries in the coming quarters. Let me conclude, we have been managing through a period of slowdown in demand. We think Q1 could be the bottom quarter. Europe is already showing early signs of recovery, and we expect the non-California states to bounce back quickly. California is the exception as NEM 3.0 is having some hiccups in the near-term. However, we remain very bullish about NEM 3.0 in the long-term. The payback is very attractive for solar plus storage. The utility rates are going up steeply on an annual basis, and the sales teams are learning fast. We see that the demand is going to eventually bounce back up in California as well. I'll wrap up outlining our approach during these times. We are laser focused on ease of doing business on both high quality and great customer service. We are doubling down on operational excellence, correcting the channel and factory inventory concentrating on sell-through and installer count reducing our expenses and product costs and maintaining healthy gross margins. We are getting many new products out and diversifying our portfolio rapidly. We are expanding worldwide with full systems comprising of IQ8 microinverters, IQ batteries, EV chargers and energy management software. We are introducing products with the small commercial solar markets worldwide and making continuous enhancements to our installer platform. In addition, we are innovating on GaN-based IQ9 and 10 microinverters, along with bidirectional EV chargers, our fourth and fifth generation IQ battery and AI-based energy management software to position us well for the long-term. With that, I will turn the call over to Mandy for her review of our financial results. Mandy?

Operator:

We will now begin the question-and-answer session. [Operator Instructions]. And our first question will come from Brian Lee of Goldman Sachs. Please go ahead.

Badri Kothandaraman:

Right. So just to tell the big picture. Basically, I told you that we have two problems. One is channel being full problem, channel inventory problem and the other is the native demand problem. And so with the demand reduction of about, let's say, 30% to 35% from our overall highs, what we expect is an end customer demand roughly in the range of $450 million to $500 million. That's what I told you the last time. And we were close our Q3 end customer demand, Q3 '23 end customer demand was approximately $500 million. Our Q4 '23 end customer demand was approximately $450 million. As you know, we -- our numbers are much lower compared to those numbers. So we said we plan to ship $150 million, undership $150 million compared to the end customer demand. So our end customer demand was $450 million in Q4. We undershipped approximately $147 million. We reported a number of $303 million, which is $450 million minus $147 million. We expect the sell-through demand is going to be seasonally down approximately by 10% in Q1. And that's typical. And we expect an undershipment of $130 million. So with these two under shipments, we would have taken $277 million out of the channel. And we expect, going forward, Q2, we expect it to be, if nothing happens, it is seasonally better. And for us, since we have taken out a lot of inventory in the channel, we then start to approach a negative demand of $450 million, depending on how much residue undershipment that we have in Q2. So while I cannot tell you the exact numbers, you should generally expect our sell-in numbers to improve as we go into Q2. You should expect the sell-through numbers to be seasonally better as you approach Q2. Now other things that are in our favor, we are seeing Europe -- I mean, Europe drop to quite a low level. We are seeing Europe starting to pick back up. We have seen France is back to the level it was before. We are seeing Netherlands, although Netherlands is not back to the original level, far from the original levels, but we see incremental progress on a weekly basis. In addition, we have introduced in the last six months, several new products in Italy, U.K. Sweden, Denmark, and a bunch of other countries. We start to see all of those also kicking in. As far as California states are concerned, we already said Q4, was stable for non-California compared to Q3. So we think the non-California states will also bounce in Q2. So while I'm not telling you any numbers, I gave you the directional indication that we expect selling numbers to go not. And my assumptions are that sell-through behaves according to the typical seasonality pattern that we have seen. California is, of course, the wild card, but we think that the -- even taking that into account, we expect to do -- we expect excellent numbers or our revenue numbers to go higher sequentially in June.

Badri Kothandaraman:

The one thing that I did not say in the script, which I will say now is the sell-through our batteries in Q4 was the highest it has ever been. It was a 140-megawatt hours 140 sell-through in Q4. Our sell-in was only 80, you might ask why is your sell-in lagging behind. We'd like to get the channel as low as we possibly can. So therefore, we are getting more conservative. We only guided 70 to 90, but because we want the channel to get cleaned up. So what is driving that sell-through, if you ask? The answer should obvious to you based on what I said, California, I told you, the sell-through increased by 58%. Just in California due to the NEM 3.0 attached, California numbers, Q4 to Q3 -- Q3 to Q4. Also, we are seeing a good momentum in Europe. We have introduced batteries now to multiple regions. We introduced in June, we introduced to Australia, in September, we introduced to the U.K., then we introduced it to a bunch of other countries, too, along with it. I'm not breaking all of those out. In December, we launched individually and we'll start shipping there very soon. So on battery demand, I'm happy to say, is very robust. And what we plan to do is to basically, of course, we plan to improve our gross margins. Gross margins, there are three things in gross margins that are obvious. The first two are applicable for our third-generation batteries, and the last one is applicable for the fourth-generation batteries. The cell pack costs are coming down rapidly. Our suppliers are offering as very competitive pricing on cell packs, which is definitely moving the needle. That's one. Number two, for us, specifically, we are transforming our supply chain so that we can make our microinverters for the batteries in the U.S., while we can have the assembly of the batteries in China. That gives us a best-in-class supply chain. And that, we get IRA benefit of $0.11 a watt, multiplied by 640-watt multiplied by 6. So for a 5-kilowatt hour battery, that's approximately $75 per kilowatt hour benefit that we get just for making the microinverters in the U.S., and we plan to do that. The third one is an architectural benefit. When we go from the third-generation to the fourth-generation battery, we are -- in the third-generation battery, we have six microinverters. We have a battery management board. We have a couple of other boards, the communication board and an interface board. So we have nine boards. So those nine boards will go down to three boards because we are integrating battery management, and we are making the power conversion with a lot more power. So we are going to have a total of three boards. So nine is becoming three. Our power electronics, therefore, the cost bill of materials are dropping down significantly. And basically form factor-wise, we drop in the power electronics, the two inverters by the site on two sides of the cell pack, Therefore, the form factor certainly becomes very elegant. So not only the form factor becomes elegant and the fourth-generation, the cost also is lower along with taking advantage of the cell pack costs plus the PC -- plus the microinverter assembly, I mean microinverter manufacturing in the U.S. So we are very encouraged that gross margins on batteries will continuously gone up for us. And I think that will reflect positively on overall gross margins.

Colin Rusch:

Thanks so much guys. Can you talk a little bit about the OpEx and the compensation plan going forward here? Obviously, with the lower non-GAAP numbers that you've talked about and the higher charge here. Is that something we should be thinking about on a go-forward basis? Or is there something else going on here that we should be attending to?

Mandy Yang:

Sure. Yes. So our OpEx we reduced from -- non-GAAP OpEx reduced from $99 million in Q3, right, to $86 million in Q4, right? And that was before the restructuring effect that that will come into effect in Q1 and Q2, right? But throughout 2023, we have been reducing discretionary spend, right, and also hiring freeze, right. And even attrition, we don't backfill. We only backfill critical ones, right? And that's why we got our OpEx to reduce from $99 million to $86 million, right? But in December, we implemented a restructuring plan, right? We further reduced our worldwide headcount full-time employees and contractors, right, by 10%. So with that, once those restructuring actions are completed by Q2, we would be at $75 million to $80 million run rate a quarter.

Badri Kothandaraman:

No, there is -- I said the same last quarter, I say the same now. This has been ever since I took over this, we have always had the special pricing adjustment business process. And we do manage that very tightly across the company. And so there has been notably not much change in general in the pricing environment, and that should be kind of obvious to see based on our gross margins as well.

Julien Dumoulin-Smith:

Hey, good afternoon. Thanks team and nice inflection. So just in terms of the 0.5 million shipments here in 1Q here, can you talk a little bit about how you plan to scale up to the $5 billion capacity, have you issued the 8-K here, kind of bringing down overall manufacturing. But can you talk about how you anticipate that ramping here, if you will. And then maybe in tandem with that implicit, how do you see underlying demand trending vis-à-vis kind of returning to that $500 million and then back up to say $700 million or what have you?

Julien Dumoulin-Smith:

Right. And maybe just a corresponding follow-up there briefly. Just the $130 million undershipped when you think about that being split again between U.S. and Europe, you talked about those two-thirds, one-thirds. How do you think about where that undership and the dynamic of that inventory being today and maybe perspective?

Operator:

The next question comes from Philip Shen of Roth MKM. Please go ahead.

Badri Kothandaraman:

Yes. As far as the channel is concerned, in the October call, I was quite clear. I said we do expect to undership in both Q4 as well as Q1, and that's right. And we did not -- at that time, you are correct. I did say we could normalize in Q2. Now we executed on what we said for Q4. The $150 million, what I said, we did $147 million. We expect to do $130 million. We expect to do a much reduced level of undershipment in Q2. We don't expect to do $130 million in Q2. We expect to be much reduced level. So we think the problem will go away for us in Q2, but I was conservative. I didn't tell you by the end of Q2, and we are sticking with that. The next one, bankruptcies, how do bankruptcies effect? Bankruptcies are definitely causing some friction in the short term. But I think what will happen in the industry is resilient. What happens is the -- end customer demand doesn't change. So therefore, it is a matter of time and it is unfortunate that these happened. However, these can be readily picked up. It might take a quarter as long as the end customer demand stays the same. We think other installers will pick it up. We have a diverse group of installers. We have -- we worked with almost 1,500 installers in the U.S. And so there's a lot of redundancy there. And so while you are correct, it is -- it will cause some short-term friction. But I think that will soon disappear.

Badri Kothandaraman:

I think at least our data, our forecasting calculation today show that Europe will be -- will recover a little bit earlier by the end of Q1. I think we should see Europe doing a little better than the U.S. But I think both of them should be normalized in Q2.

Mark Strouse:

Yes, good afternoon. Thanks for taking our questions. Kind of a follow-up to Phil's question there. Just wondering if you can dig a bit more into the Netherlands. You mentioned that, I think, you said it's still weak, but it's getting a little bit better every week. When you're talking to your customers in the field, what are their expectations as far as timing of certainty with the policy over there? And then I have a follow-up. Thanks.

Mark Strouse:

Okay. That's very helpful, Badri. Thank you. And then just a real quick follow-up. I know you don't break out exactly the country-by-country. Given the puts and takes between France and Netherlands and Germany, all of these new countries that you're entering into, any generic guidelines that you can provide, the street as far as kind of your major countries, let's just say, Netherlands, France, Germany, what they might represent of your business today?

Raghu Belur:

Yes. I think the trend, if you look at as Badri mentioned, the addition, all of these markets transitioning from some have already transitioned solar to solar plus battery means the energy management software becomes a very critical element of it to deliver whatever the use case homeowner desires. But dynamic tariffs, as Badri mentioned in Netherlands, really can prove -- requires sophisticated software to manage a day-ahead tariff and hourly day-ahead tariff but it can bring tremendous amount of value to the homeowners. For example, in a dynamic tariff environment, you could have negative pricing. I mean you have negative pricing, you get paid to charge your battery and charge your EV and turn on your heat book. In addition, in a lot of these markets, you're seeing grid services programs also come into effect that pay you a lot of money. For example, again, in the Netherlands market because of all the solar that's there, it's a 19-gigawatt grid and there's 19-gigawatts of solar and then there's another eight, nine gigawatts of wind. There are imbalance issues but there is an imbalanced market that you can participate in and get paid for either charging your battery or discharging your battery. Similarly, in some of the other markets, there is frequency regulation markets that you can participate in and provide good value to the homeowner because their battery is now basically generating money for you. Same thing, capacity markets in U.K. are also good markets to participate in our grid services. So you're seeing this move from solar plus battery plus energy management plus grid services is a very compelling movement for value creation for the homeowner. And this trend here, we are going to see happening more and more and happening worldwide.

Praneeth Satish:

Thanks. Good evening. So the metric gave for battery sell-through 140-megawatt hours, it's quite high. I guess as we look to the second half of this year, when you got NEM 3.0 fully under swing and the Netherlands bounces back, do you expect battery shipments to increase sequentially each quarter and do you think it's possible we get to 200-megawatt hours of battery shipments by the end of this year?

Praneeth Satish:

Okay. Fair enough. And then, I guess, second question here on the C&I market. Just wondering if you could give us an update on the IQ8P introduction, how that's progressing. And whether we would see meaningful revenue this year or whether that's a 2025 event?

Operator:

The next question comes from Eric Stine of Craig-Hallum. Please go ahead.

Badri Kothandaraman:

I mean that's the whole point where we are starting to diversify our product portfolio rapidly. We are planning to introduce -- we already introduced IQ8 microinverters in 21 countries last year. All of us haven't seen those results yet because of the inventory. But once the channel is lean, we should start to see results from all of those countries. So that's one. We plan to introduce even more number of countries in 2024, which is there are still a lot of markets in Europe, Nordics that are untapped. We are going to introduce microinverters there. In addition, there are also countries in Asia that we are going to introduce. So you'll see that. Next, batteries, you come to batteries. Batteries, I already topped out the sell-through continuously increasing. Already talked about our product introduction into places like Australia, U.K., Italy, these places, we are not that big. And we're going to be introducing batteries into other places as well. India is a big untapped market, for example. So many more places in Asia as well as even, I would say, Latin America, for example. We got a lot of countries there which need both solar and storage. So we are focused on multiple countries for both solar plus storage. In addition, we talked about for Europe, we talked about social housing and balcony solar. These two social housing for example is apartment complexes as well as row houses in Netherlands. In the picture each house, having a small system, about three kilowatts, six panel system and our microinverters shine when it comes to small systems. Balcony Solar is another exact countries like Germany, Italy, Austria allow you to export energy into the grid and 800, basically 800-watts of export into the grid. And we plan to basically leverage those markets as well. And each of those is a 250-megawatt market. So that will help us address 500-megawatts. In addition, the other thing we talked about is EV chargers. We are planning to introduce EV chargers in a lot of countries in Europe. And as you know, Europe is at the forefront of electric vehicles. So EV charging, for example, U.K., Netherlands, Germany and France. We will have products in the third quarter that are shipping. Additionally, bidirectional EV chargers. Bidirectional EV chargers, yes, you can argue that the price on an EV charger is under $1,000. But when you have a bidirectional EV charger, all of a sudden, value is a lot higher. We are already working on a GaN-based bidirectional chargers, which will interface to the car's battery around 800 volt D.C and that will convert DC to AC there. And it will plug right into our Ensemble Energy Management System that consists of solar and a home battery. So I talked about microinverters. I talked about batteries, usual markets going into many countries, talked about social housing, Balcony Solar, talked about EV chargers, which is into Europe as well as bidirectional chargers overall. And then the last one is software. We are going to have energy management software. This is AI-based software, which will do production, consumption forecasting and make the right decisions, particularly when it comes to serving markets with the dynamic tariffs and imbalance. And that is going to be worth quite a bit for customers. So we do expect to have our fair share affair. So of course, we are always looking at how to increase our revenue per home, and that's our focus. But we have a lot more revenues in front of us that we need to execute on.

Operator:

The next question comes from Christine Cho of Barclays. Please go ahead.

Raghu Belur:

Yes. So you have to look at the intent, the Dutch market is really very, very focused on converting to renewables. So if we see the solar plus battery to be the predominant market. Of course, there may be some corner cases where we may see people purely doing it for arbitrage purposes, but we primarily see the market to be that battery gets associated with solar. It could be battery plus solar -- sorry storage plus battery plus EV charger plus heat pump and all of that managed by as Badri mentioned in artificial intelligence and machine learning-based energy management software. So we don't see in the future that there'll be any system that would be solar only, it would be storage only or solar only as well. We expect that it will always be an energy system, and that's the transition that the Netherlands market would also undergo very quickly. And by managing dynamic tariffs, which you need very sophisticated software to do because it's a day-ahead market and the rate is going to change on an hourly basis, you need very good forecasting of both production as well as consumption. You need to be able to manage all of that. You need to be able to steer, when am I going to charge my battery? When am I going to discharge my battery? When I'm going to charge my EV soon? When am I going to be able to discharge my EV? Manage your heat pump, buy and sell energy from the grid. All of that is done by that sophisticated software that we have. And layer on top of that, grid services to participation in an imbalanced market. This is a direction in which the entire Dutch market will move towards, but always solar will be a key element of it because that's the intake.

Christine Cho:

Okay. And then part of the issue of the slowdown in the California recovery is because California installers don't know how to install the batteries. And California homes are bigger, and I suppose there are more rules here around the batteries and placement, which also has complexity. The Netherlands homes are much smaller. And from what I understand, the rules there are so relaxed around the permitting for solar. So I can't imagine that they're going to be that different for storage. But should we think that the actual installation for batteries is easier there and less of an off as it has been in California. And given I don't think they really have outages, should we think that the batteries and installations will be primarily for load shifting?

Operator:

The next question comes from Jordan Levy of Truist. Please go ahead.

Badri Kothandaraman:

Yes. Today, our -- I mean, today, our supply chain is predominantly in China, and we assemble our batteries there. Going forward, our supply chain will have two parts. One will still have one with the best-in-class cost structure will have basically the assembly of the battery in China with microinverters made in the United States. So that will help us because the microinverters are made here. The other is the entire battery is assembled in the U.S., including the microinverters, obviously. And the latter one, we plan to have it in the third quarter of 2024. And of course, some customers, especially the EPO customers will have the benefit of getting an additional 10% in ITC as long as we meet the domestic content requirement which we plan to meet. So -- and we expect to get -- we expect to have a slight premium there to compensate for the cost of assembly in the U.S. So I think either way both parts will have similar gross margins in my mind, but they will all continuously improve as our cell packs get lower cost and our microinverters are manufactured in the U.S.

Raghu Belur:

Yes. Obviously, we don't have a crystal ball to predict who is going to win the elections. But to some extent, we don't think it will matter because at the end of the day, this is about creating jobs. And investments and both of which we have done, given our factories both here in -- the two factories here in the U.S., both in South Carolina as well as in Texas.

Kashy Harrison:

Good afternoon. And thank you for taking the questions. So the first one, just a quick follow-up on the comment, Badri you made earlier. I think you said half of your activations in January were for NEM 2.0, the balance is NEM 3.0. Can you just give us a sense of what the NEM 2.0 mix of sell-through was in 4Q? And then when do you expect that NEM 2.0 backlog to run out completely?

Kashy Harrison:

Got it. Helpful. And then just a quick follow-up question. In your discussions with your distributors, has there been any indication whatsoever that they may want to hold less inventory on hand moving forward versus the eight to 10 weeks they used to previously. And really, the root of the question just stems from the fact that a lot before you were shipping a bunch of stuff to the U.S. from India. So you have longer lead times, given you're going across the ocean. That changes once Texas and South Carolina ramp and become two-thirds of your shipments. And so I'm wondering if simplistically, shorter lead times means less inventory from a distributor perspective?

Operator:

The next question will come from Andrew Percoco of Morgan Stanley. Please go ahead.

Badri Kothandaraman:

Yes. I mean we have enjoyed our contract with SunPower over the last five years almost. It is going to come to a close in Q1. And of course, we are in discussion with them. And I'll just leave it at that. I don't want to comment on any revenue. We don't comment on revenue associated with one customer like that. All of those decisions are confidential. But if there is something that gets finalized, you will know.

Badri Kothandaraman:

Right. So basically, that's right. The -- in general, the attach rate of an NEM 3.0 solar system is 80% according to the industry data. So attachment to our solar system. In the past, for a NEM 2.0, for example, for NEM 2.0 was about 10%. And that has increased now to 50% with -- because it just makes sense to add a battery. That's why we set our sell-through numbers became higher by -- improved by 58% compared to the prior quarter. Now your question is why is Enphase market share not a 100%. Why aren't all Enphase solar installations having Enphase batteries, because customers have a choice. Ours is an AC coupled system. And therefore, we have batteries that can tie into that AC coupled system. However, the situation is still a net positive for us, because the 10% battery attach is now a 50% attached. And we are constantly working on having this data and getting not the 50%.

Operator:

The next question comes from Joseph Osha of Guggenheim Partners. Please go ahead.

Badri Kothandaraman:

Yes. I mean batteries are hard to sell. First of all, they add cost to your system. I mean a high interest rate environment, people think twice about adding them. Then second is batteries are messing. It is like, for example, if you have to do a full back up, you do have to plan for it properly and you cannot short change design. It should be a very high-quality product. It should -- because when power goes, the batteries, the battery company is the utility company. So batteries are tough to do probably, also when there is a problem with the battery servicing is tough you have to get it off the wall. You have to ship it to the installer. Installer has to contact the supplier. Supplier has to ship a replacement, installer has to come back. So for installers, it's very difficult. And they have truck rolls, many truck rules on batteries, more than inverters, more than solar. So what we have tried to do in our third-generation battery and that is why our battery sales are picking up is, we have tried to take that in account. First of all, the commissioning experience is a lot simpler. So under an hour, you can commission it. Second, if you want to, you can use the battery in a grid tied environment even simpler, but it can be used for backup to. The third one, which is a very important one is 90% of the time, the batteries can be serviced in situ, in situ means on the wall, while the battery is still on the wall, which means the common problems that we see, very rarely, you see a problem with this cell pack. Problems commonly that we see are with battery management and power electronics. For us, all of them are serviceable boards, which means a $40 board gets out and a new $40 board comes in. And our field service people, Enphase field service peoples are there, and we have 100 of them. And basically, they are there and they take that off the installers, especially in a critical time like this you don't want the installer to do the service. You want the company responsible, which is Enphase here. Any issues, we take care of. It's that installer can sell. So serviceability is becoming a big differentiator. So with our third-generation battery which is the one that we are shipping today in volume. All of those are best-in-class, commissioning, the quality of the batteries, the serviceability of the batteries, the modularity, we have 5 kilowatt hours. It's an LFP battery, lithium ion phosphate with UL 9540A is just a better battery on all fronts.

Raghu Belur:

We also have our design proposal tool solar graph that upfront allows the installer to do a very, very good design for the -- whatever the homeowners expectations are in terms of payback period and upfront cost, et cetera. You can really fine tune the design of the solar plus battery system and generates a proposal. It takes it a step further. We can do single -- we do single-line diagrams, permit plant generation, everything out of this tool. So it's an end-to-end solution that we are providing the homeowner, everything from design to installation, the ease of installation, serviceability and really good customer service, and that's what it's going to take for broad white scale adoption of battery, and you're seeing that happening. I think it's being reflected in the numbers that we shared.

Badri Kothandaraman:

So yes, absolutely. It's not enough. We have to do a lot more. We have to do the events such as what we did in Netherlands. It's got to be done at a higher frequency because the NEM 3.0 experience is telling us that we don't need to help in whatever way we can. And we are going to do exactly that. We have our sales, I mean our team actually listening to our installers and their salespeople, we are we can do a lot more there in terms of simplifying our software so that we can really make sure that the selling at the kitchen table becomes a lot easier. And that's what we are going to do in the next few months.

Auguste Richard:

Yes, thanks for taking the question. I just had, first of all, on gross margin, you guided down about 500 basis points sequentially. And I was just wondering, is that a function of mix? Or is it a function of underutilization? Or is it something else?

Auguste Richard:

Okay. Can you sort of allocate to those two or?

Auguste Richard:

That's fair enough. And then moving forward, you've got a number of cost downs coming in, Gen 4 [ph] battery and moving to GaN, IQ9, et cetera. I was wondering if you could just talk about how those new products and cost down sort of roll into the model over the next couple of quarters? And what, if any, impact we'll have on gross margin? And that's for me.

Operator:

The next question comes from Moses Sutton of BNP Paribas. Please go ahead.

Badri Kothandaraman:

Yes. I mean, look, we all know that there is seasonality factor from non-California states. But the fact of the matter is at least our data non-California states have, if you look at Q4 versus Q3, they're flat in terms of microinverters. And we think they will bounce back coming off the seasonality. That's what we think. And then I already talked about the puts and takes on Europe and why we think Europe will also move continuously not because they are at the bottom right now. California is, of course, a wildcard. But there, you see -- I think our downside will be limited because, as I told you, the revenue of a NEM 3.0 system, is roughly 1.5x that of an NEM 2.0 system for us, considering the attach we are seeing. So I think in general, of course, if I could be wrong, if Q2 doesn't recover seasonally, but that's not what we have seen in the past.

Badri Kothandaraman:

I mean, look, we -- at that time, we will analyze the data in front of us. But look, that's the way we break out for you, gross margin without IRA and gross margin with IRA because we never want to -- we want to be straight with the gross margin. The native gross margin of the business. That's why we break it out. So if it doesn't make sense economically to manufacture here that we have the same two contract manufacturers worldwide. And our lines can be shipped anywhere in the world. Of course, it is tough and we will work with the contract manufacturer in terms of the labor, et cetera, and it is tough and we'll do the right things there. But if the economics are there, we will not be here.

Maheep Mandloi:

Hey, thanks for squeezing me in as well. Just on the gross margin. So it looks like the gross margins, excluding 45x is more or less in line quarter-over-quarter. But I guess the biggest delta is coming from the 45x tax credits in the quarter. Is that just a reflection of lower U.S. shipments? Or anything specific to kind of read into that on Q1 guidance?

Maheep Mandloi:

Got it. And on the IRA benefits, I'm not sure if this was asked, but is it -- can you talk about like if you can get the benefit on the micro inverters added in the IQ batteries going forward?

Operator:

The next question comes from Tristan Richardson of Scotia Bank. Please go ahead.

Badri Kothandaraman:

Yes. I'm going to have Raghu.

Tristan Richardson:

Great. Appreciate it, Raghu.

Vikram Bagri:

Good evening guys. Really two quick questions. I wanted to ask about pricing slightly differently. You say a market share opportunity that you guys see with you holding stronger margin than your peers and room to sacrifice some of that margin to more permanent discounts than SBAs, especially, Badri, you talked about new markets, Italy and launching batteries in India. Do you see that as an opportunity to gain more market share rapidly? And then both broadly, is there anything else on your radar that may make you rethink pricing, is that -- is it just competition and more sort of like cost cuts or component cost cuts that will drive pricing? Or if there's anything else on your radar that could change your view on debt pricing?

Vikram Bagri:

And the next question maybe for Mandy. I was wondering how you're thinking about use of cash and intrinsic value here, $100 million of buybacks if price is significantly below $100 million given where the stock is trading, should we expect buybacks to meaningfully slow down? Or could you still look to offset these share based compensation dilution through buybacks in forthcoming quarters? Thank you.

Operator:

The next question comes from Pavel Molchanov of Raymond James. Please go ahead.

Badri Kothandaraman:

Yes. We have -- you are correct. We have made some reasonable acquisitions. Solar graph is an example of one. The permitting services is one. EV charging is one. And we are working on all of them. So we're careful about choosing what we want. And then we try to make them an integral part of the system. So what are the opportunities like that. And we constantly keep looking for those is the key places where we would look for is, I mean, okay. First of all, what we are not going to be looking for is we are not an installer. So therefore, we don't buy installation company. We are a technology player. So and for example, on microinverters, we have all the necessary IP. We aren't going to do -- going to look for anything outside in places such as home energy management software, there's always opportunity for us especially leveraging AI and ML talent to make -- to accelerate our progress there, because I think energy management software will become the next frontier. That's one that we are always looking for opportunities. The other is on batteries, of course, innovative technologies on batteries, batteries getting better, more reliable, more energy density becoming a lot higher. That's of course an area that we continuously look at. Those are the ones that are on our radar right now. But we look at a lot of companies and when we make some decisions on those you'll know. But we are very disciplined. We don't do -- we don't just buy companies because we have cash. Those companies need to fit into our company well. They need to be bolt-on acquisitions, what we like. And we care about integration a lot. That's important for us. If there is an opportunity in the March we'll move, and you'll know.

Operator:

The next question comes from Austin Moeller of Canaccord. Please go ahead.

Badri Kothandaraman:

I think in the non-California states, it will obviously be for microinverters because the battery attach is small. But in California, it will move the needle for both microinverters and batteries.

Badri Kothandaraman:

Thank you.

Badri Kothandaraman:

Yes. Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter. Bye.

Operator:

Good afternoon, and welcome to Enphase Energy's Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please also note that this event is being recorded today. I would now like to turn the conference over to Zach Freedman. Please go ahead sir.

Badri Kothandaraman:

Good afternoon and thanks for joining us today to discuss our third quarter 2023 financial results. We reported quarterly revenue of $551.1 million, shipped approximately 3.9 million microinverters and 86 megawatt hours of batteries and generated free cash flow of $122 million. Approximately 86% of our Q3 microinverter shipments were IQ8. We exited the third quarter at 48% gross margin, 18% operating expense and 30% operating income, all as a percentage of revenue on a non-GAAP basis and including the IRA benefit. Mandy will go into our financials later in the call. Let's now discuss how we are servicing customers. Our worldwide NPS was 77% in Q3, compared to 74% in Q2. Our NPS in North America was 78%, compared to 77% in Q2. Our average call wait time was 1.3 minutes, compared to 1.1 minutes in Q2. We made significant progress on root cause fixes of some customer issues and expanded our field service teams globally. Let's talk about operations. In general, the overall supply environment for microinverters and batteries is quite stable right now. Let's cover microinverters specifically U.S. manufacturing. We began manufacturing at Salcomp's facility in Arlington, Texas during third quarter. We shipped approximately 531,000 microinverters to customers in Q3 from our three contract manufacturers in the U.S. Flex in South Carolina, Foxconn in Wisconsin, and Salcomp in Texas. We expect to ship approximately 1 million microinverters to customers from our U.S. manufacturing facilities in Q4. Let's talk about batteries. For IQ batteries, we have two cell pack suppliers, both of which are in China. We have a manufacturing capacity of 300 megawatt hours per quarter, positioning us well to ramp up in 2024. We are looking at bringing manufacturing of IQ batteries into the U.S. by the middle of 2024. Let's now cover the regions. Our U.S. and international revenue mix for Q3 was 64% and 36% respectively. In the U.S., our revenue decreased 16% sequentially and 22% year-on-year. The overall sell-through of our microinverters was down 12% in Q3 compared to Q2. On the other hand, the sell-through of our IQ batteries in the U.S. was up by 34% in Q3 compared to Q2. In Europe, our revenue decreased 34% sequentially and increased 26% year-on-year at healthy gross margin. The sell-through of our microinverters in Europe was also down 35% in Q3 compared to Q2. The sell-through of our IQ batteries in Europe was down by 14% in Q3 compared to Q2. We are now shipping IQ microinverters and batteries into many countries in Europe. We recently entered U.K., Sweden, Denmark, and Greece markets with both IQ8 microinverters and IQ batteries. Combined, these new markets represent more than 1.5 gigawatts of residential solar opportunity with countries like the U.K. having a healthy battery attach rate of 30%. I'll provide some brief commentary on Australia. Our revenue in Australia more than doubled year-on-year. We are quite pleased with the launch of our Enphase Energy System. It is state-of-the-art, powered by IQ8 microinverters plus a third-generation battery. Let me comment on the rest of the world. In Brazil, we launched our IQ8P microinverters, 480 watts AC, the highest power microinverters that we have. We also launched the Solargraf software platform and have good feedback from installers there. In addition, we started shipping both the 384 watts IQ8 HC and the 480 watts IQ8 P microinverters into India to support high-powered solar panels. Let's now talk about Q4 guidance. We are guiding revenue for Q4 in the range of $300 to $350 million. This reflects approximately $150 million of channel inventory correction in the U.S. and Europe. In other words, we are under shipping to the end market demand for our products by approximately $150 million. We anticipate under shipment will continue in Q1 and expect our channel inventory to normalize in Q2. Of course, we are conservative and are assuming the demand picture is unchanged from the current level. So what has changed since 90 days ago when we told you that the inventory levels would normalize by the end of Q3? We have seen a substantial demand reduction in Europe. We've also seen the U.S. market continue to fall, driven by California. When the demand falls, we think more decisive inventory correction becomes necessary. We are being conservative in our assumptions of no demand recovery until Q2 in this framework. So that explains the guidance. Despite the large reduction in Q4 guidance, we are maintaining our non-GAAP gross margin above 40% in our guidance without the IRA benefit. We aren't making any broad-based pricing changes at this time on microinverters, and we have already made the necessary changes on batteries before. Our pricing and operations team are doing an excellent job of managing pricing and reducing costs. Let's discuss some market trends. I'll give you a little more than usual color on markets. Let's split the U.S. market by non-California states and California. For non-California states, the sell-through of our microinverters was 4% lesser in Q3 compared to Q2. We see this business starting to stabilize given the weekly sell-through trends. In California, the sell-through of our microinverters was 25% lesser in Q3 compared to Q2 due to the NEM 3.0 transition. It will take a few more quarters for our installers to fully transition to NEM 3.0 and normalize sales to NEM 2.0 levels. Utility rates are continuing to move higher in California with one California utility recently requesting a 22% rate hike, assuming that even half of that rate hike is approved by the CPUC. The payback period for an NEM 3.0 solar plus a battery system will become close to an NEM 2.0 solar only system. So that's good. Let me say a few words about U.S. market share before I give more color on Europe. We see stable share today for our microinverters based on both internal as well as third-party data. Competition is not new for us. We have always relied on our differentiated technology with our distributed AC architecture, product quality, and customer service to win share. And we expect this to continue. We have many tools at our disposal, such as the installer services that we have bought. We made several acquisitions over time in the last couple of years, such as the software tool for design and proposal, the permitting tools, lead management, etcetera. We have a lot of tools at our disposal to help our installers and our partnerships go a lot deeper in the downtown. Let's talk about Europe demand a little bit. We are facing two challenges in Europe. And the situation has dramatically changed from the last quarter, from 90 days ago. We saw a much weaker demand recovery from summer. We also see a lot of distributors facing oversupply of solar equipment, particularly panels, leading to much more aggressive destocking. Despite this temporary weakness, we think that the pullback in Europe will be temporary as the fundamentals remain strong. And we are relatively underpenetrated in the U.S. We are entering lots of new geographies with our IQ8 microinverters and batteries. So we remain very bullish about Europe. Let me spend a few minutes discussing our three largest markets in Europe, the Netherlands, France, and Germany in detail. In Netherlands, our largest European market, our Q3 sell-through was down 40% compared to Q2. This was our first sequentially down quarter in the last two years. Installers tell us that the customers' fear of an export penalty and confusion around ending of the net metering has caused the market pullback. I was in Netherlands two weeks ago. I visited with our leading installers. I came away confident that this pullback will be short-lived. We think that the plan for net metering will be clarified after the country's elections in November. The payback period are continuing to be attractive in Netherlands. In addition, total system solutions which includes batteries, solar and EV chargers are going to become the norm as dynamic tariffs become more prevalent in Netherlands. We are well positioned to take advantage of these changes. In France, our Q3 sell-through was down 34% compared to Q2, driven by seasonality. We see potential for this market to rebound very quickly. We are already seeing that as utility rates recently moved higher and are expected to increase even more in early 2024. In Germany, our Q3 sell-through was down 32% compared to Q2. We saw strong sequential growth in installer count and activations and we are continuing to gain traction there. Let's talk about our new products, IQ batteries. Our sell-through for batteries has been steadily increasing over the last couple of quarters. We are at an inflection point for our battery business. With our IQ battery 5P, we can deliver the best power specs and the best commissioning times of any Enphase battery till date at an industry-leading 15-year warranty and at the right price point. The battery adoption rates are on the rise globally. We are well positioned to grow battery sales throughout 2024. And we are working on entering even more countries in Europe and Asia in the next few months with our IQ battery 5P. In addition, we expect to introduce our fourth-generation battery in the middle of 2024. That will have a much reduced form factor and a reduced cost structure. As previously discussed, we have entered many new markets with the IQ8 family of microinverters. We plan to enter many more new markets in Europe and Asia in the next several months. Let's talk about our latest microinverter for the residential segment in emerging markets. I did mention this before. This is the IQ8P microinverter, our highest power microinverter till date, 480 watts of AC power. That can support solar panels up to 650 watts DC for Brazil, India, South Africa, Mexico, Spain, and other emerging markets. We have started shipping the product into Brazil, South Africa, and India in Q3 and are on track to start shipping in Mexico and Spain in Q4. The other variant of the IQ8P microinverter with a new three-phase cabling system is well suited for small commercial solar installations ranging from 20 to 200 kilowatts. We are doing beta installations as we speak there and we expect to release the product this quarter into the U.S. market. We are very bullish about the small commercial solar business where we believe we can add value to our business owners and installers with our quality and good customer experience. Let's cover EV charging. We shipped over 3,500 chargers in Q3 compared to over 6,600 chargers in Q2. We launched our IQ smart EV chargers in the U.S. just a few days ago, both U.S. and Canada, actually. The IQ EV charger is Wi-Fi enabled. It includes smart control and smart monitoring capabilities. It seamlessly integrates into our solar and battery systems to help homeowners maximize savings, for example, by directly charging from solar energy only. That's called green charging. We are also working on developing IQ EV chargers for many countries in Europe and we expect to introduce them in the middle of 2024. Let's now discuss our installer platform briefly. Solargraf, our cloud-based design proposal software platform, now provides M3.0 functionality for solar and battery systems in California. We are now offering 3D and shading features and continue to make progress on our new features and functions. The software platform is now available to installers in U.S., Germany, Austria, and Brazil. We expect to make this software release as part of our standard offering to any country that we enter. Let me conclude. We are managing through a slowdown in our overall demand. In the U.S., it is due to high interest rates and M3.0. In Europe, it is due to broad macroeconomic conditions. Despite this, we are very bullish about our business long-term. We see several positive drivers that will accelerate adoption such as the 30% ITC tax credit in the U.S., rising utility rates globally, increased grid instability also globally, climate change, and of course, increasing EV adoption worldwide. We have no doubt that these will drive meaningful solar plus battery growth. Our strategy is very clear. We manage for the long-term. We are doubling down on our relationships with our customers during these times. We are driving down installation times and investing in our customer service teams. We are also strongly investing in innovation. We are working on IQ9 and IQ10, our next two generations of microinverters, as well as the next two generations of batteries. We are also rapidly expanding worldwide with systems comprising of IQ8 microinverters, IQ batteries, IQ EV chargers, and home energy management software. We are introducing products for the small commercial and emerging residential solar markets. And we are making continuous enhancements to our installer platform in addition to driving towards world-class costs on our products. We remain very positive about our future growth and profitability and will continue to make best-in-class home energy systems with a laser focus on innovation, quality, and customer experience. With that, I will turn the call over to Mandy for her review of her financial results. Mandy?

Operator:

[Operator Instructions] At this time, we will take our first question, which will come from Brian Lee with Goldman Sachs. Please go ahead.

Badri Kothandaraman:

Yes, I think there are a few puts and takes. First to answer your question is, is the under shipment going to be close to $150 million in Q1? We expect it to be a little bit less than $150 million, but not too much less. That's our expectation. And second is I will talk about markets, and then it'll become clear to you. First of all, we see the non-California state stabilizing. We see that. So therefore, we aren't that much worried there. Of course, things could go a lot south during the winter, but we are already at pretty low levels, so we don't think so. California is definitely a wild card. But even if that goes down 10% more, I think we'll be fine. Because we expect Europe to recover a little more. Europe right now, for all the reasons I said, we basically are undershipping quite a bit in order to normalize inventory. And that will be the fastest to normalize. So we expect Europe revenue to come back a little bit up in Q1. Therefore, what we expect, at least, what we expect internally is that our revenues, sell-in revenues, we think will be close to what we are looking at in Q4. Of course, I don't have a crystal ball. I'm not giving you Q1 guidance. This is our expectation right now. And Q2 onwards, we think the channel inventory is going to approach normalized levels. And therefore, that normalized level, assuming the demand picture is unchanged, that normal level is what we said, roughly around $450 million to $500 million is the normal level. That assumes no change in demand from the current situation. So we expect our revenue to approach that number in the second quarter. But of course, that doesn't tell you too much, because I'm assuming that the demand is the same at the current depressed level. One thing which I forgot to say is, in France, which is another very big market for us, we already see the sell-through rates, for example, in the first three weeks of this quarter, are already back up high, which is good. Basically, there was a utility rate hike in August. There is one more expected in February. So we think France will recover fast. Netherlands, we have some education to do. Like what I told you, there is some political uncertainty there. We think that will get cleared after Q4. So I think Q1 will be definitely better. And that's a great market, where that market is now, in addition to solar, I think with the dynamic tariff starting to become prevalent in Netherlands, there is opportunity for battery storage in 7 million homes. Today, just so that everybody understands, Netherlands, there is 7 to 8 million homes. Solar is there in 2.2 million homes today. And now, with this opportunity, where net metering is going to evolve into something similar to California, not exactly the same, but very similar, what's going to happen is it opens up opportunity for solar plus storage in all 7 million homes. So I think long-term is going to be great for us. But I told you what's going to happen in the short term.

Badri Kothandaraman:

It's pretty simple. And Brian, you will understand it quickly. You can see our storage business is actually going a little bit up. Our micro inverter business is the one that is going a lot down now because of our under-shipment. And therefore, if you see the product mix issue, and microinverters have a little bit more gross margin than storage. And therefore, with this product mix, that's why we have the guidance of non-GAAP gross margin 40% to 43% for the company without IRA. With IRA, non-GAAP gross margin of 48 to 51. So in terms of pricing, I mean, we are not planning to make any broad-based pricing changes. Of course, the pricing, there is a lot of competition, but we have seen competition for the last few years since I've been here. We have a very disciplined business process. It's a pricing business process. It's called SPA, Phil Shen likes to talk about it. It's a special pricing adjustment. We have been doing that forever, and it is not new. That's one. And also in these times, of course, underloading, we have to work with our contract manufacturers to take care of underloading. But in these times, especially when you have multiple suppliers for a particular component, multi-sourcing for a component, this is the opportunity where we can drop costs a lot. So our target, I mean, any good company in these times, we should be able to drop our cost by 10% per year. And we'll be targeting that. And so we have to talk both equations, pricing and cost. And so we are quite confident in our gross margins. This is what we do. It is not new. This is what we established when I joined the company. We have a pricing team that prices based on value. We have a world-class cost team that works on costs. And it's business as usual for us in these environments.

Operator:

Our next question will come from James West with Evercore ISI.

Badri Kothandaraman:

Hi.

Badri Kothandaraman:

Well, I'll be lying if I tell you I'm not seeing something irrational. Of course, installers are very stressed, right? They do want to take advantage of the lowest cost available at a given point in time. So therefore, sometimes without understanding, they may want to switch to somebody who's offering low cost. But we usually, most of our installers are, they have a lot of experience. They're very well trained now. And they understand the importance of distributed architecture. They understand the importance of single point, no single point of failure. They understand quality. They understand customer service. And therefore, you might save a few dollars up front, but if you have a quality problem, a service call by the installer is a truck roll. You spend a lot of money in one truck roll. And if you just do one more, I mean, that's it, you have no more room there despite the low cost. So it's a penny wise pound foolish strategy to do that. And they've all realized it. And, if you actually put things in context, let us say the pricing is $3 or $3.50 for what? You look at the inverter bill of materials, probably of the order of 10%. Should you play around there? Should you take a lot of risks there? And it's their call at the end of the day. And many of them are wise to say, we're not going to make that call. So, I mean, we have a lot of robust discussions. This is the time where we are talking to customers more than ever. We have a lot of other tools at our disposal. For example, Solargraf. We do design and proposal. We can generate leads for installers at very economical rates. We can help them on permitting services, for example, sometimes even free of charge. We have a lot of tools at our disposal to reduce their soft costs. And that's critical because we have to look at everything. We cannot look at component level. We have to look at the full system level in these times. And once you start looking at that and have these discussions, usually it comes back to, we get more market share, not less. And more installers want to move to us, not less. You can see some evidence of that in the third party reports.

Badri Kothandaraman:

No, we have not given. We will provide more details as we come close to that date.

Badri Kothandaraman:

Yes, thank you.

Eric Stein:

Hi, everyone. So just talking about California, I can appreciate talking or thinking about that as a wild card given what's going on in the market. But if I think about the expectation that that market stays flat, but then the hangover from NEM, which you said has a few quarters here left to work out, I don't want to put words in your mouth, but I mean, is it fair to say that there is some cautious optimism about California as we get into the back half of next year?

Eric Stein:

Got it. And maybe just sticking with California for my follow-up, with NEM, is that whole, that transition takes place being the biggest factor? I mean, what are some of the other factors that could do, that cause California to be a wildcard? What are the things that are maybe top of mind for you that could cause that market to take another leg down?

Badri Kothandaraman:

So to answer the question in another way, the headwinds are, headwinds that we see are if installers, aren't educated by us properly. If we don't do a good job of educating the installers, things can stall out a little bit. So it is important for us and other companies to, in this space, to make sure the installers, whatever we provide installers, the tools are very easy to use so that they can sit at the kitchen table and look at the homeowner and say, your payback is six years. And here is why your payback is six years. And explain to them very confidently. And it's not just Enphase, it is Enphase plus our competition, plus all of the energy companies. All of us have to do our job in training the, installers. And I think that is, of course, that's a piece that is not very easy to do. And you cannot have enough of it. So that's the biggest headwind that I see.

Operator:

Our next question will come from Colin Rusch with Oppenheimer. Please go ahead.

Badri Kothandaraman:

No, I mean, we are cutting OpEx by 12% from Q3 to Q4. How are we doing that? We are on a hiring freeze, except for critical positions, for example, in sales and customer service, and to a little bit on the innovation side there. So basically, that has got a big effect on, bringing down costs. The other ones are there are a few professional expenses, like, for example, this is the time where we look at a lot of fat, cutting out a lot of fat in the company. For example, when the companies are doing well, we do hire a lot of contractors. And, we are looking at all of those, and we have taken all the necessary actions to cut that level as well. And of course, as we continue to grow, I cannot deny that there is some fat that we found we can easily cut in other areas. We're able to cut about 12%. We are always looking for further room to cut because we'd like to get back to our baseline of OpEx pretty quickly, which is 15% of sales. So, we'll give the guidance accordingly. And of course, this is a dislocation in revenue, and that is temporary, but we're very cognizant of that, and we are always going to be trying to operate close to our model, which is 15% of sales.

Badri Kothandaraman:

Yes, I mean, it is a tough situation for our contract manufacturers, no question. And but we have great partners here. We have Flex, an amazing partner who helped us when we were, especially 2017, 2018, when we had some tough times, they were there right with us. Salcomp, also a great partner. So we work well together. We do have this is the time where both of us can recognize saying okay is this a short-term problem? Is this a long-term problem? Can we do things structurally? We recognize that both of us need to be profitable not just one versus the other. And we do take some necessary actions and all of those are confidential in terms of our relationships. I mean we cannot disclose the actions we are taking but our P&L always incorporates all of these. And so the message is over the next few quarters we will continue to work with them. We will give you the P&L transparently in the guidance for gross margin but we are very confident that you know we are finding the right solutions working together.

Badri Kothandaraman:

Thank you.

Philip Shen:

Hey guys thanks for taking my question. Badri you brought up SPA so I figured I'd jump in with a question on that. As you know our checks have come up with lower micro pricing under a bunch of SPA agreements on the order of 10%. Does that resonate with you at all or is that off base? I know you often will get something in return for some kind of price when you negotiate the SPA maybe a exclusivity or higher volume. Can you just talk through that a little bit? And then Mandy can you talk through how SPA accounting might work on your financial statements? For example do you net the SPA like the refunds against your sales? Do you have net sales or do you accrue a liability on your balance sheet? Thanks.

Mandy Yang:

So Phil to answer your accounting question. Yes we accrue for SPA rebates as our liability right. When we recognize revenue the associated future potential rebates for the current quarter should be we accrue a reduction in revenue and is the liability on our balance sheet. Same accounting process. No change.

Badri Kothandaraman:

Yes, I mean, that's logical. It is logical. If at Q1 what you said is right, we expect similar levels. Of course, I'm not giving guidance, but I'm just giving trends. And then Q2, we expect it to, because the mix is going to change. The microinverter mix is going to be a little bit higher than the prior quarter. So we expect that logically. That's correct.

Operator:

Our next question will come from Mark Strouse with JPMorgan. Please go ahead.

Badri Kothandaraman:

Yes, we do take a look at a number of companies all the time, every week. I have an M&A meeting. There are a lot of companies that come. We are very careful, especially in these times, to not buy something in a hurry. We're also careful of making sure that that company is aligned, of course, in terms of strategic fit and cultural fit. The former is extremely important. The latter is practically even more important. So the areas that we usually look for are more in the energy management software, sometimes in home automation, for example, small commercial solar, any innovation in batteries. We look for these. Usually we like smaller companies, bolt-on acquisitions. That's what we have done till now. But I mean, we are looking at all kinds of companies. Please stay tuned. If we are going to move on something, it won't be without you knowing.

Badri Kothandaraman:

Yes, yes, there was. We are right now doing beta installations as we speak. The product is working great. We expect to introduce this product in this quarter, current quarter, and we expect to make some reasonable revenue out of this product in Q4.

Operator:

Our next question will come from Steve Fleishman with Wolfe Research. Please go ahead.

Badri Kothandaraman:

I would say approximately equal between the two.

Badri Kothandaraman:

Yes, actually, to tell you the truth, every country is a little bit different. Clubbing them together under macroeconomics will not do justice, but there are a few factors, let me tell you, overall thing that can be generalized. It's basically, if you rewind to last year, all distributors, installers, consumers, were a lot more aggressive due to the Ukraine crisis. The Ukraine crisis, the shortage of natural gas, caused many countries to be very aggressive, to pull in their plans for renewables. And we saw a huge spike in virtually every country in Europe. Solar plus storage, everybody started stocking up a lot. And we also profited from that. Our revenue also peaked. But then that enthusiasm is a little bit tempered right now. And because of that, what's happening is the distributors are suddenly realizing that they got more on their hands. And also, earlier, maybe a year and a half back, the product availability wasn't that high because of that increase in demand. But now, all of the suppliers have geared up, especially panels. Product availability of panels is very high. So a lot of over-inventory, particularly on the panels, has happened. That is putting pressure on the distributors because they've purchased inventory at high prices before. And now the prices have collapsed on panels. So there is some financial weakness there. But again, they are conservative now. And they want to hold as less inventory as possible. So that's kind of a macroeconomic. Now let's come to Netherlands, our biggest market. Netherlands has got a very interesting dynamic that when I went there two weeks ago, because I went there, when I heard that our demand was dropping, I got concerned. I went there. And when I looked at it, the Netherlands situation is actually not so bad. If you see, their payback is about six years. But they had a scare recently, maybe two or three months ago, where an energy company called Vandebron basically said that to the consumer, saying, we are going to charge you a penalty to export solar back into the grid. And Vandebron is a very small fraction. There are about 35 energy companies I think in Netherlands. It's a deregulated market. Vandebron is one of them. They serve about 3% of customers. They basically said that, oh, we're going to charge you an export penalty. All they were trying to do is to put some pressure on the government, saying, you need to help us with net metering. Because the simple fact of the matter is Netherlands has got wind. It's got solar. There's 2.2 million homes with solar out of 7 million homes. These, if they start to export solar energy in a random manner, the energy companies are finding they cannot handle that easily. So they are putting pressure on the government to say, okay net metering needs to evolve into something where the customers have self-consumption, which is solar plus storage. And so it's actually extremely good for us there. But the way they are doing it is, of course, a little bit disruptive. So the government is going to respond once it is in place. Now there is an election happening. Net metering clarity is going to come probably after that. But the way it's going to evolve is this market. Net metering will still last until 2025. So we are covered for the next two years with good payback. And then the payback will be maintained after that with the combination of solar plus storage plus dynamic tariffs, which is getting popular there. So that's the big picture in Netherlands. Many of the European countries are evolving in a similar way. Many of them have gotten dynamic tariffs. Germany is a little bit ahead. They don't have dynamic tariffs, but they introduced feed-in tariffs early, which is very similar to net metering. Export is not paid as much as import. In fact, it's only a fraction. That is why Germany, you find 80% attach rate on batteries. So long answer to your question, but that's the color of Europe.

Badri Kothandaraman:

I didn't talk about energy prices, energy prices have also increased. In places like France the energy prices are also going up. So I mean energy prices are going to help us. The utility rates are increasing. And so that is definitely going to be a tailwind. But make no mistake. Despite all of this in a place like Netherlands, two gigawatts of solar in a place like France the payback is extremely good still five to six years where can you get that, even just for solar. It's going to evolve into solar plus storage with the payback up maybe seven to eight years but still very good for a 25-year product. So there is a small dislocation right now due to inventory issues due to these, but that's why we expect the ramp-up normalized -- I wouldn't say normalization, revenue recovery, a quick revenue recovery at least to some level in Europe.

Operator:

Our next question will come from Jeff Osborne with Cowen. Please go ahead.

Badri Kothandaraman:

Yes. I mean, what you're saying is possible, but we don't think so. So I'll give you a quick primer on the weeks on hand. So you follow it. And I think generally, I'd like to say that everybody follows it. For example, if you have -- let's say, you start off with 100 units at the beginning of a quarter in the channel, and let us say you drain inventory at 10 weeks -- I mean 10 units a week. And you also ship into the channel at 10 units a week, okay? So you ship into the channel at 10 units a week. You drain from the channel at 10 units a week. Therefore, at the end of the quarter, you find yourself at the same 100 because 100 plus 130, which is 13 weeks, minus 130, you have 100 units at the end of the quarter. You ask yourself what is the weeks on hand. You say that is 100 divided by 10. That's 10 weeks. So remember that number, 10 weeks. Now I say, oh, my demand is suddenly dropped by, let us say, 40%. That means I have 4 units a week that is accumulating. So that means -- and assume I ship the same number of units into the channel, because I am slow in recognizing that the situation has changed. So let us say I still ship the same 130 as before. But now my dream is only 78 instead of 130. So I therefore end up with 4 units’ excess per week which is 52 units more than the last case. So now I have at the end of the quarter 152. 152, but my end customer demand is only 6 units a week. So I tell you that my weeks on hand now is 152 over 6, which is 25 weeks. So I suddenly go, my weeks on hand increases by 150% due to a 40% drop in demand. If I am -- I continue to be oblivious of -- continue to be oblivious and ship the same material into the channel. So we can blow up disproportionately right? And of course, the further the demand drops, the further your weeks on hand will go up and the converts true. So if the demand improves a little bit, the weeks on hand is going to come down fast. So we think that the distributors -- I mean, we'll look at logical things here because even a 10 to 12-week inventory will be the similar dollar number that they have had in the past. And in fact, the lesser dollar number that they've held in the past. So we think logic will prevail and -- of course, end market demand could change all of that pretty quickly. So weeks on hand is not something that you -- that is obvious. It can really change drastically by small changes in demand, which I gave you the example there.

Badri Kothandaraman:

Not doing today, but of course, will consider.

Operator:

And our next question will come from Julien Dumoulin-Smith with Bank of America. Please go ahead.

Badri Kothandaraman:

Yes. I mean, I presume you're talking about one large customer here, that's the only one we have, which is official. The -- we love our partners, right? We work very closely with them. We value their relationship a lot. And we are there -- I mean, we are at their service all the time, whether it's quality, whether it's customer experience, we value their relationship a lot. So yes, of course, we will be looking to renew all of those.

Badri Kothandaraman:

Right. I did talk about it answering a prior question, and I will say the same thing here. We have great contract manufacturing partners. Flex has been great for us. They particularly helped us when we were in trouble in 2017. We are grateful there. Our relationship has been very healthy. Even during these times. And we are working together. Sometimes, we look at a problem and say, is this a short-term problem or a long-term problem. If it is going to cost them pain, we are willing to restructure. And all of those accounting are in our P&L. We report it as part of our non-GAAP and GAAP gross margin. So you should read the P&L and know that everything is there. And we view this particular situation is temporary. But we are very cognizant of the fact that under loading is a pain for our contract manufacturing. So -- and we think the right approach is to make sure both of us are profitable and share the pain. And we will be doing that.

Badri Kothandaraman:

Thank you.

Andrew Percoco:

Hi, thanks so much for squeezing me in. So I just wanted to come back to a prior question. So it's clear that the demand backdrop is going to be a tough demand backdrop potentially for the next few quarters. Can you maybe just discuss the health of the average installer that is a recurring user of your equipment and their ability to manage through this period and transition to the TPO model? I think there's been some challenges around working capital and tax equity. So just curious what you're seeing and what you're hearing from some of those maybe repeat buyers on the smaller scale side of the installer community. Thank you.

Andrew Percoco:

Yes, that makes sense. And the other questions -- my other questions have been answered.

Operator:

Our next question will come from Tristan Richardson with Scotiabank. Please go ahead.

Badri Kothandaraman:

Absolutely. We have a lot of vectors of growth and that's a great place for us to start. But we are -- in the color I gave you, we didn't assume all of that. But we have absolutely so many countries that we are -- we were not present even a couple of quarters ago like we have introduced in batteries and microinverters, actually, batteries, for example, in Austria, in Spain, U.K., as you correctly pointed out, Sweden, Denmark, Greece. We have plans to introduce to about 15 countries in the fourth quarter. Microinverters alone, they are all new countries. So that's one vector. New geographies, very important for us. But on the flip side, there, it does take some time to establish infrastructure there. You do need to build up your installer base. You do need to train them very well because our bread and butter is our installers. Therefore, we need to train them excellently. And we need to win them one by one. And that is a process in itself. It can be as early as 3 to 6 months, but it can be over a longer time frame as well. We got several new markets in Asia that are also interesting for us, like, for example, Taiwan, Korea. Indonesia, we are there today, but we are rapidly moving into IQ8, there are a few other smaller countries in Eastern Europe that we are going after. Small commercial. That's a very big one. The small commercial in the U.S. is about 1 gigawatt. We are going to add that product this quarter. The small commercial opportunity in Europe is much bigger. It's about 10-plus gigawatts and we are figuring out that one systematically because we can service that market less than 100 kilowatts with the products we have. So there, of course, pricing is something that we are looking there on how to be competitive in that segment, but we do have a lot of levers there on small commercial. So that is one more. The other one is EV charging. EV charger. We just introduced our connected EV charger. That is a big deal. Now with everybody wanting to electrify, meaning their home, which is buying electric vehicles, electrified vehicles, for example. The -- our product will work with solar plus batteries and it will help the homeowner optimize it's built. He can do green charging now. He doesn't need to spend money charging the vehicle from the grid, all he needs to do is to add about one type of investment, of course, he's got to do that, 6 to 8 panels or 6 to 10 panels. He needs to add it if he buys an EV. And that is a huge opportunity. We are now following up and introducing these EV chargers in Europe, which is what I talked about. So early next year, we will have IQ EV chargers in Europe. Then the other -- the other one is home energy management, software, right? We're now beginning with Germany. We now have the ability to also connect to third-party EV chargers and heat pumps. So now we can optimize the entire system, our solar, our storage, hopefully, our EV chargers soon, but in the meantime, third-party EV chargers, third-party EV -- I mean, third-party heat pumps and giving the homeowner one app, all in one app, optimizing his energy from his fingertips. So that energy management software plus we have some hardware there, which we will eventually integrate into our gateway. So we'll roll that out to all the countries, including the U.S. So we got a lot of vectors there, which is introduced, solar plus batteries into many, many new countries worldwide. Introduce products for the small commercial markets worldwide, introduce IQ smart EV chargers, both in the U.S., which we have done and worldwide. Energy management software plus whatever hardware is required to manage heat pumps and third-party EVs worldwide. So we have a lot of vectors. Of course, I did not include that in the color, which I gave, which is conservative from our perspective.

Badri Kothandaraman:

Thank you.

Unidentified Analyst:

Hi Badri. Thank you for squeezing me in. I just wanted to tag on to Andrew's comment about the [indiscernible] installer. Are you seeing stress outside of the California market? Are you seeing any sellers selling distributors asking for price concessions, maybe distributors asking for concessions on terms and receivables, just curious if you could give a little more color on the health of the Tier 4?

Unidentified Analyst:

Specifically for the -- for the small stores.

Unidentified Analyst:

That's very helpful. And then just any sense on Texas and Florida, in particular. I know outside California is averaging a little better, but maybe specifically those markets?

Unidentified Analyst:

Thank you.

Joseph Osha:

Hey thanks for fitting me in. Badri, appreciate it. Two questions. First, following on from the previous one, look, we all see Sunrun, Sunnova, Sunpower accessing ADS or whatever markets for third-party ownership. I'm curious, do you know if your long tail has found any other solutions for third-party ownership? Or when you talk about that avenue, is it basically those third companies that you're seeing? And I do have one other question.

Joseph Osha:

Okay. Great. And then this is really more of a philosophical question. I know all of us on Wall Street just love to hear you talk about defending your gross margin. But given how the market is evolving, have you done some analysis and are you sure that your business couldn't perhaps generate higher bottom line earnings if you simply grew it more quickly and allow, say, a 35% gross margin. I'm just curious as to your philosophy as to why the gross margin has to stay where it is.

Joseph Osha:

Okay, thank you. Appreciate that.

Vikram Bagri:

Good evening everyone. Very helpful color on demand and supply dynamic in countries in Europe. Badri, you mentioned you expect to recover a bit in your calculation of $300 million of inventory reductions over the next two quarters? Is that rebound? Is that a function of Enphase entering a number of new countries in EU this year, as you mentioned, and gaining market share in existing markets, such as Germany, or the outlook for inventory reductions assumes that the base demand rebounds in first quarter. And on top of that, you gained market share in new as well as sort of like existing markets. And then if you can talk about the U.S. market also, it seems like you're looking to defend market share. You haven't seen any declines in market share so far. But if there were some, you will look to defend that.

Vikram Bagri:

Thanks Badri. And as a follow-up, I wanted to quickly follow up on the capital allocation question earlier in the call. I was wondering if your priorities have changed given where the stock price is today. I see you repurchased about $110 million in shares versus $122 million of free cash flow this quarter. Should we expect similar trend going forward, share buybacks closely following free cash flow generation in quarters?

Vikram Bagri:

Thank you very much.

Operator:

And our next question will come from Praneeth Satish with Wells Fargo. Please go ahead.

Raghu Belur:

This is Raghu. And Badri mentioned earlier on, look, competition is not new to us. And any company out there that's doing string inverters, we have been competing against those since the inception of the company, and we have a very, very strong value proposition against that technology, a technology that we've been fighting against since 2008. So if you think about it, if you break it down, we just produce more energy. We do maximum power point tracking on a per module basis, right, because we have -- we do power conversion right at the module itself. We are much more reliable. We don't have a single point of failure, that's a true value of the distributed architecture. So even if one of our micros or the module or to -- were to fail or get impinged on energy, the rest of the system continues to operate. String inverters on the other hand, are a very significant single point of failure of that string inverter would fail, our entire system is dead. Again, if you look at also design, installation and maintenance, we don't have string designs anymore. Like those string designs are a thing of the past, those things went away in 2012. And with us, you don't have to do any stringing, no string design, no limitation, steady, can put as much new modules or just like, installations, all plug-and-play. And maintenance, we provide you with per module information, right? And with the traditional string inverters, you're completely blind to how your modules are performing. So I think that's going backwards. And finally, and arguably one of the most important elements of it, is safety, right? You want to do -- you don't want any high-voltage DC anywhere in the system. And so with Enphase, we are all low voltage DC, we are traditional AC. And the combination of high-voltage DC and high-energy chemistry is probably not very optimal. And on the reliability front, we mentioned, one is system-level reliability, which is not having a single point of failure. But look, a unit itself is extremely reliable. We offer a 25-year warranty compared to other types of technologies that offer 10 year, 12 year warranties. And on the battery, if you break the battery down as well, modularity is extremely important. You don't need to have very large batteries and you have the -- where we are building block is fast over ours. So you can right size the system to exactly what homeowner needs. But we mentioned the higher power of our third-generation battery or IQ battery 5P, the high sea [Ph] rate of the battery is really is an economic benefit to the homeowner because you can export significant amounts of power during those times of the day or those times of the hour where you get compensated by the utility for exporting energy. And finally, on safety, we use lithium iron phosphate, LFP chemistry, right? LFP chemistry is arguably much safer than any other chemistry that's out there. Put all that together, look at it in the totality of the system, right, all the software that we provide, the design tools that we provide, those are the competitive moats against any other technology that is out there. Now couple that with our customer service, right? We are open 24/7. Our customer service department is open 24/7. We -- the installer can call us at any time. The homeowner can call it. They have beautiful app where they see their solar, their batteries. Now even there with the connected EV charger, they're seeing how the EV is doing. If you have a VPP program right from the app itself, we can sign up for the VPP program. We really bring a comprehensive solution that is completely differentiated, distributed architecture on inverters, the battery arguably one of the safest batteries, connected EV chargers and a complete system solution for the homeowner and of course, a great customer experience. So take any -- we have a very competitive solution. And like I said, competition is not new for us at all.

Raghu Belur:

It start waiting, right? It's our -- we have to go out there. And we and the rest of our industry needs to get out there and continue educating our installer partners, helping our install partners, educate the homeowner, that's what it's going to take. And I think all the tools are there, everything is ready. But most importantly, the economics are there, right? It's simply getting in front of the homeowner, getting and convincing them, showing them the numbers, showing them using a tool like Solargraf and showing them what a solar install of the house would look like, the size of the battery that they would require and then showing them the payback period that it's anywhere from 5 to 7 years and getting better at utility rate continues to improve. So I think we are all doing the right things. We are getting out there and key same phase, we are getting out there and I'm sure our competition is also getting out there and educating both installers and customers and so we expect -- yes, we expect it's simply a matter of time. I think you'll see -- you'll see the California market turnaround as well.

Operator:

This concludes our question-and-answer session. I would now like to turn the conference back over to Badri Kothandaraman for any closing remarks.

Operator:

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.

Operator:

Good day, and welcome to Enphase Energy's Second Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Zach Freedman. Please go ahead.

Badri Kothandaraman:

Good afternoon, and thank you for joining us today to discuss our second quarter 2023 financial results. We reported quarterly revenue of $711.1 million, shipped approximately 5.2 million microinverters and 82.3-megawatt hours of batteries and generated free cash of $225.5 million. Approximately 78% of our Q2 microinverter shipments were IQ8. We exited the second quarter at 46% gross margin, 14% operating expense, and 32% operating income, all as a percentage of revenue on a non-GAAP basis. Mandy will go into the financials later in the call. Let's now discuss how we are servicing customers. Our worldwide NPS was 74% in Q2, compared to 75% in Q1. Our North American NPS was 77%, the same as Q1. Our average call wait time was 1.1 minutes compared to 1.2 minutes in Q1. We continued to focus on root cause fixes of customer issues and expanded our customer service and field service teams globally. Let's talk about microinverter manufacturing. Our overall supply environment remains quite stable and there are no major shortages right now. Let's come to our IRA. We expect the IRA to increase the overall solar demand in the U.S. and accelerate domestic production. We are pleased to be part of creating new jobs in the U.S. and advancing the country's clean energy economy. We shipped 50,000 microinverters to customers in Q2 from two of our contract manufacturers, Flex in South Carolina and Foxconn in Wisconsin. We are on track to begin with the third contract manufacturer in Q3. We expect to ship approximately 600,000 microinverters to customers in Q3 from our U.S. manufacturing facilities. Let's now cover the regions. Our U.S. and international revenue mix for Q2 was 59% and 41%, respectively. Q2 was a record quarter for our international revenue primarily due to the growth in Europe and Australia. In the U.S., our revenue decreased 12% sequentially and decreased 1% year-on-year. The overall sell-through of our microinverters in the U.S. was up 2% in Q2 compared to Q1. In Europe, our revenue increased 25% sequentially and more than tripled year-on-year year at healthy gross margin. Our sell-through of microinverters in Europe was 13% higher in Q2 compared to Q1. We are now shipping IQ8 microinverters into Germany, France, Netherlands, Spain, Portugal and Poland. In addition, we are shipping IQ batteries into Germany, Belgium, France, Netherlands, Spain, Portugal, Austria and Switzerland. I'll now provide some brief commentary on Australia, Latin America and Brazil. Our revenue in Australia more than doubled year-on-year. We started shipping our IQ Battery P5 to Australia during the second quarter. In Latin America, we introduced the new battery in Q2 while in Brazil, we introduced our solar graph software platform which will help installers with design and proposal for their residential customers. Let me provide some additional color on the U.S. followed by Europe. We recognize revenue when we ship product to distributors and large installers. It is therefore relevant to talk about the sell-through trends of our products from our distributors to installers. Since we have a healthy share in the U.S., our statistics are a meaningful representation of business strengths. The overall U.S. market is experiencing a broad-based slowdown due to high interest rates. As I said earlier, our Q2 sell-through of microinverters in the U.S. was only up 2% compared to Q1 and only up 2% year-on-year. The second quarter is typically stronger than the first quarter that did not happen this year due to the market environment. Let's now discuss the market trends we are seeing in the U.S. split by California and rest of the U. S. For non-California states, the Q2 sell-through of microinverters was 6% lesser as compared to Q1 and 11% lesser year-on-year. The sell-through was disproportionately worse in Texas, Florida and Arizona. In these states, the economics of loan financing has worsened due to the combination of rising interest rates and lower utility rates. In California, the Q2 sell-through of microinverters was 20% higher compared to Q1 and 34% higher year-on-year. The higher sell-through was driven by high backlog of NEM 2 installation which is expected to last through this summer. We expect NIM 3.0 will have a greater impact on results beyond Q3 and I will speak more on what we are seeing there later. I'd like to provide some more context about our revenue guidance for Q3. Our microinverter sell-through in the U.S. peaked in the fourth quarter of 2022. The sell-through in the first half of 2023 in both Q1 and Q2 was approximately 20% below the fourth quarter due to the high interest rate environment in the U.S. Our sell-in to the channel was only 10% down in the first half of 2023 relative to the fourth quarter. We were expecting a seasonally up Q2 '23 but that didn't materialize. This has increased the inventory in the channel. Plus we are assuming the same level of uncertainty continues going forward. Therefore, we are taking aggressive and prudent actions in the U.S. to manage down the channel inventory, and this is reflected in our light third quarter guidance. Let me say a few words about market share. We see stable high market share today for microinverters based on both internal and third party data. Competition is not new for us, and we have always relied on our differentiated technology with distributed architecture, product quality and customer service to win share and we expect to continue doing so. We have many tools that are disposal for installers, and our partnerships go even deeper during the downturn. For storage, we have shipped approximately 1-gigawatt hour of battery systems cumulatively by the end of the second quarter. We continued to manage our storage channel inventory in Q2 and expect further improvement in Q3. As we introduced our third generation IQ Battery 5P to the U.S. market in Q2, we reduced pricing for our second generation battery. We also expanded the warranty for both batteries to 15 years. We see the new price point and warranty for both batteries, as well as strong early customer adoption of the new battery driving increased sell-in and sell-through during Q3. We believe there will be a bigger inflection for Q4 and beyond as California battery attach rates increased with NEM 3.0. Before moving to Europe, I'd like to speak a little bit about NEM 3.0. Early anecdotes on NEM 3.0 activity from our installers are encouraging. Since the crossover date in April, we have seen an increasing rate of NEM 3.0 California proposal activity with healthy storage attach rates. We offer a comprehensive NEM 3 solution, which includes a smart battery, power control system to avoid main panel upgrades and energy management system that maximizes ROI for homeowners. The smart battery can do both backup, as well as utility rate arbitrage. Grid tied batteries require less labor and fewer balance of system components making them significantly easier and faster to install. Our solar graph design and proposal tool can model the complex interactions between solar, batteries, consumption and tariff and provide a simple proposal. Our financial analysis show that for a cash system, homeowners can expect a bill offset between 70% and 90% and payback between 5 and 7 years. We think installers can effectively sell these economics to consumers. Let's now cover Europe. Our European business remains strong. Q3 is typically down due to summer vacation, but our year-on-year growth trend is very robust. We plan to introduce IQ8 microinverters and batteries into more countries in Europe such as Sweden, Denmark, Greece, U.K. and Italy later this year. We saw strong broad based growth across Europe in Q2. Netherlands and France continued to be very strong for us. We are starting to gain real attraction in Germany, in both residential solar and batteries. The residential solar market in Germany, the biggest in Europe is roughly 3-gigawatts and the attach rates for batteries is approximately 80%. We saw strong quarterly sequential growth in installer count, sell through and activations of both solar and batteries in Germany during Q2. During Q2, we also launched our IQ router family of devices, which is part of our home energy management system in Germany and Austria to enable the integration of select third party EV chargers and heat pumps into Enphase solar and battery systems. There is a great push towards whole home electrification in Europe and countries like Germany are leading the way in adopting renewable technologies to support heat pumps, EVs and other home loads. Self-consumption is the norm as consumers want energy independence. As we think about our competitive positioning in Europe, we see increasingly complex power markets and home energy management needs playing right into our strengths. Our complete home energy management system solution delivers use cases like self-consumption and green charging along with newer software features which we plan to release this year are key differentiators in addition to our quality and service that will help strengthen our market position. Let's cover more new products. We launched our third generation IQ Battery 5P, in Australia, U.S. and Puerto Rico in Q2 with plans to launch in Europe by the end of the year. As I previously discussed, the battery has a modularity of 5-kilowatt hour and delivers double the continuous power and triple the peak power for the same kilowatt hour compared to our prior generation of batteries. The higher charging and discharge rate of our third generation battery will be uniquely beneficial for NEM 3.0 systems in California through its ability to generate revenue by exporting into the grid at appropriate time. In addition, our third generation battery is easy to install and commission with the targeted sub-30 minutes commissioning times. We are excited about the positive feedback we have received from our Australian and U. S. customers. We have now certified over 3500 installers worldwide to install our IQ batteries. Let's now talk about our latest new product for the residential segment in emerging markets. This product, the IQ8P microinverter will deliver 480 watts of AC power, supporting panels up to 650 watt DC for Brazil, Mexico, India, Spain and other emerging markets. We are on track to release this IQ8P microinverter variant to production later this year. The other variant of the IQ8P microinverter with the new 3-phase cabling system is well-suited for small commercial solar installation ranging from 20 kilowatts to 200 kilowatts. These microinverter systems offer the same grid compatibility, high-quality, rapid shutdown capability as our standard residential products. We expect to release this product into the U.S. small commercial solar market later this year. In general, we see the global commercial opportunity as greater than 11 gigawatts. We are extremely bullish about this small commercial solar market, where we believe we can add tremendous value to business owners and installers in Europe and U.S. with our high-quality rapid shutdown capability and micro-grid forming capability of our microinverter systems. Let's discuss our U.S. EV chargers. We shipped over 6,600 EV chargers in Q2 compared to 8,600 in Q1. We expect to introduce IQ smart EV chargers in Q3. These smart chargers will have Wi-Fi connectivity, enabling use cases like green charging and allowing homeowners full visibility into operation of the Enphase solar, plus battery, plus EV charger system through the app. Let's now discuss the installer platform. We released updates to our Solargraf design and proposal software platform in Q2, including NEM 3.0 functionality. The updated Solargraf platform offers a simplified experience for designing a NEM 3.0 systems by optimizing panel placements for both grid-tied as well as grid-agnostic systems, configuring battery sizing by leveraging modularity and enhancing system operations for time-of-use management and energy export to deliver the best possible electricity bill offset and payback. Let me conclude. We are managing through a correction in the U.S. solar market after three years of phenomenal growth, a period in which the residential solar market doubled and Enphase sales tripled. Even so, residential solar has only achieved 4% to 5% penetration in the U.S. We believe there are several positive long-term drivers which will accelerate adoption, such as the 30% ITC tax credit, the rising utility rates, increased grid instability, climate change and increasing EV adoption. There is no doubt that these will drive meaningful solar plus battery growth over the long term. Our strategy is clear and unchanged. We manage for the long term. We will make best-in-class home energy systems with a laser focus on innovation, quality and customer experience. We are doubling down on our relationships with customers. We are driving down installation times and investing in our service teams. We are investing even more on new product innovation. We are expanding our IQ8 microinverters and battery reach globally, accelerating our business in Europe, introducing IQ8P microinverters for the small commercial solar and emerging residential markets worldwide and making continuous enhancements to our installer platform. Before I turn the call over to Mandy, I'm happy to announce that our Board of Directors has authorized a new share repurchase program. Given our confidence in Enphase's future growth, free cash flow generation and the value we see in our stock, our Board has authorized an additional $1 billion for share repurchases. With that, I will turn the call over to Mandy for her review of our finances. Mandy?

Operator:

[Operator Instructions] The first question today comes from Brian Lee with Goldman Sachs. Please go ahead. Brian Lee, your line is open. You may ask your question. The next question comes from Phil Shen with ROTH MKM. Please go ahead. Sir, perhaps your line is muted?

Badri Kothandaraman:

Right. We are not planning any microinverter pricing reductions in general, overall. As regarding pricing pressure, it is normal for us. Since inception, we are always used to pricing pressure. We are always used to competing with string inverters from Day 1. This company was founded based on distributed architecture wins. Distributed architecture basically means no single point of failure. So distributed architecture means that it's a semiconductor-based architecture, which basically has got less number of components and very high quality, which means 0.05% failure rates. It also means 25 years of warranty versus other string inverters that may be half that many number of years. In addition, we service customers very well. 24/7 customer service, 74% NPS. Also, we strongly believe in AC coupled architecture, which means that the combination of - it's an Enphase system for solar. It's an Enphase system for storage. It is a full home energy management system with an Enphase EV charger as well. And that is starting to become more and more important as NEM 3.0-type tariffs come. And those tariffs are already there in Europe, for example. So SPAs, standing for special pricing adjustments, are a fact of life. We do that always. They are - we are very disciplined. We have a pricing team. And it always depends upon the volumes. And of course, we do - we form deeper partnership with customers in times like this. And we have a lot of tools at our disposal. We have done our recent M&As and digital transformation that we did. Solargraf software platform is invaluable for us at this time, because we are able to give customers the option of designing - for example, showing an M3 design and making sure they can sell that effectively to homeowners. So Solargraf even leads lead generation company we got. That is coming of use in times like this. So basically, to answer your question, pricing is normal. We aren't planning on any pricing reduction on microinverters. On batteries, it's a different story. On batteries, I was very clear a month back in the public call, saying that, yes, we introduced our third-generation battery. And we cut the price of our second generation battery. And both of them coexist. We believe that the second-generation battery will be very good for grid-tied NEM 3.0 as well as grid-tied batteries in Europe. The third-generation battery that comes with a 30-minute commissioning time, which we are very happy about, that is priced appropriately for backup. So - and these pricing decisions aren't done on the fly. They are done with extensive planning. And we do have upper pricing protection to our channel partners. And so we believe in doing things in a structured way. This is no exception.

Mandy Yang:

Phil, so the price protection for storage has been accounted for in our earnings. There will be no other impact in Q3 or going forward. And price protection, we offer to distributors as a policy. So in that case, if we lower our ADLP for micros, we will provide price protection. By this point, we are not planning to do things like that.

Badri Kothandaraman:

Thank you.

Colin Rusch:

Thanks so much guys. Can you talk a little bit about your opportunities for driving cost out of the supply chain? It sounds like there's plenty of supply available and your ability to continue to walk that cadence down here over the next several quarters.

Colin Rusch:

Excellent. Thanks so much guys. Just a simple follow-up here. You've historically talked about wanting to have 8 to 10 weeks of channel inventory. Will the guidance that you're indicating here for 3Q get you to those levels in the U.S. from what you're seeing at this point?

Colin Rusch:

Okay. Thanks so much guys.

Mark Strouse:

Great. Thank you very much for taking our questions. Just thinking about with valuations coming down across the space, how you're weighing potential M&A versus prioritizing this new $1 billion buyback.

Mark Strouse:

Okay. Thanks, Badri. And then just a follow-up. I think you touched on this a bit on California, but maybe just repeat what you said about the - what 3Q guidance assumes, as far as NEM 2.0 systems and when you expect that backlog to be removed and start selling 3.0?

Mark Strouse:

Okay. Thank you very much.

Andrew Percoco:

Great. Thanks so much for the question. I just had a follow-up question to Phil's question earlier on - so pricing appears to be relatively stable. So in that context, it appears like the 3Q guide is really volume-driven. So can you maybe just discuss between regions, what your expectation is on volume in the third quarter, specifically? And if you could just start to provide more context around how you expect that to rebound or change in the fourth quarter, that would also be helpful. Thank you.

Andrew Percoco:

Got it. That's super helpful. And can I just ask one more on what you're seeing on Europe channel inventory levels? I understand that 3Q is maybe historically and seasonally a light quarter. But can you just maybe elaborate on what you're seeing across Europe on inventory levels?

Andrew Percoco:

Got it. Thanks so much.

Julien Dumoulin-Smith:

Excellent. Thank you. Good afternoon, team. I appreciate it. Can you talk a little bit more about the inventory levels and any write-down risk here? Can you talk a little bit about just the backdrop on that front? And more importantly, just the normalizing functions as you think about these different inventory levels across geographies, especially thinking to continued European growth, what might be implied by inventory levels, et cetera?

Julien Dumoulin-Smith:

Right. Effectively equal to that excess inventory here. Great. And then just related here, if you can comment on gross margins. I mean, obviously, you guys provide - been providing consistently improving gross margin guidance over time. And implicit within that is the confidence to sustain that for at least some time, several quarters as far as I read it. You still feel confident in supporting these higher gross margin levels here despite this backdrop through this period of time for several quarters?

Julien Dumoulin-Smith:

Right. Sounds it's for several quarters to come. Thank you very much. A - Badri Kothandaraman Thank you.

Kashy Harrison:

So based on the feedback that you're receiving from your distribution network, are you getting the impression that sell-through in non-California will have bottomed by 3Q? Or do you still believe non-California is in the process of recalibrating? And then you said that the early NEM 3.0 data is encouraging from your larger installers. Can you maybe just speak to - wait, attachment is down to 50%. Can you just maybe speak to where we are on year-over-year trends, just based on the leading-edge data?

Kashy Harrison:

Thank you for that color. And then maybe just for my follow-up question. Also, clearly, demand is tracking beneath expectations as you're adding a significant amount of capacity to the U.S. Do you have the ability to ramp U.S. to peak capacity by throttling back in Mexico, India and Romania? Or are there minimum activity levels that you would need to maintain per your agreements with your contract manufacturers?

Kashy Harrison:

Thank you.

Jordan Levy:

Good afternoon, everyone. Thanks for taking my questions. Just a quick one for me. Just curious if you could give us a little more detail on the EV charging side of things, what it takes to break into - grow that business to a bigger segment and then the eventual progression toward bidirectional charging and how you're viewing that?

Raghu Belur:

Yes. So in terms of the importance of the connected EV charger that we are going to release in this quarter, again, plays an important role, as Badri mentioned in your home energy management system. Specifically, when you think about it in the context of NEM 3.0 as well, right? You want to avoid charging your car at certain times of the day, which is part of the time-of-use construct as well as allow your battery or preserve your battery to discharge power into the grid at certain times of the -- at certain times of the day, particularly in the summer. So getting a significant load like an EV under control of your home energy management system becomes extremely vital so we can deliver great savings for the homeowner, both in terms of bill offset as well as payback period as you think about NEM 3.0 here in the U.S. as well as, as you think about home energy management broadly in Europe as well.

Raghu Belur:

Thank you.

Brian Lee:

Hi guys. Thanks for taking the questions. Apologies about earlier. I had a question about the - I guess the, destock and how you're reading the channel. I appreciate, Badri, all the kind of detailed disclosure about the quarterly cadences you've experienced. So if I do the math, you kind of shipped 10% more than sell-through 2 quarters in a row based on your commentary in the U.S. So roughly, let's call it, $100 million, if my math is correct. And your guidance is effectively down that much sequentially, if not a little bit more. So does this imply you're entirely resetting kind of the channel all in once in 3Q? And then as you get into 4Q, we're going to start to be looking at a normalized environment, you're starting to fill the channel again. Like what -- what's sort of the implication here, if that math is correct to begin with?

Brian Lee:

Okay. Fair enough. But embedded in your guide for 3Q, the sell-through sounds like you're assuming continued weakness. Do you anticipate that to just kind of be a flat line assumption all the way through the rest of this year, end of the year, and that's how you're approaching the channel reset even beyond 3Q rates?

Brian Lee:

Okay. Great. And then I guess that's a good segue into my second question, and then I'll pass it on. You're sort of the newer player in Europe, you're coming out with new products, new markets. And obviously, you have the highest margins out there in the industry, and I know you want to protect those. But as you enter new markets in this environment, is there a kind of different mindset around pricing strategy? Can you maybe speak at a high level about kind of what you're thinking in regards to pricing when you're out in Europe and you're trying to gain share there? And maybe you have some margin wherewithal to work with? Thanks guys.

Brian Lee:

Okay. Appreciate that. Thank you.

Operator:

The next question comes from Eric Stein with Craig-Hallum. Please go ahead.

Badri Kothandaraman:

Yes. I mean, that's right. That is still a fair expectation. We are exactly on track for that. We feel really good on batteries. We have started shipping our third-generation battery. The third-generation batteries solve some unique problems with the second generation. Although on the second generation, we have kind of cleaned it up. The third generation has got outstanding commissioning times. The beautiful thing in Australia is that we have the one product that combines the gateway plus the isolator. And so, it is nice and compact and it's very easy to install, the entire commissioning time. And I was told yesterday, somebody did it in under 10 minutes. So we feel really good there. In terms of power, I mean, this battery, 5-kilowatt hour battery has got 3.84 kilowatts of continuous power and 7.68 kilowatts of peak power, just a 5-kilowatt hour battery, which is double compared to our prior generation. And in fact, it is double on continuous and triple on peak power. And that peak power is very critical, because that is what helps you start air conditioners. So - and we can do a lot of great things in software. If somebody thinks it is too much power, we have the ability to throttle continuous power, but still maintain peak power. So - I mean we are very happy with our third generation. Of course, we can -- no product is perfect at the time of introduction, but this is a step function compared to Gen 2 in terms of power. We think our battery business - I mean, we called Q2 as the bottom. I believe it is the bottom. We are guiding Q3 to be the same range, 80 to 100. And we think with the NEM 3.0 starting to come up in Q4, you should start seeing a lot more activity there, along with our introduction into U.K., Italy, Poland, Greece, all of those should start to account for more megawatt orders as well.

Eric Stine:

Okay. Thanks for the color.

Jeff Osborne:

Hi Badri and Raghu. Two quick ones. I was wondering if you could provide us, maybe dumb it down a bit. People ask us multiple ways. But the walk of guidance, you're down about $135 million sequentially at the midpoint. Is it safe to say that sort of two-thirds of that might be from the U.S., just due to the channel inventory and the third seasonality in Europe? Is there a way of bucketizing...

Jeff Osborne:

Got it. That's helpful. And then it seems the strategy is to expand into as many geographies as humanly possible quickly. In your experience with past geography expansion, how quickly does it take a country to be productive in terms of training, working with the distributor, marketing? Is that a six month lag? Or you're talking about Greece, U.K., et cetera. Like, what's your expectation internally? Is that more mid next year, when those would start kicking in or spring? Any thoughts would be helpful.

Jeff Osborne:

Appreciate it. Thank you.

Steve Fleishman:

Yes, thanks. Just wanted to clarify - sorry to ask a similar question to some others. But the impact of the inventory reset from the first half of the year that you're going to do in Q3, can you just identify what that catch-up is as opposed to kind of ongoing inventory changes? Just the impact of -

Steve Fleishman:

I guess I heard actually, just like in hundreds of millions, like on that, on revenue, do you have a number for that? Help me up. Tens of millions?

Steve Fleishman:

Okay. Great. And then on the Europe aspect, could you just clarify how you know it's the seasonal issue, as opposed to the beginning of some of the same issues we've seen in the U.S. in terms of gas prices down, higher rates? How do you know it's the seasonality?

Steve Fleishman:

Understood. Thank you very much.

Corinne Blanchard:

Hi. Good evening, team. Most of my questions have been answered at this point. But maybe if you can help me understand the impact of the IRA benefit into next year. I believe you know related to get like a tax credit. So does that fully erase what you'll be paying? Or just if you can give some color here.

Corinne Blanchard:

Great. Thank you. And just one quick follow-up. But previously, you had mentioned you expected to restart 4.5 million quarterly capacity by the end of 2024. As of today, - and look, I understand visibility can change and demand can change. But as of today, that's still something that you anticipate by next year to reach?

Corinne Blanchard:

Okay. Thank you.

Sophie Karp:

Hi. Good afternoon. Thank you for squeezing me in. I wanted to ask you a question on kind of go-to-market strategy, particularly as you expand to Europe, where competition is higher across different product lines. Does it make sense for you to, I guess, launch some kind of brand awareness campaign aimed at the end consumer so that people could maybe learn and face the brand by name? Or do you think that you should continue reaching customers by primarily targeting dealers and installers?

Sophie Karp:

Got it. Thank you. And then maybe a quick one on TPO versus, I guess, cash sales and loans. Do you have any visibility with your installers, or any commentary you can share on how they navigate in the environment where TPOs are maybe taking the market share, becoming more price competitive given the interest rates and the IRA benefits? And what does that mean for the volume of business that they can be doing going forward?

Sophie Karp:

Great. That's all for me. Thank you.

Badri Kothandaraman:

Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter. Thank you.

Operator:

Good day, everyone, and welcome to the Enphase Energy's First Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please also note that, today's event is being recorded. At this time, I'd like to turn the floor over to Karen Sagot. Ma'am, please go ahead.

Badri Kothandaraman:

Good afternoon, and thank you for joining us today to discuss our Q1 2023 financial results. We had a decent quarter. We reported revenue of $726 million, shipped approximately 4.8 million microinverters and 102-megawatts hours of batteries, and generated free cash flow of $223.8 million. Approximately 65% of our Q1 microinverter shipments were IQ8. We exited Q1 at 46% gross margin, 14% operating expense and 32% operating income, all as a percentage of revenue on a non-GAAP basis. Mandy will go into our financials later in the call. Let's now discuss how we are servicing customers. Our Net Promoter Score worldwide was 75% in Q1 compared to 71% in Q4. Our North American NPS was 77% compared to 74% in Q4. Our average call wait time was 1.2 minutes compared to 1.6 minutes in Q4. We are focusing on route cost fixes of customer issues and improving our business processes rapidly to enhance customer experience. Let's talk about microinverter manufacturing. Our overall supply environment is quite stable. There are no major shortages right now. We began manufacturing at Flex Romania in the first quarter, bringing our quarterly capacity to approximately 6 million microinverters. Our European business is growing rapidly and many customers have asked us for local manufacturing, and we will be able to do that going forward. Let's come to US manufacturing. As we discussed last quarter, the IRA, Inflation Reduction Act, will help bring back high-tech manufacturing to the US and stimulate economy through creation of new jobs. We are opening manufacturing lines with three different manufacturing partners, adding a capacity of 4.5 million microinverters per quarter, bringing our overall global capacity to 10 million microinverters per quarter as we exit 2023. We expect to begin US manufacturing with one partner in Q2 and with the remaining two in Q3. Let's now cover the regions. Our US and international revenue mix for Q1 was 65% and 35%, respectively. In the US, our revenue decreased 9% sequentially due to seasonality and macroeconomic conditions and increased 28% year-on-year. The sell-through of our microinverters in Q1 decreased 21% sequentially compared to Q4, worse than the typical seasonality of 15%. Our microinverter channel inventory at the end of Q1 was relatively normal, while the storage channel inventory was a little elevated. I'll go into details later in the call. In Europe, our revenue increased 25% sequentially and more than tripled year-on-year. Our Europe non-GAAP gross margin is quite healthy, over 45%. Another point to note is that the sell-through of our microinverters in Europe reached an all-time high in Q1. We are now shipping IQ microinverters into France, Netherlands, Spain and Portugal. In addition to Germany and Belgium, we just recently started shipping IQ batteries to Netherlands, France, Austria and Switzerland. Let me provide some brief comments on Latin America, Australia and Brazil. In Latin America, revenue decreased 2% quarter-on-quarter and increased more than 70% year-on-year. Our revenue in Australia increased 6% quarter-on-quarter, while our revenue in Brazil more than doubled. We are growing very rapidly in Brazil. And given the big market size, we are expanding the team and prioritizing new products. Let me provide some additional color on the US followed by Europe. We usually recognize revenue when we ship product to distributors and large installers. Most of our installers buy our products from distributors. It is therefore relevant for us to talk about the sell-through of our products from distributors to installers. Since we have a healthy market share in the US, our statistics are a meaningful representation of the business trends. As I said earlier on this call, our sell-through of microinverters in the US was 21% lesser in Q1 compared to Q4. Our sell-through in California was only 9% lesser than Q4. There was some impact due to the weather in early Q1, but the NEM 2.0 rush in Q1 more than compensated for it. California installers took advantage of the NEM 2.0 rush and have built up a solar backlog for the next three to four months. We believe when the stockholders aren't expanding their crews to accelerate installation, they're laser focused on their cash flow due to the high interest rate environment and are looking clarity -- for clarity on the NEM 3.0 demand. Sell-through of our batteries in California was 23% lesser in Q1 compared to Q4, as installers focused mainly on solar. We expect this trend to continue for the next three to four months. After that, we see NEM 3.0 as a net positive for California and expect strong demand to resume for solar plus storage. Let's cover the rest of the US. The sell-through of microinverters in non-California states was 25% lesser in Q1 compared to Q4. We observed that the sell-through was even lower in states with low utility rates such as Texas, Florida and Arizona. In these states, the economics of loan financing has worsened due to rising interest rates. The sell-through performance in the Northeast US was a little better. Coming to IQ Batteries, the sell-through in non-California states was 28% lesser in Q1 compared to Q4. Let's briefly discuss the health of our US customer base and some trends in financing. Our Q1 data shows higher sell-through rates for long tail installers compared to Tier 1 and 2 installers. Our installers, in general, are navigating three key challenges

Operator:

Ladies and gentlemen, at this time we will begin the question-and-answer session [Operator Instructions] Our first question today comes from Colin Rusch from Oppenheimer. Please go ahead with your question.

Badri Kothandaraman:

Yes. Actually, in Europe, our channel is rather light. We've been tight on product in the last few quarters. And so the channel is light. By light, I mean, we consider channel to be normal between eight and 10 weeks of inventory and light means less than eight weeks. So basically, that's the situation there.

Badri Kothandaraman:

Yes. On batteries, as an executive team, we are hyper focused on batteries as much as on our microinverters. Our learning curve on batteries has been tremendous. As we speak, our second-generation batteries are getting better and better every day in both their installation and performance. Our third-generation battery, like what I said is coming soon into the US and Australia in Q2, that will be even better with a wired communication can and with double the continuous power and triple the peak power and with enhanced modularity, as well as serviceability that helps us in dropping costs compared to the prior generation. And of course, it's LFP, so it's the safest battery. The demand in the US, that demand being down is temporarily. I described the dynamics due to the NEM 2.0 pulling in California, as well as the increased interest rates outside of California. We believe that's a temporary problem. Installers will figure out what to do outside. And California, we're incredibly bullish on NEM 3.0. We think our battery is going to be perfect for NEM 3.0, because the increased power of the battery will give the ability to export more energy during the time when the grid needs it in August and September, and people can get paid handsomely for it. And because of that, you see the payback for a solar plus storage system under NEM 3.0 is approximately six to eight years, depending on which utility you are in. So, we think NEM 3.0 will accelerate the attach rate of batteries, and it might take a little bit of time for the industry and for the consumers to realize it, but I have no hesitation that NEM 3.0 will be better for California. Now, let me come outside the US. So far, we've been shipping to Germany and Belgium in Europe. This quarter, I would say, in end of March as well as in the beginning of April, we introduced batteries to four more countries, basically, France, Netherlands and Switzerland -- actually, Austria, to correct myself, that was a month or two ago. So, we just introduced batteries in four countries. We are going to introduce our third-generation battery in Australia in Q2 in addition to the US. In both Q3 and Q4, we are going to target several more countries in Europe. We'll be in Italy and UK by Q4. So, on the batteries, we're just getting started in Europe. And I think the volumes will start ramping there. And in the US, it's a matter of time, the rest of the US recovers, the installers start selling batteries again. And in California, it will be a no-brainer with NEM 3.0. So the numbers are only going to get better from here on. The long answer, I just wanted to give you a full picture.

Operator:

Our next question comes from Maheep Mandloi from Credit Suisse. Please go ahead with your question.

Raghu Belur:

Yes. I think both Gen 2 and Gen 3, if you look at Gen 3, as Badri mentioned -- this is Raghu, by the way. The power is double the max continuous power of the Gen 2 and three times the peak power. The peak power, as a reminder, is what gets used to manage heavy loads during start-up time. But to you -- answer your question, the power is -- can be modified. We can set the limits to what the power needs to be in software. So what that does is just makes the whole process very efficient for the installer. They have got one SKU to purchase. They can install that one SKU, which would be the five-kilowatt hour SKU. And then they can vary the power depending on what the homeowners' needs are, whether that is going to be an NEM 3.0 system, which could be just one battery with a PV system, and it happens to be grid tied, for example, or a 10-kilowatt hours of battery that could be providing partial loan backup or you could be doing 20-kilowatt hours and doing whole home backup. So all of that -- the beauty of the system is that it all can be configured in software and gives you a tremendous amount of flexibility and simplicity for the installer.

Badri Kothandaraman:

We don't see any drop in pricing. In fact, we see our gross margin sequentially up a couple of percent from Q4 to Q1. And also, I broke out the gross margins in Europe because some of you had been asking me. The gross margins in Europe are incredibly healthy. They're over 45%. The gross margin in the US is incredibly healthy. Pricing is stable for us. Gross margin means both price as well as cost. And so we do value-based pricing, which is basically price products based upon the value they bring compared to the next best alternative like alkaline batteries, it may be increased power, increased safety. In microinverters, it may be increased quality, increased service. So that's on the pricing side. On the cost side, we have a world -- a task force that runs all the time called world-class costs. So we are constantly discovering ways to save a cent in the microinverter. For example, based on last year's shipments, last year, we shipped 15 million microinverters in 2022. So $0.01 reduction for us means $154,000. So it's very important for us, even $0.01 reduction, even $0.005 reduction is important for us. So we take it extremely seriously. On batteries, with a third-generation battery, which has got higher modularity as increased serviceability. Now I think we can reduce the overhead contribution and costs to a minimum. And on batteries, the gross margin for every generation will get better than the prior generation. So a long answer again, but ASPs, we do not see much change and our cost programs are going well.

Operator:

Our next question comes from Corinne Blanchard from Deutsche Bank. Please go ahead with your question.

Raghu Belur :

Yes. This is Raghu again. Competition is strong everywhere. It's always been. It's nothing new, both here in the U.S. as well as in Europe. And so for us, we are always striving to make sure that we are providing value and providing a highly differentiated solution. So if you look at the solutions that we provide, both here as well as the U.S. from a product point of view, I'll talk about other stuff as well, from a product point of view, we are truly a distributed architecture that gives us much better performance, much better reliability. And because it's a low-voltage DC system, both solar and batteries, et cetera, it's arguably much safer as well in addition to being very simple to install, maintain and manage. The second thing we also look at very closely is that providing very high-quality, high-reliability products. And that's, again, a big differentiator, and it starts with the architecture as well as all of the work that we do in delivering a very high-quality product. And finally, it's customer service. Just making sure that, as Badri mentioned, if you look at what our NPS is, look at what I call wait times. Somebody calls us, we answer the phone immediately. It's one phone call to make because, typically, they're buying the entire Enphase system. And so delivering the best customer experience, both for our installer -- our distributor partners, installer partners as well as for the home owner. For the homeowner, they have just one app to look at, and they can -- they have the control of their entire system on the palm of their hand. So to summarize, it's highly differentiated products, high-reliability products and great customer experience. And that's how we manage -- that's how we deal with our competition and reflected in our -- in pricing and gross margin, as Badri mentioned.

Badri Kothandaraman :

It's hard for me to say right now, but I know that NEM 3.0 has got great fundamentals in California. And contrary to what I've read from the reports, it is a change. Selling from NEM 2.0 to NEM 3.0 requires the installers to adapt. And now the storage attach is going to be a lot more, it is a change in selling. It is a change they are not used to yet. So the next three to four months will be probably well spent in training the installers on how to sell NEM 3.0, because with NEM 3.0 now, the consumption of the homeowner is important. NEM 3.0 has got tariffs for 24 hours during the day, times 365 days a year, so 8,000 plus points, 8,000-plus data points. So it's very important. Your consumption profile is important. So your savings obviously depends on the consumption profile. So we need to make a few things clear to the homeowner. And we need to clearly tell him that basically -- him or her that self consumption -- you're going to do self-consumption most of the time, which means what, your consumption is going to be met by either solar and/or storage. But during the month of August and September, we have all seen blackouts in California, during the month of August and September, why? Because the demand on the grid is higher than supply. There -- in August and September, under NEM 3.0, you get paid for actually helping the grid. You get paid handsomely. And at that time, battery is going to be your best friend. You're going to be making a lot of money on batteries. So I think, my personal opinion is NEM 3.0 -- of course, it requires a lot of evangelizing, a lot of selling, but NEM 3.0 will be a catalyst for solar plus storage. Like Germany, if you go look at Germany. Germany, the solar market is over 2 gigawatts, maybe 3 gigawatts right now. The attach rate is over 80%. That's a fuel self consumption market. And the tariff structure is similar. I think the import rate is €0.41 per kilowatt hour and the export is something like €0.11 per kilowatt hour, so a very similar construct. I think the result will be the same. Of course, it's not going to be overnight. It's going to take time, but great for the long term.

Operator:

And our next question comes from Brian Lee from Goldman Sachs. Please, go ahead with your question.

Badri Kothandaraman:

Yeah. I think the storage volumes are going to go -- Q2 is probably the low. They're going to grow from here on and simply because of one reason. We are going to be introducing batteries to a lot more countries. We just introduced to four countries. And we are going to be introducing the third-generation battery in Q2 this quarter. Then, we are going to be introducing the third-generation battery into multiple countries in Europe. So NEM 3.0 is a part of the equation, but not the only thing in the equation. And eventually, the installers are going to figure out how to sell batteries in the rest of the US, despite the high interest rates. So like what I said, I think we are turning the corner on batteries. We have understood how to enhance the customer experience. Even our second-generation batteries are best in class right now. The third-generation batteries will obviously make things even better with double the power, double continuous triple peak. Yeah.

Badri Kothandaraman:

If you see a mathematic threat, if you see one week of channel inventory equals roughly 7.5%, right -- of the quarter, right? If you split the quarter into 13 weeks, so one week is basically 7.5%. So if something, let's say, if in one quarter if the sell-through is, let's say, 15% down that equates to two weeks of inventory. And so it's nothing over the top. It is if your normal channel inventory is somewhere around 10 weeks -- or 8 to 10 weeks, this would result in a slight -- instead of 8 weeks, you would be at 10 weeks. That's what you're talking about. So now having said that is we expect sequentially better sell-through. You know, Q1 is usually bad for sell-through due to a combination of weather plus now there is a macroeconomic effect on top of it. So Q2 is seasonally better plus with the installers getting little bit more adjusted to the situation. Things are going to be incrementally better in terms of sell-through in Q2 onwards.

Operator:

And our next question comes from Philip Shen from ROTH MKM. Please go ahead with your question.

Badri Kothandaraman:

You can see our numbers. Gross margin is 2 percentage points better in Q1 than Q4. It basically comes because of our disciplined pricing management plus the conversion for us to IQ8. IQ8 comes with an outstanding cost structure. And right now, we are at 65% converted to IQ8. We expect to be at nearly 90% converted to IQ8 by Q3. So -- and we have an active cost reduction effort going on. So even if we do one-off deals, for example, in order to accelerate our market share, these are not going to cause a dent for us. So we expect pricing to be generally stable. The same thing is true on batteries. On batteries, we are learning rapidly. We are learning a lot on costs, especially the overhead costs on the battery returns. The serviceability of batteries are tough if you ask anybody in the industry. And I think we are getting better and better and better at those, basically improving the battery quality by root cost corrective action, by understanding defects, by eliminating the defects, by putting in permanent corrective actions in place. Then also building in serviceability into our new products. So why take down $3,000 products from the wall? Why not take down a $40 board from the wall instead? Why not repair it in situ? Why not service right there in 30 minutes? So there's a lot of money to be taken out of batteries from a cost perspective. That's what we are doing.

Badri Kothandaraman:

Yes. I don't. For me, it is high quality leads to high price. And why? Because it's the entire cost of ownership. Installers have become smart -- smarter. Basically, they understand it is not about just the price of the inverter. The time, the money, it causes them to go and address the failure is so huge compared to a few dollars move on the inverter for high quality. So high quality is what we focus on, and installers have realized that. And they are continuing to work with us. And you can see the latest energy say the reports for the data. And the data is there. So we don't plan on changing our strategy there.

Operator:

Our next question comes from Andrew Percoco from Morgan Stanley. Please go ahead with your question.

Badri Kothandaraman:

Yes. Just to recap what I said -- and it's good for everyone to hear it again, is our overall sell-through of microinverters in the US was 21% lesser in Q1, compared to Q4. California was only 9% out of that because we understand the situation with NEM 2.0. So the NEM 2.0 rush basically compensated for any weakness due to the macro. On the rest of the US, the sell-through dropped by 25%, compared to Q4. And the most notable drops were seen in the states with the lowest utility rates, Texas, Florida, Arizona. Then -- we then did an analysis on how did the long tail installers do in comparison with the Tier 1 and 2 installers? We found in our analysis, the sell-through rate of long tail installers was quite better compared to the Tier 1 and 2 installers. Now I'm not exactly sure of the reasons, I can only speculate. Maybe they're local. There they do a better job of servicing the client, maybe they deal with high-value clients. But we thought from the questions we had that long tail was going to be a little more stressed, but we found the opposite in our data. But having said that, I mean all installers are affected by three things like what we said. The interest rates are high. That's the first thing. So basically, it's getting more difficult to -- solar with loans is getting a little more difficult to sell. Basically, earlier, they used to do low APR loans with high dealer fees. And that was common, whether it's long tail or Tier 1 and 2 installers. Now they are switching to higher APR with lesser dealer fees, sometimes no dealer fees. A cash flow issue. That is the milestone on payment is a lot reduced now. That's causing stress. Some of the -- our expectation was some of the Tier 1, 2 installers may be able to handle that situation better than long tail, but we didn't -- the data didn't indicate that. For us, the data said that the long tail is okay, it's holding up. And we think it is a matter of time. We think the industry as a whole is going to adjust. Of course, there are a few installers who may actually find it difficult. But in general, the industry is going to adjust to the new loan structures. Probably, it's a big opportunity for more people to come in to the market to offer loans and leases to long-tail installers, leases to long tail installers hasn't been ramp until now, but that's an opportunity that we see already a few players come in. So I think it's going to be interesting to watch the situation in the next few quarters. But I think this is a resilient industry. And I believe things are only going to get better from here. Q1, as I indicated, is usually the worst quarter of the year due to seasonality. And so that -- Q2 is usually a good quarter in terms of seasonality and with the adjustments installers are making in running their business, we expect things to be incrementally better.

Badri Kothandaraman:

It's only a week, as you said, we have talked to a number of installers. All of them are optimistic that their solar plus storage business can boom. They are all -- we shared solar graphs with them. We shared the designs. We showed them three examples per utility. We showed them how a pure solar case looks. We showed them that solar now in west-facing roofs is not bad. We showed them solar plus storage is actually better than NEM 2.0. or equivalent. So, now actually storage has got meaningful savings right now. Earlier with NEM 2.0, storage didn't have value in terms of savings, but had a lot of value on resilience. Now, storage provides economic advantage in addition to it. So installers are getting it. As I said, they do have a little time on their hands in order to start accelerating the originations. But I think the data is there, that's a put. And we do expect -- like in Germany, we do expect grid-tied batteries to become popular too because imagine you have 8-kilowatt solar system, and the crew is already there. They're installing the solar system. And all I need to do is to install one of Enphase's 5-kilowatt-hour battery. That battery is not big. It is small. It can be done very quickly on the wall. There is no partial home, whole home, nothing to worry about. There's no work on the main panel. It's a simple 5-kilowatt-hour battery and they provide savings right away. So, selling needs to pick that up. I'm sure they can sell it.

Badri Kothandaraman:

Thank you.

Jordan Levy:

Thanks all. And thanks for all the commentary. Just a quick one for me to follow-up on a question of share. I'm just curious with the EU green deal industrial plan, have you seen any shift in the competitive environment over there? Any pop-ups of mom-and-pops trying to sell into the market or anything like that?

Jordan Levy:

And would you say that's true both on the battery and micro side?

Jordan Levy:

Great. Thanks so much for that.

Mark Strouse:

Yes, good afternoon. Thanks for taking our questions. Getting late in the day here, so I'll just stick to one and take the rest off-line. I wanted to come back to the OpEx. The guidance for 2Q is kind of flattish quarter-over-quarter. Just from a high level, not necessarily looking for specific guidance, but from a high level, I mean, to the extent that the macro continues to deteriorate, California transition might take longer than expected. How should we think about OpEx going forward and kind of balancing near-term profitability with a lot of the investments that you're making in geographic and product expansion and everything else?

Mark Strouse:

Okay. Fair enough. Thank you.

Christine Cho:

Thank you for taking my questions. For the US manufacturing, I think you guys just said in your prepared remarks, shipments should be 4.5 million per quarter by the end of '24, assuming robust demand in the US. But in the event that your US demand is less than that, would you still want to utilize that capacity and export the product and back out some of your production elsewhere? How should we think about that?

Christine Cho:

Okay. And then on the IQ8 rollout, that's been slower than expected. Could you just go into some more detail into what's driving that? Is it on the supply side with any of the components, or is it on the demand side, as customers sound like they've had to work through inventory over the last quarter or two? And I think on the last quarter call, you said you expected it to jump to 80% in 2Q. So is that still the expectation? And just with the gross margins, it's very high this quarter and the IQ8 drove that. But your 2Q guidance is lower and batteries are lower. So that's going to be less of a drag. So is this just conservatism, or is there anything one-off that we should be aware about in 1Q or 2Q?

Operator:

Our next question comes from Kashy Harrison from Piper Sandler. Please, go ahead with your question.

Badri Kothandaraman:

Yes. I mean, we have stated our strategy. It is unchanged. Basically, first to make sure that we have plenty of cash for the needs of the business. The capital that we need for our portion of you is manufacturing, et cetera, we're doing exactly that. The next one we look at is -- we look at are there any M&As that we should be taking advantage of now? We look at a number of companies on a weekly basis in the areas of batteries, even in power conversion, in software, in home energy management, EV charging. We look at many, many areas. And that's the second priority. The third one is, if we -- basically, if we have cash left over from number one and number two, we will buy back stock assuming the share price is below conservatively estimated intrinsic value. So we will do that. Our Board looks at it very carefully. And that's our strategy.

Operator:

Our next question comes from Eric Stine from Craig-Hallum. Please, go ahead with your question.

Badri Kothandaraman:

Yes. I mean, we are pretty conservative when it comes to our guidance. You should see our track record in general. And we do have -- like, what I said, we do have a lot of dry powder in terms of new products. This year is the year of new products, and we are going to be releasing new products constantly. And so, we think other than the base business, which we guided on in Q2, there is a lot more to come there. So our guidance is a little bit wider this time, plus/minus $25 million. It is to reflect a slightly more uncertainty compared to the last time. But our Europe business is doing incredibly well. We grew 25% in one quarter from Q4 to Q1. We have doubled -- we doubled from 2020 to 2021. From 2021 to 2022, we grew 132%. I just released my annual letter yesterday. You can see that 132% growth from 2021 to 2022. And so Europe is doing incredibly well for us. We are focused on entering a lot more countries there. We are focused on IQ8 microinverters. We're focused on IQ Batteries, lots of regions big market over 10 gigawatts compared to the US, which is 5 gigawatts right now. So bottom line, we are pretty conservative.

Badri Kothandaraman:

I mean we gave $700 million to $750 million. And there's nothing else we say -- we cannot say, we are in the top half of the range.

Operator:

Our next question comes from Joseph Osha from Guggenheim Partners. Please go ahead with your question.

Badri Kothandaraman:

Yeah, 50, 000 microinverters shipped to customers. That's what we talk about. We always talk about shipments. Then –

Badri Kothandaraman:

Therefore, you should take that number, you should take 4.5 million unit number by end of 2024, you can do some kind of an interpolation, you can work with us and a linear interpolation may be fine too.

Badri Kothandaraman:

Yes. And like what you said, you can really calculate it.

Operator:

Our next question comes from Julien Dumoulin-Smith from Bank of America. Please go ahead your question.

Badri Kothandaraman:

I mean, we cannot predict what it's going to be in the back of -- all I know is Q1 is supposed to be seasonally a tough quarter. And on top of it, in Q1, installers had to face all of these uncertainties for the first time, Q1 as well as probably Q4 a little bit. So I think -- we said, and we hope this is true, is installers are going to adjust. Everybody is going to adjust. And of course, as long as interest rates are so high, we cannot -- we're not saying that, the numbers are going to return back to where it were. That is going to be stress on those numbers because interest rates were high, but there are going to be some innovation in financing, innovation in loans, innovation in leases that are going to come. It's going to provide more access to our long tail installers. The demand will unleash only when the interest rates are back to normal. But until then, it will get incrementally better compared to Q1.

Julien Dumoulin-Smith:

When you said temporary here and demand being down -- just to clarify that super quickly, I know you only guide one quarter forward. I'm just trying to understand how temporary?

Julien Dumoulin-Smith:

Excellent. Thank you, guys.

Pavel Molchanov:

Thanks for taking the question. Just one for me. In the 10-Q, you broke out revenue between products and services, and this may have been the first time you're doing that. Should we look at that $24 million service line as essentially the software slice of the revenue mix, or does that signify something else?

Pavel Molchanov:

Very useful context. Appreciate that.

Operator:

Our next question comes from Jeff Osborne from TD Cowen. Please go ahead with your question.

Badri Kothandaraman:

Well, yeah, as you can imagine, in good times, we will have nine-month visibility. In bad times, we will have approximately three-month visibility. Those are the ranges.

Badri Kothandaraman:

No. I mean I'm not saying that, but we have to be sensitive to installers. We -- even though our orders are non-cancelable, for that quarter, the installer situation, considering their cash situation is important, so we might accommodate push out requests, et cetera. So that's why even if we are fully booked, I don't -- I didn't -- I answered his question that way.

Operator:

Our next question comes from Sophie Karp from KeyBanc. Please go ahead with your question.

Badri Kothandaraman:

A hard question for me to answer. I expect the rest of the country to get incrementally better as we go. I do expect -- I do see NEM 3.0, I do see that there is a simple, clear value proposition. I do see California having very high utility rates, I do see a clear payback of six to eight years with solar plus storage. So, -- but I also do see a time -- it will take us some time, maybe not much, to train installers in order to sell NEM 3.0. So, I'm optimistic on both fronts, actually.

Badri Kothandaraman:

Right. Both batteries are equally good in terms of quality, in terms of commissioning now, in terms of performance. The nice thing about the Generation 3 is the double -- the continuous power. What happens because of that, it allows you to export the same amount of energy in half the time. And therefore, when you have -- for example, when you have one particular hour in California, where your rates are going to be high, you maximize it with our battery. So, yes, to answer the question, over the long-term, I would expect this battery with a high charging rate to uniquely help California.

Badri Kothandaraman:

Thank you.

Biju Perincheril:

Thanks. Thanks for taking my question. Badri, you have some internal sort of top of the funnel indicators from the software platform that you just went through. And can you sort of talk about the trends that you're seeing from there as far as installer demand is concerned?

Operator:

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I would like to turn the conference call back over to Badri Kothandaraman for any closing remarks.

Operator:

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining today's conference call. You may now disconnect your lines.

Operator:

Good afternoon and welcome to the Enphase Energy Fourth Quarter 2022 Financial Results Conference Call. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Karen Sagot. Please go ahead.

Badri Kothandaraman:

Good afternoon and thank you for joining us today to discuss our fourth quarter 2022 financial results. We had a good quarter. We reported record quarterly revenue of $724.7 million, shipped approximately 4.9 million microinverters and 122-megawatt hours of batteries and generated free cash flow of $237.3 million. Approximately 55% of our Q4 microinverter shipments were IQ8. We exited the fourth quarter at 44% gross margin, 12% operating expenses and 32% operating income, all as a percentage of revenue on a non-GAAP basis. Mandy will go into our financials later in the call. Let’s now discuss how we are servicing customers. Our Q4 net promoter score worldwide was 71% compared to 70% in Q3. Our North American net promoter score was 74% compared to 71% in Q3. Our average call rate time was quite down to 1.6 minutes compared to 4.8 minutes in Q3. We started our teams well, focused on root cause, fixes of customer issues and improved our business processes. Let’s talk about microinverter manufacturing. Our overall supply environment remains quite stable in general. There are issues that crop up from time-to-time. Our teams are staying on top of them. Our quarterly capacity was 5 million microinverters exiting Q4. We are on track to begin manufacturing at Flex Romania starting this quarter, enabling us to service Europe better. This will enable a total quarterly capacity of 6 million microinverters exiting Q1. We are going to increase this capacity even more with U.S. manufacturing. Let’s cover that now. As we discussed last quarter, we are pleased that the IRA will help bring back high-tech manufacturing to the U.S. and stimulate the economy through the creation of jobs. We are excited to service the U.S. customers better with local manufacturing. We plan to begin U.S. manufacturing of our microinverters in the second quarter of 2023 with a new contract manufacturing partner and in the second half of 2023 with our two existing contract manufacturing partners. We plan to open 6 manufacturing lines by the end of this year adding a quarterly capacity of 4.5 million microinverters, bringing our total quarterly capacity to more than 10 million microinverters as we exit 2023. We continue to await the details of IRA implementation from the U.S. Department of Treasury. Let’s cover the regions. Our U.S. and international revenue mix for Q4 was 71% and 29% respectively. In the U.S., our revenue increased 15% sequentially and 59% year-on-year. We had record quarterly revenue, record quarterly sell-through for our microinverters and record quarterly installer count in the fourth quarter. Our microinverter channel inventory was quite healthy at the end of the fourth quarter, while our storage channel inventory was a little elevated. I will go into more details about our batteries later in the call. In Europe, our revenue increased 21% sequentially and more than 130% year-on-year, led by strong demand in Netherlands, France, Germany, Belgium, Spain, Portugal and the UK. We had record sell-through and record installer count in Q4 as we continue to grow our business. We started shipping our IQ8 microinverters into Netherlands and France in Q4. We are working hard to introduce IQ8 into other European countries shortly. Also, we are currently shipping IQ batteries into Germany and Belgium. We expect to start shipping IQ batteries into Austria, France, Netherlands and Spain in the first half of this year. Our GreenCom Networks acquisition, which closed in the fourth quarter helps to integrate Enphase microinverters and batteries with third-party EV chargers and heat pumps, enabling homeowners to control their devices from one app, which is the Enphase App. We are integrating the GreenCom offering with the Enphase ecosystem and expect to make it available to our European installers shortly. Now I will provide some color on Latin America, Australia and Brazil. In Latin America, our revenue doubled year-on-year. We had steady growth in our solar plus storage business in Puerto Rico during 2020. In Australia, the solar market continued to recover in Q4 after a weak first half of the year. We expect to introduce IQ batteries in Australia, along with IQ8 microinverters in the second quarter of ‘23. As for Brazil, we experienced significant quarter-over-quarter revenue growth as we saw increased deployment of our IQ7 family of microinverters. The residential solar market in Brazil continues to grow rapidly. We have a very strong team in place. And we are excited about our future growth in the country. The emerging residential markets in Brazil, Mexico, Spain and India are all moving to high-wattage panels. In order to service them better, we plan to introduce a high-power 480 watt AC microinverter in the second quarter. Let’s discuss our overall company outlook for Q1. We expect our Q1 revenue for the company to be within a range of $700 million to $740 million. We are fully booked for Q1 right now. Let me provide some additional information on the key regions, first about Europe, then about the U.S. Our Europe business is doing very – is very strong as I noted. Note that we also doubled our revenue from 2020 to 2021 and more than doubled again from ‘21 to ‘22. We have a strong team in place and are quite bullish about 2023. We expect to introduce IQ batteries and IQ8 microinverters into many more countries in Europe as we progress through the year. Our value proposition is our differentiated home energy management systems, combined with high quality and great customer experience. As for Q1, we expect healthy growth compared to Q4, consistent with the overall growth in the European market. Let’s now cover the U.S. We expect our U.S. business to be slightly down in Q1 compared to Q4, primarily driven by seasonality and the macroeconomic environment. We are seeing that our distributor and installer partners are a little more cautious in booking orders. We normally have a 6-month order visibility and that has been somewhat reduced as our partners watch their spending closely. On the sell-through of our microinverters, while December was quite strong for us we saw a more pronounced seasonality in January than normal. There are a couple of interesting observations I thought I will share with you. Even with the pronounced seasonality and sell-through in January, we would like to point out that our activations are holding up. The second point to also note is that in conversations with our installers and distributor partners, they have started to see originations pickup in January when compared to December. Although the data we have is limited, these two points make us cautiously optimistic about Q2. We have also seen some analyst reports about a possible shift from loans to PPA due to the high prevailing interest rates. We work with thousands of installers every quarter. Our installer base is very diverse, both small and large installers that offer cash, loans and PPA options to homeowners. Any shift from one type of financing to another only has a minor impact to our business, almost negligible. No matter what the conditions are, our approach at Enphase does not change. We manage for the long-term. The basic thesis ongoing solar and storage remains intact, aided by a few factors

Operator:

[Operator Instructions] Our first question will come from Colin Rusch of Oppenheimer. Please go ahead.

Badri Kothandaraman:

Yes. The pricing in general right now is very stable. We do value-based pricing. We look at pricing versus the next best alternative. And we usually look at what value do we add in compared to that alternative. And typically, the things we focus on for microinverters are how is our quality compared to competition with our customer experience compared to competition. How is our ease of use compared to competition is the product a lot more easier to install and that matters to the installers and they – once they install, they do not want to come back to that site again. So they need excellent support. So if we look at all of these puts and takes, and we look at it versus the next best alternative. We price our products. We are extremely disciplined. There we also have a segmentation strategy, which means that we look at different flavors of power, and we price it according to the value those provide. In batteries, our strategy has been similar with the first two products in our generation, first generation and second-generation batteries, we fell a little bit short in terms of the differentiating features. And now with the third generation, I think we are going to be quite unique. We have modularity of 5-kilowatt hours, we will have double the power compared to the prior generation, which means a 5-kilowatt hour battery will have 3.84 kilowatts of continuous power and 7.68 kilowatts of peak power, which is amazing power. And then in addition, that’s going to have 30 minutes commissioning time, the thing that we didn’t get right on the first two generations. So with batteries, we are back into the value space, again, and we will price those products accordingly. So the short answer to your question, pricing is quite stable now.

Badri Kothandaraman:

Right. This product, we had originally 3 years ago, we started with introducing the IQ8D product. And that at that time was a good idea. It was 640-watt AC. And that microinverter covered two panels. And we got excited by that. We’ve worked on it. And that product, it took us some time to work on it because not only we had to get the microinverter right, we had to get the entire chain right, which is the microinverter performance, the gateway performance, most important, the software performance. And then we needed a proper design and proposal inject light Solargraf. So it took us quite a bit of time. And then we realized a few months ago that, yes, we can come with that product, we can release that product out, but that product is going to fall short in terms of power because the panel power in the commercial business has moved to, let’s say, greater than 500 watts. So, two panels will be 1,000 watts. 1,000 over 640 is a DCA ratio of more than 1.5. 1.5 is not acceptable in this business. The right number is between 1.2 and 1.25. So then we regrouped, we told the installers we are going to make a quick change, going back to the single panel, single micro architecture, we are increasing the power, leveraging what we did on the IQ8D. So it was not lost. We increased – we used that architecture and we basically are introducing now a product that is a 480-watt AC product. And that will take care up to 650 watts of panel power. So – and also accompanied by that product, we need the entire platform. What I talk about in the installer platform, which is starting from lead generation qualification because this is a design win business. It’s not like the residential business. There is some cycle time. You have to capture opportunities properly. You spend a lot of time in understanding analyzing the ROI, the tools need to be excellent for that. And then you need help the installers through the entire process. And so I think we are finally almost ready that we are looking to introduce – beat our test with the installers in the second quarter using the entire flow. Then we are planning to release to release it start ramping in the third quarter. And it’s going to take us a few quarters to ramp because like what I said, this is not like the residential business. It’s a design win business. And so we have to work with customers for an extended period of time and then convince them of the value proposition, and we will start winning. But our basic piece is there is the same. Product innovation great quality and support customers well, which is customer experience.

Badri Kothandaraman:

Thank you.

Philip Shen:

Hi, everyone. Thanks for taking my questions. Congrats on the strong Q4 and Q1. Badri, one thing that I noted in your prepared remarks was that you talked about how some of your customers are experiencing more caution or they are a little bit more cautious in booking orders. Normally, you have a 6-month order visibility, and that has been somewhat reduced as your partners watch their spending closely. Can you expand on that a little bit and help us understand when do you expect to get back to your 6-month visibility? You talked about originations improving in January. But based on some of the conversations we’re having in the industry, it seems like there is a fair amount of tumult and challenge out there with trade credit being pulled back and some bankruptcies and just some challenges out there. So how do you expect to navigate that overall and perhaps share gain is one source of strength. But just wanted to understand, as we look through the rest of the year beyond Q1, how do you expect the year to develop. Thanks.

Philip Shen:

Okay. Great. Thanks, Badri. Shifting gears to the IRA historical, I think on the last call, you were talking about the ability to get the majority of that credit. I was wondering if you could comment on the latest you see in terms of the microinverter credits? Do you expect to get the vast majority of that? And then in terms of the timing of the Section 45X or manufacturing PTC guidelines, some of our checks suggest this could be released much later than originally expected maybe a year later. Just curious if that impacts your plans at all? And if you can talk about CapEx required for the facilities and factories, that would be great. Thanks.

Philip Shen:

Great. Thanks very much for color, Badri. I will pass it on.

Operator:

The next question comes from Brian Lee of Goldman Sachs. Please go ahead.

Badri Kothandaraman:

Yes. On NEM 3.0, we aren’t really seeing any pull forward right now. But in talks with few installers in California, both big and small, like what I said, the originations are up strongly. They are all quite optimistic. And maybe we will see something soon that’s why I talked about an optimistic Q2. But so far, we haven’t seen any pull forward demand yet. Now on talking about NEM 3.0 in general. NEM 3.0 is going to be incredibly positive for us. Because NEM 3.0, I mean, just so everybody gets it, I’ll talk about NEM 3.0, the features of NEM 3.0. Basically, the – previously, the import and export rates were the same. So therefore, when you exported electrons with the solar system didn’t really matter. As long as you exported, it got directly subtracted from what your input. That’s why it’s called net metering, and that was net metering 2.0. With NEM 3.0, it matters when you export these electrons. So you have 24 hours a day, 365 days a year. So basically, 8,760 data points, and there is an export rate for each of those data points. Each of those hours, there is an export rate. And – but what it works out to be is if you are interested in a pure solar system, your payback dropped understandably from, let’s say, 5 years, it increases actually to something like 7 or 7.5 years with the pure solar system. But the moment you add batteries, you can add batteries in steps of 5-kilowatt hour, 10-kilowatt hour, 15-kilowatt hour, the moment you add batteries, that payback comes right back in to that 5 to 6-year time, to that 5 to 6-year period. That is the stock difference with NEM 2.0. With NEM 2.0, the grid was the battery. Batteries didn’t have an ROI because batteries were primarily for resilience only. With NEM 3.0, batteries are going to be financially attractive. But it is complex. NEM 3.0 is definitely complex. So the installers need to demystify it for the homeowners. And that’s where an engine like solar draft and other engines come in, where if we are able to show this to the homeowner, we think it is a no-brainer. The homeowner will always pick solar plus storage. Now to add some more variance to it, Germany, for example, if you look at Germany, this is exactly what happened. They call it as a feed-in tariff where – so that is not 8,760 different rates for those hours, but they have one rate, which is a much reduced rate. And therefore, self-consumption becomes the norm in Germany. No one thinks about exporting solar, right? And that have an 80% attach there. This is going in the same direction, going in the same direction. In Germany, you have grid-tied batteries because power doesn’t go out there much. It goes out maybe once a year. We have grid tied battery. Grid tied batteries means you – the installation is simpler, and it is cheaper. I’m not sure whether California will go in that direction. Time will tell because we do have some color. We do have resilience issues as well. But I am sure markets will evolve a little in that direction, too. So bottom line, we are incredibly optimistic. We got the right batteries for it with the third-generation battery. We got the modularity, which I think will start becoming popular. Grid tied may become popular, but we will be ready to do either grid tied or off grid, on grid with backup. The things that are looking, we like NEM 3.0. Of course, we didn’t like the fact the step down happened right away. But I think in the long-term, it’s an okay decision.